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EXHIBIT 13.2
Sybase, Inc.
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Selected Financial Data
Consolidated Statement of Operations Data
(In thousands, except per share data) 1997 1996 1995 1994 1993
Revenues:
License fees $471,036 $ 605,491 $615,642 $588,973 $349,131
Services 432,901 406,054 340,944 236,420 134,919
Total revenues 903,937 1,011,545 956,586 825,393 484,050
Costs and expenses:
Cost of license fees 31,356 29,859 29,736 33,446 17,658
Cost of services 248,625 246,273 205,019 140,274 69,402
Sales and marketing 469,161 523,159 481,404 350,239 210,478
Product development and engineering 138,590 164,676 151,902 114,008 71,911
General and administrative 62,607 72,561 67,888 52,844 36,675
Cost of restructuring -- 49,232 -- -- --
Cost of merger -- -- 24,017 -- --
Purchase of in-process technology -- -- 19,965 -- --
Total costs and expenses 950,339 1,085,760 979,931 690,811 406,124
Operating income (loss) (46,402) (74,215) (23,345) 134,582 77,926
Interest income and expense, net 5,646 7,507 8,603 5,694 3,728
Income (loss) before income taxes (40,756) (66,708) (14,742) 140,276 81,654
Provision for income taxes 14,668 12,298 4,760 53,223 31,056
Net income (loss) $(55,424) $ (79,006) $(19,502) $ 87,053 $ 50,598
Basic net income (loss) per share $ (0.70) $ (1.05) $ (0.27) $ 1.29 $ 0.79
Shares used in computing basic net income (loss) per share 78,794 75,160 71,292 67,458 64,143
Diluted net income (loss) per share $ (0.70) $ (1.05) $ (0.27) $ 1.18 $ 0.72
Shares used in computing diluted net income (loss) per share 78,794 75,160 71,292 73,523 70,423
Consolidated Balance Sheet Data
(In Thousands)
1997 1996 1995 1994 1993
Cash, cash equivalents and cash investments $246,137 $ 174,522 $223,721 $256,001 $181,385
Working capital 67,510 93,056 140,306 200,767 170,199
Total assets 781,625 751,891 766,292 671,440 400,621
Long-term obligations 1,959 2,871 5,452 7,543 5,927
Stockholders' equity 371,515 396,808 439,649 407,615 243,953
Historical Financial results of operations of Sybase contained in this annual
report have been restated to include the results of operations of Powersoft
Corporation.
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Management's Discussion and Analysis of Financial Condition and Results of
Operations
Overview
Sybase completed 1997 with revenue of over $900 million; down from the Company's
record high of $1 billion in 1996. There were three major factors in 1997 that
significantly impacted revenue: First, revenue growth in North America slowed
partially, the Company believes, due to companies reallocating technological
resources toward "Year 2000" compliance and away from building strategic
enterprise applications. Second, because of the uncertain economic conditions in
the Asia Pacific region, the Company has taken a more conservative approach with
respect to its business practices in the region. Consequently, while the Company
continued to win substantial new business in the region, the economic conditions
and the changes in our business practices resulted in a decrease in revenue
recognized for the year. Third, in January 1998, the Company discovered that
certain accounting practices in its Japanese subsidiary were not in accordance
with U.S. generally accepted accounting principles and the Company's policies.
As a result of these irregularities, the Company has restated its revenues and
results of operations for the quarters ended September 30, 1997, June 30, 1997
and March 31, 1997. The restatement resulted in a decrease in revenue totaling
approximately $43 million for the nine months ended September 30, 1997.
At the end of 1997, Sybase had approximately $246 million in cash, cash
equivalents and cash investments and stockholders' equity of approximately $372
million. Days sales outstanding in accounts receivable was 82 days for the
quarter ended December 31, 1997.
The Company continued to maintain its core customer base with strength in many
markets. In particular, Sybase counts as its customers 68 of the top 100 banks,
all 20 of the leading life insurance companies, 300 worldwide healthcare
organizations, and the top 25 telecommunications companies worldwide.
In 1997, the Company delivered its next generation relational database, Adaptive
Server(TM) Enterprise 11.5. Other products delivered as part of the Adaptive
Component Architecture(TM) included PowerJ(TM) Java(TM) development tool, Jaguar
CTS(TM) component transaction server, DirectConnect(TM) and OmniConnect(TM),
PowerBuilder(R) 6.0, PowerDesigner(R), Power++(TM) and PowerSite(TM). Leveraging
the strength of each product category, this comprehensive suite of innovative
technology will be the basis for revenue growth for 1998. However, as this is a
forward-looking statement, future actual results may differ based on future
product licenses and the factors described in "Future Operating Results."
