UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
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| þ | | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2005
OR
| | | |
| o | | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number: 1-16493
SYBASE, INC.
(Exact name of registrant as specified in its charter)
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Delaware
(State or other jurisdiction of
incorporation or organization) | | 94-2951005
(I.R.S. Employer
Identification No.) |
| | | |
One Sybase Drive, Dublin, California
(Address of principal executive offices) | | 94568
(Zip Code) |
(925) 236-5000
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
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| Title of each class | | Name of each exchange on which registered |
| | | |
| Common Stock, $.001 par value per share | | New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 par value
Preferred Share Purchase Rights
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yesþ Noo
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.
Yeso Noþ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yesþ Noo
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.
Large accelerated filerþ Accelerated filero Non-accelerated filero
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yeso Noþ
As of June 30, 2005, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was $1,614,570,808 based on the closing sale price as reported on the New York Stock Exchange.
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.
| | | |
| Class | | Outstanding at March 1, 2006 |
| | | |
| Common Stock, $.001 par value per share | | 89,738,493 shares |
DOCUMENTS INCORPORATED BY REFERENCE
| | | |
| Document | | Parts Into Which Incorporated |
| Annual Report to Stockholders for the Fiscal Year Ended December 31, 2005 (Annual Report) | | Parts I, II, and IV |
| | | | | |
| Proxy Statement for the Annual Meeting of Shareholders to be held May 31, 2006 (Proxy Statement) | | Part III |
FORWARD-LOOKING STATEMENTS
This annual report contains forward-looking statements that involve risk and uncertainties that could cause the actual results of Sybase, Inc. and its consolidated subsidiaries (“Sybase”, the “Company,” “we” or “us”) to differ materially from those expressed or implied by such forward-looking statements. These risks include the performance of the global economy and growth in software industry sales; market acceptance of the Company’s products and services; possible disruptive effects of organizational or personnel changes; shifts in our business strategy; interoperability of our products with other software products; the success of certain business combinations engaged in by us or by competitors; political unrest or acts of war; customer and industry analyst perception of the Company and its technology vision and future prospects; and other risks detailed from time to time in our Securities and Exchange Commission filings, including those discussed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A)- Overview,” and “MD&A — Future Operating Results,” Part II, Item 7 of this Annual Report on Form 10-K.
Expectations, forecasts, and projections that may be contained in this report are by nature forward-looking statements, and future results cannot be guaranteed. The words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “will,” and similar expressions in this document, as they relate to Sybase and our management, may identify forward-looking statements. Such statements reflect the current views of our management with respect to future events and are subject to risks, uncertainties and assumptions. Forward-looking statements that were true at the time made may ultimately prove to be incorrect or false, or may vary materially from those described as anticipated, believed, estimated, intended or expected. We do not intend to update these forward-looking statements.
We file registration statements, periodic and current reports, proxy statements, and other materials with the Securities and Exchange Commission, or SEC. You may read and copy any materials we file with the SEC at the SEC’s Office of Public Reference at 450 Fifth Street, NW, Room 1300, Washington, DC 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains a web site atwww.sec.gov that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC, including our filings.
We are headquartered at One Sybase Drive, Dublin, CA 94568, and the telephone number at that location is (925) 236-5000. Our internet address iswww.sybase.com. We make available, free of charge, through the investor relations section of our website, our annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, and any amendments to those reports filed pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after they are electronically filed with or furnished to the SEC. The contents of our website are not incorporated into, or otherwise to be regarded as part of this Annual Report on
Form 10-K.
Sybase, Adaptive Server Enterprise, Advantage Database Server Answers Anywhere, Avaki, AvantGo, Dejima, Extended Systems, Financial Fusion, Financial Fusion Server, M-Business Anywhere, Mirror Activator, New Era of Networks, OneBridge, Pharma Anywhere, PowerAMC, PowerBuilder, PowerDesigner, Pylon, Replication Server, RFID Anywhere, Sales Anywhere, SQL Anywhere, Sybase IQ, XcelleNet, and XTNDConnect, are trademarks of Sybase, Inc. or its subsidiaries. All other names may be trademarks of the companies with which they are associated.
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TABLE OF CONTENTS
PART I
ITEM 1. BUSINESS
Sybase enables the Unwired Enterprise through enterprise, mobile and wireless software solutions for information management, development and data integration. Sybase solutions provide customers with an information edge by integrating platforms, databases, and applications, and extending those applications by moving critical information from data centers to mobile workers through mobile and wireless technologies. Sybase information management solutions are widely recognized for superior reliability, security and openness, allowing easy and effective development in heterogeneous environments. Our targeted markets include commerce, communications, finance, government, defense, manufacturing, transportation and healthcare. Sybase was founded and incorporated in California on November 15, 1984, and was re-incorporated in Delaware on July 1, 1991.
Our business is organized into two principal operating segments, Infrastructure Platform Group (IPG) and iAnywhere Solutions, Inc. (iAS). Below is a brief description of the business of each division:
• Infrastructure Platform Group (IPG)focuses on information management by helping customers build a trusted data infrastructure and create a more intelligent enterprise. IPG offers two lines of enterprise class database servers: Adaptive Server Enterprise (ASE) for mission-critical transactions and the Sybase IQ analytics server for data warehousing and operational business intelligence. IPG also produces solutions for business continuity including the Sybase Mirror Activator for very high availability data environments. IPG data integration and middleware solutions include data replication, data federation and business process management and monitoring. Today’s information technology systems require tight integration of data, applications and business processes. IPG offers integrated tooling to design, analyze and develop these environments. Products include PowerDesigner, a leading modeling tool and WorkSpace for integrated development environments. In 2005, Sybase integrated the operations of its subsidiary, Financial Fusion Inc. into IPG. Financial Fusion products enable banks to provide account access and payment initiation on behalf of their consumer, small business and corporate clients. During 2005, the principal products of IPG accounted for approximately 70 percent of our license revenue.
• iAnywhere Solutions, Inc. (iAS)enables success at the front lines of business. iAS holds worldwide market leadership positions in mobile and embedded databases, mobile management and security, mobile middleware and synchronization, and Bluetooth and infrared protocol technologies. Tens of millions of mobile devices, millions of subscribers, and 20,000 customers and partners rely on iAS’s “Always Available” technologies, including SQL Anywhere, Afaria, OneBridge, and the AvantGo mobile Internet service. Recent acquisitions include Extended Systems (October 2005), XcelleNet (April 2004), Dejima (April 2004) and AvantGo (February 2003). The principal products of iAS accounted for approximately 30 percent of our license revenue in 2005.
A summary of financial results for these divisions is found in Note Ten to Consolidated Financial Statements, Part II, Item 8.
UNWIRED ENTERPRISE
We define the Unwired Enterprise as the free flow of information within an organization, whether inside the office or on the road. An Unwired Enterprise breaks down information technology barriers and delivers critical information and applications to employees, partners, and customers anytime, anywhere providing our customers with an information edge. An Unwired Enterprise is more efficient, more productive, and better able to capitalize on new opportunities because information is moved to the point of action, increasing its relevance and enhancing the power of decisions and transactions.
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CUSTOMERS
Our customers are primarily Fortune 1000 companies in North America and their equivalents around the globe. Our targeted markets include commerce, communications, finance, government, defense, manufacturing, transportation and healthcare. No single customer accounted for more than 10 percent of total revenues during 2005, 2004 or 2003. In 2005 our customers included:
| • | | One of the top 5 U.S. cable companies that provides basic cable service, digital cable and internet access to millions of customers in the US. This company’s field technicians record customer interactions on ruggedized vehicle-mounted laptops and rely on iAS’ Afaria to manage these remote devices as well as automatically push updates. The company has succeeded in its goal of dramatically reducing the cost of manually updating all field devices. The iAS solution also increases the time a technician can be on the road interacting with customers. |
| • | | A leader in mortgage finance, servicing, securitization information and analytics uses Sybase IQ to process terabytes of data for predictive analytics and robust reporting capabilities. With the addition of Sybase IQ, the system’s speed has dramatically improved. This company’s banking, trading, and securities users can understand and manage their loan portfolios using state-of-the art analytical tools that work with some of the largest and most robust mortgage securities and servicing databases. |
| • | | A leading supply management and healthcare information technology company that relies on distribution as a critical component of their business. The company’s pharmaceutical distribution business serves tens of thousands of customers through dozens of distribution centers and thousands of drivers. The company wanted to replace its paper-based schedule and delivery process with an automated one using mobile devices. The company now relies on iAS’ M-Business Anywhere to allow drivers to record delivery, using bar code scanners to track packages. Thanks to the application, and customer service and productivity have improved. |
| • | | A west coast-based retail banking organization selected Sybase Avaki EII to provide a transparent data service layer for all applications requesting data access to data from any source in the enterprise. Encompassing over 40 branches and four bank brands, the solution creates a data service layer to transparently provide consuming applications with seamless data stores. The flexible Avaki EII solution vastly simplifies application access to data, providing a platform for transforming and integrating both relational data and flat file data. Avaki EII forms the foundation of the bank’s data architecture, streamlining data access and integration, shortening project timelines, and reducing costs. |
| • | | The leading provider of wire-line telecommunication services in China needed to improve the speed of its database storage and queries. For this, it chose Sybase ASE and Sybase IQ technology to deliver more effective decision-making support by handling daily network management and business analysis and to provide rich historical analysis. Performance is no longer a bottleneck for the storage and analysis of large volumes of data. The new Sybase network management system not only handles daily network management, but also expedites analysis of significant amounts of historical data for forecasts and improved decision-making capabilities. |
Our products are available on hardware platforms manufactured by Dell, Hewlett-Packard, IBM, Sun Microsystems, and others. We also make products that connect these platforms to other hardware platforms with large installed bases. Our products are also available for a wide range of operating systems including various UNIX environments, Windows, Windows NT, and Linux. A description of our principal products follows:
Infrastructure Platform Group (IPG)
Sybase IQis an analytics server optimized for outstanding query performance for both structured and unstructured data in business intelligence, reporting environments, and large data warehouses. Sybase IQ combines extraordinary speed and agility with a low cost of ownership.
Sybase Adaptive Server Enterprise(ASE) is a powerful data management platform for high performance business applications especially in high-transaction, mission-critical environments. ASE combines a low total cost of ownership with excellent reliability, security, and scalability. In 2005, Sybase released ASE 15.0, a very significant release of this flagship product. Innovations in the ASE 15 line include patented encryption, partitioning for scalability and new query technology for “smarter” transactions enabling greater use of business intelligence.
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Sybase Replication Serverincreases the flexibility and lowers the cost of managing multiple data management platforms. It provides bi-directional, heterogeneous replication and synchronization across enterprise, client/server, desktop, and mobile systems.
Sybase Avaki EIIstreamlines the integration of data from many distributed sources to provide and integrated view of data through a single data layer. Avaki uses a federated approach delivering data from the original source rather than data replicas or marts. Enterprise applications include corporate performance, integrated customer data, regulatory compliance and financial reporting.
Sybase Real-Time Data Servicesis a simple, cost-effective way to give decision-makers immediate insight into changing business events by proactively pushing time-critical data from heterogeneous enterprise databases to messaging architectures, eliminating the “information lags” created by batch updates or intermittent polling processes.
Sybase Mirror Activatorimproves the economics of high-end storage replication systems by reducing network costs, accelerating recovery time and guaranteeing data integrity. It also extends the usefulness of standby systems by utilizing them for reporting and decision support.
Sybase Unwired Acceleratorspeeds the mobilization of Web applications and data sources for always-available access. Its rapid development tools can mobilize existing applications or create new mobile applications.
Sybase Unwired Orchestratorenables organizations to “unwire” enterprise applications making data available to anyone, anywhere. Unwired Orchestrator facilitates rapid development of new applications, especially composite applications, by combining graphically built process flows, enterprise integration, process monitoring and notification, all within a standards-based infrastructure platform and common toolset. This capability cuts cost and rigidity of labor-intensive, hand-coded traditionally needed to extend enterprise applications.
Sybase PowerDesigneris a leading data-modeling and application design tool for enterprises that need to build or re-engineer applications quickly, cost-effectively and consistently (also sold as Sybase PowerAMC).
Sybase WorkSpaceis an Eclipse-based unified development environment bridging the gap between development of applications for service-oriented-architectures (SOA) and traditional tooling. Sybase WorkSpace combines modeling, data management, services assembly and orchestration, Java development and mobile development.
Sybase PowerBuilderis an industry-leading rapid application development (RAD) tool that increases developer productivity through tight integration of design, modeling, development, and management.
Sybase DataWindow.Netboosts the performance of .Net application environments.
Sybase EA Serveris an enterprise application server based on open standards for powering mission critical applications.
Financial Fusion Banking Solutionsenable financial institutions to offer multiple-delivery channel support to their consumer, small business, and large corporate clients. Features include account access, banking, cash management services, imaging, bill payment and presentment, customer care, and wireless application support. Solutions are supported on an integrated platform driven by Financial Fusion Server using advanced Java technology and industry protocols.
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iAnywhere Solutions (iAS)
SQL Anywhereis a market leading data management and enterprise data synchronization solution, enabling the rapid development and deployment of database-powered applications for mobile, remote and small to medium sized business environments. In addition, our Advantage Database Server is designed to meet the needs of Borland Delphi and C++ Builder developers.
Afariaallows companies to centrally manage and secure technology used at the front lines of business. Its frontline security management capabilities provide enterprise-ready security solutions to protect mobile data and devices. Afaria frontline systems management capabilities proactively manage the devices, applications, data and communications critical to frontline success, regardless of the bandwidth available.
OneBridgeMobile Platform is a mobile application enablement tool that provides a framework to mobilize enterprise applications on virtually any mobile device type. Mobile users can access enterprise data via synchronization, real-time or push technology. OneBridge Mobile Groupware is a leading solution for accessing e-mail, tasks, calendar and contacts from mobile devices.
AvantGo.comis a free service that delivers rich, personalized mobile websites to smartphones and PDAs. Today, hundreds of major brands, including American Airlines, CNET, Infiniti, Rolling Stone and The New York Times, leverage AvantGo to target a highly desirable demographic of millions of registered users. AvantGo offers the convenience of anywhere, anytime access, seamlessly supporting both wireless and “sync and go” connectivity.
Answers Anywhereharnesses the power of computer applications by enabling end-users, whether they are on a wireless phone, using a handheld PDA, interacting with a customized console, or at a desktop computer, to ask for information and transactions in their own words, in any language, and rapidly get accurate, relevant answers back.
M-Business Anywhereis a highly scalable platform for delivering Web-based applications and content to mobile devices. It enables “always available” computing, providing both secure wireless and offline access to information – allowing users to access the information they need, when and where they need it.
Pylonis a set of flexible, feature rich, secure solutions that extend a company’s existing Lotus Notes and Microsoft Exchange infrastructure to handheld devices. Pylon products enable organizations to mobilize corporate email, calendar, contacts, task lists, expenses and custom Notes applications.
RemoteWareis an industry leader in polling, file transfer, and content distribution, RemoteWare supports a broad range of frontline systems and networking options, and supports both classic POS devices and contemporary software environments.
RFID Anywhereis designed to automate the process of developing and deploying RFID applications, RFID Anywhere is a middleware platform that addresses the physical requirements of the technology, and even provides the ability to simulate and troubleshoot production RFID environments. This frees developers from getting bogged down in the code-level complexities of evolving devices and standards, differing topologies and far-flung reader locations, allowing them to quickly focus their efforts on applying their knowledge of the business to the task at hand.
Sales Anywhereis a customizable software package that helps organizations accelerate the adoption and ROI of existing CRM solutions, by enabling sales professionals to access these systems from mobile devices, anywhere, at anytime. Sales Anywhere offers adaptors for Siebel and salesforce.com. Pharma Anywhere addresses the mobile CRM needs of the pharmaceutical industry.
Standards-based SDKs- iAS provides standards-based software development kits (SDKs) for implementing protocol stack technologies for infrared, Bluetooth, data synchronization and device management. Over the past 10 years, iAS mobile device solutions have been used in hundreds of product designs resulting in tens of millions of iAS-enabled products deployed into the market.
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XTNDConnect PCis a software application that allows users to synchronize contacts, calendar, tasks, email and notes between mobile devices and popular PC applications such as Microsoft Outlook and ACT!
WORLDWIDE SERVICES
Technical Support.Our Customer Service and Support organization offers technical support for our entire family of products. We currently maintain regional support centers in North America, Europe, and Asia Pacific that can provide 24 x 7 technical services in all time zones around the world. Our end users and partners have access to technical information sources and newsgroups on our support website, including a problem-solving library, a “solved cases” database, and software fixes that can be downloaded. Generally, customers can choose technical support programs that best suit their business needs. All of the following support programs are priced on a per-product basis and include updates and new version releases that become available during the support period.
•Basic Supportis designed for smaller local enterprises and includes 24 x 7 support coverage for up to two customer support contacts.
•Extended Supportis the minimum support level recommended for our enterprise database products such as ASE and includes 24 x 7 coverage for up to four customer support contacts.
•Enterprise Supportoffers personalized high-availability support for companies with mission-critical projects. Services include a designated enterprise support team, account management, and other specialized options.
In addition to the above support offerings, we offer several support services options geared toward developers for designated workplace level and tools products. These programs are priced on a flat-fee annual basis with updates and new version releases available for purchase separately.
Each of our principal business divisions also offers a variety of support services to their partners and resellers.
Consulting.The Sybase Professional Services (SPS) organization offers customers comprehensive consulting, education and integration services designed to optimize their business solutions using both Sybase and non-Sybase products. Service offerings include assistance with data and system migration, custom application design and development, implementation, performance improvement, knowledge transfer and system administration. SPS also provides extensive SQL and Sybase product education.
Education.We provide a broad education curriculum allowing customers and partners to increase their proficiency in our products. Basic and advanced courses are offered at Sybase education centers throughout North America, South America, Europe, and Asia Pacific (including Australia and New Zealand). Specially tailored customer classes and self-paced training are also available. A number of our distributors and authorized training providers also provide education in our products.
SALES AND DISTRIBUTION
Licensing Model.Consistent with software industry practice, we do not sell or transfer title to our software products to our customers. Instead, customers generally purchase non-exclusive, nontransferable perpetual licenses in exchange for a fee that varies depending on the mix of products and services, the number and type of users, the number of servers, and the type of operating system. License fees range from several hundred dollars for single user desktop products to several million dollars for solutions that can support hundreds or thousands of users. We also license many of our products for use in connection with customer applications on the Internet. Our products and services are offered in a wide variety of configurations depending on each customer’s needs and hardware environment.
Distribution Method.Sybase products and services are generally licensed through our direct sales organization and our indirect sales channels. “Indirect sales channels” include value added resellers (VARs), systems integrators (SIs), original equipment manufacturers (OEMs) and international distributors and resellers. Our ability to utilize theses channels is demonstrated in our the license revenue associated with the VAR and OEM channels which increased 18 percent in 2005 versus 2004.
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International Business.In 2005, 43 percent of our total revenues were from operations outside North America, with operations in EMEA (Europe, Middle East and Africa) accounting for 28 percent, and operations in our Intercontinental region (Asia Pacific and Latin America) accounting for 15 percent. Most of our international sales are made by our foreign subsidiaries. However, certain sales are made in international markets from the United States. We also license our products through distributors and other resellers throughout the world. A summary of our geographical revenues is set forth in “MD&A — Geographical Revenues”, Part II, Item 7, and Note Ten to Consolidated Financial Statements, Part II, Item 8. For a discussion of the risks associated with our foreign operations, see “MD&A – Future Operating Results – We are subject to risks arising from our international operations,” Part II, Item 7.
INTELLECTUAL PROPERTY RIGHTS
We rely on a combination of trade secret, copyright, patent and trademark laws, as well as contractual terms, to protect our intellectual property rights. As of March 1, 2006, we had 117 issued patents (106 U.S. and 11 non-U.S.) that expire approximately 20 years from the date they were filed. These patents cover various aspects of our technology. We believe that our patents and other intellectual property rights have value. However, any of our proprietary rights could be challenged, invalidated or circumvented, or may not provide us with significant competitive advantage. For a discussion of additional risks associated with our intellectual property, see “MD&A – Future Operating Results – If we are unable to protect our intellectual property, or if we infringe or are alleged to infringe a third party’s intellectual property, our operating results may be adversely affected,” Part II, Item 7.
RESEARCH AND DEVELOPMENT
Since inception, we have made substantial investments in research and product development. We believe that timely development of new products and enhancements to our existing products is essential to maintaining a strong position in our market. During 2005, we invested $139.0 million, or 17 percent of our total revenue in research and development. These amounts compared to $119.9 million and 15 percent in 2004, and $116.9 million and 15 percent in 2003. In addition, our capitalized software costs were $33.9 million and 36.5 million in 2005 and 2004, respectively. We intend to continue to invest heavily in these areas. However, future operations could be affected if we fail to timely enhance existing products or introduce new products to meet customer demands. For a further discussion of the risks associated with product development, see “MD&A – Future Operating Results – The ability to rapidly develop and bring to market advanced products and services that are successful is crucial to maintaining our competitive position,” Part II, Item 7.
COMPETITION
The market for our products and services is extremely competitive due to various factors including a maturing enterprise infrastructure software market, changes in customer IT spending habits, and the trend toward consolidation of companies within the software industry.
Principal competitors to IPG vary by product type
Information Management Products.Principal competitors to our Information Management Products include Oracle, IBM and Microsoft. We also see compete with certain specialized vendors in niche segments such as Teradata in data warehousing; GoldenGate Software and Datamirror in replication software; and Metamatrix and Composite Software in Enterprise Information Integration (EII).
Design and Development Products.Principal competitors to Design and Development Tools vary by product type. For design and modeling, we compete primarily with CA and IBM. For development tools, our principal competitors are Microsoft, BEA and IBM.
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Financial Fusion Products:Principal competitors for our banking solutions include Corillian, S1, and Digital Insight.
Principal competitors to iAS vary by product type.
Mobile and Embedded Database Products. Principal competitors to our mobile and embedded database products include Pervasive Software, Progress Software, Intersystems, MySQL, IBM and Oracle.
Mobile Middleware and Device Management Products. Principal competitors to our mobile middleware products include IBM, Nokia’s Intellisync and host of numerous small vendors. For mobile device management and security products, we compete with Microsoft, Altiris, iPass, Pointsec and Credant.
We believe that we compete favorably against our competitors in each of these areas. However, some of our competitors have longer operating histories, greater name recognition, stronger relationships with partners, larger technical staffs, established relationships with hardware vendors and/or greater financial, technical and marketing resources. These factors may provide our competitors with an advantage in penetrating markets. For a discussion of certain risks associated with competition, see “MD&A – Future Operating Results – Industry consolidation and other competitive pressures could affect prices or demand for our products and services, and our business may be adversely affected,” Part II, Item 7.
EMPLOYEES
As of March 1, 2006, Sybase and its subsidiaries had approximately 3,715 regular employees. For information regarding our executive officers, see “Directors and Executive Officers of the Registrant,” Part III, Item 10.
ITEM 1(A). RISK FACTORS
See Item 7 — MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS, Future Operating Results
ITEM 2. PROPERTIES
As of December 31, 2005, our field operations, professional service organizations and subsidiaries occupied leased facilities in approximately 61 separate locations throughout North America, Latin America, Europe and the Asia Pacific region (including Australia and New Zealand), aggregating approximately 1.8 million square feet.
On January 28, 2000, we entered into a 15-year non-cancelable lease of our corporate headquarters facility in Dublin, California. The property consists of approximately 406,000 square feet of administrative and product development facilities. We moved to Dublin from our offices in Emeryville, California beginning in January 2002. We have the option to renew our Dublin lease for up to two five-year periods, generally at then-fair market value, subject to certain conditions.
In the third quarter of 2004 we commenced occupancy of a 105,000 square foot building housing administrative, R&D and other facilities of our subsidiaries in Waterloo, Canada. This lease expires in 2019 and we have a 10 year renewal option at the end of the lease at then-fair market value.
We occupy three buildings totaling approximately 167,000 square feet in Concord, Massachusetts under a lease that terminates in October 2012. In the third quarter of 2004 we determined to sublease one of these buildings, totaling approximately 44,600 square feet in connection with our restructuring activities.
In connection with our Extended Systems acquisition, we acquired a leased property in Boise, Idaho. The property is approximately 96,000 square feet, of which approximately 20,000 square feet are currently sublet. We have determined to sublet an additional 40,000 square feet of this facility. The lease for this facility expires in September 2013. Under the terms of a sale-leaseback transaction Extended Systems entered into, we have the option of purchasing the land and building for $5.1 million at any time prior to the expiration of the lease.
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For a further discussion of our leases, see Note Six to Consolidated Financial Statements, Part II, Item 8.
We continue to lease space at other locations around the world that serve a variety of functions, including professional services, sales, engineering, technical support, and general administration. These include significant facilities in Maidenhead, England; Boulder, Colorado; Alpharetta, Georgia, Boise, Idaho and Utrecht, Netherlands. In addition to the facilities noted above, we maintain engineering centers in Englewood, Colorado; Paris, France; Pune, India, Singapore, Shanghai, China and Beijing, China.
ITEM 3. LEGAL PROCEEDINGS
See Note Twelve to Consolidated Financial Statements, Part II, Item 8.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a stockholder vote in the quarter ended December 31, 2005.
PART II
ITEM 5. MARKET FOR THE REGISTRANT’S COMMON STOCK AND RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
Sybase, Inc. Common Stock, par value $.001, began trading on the New York Stock Exchange (NYSE) on May 22, 2001, under the symbol “SY.” Prior to that, our stock traded on the NASDAQ National Market System under the symbol “SYBS.” Following is the range of low and high closing prices for our stock as reported on the NYSE for the quarters indicated.
| | | | | | | | | |
| | | High | | Low |
| Fiscal 2004 | | | | | | | | |
| | | | | | | | | |
| Quarter ended March 31, 2004 | | $ | 22.66 | | | $ | 19.75 | |
| Quarter ended June 30, 2004 | | $ | 20.88 | | | $ | 16.46 | |
| Quarter ended September 30, 2004 | | $ | 17.67 | | | $ | 12.80 | |
| Quarter ended December 31, 2004 | | $ | 19.95 | | | $ | 13.93 | |
| | | | | | | | | |
| Fiscal 2005 | | | | | | | | |
| | | | | | | | | |
| Quarter ended March 31, 2005 | | $ | 20.00 | | | $ | 17.12 | |
| Quarter ended June 30, 2005 | | $ | 20.40 | | | $ | 18.03 | |
| Quarter ended September 30, 2005 | | $ | 23.82 | | | $ | 18.20 | |
| Quarter ended December 31, 2005 | | $ | 23.46 | | | $ | 21.60 | |
We have never paid cash dividends on our capital stock, and we do not anticipate doing so in the foreseeable future. The closing sale price of our Common Stock on the NYSE on March 1, 2006 was $21.25. The number of stockholders of record on that date was 1,334, according to American Stock Transfer and Trust, our transfer agent.
The information required by this item regarding our securities authorized for issuance under equity compensation plans is provided in “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters,” Part III, Item 12, which incorporates information to be disclosed in our 2006 Proxy Statement.
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Issuer Purchases of Equity Securities
During the fourth quarter of 2005 we conducted the following repurchases of our common stock pursuant to our repurchase program:
| | | | | | | | | |
| | | Number of shares | | Avg. Price Paid Per |
| | | purchased | | Share |
| Period | | | | | | | | |
| | | | | | | | | |
| October 2005 | | | 715,100 | | | $ | 22.20 | |
| November 2005 | | | 387,350 | | | $ | 22.33 | |
| December 2005 | | | 0 | | | | 0 | |
| | | | | | | | | |
| Total for Fourth Quarter 2005 | | | 1,102,450 | | | $ | 22.24 | |
After completing the repurchases noted above, $59.6 million remained authorized for repurchase pursuant to our publicly announced repurchase program.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial information is not necessarily indicative of the results of our future operations. This data should be read in conjunction the MD&A, Part II, Item 7, as well as the Consolidated Financial Statements and related Notes included in Part II, Item 8 of this Report on Form 10-K.
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Consolidated Statements of Operations Data
| | | | | | | | | | | | | | | | | | | | | |
| (In thousands, except per share data) | | 2005 | | | 2004 | | | 2003 | | | 2002 | | | 2001 | |
| Revenues: | | | | | | | | | | | | | | | | | | | | |
| License fees | | $ | 291,695 | | | $ | 275,872 | | | $ | 274,817 | | | $ | 325,916 | | | $ | 389,038 | |
| Services | | | 527,000 | | | | 512,664 | | | | 503,245 | | | | 503,945 | | | | 538,885 | |
| | | | | | | | | | | | | | | | |
| Total revenues | | | 818,695 | | | | 788,536 | | | | 778,062 | | | | 829,861 | | | | 927,923 | |
| | | | | | | | | | | | | | | | | | | | | |
| Costs and expenses: | | | | | | | | | | | | | | | | | | | | |
| Cost of license fees | | | 51,556 | | | | 60,795 | | | | 60,711 | | | | 51,448 | | | | 45,695 | |
| Cost of services | | | 156,325 | | | | 162,016 | | | | 162,703 | | | | 190,067 | | | | 240,779 | |
| Sales and marketing | | | 250,003 | | | | 242,778 | | | | 239,173 | | | | 271,850 | | | | 331,294 | |
| Product development and engineering | | | 139,011 | | | | 119,959 | | | | 116,967 | | | | 117,862 | | | | 125,460 | |
| General and administrative | | | 92,106 | | | | 91,117 | | | | 84,750 | | | | 86,712 | | | | 78,106 | |
| Amortization of other purchased intangibles | | | 6,639 | | | | 5,139 | | | | 2,000 | | | | 2,000 | | | | 2,000 | |
| Amortization of goodwill (1) | | | — | | | | — | | | | — | | | | — | | | | 53,859 | |
| Goodwill impairment (1) | | | — | | | | — | | | | — | | | | 12,300 | | | | — | |
| In-process research and development | | | — | | | | — | | | | — | | | | — | | | | 18,500 | |
| Reversal of AvantGo restructuring accrual | | | — | | | | (2,677 | ) | | | — | | | | — | | | | — | |
| Cost of restructuring | | | 1,115 | | | | 20,017 | | | | 7,429 | | | | 40,446 | | | | 48,751 | |
| | | | | | | | | | | | | | | | |
| Total costs and expenses | | | 696,755 | | | | 699,144 | | | | 673,733 | | | | 772,685 | | | | 944,444 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| Operating income (loss) | | | 121,940 | | | | 89,392 | | | | 104,329 | | | | 57,176 | | | | (16,521 | ) |
| |
| Interest income and expense, net | | | 14,824 | | | | 11,574 | | | | 13,766 | | | | 14,033 | | | | 17,529 | |
| Minority interest | | | (49 | ) | | | — | | | | — | | | | — | | | | (30 | ) |
| | | | | | | | | | | | | | | | |
| Income before income taxes and cumulative effect of an accounting change | | | 136,715 | | | | 100,966 | | | | 118,095 | | | | 71,209 | | | | 978 | |
| Provision for income taxes | | | 51,132 | | | | 33,016 | | | | 30,829 | | | | 33,428 | | | | 26,500 | |
| | | | | | | | | | | | | | | | |
| Income (Loss) before cumulative effect of an accounting change | | | 85,583 | | | | 67,950 | | | | 87,266 | | | | 37,781 | | | | (25,522 | ) |
| Cumulative effect of an accounting change to adopt SFAS 142 (1) | | | — | | | | — | | | | — | | | | (132,450 | ) | | | — | |
| | | | | | | | | | | | | | | | |
| Net income (loss) | | $ | 85,583 | | | $ | 67,950 | | | $ | 87,266 | | | $ | (94,669 | ) | | $ | (25,522 | ) |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| Income (Loss) per share before cumulative effect of an accounting change | | $ | 0.95 | | | $ | 0.71 | | | $ | 0.92 | | | $ | 0.39 | | | $ | (0.27 | ) |
| Cumulative effect of an accounting change | | | — | | | | — | | | | — | | | | (1.37 | ) | | | — | |
| | | | | | | | | | | | | | | | |
| Basic net income (loss) per share | | $ | 0.95 | | | $ | 0.71 | | | $ | 0.92 | | | $ | (0.98 | ) | | $ | (0.27 | ) |
| | | | | | | | | | | | | | | | |
| Shares used in computing basic net income (loss) per share | | | 90,307 | | | | 95,550 | | | | 94,833 | | | | 96,844 | | | | 94,592 | |
| | | | | | | | | | | | | | | | |
| |
| Income (Loss) per share before cumulative effect of an accounting change | | $ | 0.92 | | | $ | 0.69 | | | $ | 0.89 | | | $ | 0.38 | | | $ | (0.27 | ) |
| Cumulative effect of an accounting change | | | — | | | | — | | | | — | | | | (1.33 | ) | | | — | |
| | | | | | | | | | | | | | | | |
| Diluted net income (loss) per share | | $ | 0.92 | | | $ | 0.69 | | | $ | 0.89 | | | $ | (0.95 | ) | | $ | (0.27 | ) |
| | | | | | | | | | | | | | | | |
| Shares used in computing diluted net Income (loss) per share | | | 93,257 | | | | 98,001 | | | | 97,582 | | | | 99,584 | | | | 94,592 | |
| | | | | | | | | | | | | | | | |
| | |
| (1) | | We implemented Statement of Financial Accounting Standards (SFAS) No. 142 on January 1, 2002, which states that goodwill (including assembled workforce) can no longer be amortized, but must be tested for impairment on at least an annual basis. For a further discussion of SFAS 142, see Note One to Consolidated Financial Statements — Goodwill and Other Purchased Intangible Assets, Part II, Item 8. |
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Consolidated Balance Sheet Data
(In thousands)
| | | | | | | | | | | | | | | | | | | | | |
| | | 2005 | | | 2004 | | | 2003 | | | 2002 | | | 2001 | |
| Cash, cash equivalents and cash investments | | $ | 859,936 | | | $ | 513,632 | | | $ | 573,793 | | | $ | 387,180 | | | $ | 343,160 | |
| Working capital | | | 573,247 | | | | 290,237 | | | | 261,023 | | | | 112,296 | | | | 111,822 | |
| Total assets | | | 1,570,614 | | | | 1,183,522 | | | | 1,151,356 | | | | 992,749 | | | | 1,133,242 | |
| Long-term obligations | | | 500,339 | | | | 33,121 | | | | 15,129 | | | | 10,641 | | | | 5,887 | |
| Stockholders’ equity | | | 698,830 | | | | 756,556 | | | | 741,469 | | | | 580,374 | | | | 716,519 | |
| | |
| ITEM 7. | | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
Overview
Sybase is a global enterprise software company exclusively focused on managing and mobilizing information from the data-center to the point of action. We provide open, cross-platform solutions that securely deliver information anytime, anywhere, enabling customers to create an information edge. Our value proposition involves enabling the Unwired Enterprise through integrated applications and solutions designed to manage information across the enterprise, allowing customers to extract more value from their information technology (IT) investments. We deliver a full range of solutions to ensure that customer information is securely managed and mobilized to the point of action, including enterprise and mobile databases, middleware, synchronization, encryption, and management software.