The Company continues to focus resources and product/service solutions around
rapid growth market opportunities in data warehouse, Web computing and
occasionally connected computing. Sybase's services business, which includes
consulting, education and support, has grown to be a more significant part of
the Company and a critical element in our customer relationships. While the
Company has focused efforts towards increasing software sales, services will
likely continue to be an important element of our business for 1998 as we bring
complete solutions to solving customers' problems.
Furthermore, we have added depth and breadth to our management team bringing
core operational competencies, such as product lifecycle planning, unified
pricing strategies and new partner business models to Sybase.
We anticipate that the competitive environment in which Sybase operates will
remain intense. While much progress has been made in improving Sybase's product
and market competitiveness, crisp execution of product development programs,
marketing and sales execution is vital to realizing the Company's financial
goals.
Overall, we are optimistic about the future. Our refreshed product line,
strengthened management team, and sound financial base will be key to achieving
Sybase's long-term goals of profitability and sustained revenue growth.
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Management's Discussion and Analysis of Financial Condition and Results of
Operations
Results of Operations
Revenues
(Dollars in millions) 1997 Change 1996 Change 1995
License fees $471.0 (22%) $ 605.5 (2%) $615.6
Percentage of total revenues 52% 60% 64%
Services $432.9 7% $ 406.0 19% $341.0
Percentage of total revenues 48% 40% 36%
Total revenues $903.9 (11%) $1,011.5 6% $956.6
Total revenues for 1997 decreased 11 percent to $903.9 million compared to $1.0
billion recorded in 1996 compared to an increase of 6 percent in 1996 over the
$956.6 million achieved in 1995. The decline in total revenue in 1997 was the
result of the factors described above.
License fees decreased 22 percent to $471.0 million in 1997, down from $605.5
million recorded in 1996 and decreased 2 percent in 1996 from $615.6 million
recorded in 1995. The decline in license fee revenues in 1997 was the result of
the factors described above. The Company's efforts are focused on license
revenue growth opportunities for 1998 in the data warehouse, Web computing and
occasionally connected computing. The Company's strong technological base and
comprehensive marketing strategy, along with improved sales execution, will be
key drivers to the growth in the Company's software license business. However,
as this is a forward-looking statement, future actual growth results may differ
based on the factors described in "Future Operating Results."
Services revenues grew 7 percent to $432.9 million in 1997, up from $406.0
million and $341.0 million recorded in 1996 and 1995, respectively. Services
revenues consist primarily of consulting, education and other services related
to the development and deployment of applications using the Company's software
products and product support and maintenance fees. Services revenues as a
percentage of total revenues increased to 48 percent in 1997 from 40 percent in
1996 and 36 percent in 1995.
The increase in services revenues in absolute dollars resulted, in part, from
the increase in support and maintenance service fees related to the Company's
growing installed base, both in terms of directly supported sites as well as
additional users and the renewal of maintenance contracts. The increase in
services revenue also resulted from increased demand for the Company's
consulting and other services. The Company expects services revenue to continue
to increase modestly in absolute dollars in 1998, due partially to an expanding
installed base of customers. However, as this is a forward-looking statement,
future actual results may differ based on the factors described in "Future
Operating Results."
Geographical Revenues
(Dollars in millions) 1997 Change 1996 Change 1995
North America $ 571.5 (7%) $ 615.7 5% $ 588.8
Percentage of total revenues 63% 61% 62%
International:
European $ 232.6 (3%) $ 238.8 0% $ 239.8
Percentage of total revenues 26% 23% 25%
Intercontinental $ 99.8 (36%) $ 157.0 23% $ 127.9
Percentage of total revenues 11% 16% 13%
Total International $ 332.4 (16%) $ 395.8 8% $ 367.8
Percentage of total revenues 37% 39% 38%
Total revenue $ 903.9 (11%) $1,011.5 6% $ 956.6
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Management's Discussion and Analysis of Financial Condition and Results of
Operations
North American revenues (United States, Canada and Mexico) declined 7 percent in
1997 to $571.5 million from $615.7 million and increased 5 percent in 1996 over
1995 from $588.8 million to $615.7 million. International revenues decreased 16
percent in 1997 to $332.4 million from $395.8 million in 1996, with European
revenues down 3 percent and Intercontinental revenues (principally Japan, Asia
Pacific and South America) decreasing 36 percent as a result of the factors
described above. International revenues comprised 37 percent of total revenues
in 1997, down from 39 percent in 1996 and 38 percent in 1995.
In Europe and the Intercontinental Region, most revenues and expenses are
denominated in local currencies. The U.S. dollar strengthened throughout 1997
against the major European and Intercontinental currencies, which resulted in
lower revenue and expenses recorded for these regions when translated into U.S.
dollars compared with the prior year. The substantial decrease in the value of
certain Asian currencies, particularly in Thailand, relative to the U.S. dollar
adversely impacted revenues in the fourth quarter of 1997. The effect of foreign
currency exchange rate changes was not material in 1996 or 1995.
Although the Company takes into account changes in exchange rates over time in
its pricing strategy, the Company's business and results of operations could be
materially and adversely affected by fluctuations in foreign currency exchange
rates. Changes in foreign currency exchange rates, the strength of local
economies, and the general volatility of software markets may result in a higher
or lower proportion of foreign revenues as a percentage of total revenues in the
future.
Cost and Expenses
(Dollars in millions) 1997 Change 1996 Change 1995
Cost of license fees $ 31.4 5% $ 29.9 0% $ 29.7
Percentage of license fees 7% 5% 5%
Cost of services $ 248.6 1% $ 246.3 20% $ 205.0
Percentage of services revenues 57% 61% 60%
Sales and marketing $ 469.2 (10%) $ 523.2 9% $ 481.4
Percentage of total revenues 52% 52% 50%
Product development and engineering $ 138.6 (16%) $ 164.7 8% $ 151.9
Percentage of total revenues 15% 16% 16%
General and administrative $ 62.6 (14%) $ 72.6 7% $ 67.9
Percentage of total revenues 7% 7% 7%
Cost of merger and purchase of in-process technology $ -- * $ -- * $ 44.0
Percentage of total revenues -- -- 5%
Cost of restructuring $ -- * $ 49.2 * $ --
Percentage of total revenues -- 5% --
*Not meaningful
Cost of license fees. Cost of license fees, consisting primarily of product
costs (media and documentation), amortization of capitalized software
development costs and third-party royalty costs, increased in absolute dollar
amount in 1997 to $31.4 million, up from $29.9 million in 1996 and $29.7 million
in 1995 as a result of higher amortization of capitalized software. These costs
were 7 percent of license fees in 1997 and 5 percent of license fees in both
1996 and 1995. Amortization of capitalized software costs included in cost of
license fees was $9.7 million in 1997, $7.4 million in 1996 and $5.3 million in
1995. The increase in the amortization of capitalized software related to the
release of Adaptive Server Enterprise 11.5 and PowerBuilder 6.0 was the largest
factor in the increase of cost of license fees.
Cost of services. Cost of services, consisting primarily of maintenance,
consulting and education expenses and, to a lesser degree, services-related
product costs (media and documentation), decreased as a percentage of services
revenues to 57 percent in 1997 compared to 61 percent and 60 percent in 1996 and
1995, respectively. The small increase in absolute dollars in 1997 over 1996
reflects the continued investment in the customer support and the professional
services organizations, in order to better serve the Company's growing customer
base.
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Management's Discussion and Analysis of Financial Condition and Results of
Operations
Sales and marketing. Sales and marketing expenses decreased 10 percent in
absolute dollars to $469.2 million in 1997 from $523.2 million in 1996 while
remaining consistent as a percentage of total revenues with 1996 at 52 percent.
In 1996, sales and marketing expense increased 9 percent in absolute dollars,
over 1995 from $481.4 million while increasing as a percentage of revenues to 52
percent. This increase in sales and marketing expense as a percentage of
revenues was primarily the result of lower than expected license revenues and,
to a lesser extent, lower services revenues realized in 1996. The decrease in
sales and marketing expense, in absolute dollars, in 1997 compared to 1996 is
the result of efforts to minimize growth in sales and marketing expenses and an
improvement in the productivity of the resources already in place.
Product development and engineering. Product development and engineering
expenses (net of capitalized software development costs) decreased slightly as a
percentage of total revenues in 1997 to 15 percent. In 1996 and 1995, the
percentage remained consistent at 16 percent. The decrease for 1997 is in part
the result of lower than anticipated license revenues and the Company's emphasis
on managing its expense base relative to expected 1997 license revenues. In
absolute dollars, product development and engineering expenses for 1997 of
$138.6 million decreased 16 percent compared to $164.7 million for 1996. Much of
the reduction in expenses between 1997 and 1996 resulted from discontinuation of
certain product lines in 1996. These product lines included interactive
television, wireless messaging and multimedia authoring tools. The Company
capitalized approximately $21.6 million of software development costs in 1997
compared to $13.8 million in 1996 and $13.4 million in 1995. During the third
and fourth quarter of 1997, the Company released Adaptive Server Enterprise 11.5
and PowerBuilder 6.0, respectively. Product development and engineering costs
incurred in connection with these releases during the period between the
achievement of technological feasibility and release have been capitalized. The
Company believes that product development and engineering expenditures are
essential to technology and product leadership and expects 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 represented 7
percent of total revenues in 1997, 1996 and 1995, while decreasing in absolute
dollars in 1997. The absolute dollar decrease to $62.6 million in 1997 from
$72.6 million in 1996 resulted primarily from the Company's emphasis on managing
general and administrative costs and improving productivity.