Our business is organized into two business segments: IPG, which principally focuses on enterprise class database servers, integration and development products; and iAS, which provides mobile database and mobile enterprise solutions. For further discussion of our business segments and principal products, see “Business,” Part I, Item 1.
During the second quarter of 2005 we made two acquisitions that we believe will further strengthen the product offerings of our IPG segment. First, we acquired the assets of Avaki Corporation (Avaki), a leading provider of enterprise information integration software. This data management technology provides enterprises a single window into multiple data sources enabling them to further extend the value of their existing infrastructure investments. We also acquired ISDD Ltd (ISDD), a privately-held search engine provider focused on helping companies in data intensive industries to query and analyze their structured and unstructured data from both fixed and mobile sources. Both technologies are being integrated into existing Sybase products to expand the capabilities of our Unwired Enterprise solutions.
During the fourth quarter of 2005 we acquired Extended Systems Incorporated, a pioneering provider in mobile application software for the enterprise. The acquisition of Extended Systems strengthens the Unwired Enterprise offering of our iAS segment by expanding our ability to enable organizations to streamline business processes through mobile technology. The acquisition also provides us with an entry into new market segments through Extended Systems’ mobile device solutions that enable manufacturers and partners to integrate wireless connectivity and synchronization capabilities, Bluetooth, IrDA and OMA, into mobile devices. See Note Eleven to Consolidated Financial Statements – Business combinations, Part II, Item 8.
We also successfully launched a major upgrade to our flagship data base, Adaptive Server Enterprise 15.0, during the third quarter of 2005. This upgrade signals our continuing commitment to our enterprise database customers and will, we believe, drive future revenue growth over the long term.
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Total revenues were $818.7 million for 2005, compared to $788.5 million for 2004, and $778.1 million for 2003. The increase in total revenues from 2004 to 2005 was primarily due to a $28.0 million (23 percent) increase in iAS revenues and a $2.9 million (less than 1 percent) increase in IPG revenues.
The increase in iAS revenues was primarily driven by a $10.7 million (15 percent) increase in license revenue and a $17.2 million (36 percent) increase in service revenue primarily generated from a $13.7 million increase in technical support services. These increases were largely related to our device management products and the products and services offered by ESI which was acquired in the fourth quarter of 2005
The increase in IPG revenues was primarily attributable to a $5.9 million (3 percent) increase in license revenues. The growth in IPG license revenue was primarily driven by a $5.1 million (34 percent) increase in our Sybase IQ product and a $2.7 million (3 percent) increase from our Adaptive Server Enterprise product.
We reported net income of $85.6 million for 2005, compared to net income of $68.0 million for 2004, and $87.3 million in 2003. Our 2005 operating income was $121.9 million (15 percent operating margin) compared to $89.4 million (11 percent operating margin) in 2004. The increase in operating margin was attributable to a $30.2 million increase in revenues and a $2.3 million decrease in expenses. The overall reduction in operating expenses was attributable to a $16.2 million decrease in our restructuring charges, net of reversals, and a $14.9 million decrease in our cost of license fees and services; primarily offset by a $19.4 million increase in our product research and development costs and a $7.2 million increase in our sales and marketing costs.
Our overall financial position remains strong. During 2005 we generated net cash from operating activities of $170.0 million, and had $865.3 million in cash, cash equivalents and cash investments (including restricted cash) at December 31, 2005. On February 22, 2005, we issued through a private offering to qualified institutional buyers in the U.S. $460 million of convertible subordinated notes (see Note Fifteen to Consolidated Financial Statements, Part II, Item 8, incorporated here by reference). We used $125.0 million of the net proceeds from the offering to purchase approximately 6.7 million shares of our common stock during 2005. The balance of the net proceeds will continue to be used for working capital and general corporate purposes, which may include the acquisition of businesses, products, product rights or technologies, strategic investments, or additional purchases of our common stock. Our days sales outstanding in accounts receivable was 68 days for the quarter ended December 31, 2005 compared to 65 days for the quarter ended December 31, 2004.
For a discussion of certain factors that may impact our business and financial results, see “Future Operating Results,” below.
The market for new sales of enterprise infrastructure software primarily sold by our IPG segment continues to be challenging due to various factors including a maturing enterprise infrastructure software market and cautious information technology spending. During 2005, however, we noted indications of an improving market for enterprise infrastructure products. With respect to the market for mobility and integration products primarily sold by our iAS segment, we believe these products are gaining market acceptance and will provide us with growth opportunities in the future. We also believe that we are well positioned to compete within several growing market segments including mobility solutions, data analytic tools, and Linux-based enterprise software.
As was the case in 2004, the majority of our IPG license fee revenues during 2005 came from sales to our existing customers. These customers are buying products for both existing applications and new application deployments. We also continued to see general buying patterns which indicate a level of market saturation in certain target markets (including financial services, insurance and telecommunications) for some of our historical enterprise database products where large enterprises are still utilizing heavy investments made in their core database infrastructures during past years.
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However, during 2005, we did increase the number of new ASE customers by 40 percent over 2004 and were encouraged by momentum we saw developing in the area of data integration projects. We have noted greater customer willingness to invest resources on new data integration solutions which has contributed to a yearly increase of approximately 34 percent in our IQ product during 2005. This product offers a data integration solution through a highly optimized analytic engine specifically designed to deliver dramatically faster results for business intelligence, analytic and reporting solutions.
In the future, we believe that much of our growth will be fueled through the inclusion of Sybase technologies in products offered by original equipment manufacturers (OEMs) and value-added-resellers (VARs). Our ability to exploit this opportunity is demonstrated by an 18 percent increase in license revenue associated with these sales channels in 2005 versus 2004.
Overall, the IT spending patterns we are witnessing supports our view that fiscally cautious customers generally are continuing to purchase products and services based more on present need and less on fulfilling anticipated future needs. We are also seeing a trend where larger deals take longer to close and require more levels of review and approval at the client. We believe that these trends along with mixed signs of strong and sustained U.S. and global economic growth could make our quarterly results more volatile given the difficulty in projecting the overall market for enterprise infrastructure products in the near to mid-term. We believe the operating results of our business are more accurately reflected in our annual as opposed to quarterly financial results. In light of this we are evaluating whether to provide annual guidance, updated quarterly, to our investors.
Moving forward we will continue to manage our operating margin and build upon our revenue momentum as we aggressively pursue our Unwired Enterprise initiative and strategic alliances with our key partners. For further discussion of the effect of current business trends on our results of operations, see “Future Operating Results,” below.
Critical Accounting Policies and Estimates
We prepare our financial statements in accordance with U.S. generally accepted accounting principles (GAAP). These accounting principles require us to make estimates and assumptions that affect the reported amounts of assets and liabilities, and the disclosure of contingent assets and liabilities at the date of our financial statements. We also are required to make certain judgments that affect the reported amounts of revenues and expenses during each reporting period. We periodically evaluate our estimates and assumptions including those relating to revenue recognition, impairment of goodwill and intangible assets, the allowance for doubtful accounts, capitalized software, restructuring, income taxes, stock-based compensation and contingencies and litigation. We base our estimates on historical experience and various other assumptions that we believe to be reasonable based on specific circumstances. Our management has reviewed the development, selection, and disclosure of these estimates with the Audit Committee of our Board of Directors. These estimates and assumptions form the basis for our judgments about the carrying value of certain assets and liabilities that are not readily apparent from other sources. Actual results could differ from these estimates. Further, changes in accounting and legal standards could adversely affect our future operating results (see “Future Operating Results,” below). Our critical accounting policies include: revenue recognition, impairment of goodwill and other intangible assets, allowance for doubtful accounts, capitalized software, restructuring, income taxes, stock-based compensation, and contingencies and liabilities, each of which are discussed below.
Revenue recognition rules for software companies are very complex. We follow specific and detailed guidance in measuring revenue, although certain judgments affect the application of our revenue recognition policy. These judgments would include, for example, the determination of a customer’s creditworthiness, whether two separate transactions with a customer should be accounted for as a single transaction, or whether included services are essential to the functionality of a product thereby requiring percentage of completion accounting.
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We recognize revenue in accordance with Statement of Position (SOP) 97-2, “Software Revenue Recognition,” as amended by SOP 98-4 and SOP 98-9, and in certain instances in accordance with SOP 81-1, “Accounting for Performance of Construction-Type and Certain Production-Type Contracts.” We license software under non-cancelable license agreements. License fee revenues are recognized when (a) a non-cancelable license agreement is in force, (b) the product has been delivered, (c) the license fee is fixed or determinable, and (d) collection is reasonably assured. If the fee is not fixed or determinable, revenue is recognized as payments become due from the customer and all other revenue recognition criteria have been met.
Residual Method Accounting. In software arrangements that include multiple elements (e.g., license rights and technical support services), we allocate the total fees among each of the elements using the “residual” method of accounting. Under this method, revenue allocated to undelivered elements is based on vendor-specific objective evidence of fair value of such undelivered elements, and the residual revenue is allocated to the delivered elements. Vendor specific objective evidence of fair value for such undelivered elements is based upon the price we charge for such product or service when it is sold separately. We may modify our pricing practices in the future, which would result in changes to our vendor specific objective evidence. As a result, future revenue associated with multiple element arrangements could differ significantly from our historical results.
Percentage of Completion Accounting. Fees from licenses sold together with consulting services are generally recognized upon shipment of the licenses, provided (i) the criteria described in subparagraphs (a) through (d) above are met, (ii) payment of the license fee is not dependent upon performance of the consulting services, and (iii) the consulting services are not essential to the functionality of the licensed software. If the services are essential to the functionality of the software, or performance of services is a condition to payment of license fees, both the software license and consulting fees are recognized under the “percentage of completion” method of contract accounting. We use labor hours to estimate the progress to completion. Under this method, we are required to estimate the number of total hours needed to complete a project, and revenues and profits are recognized based on the percentage of total contract hours as they are completed. Due to the complexity involved in the estimating process, revenues and profits recognized under the percentage of completion method of accounting are subject to revision as contract phases are actually completed. Historically, these revisions have not been material.
Sublicense Revenues. We recognize sublicense fees as reported to us by our licensees. License fees for certain application development and data access tools are recognized upon direct shipment by us to the end user or upon direct shipment to the reseller for resale to the end user. If collection is not reasonably assured in advance, revenue is recognized only when sublicense fees are actually collected and all other revenue recognition criteria have been met.
Service Revenues. Technical support revenues are recognized ratably over the term of the related support agreement, which in most cases is one year. Revenues from consulting services under time and materials contracts, and for education, are recognized as services are performed. Revenues from other contract services are generally recognized based on the proportional performance of the project, with performance measured based on hours of work performed.
| • | | Impairment of Goodwill and Other Intangible Assets |
Goodwill and intangible assets have generally resulted from our business combinations accounted for as purchases. We are required to test amounts recorded as goodwill or recorded as intangible assets with indeterminate lives, at least annually for impairment. The review of goodwill and indeterminate lived intangibles for potential impairment is highly subjective and requires us to make numerous estimates to determine both the fair values and the carrying values of our reporting units to which goodwill is assigned. For these purposes, our reporting units equate to our reported segments. See Note Ten to Consolidated Financial Statements, Part II, Item 8, incorporated here by reference. If the estimated fair value of a reporting unit is determined to be less than its carrying value, we are required
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to perform an analysis similar to a purchase price allocation for an acquired business in order to determine the amount of goodwill impairment, if any. This analysis requires a valuation of certain other purchased intangible assets with determinate and indeterminate useful lives including in-process research and development, and developed technology. We performed our annual impairment analysis as of December 31, 2005 for each of our reporting units and for each indeterminate lived intangible asset. This analysis indicated that the estimated fair value of each reporting unit or indeterminate lived intangible exceeded its carrying value. Therefore, we were not required to recognize an impairment loss in 2005. As of December 31, 2005, our goodwill balance totaled $238.9 million and our other purchased intangibles totaled $87.6 million. Changes in our internal business structure, changes in our future revenue and expense forecasts, and certain other factors that directly impact the valuation of our reporting units could result in a future impairment charge.
We also continue to separately review our other intangible assets (e.g., purchased technology, trade names and customer lists) for indications of impairment whenever events or changes in circumstances indicate the carrying amount of any such asset may not be recoverable. For these purposes, recoverability of these assets is measured by comparing their carrying values to the future undiscounted cash flows the assets are expected to generate. This methodology requires us to estimate future cash flows associated with certain assets or groups of assets. Changes in these estimates could result in impairment losses associated with other intangible assets. At December 31, 2005 there was no indication of impairment.
| • | | Allowance for Doubtful Accounts |
We maintain an allowance for doubtful accounts to reflect the expected non-collection of accounts receivable based on past collection history and specific risks identified in our portfolio of receivables. Additional allowances might be required if deteriorating economic conditions or other factors affect our customers’ ability to make timely payments.
We capitalize certain software development costs after a product becomes technologically feasible and before its general release to customers. Significant judgment is required in determining when a product becomes “technologically feasible.” Capitalized development costs are then amortized over the product’s estimated life beginning upon general release of the product. Quarterly, we compare a product’s unamortized capitalized cost to the product’s net realizable value. To the extent unamortized capitalized cost exceeds net realizable value based on the product’s estimated future gross revenues (reduced by the estimated future costs of completing and selling the product) the excess is written off. This analysis requires us to estimate future gross revenues associated with certain products and the future costs of completing and selling certain products. Changes in these estimates could result in write-offs of capitalized software costs. See Note One to Consolidated Financial Statements, Part II, Item 8, incorporated here by reference.
We have recorded significant accruals in connection with various restructuring activities. Our remaining restructuring accruals primarily relate to the estimated net costs to settle certain lease obligations based on analysis of independent real estate consultants. While we do not anticipate significant changes to these estimates in the future, the actual costs may differ from estimates. For example, if we are able to negotiate more affordable termination fees, if rental rates increase in the markets where the properties are located, or if we are able to locate suitable sublease tenants more quickly than expected, the actual costs could be lower than our estimates. In that case, we would reduce our restructuring accrual with a corresponding credit to cost of restructuring. Alternatively, if we are unable to negotiate affordable termination fees, if rental rates decrease in the markets where the properties are located, or if it takes us longer than expected to find suitable sublease tenants, the actual costs could exceed our estimates See Note Thirteen to Consolidated Financial Statements, Part II, Item 8, incorporated here by reference.
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We use the asset and liability approach to account for income taxes. This methodology recognizes deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities. We then record a valuation allowance to reduce deferred tax assets to an amount that likely will be realized. We consider future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance. If we determine during any period that we could realize a larger net deferred tax asset than the recorded amount, we would adjust the deferred tax asset and record a corresponding reduction to our income tax expense for the period. Conversely, if we determine that we would be unable to realize a portion of our recorded deferred tax asset, we would adjust the deferred tax asset and record a charge to income tax expense for the period. Significant judgment is required in assessing the future tax consequences of events that have been recognized in the Company’s financial statements or tax returns. Fluctuations in the actual outcome of these future tax consequences (e.g., the income we earn within the United States) could materially impact our financial position or results of operations. See Note Eight to Consolidated Financial Statements, Part II, Item 8.
Our effective tax rate is based on expected geographic income, statutory rates and enacted tax rules, including transfer pricing. We are required to exercise significant judgment in determining our effective rate and in evaluating various tax positions that apply to our worldwide operations. We believe our tax positions, including intercompany transfer pricing policies, are consistent with the tax laws in the jurisdictions in which we conduct business. It is possible, however that these positions will be challenged which may have a significant impact on our effective tax rate.
| • | | Stock-Based Compensation |
Through the end of the 2005 calendar year, we measured compensation expense for our stock-based incentive programs using the intrinsic value method prescribed by Accounting Principles Board (APB) Opinion No. 25,“Accounting for Stock Issued to Employees.”Under this method, we did not record compensation expense when stock options were granted to eligible participants as long as the exercise price was not less than the fair market value of the stock when the option was granted. We also did not record compensation expense for shares purchased in connection with our Employee Stock Purchase Plan as long as the purchase price of the stock was not less than 85% of the lower of the fair market value of the stock at the beginning of each offering period or at the end of each purchase period. In accordance with SFAS 123,“Accounting for Stock-Based Compensation,”and SFAS 148,“Accounting for Stock-Based Compensation – Transition and Disclosure,”we disclosed our pro forma net income or loss and net income or loss per share as if the fair value-based method had been applied in measuring compensation expense for our stock-based incentive programs.
To determine the pro forma effect of applying SFAS 123, we estimated the fair value of our options using the Black Scholes option valuation model. This model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. This model also requires the input of highly subjective assumptions including the expected volatility of our common stock price. The assumptions we used for the valuation model are set forth in Note One to the Consolidated Financial Statements.
The appropriate volatility factor for stock options is the estimated future volatility of our stock over the expected life of the options. Prior to the second quarter of 2005 we estimated the volatility factors for stock options considering the historical volatility of our stock over the most recent 4.25 year period, which was approximately equal to the average expected life of our options. Beginning in the second quarter of 2005 we estimated the volatility of our options considering both the historical volatility of our stock over the most recent 4.25 year period and the prices of publicly traded options, which we believe provides a more accurate estimate of expected volatility factors over the life of the options. We estimated the volatility factors for our Employee Stock Purchase Plan using the historical volatility of our stock over the most recent six-month period, which was equal to the length of the offering periods under that plan.
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Changes in the subjective input assumptions can materially affect the fair value estimates. In the future, we may elect to use different assumptions under the Black Scholes valuation model or a different valuation model, which could result in a significantly different impact on our net income or loss.
On December 16, 2004 the FASB issued SFAS 123 (revised 2004),“Share-Based Payment,” (SFAS 123(R)which is a revision of SFAS 123. SFAS 123(R) requires all share-based payments to employees, including grants of employee stock options and purchases under employee stock purchase plans, to be recognized in the statement of operations based on their fair values. We are required to adopt this new standard in the first quarter of our 2006 calendar year. The adoption of SFAS 123(R)’s fair value method will have a significant adverse impact on our net income and net income per share. See“New Accounting Pronouncements”later in this Item 7.
| • | | Contingencies and Liabilities |
We are involved from time to time in various proceedings, lawsuits and claims involving our customers, products, intellectual property, stockholders and employees, among other things. We routinely review the status of each significant matter and assess our potential financial exposure. When we reasonably determine that a loss associated with any of these matters is probable, and can reasonably estimate the loss, we record a reserve to provide for such loss contingencies. If we are unable to record a reserve because we are not able to estimate the amount of a potential loss in a matter, or if we determine that a loss is not probable, we are nevertheless required to disclose certain information regarding such matter if we determine that there is a reasonable possibility that a loss has been incurred. Because of the inherent uncertainties related to these types of matters, we base our loss reserves on the best information available at the time. As additional information becomes available, we may reevaluate our assessment regarding the probability of a matter or its expected loss. Our financial position or results of operations could be materially and adversely affected by such revisions in our estimates. For further discussion of contingencies and liabilities, see “Future Operating Results,” below.
Results of Operations
Revenues(Dollars in millions)
| | | | | | | | | | | | | | | | | | | | | |
| | | 2005 | | | Change | | | 2004 | | | Change | | | 2003 | |
| License fees by segment: | | | | | | | | | | | | | | | | | | | | |
| IPG | | $ | 237.2 | | | | 3 | % | | $ | 231.4 | | | | (4 | %) | | $ | 240.3 | |
| iAS | | | 81.4 | | | | 15 | % | | | 70.7 | | | | 26 | % | | | 56.3 | |
| Eliminations | | | (26.9 | ) | | | 3 | % | | | (26.2 | ) | | | 20 | % | | | (21.8 | ) |
| | | | | | | | | | | | | | | | | | |
| Total license fees | | $ | 291.7 | | | | 6 | % | | $ | 275.9 | | | | * | | | $ | 274.8 | |
| Percentage of total revenues | | | 36 | % | | | | | | | 35 | % | | | | | | | 35 | % |
| Services by segment: | | | | | | | | | | | | | | | | | | | | |
| IPG | | $ | 488.1 | | | | (1 | %) | | $ | 491.0 | | | | * | | | $ | 493.1 | |
| iAS | | | 65.9 | | | | 36 | % | | | 48.6 | | | | 35 | % | | | 35.9 | |
| Eliminations | | | (27.0 | ) | | | * | | | | (27.0 | ) | | | 5 | % | | | (25.7 | ) |
| | | | | | | | | | | | | | | | | | |
| Total services | | $ | 527.0 | | | | 3 | % | | $ | 512.6 | | | | 2 | % | | $ | 503.3 | |
| Percentage of total revenues | | | 64 | % | | | | | | | 65 | % | | | | | | | 65 | % |
| Total revenues | | $ | 818.7 | | | | 4 | % | | $ | 788.5 | | | | 1 | % | | $ | 778.1 | |
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Total license fees for 2005 increased $15.8 million (6 percent) from total license fees in 2004 (which had increased slightly from 2003). The increase in license fees during 2005 was primarily attributable to a $10.7 million (15 percent) increase in iAS license fees and to a $5.8 million (3 percent) increase in IPG license fees.
The increase in iAS license fees during 2005 was primarily attributable to $8.6 million in license revenues related to device management products and products offered by ESI We believe further integration of acquired businesses will continue to offer growth opportunities in new and existing markets.
The increase in IPG license fees was primarily attributable to a $5.1 million (34 percent) increase in our Sybase IQ product and a $2.7 million (3 percent) increase from our Adaptive Server Enterprise product. These increases were partially offset by a $3.5 million (18 percent) decline in mature middleware products impacted by our transition to newer technology. We believe the growth in the IQ product stems from increased momentum we see developing in the area of data integration projects. We believe the growth in our Adaptive Server Enterprise product was due to strong demand for heterogeneous data integration, management, and analytics projects, primarily driven by business process reengineering and compliance reporting needs. We further believe that the increasing acceptance of our IQ product and the introduction of Adaptive Server Enterprise 15.0 in the third quarter of 2005 will drive future revenue growth.
Segment license and service revenues include transactions between iAS and IPG, The most common instance relates to the sale of iAS products and services to third parties by IPG. In the case of such a transaction, IPG records the revenue on the sale with a corresponding inter-company expense on the transaction, with corresponding intercompany revenue recorded by iAS together with costs of providing the product or service. The excess of revenues over inter-company expense recognized by IPG is intended to reflect the costs incurred by IPG to complete the sales transaction. Total transactions between the segments are captured in “Eliminations.”
Total service revenues for 2005 (which include revenues from technical support, education, and professional services) increased $14.4 million (3 percent) from total service revenues in 2004. This increase was due to a $17.3 million (36 percent) increase in iAS services offset by a $2.9 million (1 percent) decline in IPG services. The increase in iAS service revenues was primarily due to a 97 percent increase in iAS technical support revenues, largely related to the technical support revenues associated with device management products. The decline in IPG service revenues was primarily due to a 2 percent decline in technical support revenues offset by a 4 percent increase in professional services revenues.
Technical support revenues comprised 77% percent of total services revenues for 2005 and 2004. Total technical support revenue for 2005 increased $7.7 million (2 percent) from the 2004 total. The deferred revenue balance related to technical support contracts at the end of 2005 declined $15.3 million (8 percent) from 2004. The decline in deferred revenue balances was primarily the result of billing changes to various governmental agencies from annually in advance to quarterly in arrears; and, continued pricing pressure from large technical support contracts offset by an increase in deferred revenues related to the companies acquired in 2004.
Other services revenues increased 6 percent in 2005 from 2004. The increase was primarily related to consulting services performed by IPG for the financial services industry and by iAS related to unwired enterprise initiatives.
For a description of our technical support, consulting and education services, see “Business — Worldwide Services,” Part I, Item 1.
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Geographical Revenues
(Dollars in millions)
| | | | | | | | | | | | | | | | | | | | | |
| | | 2005 | | Change | | 2004 | | Change | | 2003 |
| North America | | $ | 464.9 | | | | 3 | % | | $ | 453.5 | | | | * | | | $ | 455.0 | |
| Percentage of total revenues | | | 57 | % | | | | | | | 58 | % | | | | | | | 59 | % |
| | | | | | | | | | | | | | | | | | | | | |
| International: | | | | | | | | | | | | | | | | | | | | |
| EMEA (Europe, Middle East and Africa) | | $ | 233.5 | | | | 6 | % | | $ | 220.4 | | | | 4 | % | | $ | 212.8 | |
| Percentage of total revenues | | | 28 | % | | | | | | | 28 | % | | | | | | | 27 | % |
| | | | | | | | | | | | | | | | | | | | | |
| Intercontinental (Asia Pacific and Latin America) | | $ | 120.3 | | | | 5 | % | | $ | 114.6 | | | | 4 | % | | $ | 110.3 | |
| Percentage of total revenues | | | 15 | % | | | | | | | 14 | % | | | | | | | 14 | % |
| | | | | | | | | | | | | | | | | | | | | |
| Total Outside North America | | $ | 353.8 | | | | 6 | % | | $ | 335.0 | | | | 4 | % | | $ | 323.1 | |
| Percentage of total revenues | | | 43 | % | | | | | | | 42 | % | | | | | | | 41 | % |
| | | | | | | | | | | | | | | | | | | | | |
| Total revenues | | $ | 818.7 | | | | 4 | % | | $ | 788.5 | | | | 1 | % | | $ | 778.1 | |
North American revenues (United States, Canada and Mexico) for 2005 increased 11.4 million (3 percent) from 2004. The increase from 2004 was primarily due to a $5.2 million (7 percent) increase in consulting services and a $5.8 million (2 percent) increase in technical support. In 2004, the slight decline in North America revenues was primarily due to the decline in license fees from our enterprise database products offset by an increase in license fees from products included in the iAS segment.
EMEA (Europe, Middle East and Africa) revenues for 2005 increased $13.1 million (6 percent) from 2004. The increase was primarily due to a $6.8 million increase in license fees from our enterprise database products and a $3.4 million increase in license fees from products included in the iAS segment. The services revenues showed modest growth from 2004. Increased revenues in Holland and Spain contributed most to the overall increase for 2005. In 2004, the increase in EMEA revenues was attributable to iAS license fees and technical support fees partially offset by declines IPG license fees and professional service fees.
Intercontinental (Asia Pacific and Latin America) revenues for 2005 increased $5.7 million (5 percent) from 2004. The increase was primarily due to a $2.4 million increase in license fees revenues from products included in the iAS segment and a $2.3 million increase in our technical support and professional services revenues. The results of our operations in India, Brazil, Korea and Singapore contributed most significantly to the increased revenue, offsetting lower revenues primarily in New Zealand. The 4 percent increase in 2004 Intercontinental revenues compared to 2003 was due to an increase in license fees revenues from enterprise database products and an increase in technical support and professional services revenues. The results of our operations in China, Australia, India, Korea, and New Zealand contributed most significantly to the increased revenues, offset by decreased revenues in Japan and Hong Kong.
In EMEA and the Intercontinental region, most revenues and expenses are denominated in local currencies. The cumulative impact of changes in foreign currency exchange rates from 2004 to 2005 resulted in a 1 percent increase in our revenues and a 1 percent increase in our operating expenses. The cumulative impact of changes in foreign currency exchange rates from 2003 to 2004 resulted in a 3 percent increase in our revenues and a 2 percent increase in our operating expenses. The change for both comparable periods was primarily due to the weakness of the U.S. dollar against certain European and Intercontinental currencies.
Our business and results of operations could be materially and adversely affected by fluctuations in foreign currency exchange rates, even though we take into account changes in exchange rates over time in our pricing strategy. Additionally, changes in foreign currency exchange rates, the strength of local economies, and the general volatility of worldwide software markets could result in a higher or lower proportion of international revenues as a percentage of total revenues in the future. For additional risks associated with currency fluctuation, see “Financial Risk Management – Foreign Exchange Risk,” below.
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Cost and Expenses
(Dollars in millions)
| | | | | | | | | | | | | | | | | | | | | |
| | | 2005 | | Change | | 2004 | | Change | | 2003 |
| Cost of license fees | | $ | 51.6 | | | | (15 | %) | | $ | 60.8 | | | | * | | | $ | 60.7 | |
| Percentage of license fee revenues | | | 18 | % | | | | | | | 22 | % | | | | | | | 22 | % |
| | | | | | | | | | | | | | | | | | | | | |
| Cost of services | | $ | 156.3 | | | | (4 | %) | | $ | 162.0 | | | | * | | | $ | 162.7 | |
| Percentage of services revenues | | | 30 | % | | | | | | | 32 | % | | | | | | | 32 | % |
| | | | | | | | | | | | | | | | | | | | | |
| Sales and marketing | | $ | 250.0 | | | | 3 | % | | $ | 242.8 | | | | 2 | % | | $ | 239.2 | |
| Percentage of total revenues | | | 31 | % | | | | | | | 31 | % | | | | | | | 31 | % |
| | | | | | | | | | | | | | | | | | | | | |
| Product development and engineering | | $ | 139.0 | | | | 16 | % | | $ | 120.0 | | | | 3 | % | | $ | 117.0 | |
| Percentage of total revenues | | | 17 | % | | | | | | | 15 | % | | | | | | | 15 | % |
| | | | | | | | | | | | | | | | | | | | | |
| General and administrative | | $ | 92.1 | | | | 1 | % | | $ | 91.1 | | | | 7 | % | | $ | 84.8 | |
| Percentage of total revenues | | | 11 | % | | | | | | | 12 | % | | | | | | | 11 | % |
| | | | | | | | | | | | | | | | | | | | | |
| Amortization of other purchased intangibles | | $ | 6.6 | | | | 29 | % | | $ | 5.1 | | | | 155 | % | | $ | 2.0 | |
| Percentage of total revenues | | | 1 | % | | | | | | | 1 | % | | | | | | | * | |
| | | | | | | | | | | | | | | | | | | | | |
| Reversal of AvantGo restructuring accrual. | | | — | | | | * | | | $ | (2.7 | ) | | | * | | | | — | |
| Percentage of total revenues | | | — | | | | | | | | * | | | | | | | | — | |
| | | | | | | | | | | | | | | | | | | | | |
| Cost of restructuring | | $ | 1.1 | | | | (95 | %) | | $ | 20.0 | | | | 170 | % | | $ | 7.4 | |
| Percentage of total revenues | | | * | | | | | | | | 3 | % | | | | | | | 1 | % |
Cost of license fees
Cost of license fees consists primarily of product costs (media and documentation), amortization of capitalized software development costs and purchased technology, and third party royalty costs. The cost of license fees decreased $9.2 million (15 percent) in 2005 over 2004, and increased slightly in 2004 over 2003. The 2005 decrease was primarily due to a $5.9 million decrease in the amortization of purchased technology and a $3.9 million decrease in the amortization of capitalized software development costs partially offset by a $1.0 million increase in third-party royalties The decline in amortization of purchased technology was due to purchased technology acquired in the 2001 New Era of Networks, Inc. acquisition that became fully amortized during the second quarter of 2005. The 2004 increase was primarily due to a $2.5 million increase in amortization of capitalized software development costs and amortization of $2.6 million on purchased technology acquired as a result of the 2004 XcelleNet acquisition, partially offset by a $4.6 million decrease in third-party royalties.
The amortization of purchased technology was $11.9 million, $17.8 million and $15.3 million in 2005, 2004 and 2003, respectively.
Amortization of capitalized software costs was $29.7 million, $33.6 million and $31.1 million in 2005, 2004 and 2003, respectively. In 2005, the decrease in amortization of capitalized software costs was primarily related to certain products in the IPG segment that became fully amortized in the first two quarters of 2005. In 2004, the increase in amortization of capitalized software costs was primarily due to certain products included in the IPG segment that we began amortizing in the second half of 2003 and in 2004. See Note One to the Consolidated Financial Statements - Capitalized Software, Part II, Item 8.
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Cost of services
Cost of services consists primarily of the fully burdened cost of our personnel who provide technical support, education and professional services and, to a lesser degree, services-related product costs (media and documentation). These costs decreased $5.7 million (4 percent) in 2005 compared to 2004 and decreased as a percentage of service revenues to 30 percent in 2005 from 32 percent in 2004. These decreases were primarily due to a reduction in technical support and professional services headcount as a result of our 2004 restructuring activities in addition to a slight decline in media costs. Headcount continued a slight decline in 2005 and ended the year flat with 2004 after absorbing the Extended Systems personnel. The average professional services headcount decreased approximately 10 percent in 2004 from 2003. For further discussion of the effect of our restructuring activities, see Note Thirteen to Consolidated Financial Statements, Part II, Item 8.
Sales and marketing
Sales and marketing expense were 31 percent of total revenues in both 2005 and 2004 and in absolute dollars increased $7.2 million (3 percent) in 2005 compared to 2004 due to increases of $3.2 million in sales commissions on higher 2005 revenues, $3.5 million in marketing programs and a $1.3 million increase in certain allocated common costs.
The 2 percent increase in sales and marketing expense in 2004 compared to 2003 was primarily due to sales and marketing costs associated with the XcelleNet organization and an increase in certain allocated common costs offset by reductions in marketing expenses.
Product development and engineering
Product development and engineering expenses (net of capitalized software development costs – see discussion below) increased $19 million (16 percent) in 2005 from 2004 and as a percentage of total revenue increased to 17 percent in 2005 from 15 percent in 2004. The increases were primarily due to a $13.9 million increase in headcount related expenses, a $3.7 million decrease in capitalized software, and a $1.5 million increase in certain allocated common costs. The headcount reflected in this expense category, including the engineering personal added as part of the Extended Systems acquisitions, was approximately 5 percent higher at December 31, 2005 compared to December 31, 2004.
The 3 percent increase in product development and engineering expenses in 2004 over 2003 was primarily due to an increase in headcount related expenses including XcelleNet product development and engineering personnel and allocated common costs. These increases were partially offset by an increase in capitalized software development costs.
We capitalize product development and engineering costs during the period between a product’s achievement of technological feasibility and its general availability. Our capitalized software costs in 2005 of $33.9 million included costs incurred for the development of the Adaptive Server Enterprise 15.0 and Unwired Orchestrator. In 2004, our capitalized software costs of $36.5 million included costs incurred for the development of Adaptive Server Enterprise 12.5.2 and 15.0, Financial Fusion Corporate Banking Solutions 2.20, EA Server 5.2, EDI Server 4.2, Sybase IQ 12.6, PowerBuilder 10.0, PowerDesigner 11.0, and Unwired Orchestrator 4.5.
We believe product development and engineering expenditures are essential to technology and product leadership and expect product development and engineering expenditures to continue to be significant, both in absolute dollars and as a percentage of total revenues.
General and administrative
General and administrative expenses, which include IT, legal, business operations, finance, and administrative functions, increased 1 percent in 2005 compared to 2004 but decreased as a percentage of total revenue to 11 percent in 2005 from 12 percent in 2004. The cause of the increase in absolute dollars was primarily due to an increase in stock based compensation expense offset by a slight decrease in certain legal expenses. General and administrative expenses included approximately $6.6 million in 2005 and $4.0 million in 2004 attributable to stock based compensation.
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The 7 percent increase in 2004 compared to 2003 was primarily due to an increase in the total number of general and administrative personnel attributable in part to our acquisition of XcelleNet and an increase in legal expenses. Also included were incremental costs associated with Sarbanes-Oxley compliance.
Stock compensation expense
Stock compensation expense reflects non-cash compensation expense associated with restricted stock purchase rights granted to certain Sybase executives in 2003, 2004 and 2005 (see Note Seven to the Consolidated Financial Statements, Part II, Item 8). Stock compensation expense was included in costs and expenses as follows:
| | | | | | | | | | | | | |
| (Amounts in thousands) | | 2005 | | | 2004 | | | 2003 | |
| Costs of services | | | 380 | | | | 160 | | | | 30 | |
| Sales and marketing | | | 302 | | | | 335 | | | | 112 | |
| Product development and engineering | | | 38 | | | | 82 | | | | 78 | |
| General and administrative | | | 6,586 | | | | 4,022 | | | | 2,662 | |
| | | |
| | | | 7,306 | | | | 4,599 | | | | 2,882 | |
| | | |
The increase in stock compensation expenses in 2005 resulted from the grant, in 2005, of certain performance-based restricted stock described more fully in Note Seven to the Consolidated Financial Statements. If the performance targets, which relate to the growth of our revenues, earnings and stock price over a three year period, are not met, the restricted stock will not vest, and all or a portion of the stock compensation expense related to these instruments would be reversed through the same expense categories detailed above.
Amortization of other purchased intangibles
Amortization of other purchased intangibles reflects the amortization of the established customer list associated with our acquisition in 2000 of Home Financial Network, Inc. the amortization of the established customer list and covenant not to compete associated with our acquisition of XcelleNet in 2004, and the amortization of the established customer list and other intangible assets associated with our acquisition of Extended Systems in 2005. See Note Four to Consolidated Financial Statements — Goodwill and Other Purchased Intangible Assets, Part II, Item 8.
Reversal of AvantGo restructuring accrual
In connection with the 2003 acquisition of AvantGo, we assumed certain liabilities associated with AvantGo’s 2001 and 2002 restructuring programs, primarily related to excess space at AvantGo’s Hayward, California and Chicago, Illinois facilities. At the time of acquisition, we also accrued additional amounts for lease obligations, net of the expected sublease revenue, associated with AvantGo’s remaining facilities in Hayward which would be vacated upon the expected move of all personnel to Sybase’s facilities in Dublin, California. During the quarter ended September 30, 2004, we were able to sublease the Hayward facilities on terms much better than those anticipated when the applicable accruals were recorded. As a result, we reversed accrued restructuring liabilities related to this facility in 2004.
Cost of restructuring
2004, 2003, 2002 and 2001 Restructuring Activities. We undertook restructuring activities in 2004, 2003, 2002 and 2001 as a means of managing our operating expenses and assumed certain restructuring program liabilities of AvantGo when we acquired that company in 2003.
For descriptions of each restructuring plan, see Note Thirteen to Consolidated Financial Statements — Restructuring Costs, Part II, Item 8.
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Operating income
(Dollars in millions)
| | | | | | | | | | | | | | | | | | | | | |
| | | 2005 | | | Change | | | 2004 | | | Change | | | 2003 | |
| Operating income by segment: | | | | | | | | | | | | | | | | | | | | |
| IPG | | $ | 101.9 | | | | 33 | % | | $ | 76.5 | | | | 6 | % | | $ | 71.9 | |
| IAS | | | 21.6 | | | | 70 | % | | | 12.7 | | | | (34 | %) | | | 19.2 | |
| Unallocated (costs) savings | | | (1.6 | ) | | | * | | | | 0.2 | | | | (98 | %) | | | 13.2 | |
| | | | | | | | | | | | | | | | | | |
| Total operating income | | $ | 121.9 | | | | 36 | % | | $ | 89.4 | | | | (14 | %) | | $ | 104.3 | |
| Percentage of total revenues | | | 15 | % | | | | | | | 11 | % | | | | | | | 13 | % |
Operating income in 2005 was $121.9 million compared to operating income of $89.4 million in 2004 and $104.3 million in 2003. The increase in the operating margin to 14.9 percent in 2005 compared to 11.3 percent in 2004 was primarily the result of the various factors discussed under “Revenues” and “Costs and Expenses” above.
The operating margin for the IPG segment was 14.0 percent for 2005 compared to 10.6 percent for 2004. The increase in operating income and margin in the IPG segment for 2005 compared to 2004 was primarily due to a change in the mix of license and service revenues with higher margin license revenues increasing more than the reduction in lower margin services revenues, the decrease in amortization on purchased technology, and the decrease in costs of restructuring.
The increase in operating income for the IPG segment in 2004 compared to 2003 was primarily due to a decrease in employee and facilities related operating expenses as a result of restructuring activities in 2003 and 2004 partially offset by a decline in license fees revenues from Integration and Access products and the separate restructuring charges.
The operating margin for the iAS segment was 14.7 percent for 2005 compared to 10.7 percent for 2004. The increase in operating income and margin for the iAS segment was primarily due to an increase in total revenues largely attributable to increased license fee revenues and increased technical support revenue associated with the device management products, offset by an increase in operating expenses, a shift in revenue mix from license to services, and increased amortization of purchased technology and other intangibles. The decline in operating income and margin for the iAS segment in 2004 compared to 2003 was primarily due to an increase in operating expenses largely attributable to the XcelleNet and Dejima acquisitions, offset by an increase in total revenues.
Certain common costs and expenses are allocated to the various segments based on measurable drivers of expense. Unallocated expenses represent corporate expenditures or cost savings that are not specifically allocated to the segments including reversals or restructuring expenses associated with restructuring activities undertaken prior to 2003.
Other income (expense), net
(Dollars in millions)
| | | | | | | | | | | | | | | | | | | | | |
| | | 2005 | | | Change | | | 2004 | | | Change | | | 2003 | |
| Interest income | | $ | 25.7 | | | | 136 | % | | $ | 10.9 | | | | (3 | %) | | $ | 11.2 | |
| Percentage of total revenues | | | 3 | % | | | | | | | 1 | % | | | | | | | 1 | % |
| | | | | | | | | | | | | | | | | | | | | |
| Interest expense and other, net | | $ | (10.9 | ) | | | * | | | $ | 0.7 | | | | (72 | %) | | $ | 2.5 | |
| Percentage of total revenues | | | (1 | %) | | | | | | | * | | | | | | | | * | |
| | | | | | | | | | | | | | | | | | | | | |
| Minority interest | | | * | | | | * | | | | — | | | | — | | | | — | |
| Percentage of total revenues | | | * | | | | | | | | — | | | | | | | | — | |
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In 2005, interest income increased $14.8 million from 2004. Interest income consists primarily of interest earned on our investments. The increase in interest income for 2005 compared to 2004 is due to the increase in the cash balances invested. Our invested cash balances increased primarily due to the investment of the net proceeds from our private offering of convertible subordinated notes in the first quarter of 2005 offset by cash balance declines as a result of cash used in our stock repurchase program and for acquisitions. See “Consolidated Statements of Cash Flows,” Part II, Item 8. The 3 percent decrease in interest income from 2003 to 2004 was largely due to the decrease in the cash balances invested. Our invested cash balances declined as a result of cash used in our stock repurchase program and for the XcelleNet and Dejima acquisitions.
Interest expense and other, net, primarily includes: interest expense on the convertible subordinated notes; amortization of deferred offering expenses associated with these notes; net gains and losses resulting from foreign currency transactions and the related hedging activities; the cost of hedging foreign currency exposures; bank fees; and gains from the disposition of certain real estate and investments. The increase in interest expense and other, net from 2005 compared to 2004 was primarily the result of the interest expense incurred on the convertible subordinated notes which bear an interest rate of 1.75 percent and the amortization of capitalized offering fees and expenses associated with the convertible subordinated notes. The net decrease in interest expense and other, net for 2004 compared to 2003 was primarily due to a gain of approximately $3.2 million recorded in 2003 relating to the collection of a note receivable originally generated from our sale of certain Swiss subsidiaries which had previously been offset by an allowance for uncollectible receivables.
Provision for Income Taxes
(Dollars in millions)
| | | | | | | | | | | | | | | | | | | | | |
| | | 2005 | | | Change | | | 2004 | | | Change | | | 2003 | |
| Provision for income taxes | | $ | 51.1 | | | | 55 | % | | $ | 33.0 | | | | 7 | % | | $ | 30.8 | |
In 2005 a provision for income taxes was recorded at a rate of approximately 37 percent of income before taxes. Our effective rate differed from the statutory federal rate of 35 percent primarily due to adjustments for the impact of state taxes, the addition of tax reserves relating primarily to foreign transfer pricing exposures, and certain non-deductible executive compensation; offset somewhat by the release of tax reserves upon the expiration of the statute of limitation relating to various tax exposure items and adjustments for the difference between estimated amounts recorded and actual liabilities resulting from the filing of prior years’ tax returns.
In 2004 a provision for income taxes was recorded at a rate of approximately 33 percent on income before taxes. Our effective tax rate differed from the statutory federal rate of 35 percent primarily due to adjustments for the difference between estimated amounts recorded and actual liabilities resulting from the filing of prior years’ tax returns, the utilization of Japanese net operating losses that were otherwise due to expire after 2004, additional tax reserves relating primarily to foreign transfer pricing exposures and the release of tax reserves upon the completion of various tax audits. Without the benefit of the Japanese net operating losses, adjustments for the difference resulting from the filing of the prior years’ tax returns and for tax reserves, our effective tax rate for the year would have been approximately 39 percent.
In 2003 a provision for income taxes was recorded at a rate of approximately 26 percent on income before taxes. Our effective tax rate differed from the statutory federal rate of 35 percent primarily due to the utilization of certain foreign tax credits upon which a full valuation allowance was provided, the release of certain deferred tax liabilities which were made unnecessary when we were able to restructure certain earnings of a foreign subsidiaries in a manner to allow for their repatriation free from the withholding taxes we provided for with the deferred tax liability, and the release of certain tax reserve upon the completion of various tax audits.
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We had a net deferred tax asset of $30.4 million at December 31, 2005. This deferred tax asset included a valuation allowance of $132.7 million. As of December 31, 2005, the gross deferred tax asset included a research and development tax credit of $33.8 million, foreign tax credits of $20.1 million and an asset for certain net operating losses of $65.7 million. The research and development tax credits expire in years from 2010 through 2025 the foreign tax credits expire in years from 2010 through 2015 and the net operating losses expire in years from 2007 and 2024. In order to realize our net deferred tax assets we must generate sufficient taxable income in future years in appropriate tax jurisdictions to obtain the recorded benefit from the reversal of temporary differences (i.e., between book and tax basis), and from tax credit carryforwards. Specifically, realization of these assets is dependent on our ability to generate approximately $120 million of future taxable income, largely in the U.S. Based on the plans and estimates we are using to manage the underlying business we believe that sufficient income will be earned in the future to realize these assets. The amount of the deferred tax assets considered realizable is subject to adjustment in future periods if estimates of future taxable income are reduced. Any such adjustments to the deferred tax assets would be charged to income in the period such adjustment was made.
The valuation allowance primarily relates to the deferred tax assets associated with acquired net operating losses, net operating loss and capital loss carryforwards, tax assets associated with stock option activity, and foreign tax credits. Approximately $76 million of the valuation allowance relates to deferred tax assets associated with net operating losses and capital losses acquired in, or attributable to, the New Era of Networks, XcelleNet, Extended Systems and AvantGo acquisitions. If the associated deferred tax assets are realized, the benefit from their realization will reduce goodwill carried on our books associated with these acquisitions. The valuation allowance also includes approximately $28 million associated with stock option activity for which any recognized tax benefits will be credited directly to shareholders’ equity.
Net income per share
(Dollars and shares in millions)
| | | | | | | | | | | | | | | | | | | | | |
| | | 2005 | | | Change | | | 2004 | | | Change | | | 2003 | |
| Net income | | $ | 85.6 | | | | 26 | % | | $ | 68.0 | | | | (22 | %) | | $ | 87.3 | |
| Percentage of total revenues | | | 10 | % | | | | | | | 9 | % | | | | | | | 11 | % |
| Basic: | | | | | | | | | | | | | | | | | | | | |
| Net income per share | | $ | 0.95 | | | | 34 | % | | $ | 0.71 | | | | (23 | %) | | $ | 0.92 | |
| Shares used in computing basic net income per share | | | 90.3 | | | | (6 | %) | | | 95.6 | | | | 1 | % | | | 94.8 | |
| Diluted: | | | | | | | | | | | | | | | | | | | | |
| Net income per share | | $ | 0.92 | | | | 33 | % | | $ | 0.69 | | | | (22 | %) | | $ | 0.89 | |
| Shares used in computing diluted net income per share | | | 93.3 | | | | (5 | %) | | | 98.0 | | | | * | | | | 97.6 | |
We reported net income of $85.6 million in 2005, $68.0 million in 2004 and $87.3 million in 2003. In 2005, the increase in net income compared to 2004 was due to the various factors discussed above.
In 2005, the decrease in shares used for computing basic and diluted net income per share was due primarily to 2.0 million shares repurchased under our ongoing stock repurchase program and 6.7 million shares repurchased during the first quarter of 2005 in conjunction with the issuance of the convertible subordinated notes, partially offset by exercises of employee stock options. In 2004, the increase in shares used for computing basic and diluted net income per share was due primarily to the ongoing exercise of employee stock options, partially offset by shares repurchased under our Stock Repurchase Program (described in “Liquidity and Capital Resources,” below). See Consolidated Statements of Stockholders’ Equity, Part II, Item 8
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Liquidity and capital resources
(Dollars in millions)
| | | | | | | | | | | | | | | | | | | | | |
| | | 2005 | | | Change | | | 2004 | | | Change | | | 2003 | |
| Working capital | | $ | 573.2 | | | | 98 | % | | $ | 290.2 | | | | 11 | % | | $ | 261.0 | |
| Cash, cash equivalents and cash Investments | | $ | 859.9 | | | | 67 | % | | $ | 513.6 | | | | (10 | %) | | $ | 573.8 | |
| Net cash provided by operating activities | | $ | 170.0 | | | | (4 | %) | | $ | 176.2 | | | | (13 | %) | | $ | 202.1 | |
| Net cash used for investing activities | | $ | 389.4 | | | | 370 | % | | $ | 82.8 | | | | (54 | %) | | $ | 178.7 | |
| Net cash provided by (used for) financing activities | | $ | 328.5 | | | | * | | | $ | (102.2 | ) | | | * | | | $ | 25.0 | |
Net cash provided by operating activities decreased 4 percent in 2005 compared to 2004 primarily due to a larger decline in the deferred revenues in 2005 compared to 2004. The decline in deferred revenue balances was primarily the result of billing changes to various governmental agencies from annually in advance to quarterly in arrears; and, continued pricing pressure from large technical support contracts offset by an increase in deferred revenues related to the companies acquired in 2004. This was partially offset by changes in deferred tax assets and taxes payable and an increase in net income before consideration of depreciation, amortization and asset write-offs.
Net cash provided by operating activities decreased 13 percent in 2004 compared to 2003 primarily due to a $12.6 million decrease in net income before consideration of depreciation, amortization and asset write-offs, and the impact in 2003 of aggressive collection efforts which significantly reduced our accounts receivables (DSO was reduced from 72 days in Q4 2002 to 60 days in Q4 2003). This decrease was partially offset by a larger reduction of accrued liabilities in 2003 compared to 2004, with the 2003 decrease principally related to restructuring related facility accruals.
Net cash used for investing activities increased $306.6 million from 2004 to 2005. The increase in net cash used for investing activities is primarily due to net purchases of cash investments of $269.9 million in 2005 compared to a net disposition of cash investments of $65.0 million in 2004. We had significant purchases of cash investments during 2005 as we invested the net proceeds received from our private offering of the convertible subordinated notes. The increase was also due to a decline in net cash used for acquisitions. In 2005, $71.9 million was invested related to the acquisitions of Avaki, ISDD, and Extended Systems as compared to $81.3 million invested related to the acquisitions of XcelleNet and Dejima in 2004.
Net cash provided by financing activities increased $430.7 million in 2005. The shift from net cash used for financing activities to net cash provided by financing activities was primarily the result of the $450.2 million net proceeds received from our private offering of convertible subordinated notes. (See Note Fifteen to Consolidated Financial Statements, Part I, Item I, incorporate here by reference). In addition, our repayments of long-term debt declined $21.2 million in 2005 and our net proceeds for the issuance of common stock and reissuance of treasury stock increased $13.0 million in 2005. Our long-term debt repayments in 2004 included repayment of $22.2 million related to obligations assumed as part of the 2004 XcelleNet acquisition. There were no similar repayments in 2005. These sources of financing were offset by an increase of $53.5 million in common stock repurchases in 2005 from 2004. Our 2005 stock repurchases included $125 million repurchased in conjunction with our issuance of convertible subordinated notes and $44.1 million repurchased under our Stock Repurchase Program.
Our Board of Directors has authorized the repurchase of our outstanding Common Stock from time to time, subject to price and other conditions (Stock Repurchase Program). Through December 31, 2005, aggregate amounts authorized under the Stock Repurchase Program totaled $600 million. During 2005, we repurchased 2.0 million shares at a cost of $44.1 million. In 2004, we repurchased 6.4 million shares at a cost of $115.6 million and in 2003 we repurchased 2.3 million shares at a cost of $30.9 million.
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Approximately $59.6 million remained in the Stock Repurchase Program at December 31, 2005. The average price per share of the shares repurchased under the Stock Repurchase Program during 2005 was $21.54, compared to $18.06 in 2004 and $13.24 in 2003.
The repurchase of the shares in conjunction with our convertible debt offering is not part of the Stock Repurchase Program.
We had no significant commitments for capital expenditures at December 31, 2005. We expect to fund expenditures for future capital requirements, liquidity and strategic operating programs and semi-annual interest payments from a combination of available cash balances and internally generated funds.
We engage in global business operations and are therefore exposed to foreign currency fluctuations that can affect the overall value of the assets (including cash.) and liabilities reflected on our balance sheet. For a further discussion of the effect of foreign currency fluctuations on our financial condition, see “Financial Risk Management – Foreign Exchange Risk,” below.
Contractual Obligations
Our contractual obligations at December 31, 2005 are summarized as follows:
| | | | | | | | | | | | | | | | | | | | | |
| (Dollars in Millions) | | Payments Due by Period |
| | | | | | | 2006 | | 2007-2008 | | 2009-2010 | | |
| Contractual Obligations | | Total | | Commitments | | Commitments | | Commitments | | After 2010 |
| Operating leases | | $ | 303.3 | | | $ | 44.4 | | | $ | 75.9 | | | $ | 62.5 | | | $ | 120.5 | |
| Capital lease | | | 13.7 | | | | 1.0 | | | | 2.0 | | | | 2.0 | | | | 8.7 | |
| Debt obligations: | | | | | | | | | | | | | | | | | | | | |
| Sale-and-leaseback | | | 3.4 | | | | 0.4 | | | | 0.9 | | | | 0.9 | | | | 1.2 | |
| Note(s) payable | | | 2.6 | | | | 0.2 | | | | 0.4 | | | | 0.4 | | | | 1.6 | |
| Convertible subordinated notes | | | 496.3 | | | | 8.1 | | | | 16.1 | | | | 472.1 | | | | | |
| Third party royalties /software licenses & maintenance commitments | | | 7.2 | | | | 5.9 | | | | 1.3 | | | | | | | | — | |
| | | | | | | | | | | | | | | | | | | | | |
| | | |
| Total commitments | | $ | 826.5 | | | $ | 60.0 | | | $ | 96.6 | | | $ | 537.9 | | | $ | 132 | |
| | | |
Upon completion of our acquisition of Extended Systems Incorporated (ESI) in October 2005, we assumed the obligations under a sale-and-leaseback transaction completed by ESI in September 2003 related to ESI’s headquarters building and land in Boise, Idaho. The sale-and-leaseback is recorded as a financing transaction. Under the terms of the agreement we have an option to repurchase the building and land at any time before September 2013 at a price of $5.1 million. Net assets of approximately $3.2 million have been recorded in relation to the building as of December 31, 2005. The gross proceeds received of $4.8 million are included in other long-term liabilities on our balance sheet at December 31, 2005.
As part of the agreement, ESI entered into a 10-year master lease for the building with annual lease payments, which are recorded as interest expense, equal to 9.2 percent of the sale price, or approximately $442,000. We are also obligated to pay all expenses associated with the building during our lease, including the costs of property taxes, insurance, operating expenses and restoration and other repairs. (See Note Six to Consolidated Financial Statements, Part II, Item 8).
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As part of the 15-year capital lease agreement entered into for our Waterloo, Canada facility (see Note Six to Consolidated Financial Statements, Part II, Item 8), we entered into an agreement with the landlord to finance approximately $1.6 million of tenant improvements at an annual interest rate of 8.86%. The loan requires monthly payments of $15,626, which includes both principal and interest commencing October 2004 through October 2019.
On February 22, 2005, we issued through a private offering to qualified institutional buyers in the U.S. $460 million of convertible subordinated notes pursuant to exemptions from registration afforded by the Securities Act of 1933, as amended. These notes have an interest rate of 1.75 percent and are subordinated to all of our future senior indebtedness. The notes mature on February 22, 2025 unless earlier redeemed by us at our option, or converted or put to us at the option of the holders. Interest is payable semi-annually in arrears on February 22 and August 22 of each year, commencing on August 22, 2005. We have used approximately $125 million of the proceeds to repurchase 6.7 million shares of Sybase stock. We intend to use the remaining proceeds for working capital and general corporate purposes which may include the acquisition of businesses, products, product rights or technologies, strategic investments or additional purchases of our common stock. For purposes of determining the total principal and interest payment commitments above, we have assumed the notes will be held until the first day we may redeem the notes, March 1, 2010. See Note Fifteen to Consolidated Financial Statements, Part II, Item 8.
New Accounting Pronouncements
SFAS 123(R),“Share-Based Payment”
On December 16, 2004 the FASB issued SFAS 123 (revised 2004),“Share-Based Payment,”(SFAS 123(R)) which is a revision of SFAS 123,“Accounting for Stock-Based Compensation.”SFAS 123(R) supersedes APB 25,“Accounting for Stock Issued to Employees,”and amends SFAS 95,“Statement of Cash Flows.” Generally, the approach in SFAS 123(R) is similar to the approach described in SFAS 123. However, SFAS 123(R) requires all share-based payments to employees, including grants of employee stock options and purchases under employee stock purchase plans, to be recognized in the statement of operations based on their fair values. Pro forma disclosure of fair value recognition will no longer be an alternative.
We are required to adopt this new standard in the first quarter of our 2006 calendar year. SFAS 123(R) permits public companies to adopt its requirements using one of two methods:
| | 1. | | A “modified prospective” method in which compensation cost is recognized beginning with the effective date (a) based on the requirements of SFAS 123(R) for all share-based payments granted after the effective date and (b) based on the requirements of SFAS 123 for all awards granted to employees prior to the effective date that remain unvested on the effective date. |
| |
| | 2. | | A “modified retrospective” method which includes the requirements of the modified prospective method described above but also permits restatement using amounts previously disclosed under the pro forma provisions of SFAS 123 either for (a) all prior periods presented or (b) prior interim periods of the year of adoption. |
We have elected to apply the modified prospective method of adopting SFAS 123(R).
As permitted by SFAS 123, through the end of calendar year 2005 we accounted for share-based payments to employees using APB 25’s intrinsic value method. As a consequence, we generally recognized no compensation cost for employee stock options and purchases under our Employee Stock Purchase Plan. Although the adoption of SFAS 123(R)’s fair value method will have no adverse impact on our balance sheet or net cash flows, it will have a significant adverse impact on our net income and net income per share. The pro forma effects on net income and earnings per share if we had applied the fair value recognition provisions of SFAS 123 to share-based payments to employees in prior periods are disclosed in Note One to the Consolidated Financial Statements. Although the pro forma effects of applying SFAS 123 may be indicative of the effects of applying SFAS 123(R), the provisions of these two statements differ in some important respects.
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We currently estimate that the fiscal 2006 impact on Sybase of adopting SFAS 123(R) will be a decrease in net income in the range of approximately $5 million to $8 million. The actual effects of adopting SFAS 123(R) will depend on numerous factors including the assumptions used for the Black Scholes value model including expected volatility, term, and forfeiture rates, and the timing and amount of future share-based payments to employees.
SFAS 123(R) also requires the benefits of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow, rather than as an operating cash flow as prescribed under current accounting rules. This requirement will reduce net operating cash flows and increase net financing cash flows in periods after adoption. Total cash flow will remain unchanged compared with cash flow as it would have been reported under prior accounting rules.
SFAS No. 154“Accounting Changes and Error Corrections”
In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections: A Replacement of APB Opinion No. 20 and SFAS No. 3.” This statement changes the requirements for the accounting for and reporting of a voluntary change in accounting principle, and also applies to instances when an accounting pronouncement does not include specific transition provisions. The statement replaces the previous requirement that voluntary changes be recognized by including the cumulative effect of the change in net income of the period of the change. The statement requires retrospective application of a new accounting principle to prior periods’ financial statements, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. The statement is effective for changes and corrections made in fiscal years beginning after December 15, 2005. The Company does not expect the adoption of the statement to have a material effect on its financial condition, results of operations or cash flows.
See Note One to Consolidated Financial Statements –Recent Accounting Pronouncements, Part II, Item 8.
Financial Risk Management
Foreign Exchange Risk
We experience foreign exchange translation exposure on our net assets and liabilities denominated in currencies other than the U.S. dollar. The related foreign currency translation gains and losses from translating these amounts into U.S. dollars for subsidiaries that conduct their business in a currency other than the U.S. dollar, are reflected in “Accumulated other comprehensive income” under “Stockholders’ equity” on the balance sheet. As of December 31, 2005, we had identifiable net assets totaling $100.9 million associated with our EMEA operations and $81.4 million associated with our other operations.
As a global concern, we face exposure to movements in foreign currency exchange rates. These exposures may change over time as business practices evolve and could have material adverse or beneficial impacts on our financial position and results of operations. Historically, our primary exposures have been related to sales and expenses in EMEA, Asia Pacific, and Latin America which are denominated in a currency other than the functional currency of the subsidiary recording the transaction. In order to reduce the effect of foreign currency fluctuations, we utilize foreign currency forward exchange contracts (forward contracts) to hedge certain foreign currency transaction exposures. Specifically, we enter into forward contracts with a maturity of approximately 30 days to hedge against the foreign exchange exposure created by certain balances that are denominated in a currency other than the principal reporting currency of the entity recording the transaction. The gains and losses on the forward contracts are meant to mitigate the gains and losses on these outstanding foreign currency transactions. We do not enter into forward contracts for trading purposes. All foreign currency transactions and all outstanding forward contracts are marked to market at the end of the period with unrealized gains and losses included in interest expense and other, net. The unrealized gain (loss) on our outstanding forward contracts as of December 31, 2005 was immaterial to our consolidated financial statements. The tables below provide information about our forward contracts as of December 31, 2005 and 2004.
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(Amounts in thousands except exchange rates)
| | | | | | | | | |
| | | US $ | | | Average | |
| Forward Contracts - As of December 31, 2005 | | Notional amount | | | Contract rate | |
| Contracts for the sale of US Dollars and purchase of: | | | | | | | | |
| Canadian Dollars | | $ | 9,337 | | | | 0.8566 | |
| Euro | | $ | 14,359 | | | | 1.1867 | |
| Singapore Dollars | | $ | 4,223 | | | | 0.6034 | |
| | | | | | | | | |
| Contracts for the purchase of US Dollars and sale of: | | | | | | | | |
| Japanese Yen | | $ | 3,072 | | | | 117.2000 | |
| Swiss Franc | | $ | 1,672 | | | | 1.3154 | |
| | | | | | | | | |
| Contracts for the purchase of Euros and sale of: | | | | | | | | |
| Swedish Krona | | $ | 1,540 | | | | 9.4580 | |
| Swiss Franc | | $ | 2,504 | | | | 1.5610 | |
| UK Pound | | $ | 10,002 | | | | 0.6869 | |
| Norwegian Krone | | $ | 1,351 | | | | 7.9758 | |
| | | | | | | | |
| Total | | $ | 48,060 | | | | | |
(Amounts in thousands except exchange rates)
| | | | | | | | | |
| | | US $ | | | Average | |
| Forward Contracts - As of December 31, 2004 | | Notional amount | | | Contract rate | |
| Contracts for the sale of US Dollars and purchase of: | | | | | | | | |
| Canadian Dollars | | $ | 249 | | | | 0.8302 | |
| British Pounds | | $ | 957 | | | | 1.9135 | |
| Euro | | $ | 15,609 | | | | 1.3573 | |
| Singapore Dollars | | $ | 6,611 | | | | 0.6121 | |
| Mexican Pesos | | $ | 313 | | | | 0.0893 | |
| |
| Contracts for the purchase of US Dollars and sale of: | | | | | | | | |
| Japanese Yen | | $ | 1,761 | | | | 102.2300 | |
| Swiss Franc | | $ | 1,924 | | | | 1.1433 | |
| Korean Won | | $ | 4,415 | | | | 1039.5000 | |
| |
| Contracts for the purchase of Euros and sale of: | | | | | | | | |
| Swedish Krona | | $ | 603 | | | | 9.0011 | |
| Swiss Franc | | $ | 2,186 | | | | 1.5518 | |
| UK Pound | | $ | 7,270 | | | | 0.7093 | |
| Norwegian Krone | | $ | 2,049 | | | | 8.2802 | |
| | | | | | | | |
| Total | | $ | 43,947 | | | | | |
Interest Rate Risk
Our exposure to market risk for changes in interest rates relates to our investment portfolio, which consists of taxable, short-term money market instruments and debt securities with maturities between 90 days and three years. We do not use derivative financial instruments in our investment portfolio.
Default Risk
We place our investments with high quality credit issuers and, by policy, limit the amount of credit exposure with any one issuer. We mitigate default risk by investing in safe, high investment grade securities and by monitoring the credit rating of investment issuers. The portfolio includes only marketable securities with active secondary or resale markets to ensure portfolio liquidity. We have no cash flow exposure due to rate changes for our investment portfolio, since all investments are made in securities with fixed interest rates.
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Future Operating Results
Our future operating results may vary substantially from period to period due to a variety of significant risks, some of which are discussed below and elsewhere in this Report on Form 10-K. We strongly urge current and prospective investors to carefully consider the cautionary statements and risks contained in this Report including those regarding forward-looking statements described on Page 2.
Significant variation in the timing and amount of our revenues may cause fluctuations in our quarterly operating results and accurate estimation of our revenues is difficult.
Our operating results have varied from quarter to quarter in the past and may vary in the future depending upon a number of factors described below, including many that are beyond our control. As a result, we believe that quarter-to-quarter comparisons of our financial results should not be relied on to indicate our future performance. We operate with little or no backlog, and our quarterly license revenues depend largely on orders booked and shipped in a quarter. Historically, we have recorded a majority of our quarterly license revenues in the last month of each quarter, particularly during the final two weeks. In recent periods, we have experienced fluctuations in the purchasing patterns of our customers. For example, during 2003 and the first half of 2004, we experienced an overall increase in the volume of license revenue transactions but an overall decrease in the average dollar value of these transactions. Although many of our customers are larger enterprises, an apparent trend toward more conservative IT spending could result in fewer of these customers making substantial investments in our products and services in any given period. Therefore, if one or more significant orders do not close in a particular quarter, our results of operations could be materially and adversely affected, as was the case in the first and second quarters of 2004.
Our operating expenses are based on projected annual and quarterly revenue levels, and are generally incurred ratably throughout each quarter. Since our operating expenses are relatively fixed in the short term, failure to realize projected revenues for a specified period could adversely impact operating results, reducing net income or causing an operating loss for that period. The deferral or non-occurrence of such revenues would materially adversely affect our operating results for that quarter and could impair our business in future periods. Because we do not know when, or if, our potential customers will place orders and finalize contracts, we cannot accurately predict our revenue and operating results for future quarters.
In addition to the above factors, the timing and amount of our revenues are subject to a number of factors that make it difficult to accurately estimate revenues and operating results on a quarterly or annual basis. For example, in the first and second quarters of fiscal 2004, our results fell short of our previously announced forecasts for those periods. In our experience revenues in the fourth quarter benefit from large enterprise customers placing orders before the expiration of budgets tied to the calendar year. As a result, revenues from license fees tend to decline from the fourth quarter of one year to the first quarter of the next year. In the past, this seasonality has contributed to lower total revenues and earnings in the first quarter compared to the prior fourth quarter. We cannot assure you that estimates of our revenues and operating results can be made with certain accuracy or predictability. Fluctuations in our operating results may contribute to volatility in our stock price.
Economic conditions in the U.S. and worldwide could adversely affect our revenues.
Our revenues and operating results depend on the overall demand for our products and services. General weakening of the U.S. and worldwide economy in recent years contributed to a decrease in our revenues from 2000 to 2003. Economic uncertainty caused many of our customers to delay or significantly reduce discretionary spending for larger infrastructure IT projects, which contributed to the decline in our revenues from 2000 to 2003. In part due to improvements in the worldwide economy, our 2005 revenues exceeded 2004 revenues by 3.8 percent. If the U.S. and worldwide economies do not continue to stabilize and improve, or if these economies weaken, either alone or in tandem with other factors beyond our control (including war, political unrest, shifts in market demand for our products, actions by competitors, etc.), we may not be able to maintain or expand our recent revenue growth.
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If we fail to maintain or expand our relationships with strategic partners and indirect distribution channels our license revenues could decline.
We currently derive a significant portion of our license revenues from sales of our products and services through non-exclusive distribution channels, including strategic partners, systems integrators (SIs), original equipment manufacturers (OEMs) and value-added resellers (VARs). We generally anticipate that sales of our products through these channels will account for a substantial portion of our license revenues in the foreseeable future. Because most of our channel relationships are non-exclusive, there is a risk that some or all of them could promote or sell our competitors’ products instead of ours, or that they will be unable to effectively sell new products that we may introduce. Additionally, if we are unable to expand our indirect channels, or these indirect channels fail to generate significant revenues in the future, our business could be harmed.
Our development, marketing and distribution strategies also depend in part on our ability to form strategic relationships with other technology companies. If these companies change their business focus, enter into strategic alliances with other companies or are acquired by our competitors or others, support for our products could be reduced or eliminated, which could have a material adverse effect on our business and financial condition.
Industry consolidation and other competitive pressures could affect prices or demand for our products and services, and our business may be adversely affected.
The IT industry and the market for our core database infrastructure products and services is becoming increasingly competitive due to a variety of factors including a maturing enterprise infrastructure software market, changes in customer IT spending habits, and mixed economic recovery in the U.S. There also appears to be a growing trend toward consolidation in the software industry, as evidenced by Oracle’s acquisitions of PeopleSoft and Siebel Systems, Symantec’s acquisition of Veritas, and PeopleSoft’s 2003 acquisition of J.D. Edwards. Continued consolidation within the software industry could create opportunities for larger software companies, such as IBM, Microsoft and Oracle, to increase their market share through the acquisition of companies that dominate certain lucrative market niches or that have loyal installed customer bases. Continued consolidation activity could pose a significant competitive disadvantage to us.
The significant purchasing and market power of larger companies may also subject us to increased pricing pressures. Many of our competitors have greater financial, technical, sales and marketing resources, and a larger installed customer base than us. In addition, our competitors’ advertising and marketing efforts could overshadow our own and/or adversely influence customer perception of our products and services, and harm our business and prospects as a result. To remain competitive, we must develop and promote new products and solutions, enhance existing products and retain competitive pricing policies, all in a timely manner. Our failure to compete successfully with new or existing competitors in these and other areas could have a material adverse impact on our ability to generate new revenues or sustain existing revenue levels.
The ability to rapidly develop and bring to market advanced products and services that are successful is crucial to maintaining our competitive position.
Widespread use of the Internet and fast-growing market demand for mobile and wireless solutions may significantly alter the manner in which business is conducted in the future. In light of these developments, our ability to timely meet the demand for new or enhanced products and services to support wireless and mobile business operations at competitive prices could significantly impact our ability to generate future revenues. We acquired AvantGo in 2003, as well as XcelleNet and certain assets of Dejima in April 2004, to enhance our mobile, wireless and embedded solutions that form the foundation of our Unwired Enterprise initiative. In October 2005 we acquired Extended Systems Incorporated, in part to strengthen our Unwired Enterprise effort. If the market for unwired solutions does not continue to develop as we anticipate, if our solutions and services do not successfully compete in the relevant markets, or our new products are not widely adopted and successful, our competitive position and our operating results could be adversely affected.
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If our existing customers cancel or fail to renew their technical support agreements, or if customers do not license new or additional products on terms favorable to us, our technical support revenues could be adversely affected.
We currently derive a significant portion of our overall revenues from technical support services, which are included in service revenues. The terms of our standard software license arrangements provide for the payment of license fees and prepayment of first-year technical support fees. Support is renewable annually at the option of the end user. We have recently been experiencing increasing pricing pressure from customers when purchasing or renewing technical support agreements and this pressure may result in our reducing support fees or in lost support fees if we refuse to reduce our pricing, either of which could result in reduced revenue. If our existing customers cancel or fail to renew their technical support agreements, or if we are unable to generate additional support fees through the license of new products to existing or new customers, our business and future operating results could be adversely affected.
Unanticipated delays or accelerations in our sales cycles could result in significant fluctuations in our quarterly operating results.
The length of our sales cycles varies significantly from product to product. The sales cycle for some of our products can take up to 18 months to complete. Any delay or unanticipated acceleration in the closing of a large license or a number of smaller licenses could result in significant fluctuations in our quarterly operating results. For example, in the second quarter of 2004, the license revenue in IPG declined 15% from the prior year period, in part due to larger sales being delayed and a lengthening sales cycle. The length of the sales cycle may vary depending on a number of factors over which we may have little or no control, including the size and complexity of a potential transaction, the level of competition that we encounter in our selling activities and our potential customers’ internal budgeting process. Our sales cycle can be further extended for product sales made through third party distributors. As a result of the lengthy sales cycle, we may expend significant efforts over a long period of time in an attempt to obtain an order, but ultimately not complete the sale, or the order ultimately received may be smaller than anticipated.
We may encounter difficulties completing or integrating our acquisitions and strategic relationships and may incur acquisition-related charges that could adversely affect our operating results.
We regularly explore possible acquisitions and other strategic ventures to expand and enhance our business. Additionally, we have in the past and may in the future make strategic investments in other companies. We have recently acquired a number of companies and formed certain strategic relationships. For example, we acquired AvantGo in 2003 and XcelleNet and certain assets of Dejima in April 2004. In April 2005 we acquired ISDD and the assets of Avaki Corporation, both privately-held companies. In October 2005 we acquired Extended Systems Incorporated, a NASDAQ listed company. We expect to continue to pursue acquisitions of complimentary or strategic business product lines, assets and technologies.
We may not achieve the desired benefits of our acquisitions and investments. For example, we may be unable to successfully assimilate an acquired company’s management team, employees or business infrastructure. Also, dedication of additional resources to execute acquisitions and handle integration tasks could temporarily divert attention from other important business. Such acquisitions could also result in costs, liabilities, or additional expenses that could harm our results of operations and financial condition. In addition, we may not be able to maintain customer, supplier or other favorable business relationships of ours, or of our acquired operations, or be able to terminate or restructure unfavorable relationships.
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Under Statement of Financial Accounting Standard No. 142 we no longer amortize goodwill but evaluate goodwill recorded in connection with acquisitions at least annually for impairment. As of December 31, 2005, we had approximately $238.9 million of goodwill recorded on our balance sheet, none of which was determined to be impaired as of that date. Goodwill impairments are based on the value of our reporting units and reporting units that previously recognized impairment charges are prone to additional impairment charges if future revenue and expense forecasts or market conditions worsen after an impairment is recognized. If goodwill is determined to be impaired in the future we will be required to take a non-cash charge to earnings to write-off impaired goodwill, which could significantly impact our net income.
With respect to our investments in other companies, we may not realize a return on our investments, or the value of our investments may decline if the businesses in which we invest are not successful. Future acquisitions may also result in dilutive issuances of equity securities, the incurrence of debt, restructuring charges relating to the consolidation of operations and the creation of other intangible assets that could result in amortization expense or impairment charges, any of which could adversely affect our operating results.
Restructuring activities and reorganizations in our sales model or business units may not succeed in increasing revenues and operating results.
Since 2000, we have implemented several restructuring plans in an effort to align our expense structure to our expected revenue. As a result of these restructuring activities, we have recorded restructuring charges totaling approximately $116 million through December 31, 2005. Our ability to significantly reduce our current cost structure in any material respects through future restructurings may be difficult without fundamentally changing elements of our current business. If we are unable to generate increased revenues or control our operating expenses going forward, our results of operations will be adversely affected.
Our sales model has evolved significantly during the past few years to keep pace with new and developing markets and changing business environments. If we have overestimated demand for our products and services in our target markets, or if we are unable to coordinate our sales efforts in a focused and efficient way, our business and prospects could be materially and adversely affected. For example, in January 2003, we reorganized our sales focus with the creation of the IPG, which was designed to integrate and provide synergies among our different products lines and to focus on increasing our market presence and revenue through indirect channels such as SIs, OEMs and VARs and other resellers. In the process of this reorganization, we brought three of our former divisions, ESD, eBD and BID, under a single umbrella, and reduced the number of our business divisions from five to three. In early 2005 the IPG sales organization was restructured into two organizations, North America and International. In the second quarter of 2005, our FFI business was integrated into IPG in an effort to better support the FFI product line and promote synergies between FFI and IPG technical resources. Other organizational changes in our sales or divisional model could have a direct effect on our results of operations depending on whether and how quickly and effectively our employees and management are able to adapt to and maximize the advantages these changes are intended to create. We cannot assure that these or other organizational changes in our sales or divisional model will result in any increase in revenues or profitability, and they could adversely affect our business.
Our results of operations may depend on the compatibility of our products with other software developed by third parties.
Our future results may be affected if our products cannot interoperate and perform well with software products of other companies. Certain leading applications currently are not, and may never be, interoperable with our products. In addition, many of our principal products are designed for use with products offered by competitors. In the future, vendors of non-Sybase products may become less willing to provide us with access to their products, technical information, and marketing and sales support, which could harm our business and prospects.
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We are subject to risks arising from our international operations.
We derive a substantial portion of our revenues from our international operations, and we plan to continue expanding our business in international markets in the future. In 2005, revenues outside North America represented 43 percent of our total revenues. As a result of our international operations, we are affected by economic, regulatory and political conditions in foreign countries, including changes in IT spending generally, the imposition of government controls, changes or limitations in trade protection laws, unfavorable changes in tax treaties or laws, natural disasters, labor unrest, earnings expatriation restrictions, misappropriation of intellectual property, acts of terrorism and continued unrest and war in the Middle East and other factors, which could have a material impact on our international revenues and operations. Our revenues outside North America could also fluctuate due to the relative immaturity of some markets, rapid growth in other markets, and organizational changes we have made to accommodate these conditions.
Due to the significance of our business conducted in currencies other than the U.S. dollar, our results of operations could be materially and adversely affected by fluctuations in foreign currency exchange rates, even though we take into account changes in exchange rates over time in our pricing strategy. Additionally, changes in foreign currency exchange rates, the strength of local economies, and the general volatility of worldwide software markets could result in a higher or lower proportion of international revenues as a percentage of total revenues in the future.
We face exposure to adverse movements in foreign currency exchange rates.
We experience foreign exchange translation exposure on our net assets and transactions denominated in currencies other than the U.S. dollar. We do not utilize foreign currency hedging contracts to smooth the impact of converting non-U.S. dollar denominated revenues into U.S. dollars for financial reporting. Because we do not anticipate entering into currency hedges for non-U.S. dollar revenues, our future results will fluctuate based on the appreciation or depreciation of the U.S. dollar against major foreign currencies.
As of December 31, 2005, we had identified net assets totaling $100.9 million associated with our EMEA operations, and $81.4 million associated with our Asia Pacific and Latin America operations. Accordingly, we may experience fluctuations in operating results as a result of translation gains and losses associated with these asset and liability values. In order to reduce the effect of foreign currency fluctuations on our and certain of our subsidiaries’ balance sheets, we utilize foreign currency forward exchange contracts (forward contracts) to hedge certain foreign currency transaction exposures. Specifically, we enter into forward contracts with a maturity of approximately 30 days to hedge against the foreign exchange exposure created by certain balances that are denominated in a currency other than the principal reporting currency of the entity recording the transaction. The gains and losses on the forward contracts are intended to mitigate the gains and losses on these outstanding foreign currency transactions and we do not enter into forward contracts for trading purposes. However, our efforts to manage these risks may not be successful. Failure to adequately manage our currency exchange rate exposure could adversely impact our financial condition and results of operations.
Growing market acceptance of “open source” software could cause a decline in our revenues and operating margins.
Growing market acceptance of open source software has presented both benefits and challenges to the commercial software industry in recent years. “Open source” software is made widely available by its authors and is licensed “as is” for a nominal fee or, in some cases, at no charge. For example, Linux is a free Unix-type operating system, and the source code for Linux is freely available. We have developed certain products to operate on the Linux platform, which has created additional sources of revenues. Additionally, we have incorporated other types of open source software into our products, allowing us to enhance certain solutions without incurring substantial additional research and development costs. Thus far, we have encountered no unanticipated material problems arising from our use of open source software. However, as the use of open source software becomes more widespread, certain open source technology could become competitive with our proprietary technology, which could cause sales of our products to decline or force us to reduce the fees we charge for our products, which could have a material adverse impact on our revenues and operating margins.
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If we are unable to protect our intellectual property, or if we infringe or are alleged to infringe a third party’s intellectual property, our operating results may be adversely affected.
We rely on a combination of copyright, patent, trademark and trade secret laws and contractual restrictions on disclosure to protect our intellectual property rights. We cannot be certain that the steps we have taken will prevent unauthorized use of our technology. Our inability to obtain adequate copyright, patent or trade secret protection for our products in certain countries could diminish the competitive advantages we derive from our proprietary technology and may have a material adverse impact on future operating results. In addition, as the number of software products and associated patents increase, it is possible that software developers will become subject to more frequent infringement claims.
We have in the past received claims by third parties asserting that our products violate their patents or other proprietary rights. It is likely that such claims will be asserted in the future. In addition, to the extent we acquire other intellectual property rights, whether directly from third parties or through acquisitions of other companies, we face the possibility that such intellectual property will be found to infringe or violate the proprietary rights of others. Regardless of whether these claims have merit, they can be time consuming and expensive to defend or settle, and can harm our business and reputation. Patent litigation involving software companies has increased significantly in recent years as the number of software patents has increased and as the number of patent holding companies has increased. Recent high profile litigation and patent settlements in the United States may encourage additional patent litigation involving software and technology companies.
We currently license our software products to end users directly, or through a number of reseller channels including OEMs, VARs and SIs. Under our standard software license agreements, we contractually agree to indemnify our licensees against claims that our software infringes the intellectual property rights of third parties. Some of our products, including our core enterprise database product, incorporate intellectual property licensed from third parties or open source software. We attempt to exclude open source software and other products for which no IP indemnity is provided by the licensor from the scope of our indemnification obligations. However, if we fail to successfully exclude such technology from our indemnification obligations, claims that such open source or third party technology infringes the intellectual property rights of a third party could materially and adversely affect our business and financial condition.
Our key personnel are critical to our business, and we cannot assure that they will remain with us.
Our success depends on the continued service of our executive officers and other key personnel. In recent years, we have made additions and changes to our executive management team. For example, in August 2004, Martin J. Healy, Vice President and Corporate Controller, retired and was replaced by Jeffrey G. Ross, formerly Group Director of Tax and Accounting. Further changes involving executives and managers resulting from acquisitions, mergers and other events could increase the current rate of employee turnover, particularly in consulting, engineering and sales. We cannot be certain that we will retain our officers and key employees. In particular, if we are unable to hire and retain qualified technical, managerial, sales, finance and other employees it could adversely affect our product development and sales efforts, other aspects of our operations, and our financial results. Competition for highly skilled personnel in the software industry is intense. Our financial and stock price performance relative to the companies with whom we compete for employees, and the high cost of living in the San Francisco Bay Area, where our headquarters is located, could also impact the degree of future employee turnover.
Changes in accounting and legal standards could adversely affect our future operating results.
During the past several years, various accounting guidance has been issued with respect to revenue recognition rules in the software industry. However, much of this guidance addresses software revenue recognition primarily from a conceptual level, and is silent as to specific implementation requirements. As a consequence, we have been required to make assumptions and judgments, in certain circumstances, regarding application of the rules to transactions not addressed by the existing rules. We believe our current business arrangements and contract terms have been properly reported under the current rules. However, if final interpretations of, or changes to, these rules necessitate a change in our current revenue recognition practices, our results of operations, financial condition and business could be materially and adversely affected.
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In October 2004, the FASB concluded that Statement 123R, Share-Based Payment “Statement 123(R)” requiring companies to measure compensation cost for all share-based payments at fair value, would be effective for most public companies for interim or annual periods beginning after June 15, 2005. In April 2005 the SEC extended the implementation date to annual periods commencing after June 15, 2005. We currently account for stock-based employee compensation using the intrinsic value method prescribed in Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued to Employees, and Related Interpretations.” However, we will be required to measure and recognize the cumulative effect, if any, from the adoption of Statement 123(R) beginning January 1, 2006. We currently estimate that the fiscal 2006 impact on Sybase of adopting SFAS 123(R) will be a decrease in net income in the range of approximately $5 million to $8 million. The actual effects of adopting SFAS 123(R) will depend on numerous factors including the assumptions used for the Black Scholes value model including expected volatility, term, and forfeiture rates, and the timing and amount of future share-based payments to employees.
In addition to the changes discussed above, the U.S. Congress enacted the Sarbanes-Oxley Act of 2002 in July 2002, providing for or mandating the implementation of extensive corporate governance reforms relating to public company financial reporting, internal controls, corporate ethics, and oversight of the accounting profession, among other areas. We are also subject to additional rules and regulations, including those enacted by the New York Stock Exchange where our common stock is traded. Compliance with existing or new rules that influence significant adjustments to our business practices and procedures could result in significant expense and may adversely affect our results of operations. Failure to comply with these rules could result in delayed financial statements and might adversely impact the price of our common stock.
The unfavorable outcome of litigation and other claims against us could have a material adverse impact on our financial condition and results of operations.
We are subject to a variety of claims and lawsuits from time to time, some of which arise in the ordinary course of our business. Adverse outcomes in some or all of such pending cases may result in significant monetary damages or injunctive relief against us. While management currently believes that resolution of these matters, individually or in the aggregate, will not have a material adverse impact on our financial position or results of operations, the ultimate outcome of litigation and other claims noted are subject to inherent uncertainties, and management’s view of these matters may change in the future. It is possible that our financial condition and results of operations could be materially adversely affected in any period in which the effect of an unfavorable final outcome becomes probable and reasonably estimable.
Our operations and financial results could be severely harmed by certain natural disasters.
Our headquarters and some of our major customers’ facilities are located near major earthquake faults. We have not been able to maintain earthquake insurance coverage at reasonable costs. Instead, we rely on self-insurance and preventative safety measures. We currently ship most of our products from our Dublin, California facility near the site of our corporate headquarters. If a major earthquake or other natural disaster occurs, disruption of operations at that facility could directly harm our ability to record revenues for such quarter. This could, in turn, have an adverse impact on operating results.
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Provisions of our corporate documents have anti-takeover effects that could prevent a change in control.
Provisions of our certificate of incorporation, bylaws, stockholder rights plan and Delaware law could make it more difficult for a third party to acquire us, even if doing so would be beneficial to our stockholders. These provisions include authorizing the issuance of preferred stock without stockholder approval, prohibiting cumulative voting in the election of directors, prohibiting the stockholders from calling stockholders meetings and prohibiting stockholder actions by written consent.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required by this item is presented under “MD&A — Financial Risk Management,” Part II, Item 7.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
TABLE OF CONTENTS
| | | | | |
| | | Page | |
| Report of Management on Internal Controls over Financial Reporting | | | 40 | |
| Report of Independent Registered Public Accounting Firm on Internal Controls over Financial Reporting | | | 41 | |
| Report of Independent Registered Public Accounting Firm | | | 42 | |
| Consolidated Balance Sheets as of December 31, 2005 and 2004 | | | 43 | |
| Consolidated Statements of Operations for the Years Ended December 31, 2005, 2004 and 2003 | | | 44 | |
| Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2005, 2004 and 2003 | | | 45 | |
| Consolidated Statements of Cash Flows for the Years Ended December 31, 2005, 2004 and 2003 | | | 46 | |
| Notes to Consolidated Financial Statements | | | 47 | |
Report of Management on Internal Controls over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2005 based on the framework in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on that evaluation, our management concluded that our internal control over financial reporting was effective as of December 31, 2005 to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with generally accepted accounting principles. We reviewed the results of management’s assessment with the Audit Committee of our Board of Directors.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management’s assessment of the effectiveness of our internal control over financial reporting as of December 31, 2005 has been audited by Ernst & Young LLP, an independent registered public accounting firm, as stated in their report which is included elsewhere herein.
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The Board of Directors and Stockholders of Sybase, Inc.
We have audited management’s assessment, included in the accompanying Report of Management on Internal Controls over Financial Reporting, that Sybase, Inc. maintained effective internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Sybase, Inc.’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, management’s assessment that Sybase, Inc. maintained effective internal control over financial reporting as of December 31, 2005, is fairly stated, in all material respects, based on the COSO criteria. Also, in our opinion, Sybase, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2005, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the 2005 consolidated financial statements of Sybase, Inc. and our report dated March 10, 2006 expressed an unqualified opinion thereon.
/s/ ERNST & YOUNG LLP
San Jose, California
March 10, 2006
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders of Sybase, Inc.
We have audited the accompanying consolidated balance sheets of Sybase, Inc. as of December 31, 2005 and 2004, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2005. Our audits also included the financial statement schedule listed in the Index at Item 15(a). These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Sybase, Inc. at December 31, 2005 and 2004, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2005, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Sybase, Inc.’s internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 10, 2006 expressed an unqualified opinion thereon.
/s/ ERNST & YOUNG LLP
San Jose, California
March 10, 2006
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Consolidated Balance Sheets
| | | | | | | | | |
| (Dollars in thousands, except share and per share data) | | December 31 | |
| | | 2005 | | | 2004 | |
| Assets | | | | | | | | |
| Current assets: | | | | | | | | |
| Cash and cash equivalents | | $ | 398,741 | | | $ | 321,417 | |
| Short-term cash investments | | | 342,247 | | | | 158,217 | |
| | | | | | | |
| Total cash, cash equivalents and short-term cash investments | | | 740,988 | | | | 479,634 | |
| Restricted cash | | | 2,773 | | | | 5,356 | |
| Accounts receivable, less allowance for doubtful accounts of $2,651 (2004 — $1,852) | | | 167,790 | | | | 157,897 | |
| Deferred income taxes | | | 5,523 | | | | 11,205 | |
| Prepaid expenses and other current assets | | | 16,876 | | | | 14,790 | |
| | | | | | | |
| Total current assets | | | 933,950 | | | | 668,882 | |
| Long-term cash investments | | | 118,948 | | | | 33,998 | |
| Restricted long-term cash investments | | | 2,600 | | | | 2,600 | |
| Property, equipment and improvements, net | | | 59,178 | | | | 64,371 | |
| Deferred income taxes | | | 24,879 | | | | 39,440 | |
| Capitalized software, net | | | 65,911 | | | | 61,771 | |
| Goodwill | | | 238,864 | | | | 214,110 | |
| Other purchased intangibles, less accumulated amortization of $104,915 (2004 — $86,442) | | | 87,562 | | | | 67,208 | |
| Other assets | | | 38,722 | | | | 31,142 | |
| | | | | | | |
| Total assets | | $ | 1,570,614 | | | $ | 1,183,522 | |
| | | | | | | |
| | | | | | | | | |
| Liabilities and stockholders’ equity | | | | | | | | |
| | | | | | | | | |
| Current liabilities: | | | | | | | | |
| Accounts payable | | $ | 10,353 | | | $ | 11,962 | |
| Accrued compensation and related expenses | | | 51,983 | | | | 43,632 | |
| Accrued income taxes | | | 31,398 | | | | 32,595 | |
| Other accrued liabilities | | | 78,040 | | | | 81,715 | |
| Deferred revenue | | | 188,929 | | | | 208,741 | |
| | | | | | | |
| Total current liabilities | | | 360,703 | | | | 378,645 | |
| | | | | | | |
| | | | | | | | | |
| Other liabilities | | | 40,339 | | | | 33,121 | |
| Long-term deferred revenue | | | 5,663 | | | | 10,170 | |
| Minority interest | | | 5,079 | | | | 5,030 | |
| Convertible subordinated notes | | | 460,000 | | | | — | |
| | | | | | | | | |
| Commitments and contingent liabilities | | | | | | | | |
| |
| Stockholders’ equity: | | | | | | | | |
| Preferred stock, $0.001 par value, 8,000,000 shares authorized; none Issued or outstanding | | | — | | | | — | |
| Common stock, $0.001 par value; 200,000,000 shares authorized; 105,337,362 shares issued and 90,531,145 shares outstanding (2004 – 105,337,362 shares issued and 95,518,977 shares outstanding) | | | 105 | | | | 105 | |
| Additional paid-in capital | | | 953,771 | | | | 940,806 | |
| Accumulated earnings (deficit) | | | 16,195 | | | | (66,690 | ) |
| Accumulated other comprehensive income | | | 19,231 | | | | 49,356 | |
| Cost of 14,806,217 shares of treasury stock (2004 – 9,818,385 shares) | | | (277,510 | ) | | | (159,617 | ) |
| Unearned stock compensation | | | (12,962 | ) | | | (7,404 | ) |
| | | | | | | |
| Total stockholders’ equity | | | 698,830 | | | | 756,556 | |
| | | | | | | |
| Total liabilities and stockholders’ equity | | $ | 1,570,614 | | | $ | 1,183,522 | |
| | | | | | | |
See accompanying notes.
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Consolidated Statements of Operations
| | | | | | | | | | | | | |
| (In thousands, except per share data) | | For the years ended December 31 | |
| | | 2005 | | | 2004 | | | 2003 | |
| Revenues: | | | | | | | | | | | | |
| License fees | | $ | 291,695 | | | $ | 275,872 | | | $ | 274,817 | |
| Services | | | 527,000 | | | | 512,664 | | | | 503,245 | |
| | | | | | | | | | |
| Total revenues | | | 818,695 | | | | 788,536 | | | | 778,062 | |
| | | | | | | | | | | | | |
| Costs and expenses: | | | | | | | | | | | | |
| Cost of license fees | | | 51,556 | | | | 60,795 | | | | 60,711 | |
| Cost of services | | | 156,325 | | | | 162,016 | | | | 162,703 | |
| Sales and marketing | | | 250,003 | | | | 242,778 | | | | 239,173 | |
| Product development and engineering | | | 139,011 | | | | 119,959 | | | | 116,967 | |
| General and administrative | | | 92,106 | | | | 91,117 | | | | 84,750 | |
| Amortization of other purchased intangibles | | | 6,639 | | | | 5,139 | | | | 2,000 | |
| Reversal of AvantGo restructuring accrual | | | — | | | | (2,677 | ) | | | — | |
| Cost of restructuring | | | 1,115 | | | | 20,017 | | | | 7,429 | |
| | | | | | | | | | |
| Total costs and expenses | | | 696,755 | | | | 699,144 | | | | 673,733 | |
| | | | | | | | | | |
| | | | | | | | | | | | | |
| Operating income | | | 121,940 | | | | 89,392 | | | | 104,329 | |
| Interest income | | | 25,707 | | | | 10,908 | | | | 11,229 | |
| Interest expense and other income, net | | | (10,883 | ) | | | 666 | | | | 2,537 | |
| Minority interest | | | (49 | ) | | | — | | | | — | |
| | | | | | | | | | |
| Income before income taxes | | | 136,715 | | | | 100,966 | | | | 118,095 | |
| Provision for income taxes | | | 51,132 | | | | 33,016 | | | | 30,829 | |
| | | | | | | | | | |
| | | | | | | | | | | | | |
| Net income | | $ | 85,583 | | | $ | 67,950 | | | $ | 87,266 | |
| | | | | | | | | | |
| Basic net income per share | | $ | 0.95 | | | $ | 0.71 | | | $ | 0.92 | |
| | | | | | | | | | |
| Shares used in computing basic net income per share | | | 90,307 | | | | 95,550 | | | | 94,833 | |
| | | | | | | | | | |
| Diluted net income per share | | $ | 0.92 | | | $ | 0.69 | | | $ | 0.89 | |
| | | | | | | | | | |
| Shares used in computing diluted net income per share | | | 93,257 | | | | 98,001 | | | | 97,582 | |
| | | | | | | | | | |
See accompanying notes.
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Consolidated Statements of Stockholders’ Equity
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (Dollars and shares in thousands) | | Three years ended December 31, 2005 | |
| | | | | | | | | | | | | | | | | | | Accumulated | | | | | | | | | | | |
| | | Common stock | | | Additional | | | | | | | Other | | | | | | | Unearned | | | | |
| | | Outstanding | | | Par | | | paid-in | | | Accumulated | | | Comprehensive | | | Treasury | | | Stock | | | | |
| | | Shares | | | Value | | | capital | | | Earnings/ | | | Income/(Loss) | | | Stock | | | Compensation | | | Total | |
| | | | | | | | | | | | | | | (Deficit) | | | | | | | | | | | | | | | | | |
| Balances at December 31, 2002 | | | 94,660 | | | $ | 105 | | | $ | 929,064 | | | $ | (189,936 | ) | | $ | (8,673 | ) | | $ | (146,816 | ) | | $ | (3,370 | ) | | $ | 580,374 | |
| | | | | |
| Common stock issued and treasury Stock reissued under stock option, Stock purchase plans and other | | | 5,148 | | | | — | | | | (3 | ) | | | (20,054 | ) | | | — | | | | 75,938 | | | | — | | | | 55,881 | |
| Treasury stock reissued under Restricted stock option plan | | | 353 | | | | | | | | 5,012 | | | | (5,915 | ) | | | — | | | | 5,949 | | | | (5,012 | ) | | | 34 | |
| Treasury stock reissued for certain Services | | | 721 | | | | | | | | — | | | | 1,720 | | | | — | | | | 8,676 | | | | — | | | | 10,396 | |
| Treasury stock repurchased due to Forfeiture in restricted stock Option plan | | | (24 | ) | | | | | | | (416 | ) | | | 534 | | | | — | | | | (536 | ) | | | 415 | | | | (3 | ) |
| Acquisition of treasury stock | | | (2,333 | ) | | | — | | | | — | | | | — | | | | — | | | | (30,883 | ) | | | | | | | (30,883 | ) |
| Amortization of unearned stock Compensation | | | | | | | — | | | | — | | | | — | | | | — | | | | | | | | 2,882 | | | | 2,882 | |
| | | |
| Subtotal | | | 98,525 | | | | 105 | | | | 933,657 | | | | (213,651 | ) | | | (8,673 | ) | | | (87,672 | ) | | | (5,085 | ) | | | 618,681 | |
| Net income | | | — | | | | — | | | | — | | | | 87,266 | | | | — | | | | — | | | | — | | | | 87,266 | |
| Foreign currency translation adjustments | | | — | | | | — | | | | — | | | | — | | | | 36,100 | | | | — | | | | — | | | | 36,100 | |
| Unrealized gains/(losses) on Marketable securities | | | — | | | | — | | | | — | | | | — | | | | (578 | ) | | | — | | | | — | | | | (578 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Comprehensive income | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 122,788 | |
| | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Balances at December 31, 2003 | | | 98,525 | | | $ | 105 | | | $ | 933,657 | | | $ | (126,385 | ) | | $ | 26,849 | | | $ | (87,672 | ) | | $ | (5,085 | ) | | $ | 741,469 | |
| | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common stock issued and treasury Stock reissued under stock option, Stock purchase plans and other | | | 3,058 | | | | — | | | | 601 | | | | (4,284 | ) | | | — | | | | 39,243 | | | | — | | | | 35,560 | |
| Treasury stock reissued under Restricted stock option plan | | | 355 | | | | | | | | 6,673 | | | | (4,071 | ) | | | — | | | | 4,727 | | | | (7,294 | ) | | | 35 | |
| Treasury stock repurchased due to Forfeiture in restricted stock Option plan | | | (21 | ) | | | | | | | (125 | ) | | | 100 | | | | — | | | | (353 | ) | | | 376 | | | | (2 | ) |
| Acquisition of treasury stock | | | (6,398 | ) | | | — | | | | — | | | | — | | | | — | | | | (115,562 | ) | | | — | | | | (115,562 | ) |
| Amortization of unearned stock Compensation | | | | | | | — | | | | — | | | | — | | | | — | | | | | | | | 4,599 | | | | 4,599 | |
| | | |
| Subtotal | | | 95,519 | | | | 105 | | | | 940,806 | | | | (134,640 | ) | | | 26,849 | | | | (159,617 | ) | | | (7,404 | ) | | | 666,099 | |
| Net income | | | — | | | | — | | | | — | | | | 67,950 | | | | — | | | | — | | | | — | | | | 67,950 | |
| Foreign currency translation adjustments | | | — | | | | — | | | | — | | | | — | | | | 23,099 | | | | — | | | | — | | | | 23,099 | |
| Unrealized gains/(losses) on Marketable securities | | | — | | | | — | | | | — | | | | — | | | | (592 | ) | | | — | | | | — | | | | (592 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Comprehensive income | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 90,457 | |
| | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Balances at December 31, 2004 | | | 95,519 | | | $ | 105 | | | $ | 940,806 | | | $ | (66,690 | ) | | $ | 49,356 | | | $ | (159,617 | ) | | $ | (7,404 | ) | | $ | 756,556 | |
| | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common stock issued and treasury Stock reissued under stock option, Stock purchase plans and other | | | 3,764 | | | | — | | | | 101 | | | | (2,913 | ) | | | — | | | | 51,375 | | | | — | | | | 48,563 | |
| Treasury stock repurchased due to Forfeiture in restricted stock Option plan | | | (15 | ) | | | | | | | (267 | ) | | | 215 | | | | — | | | | (216 | ) | | | 267 | | | | (1 | ) |
| Acquisition of treasury stock | | | (8,737 | ) | | | — | | | | — | | | | — | | | | — | | | | (169,052 | ) | | | — | | | | (169,052 | ) |
| Restricted stock | | | — | | | | — | | | | 13,131 | | | | — | | | | — | | | | — | | | | (13,131 | ) | | | — | |
| Amortization of unearned stock Compensation | | | — | | | | — | | | | — | | | | — | | | | — | | | | | | | | 7,306 | | | | 7,306 | |
| | | |
| Subtotal | | | 90,531 | | | | 105 | | | | 953,771 | | | | (69,388 | ) | | | 49,356 | | | | (277,510 | ) | | | (12,962 | ) | | | 643,372 | |
| Net income | | | — | | | | — | | | | — | | | | 85,583 | | | | — | | | | — | | | | — | | | | 85,583 | |
| Foreign currency translation adjustments | | | — | | | | — | | | | — | | | | — | | | | (29,840 | ) | | | — | | | | — | | | | (29,840 | ) |
| Unrealized gains/(losses) on Marketable securities | | | — | | | | — | | | | — | | | | — | | | | (285 | ) | | | — | | | | — | | | | (285 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Comprehensive income | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 55,458 | |
| | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Balances at December 31, 2005 | | | 90,531 | | | $ | 105 | | | $ | 953,771 | | | $ | 16,195 | | | $ | 19,231 | | | $ | (277,510 | ) | | $ | (12,962 | ) | | $ | 698,830 | |
| | | |
See accompanying notes.
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Consolidated Statements of Cash Flows
| | | | | | | | | | | | | |
| (Dollars in thousands) | | For the years ended December 31 | |
| | | 2005 | | | 2004 | | | 2003 | |
| Cash and cash equivalents, beginning of year | | $ | 321,417 | | | $ | 315,404 | | | $ | 231,267 | |
Cash flows from operating activities: | | | | | | | | | | | | |
| Net income | | | 85,583 | | | | 67,950 | | | | 87,266 | |
| Adjustments to reconcile net income to net cash Provided by operating activities: | | | | | | | | | | | | |
| Depreciation and amortization | | | 73,600 | | | | 84,912 | | | | 84,885 | |
| Write-off of assets in restructuring | | | — | | | | 6,908 | | | | 258 | |
| Minority interest in income of subsidiaries | | | 49 | | | | — | | | | — | |
| (Gain) Loss on disposal of assets | | | 528 | | | | 2,680 | | | | (435 | ) |
| Reversal of purchase accounting accrual | | | — | | | | (2,677 | ) | | | — | |
| Deferred income taxes | | | 8,928 | | | | 504 | | | | 729 | |
| Amortization of deferred stock-based compensation | | | 7,306 | | | | 4,599 | | | | 2,882 | |
| Amortization of note issuance costs | | | 1,671 | | | | — | | | | — | |
| Changes in assets and liabilities: | | | | | | | | | | | | |
| Accounts receivable | | | (1,914 | ) | | | (5,342 | ) | | | 40,738 | |
| Other current assets | | | (1,298 | ) | | | 2,070 | | | | 1,646 | |
| Other assets – operating | | | 651 | | | | 4,623 | | | | — | |
| Accounts payable | | | (2,410 | ) | | | 2,323 | | | | (4,591 | ) |
| Accrued compensation and related expenses | | | 7,072 | | | | 3,397 | | | | 1,495 | |
| Accrued income taxes | | | 24,724 | | | | 791 | | | | 6,598 | |
| Other accrued liabilities | | | (10,570 | ) | | | (14,792 | ) | | | (29,598 | ) |
| Deferred revenues | | | (26,436 | ) | | | 8,887 | | | | 5,622 | |
| Other liabilities | | | 2,508 | | | | 9,318 | | | | 4,650 | |
| | | | | | | | | | |
| Net cash provided by operating activities | | | 169,992 | | | | 176,151 | | | | 202,145 | |
| | | | | | | | | | | | | |
Cash flows from investing activities: | | | | | | | | | | | | |
| Decrease in restricted cash | | | 2,583 | | | | 191 | | | | 906 | |
| Purchases of available-for-sale cash investments | | | (837,237 | ) | | | (201,417 | ) | | | (325,725 | ) |
| Maturities of available-for-sale cash investments | | | 439,737 | | | | 149,923 | | | | 153,805 | |
| Sales of available-for-sale cash investments | | | 127,648 | | | | 116,462 | | | | 69,064 | |
| Business combinations, net of cash acquired | | | (71,890 | ) | | | (81,255 | ) | | | (13,900 | ) |
| Purchases of property, equipment and improvements | | | (16,366 | ) | | | (30,445 | ) | | | (35,325 | ) |
| Proceeds from sale of fixed assets | | | 25 | | | | 205 | | | | 159 | |
| Capitalized software development costs | | | (33,906 | ) | | | (36,484 | ) | | | (27,964 | ) |
| Decrease in other assets – investing | | | 2 | | | | 2 | | | | 288 | |
| | | | | | | | | | |
| Net cash used for investing activities | | | (389,404 | ) | | | (82,818 | ) | | | (178,692 | ) |
| | | | | | | | | | | | | |
Cash flows from financing activities: | | | | | | | | | | | | |
| Proceeds from the issuance of convertible subordinated notes, net of issuance costs | | | 450,234 | | | | — | | | | — | |
| Repayments of long-term obligations | | | (1,012 | ) | | | (22,173 | ) | | | — | |
| Payments on capital lease | | | (274 | ) | | | (63 | ) | | | — | |
| Net proceeds from the issuance of common stock and reissuance of treasury stock | | | 48,564 | | | | 35,592 | | | | 55,915 | |
| Purchases of treasury stock | | | (169,053 | ) | | | (115,563 | ) | | | (30,883 | ) |
| | | | | | | | | | |
| Net cash provided by (used for) financing activities | | | 328,459 | | | | (102,207 | ) | | | 25,032 | |
| | | | | | | | | | | | | |
| Effect of exchange rate changes on cash | | | (31,723 | ) | | | 14,887 | | | | 35,652 | |
| | | | | | | | | | |
| | | | | | | | | | | | | |
| Net increase in cash and cash equivalents | | | 77,324 | | | | 6,013 | | | | 84,137 | |
| Cash and cash equivalents, end of year | | | 398,741 | | | | 321,417 | | | | 315,404 | |
| | | | | | | | | | |
| Cash investments, end of year | | | 461,195 | | | | 192,215 | | | | 258,389 | |
| Total cash, cash equivalents and cash investments, end of year | | $ | 859,936 | | | $ | 513,632 | | | $ | 573,793 | |
| | | | | | | | | | |
| | | | | | | | | | | | | |
| Supplemental disclosures: | | | | | | | | | | | | |
| Interest paid | | $ | 5,265 | | | $ | 308 | | | $ | 62 | |
| Income taxes paid, net of refunds | | $ | 15,997 | | | $ | 26,471 | | | $ | 24,152 | |
See accompanying notes.
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Notes to Consolidated Financial Statements
Note One: Summary of Significant Accounting Policies
The Company
Sybase, Inc. (Sybase or the Company) enables the Unwired Enterprise for customers and partners by delivering enterprise and mobile software solutions for information management, development and integration. Sybase solutions integrate platforms, databases, and applications, and extend those applications to mobile workers through mobile and Wi-Fi technologies.
In 2005, the Company’s business was organized into two business segments: Infrastructure Platform Group (IPG), which principally focuses on enterprise class database servers, integration and development products, and iAnywhere Solutions, Inc. (iAS) which provides mobile database and mobile enterprise solutions.
Principles of Consolidation
The consolidated financial statements include the accounts of Sybase and its majority owned subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation. Certain prior year balances have been reclassified to conform to the current year presentation.
Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles (GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements. Management is also required to make certain judgments that affect the reported amounts of revenues and expenses during the reporting period. Sybase periodically evaluates its estimates including those relating to revenue recognition, (impairments) of goodwill and intangible assets, the allowance for doubtful accounts, capitalized software, investments, intangible assets, income taxes, restructuring, stock-based compensation, litigation and other contingencies. The Company bases its estimates on historical experience and various other assumptions that are believed to be reasonable based on the specific circumstances. The Company’s management has discussed these estimates with the Audit Committee of Sybase’s Board of Directors. These estimates and assumptions form the basis for making judgments about the carrying value of certain assets and liabilities that are not readily apparent from other sources. Actual results could differ from these estimates.
Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable consist primarily of amounts due to the Company from its normal business activities. The Company maintains an allowance for doubtful accounts to reflect the expected non-collection of accounts receivable based on past collection history and specific risks identified in the portfolio. Additional allowances might be required if deteriorating economic conditions or other factors affect Sybase customers’ ability to make timely payments.
Capitalized Software
The Company capitalizes software development costs in accordance with SFAS No. 86, “Accounting for Costs of Computer Software to be Sold, Leased or Otherwise Marketed,” (SFAS 86), under which certain software development costs incurred subsequent to the establishment of technological feasibility may be capitalized and amortized over the estimated lives of the related products. The Company determines technological feasibility to be established upon the internal release of a detailed program design as specified by SFAS 86. Upon the general release of the product to customers, development costs for that product are amortized over periods not exceeding three years, based on the estimated economic life of the product. Capitalized software costs amounted to $285.1 million and $251.2 million, at December 31, 2005 and 2004, respectively, and related accumulated amortization was $219.2 million, and $189.4 million, respectively. Software amortization charges included in cost of license fees were $29.7 million, $33.6 million and $31.1 million for 2005, 2004 and 2003, respectively.
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SFAS 86 also requires that the unamortized capitalized costs of a computer software product be compared to the net realizable value of such product at each reporting date. To the extent the unamortized capitalized cost exceeds the net realizable value of a software product based upon its estimated future gross revenues reduced by estimated future costs of completing and disposing of the product, the excess is written off. If the estimated future gross revenue associated with certain of the Company’s software products were to be reduced, write-offs of capitalized software costs might be required. There were no such write-offs in 2005, 2004 or 2003.
Property, Equipment and Improvements
Property, equipment and improvements are stated at cost less accumulated depreciation. Major renewals and improvements are capitalized, and minor replacements, maintenance and repairs are charged to current operations. Depreciation and amortization are computed using the straight — line method over the estimated useful lives of the assets, while leasehold improvements are amortized over the shorter of the estimated useful life of the asset or the associated lease term.
Costs related to internally developed software and software purchased for internal use, which are required to be capitalized pursuant to Statement of Position (SOP) No. 98-1, “Accounting for Costs of Computer Software Developed or Obtained for Internal Use,“ are included in property, equipment and improvements. Such amounts are amortized over a three-year period which is the estimated economic life, from the time they are placed in service.
Goodwill and Other Purchased Intangible Assets
The Company complies with SFAS No. 142, “Goodwill and Other Intangible Assets,” (SFAS 142). The Company conducted the annual impairment testing required by SFAS 142 as of December 31, 2005, December 31, 2004, and December 31, 2003. The analysis for these years did not indicate an impairment for any of the Company’s reporting units. Therefore, no impairment loss was recognized for these years. In future years, a reduction of the Company’s estimated future economic benefits to be generated by certain reporting units could result in an impairment loss associated with various intangible assets.
Other purchased intangible assets have generally resulted from business combinations accounted for as purchases (see Note Eleven below). Other purchased intangibles with determinate lives are amortized using the straight-line method over periods of 1.5 to 10 years. Other purchased intangibles with indeterminate lives (e.g., trade names) are not amortized.
Impairment of Long-Lived Assets
The Company complies with the provisions of SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” (SFAS 144) which generally requires impairment losses to be recorded on long-lived assets (excluding goodwill) used in operations, such as property, equipment and improvements, and other purchased intangible assets, when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the carrying amount of the assets. There were no such impairment losses in 2005, 2004 or 2003.
Revenue Recognition
The Company derives revenues from two primary sources: the licensing of software, primarily under perpetual software licenses, which are recorded as license fee revenue; and the provision of services which primarily include technical support revenues, consulting, and education revenues.
The Company recognizes revenue in accordance with Statement of Position (“SOP”) 97-2, “Software Revenue Recognition,” as amended by SOP 98-4 and SOP 98-9, and in certain instances in accordance with SOP 81-1, “Accounting for Performance of Construction-Type and Certain Production-Type Contracts.” The Company licenses software under non-cancelable license agreements. License fee revenues are recognized when (a) a non-cancelable license agreement is in force, (b) the product has been delivered, (c) the license fee is fixed or determinable, and (d) collectibility is reasonably assured. If the fee is not fixed or determinable, revenue is recognized as payments become due from the customer and all other revenue recognition criteria are met.
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In software arrangements that include rights to multiple software products and/or services, the Company allocates the total arrangement fee among each of the deliverables using the residual method, under which revenue is allocated to undelivered elements based on vendor-specific objective evidence of fair value of such undelivered elements and the residual amounts of revenue are allocated to delivered elements.
Fees from licenses sold together with consulting services are generally recognized upon shipment provided that the above criteria are met, payment of the license fees are not dependent upon the performance of the services, and the consulting services are not essential to the functionality of the licensed software. If the services are essential to the functionality of the software; payment of the license fees are dependent upon the performance of the services; the arrangement includes milestones or customer specific acceptance criteria; or the services include significant modification or customization of the software both the software license and consulting fees are recognized under the “percentage of completion” method of contract accounting. We use labor hours to estimate the progress to completion. . In order to apply the “percentage of completion” method, management is required to estimate the number of hours needed to complete a particular project. As a result, recognized revenues and profits are subject to revisions as the contract progresses to completion. When the total cost estimate associated with a contract accounted for under the percentage of completion method exceeds revenues, the Company accrues for the estimated loss based on the amount its estimated cost of completing the contract exceeds the applicable revenues.
Sublicense fees are recognized as reported to the Company by its licensees. License fee revenues from sublicense transactions for certain application development and data access tools are recognized upon direct shipment to the end user or direct shipment to the reseller for the end user. If collectibility is not reasonably assured, revenue is recognized when the fee is collected and all other revenue recognition criteria are met.
Technical support revenues are recognized ratably over the term of the related agreements, which in most cases is one year. Revenues from consulting services under time and materials contracts and for education are recognized as services are performed. Revenues from other contract services (e.g., fixed price arrangements) are recognized based on the proportional performance of the project, with performance measured based on hours of work performed.
Business Combinations
The Company has accounted for all its recent acquisitions using the purchase method of accounting. In the case of material acquisitions, the Company based its purchase price allocation on analysis performed by an independent third party. This independent third party also assists in the determination of the useful life of intangible assets acquired in this manner. See Note Eleven for specific details.
Foreign Currencies
The Company translates the accounts of its foreign subsidiaries using the local foreign currency as the functional currency. The assets and liabilities of foreign subsidiaries are translated into U.S. dollars using year-end exchange rates, while revenues and expenses are translated into U.S. dollars using the average exchange rate for the period. Gains and losses from this translation process are credited or charged to the “accumulated other comprehensive loss” account included in stockholders’ equity. Foreign currency transaction gains and losses, which historically have not been material, are included in interest expense and other, net in the consolidated statements of operations.
In order to reduce the effect of foreign currency fluctuations on its results of operations, the Company hedges its exposure on certain transactional balances that are denominated in foreign currencies through the use of short-term foreign currency forward exchange contracts. For the most part, these exposures
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consist of inter-company balances between Sybase entities resulting from software license royalties and certain management, research, and administrative services. These exposures are denominated in Canadian, European and Asia Pacific currencies, primarily the Canadian dollar, the UK pound, and the Euro. These forward exchange contracts are recorded at fair value and the resulting gains or losses, as well as the associated premiums or discounts, are recorded in interest expense and other, net in the consolidated statements of operations and are offset by corresponding gains and losses on hedged balances. All foreign exchange contracts have a life of approximately 30 days and are marked to market at the end of each reporting period with unrealized gains and losses included in other income.
Income Taxes
The asset and liability approach is used to account for income taxes by recognizing deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax base of assets and liabilities. The Company records a valuation allowance to reduce deferred tax assets to the amount that is more likely than not to be realized. The Company has considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance. Additional information regarding the Company’s deferred tax asset and associated valuation allowance is provided in Note Eight below.
Contingent change of control provisions
During the fourth quarter of 2003, FFI, a wholly owned subsidiary of the Company included in the IPG segment entered into a software license and support agreement with an end user customer containing certain change of control provisions that will be triggered if the Company or its customer undergoes a full or partial change of control within five years from the contract date. For example, if an unrelated third party acquires all of the stock or assets of FFI so that Sybase can no longer include any portion of, or any material interest in, the results of FFI (or the acquiring entity) in its consolidated financial statements or its results of operations, the acquiring party will be required to pay the end user customer $10.0 million. Alternatively, if FFI undergoes a partial change of control resulting in Sybase or its affiliates holding less than 50 percent of the voting control of FFI or the acquiring entity, then the acquiring company (or Sybase, if it still includes the results of FFI in its consolidated financial statements) will be required to pay up to $1.5 million to the end user customer. Although the $10.0 million remains fixed, the $1.5 million declined to $1.0 million at December 31, 2004, and to $0.5 million at December 31, 2005, and will expire completely in 2008. As a result, at December 31, 2005, $0.5 million in revenues fees have been deferred and such amounts will be recognized as revenue when the payment obligation expires in 2008.
Stock-Based Compensation
Through calendar year 2005, the Company applied the intrinsic value recognition and measurement principles of Accounting Principles Board (APB) Opinion No. 25,“Accounting for Stock Issued to Employees,”in accounting for stock-based incentives. Accordingly, the Company was not required to record compensation expense when stock options were granted to eligible participants as long as the exercise price was not less than the fair market value of the stock when the option was granted. The Company was also not required to record compensation expense in connection with its Employee Stock Purchase Plan as long as the purchase price of the stock was not less than 85% of the lower of the fair market value of the stock at the beginning of each offering period or at the end of each purchase period.
In October 1995 the FASB issued SFAS 123,“Accounting for Stock-Based Compensation,”and in December 2002 the FASB issued SFAS 148,“Accounting for Stock-Based Compensation – Transition and Disclosure.”Although these pronouncements allowed us to continue to follow the APB 25 guidelines and not record compensation expense for most employee stock-based awards, the Company was required to disclose its pro forma net income or loss and net income or loss per share as if it had adopted SFAS 123 and SFAS 148. The pro forma impact of applying SFAS 123 and SFAS 148 in fiscal 2005, 2004 and 2003 does not necessarily represent the pro forma impact in future years.
On December 16, 2004 the FASB issued SFAS 123 (revised 2004),“Share-Based Payment,”which is a revision of SFAS 123. SFAS 123(R) requires all share-based payments to employees, including grants of employee stock options and purchases under employee stock purchase plans, to be recognized in the statement of operations based on their fair values. The Company is required to adopt this new standard in the first quarter of 2006 calendar year. See“Recent Accounting Pronouncements”later in this Note One.
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To determine the pro forma impact of applying SFAS 123, the Company estimated the fair value of its options using the Black-Scholes option valuation model. This model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. This model also requires the input of highly subjective assumptions including the expected volatility of the Company’s common stock price. The Company’s stock options have characteristics significantly different from those of traded options, and changes in the subjective input assumptions can materially affect the fair value estimates.
Assumptions used for the valuation model are set forth below. The appropriate volatility factor for stock options is the estimated future volatility of the Company’s stock over the expected life of the options.
Prior to the second quarter of 2005 the Company estimated the volatility factors for stock options considering the historical volatility of its stock over the most recent 4.25 year period, which was approximately equal to the average expected life of its options. The Company estimated the volatility factors for its Employee Stock Purchase Plan using the historical volatility of its stock over the most recent six-month period, which was equal to the length of the offering periods under that plan. Beginning in the second quarter of 2005 the Company estimated the volatility of its options considering both the historical volatility of its stock over the most recent 4.25 year period and the prices of publicly traded options, which the Company believes provides a more accurate estimate of expected volatility factors over the life of the options. The Company estimated the volatility factors for its Employee Stock Purchase Plan using the historical volatility of its stock over the most recent six-month period, which was equal to the length of the offering periods under that plan.
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Stock option plans | | Purchase plans |
| | | 2005 | 2004 | 2003 | | | 2005 | 2004 | 2003 |
| Expected volatility | | | 36.93 | % | | | 54.45 | % | | | 64.54 | % | | | * | | | | 55.42 | % | | | 64.41 | % |
| Risk-free interest rates | | | 3.81 | % | | | 3.08 | % | | | 2.56 | % | | | * | | | | 1.39 | % | | | 1.29 | % |
| Expected lives (years) | | | 4.24 | | | | 4.25 | | | | 4.25 | | | | * | | | | .50 | | | | .50 | |
| Expected dividend yield | | | — | | | | — | | | | — | | | | * | | | | — | | | | — | |
| | |
| * | | Due to changes in the discount on ESPP purchases, the ESPP is no longer a compensatory plan under SFAS 123(R). Therefore, no Black-Scholes calculations were necessary for 2005. |
The fair value of the stock-based employee compensation cost was determined using the Black-Scholes option pricing model. The weighted average grant date fair value of options (excluding options for shares in majority owned subsidiaries, FFI and iAS) granted in 2005, 2004 and 2003 was $9.83, $10.10, and $8.40 per share, respectively. The weighted average grant date fair value of the FFI options granted in 2004 and 2003 was $0.36 and $0.43 per share, respectively. No FFI options were granted in 2005. The weighted-average grant-date fair value of the iAS options granted in 2005, 2004 and 2003 was $1.06, $1.16, and $1.31 per share, respectively. The Company excludes expected forfeitures in determining the initial fair values of options.
The following table illustrates the effect on the Company’s net income and net income per share if the Company had applied the fair value recognition provisions of SFAS 123 to stock-based incentives using the Black Scholes valuation model. For purposes of this reconciliation, the Company adds back to previously reported net income all stock-based incentive expense it recorded that relates to acquisitions. The Company then deducts the pro forma stock-based incentive expense determined under the fair value method for all awards including those that relate to acquisitions. The pro forma stock-based incentive expense has no impact on the Company’s cash flow. In the future, the Company may elect to use different
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assumptions under the Black Scholes valuation model or a different valuation model, which could result in a significantly different impact on the Company’s pro forma net income or loss.
| | | | | | | | | | | | | |
| (Dollars in thousands, except per share data) | | 2005 | | | 2004 | | | 2003 | |
| As reported net income — stock-based employee compensation determined using the intrinsic value method | | $ | 85,583 | | | $ | 67,950 | | | $ | 87,266 | |
| | | | | | | | | | | | | |
| Add: Stock-based employee compensation cost, net of tax, Included in net income as reported | | | 7,306 | | | | 4,599 | | | | 2,882 | |
| | | | | | | | | | | | | |
| Less: Pro-forma stock-based employee compensation cost, net of tax, determined under the fair value method | | | (18,148 | ) | | | (24,772 | ) | | | (30,389 | ) |
| | | | | | | | | | |
| | | | | | | | | | | | | |
| Pro-forma net income – stock-based employee Compensation determined under the fair value method | | $ | 74,041 | | | $ | 47,777 | | | $ | 59,759 | |
| | | | | | | | | | | | | |
| Basic net income per share | | | | | | | | | | | | |
| As reported | | $ | 0.95 | | | $ | 0.71 | | | $ | 0.92 | |
| Pro forma | | | 0.82 | | | | 0.50 | | | | 0.63 | |
| | | | | | | | | | | | | |
| Diluted net income per share | | | | | | | | | | | | |
| As reported | | $ | 0.92 | | | $ | 0.69 | | | $ | 0.89 | |
| Pro forma | | | 0.79 | | | | 0.49 | | | | 0.61 | |
Additional information regarding the stock options is provided in Note Seven below.
Net Income Per Share
Shares used in computing basic and diluted net income per share are based on the weighted average shares outstanding in each period. Basic net income per share excludes any dilutive effects of stock options and vested restricted stock. Diluted net income per share includes the dilutive effect of the assumed exercise of stock options and unvested restricted stock not expected to be forfeited using the treasury stock method.
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The following shows the computation of basic and diluted net income per share at December 31:
| | | | | | | | | | | | | |
| (In thousands, except per share data) | | 2005 | | 2004 | | 2003 |
| Net income | | $ | 85,583 | | | $ | 67,950 | | | $ | 87,266 | |
| | | | | | | | | | | | | |
| Shares used in computing basic net income per share | | | 90,307 | | | | 95,550 | | | | 94,833 | |
| | | | | | | | | | | | | |
| Effect of dilutive securities – stock options | | | 2,950 | | | | 2,451 | | | | 2,749 | |
| | | | | | | | | | | | | |
| Shares used in computing diluted net income per share | | | 93,257 | | | | 98,001 | | | | 97,582 | |
| | | | | | | | | | | | | |
| Basic net income per share | | $ | 0.95 | | | $ | 0.71 | | | $ | 0.92 | |
| | | | | | | | | | | | | |
| Diluted net income per share | | $ | 0.92 | | | $ | 0.69 | | | $ | 0.89 | |
The anti-dilutive weighted average shares that were excluded from the shares used in computing diluted net income per share, were 3.7 million, 6.9 million and 6.7 million in 2005, 2004 and 2003, respectively. In addition, the computation of diluted earnings per share excludes the impact of a conversion value excess as conversion requirements have not yet been met. See Note Fifteen – Convertible Subordinated Notes.
Comprehensive Income
Comprehensive income includes net earnings and other changes to stockholders’ equity not reflected in net income. The Company’s components of other comprehensive income consist of foreign currency translation adjustments and unrealized gain/loss on available-for-sale securities.
Advertising
The Company expenses its advertising costs as they are incurred. The Company’s advertising expenses for the years ended December 31, 2005, 2004 and 2003 were approximately $6.6 million, $8.0 million and $10.9 million, respectively.
Recent Accounting Pronouncements
SFAS 123(R),“Share-Based Payment”
On December 16, 2004 the FASB issued SFAS 123 (revised 2004),“Share-Based Payment,”(SFAS 123(R)) which is a revision of SFAS 123,“Accounting for Stock-Based Compensation.”SFAS 123(R) supersedes APB 25,“Accounting for Stock Issued to Employees,”and amends SFAS 95,“Statement of Cash Flows.” Generally, the approach in SFAS 123(R) is similar to the approach described in SFAS 123. However, SFAS 123(R) requires all share-based payments to employees, including grants of employee stock options and purchases under employee stock purchase plans, to be recognized in the statement of operations based on their fair values. Pro forma disclosure of fair value recognition will no longer be an alternative.
The Company is required to adopt this new standard in the first quarter of its 2006 calendar year. SFAS 123(R) permits public companies to adopt its requirements using one of two methods:
| | 1. | | A “modified prospective” method in which compensation cost is recognized beginning with the effective date (a) based on the requirements of SFAS 123(R) for all share-based payments granted after the effective date and (b) based on the requirements of SFAS 123 for all awards granted to employees prior to the effective date that remain unvested on the effective date. |
| |
| | 2. | | A “modified retrospective” method which includes the requirements of the modified prospective method described above but also permits restatement using amounts previously disclosed under the pro forma provisions of SFAS 123 either for (a) all prior periods presented or (b) prior interim periods of the year of adoption. |
The Company has elected to apply the modified prospective method in adopting SFAS 123(R).
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As permitted by SFAS 123, through the end of calendar year 2005 the Company accounted for share-based payments to employees using APB 25’s intrinsic value method. As a consequence, the Company generally recognized no compensation cost for employee stock options and purchases under the Company’s Employee Stock Purchase Plan. Although the adoption of SFAS 123(R)’s fair value method will have no adverse impact on the Company’s balance sheet or net cash flows, it will have a significant adverse impact on the Company’s net income and net income per share. The pro forma effects on net income and earnings per share if the Company had applied the fair value recognition provisions of SFAS 123 to share-based payments to employees in prior periods are disclosed in Note One to the Consolidated Financial Statements.
Although the pro forma effects of applying SFAS 123 may be indicative of the effects of applying SFAS 123(R), the provisions of these two statements differ in some important respects. The actual effects of adopting SFAS 123(R) will depend on numerous factors including the assumptions used for the Black Scholes value model including expected volatility, term, and forfeiture rates, and the timing and amount of future share-based payments to employees.
SFAS 123(R) also requires the benefits of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow, rather than as an operating cash flow as prescribed under current accounting rules. This requirement will reduce net operating cash flows and increase net financing cash flows in periods after adoption. Total cash flow will remain unchanged compared with cash flow as it would have been reported under prior accounting rules.
SFAS No. 154“Accounting Changes and Error Corrections”
In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections: A Replacement of APB Opinion No. 20 and SFAS No. 3.” This statement changes the requirements for the accounting for and reporting of a voluntary change in accounting principle, and also applies to instances when an accounting pronouncement does not include specific transition provisions. The statement replaces the previous requirement that voluntary changes be recognized by including the cumulative effect of the change in net income of the period of the change. The statement requires retrospective application of a new accounting principle to prior periods’ financial statements, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. The statement is effective for changes and corrections made in fiscal years beginning after December 15, 2005. The Company does not expect the adoption of the statement to have a material effect on its financial condition, results of operations or cash flows.
Note Two: Financial Instruments
Cash, Cash Equivalents and Cash Investments
Cash and cash equivalents consist of highly liquid investments that are comprised principally of taxable, short-term money market instruments with maturities of three months or less at the time of purchase and demand deposits with financial institutions. These instruments carry insignificant interest rate risk because of the short-term maturities. Cash equivalents are stated at amounts that approximate fair value based on quoted market prices. Current and long-term cash investments consist principally of commercial paper, corporate bonds, U.S. Government bonds and taxable municipal bonds with maturities between 90 days and up to three years and are stated at amounts that approximate fair value, based on quoted market prices. No individual investment security equaled or exceeded two percent of total assets.
In accordance with SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities,” (SFAS 115) management determines the appropriate classification of debt and equity securities at the time of purchase and re-evaluates such designation as of each balance sheet date. At December 31, 2005, the Company has classified all of its debt and equity securities as available-for-sale pursuant to SFAS 115. Such securities are recorded at fair value and unrealized holding gains and losses, net of the related tax effect, if any, are not reflected in earnings but are reported as a separate component of other comprehensive income (loss) until realized. Declines in fair value judged to be other than temporary are reflected in earnings. Securities are presumed to be impaired if the fair value is less than the cost basis for six consecutive months, absent compelling evidence to the contrary. Declines in fair value recorded as impairment losses in earnings have not been material in any reporting period. Realized gains and losses are determined on the specific identification method and are reflected in income.
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At December 31, cash equivalents and amortized cost of investments in marketable securities and their approximate fair values are as follows:
| | | | | | | | | | | | | | | | | |
| (Dollars in thousands) | | Amortized | | | Unrealized | | | Unrealized | | | Fair Market | |
| | | Cost | | | Gains | | | (Losses) | | | Value | |
| December 31, 2005: | | | | | | | | | | | | | | | | |
| Cash and cash equivalents | | $ | 398,736 | | | $ | 5 | | | $ | — | | | $ | 398,741 | |
| Short-term corporate notes and bonds (maturities of one year or less) | | | 174,274 | | | | 218 | | | | (81 | ) | | | 174,411 | |
| Short-term government obligations (maturities of one year or less) | | | 167,753 | | | | 128 | | | | (45 | ) | | | 167,836 | |
| Long-term corporate notes and bonds (maturities over one year) | | | 83,460 | | | | — | | | | (642 | ) | | | 82,818 | |
| Long-term government obligations (maturities over one year) | | | 36,327 | | | | — | | | | (197 | ) | | | 36,130 | |
| | | |
| | | $ | 860,550 | | | $ | 351 | | | $ | (965 | ) | | $ | 859,936 | |
| | | |
| | | | | | | | | | | | | | | | | |
| December 31, 2004: | | | | | | | | | | | | | | | | |
| Cash and cash equivalents | | $ | 321,417 | | | $ | — | | | $ | — | | | $ | 321,417 | |
| Short-term corporate notes and bonds (maturities of one year or less) | | | 115,180 | | | | 72 | | | | (29 | ) | | | 115,223 | |
| Short-term government obligations (maturities of one year or less) | | | 43,033 | | | | 2 | | | | (41 | ) | | | 42,994 | |
| Long-term corporate notes and bonds (maturities over one year) | | | 28,949 | | | | — | | | | (127 | ) | | | 28,822 | |
| Long-term government obligations (maturities over one year) | | | 5,212 | | | | — | | | | (36 | ) | | | 5,176 | |
| | | |
| | | $ | 513,791 | | | $ | 74 | | | $ | (233 | ) | | $ | 513,632 | |
| | | |
Restricted Cash
At December 31, 2005, the Company had approximately $5.4 million in restricted cash (and restricted long-term cash investments) set aside for a guarantee against certain payroll and lease obligations in the United Kingdom, Sweden, Norway, and California.
Foreign Currency Forward Exchange Contracts
At December 31, 2005, the Company had outstanding forward contracts, all having maturities of approximately 30 days, to exchange various foreign currencies for U.S. dollars and Euros in the amounts of $4.7 million and $15.4 million, respectively, and to exchange U.S. dollars into various foreign currencies in the amount of $27.9 million. At December 31, 2004, the Company had outstanding forward exchange contracts, all having maturities of approximately 30 days, to exchange various foreign currencies for U.S. dollars and Euros in the amounts of $8.1 million and $12.1 million, respectively, and to exchange U.S. dollars into various foreign currencies in the amounts of $23.7 million. All foreign currency forward contracts are marked-to-market at the end of each reporting period with unrealized gains and losses included in other income. Neither the cost nor the fair value of these foreign currency forward contracts was material at December 31, 2005 or 2004. A major U.S. based multinational bank was counter party to all of these contracts during both 2005 and 2004.
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Note Three: Property, Equipment and Improvements
| | | | | | | | | | | |
| | | | | | | | | Estimated useful | |
| (Dollars in thousands) | | 2005 | | | 2004 | | lives | |
| Computer equipment and software | | $ | 274,712 | | | $275,252 | | 3 years |
| Furniture and fixtures | | | 58,260 | | | 59,845 | | 5 years |
| Leasehold improvements and real property | | | 69,976 | | | 63,171 | | Improvements over shorter of 5 years or lease term; property over 7 to 40 years |
| | | | | | | | | |
| | | | 402,948 | | | 398,268 | | | | |
| Less accumulated depreciation | | | (343,770 | ) | | (333,897 | ) | | | |
| | | | | | | | | |
| Net property, equipment and improvements | | $ | 59,178 | | | $ 64,371 | | | | |
| | | | | | | | | |
Depreciation expense amounted to $25.4 million, $28.4 million and $34.9 million in 2005, 2004 and 2003, respectively.
Note Four: Goodwill and Other Purchased Intangibles
The following table reflects the changes in the carrying amount of goodwill (including assembled workforce) by reporting unit.
| | | | | | | | | | | | | |
| (In thousands) | | IPG | | | iAS | | | Consolidated Total | |
| Balance at January 1, 2004 | | $ | 132,541 | | | $ | 8,334 | | | $ | 140,875 | |
| |
| Goodwill recorded on XcelleNet acquisition | | | — | | | | 74,051 | | | | 74,051 | |
| |
| Goodwill recorded on Dejima acquisition | | | — | | | | 837 | | | | 837 | |
| Return to provision adjustment to utilization of acquired tax assets | | | — | | | | 19 | | | | 19 | |
| Reduction for utilization of acquired tax assets | | | (2,114 | ) | | | | | | | (2,114 | ) |
| Foreign currency translation Adjustments | | | 442 | | | | — | | | | 442 | |
| |
| | | | | | | | | | |
| Balance at December 31, 2004 | | $ | 130,869 | | | $ | 83,241 | | | $ | 214,110 | |
| | | | | | | | | | |
| Reduction in goodwill recorded on XcelleNet acquisition | | | — | | | | (410 | ) | | | (410 | ) |
| | | | | | | | | | | | | |
| Reduction in liabilities in purchase accounting | | | (11 | ) | | | — | | | | (11 | ) |
| | | | | | | | | | | | | |
| Goodwill recorded on ISDD acquisition | | | 2,031 | | | | — | | | | 2,031 | |
| | | | | | | | | | | | | |
| Goodwill recorded on Avaki acquisition | | | 2 | | | | — | | | | 2 | |
| | | | | | | | | | | | | |
| Goodwill recorded on Extended Systems acquisition | | | — | | | | 44,898 | | | | 44,898 | |
| | | | | | | | | | | | | |
| Reduction for utilization of acquired tax assets | | | (15,825 | ) | | | (5,049 | ) | | | (20,874 | ) |
| Foreign currency translation Adjustments | | | (882 | ) | | | — | | | | (882 | ) |
| | | | | | | | | | |
| | | | | | | | | | | | | |
| Balance at December 31, 2005 | | $ | 116,184 | | | $ | 122,680 | | | $ | 238,864 | |
| | | | | | | | | | |
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The following table reflects the carrying amounts and accumulated amortization of other purchased intangible assets:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Gross | | | | | | | | | | | Gross | | | | | | | |
| | | Carrying | | | Accumulated | | | Net Carrying | | | Carrying | | | Accumulated | | | Net Carrying | |
| | | Amount | | | Amortization | | | Amount | | | Amount | | | Amortization | | | Amount | |
| (In thousands) | | 12/31/05 | | | 12/31/05 | | | 12/31/05 | | | 12/31/04 | | | 12/31/04 | | | 12/31/04 | |
| Purchased technology | | $ | 134,988 | | | $ | (85,246 | ) | | $ | 49,742 | | | $ | 103,850 | | | $ | (73,414 | ) | | $ | 30,436 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| AvantGo tradenames | | | 3,100 | | | | — | | | | 3,100 | | | | 3,100 | | | | — | | | | 3,100 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| XcelleNet tradenames | | | 4,000 | | | | — | | | | 4,000 | | | | 4,000 | | | | — | | | | 4,000 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Covenant not to compete | | | 2,800 | | | | (2,800 | ) | | | — | | | | 2,800 | | | | (1,244 | ) | | | 1,556 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Customer lists | | | 47,589 | | | | (16,869 | ) | | | 30,720 | | | | 39,900 | | | | (11,784 | ) | | | 28,116 | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Totals | | $ | 192,477 | | | $ | (104,915 | ) | | $ | 87,562 | | | $ | 153,650 | | | $ | (86,442 | ) | | $ | 67,208 | |
| | | | | | | | | | | | | | | | | | | |
Purchased technology is amortized over a period of 4 to 7 years; covenant not to compete is amortized over a period of 18 months; customer lists are amortized over a period of 6 to 10 years. The Avantgo and XcelleNet tradenames are assigned an indeterminate life and are not amortized but instead tested for impairment in the same manner as goodwill. Amortization expense for other purchased intangibles totaled $18.5 million, $22.8 million and $17.3 million in 2005, 2004 and 2003, respectively.
Estimated amortization expense for other purchased intangibles in each of the next five years ending December 31, is as follows (in thousands):
| | | | | |
| 2006 | | | 15,516 | |
| 2007 | | | 15,333 | |
| 2008 | | | 15,259 | |
| 2009 | | | 14,925 | |
| 2010 | | | 12,538 | |
Note Five: Other Assets
Other assets consist of the following (in thousands):
| | | | | | | | | |
| | | 2005 | | | 2004 | |
| Deposits | | $ | 28,476 | | | $ | 25,015 | |
| Other | | | 10,246 | | | | 6,127 | |
| | | | | | | |
| | | | | | | | | |
| | | $ | 38,722 | | | $ | 31,142 | |
| | | | | | | |
Deposits include an $18.0 million security deposit on a 15-year non-cancelable lease for the Company’s Dublin, California facility. Other includes $8.1 million of capitalized note issuance costs related to the Company’s issuance of convertible subordinated notes in 2005. See Note Fifteen to Consolidated Financial Statements.
Note Six: Lease Obligations, Other Liabilities and Commitments
Capital Lease
In May of 2003, the Company entered into a 15-year capital lease for a new facility in Waterloo, Canada. The lease requires monthly payments of approximately $82,717, which includes both principal and interest commencing October 2004 through October 2019. Gross assets of approximately $8.3 million and accumulated depreciation of $0.7 million have been recorded in relation to this capital lease as of December 31, 2005. This capital lease asset is captured on the Company’s balance sheet within property, equipment and improvements, net. The corresponding liability is captured within other liabilities.
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Future minimum lease payments under capital lease obligations at December 31, 2005 are as follows (dollars in thousands):
| | | | | |
| 2006 | | $ | 1,001 | |
| 2007 | | | 996 | |
| 2008 | | | 993 | |
| 2009 | | | 993 | |
| 2010 | | | 993 | |
| Thereafter | | | 8,724 | |
| | | | |
| Sub-total | | | 13,700 | |
| Less amount representing interest | | | 5,758 | |
| | | | |
| Total minimum lease payments | | $ | 7,942 | |
| | | | |
Sale-and-Leaseback
Upon completion of the Company’s acquisition of Extended Systems Incorporated (ESI) in October 2005, the Company assumed the obligations under a sale-and-leaseback transaction completed by ESI in September 2003 related to ESI’s headquarters in Boise, Idaho. The sale-and-leaseback is recorded as a financing transaction. Under the terms of the agreement the Company has an option to repurchase the building and land at any time before September 2013 at a price of $5.1 million. Net assets of approximately $3.2 million have been recorded in relation to the building as of December 31, 2005. The gross proceeds received of $4.8 million are included in other long-term liabilities on the balance sheet at December 31, 2005.
As part of the agreement, ESI entered into a 10-year master lease for the building with annual lease payments, which are recorded as interest expense, equal to 9.2 percent of the sale price, or approximately $442,000. The Company is also obligated to pay all expenses associated with the building during the lease, including the costs of property taxes, insurance, operating expenses and repairs.
Leasehold Improvements Note
As part of the 15-year capital lease agreement entered into for the Company’s Waterloo, Canada facility (see discussion under Capital Lease Obligation above), the Company entered into an agreement with the landlord to finance approximately $1.6 million of leasehold improvements at an annual interest rate of 8.86%. The loan requires monthly principal and interest payments of $15,626, commencing October 2004 through October 2019. The corresponding liabilities of $0.1million and $1.4 million at December��31, 2005 have been recorded in the current and long-term portions of other liabilities, respectively.
Operating leases and Commitments
The Company leases, or has committed to lease, certain office facilities and equipment under operating leases expiring through 2017, which generally require Sybase to pay operating costs, including property taxes, insurance and maintenance. The facility leases generally contain renewal options and provisions adjusting the lease payments based upon changes in the consumer price index, increases in real estate taxes and operating expenses or in fixed increments. Rent expense is reflected on a straight-line basis over the term of the lease.
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Future minimum lease payments under non-cancelable operating leases having initial terms in excess of one year as of December 31, 2005 (including those provided for in the Company’s restructuring accrual) are as follows (dollars in thousands):
| | | | | |
| 2006 | | $ | 44,367 | |
| 2007 | | | 40,164 | |
| 2008 | | | 35,735 | |
| 2009 | | | 34,202 | |
| 2010 | | | 28,307 | |
| Thereafter | | | 120,513 | |
| |
| | | | |
| Total minimum lease payments* | | $ | 303,288 | |
| | | | |
| | |
| * | | Minimum payments have not been reduced by minimum sublease rentals of $10.1 million due in the future under non-cancelable subleases. |
The following schedule shows the composition of total rent expenses for all operating leases:
| | | | | | | | | | | | | |
| | | Year ending December 31, | |
| | | 2005 | | | 2004 | | | 2003 | |
| Rent expense | | $ | 45,990 | | | $ | 46,463 | | | $ | 51,064 | |
| Less: sublease rentals | | | 4,339 | | | | 3,797 | | | | 3,570 | |
| | | | | | | | | | |
| | | | | | | | | | | | | |
| | | $ | 41,651 | | | $ | 42,666 | | | $ | 47,494 | |
| | | | | | | | | | |
Letters of Credit
At December 31, 2005, the Company had outstanding letters of credit in the amount of $2.9 million. These letters of credit have never been accessed, and related to lease obligations of the Company.
Note Seven: Stockholders’ Equity
Pursuant to a Preferred Stock Rights Agreement between the Company and American Stock Transfer and Trust Company, as rights agent, the Company’s Board of Directors declared a dividend of one right (a Right) to purchase one one-thousandth share of the Company’s Series A Participating Preferred Stock for each outstanding share of the Company’s Common Stock outstanding on August 15, 2002. Each Right entitles the registered holder to purchase one one-thousandth of a share of Series A Participating Preferred Stock at an exercise price of $90, subject to certain adjustments, upon the acquisition of, or announcement of the intent to acquire, 15 percent of the Company’s Common Stock by a person or group of affiliated or associated persons. The Rights plan is intended to maximize the value of the Company in the event of an unsolicited attempt to take over the Company in a manner or on terms not approved by the Company’s Board of Directors.
Restricted Option and Stock Grants
Restricted Option Grants
The Company issued rights to certain senior executives to purchase its Common Stock at a price of $0.10 per share as restricted stock under the 1996 Stock Plan. Such issuances totaled 346,000, 358,000, and 383,667 shares during 2004, 2003 and 2001, respectively. Rights totaling 342,000, 353,500, and 383,667 shares were timely exercised, and the restricted shares were issued during 2004, 2003 and 2001, respectively. The restricted shares are subject to repurchase by the Company over a period of six months to four years from the date of grant (Repurchase Period).
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The Company has amortized the difference between the fair market value of the underlying shares on the date the restricted stock purchase rights were granted, and the exercise price of such shares, pro rata over the term of the applicable Repurchase Period. The Company may repurchase shares in the event a restricted shareholder’s recipient’s employment is terminated any time before the relevant Repurchase Period has expired. At December 31, 2005, 327,000 restricted shares issued in 2004 and 326,500 restricted shares issued in 2003, were outstanding and subject to repurchase during the Repurchase Period.
Restricted Stock Grants
During 2005 and 2004 the Company issued restricted Common Stock under the 2003 Stock Plan to certain senior executives and employees totaling 60,000 and 12,700 shares, respectively. The restricted shares are subject to be returned to the Company over a period of three to four years from date of grant. The Company’s return right is triggered in the event a restricted shareholder’s recipient’s employment is terminated any time during the three to four year periods. The Company has amortized the fair market value of the underlying shares on the date the restricted shares were granted pro rata over the term of the applicable return right period.
In 2005, an aggregate of 582,000 shares of Common Stock were granted as restricted stock under the 2003 Stock Plan to certain executives. The restricted shares are subject to be returned to the Company over a period of three years from date of grant. The Company’s return right is triggered in the event a restricted shareholder’s recipient’s employment is terminated any time during the three year period. In addition, two performance criteria need to be met by the Company in order for any restricted shares to have vested. First, the Company needs to have positive cash flow from operations in each of the calendar years 2005, 2006, and 2007, in order for any restricted shares to vest. If the Company does have positive cash flow from operations in each of the calendar years 2005, 2006, and 2007, then the percentage of shares, if any, that will vest will be determined based on the Company’s percentage achievement of certain performance targets. As of December 31, 2005, the Company has estimated that approximately 548,069 restricted shares will vest based on the Company’s estimated percentage achievement rate of approximately 94 percent. The Company has amortized the current fair market value of the underlying shares expected to vest pro rata over the term of the applicable return right period. The fair value amortization is adjusted periodically for changes in fair market value of the Company’s common stock and also adjusted for any changes to the amount of restricted shares expected to vest as a result of the Company’s percentage achievement of certain performance targets.
Stock Repurchase Program
Beginning in 1998, the Company’s Board of Directors authorized the repurchase of Sybase outstanding Common Stock from time to time, subject to price and other conditions (Stock Repurchase Program). Through December 31, 2005, aggregate amounts authorized under the Stock Repurchase Program totaled $600.0 million. During 2005, the Company repurchased 2.0 million shares at a cost of $44.1 million. In 2004, the Company repurchased 6.4 million shares at a cost of $115.6 million, and in 2003 the Company repurchased 2.3 million shares at a cost of $30.9 million.
During the first quarter of 2005, the Company also repurchased approximately 6.7 million shares at a cost of $125.0 million using a portion of the net proceeds received from its private offering of convertible subordinated notes (See Note Fifteen – Convertible Subordinated Notes). The repurchase of these shares are not part of the Company’s stock repurchase program and was authorized by the Board of Directors in connection with the convertible subordinated note offering.
Issuance of Company Stock for Certain Services
During the quarter ended September 30, 2003, the Company issued approximately 0.7 million shares of its common stock to an unrelated party in connection with an agreement under which the Company will be provided with certain specified marketing services over a period of 42 months. The Company recorded a pre-paid asset of approximately $10.4 million upon the issuance of these shares based on the fair value of such shares on the date of grant. The Company recognizes these amounts as Sales and Marketing expenses as they are provided. As of December 31, 2005, the balance of this pre-paid was $4.0 million.
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Employee Stock Purchase Plans
The Company’s 1991 Employee Stock Purchase Plan and 1991 Foreign Subsidiary Employee Stock Purchase Plan, as amended (collectively the ESPP), allow eligible employees to purchase our Common Stock through payroll deductions. The ESPP consists of 6-month exercise periods. The shares can be purchased at 95% of the fair market value of the Common Stock on the last day of each 6-month exercise period. Purchases are limited to 10 percent of an employee’s eligible compensation, subject to an annual maximum, as defined in the ESPP.
As of December 31, 2005, an aggregate of 13,400,000 shares of Common Stock had been reserved under the ESPP, of which 1,465,123 shares remained available for issuance. Employees purchased 300,616 shares in 2005, 734,491 shares in 2004, and 740,312 shares in 2003.
Stock Option Plans
An aggregate of 700,000 shares of Common Stock have been issued or reserved for issuance under the 1992 Director Option Plan, as amended (the 1992 Director Plan), as of December 31, 2005. Options expire ten years from the date of grant and vest ratably over four years from the grant date. The 1992 Director Plan expired in February 2002, and no further options are available for grant under the 1992 Director Plan, but optionees are able to exercise their vested options before those options expire.
An aggregate of 300,000 shares of Common Stock has been issued or reserved for issuance under the 2001 Director Option Plan (the 2001 Director Plan) as of December 31, 2005. Options expire ten years from the date of grant and vest ratably over four years from the grant date.
Pursuant to the 2003 Stock Plan (2003 Stock Plan) at December 31, 2005, an aggregate of 7,889,486 shares of Common Stock have been reserved upon the exercise of options granted to qualified employees and consultants of the Company. The Board of Directors, directly or through committees, administers the Plan and establishes the terms of option grants. Options expire on terms set forth in the grant notice (generally 10 years from the grant date, and for options granted after May 25, 2005 not more than 7 years from the grant date), three months after termination of employment, two years after death, or one year after permanent disability. Options are exercisable to the extent vested. Vesting occurs at various rates and over various time periods.
On May 27, 2004, the Company’s stockholders approved the transfer of all shares available for grant pursuant to the Company’s 1996 Stock Plan and the Company’s 1999 Stock Plan to the 2003 Stock Plan along with all remaining shares represented by grants that are cancelled or forfeited without exercise under these plans and the 1992 Director Plan and the 2001 Director Option Plan. The Company’s 1988 Stock Plan terminated in June 1998 in accordance with its terms, at that time no further grants were made under the 1998 Stock Plan, but optionees may exercise vested options prior to their expiration. As of December 31, 2005, 838,549 unexercised options remain outstanding under the 1988 Stock Plan.
Price data and activity for the Company’s option plans, including options assumed by the Company in mergers with other companies (adjusted for the merger exchange ratio) and restricted shares are summarized as follows:
| | | | | | | | | |
| | | Outstanding options | | | Weighted average | |
| | | and restricted shares | | | exercise price | |
| | | number of shares | | | per share | |
| Balance at December 31, 2002 | | | 21,326,724 | | | $ | 14.09 | |
| Granted | | | 3,021,750 | | | | 12.94 | |
| Exercised | | | (4,402,181 | ) | | | 10.69 | |
| Forfeited | | | (1,925,615 | ) | | | 17.16 | |
| | | | | | | | |
| Balance at December 31, 2003 | | | 18,020,678 | | | $ | 14.40 | |
| Granted | | | 2,967,294 | | | | 16.48 | |
| Exercised | | | (2,511,797 | ) | | | 10.39 | |
| Forfeited | | | (1,547,958 | ) | | | 16.63 | |
| | | | | | | | |
| Balance at December 31, 2004 | | | 16,928,217 | | | $ | 15.15 | |
| Granted | | | 2,329,981 | | | | 14.45 | |
| Exercised | | | (3,640,478 | ) | | | 12.15 | |
| Forfeited | | | (855,106 | ) | | | 18.95 | |
| | | | | | | | |
| Balance at December 31, 2005 | | | 14,762,614 | | | $ | 15.59 | |
| | | | | | | | |
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At December 31, 2005, options to purchase 10,257,272 shares and restricted shares were exercisable at prices ranging from $0.00 to $148.27. Shares available for grant totaled 5,327,221 at December 31, 2005. The above totals include the restricted shares issued under the 1996 and 2003 Stock Plans.
The income tax benefits that accrue to the Company from exercises of nonqualified stock options and disqualifying dispositions of incentive stock options and grants of restricted stock are recorded as additional paid-in capital.
The following table summarizes information about the Company’s stock options and restricted stock subject to repurchase outstanding at December 31, 2005:
| | | | | | | | | | | | | | | | | | | | | |
| | | Options & restricted stock outstanding | | | Options exercisable | |
| | | | | | | Weighted- | | | | | | | | | | | |
| | | | | | | Average | | | Weighted- | | | | | | | Weighted- | |
| | | | | | | Remaining | | | Average | | | | | | | Average | |
| | | | | | | Contractual | | | Exercise | | | | | | | Exercise | |
| Ranges of Exercisable prices | | Shares | | | Life | | | Price | | | Shares | | | Price | |
| $0.00 to $9.93 | | | 2,715,920 | | | | 6.61 | | | $ | 4.65 | | | | 1,261,688 | | | $ | 8.81 | |
| $10.10 to $14.10 | | | 2,933,537 | | | | 5.80 | | | $ | 11.59 | | | | 2,744,702 | | | $ | 11.47 | |
| $14.19 to $18.85 | | | 3,250,372 | | | | 6.96 | | | $ | 16.72 | | | | 2,018,211 | | | $ | 16.42 | |
| $18.94 to $20.72 | | | 2,727,105 | | | | 6.37 | | | $ | 19.93 | | | | 1,281,544 | | | $ | 19.98 | |
| $20.77 to $25.06 | | | 2,920,245 | | | | 4.88 | | | $ | 23.45 | | | | 2,737,727 | | | $ | 23.54 | |
| $26.63 to $148.27 | | | 215,435 | | | | 3.88 | | | $ | 29.16 | | | | 213,400 | | | $ | 28.02 | |
| |
| | | | | |
| |
| $0.00 to $148.27 | | | 14,762,614 | | | | 6.10 | | | $ | 15.59 | | | | 10,257,272 | | | $ | 16.74 | |
| | | | | | | | | | | | | | | | | | | |
FFI Stock Option Plans
In February of 2000, the Company established the 2000 FFI Stock Option Plan (2000 FFI Plan). At December 31, 2005, an aggregate of 7,088,870 shares of Common Stock have been reserved for issuance upon the exercise of options granted to qualified employees and consultants of FFI, a majority-owned subsidiary of the Company, and certain employees of Sybase, Inc. FFI’s Board of Directors, directly or through committees, administers the 2000 FFI Plan and establishes the terms of option grants. As FFI is not a public company, the fair market value of the shares issued under the plan has been determined by FFI’s Board of Directors and supported by a valuation prepared by an independent valuation expert. All options issued under the 2000 FFI Plan were granted at the estimated fair market value of the option at the date of grant. Options expire ten years from the grant date. Vesting generally occurs at the rate of 12.5 percent after 6 months and the balance in equal installments over the following 42 months. In March 2001, the 2000 FFI Plan was terminated and no further options were granted under the Plan. As of December 31, 2005, there were 3,144,320 unexercised options outstanding under the 2000 Plan.
In March 2001, FFI established the 2001 FFI Stock Option Plan (2001 FFI Plan). At December 31, 2005, an aggregate of 6,175,360 shares of FFI’s common stock have been reserved for issuance upon the exercise of options granted to qualified employees and consultants of FFI, and certain employees of Sybase, Inc. FFI’s Board of Directors, directly or through committees, administers the 2001 FFI Plan and establishes the terms of option grants. No options were issued during 2005. Options expire ten years from the grant date. Vesting occurs at the rate of at least 20 percent per year over 5 years from the date options are granted.
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Price data and activity for the FFI 2000 and 2001 Plans are summarized as follows:
| | | | | | | | | |
| | | | | | | Weighted average | |
| | | Outstanding options | | | Exercise price | |
| | | number of shares | | | Per share | |
| Balance at December 31, 2002 | | | 5,779,039 | | | $ | 5.00 | |
| Granted | | | 3,581,000 | | | | 0.83 | |
| Forfeited | | | (627,983 | ) | | | 4.67 | |
| | | | | | | | |
| Balance at December 31, 2003 | | | 8,732,056 | | | $ | 3.32 | |
| Granted | | | 200,500 | | | | 0.78 | |
| Forfeited | | | (1,067,100 | ) | | | 2.47 | |
| | | | | | | | |
| Balance at December 31, 2004 | | | 7,865,456 | | | $ | 3.37 | |
| Forfeited | | | (112,950 | ) | | | 3.33 | |
| | | | | | | | |
| Balance at December 31, 2005 | | | 7,752,506 | | | $ | 3.37 | |
| | | | | | | | |
The following table summarizes information about the FFI stock options outstanding at December 31, 2005:
| | | | | | | | | | | | | | | | | | | | | |
| | | Options outstanding | | | Options exercisable | |
| | | | | | | Weighted- | | | | | | | | | | | |
| | | | | | | Average | | | Weighted- | | | | | | | Weighted- | |
| | | | | | | Remaining | | | Average | | | | | | | Average | |
| Ranges of | | | | | | Contractual | | | Exercise | | | | | | | Exercise | |
| Exercisable prices | | Shares | | | Life | | | Price | | | Shares | | | Price | |
| $ 0.75 | | | 1,093,000 | | | | 7.09 | | | $ | 0.75 | | | | 792,774 | | | $ | 0.75 | |
| $ 0.78 | | | 1,893,500 | | | | 7.67 | | | $ | 0.78 | | | | 1,147,373 | | | $ | 0.78 | |
| $ 5.00 | | | 4,766,006 | | | | 4.81 | | | $ | 5.00 | | | | 4,694,400 | | | $ | 5.00 | |
| |
| | | | | |
| |
| $ 0.75 to $ 5.00 | | | 7,752,506 | | | | 5.83 | | | $ | 3.37 | | | | 6,634,547 | | | $ | 3.76 | |
| | | | | | | | | | | | | | | | | | | |
iAS Stock Option Plan
In March 2001, iAS established the 2001 iAS Stock Option Plan (iAS Plan) and reserved for issuance an aggregate of 15,250,000 shares of iAS common stock upon the exercise of options granted to qualified employees and consultants of iAnywhere Solutions, Inc., a majority-owned subsidiary of the Company, and certain employees of Sybase, Inc. iAS’s Board of Directors, directly or through committees, administers the iAS Plan and establishes the terms of option grants. Because iAS is not a public company, the fair market value of the shares issued under the plan has been determined by iAS’s Board of Directors and supported by a valuation prepared by the Company. All options issued during 2005 were granted at or above the estimated fair market value of a share iAS common stock at the date of grant. Options expire ten years from the grant date, or three months after termination of employment, or two years after death, or one year after permanent disability. Vesting occurs at the rate of at least 20 percent per year over 5 years from the date options are granted.
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Price data and activity for the iAS Plan are summarized as follows:
| | | | | | | | | |
| | | | | | | Weighted average | |
| | | Outstanding options | | | exercise price | |
| | | number of shares | | | per share | |
| Balance at December 31, 2002 | | | 9,526,158 | | | $ | 2.51 | |
| Granted | | | 1,306,000 | | | | 2.51 | |
| Forfeited | | | (201,572 | ) | | | 2.51 | |
| | | | | | | | |
| Balance at December 31, 2003 | | | 10,630,586 | | | $ | 2.51 | |
| Granted | | | 1,250,650 | | | | 2.51 | |
| Forfeited | | | (353,882 | ) | | | 2.51 | |
| | | | | | | | |
| Balance at December 31, 2004 | | | 11,527,354 | | | $ | 2.51 | |
| Granted | | | 46,750 | | | | 2.51 | |
| Forfeited | | | (57,405 | ) | | | 2.51 | |
| | | | | | | | |
| Balance at December 31, 2005 | | | 11,516,699 | | | $ | 2.51 | |
| | | | | | | | |
At December 31, 2005 there were 10,153,220 shares exercisable under the iAS Plan all at an exercise price of $2.51 per share. The weighted average remaining contractual life of the options outstanding at December 31, 2005 was 6.16 years.
Note Eight: Income Taxes
The Company accounts for income taxes under the liability method. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and income tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse.
The following is a geographical breakdown of consolidated income (loss) before the cumulative effect of an accounting change, and income taxes (including intercompany royalties and expenses) by income tax jurisdiction (dollars in thousands):
| | | | | | | | | | | | | |
| | | 2005 | | | 2004 | | | 2003 | |
| United States | | $ | 24,755 | | | $ | (8,590 | ) | | $ | 11,788 | |
| Foreign | | | 111,960 | | | | 109,556 | | | | 106,317 | |
| |
| | | | | | | | | | |
| | | | | | | | | | | | | |
| Total | | $ | 136,715 | | | $ | 100,966 | | | $ | 118,095 | |
| | | | | | | | | | |
The provisions (credits) for income taxes consist of the following (dollars in thousands):
| | | | | | | | | | | | | |
| | | 2005 | | | 2004 | | | 2003 | |
| Federal | | | | | | | | | | | | |
| Current | | $ | 16,595 | | | $ | 3,445 | | | $ | 6,760 | |
| Deferred | | | 7,199 | | | | (1,869 | ) | | | (3,964 | ) |
| | | | | | | | | | |
| | | | 23,794 | | | | 1,576 | | | | 2,796 | |
| | | | | | | | | | | | | |
| State | | | | | | | | | | | | |
| Current | | $ | 2,413 | | | | 475 | | | | 212 | |
| Deferred | | | 2,002 | | | | 1,603 | | | | 2,401 | |
| | | | | | | | | | |
| | | | 4,415 | | | | 2,078 | | | | 2,613 | |
| | | | | | | | | | | | | |
| Foreign | | | | | | | | | | | | |
| Current | | $ | 21,952 | | | | 28,391 | | | | 25,645 | |
| Deferred | | | 971 | | | | 971 | | | | (225 | ) |
| | | | | | | | | | |
| | | | 22,923 | | | | 29,362 | | | | 25,420 | |
| | | | | | | | | | |
| | | | | | | | | | | | | |
| Total | | $ | 51,132 | | | $ | 33,016 | | | $ | 30,829 | |
| | | | | | | | | | |
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The American Jobs Creation Act of 2004 (the “Jobs Creation Act”) created a temporary incentive for U.S. corporations to repatriate accumulated income earned abroad by providing an 85 percent dividends received deduction for certain dividends from controlled foreign corporations. In the fourth quarter the Company distributed cash from certain foreign subsidiaries and will report an extraordinary dividend (as defined in the Jobs Creation Act) of approximately $96 million. This extraordinary dividend generated an income tax expense of approximately $4.1 million relating to the Company’s 2005 results.
The provision for income taxes differs from the amount computed by applying the statutory federal income tax rate to income before income taxes. The sources and tax effects of the differences are as follows (dollars in thousands):
| | | | | | | | | | | | | |
| | | 2005 | | | 2004 | | | 2003 | |
| Tax (credit) at U.S. statutory rate | | $ | 47,850 | | | $ | 35,338 | | | $ | 41,333 | |
| State tax, net of federal benefit | | | 4,415 | | | | 2,078 | | | | 2,613 | |
| Difference between estimated amounts recorded and actual liabilities resulting from the filing of prior year’s tax return | | | (2,646 | ) | | | (2,820 | ) | | | (1,636 | ) |
| Effect of foreign operations | | | 410 | | | | (971 | ) | | | 1,645 | |
| Benefit of Japanese operating losses | | | (275 | ) | | | (3,751 | ) | | | (4,507 | ) |
| Amortization/impairment of intangible assets | | | 1,054 | | | | 788 | | | | 928 | |
| Research and development tax credits | | | | | | | | | | | (500 | ) |
| Utilization of foreign tax credit carryforwards | | | | | | | | | | | (6,592 | ) |
| Non-deductible executive compensation | | | 2,570 | | | | 1,610 | | | | 2,882 | |
| Release of deferred tax liability associated with certain foreign earnings | | | (1,174 | ) | | | | | | | (3,990 | ) |
| Release of tax reserves following the completion of certain audits and expiration of statute of limitations | | | (4,978 | ) | | | (3,519 | ) | | | (2,313 | ) |
| Reserve for tax contingencies | | | 2,922 | | | | 3,680 | | | | 1,449 | |
| Other | | | 984 | | | | 583 | | | | (483 | ) |
| | | | | | | | | | |
| Total | | $ | 51,132 | | | $ | 33,016 | | | $ | 30,829 | |
| | | | | | | | | | |
Deferred income taxes result principally from temporary differences between years in the recognition of certain revenue and expense items for financial and tax reporting purposes. Significant components of the Company’s net deferred tax assets were as follows at December 31 (dollars in thousands):
| | | | | | | | | |
| | | 2005 | | | 2004 | |
| Depreciation | | $ | 9,682 | | | $ | 10,227 | |
| Deferred revenue | | | 2,366 | | | | 2,306 | |
| Accrued expenses | | | 19,449 | | | | 22,710 | |
| Allowance for doubtful accounts | | | 1,056 | | | | 543 | |
| Capitalized R&D expenses | | | 16,809 | | | | 23,432 | |
| Net operating loss carryovers and tax credits Carryforwards | | | 127,022 | | | | 96,444 | |
| Intangible assets | | | 225 | | | | 2,307 | |
| Capital loss carryforward | | | 14,885 | | | | 14,074 | |
| Other assets | | | 6,994 | | | | 2,217 | |
| | | | | | | |
| Gross deferred tax asset | | | 198,488 | | | | 174,260 | |
| Unremitted foreign earnings | | | (4,059 | ) | | | (5,859 | ) |
| Acquired Intangibles | | | (29,395 | ) | | | (20,382 | ) |
| Other liabilities | | | (1,896 | ) | | | (1,056 | ) |
| | | | | | | |
| Gross deferred tax liability | | | (35,350 | ) | | | (27,297 | ) |
| |
| Total before valuation allowance | | | 163,138 | | | | 146,963 | |
| Valuation allowance | | | (132,736 | ) | | | (96,318 | ) |
| | | | | | | |
| Net deferred tax assets | | $ | 30,402 | | | $ | 50,645 | |
| Recorded as: | | | | | | | | |
| Current deferred tax assets | | $ | 5,523 | | | $ | 11,205 | |
| Noncurrent deferred tax assets | | | 24,879 | | | | 39,440 | |
| | | | | | | |
| | | $ | 30,402 | | | $ | 50,645 | |
| | | | | | | |
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The valuation allowance increased by $36.4 million, $24.6 million and $23.2 million in 2005, 2004 and 2003, respectively. This valuation allowance primarily relates to the deferred tax assets for acquired net operating losses, net operating loss carryforwards, capital loss carryforwards, certain research and development tax credits, tax assets associated with stock option activity, and foreign tax credits. The movement was primarily related to the following items (dollars in millions)
| | | | | |
| Valuation allowance primarily associated with deferred tax asset acquired during the year on Extended Systems | | $ | 20.8 | |
| Valuation allowance attributable to 2005 stock option activity any benefit of which will be credited to shareholders’ equity when realized | | | 8.8 | |
| Valuation allowance associated with certain research and development tax Credits | | | 15.7 | |
| Generation of additional capital loss carryforward | | | 1.0 | |
| Valuation Allowance associated with foreign tax credit carryforwards | | | 5.3 | |
| Utilization of NOLs generated in 2004 subject to full valuation allowance | | | (15.2 | ) |
| | | | |
| | | $ | 36.4 | |
| | | | |
Approximately $76 million of the valuation allowance relates to deferred tax assets associated with net operating losses and capital losses acquired in, or attributable to, the NEN, AvantGo and XcelleNet acquisitions. If the associated deferred tax assets are realized, the benefit from their realization will reduce goodwill carried on the Company’s books associated with these acquisitions rather than future income tax expense. The valuation allowance also includes approximately $28 million associated with stock option activity for which any recognized tax benefits will be credited directly to shareholders’ equity.
As of December 31, 2005, the Company had research and development tax credits of $33.8 million, which expire in years from 2010 through 2025, foreign tax credits of $20.1 million expiring in years from 2010 through 2015, and an asset of $65.7 million associated with certain net operating losses which expire in the years from 2007 through 2024.
Realization of the Company’s net deferred tax assets is dependent upon the Company generating sufficient taxable income in future years in appropriate tax jurisdictions to obtain benefit from the reversal of temporary differences and from tax credit carryforwards. Specifically, realization of these assets is dependent on the Company’s ability to generate approximately $120 million of future taxable income, largely in the U.S. Based on the plans and estimates the Company is using to manage the underlying business it believes that sufficient income will be earned in the future to realize these assets. The amount of the deferred tax assets considered realizable is subject to adjustment in future periods if estimates of future taxable income are reduced. Any such adjustments to the deferred tax assets would be charged to income in the period such adjustment was made.
No provision has been made for income taxes and foreign withholding taxes on approximately $96.4 million of undistributed earnings from non-US operations as of December 31, 2005 because the Company currently plans to permanently reinvest all such earnings. If the Company did not plan on permanently reinvesting these earnings, the additional deferred tax liability would be approximately $6.5 million. When excess cash accumulates in the Company’s non-US subsidiaries, the subsidiary’s earnings are remitted if it is advantageous for business, tax and foreign exchange reasons.
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The Internal Revenue Service (“IRS”) has examined the Company’s income tax returns for all years through 2000. The Company believes that it has provided adequate accruals for all anticipated tax audit adjustments in the U.S., State and foreign tax jurisdictions based on our estimate of whether, and the extent to which, additional taxes and interest may be due. If events occur which indicate that payment of these amounts are unnecessary, the reversal of these liabilities would result in tax benefits being recognized in the period when the Company determines the liabilities are no longer necessary. If the Company’s estimate of tax liabilities proves to be less than the ultimate assessment, a further charge to expense would result.
Note Nine: Retirement Plan
401(k) Defined Contribution Retirement Plan
The Company maintains a defined contribution retirement plan pursuant to Section 401(k) of the Internal Revenue Code (the 401(k) Plan) that allows eligible employees to contribute up to a certain percentage of their annual compensation to the Plan, subject to the annual IRS limit. Starting in 2005, 401(k) Plan participants who (i) attained the age of 50 during the calendar year and (ii) had made the maximum plan or IRS pre-tax contribution were able to make an additional “catch-up” contribution up to a maximum of $4,000. In 2005, the Company matched employee contribution at a rate of $0.50 for each dollar up to the first $4,000 of salary contributed by the employee, with a maximum employer match of $2,000 for the year fully vested. In 2004 and 2003, the Company matched employee contribution at a rate of $0.50 for each dollar up to the first $3,000 of salary contributed by the employee, with a maximum employer match of $1,500 for the year fully vested. The Plan also allows the Company to make discretionary contributions. There were no such discretionary contributions made in 2005, 2004 or 2003.
Note Ten: Segment and Geographical Information
Through the first quarter of 2005, the Company was organized into three separate reportable business segments each of which focused on one of three key market segments: Infrastructure Platform Group (IPG), which principally focuses on enterprise class database servers, integration and development products; iAnywhere Solutions, Inc. (iAS), which provides mobile database and mobile enterprise solutions; and Financial Fusion, Inc. (FFI), which delivers integrated banking, payment and trade messaging solutions to large financial institutions. Beginning in the second quarter of 2005, the FFI segment was integrated into the IPG segment to enable the Company to better leverage and optimize its engineering, R&D and technical resources to support the FFI product line and to promote synergies between the FFI and IPG technical resources. The results of the FFI business are now reported in the results of the IPG segment. The Company has restated all earlier periods reported to reflect the segment change made in the second quarter of 2005.
Sybase’s chief operating decision maker is the President and Chief Executive Officer (CEO). While the CEO is apprised of a variety of financial metrics and information, the Sybase business is principally managed on a segment basis, with the CEO evaluating performance based upon segment operating profit or loss that includes an allocation of common expenses, but excludes certain unallocated expenses. The CEO does not view segment results below operating profit (loss) before unallocated costs, and therefore unallocated expenses or savings; interest income, interest expense and other, net; the provision for income taxes, and minority interests are not broken out by segment. Sybase does not account for, or report to the CEO, assets or capital expenditures by segment.
Certain common costs and expenses are allocated based on measurable drivers of expense. Unallocated expenses or savings represent corporate transactions/activities(expenditures or cost savings) that are not specifically allocated to the segments including reversals of restructuring expenses associated with restructuring activities undertaken prior to 2003.
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Prior to 2003, the Company did not track its restructuring activities by segment and it is impracticable to now do so with respect to these prior activities. Accordingly, reversals of expenses associated with restructuring activities undertaken before 2003 are not included in segment level operating results, but instead included in the total for unallocated cost savings. In accordance with SFAS 146, “Accounting for Costs Associated with Exit or Disposal Activities,” the Company has allocated the costs associated with 2004 and 2003 restructuring activities to each reportable segment. Additionally, the Company has allocated restructuring expenses incurred in accordance with SFAS 112, “Employer’s Accounting for Post employment Benefits,” to each reportable segment.
Segment license and service revenues include transactions between iAS and IPG, The most common instance relates to the sale of iAS products and services to third parties by IPG. In the case of such a transaction, IPG records the revenue on the sale with a corresponding inter-company expense on the transaction, with corresponding intercompany revenue recorded by iAS together with costs of providing the product or service. The excess of revenues over inter-company expense recognized by IPG is intended to reflect the costs incurred by IPG to complete the sales transaction. Total transactions between the segments are captured in “Eliminations.”
A summary of the segment financial information reported to the CEO for the year ended December 31, 2005 is presented below (in thousands):
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | Consolidated | |
| (In thousands) | | IPG | | | iAS | | | Elimination | | | Total | |
| Revenues: | | | | | | | | | | | | | | | | |
| License fees | | | | | | | | | | | | | | | | |
| Infrastructure | | $ | 201,107 | | | $ | 48 | | | $ | — | | | $ | 201,155 | |
| Mobile and Embedded | | | 32,171 | | | | 54,501 | | | | — | | | | 86,672 | |
| Financial Fusion products | | | 3,868 | | | | — | | | | — | | | | 3,868 | |
| | | | | | | | | | | | | |
| Subtotal license fees | | | 237,146 | | | | 54,549 | | | | — | | | | 291,695 | |
| Intersegment license revenues | | | 86 | | | | 26,854 | | | | (26,940 | ) | | | — | |
| | | | | | | | | | | | | |
| Total license fees | | | 237,232 | | | | 81,403 | | | | (26,940 | ) | | | 291,695 | |
| | | | | | | | | | | | | | | | | |
| Services | | | | | | | | | | | | | | | | |
| Direct service revenue | | | 462,575 | | | | 38,981 | | | | — | | | | 501,556 | |
| Financial Fusion services | | | 25,444 | | | | — | | | | — | | | | 25,444 | |
| Intersegment service revenues | | | 59 | | | | 26,907 | | | | (26,966 | ) | | | — | |
| | | | | | | | | | | | | |
| Total services | | | 488,078 | | | | 65,888 | | | | (26,966 | ) | | | 527,000 | |
| |
| | | | | | | | | | | | | |
| Total revenues | | | 725,310 | | | | 147,291 | | | | (53,906 | ) | | | 818,695 | |
| |
| Total allocated costs and expenses before amortization of other purchased intangibles and purchased technology and cost of restructure | | | 613,912 | | | | 116,402 | | | | (53,906 | ) | | | 676,408 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Operating income before amortization of other purchased intangibles and purchased technology and cost of restructure | | | 111,398 | | | | 30,889 | | | | — | | | | 142,287 | |
| Amortization of other purchased intangibles | | | 2,000 | | | | 4,639 | | | | — | | | | 6,639 | |
| Amortization of purchased technology | | | 7,224 | | | | 4,626 | | | | — | | | | 11,850 | |
| | | | | | | | | | | | | |
| Operating income before cost of restructure and unallocated costs (2) | | | 102,174 | | | | 21,624 | | | | — | | | | 123,798 | |
| Cost of restructure – 2005 Activity | | | 284 | | | | — | | | | — | | | | 284 | |
| | | | | | | | | | | | | |
| Operating income before unallocated costs | | | 101,890 | | | | 21,624 | | | | — | | | | 123,514 | |
| Unallocated costs | | | | | | | | | | | | | | | 1,574 | |
| | | | | | | | | | | | | | | | |
| Operating income | | | | | | | | | | | | | | | 121,940 | |
| Interest income, interest expense and other, net | | | | | | | | | | | | | | | 14,824 | |
| Minority interest | | | | | | | | | | | | | | | (49 | ) |
| | | | | | | | | | | | | | | | |
| Income before income taxes | | | | | | | | | | | | | | $ | 136,715 | |
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A summary of the segment financial information reported to the CEO for the year ended December 31, 2004 is presented below (in thousands):
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | Consolidated | |
| (In thousands) | | IPG | | | iAS | | | Elimination | | | Total | |
| Revenues: | | | | | | | | | | | | | | | | |
| License fees | | | | | | | | | | | | | | | | |
| Infrastructure | | $ | 192,588 | | | $ | 87 | | | $ | — | | | $ | 192,675 | |
| Mobile and Embedded | | | 31,152 | | | | 44,536 | | | | — | | | | 75,688 | |
| Financial Fusion products | | | 7,509 | | | | — | | | | — | | | | 7,509 | |
| | | | | | | | | | | | | |
| Subtotal license fees | | | 231,249 | | | | 44,623 | | | | — | | | | 275,872 | |
| Intersegment license revenues | | | 117 | | | | 26,063 | | | | (26,180 | ) | | | — | |
| | | | | | | | | | | | | |
| Total license fees | | | 231,366 | | | | 70,686 | | | | (26,180 | ) | | | 275,872 | |
| | | | | | | | | | | | | | | | | |
| Services | | | | | | | | | | | | | | | | |
| Direct service revenue | | | 469,616 | | | | 21,631 | | | | — | | | | 491,247 | |
| Financial Fusion services | | | 21,417 | | | | — | | | | — | | | | 21,417 | |
| Intersegment service revenues | | | 11 | | | | 27,007 | | | | (27,018 | ) | | | — | |
| | | | | | | | | | | | | |
| Total services | | | 491,044 | | | | 48,638 | | | | (27,018 | ) | | | 512,664 | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Total revenues | | | 722,410 | | | | 119,324 | | | | (53,198 | ) | | | 788,536 | |
| |
| Total allocated costs and expenses before amortization of other purchased intangibles and purchased technology and cost of restructure | | | 610,009 | | | | 100,428 | | | | (53,198 | ) | | | 657,239 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Operating income before amortization of other purchased intangibles and purchased technology and cost of restructure | | | 112,401 | | | | 18,896 | | | | — | | | | 131,297 | |
| Amortization of other purchased intangibles | | | 2,000 | | | | 3,139 | | | | — | | | | 5,139 | |
| Amortization of purchased technology | | | 14,924 | | | | 2,894 | | | | — | | | | 17,818 | |
| | | | | | | | | | | | | |
| Operating income before cost of restructure and unallocated savings | | | 95,477 | | | | 12,863 | | | | — | | | | 108,340 | |
| Cost of restructure – 2004 Activity | | | 19,016 | | | | 140 | | | | — | | | | 19,156 | |
| | | | | | | | | | | | | |
| Operating income before unallocated savings | | | 76,461 | | | | 12,723 | | | | — | | | | 89,184 | |
| Unallocated savings | | | | | | | | | | | | | | | (208 | ) |
| | | | | | | | | | | | | | | | |
| Operating income | | | | | | | | | | | | | | | 89,392 | |
| Interest income, interest expense and other, net | | | | | | | | | | | | | | | 11,574 | |
| | | | | | | | | | | | | | | | |
| Income before income taxes | | | | | | | | | | | | | | $ | 100,966 | |
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A summary of the segment financial information reported to the CEO for the year ended December 31, 2003 is presented below (in thousands):
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | Consolidated | |
| (In thousands) | | IPG | | | iAS | | | Elimination | | | Total | |
| Revenues: | | | | | | | | | | | | | | | | |
| License fees | | | | | | | | | | | | | | | | |
| Infrastructure | | $ | 210,049 | | | $ | 763 | | | $ | — | | | $ | 210,812 | |
| Mobile and Embedded | | | 26,049 | | | | 33,807 | | | | — | | | | 59,856 | |
| Financial Fusion products | | | 4,149 | | | | — | | | | — | | | | 4,149 | |
| | | | | | | | | | | | | |
| Subtotal license fees | | | 240,247 | | | | 34,570 | | | | — | | | | 274,817 | |
| Intersegment license revenues | | | 86 | | | | 21,778 | | | | (21,864 | ) | | | — | |
| | | | | | | | | | | | | |
| Total license fees | | | 240,333 | | | | 56,348 | | | | (21,864 | ) | | | 274,817 | |
| | | | | | | | | | | | | | | | | |
| Services | | | | | | | | | | | | | | | | |
| Direct service revenue | | | 475,115 | | | | 10,212 | | | | — | | | | 485,327 | |
| Financial Fusion services | | | 17,918 | | | | — | | | | — | | | | 17,918 | |
| Intersegment service revenues | | | — | | | | 25,691 | | | | (25,691 | ) | | | — | |
| | | | | | | | | | | | | |
| Total services | | | 493,033 | | | | 35,903 | | | | (25,691 | ) | | | 503,245 | |
| | | | | | | | | | | | | |
| |
| Total revenues | | | 733,366 | | | | 92,251 | | | | (47,555 | ) | | | 778,062 | |
| |
| Total allocated costs and expenses before amortization of other purchased intangibles and purchased technology and cost of restructure | | | 635,346 | | | | 72,362 | | | | (47,555 | ) | | | 660,153 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Operating income before amortization of other purchased intangibles and purchased technology and cost of restructure | | | 98,020 | | | | 19,889 | | | | — | | | | 117,909 | |
| |
| Amortization of other purchased intangibles | | | 2,000 | | | | — | | | | — | | | | 2,000 | |
| Amortization of purchased technology | | | 14,924 | | | | 333 | | | | — | | | | 15,257 | |
| | | | | | | | | | | | | |
| Operating income before cost of restructure and unallocated | | | 81,096 | | | | 19,556 | | | | — | | | | 100,652 | |
| Cost of restructure – 2003 Activity | | | 9,212 | | | | 341 | | | | — | | | | 9,553 | |
| | | | | | | | | | | | | |
| |
| Operating income before unallocated costs | | | 71,884 | | | | 19,215 | | | | — | | | | 91,099 | |
| Unallocated savings | | | | | | | | | | | | | | | (13,230 | ) |
| | | | | | | | | | | | | | | | |
| Operating income | | | | | | | | | | | | | | | 104,329 | |
| Interest income, interest expense and other, net | | | | | | | | | | | | | | | 13,766 | |
| | | | | | | | | | | | | | | | |
| Income before income taxes | | | | | | | | | | | | | | $ | 118,095 | |
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Geographic Information
The Company operates in one industry (the development and marketing of computer software and related services) and markets its products and services internationally through both foreign subsidiaries and distributors located in the United States, Europe, Asia, Australia, Canada, New Zealand, and Latin America. Other includes operations in Asia, Australia, Canada, New Zealand and Latin America. The following table presents a summary of annual revenues and net long-lived assets excluding deferred tax assets by geographic region (in thousands):
| | | | | | | | | | | | | |
| | | 2005 | | | 2004 | | | 2003 | |
| Revenues: | | | | | | | | | | | | |
| Unaffiliated customers: | | | | | | | | | | | | |
| United States | | $ | 441,809 | | | $ | 426,626 | | | $ | 425,834 | |
| Europe | | | 233,524 | | | | 220,441 | | | | 212,774 | |
| Other | | | 143,362 | | | | 141,469 | | | | 139,454 | |
| | | | | | | | | | |
| Total | | $ | 818,695 | | | $ | 788,536 | | | $ | 778,062 | |
| | | | | | | | | | |
| | | | | | | | | | | | | |
| Long-lived assets, net: | | | | | | | | | | | | |
| United States | | $ | 571,976 | | | $ | 435,003 | | | $ | 423,508 | |
| Europe | | | 13,572 | | | | 10,082 | | | | 12,483 | |
| Other | | | 26,237 | | | | 30,115 | | | | 12,377 | |
| | | | | | | | | | |
| Total | | $ | 611,785 | | | $ | 475,200 | | | $ | 448,368 | |
| | | | | | | | | | |
Note Eleven: Business Combinations
On October 26, 2005, the Company completed its acquisition of Extended Systems Incorporated, a publicly held corporation that provides mobile application software for the enterprise, for approximately $70.7 million in cash. The Company used approximately $70.1 million in cash to acquire Extended Systems’ outstanding stock. Additional purchase related costs were approximately $0.6 million. As a result of the acquisition, Sybase expects to strengthen its Unwired Enterprise offering by expanding the Company’s ability to enable organizations to streamline business processes through mobile technology. The acquisition also provides Sybase with an entry into new market segments through Extended Systems’ mobile device solutions that enable manufacturers and partners to integrate wireless connectivity and synchronization capabilities, Bluetooth, IrDA and OMA, into mobile devices. The results of Extended Systems are included in the Company’s iAS reporting segment from October 27, 2005 onward.
The excess of the purchase price over the fair value of the net tangible assets acquired is approximately $76.2 million. Of the estimated $76.2 million excess, $23.6 million was allocated to developed technology, $7.7 million was allocated to customer lists, and $44.9 million was allocated to goodwill. The developed technology and customer lists were assigned useful lives of six years. The Company’s basis for determining its allocation included consideration of a valuation prepared by an independent third-party appraiser. This independent appraiser also assisted the Company in determining the appropriate useful life with the intangible assets acquired. Included in goodwill is approximately $9.4 million which has an offsetting amount allocated to long-term deferred tax liability for the amortization of the developed technology, and customer lists, which is not deductible for tax purposes.
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Based on an independent valuation prepared using estimates and assumptions provided by the Company, the total purchase price of approximately $70.7 million was allocated as follows:
| | | | | |
| | | (In millions) | |
| Cash and cash equivalents | | $ | 10.3 | |
| Accounts receivable, net | | | 9.3 | |
| Other current assets | | | 0.8 | |
| Property, equipment and improvements | | | 4.1 | |
| Deferred income taxes | | | (9.4 | ) |
| Developed technology | | | 23.6 | |
| Customer lists | | | 7.7 | |
| Goodwill | | | 44.9 | |
| Other assets | | | 0.1 | |
| Other current accrued liabilities | | | (15.9 | ) |
| Other long-term liabilities | | | (4.8 | ) |
| | | | |
| | | $ | 70.7 | |
The following unaudited pro forma financial information presents the combined results of operations of Sybase and Extended Systems as if the acquisition of Extended Systems had occurred as of the beginning of 2005 and 2004, respectively. The pro forma financial information gives effect to certain adjustments, including the amortization of purchased intangibles and the elimination of Extended Systems’ amortization of purchased intangibles. The pro forma financial information does not necessarily reflect the results of operations that would have occurred had the two companies constituted a single entity during such periods.
| | | | | | | | | |
| | | Twelve | | | Twelve | |
| | | Months | | | Months | |
| | | Ended | | | Ended | |
| (In thousands, except per share data) | | 12/31/05 | | | 12/31/04 | |
| Revenue | | $ | 853,102 | | | $ | 822,447 | |
| Net income | | $ | 75,645 | | | $ | 61,930 | |
| Basic net income per share | | $ | 0.84 | | | $ | 0.65 | |
| Diluted net income per share | | $ | 0.81 | | | $ | 0.63 | |
On April 25, 2005, the Company acquired the technology, assets and certain liabilities of Avaki Corporation (Avaki), a private software company providing enterprise information integration software, for approximately $3.1 million in cash. This purchase price exceeded the fair value of the net tangible assets acquired by $3.2 million. The $3.2 million excess was allocated to developed technology with a useful life of five years. The Company is integrating the Avaki technology into its core group of information management solutions contained by the IPG segment. The results of Avaki are included in the Company’s IPG reporting segment from April 26, 2005 onward.
On April 19, 2005, the Company acquired ISDD Ltd. (ISDD), a privately-held software company providing unstructured data management solutions, for approximately $3.7 million in cash. At the time of acquisition, ISDD’s liabilities exceeded its tangible assets by approximately $3.0 million which resulted in the purchase price exceeding the fair value of the net tangible assets acquired by $6.7 million. Of this excess, $4.7 million was allocated to developed technology with a useful life of seven years, and $2.0 million was assigned to goodwill. The Company is incorporating ISDD’s unstructured data management technology and solutions into its IPG segment to further expand and differentiate the Company’s information management and mobility solutions. The results of ISDD are included in the Company’s IPG reporting segment from April 20, 2005 onward.
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Note Twelve: Litigation
Sybase is a party to various legal disputes and proceedings arising in the ordinary course of business. In the opinion of management, resolution of these matters, including those legal matters described below, is not expected to have a material adverse effect on our consolidated financial position or results of operations as the Company believes it has adequately accrued for these matters at December 31, 2005. However, depending on the amount and timing of such resolution, an unfavorable resolution of some or all of these matters could materially affect our future results of operations or cash flows in a particular period.
A former employee, who was terminated as part of a position elimination in February 2003, filed a civil action in the Superior Court for the State of California, Alameda County, alleging discrimination on the basis of gender, national origin, and race. The former employee also alleged retaliation for discussing her working conditions with senior managers. The parties were not able to settle the matter and trial commenced on August 27, 2004. Sybase’s motion for non-suit on the retaliation claim was granted and that claim was dismissed. On October 5, 2004, the jury found in favor of the plaintiff on the remaining claims and awarded her $1,845,000 in damages. Sybase filed a motion to set aside the jury verdict or, in the alternative, for a new trial. The motion also asked the judge to set aside the punitive damage part of the award in the amount of $500,000. On December 7, 2004, the judge issued a decision denying the motion to set the verdict aside and order a new trial, but he did grant that part of the motion asking to set aside the $500,000 punitive damage award, reducing the damage amount to $1,345,000. Plaintiff’s counsel has filed a motion for $40,000 in costs which was reduced by the judge’s award to $16,000 Plaintiff filed its motion for attorney’s fees for the trial and was awarded $620,601.00 in attorney fees on July 20, 2005. An additional fee award for the argument of post-trial motions was granted in the amount of $75,000. Sybase filed a notice of appeal of the $1,345,000 jury verdict, as well as the fee and cost awards. Sybase filed its opening brief in the appeal on January 27, 2006.
On August 20, 1999, Medaphis Corporation (now PerSe Technologies) initiated a civil action against Sybase in the District Court for Harris County, Texas for negligent misrepresentation and common law fraud. The claims are based on misrepresentations allegedly made by Sybase in 1996 and 1997 with regard to its ability to provide a product with certain replication functionality. In its Second Amended Petition (filed in June 2003), Medaphis estimates its damages to be $16,761,470. In addition, the Second Amended Petition seeks punitive damages in an unspecified amount. Sybase’s motion for summary judgment in the matter was granted, dismissing the case in its entirety, on November 13, 2003. PerSe appealed that judgment. The appellate court upheld the judgment in part and reversed in part. The matter is now scheduled to proceed to trial on Per Se’s fraud and indemnity claims on June 13, 2006.
Note Thirteen: Restructuring Costs
2004 Restructuring Actions
In the third quarter of 2004, the Company embarked on a restructuring plan (2004 Plan) aimed at reducing its annual expenses (primarily employee related) by approximately $15 million. These 2004 Plan activities include the termination of approximately 140 employees worldwide, the closure or consolidation of 5 facilities worldwide and the write-off of certain enterprise software purchased from a third party. The Company recorded restructuring charges of $18.6 million during 2004 to reflect these activities. The charges relating to future lease costs, reduced by estimated sublease payments, were recorded at present value.
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The following table summarizes the activity associated with the balance of the accrued restructuring charges related to the 2004 restructuring plan through December 31, 2005:
| | | | | | | | | | | | | | | | | |
| | | Accrued | | | | | | | | | | | Accrued | |
| | | liabilities | | | | | | | | | | | liabilities | |
| | | at | | | Amounts | | | | | | | at | |
| (Dollars in millions) | | 12/31/04 | | | paid | | | Amounts Accrued | | | 12/31/05 | |
| Termination payments to employees and other related costs | | $ | 0.3 | | | $ | 0.3 | | | $ | — | | | $ | — | |
| Lease cancellations and commitments | | | 7.2 | | | | 2.2 | | | | 0.1 | | | | 5.1 | |
| | | | | | | | | | | | | |
| | | $ | 7.5 | | | $ | 2.5 | | | $ | 0.1 | | | $ | 5.1 | |
| | | | | | | | | | | | | |
The remaining restructuring accrual primarily relates to certain lease costs the Company is contractually required to pay on certain closed facilities, net of estimated associated sublease amounts. Sybase’s payments (net of sublease income) toward the accruals relating to lease cancellations and commitments are dependent upon market conditions and the Company’s ability to negotiate acceptable lease buy-outs or to locate suitable subtenants. These payments will be made over the remaining lease terms, ending at various dates through October 2012, or over a shorter period as the Company may negotiate with its lessors.
In 2005, the Company recognized additional restructure charges of $0.1 million related to lease commitments to reflect the difference between the discounted amounts accrued and the actual payments.
2003 Restructuring Activities
During the first quarter of 2003, the Company embarked on a Restructuring Plan (2003 Plan) aimed at reducing its annual payroll and facilities related expenses by approximately $16.0 million. These activities included the planned termination of approximately 240 employees worldwide and the planned closure or consolidation of approximately 9 facilities worldwide. The Company recorded restructuring charges of $9.6 million during 2003 to reflect these activities.
The following table summarizes the activity associated with the balance of the accrued restructuring charges related to the 2003 restructuring plan through December 31, 2005:
| | | | | | | | | | | | | | | | | |
| | | Accrued | | | | | | | | | | | Accrued | |
| | | liabilities | | | | | | | | | | | liabilities | |
| | | at | | | Amounts | | | Amounts | | | at | |
| (Dollars in millions) | | 12/31/04 | | | paid | | | Accrued | | | 12/31/05 | |
| Lease cancellations and commitments | | | 0.2 | | | | 0.1 | | | | 0.2 | | | | 0.3 | |
The remaining restructuring accrual primarily relates to certain lease costs the Company is contractually required to pay on certain closed facilities, net of estimated associated sublease amounts. Sybase’s payments (net of sublease income) toward the accruals relating to lease cancellations and commitments are dependent upon market conditions and the Company’s ability to negotiate acceptable lease buy-outs or to locate suitable subtenants. These payments will be made over the remaining lease terms, ending at various dates through January 2008, or over a shorter period as the Company may negotiate with its lessors.
During 2005, the Company recorded restructuring charges of $0.2 million, primarily related to revisions to expected sublease income associated with a property located in Germany.
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2002 Restructuring Activities
During the third and fourth quarters of 2002 the Company instituted a Restructuring Plan (2002 Plan) aimed at reducing its annual payroll and facilities-related expenses by approximately $24.0 million. The Company recorded restructuring charges of $36.5 million during 2002 to reflect these activities. These activities included the termination of approximately 400 employees worldwide, the closure or consolidation of approximately 18 facilities worldwide, and the liquidation of approximately 9 foreign subsidiaries. During 2004 and 2005, the Company recorded additional restructuring charges of $3.7 million related to revisions to expected sublease income associated with a property located in Colorado. Due to the length of some of the lease terms and the uncertainty of the real estate market, the Company expects to make periodic adjustments to the accrual balance to reflect changes in its estimates, and to reflect actual events as they occur.
The following table summarizes the activity associated with the balance of the accrued restructuring charges related to the 2002 restructuring plan through December 31, 2005:
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | Accrued | |
| | | Accrued | | | | | | | | | | | liabilities | |
| | | liabilities | | | Amounts | | | Amounts | | | at | |
| (Dollars in millions) | | at 12/31/04 | | | paid | | | Accrued | | | 12/31/05 | |
| Lease cancellations and commitments | | | 12.7 | | | | 2.7 | | | | 0.5 | | | | 10.5 | |
| |
| Other | | | 0.2 | | | | | | | | — | | | | 0.2 | |
| | | | | | | | | | | | | |
| | | $ | 12.9 | | | $ | 2.7 | | | $ | 0.5 | | | $ | 10.7 | |
| | | | | | | | | | | | | |
The remaining restructuring accrual primarily relates to certain lease costs the Company is contractually required to pay on certain closed facilities, net of estimated associated sublease amounts. Sybase’s payments toward the accruals relating to lease cancellations and commitments are dependent upon market conditions and the Company’s ability to negotiate acceptable lease buy-outs or to locate suitable subtenants. These payments will be made over the remaining lease terms, ending at various dates through May 2010, or over a shorter period as the Company may negotiate with its lessors.
2001 Restructuring Activities
The following table summarizes the activity associated with the balance of the accrued restructuring charges associated with certain 2001 restructuring activities through December 31, 2005:
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | Accrued | |
| | | Accrued | | | | | | | | | | | liabilities | |
| | | liabilities | | | Amounts | | | | | | | at | |
| (Dollars in millions) | | at 12/31/04 | | | paid | | | Amounts accrued | | | 12/31/05 | |
| Lease cancellations and Commitments | | $ | 7.3 | | | $ | 4.0 | | | $ | 0.3 | | | $ | 3.6 | |
The remaining restructuring accrual primarily relates to certain lease payments the Company is contractually required to make on certain closed facilities, net of estimated associated sublease amounts. The payments of these accruals are dependent upon market conditions and the Company’s ability to negotiate acceptable lease buy-outs or locate suitable subtenants. These payments will be paid over the remaining lease terms, ending at various dates through May 2011, or over a shorter period as the Company may negotiate with its lessors.
During 2005, the Company recorded additional charges of $0.3 million, primarily related to revisions to expected sublease income associated with a property located in Colorado.
AvantGo Restructuring Reserves
In connection with the 2003 acquisition of AvantGo, the Company assumed certain liabilities associated with AvantGo’s 2001 and 2002 restructuring programs, primarily related to excess space at AvantGo’s Hayward, California and Chicago, Illinois facilities. At the time of acquisition, the Company also accrued additional amounts for lease obligations, net of the expected sublease revenue, associated with AvantGo’s remaining facilities in Hayward which would be vacated upon the expected move of all personnel to Sybase’s facilities in Dublin, California.
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During 2004, Sybase was able to sublease the Hayward facilities on terms more favorable than those anticipated when the applicable accruals were recorded. As a result, the Company revised its estimates and reversed accrued restructuring liabilities related to these facilities. The Company recorded net reversals of $2.7 million in restructuring accruals by a corresponding credit to operating expense. The net reversal included additional charges of $0.2 million related to the Chicago, Illinois facility and reversals of $2.9 million related to the Hayward, California facilities, where the Company was able to locate a suitable subtenant.
The following table summarizes the activity associated with the balance of the accrued restructuring charges related to AvantGo’s restructuring actions:
| | | | | | | | | | | | | |
| | | Accrued | | | | | | | Accrued | |
| | | liabilities | | | | | | | liabilities | |
| | | at | | | Amounts | | | at | |
| (Dollars in millions) | | 12/31/04 | | | paid | | | 12/31/05 | |
| Lease cancellations and Commitments | | $ | 3.4 | | | $ | 1.3 | | | $ | 2.1 | |
Note Fourteen: Guarantees
Under its standard software license agreement (SWLA), the Company agrees to indemnify, defend and hold harmless its licensees from and against certain losses, damages and costs arising from claims alleging the licensees’ use of Company software infringes the intellectual property rights of a third party. Historically, the Company has not been required to pay material amounts in connection with claims asserted under these provisions and, accordingly, the Company has not recorded a liability relating to such provisions. Under the SWLA, the Company also represents and warrants to licensees that its software products operate substantially in accordance with published specifications. Under its standard consulting and development agreement, the Company warrants that the services it performs will be undertaken by qualified personnel in a professional manner conforming to generally accepted industry standards and practices. Historically, only minimal costs have been incurred relating to the satisfaction of product warranty claims and, as such, no accruals for warranty claims have been made. Other guarantees include promises to indemnify, defend and hold harmless each of the Company’s executive officers, non-employee directors and certain key employees from and against losses, damages and costs incurred by each such individual in administrative, legal or investigative proceedings arising from alleged wrongdoing by the individual while acting in good faith within the scope of his or her job duties on behalf of the Company. Historically minimal costs have been incurred relating to such indemnifications and, as such, no accruals for these guarantees have been made.
Note Fifteen: Convertible Subordinated Notes
On February 22, 2005, the Company issued through a private offering to qualified institutional buyers in the U.S. $460 million of convertible subordinated notes (“Notes”) pursuant to exemptions from registration afforded by the Securities Act of 1933, as amended. These notes have an interest rate of 1.75 percent and are subordinated to all of the Company’s future senior indebtedness. The notes mature on February 22, 2025 unless earlier redeemed by the Company at its option, or converted or put to the Company at the option of the holders. Interest is payable semi-annually in arrears on February 22 and August 22 of each year, commencing on August 22, 2005. The Company recognized interest expense of $6.9 million in 2005, excluding amortization of debt issuance costs totaling $1.2 million.
The Company may redeem all or a portion of the notes at par on and after March 1, 2010. The holders may require that the Company repurchase notes at par on February 22, 2010, February 22, 2015 and February 22, 2020.
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Holders may convert the notes into the right to receive the conversion value (i) when the Company’s stock price exceeds 130% of the $25.22 per share initial conversion price for a specified time, (ii) in certain change in control transactions, (iii) if the notes are redeemed by the Company, (iv) in certain specified corporate transactions, and (v) when the trading price of the notes does not exceed a minimum price level. For each $1,000 principal amount of notes, the conversion value represents the amount equal to 39.6511 shares multiplied by the per share price of the Company’s common stock at the time of conversion. If the conversion value exceeds $1,000 per $1,000 in principal of notes, the Company will pay $1,000 in cash and may pay the amount exceeding $1,000 in cash, stock or a combination of cash and stock, at the Company’s election.
The Company has recorded these notes as long-term debt. Offering fees and expenses associated with the debt offering were approximately $9.8 million and are included in “other assets” in the Company’s consolidated Balance Sheets at December 31, 2005. This asset will be amortized into interest expenses on a straight-line basis over a five-year period which corresponds to the earliest put date. This approximates the effective interest method.
The Company used $125.0 million of the offering proceeds to repurchase approximately 6.7 million shares of its common stock.
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Quarterly Financial Information (Unaudited)
| | | | | | | | | | | | | | | | | | | | | |
| Three months ended (in thousands, | | March 31 | | | June 30 | | | September 30 | | | December 31 | | | Total | |
| except per share and stock price data) | | 2005 | | | 2005 | | | 2005 | | | 2005 | | | 2005 | |
| Revenues: | | | | | | | | | | | | | | | | | | | | |
| License fees | | $ | 62,708 | | | $ | 67,915 | | | $ | 69,739 | | | $ | 91,333 | | | $ | 291,695 | |
| Services | | | 129,203 | | | | 136,493 | | | | 129,588 | | | | 131,716 | | | | 527,000 | |
| | | | | | | | | | | | | | | | |
| Total revenues: | | | 191,911 | | | | 204,408 | | | | 199,327 | | | | 223,049 | | | | 818,695 | |
| Costs and expenses: | | | | | | | | | | | | | | | | | | | | |
| Cost of license fees | | | 14,258 | | | | 11,721 | | | | 10,993 | | | | 14,584 | | | | 51,556 | |
| Cost of services | | | 40,340 | | | | 39,928 | | | | 37,980 | | | | 38,077 | | | | 156,325 | |
| Sales and marketing | | | 59,578 | | | | 65,360 | | | | 59,655 | | | | 65,410 | | | | 250,003 | |
| Product development and engineering | | | 33,527 | | | | 34,305 | | | | 34,932 | | | | 36,247 | | | | 139,011 | |
| General and administrative | | | 22,233 | | | | 23,077 | | | | 23,873 | | | | 22,923 | | | | 92,106 | |
| Amortization of other purchased Intangibles | | | 1,677 | | | | 1,677 | | | | 1,677 | | | | 1,608 | | | | 6,639 | |
| Cost (reversal) of restructure | | | (8 | ) | | | 289 | | | | 21 | | | | 813 | | | | 1,115 | |
| | | | | | | | | | | | | | | | |
| Total costs and expenses | | | 171,605 | | | | 176,357 | | | | 169,131 | | | | 179,662 | | | | 696,755 | |
| | | | | | | | | | | | | | | | |
| Operating income | | | 20,306 | | | | 28,051 | | | | 30,196 | | | | 43,387 | | | | 121,940 | |
| Interest income, expense, and other, net | | | 3,108 | | | | 3,631 | | | | 3,881 | | | | 4,204 | | | | 14,824 | |
| Minority interest | | | — | | | | — | | | | — | | | | (49 | ) | | | (49 | ) |
| | | | | | | | | | | | | | | | |
| Income before income taxes | | | 23,414 | | | | 31,682 | | | | 34,077 | | | | 47,542 | | | | 136,715 | |
| Provision for income taxes | | | 10,068 | | | | 15,827 | | | | 6,090 | | | | 19,147 | | | | 51,132 | |
| | | | | | | | | | | | | | | | |
| Net income | | $ | 13,346 | | | $ | 15,855 | | | $ | 27,987 | | | $ | 28,395 | | | $ | 85,583 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| Basic net income per share | | $ | 0.14 | | | $ | 0.18 | | | $ | 0.31 | | | $ | 0.32 | | | $ | 0.95 | |
| Diluted net income per share | | $ | 0.14 | | | $ | 0.17 | | | $ | 0.30 | | | $ | 0.31 | | | $ | 0.92 | |
| | | | | | | | | | | | | | | | | | | | | |
| Three months ended (in thousands, | | March 31 | | | June 30 | | | September 30 | | | December 31 | | | Total | |
| except per share and stock price data) | | 2004 | | | 2004 | | | 2004 | | | 2004 | | | 2004 | |
| Revenues: | | | | | | | | | | | | | | | | | | | | |
| License fees | | $ | 57,905 | | | $ | 60,427 | | | $ | 70,380 | | | $ | 87,160 | | | $ | 275,872 | |
| Services | | | 125,254 | | | | 127,603 | | | | 128,338 | | | | 131,469 | | | | 512,664 | |
| | | | | | | | | | | | | | | | |
| Total revenues: | | | 183,159 | | | | 188,030 | | | | 198,718 | | | | 218,629 | | | | 788,536 | |
| Costs and expenses: | | | | | | | | | | | | | | | | | | | | |
| Cost of license fees | | | 13,580 | | | | 15,558 | | | | 15,566 | | | | 16,091 | | | | 60,795 | |
| Cost of services | | | 41,629 | | | | 41,517 | | | | 39,757 | | | | 39,113 | | | | 162,016 | |
| Sales and marketing | | | 58,240 | | | | 62,194 | | | | 59,254 | | | | 63,090 | | | | 242,778 | |
| Product development and engineering | | | 30,667 | | | | 29,141 | | | | 29,114 | | | | 31,037 | | | | 119,959 | |
| General and administrative | | | 20,943 | | | | 22,634 | | | | 24,034 | | | | 23,506 | | | | 91,117 | |
| Amortization of other purchased Intangibles | | | 500 | | | | 1,285 | | | | 1,677 | | | | 1,677 | | | | 5,139 | |
| Reversal of purchase accounting accrual | | | — | | | | — | | | | (2,677 | ) | | | — | | | | (2,677 | ) |
| Cost (reversal) of restructure | | | 125 | | | | (253 | ) | | | 10,479 | | | | 9,666 | | | | 20,017 | |
| | | | | | | | | | | | | | | | |
| Total costs and expenses | | | 165,684 | | | | 172,076 | | | | 177,204 | | | | 184,180 | | | | 699,144 | |
| | | | | | | | | | | | | | | | |
| Operating income | | | 17,475 | | | | 15,954 | | | | 21,514 | | | | 34,449 | | | | 89,392 | |
| Interest income, expense, and other, net | | | 3,589 | | | | 2,387 | | | | 2,518 | | | | 3,080 | | | | 11,574 | |
| | | | | | | | | | | | | | | | |
| Income before income taxes | | | 21,064 | | | | 18,341 | | | | 24,032 | | | | 37,529 | | | | 100,966 | |
| Provision for income taxes | | | 7,879 | | | | 5,519 | | | | 6,201 | | | | 13,417 | | | | 33,016 | |
| | | | | | | | | | | | | | | | |
| Net income | | $ | 13,185 | | | $ | 12,822 | | | $ | 17,831 | | | $ | 24,112 | | | $ | 67,950 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| Basic net income per share | | $ | 0.14 | | | $ | 0.13 | | | $ | 0.19 | | | $ | 0.26 | | | $ | 0.71 | |
| Diluted net income per share | | $ | 0.13 | | | $ | 0.13 | | | $ | 0.19 | | | $ | 0.25 | | | $ | 0.69 | |
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
ITEM 9A. CONTROLS AND PROCEDURES
Report of Management on Internal Controls over Financial Reporting
See Financial Statements and Supplementary Data — Report of Management on Internal Controls over Financial Reporting. Part II, Item 8.
Evaluation of Disclosure Controls and Procedures
An evaluation was performed under the supervision and with the participation of our management, including the Chief Executive Officer (CEO) and Chief Financial Officer (CFO), of the effectiveness of the design and operation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended. Based on that evaluation, our CEO and CFO concluded that our disclosure controls and procedures at December 31, 2005 were effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in reports we file or submit under the Exchange Act is accumulated and communicated to our management, including our CEO and CFO as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during our fourth quarter of 2005 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
Current Executive Officers
Our executive officers are identified in our definitive Proxy Statement for the Annual Meeting of Stockholders to be held May 31, 2006 (Proxy Statement), to be filed with the SEC within 120 days after our fiscal year ended December 31, 2005.
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Identification of Directors
Our directors are identified under the section entitled “Election of Directors” in our definitive Proxy Statement for the Annual Meeting of Stockholders to be held May 31, 2006 (Proxy Statement), to be filed with the SEC within 120 days after our fiscal year ended December 31, 2005.
Compliance with Section 16(a) of the Exchange Act
The information required under Item 405 of Regulation S-K is incorporated here by reference to “Section 16(a) Beneficial Ownership Reporting Compliance” in the Proxy Statement.
Audit Committee Financial Expert
Our Board of Directors has determined that Audit Committee members Robert P. Wayman and Jack E. Sum are both audit committee financial experts as defined in Item 401(h) of Regulation S-K, and are independent within the meaning of Item 7(d)(3)(iv) of Schedule 14A of the Exchange Act.
Standing Audit Committee
The information required under Item 401(i) of Regulation S-K and Item 7(d)(1) of Schedule 14A of the Exchange Act pertaining to the standing Audit Committee of the Board of Directors is incorporated by reference to “Election of Directors” in the Proxy Statement.
Corporate Governance Guidelines
We have adopted Corporate Governance Guidelines that are available on our website at www.sybase.com under “Investor Relations.” Stockholders may request a free copy of the guidelines by contacting Investor Relations at the same address set forth under “Code of Ethics,” below.
Certifications
Pursuant to NYSE Rule 303A.12(a), in 2005 the Company submitted a CEO certification to the NYSE regarding compliance with NYSE Corporate Governance Listing Standards. No qualifications were included in this report. Exhibits 31.1 and 31.2 to this Form 10-K contain certifications of the Company’s CEO and CFO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Exhibit 32 to this Form 10-K contains certifications of the Company’s CEO and CFO pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
Code of Ethics
Our code of ethics, entitled “Statement of Values and Business Ethics,” applies to all of our employees, directors and officers (including the chief executive officer, chief financial officer and principal accounting officer), and is available by clicking on the “Code of Ethics” link at the bottom of any page at our website at www.sybase.com. Stockholders may request a free copy of the Statement of Values and Business Ethics from:
Sybase, Inc.
Attention: Investor Relations
One Sybase Drive
Dublin, CA 94568
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to “Executive Compensation” in the Proxy Statement.
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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information required by this item is incorporated by reference to “Stock Ownership of Management and Beneficial Owners” in the Proxy Statement.
Information required under Item 201(d) of Regulation S-K regarding our equity compensation plans (both stockholder and non-stockholder approved plans) is incorporated by reference to “Executive Compensation – Equity Compensation Plan Information” in the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference to “Employment Agreements and Certain Transactions” in the Proxy Statement.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this item is incorporated by reference to “Ratification of Appointment of Independent Auditors” in the Proxy Statement.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Report on Form 10-K:
1. Financial Statements. See financial statements listed in the table of contents at the beginning of Part II, Item 8.
2. Financial Statement Schedules. The following financial statement schedules of Sybase, Inc. for the years ended December 31, 2005, 2004, and 2003 are filed as part of this Report on Form 10-K and should be read in conjunction with the Consolidated Financial Statements in Part II, Item 8, and related Notes.
3. Exhibits. See the response under Item 15(c) below. All management contracts and compensatory plans filed as exhibits are indicated as such in Item 15(c).
(b)Exhibits. The exhibits required by Item 601 of Regulation S-K are listed in the Exhibit Index to this Report on Form 10-K.
(c) Schedules. Form 10-K
| | | | | |
| | | Page |
| II Valuation and Qualifying Accounts | | | 82 | |
Schedules not listed above have been omitted because they are either (i) not applicable or are not required, or (ii) the information is included in the Consolidated Financial Statements and related Notes, Part II, Item 8.
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SCHEDULE II – VALUATION AND QUALIFYING ACCOUNTS
SYBASE, INC.
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | Translation | | | | |
| | | Beginning | | | Charged to | | | | | | | Adjustments and | | | Ending | |
| (Dollars in thousands) | | Balance | | | Operations (A) | | | Write-offs (B) | | | Other | | | Balance | |
| Year ended December 31, 2005: | | | | | | | | | | | | | | | | | | | | |
| Allowance for doubtful accounts | | $ | 1,852 | | | $ | 2,263 | | | $ | (1,480 | ) | | $ | 16 | | | $ | 2,651 | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| Year ended December 31, 2004: | | | | | | | | | | | | | | | | | | | | |
| Allowance for doubtful accounts | | $ | 4,145 | | | $ | (595 | ) | | $ | (2,022 | ) | | $ | 324 | | | $ | 1,852 | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| Year ended December 31, 2003: | | | | | | | | | | | | | | | | | | | | |
| Allowance for doubtful accounts | | $ | 5,507 | | | $ | 3,331 | | | $ | (5,841 | ) | | $ | 1,148 | | | $ | 4,145 | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | |
| A | | Sales returns and credit memos allowances |
| |
| B | | Uncollectible accounts written off and recoveries |
The required information regarding the valuation allowance for deferred tax assets is included in Note Eight to the Consolidated Financial Statements.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Exchange Act, the Registrant has duly caused this Report on Form 10-K to be signed on its behalf of the undersigned, thereunto duly authorized.
| | | | | |
| | | SYBASE, INC. |
| | | | | |
| | | By: | | /S/ JOHN S. CHEN |
| | | | | |
| March 15, 2006 | | John S. Chen |
| | | Chairman of the Board, Chief |
| | | Executive Officer and President |
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints John S. Chen, Pieter Van der Vorst and Daniel Cohen, jointly and severally, his or her attorneys-in-fact, each with the power of substitution, for him or her in any and all capacities, to sign any amendment to this Report on Form 10-K and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact, or his substitute or substitutes, may do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this Report on Form 10-K has been signed by the following persons in the capacities and as of the dates indicated:
| | | | | |
| Signature | | Title | | Date |
| |
| /S/ JOHN S. CHEN | | Chairman of the Board, Chief Executive Officer | | March 15, 2006 |
| | (Principal Executive Officer), President and Director | | |
| | | | | |
| /S/ PIETER A. VAN DER VORST | | Senior Vice President and Chief Financial Officer | | March 15, 2006 |
(Pieter A. Van der Vorst) | | (Principal Financial Officer) | | |
| | | | | |
| /S/ JEFFREY G. ROSS | | Vice President and Corporate Controller | | March 15, 2006 |
| | (Principal Accounting Officer) | | |
| | | | | |
| /S/ RICHARD C. ALBERDING | | Director | | March 15, 2006 |
| | | | |
| | | | | |
| /S/ CECILIA CLAUDIO | | Director | | March 15, 2006 |
| | | | |
| | | | | |
| /S/ L. WILLIAM KRAUSE | | Director | | March 15, 2006 |
| | | | |
| | | | | |
| /S/ ALAN B. SALISBURY | | Director | | March 15, 2006 |
| | | | |
| | | | | |
| /S/ JACK E. SUM | | Director | | March 15, 2006 |
| | | | |
| | | | | |
| /S/ ROBERT P. WAYMAN | | Director | | March 15, 2006 |
| | | | |
| | | | | |
| /S/ LINDA K. YATES | | Director | | March 15, 2006 |
| | | | |
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EXHIBIT INDEX
| | | |
| Exhibit No. | | Description |
| |
| 2.1 (1) | | Agreement and Plan of Reorganization dated as of November 29, 1999, among the Company, On-Line Financial Services, Inc., and Home Financial Network, Inc. |
| | | |
| 2.2 (2) | | Agreement and Plan of Merger dated as of February 20, 2001, among the Company, New Era of Networks, Inc., and Neel Acquisition Corp. |
| | | |
| 2.3 (3) | | Agreement and Plan of Merger dated as of December 19, 2002, by and among the Company, Seurat Acquisition Corporation and AvantGo, Inc. |
| | | |
| 2.4 (12) | | Agreement and Plan of Merger dated as of July 28, 2005, by and among the Company, Ernst Acquisition Corporation and Extended Systems Incorporated. |
| | | |
| 3.1 (4) | | Restated Certificate of Incorporation of the Company, as amended. |
| | | |
| 3.2 (5) | | Bylaws of the Company, amended and restated as of February 4, 2004. |
| | | |
| 4.1 (6) | | Preferred Share Rights Agreement dated as of July 31, 2002 between the Company and American Stock Transfer and Trust Co. |
| | | |
| 4.2 (7) | | Amendment No. 1 dated as of February 14, 2005 to the Preferred Share Rights Agreement dated as of July 31, 2002 between the Company and American Stock Transfer and Trust Co. |
| | | |
| 4.3 (8) | | Indenture dated as of February 22, 2005 between the Company and U.S. Bank National Association, as Trustee (including form of 1.75% Convertible Subordinated Notes due 2025). |
| | | |
| 4.4 (8) | | Registration Rights Agreement dated as of February 22, 2005 between the Company and Merrill Lynch, Pierce, Fenner & Smith Incorporated and Lehman Brothers Inc. |
| | | |
| 10.1 (9)* | | New Era of Networks, Inc. Amended and Restated 1995 Stock Option Plan. |
| | | |
| 10.2 (9)* | | New Era of Networks, Inc. 1998 Nonstatutory Stock Option Plan. |
| | | |
| 10.3 (9)* | | Convoy Corporation 1997 Stock Option Plan. |
| | | |
| 10.4 (9)* | | Microscript, Inc. 1997 Stock Option Plan. |
| | | |
| 10.5 (10)* | | 1988 Stock Option Plan and Forms of Incentive Stock Option Agreements and Nonstatutory Stock Option Agreements, as amended. |
| | | |
| 10.6 (11)* | | 1991 Employee Stock Purchase Plan and 1991 Foreign Subsidiary Employee Stock Purchase Plan, as amended. |
| | | |
| 10.7* | | Sybase, Inc. 401(k) Plan, as amended. |
| | | |
| 10.8* | | Amendment No. 1 to the Sybase, Inc. 401(k) Plan dated December 22, 2005. |
| | | |
| 10.9 (14)* | | Sybase, Inc. 1992 Director Stock Option Plan, as amended. |
| | | |
| 10.10 (9)* | | Sybase, Inc. 2001 Director Stock Option Plan. |
| | | |
| 10.11 (5)* | | Executive Deferred Compensation Plan, as amended December 5, 2003. |
| | | |
| 10.12* | | Amendment No. 1 to the Executive Deferred Compensation Plan, dated November 3, 2005. |
| | | |
| 10.13 (9)* | | Sybase, Inc. 1996 Stock Plan, as amended. |
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| | | |
| Exhibit No. | | Description |
| | | |
| 10.14 (21)* | | Form of Indemnification Agreement |
| | | |
| 10.15 (14)* | | Form of Amended and Restated Change of Control Agreement (standard version). |
| | | |
| 10.16 (14)* | | Form of Amended and Restated Change of Control Agreement (enhanced version). |
| | | |
| 10. 17(20) * | | Amended and Restated 1991 Employee Stock Purchase Plan, as amended February 2, 2005 and Amended and Restated 1991 Foreign Subsidiary Employee Stock Purchase Plan, as amended February 2, 2005. |
| | | |
| 10.18 (14)* | | Amended and Restated Employment Agreement between the Company and John S. Chen dated as of June 11, 2001. |
| | | |
| 10.19 (13)* | | Addendum to John Chen Amended and Restated Employment Agreement dated August 20, 2002. |
| | | |
| 10.20 (18)* | | Amended and Restated Sybase, Inc. 1999 Nonstatutory Stock Plan. |
| | | |
| 10.21 (16)* | | Home Financial Network, Inc. 1995 Stock Plan, and form of Stock Option Agreement. |
| | | |
| 10.22 (17) | | Corporate Headquarters Lease, dated January 28, 2000, between the Company and WDS-Dublin, LLC, as amended on November 29, 2000, and December 13, 2001. |
| | | |
| 10.23 (14) | | Amendment to Corporate Headquarters Lease, dated December 13, 2001, between the Company and WDS-Dublin, LLC. |
| | | |
| 10.24 (17) | | Trust Agreement dated May 1, 2000 between Fidelity Management Trust Company and the Company for administration of 401(k) Plan. |
| | | |
| 10.25 (5) | | First Amendment to May 1, 2000 Trust Agreement between Fidelity Management Trust Company and the Company for administration of the Sybase 401(k) plan, dated as of April 1, 2002. |
| | | |
| 10.26 | | Second Amendment to May 1, 2000 Trust Agreement between Fidelity Management Trust Company and the Company for administration of the Sybase 401(k) plan, dated as of February 11, 2005. |
| | | |
| 10.27 (5) | | November 17, 2003 Letter Agreement between Fidelity Management Trust Company and the Company for administration of the Sybase 401(k) plan. |
| | | |
| 10.28 (17) | | Trust Agreement dated May 1, 2000 between Fidelity Management Trust Company and the Company for administration of the Sybase Executive Deferred Compensation Plan. |
| | | |
| 10.29 (5) | | First Amendment to Trust Agreement between Fidelity Management Trust Company and the Company for administration of Sybase Executive Deferred Compensation Plan. |
| | | |
| 10.30 | | Second Amendment to May 1, 2000 Trust Agreement between Fidelity Management Trust Company and the Company for administration of Sybase Executive Deferred Compensation Plan, dated as of February 11, 2005. |
| | | |
| 10.31 (5) | | November 17, 2003 Letter Agreement between Fidelity Management Trust Company and Sybase, Inc. for administration of the Sybase Executive Deferred Compensation Plan. |
- 85 -
| | | |
| Exhibit No. | | Description |
| | | |
| 10.32 (17)* | | Financial Fusion, Inc. 2000 Stock Option Plan. |
| | | |
| 10.33 (14)* | | Financial Fusion, Inc. 2001 Stock Option Plan. |
| | | |
| 10.34 (14)* | | iAnywhere Solutions, Inc. Stock Option Plan. |
| | | |
| 10.35 (14)* | | Form of Notice of Grant and Restricted Stock Purchase Agreement. |
| | | |
| 10.36 (13)* | | Offer Letter of Thomas Volk dated September 5, 2002. |
| | | |
| 10.37 (5)* | | Retention Letter of Steven M. Capelli dated as of January 2, 2001. |
| | | |
| 10.38 (5)* | | Executive Financial Planning and Services Program for Section 16 Officers, effective as of February 5, 2003. |
| | | |
| 10.39 (5)* | | Summary Plan Description for Sabbatical Leave Plan of Sybase, Inc., as Amended and Restated as of May 1, 2003. |
| | | |
| 10.40 (20)* | | Amended and Restated Sybase, Inc. 2003 Stock Plan. |
| | | |
| 10.41 (19)* | | Letter dated January 31, 2006 to John Chen regarding 2006 compensation. |
| | | |
| 10.42 (19)* | | Letter dated January 31, 2006 to Marty Beard regarding 2006 compensation. |
| | | |
| 10.43 (19)* | | Letter dated January 31, 2006 to Raj Nathan regarding 2006 compensation. |
| | | |
| 10.44 (19)* | | Letter dated January 31, 2006 to Pieter Van Der Vorst regarding 2006 compensation. |
| | | |
| 10.45 (19)* | | Letter dated January 31, 2006 to Thomas Volk regarding 2006 compensation. |
| | | |
| 10.46 (21) | | Purchase Agreement, dated February 15, 2005 between the Company and Merrill Lynch, Pierce, Fenner & Smith Incorporated and Lehman Brothers Inc. |
| | | |
| 12 | | Computation of Ratio of Earnings to Fixed Charges |
| | | |
| 21 | | Subsidiaries of the Company |
| | | |
| 23.1 | | Consent of Independent Registered Public Accounting Firm |
| | | |
| 24 (22) | | Powers of Attorney |
| | | |
| 31.1 | | Certification of Chief Executive Officer pursuant to Securities Exchange Act Rule 13a-14 or 15d-14, as adopted pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002. |
| | | |
| 31.2 | | Certification of Chief Financial Officer pursuant to Securities Exchange Act Rule 13a-14 or 15d-14, as adopted pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002. |
| | | |
| 32 | | Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| | |
| * | | Indicates Management Contract or Compensatory Plan. |
| |
| (1) | | Incorporated by reference to Exhibit 2.1 to the Company’s Registration Statement on Form S-3 filed on January 31, 2000. |
| |
| (2) | | Incorporated by reference to Exhibit 2(a) to the Company’s Registration Statement on Form S-4 filed March 15, 2001. |
| |
| (3) | | Incorporated by reference to Exhibit 1 to the Company’s Schedule 13D filed with the Securities and Exchange Commission on December 30, 2002. |
- 86 -
| | |
| (4) | | Incorporated by reference to Amendment No. 1 to the Company’s Registration Statement on Form S-4 filed March 9, 1994 (file no. 33-75462), as amended by the Amended and Restated Certificate of Designation of Rights, Preferences and Privileges of Series A Participating Preferred Stock of Sybase, Inc., attached as Exhibit 3.3 to Form 8-A filed on August 5, 2002. |
| |
| (5) | | Incorporated by reference to the Exhibits filed with the Company’s Annual Report on Form 10-K for the year ended December 31, 2003. |
| |
| (6) | | Incorporated by reference to Exhibit 4.1 to the Company’s Report on Form 8-K filed on August 5, 2002. |
| |
| (7) | | Incorporated by reference to Exhibit 4.2 to the Company’s Report on Form 8-K filed on February 17, 2005. |
| |
| (8) | | Incorporated by reference to the Exhibits filed with the Company’s Report on Form 8-K filed on February 22, 2005. |
| |
| (9) | | Incorporated by reference to the Company’s Registration Statement on Form S-8 filed June 19, 2001. |
| |
| (10) | | Incorporated by reference to the Exhibits filed with the Company’s Annual Report on Form 10-K for the year ended December 31, 1997. |
| |
| (11) | | Incorporated by reference to the Company’s Registration Statement on Form S-8 (file no. 333-83271) filed July 20, 1999. |
| |
| (12) | | Incorporated by reference to the Exhibits filed with the Schedule 13D the Company filed August 8, 2005. |
| |
| (13) | | Incorporated by reference to the Exhibits filed with the Company’s Annual Report on Form 10-K for the year ended December 31, 2002. |
| |
| (14) | | Incorporated by reference to the Exhibits filed with the Company’s Annual Report on Form 10-K for the year ended December 31, 2001. |
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| (15) | | Incorporated by reference to the Company’s Registration Statement on Form S-8 filed August 20, 1999. |
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| (16) | | Incorporated by reference to the Company’s Registration Statement on Form S-8 filed on January 20, 2000. |
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| (17) | | Incorporated by reference to the Exhibits filed with the Company’s Annual Report on Form 10-K for the year ended December 31, 2000. |
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| (18) | | Incorporated by reference to the Exhibits filed with the Company’s Registration Statement on Form S-8 filed on August 25, 2004. |
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| (19) | | Incorporated by reference to the Exhibits filed with the Company’s Report on Form 8-K filed on February 3, 2006. |
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| (20) | | Incorporated by reference to the Exhibits filed with the Company’s Registration Statement on Form S-8 filed on July 29, 2005. |
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| (21) | | Incorporated by reference to the Exhibits filed with the Company’s Annual Report on Form 10-K for the year ended December 31, 2004. |
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| (22) | | Incorporated by reference to the signature page of this Report on Form 10-K. |
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