Cost of merger and purchase of in-process technology. In 1995, the Company
charged to operations one-time costs related to the merger with Powersoft
Corporation of approximately $24.0 million, a substantial portion of which were
nondeductible for income tax purposes. These costs consisted primarily of
investment banking and professional fees and other direct costs associated with
the merger. In 1995, the Company also charged to operations one-time costs of
approximately $20.0 million related to in-process technology acquired in the
acquisition of SDP, S.A.
Cost of restructuring. In 1996, the Company charged to operations $49.2 million
to cover the costs of a restructuring. The Company's goal in the restructuring
was to reduce on-going expenses and focus its operations. The charge included
approximately $17.0 million for severance and related items, $15.7 million for
facilities consolidation, $13.9 million for disposition expenses and write-off
of capitalized software development costs related to discontinued products, and
$2.6 million for other restructuring related items.
Operating Loss
(Dollars in millions) 1997 Change 1996 Change 1995
Operating loss $(46.4) * $(74.2) * $(23.3)
Percentage of total revenues 5% 7% 2%
* Not meaningful
The operating loss was $46.4 million in 1997, as compared to a loss of $74.2
million in 1996. The operating loss of $46.4 million in 1997 includes charges of
$68.5 million related to the reversal of revenues recorded during 1997 in the
Company's Japanese subsidiary which were not in conformity with U.S. generally
accepted accounting principals and the Company's policies. These charges include
$43.0 million related to the restatement of revenues for the nine months ended
September 30, 1997 and $25.5 million related to adoption of more conservative
revenue recognition practices for the Japanese subsidiary under which revenue is
not recognized until cash is received from the customer for the three months
ended December 31, 1997.
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Management's Discussion and Analysis of Financial Condition and Results of
Operations
The operating loss of $74.2 million in 1996 includes a non-recurring
restructuring charge of $49.2 million. The operating loss in 1995 of $23.3
million includes non-recurring charges of $ 44.0 million related to the cost of
merger with Powersoft Corporation and the purchases of in-process technology.
The decrease in operating income and margins results from the operating factors
described above.
Interest Income and Interest Expense and Other
(Net)
(Dollars in millions) 1997 Change 1996 Change 1995
Interest income $ 9.2 0% $ 9.2 3% $ 8.9
Percentage of total revenues 1% 0.9% 0.9%
Interest expense and other, net $(3.5) 106% $(1.7) 421% $(0.3)
Percentage of total revenues 0.4% 0.2% 0%
Interest income consists primarily of interest earned on investments. Interest
expense and other (net) includes interest expense from capital lease obligations
incurred in prior years, bank fees and expenses, net gains and losses resulting
from the Company's foreign currency transactions and the related hedging
activities and the cost of hedging foreign currency exposures.
Provision for Income Taxes
(Dollars in millions) 1997 Change 1996 Change 1995
Provision for income taxes $14.7 20% $12.3 158% $4.8
The Company recorded a $14.7 million provision for income taxes in 1997, up from
$12.3 million and $4.8 million recorded in 1996 and 1995, respectively. The 1997
tax provision is primarily the result of earnings generated from operations and
withholding taxes on revenues in certain international jurisdictions. The
deferred tax asset includes a valuation allowance of $33.4 million. As of
December 31, 1997, the Company has federal net operating loss carryforwards of
$38.6 million, research and development tax credits of $9.4 million and foreign
tax credits of $9.4 million. The net operating loss carryforwards expire in
years from 2003 through 2112, the research and development tax credits expire in
years from 2006 and through 2010, and the foreign tax credits expire in 1999 and
2000. The Company has a net deferred tax asset of $41.0 million at December 31,
1997. 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. The amount of deferred tax assets considered
realizable is subject to adjustment in future periods if estimates of future
taxable income are reduced and any such adjustments could have an impact on the
Company's effective tax rate in future periods.
Net Loss per Share
(Dollars in millions) 1997 Change 1996 Change 1995
Net loss $(55.4) (30%) $(79.0) 305% $(19.5)
Percentage of total revenues 6% 8% 2%
Basic and Diluted:
Net loss per share $(0.70) 33% $(1.05) 289% $(0.27)
Shares used in per share computations 78.8 5% 75.2 5% 71.3
The Company incurred a net loss in 1997 of $55.4 million compared to a net loss
in 1996 of $79.0 million and a net loss in 1995 of $19.5 million. The basic and
diluted net loss per share was $0.70 in 1997, $1.05 in 1996 and $0.27 in 1995.
Shares used in the per share computations increased 5 percent in both 1997 and
1996, primarily due to the exercise of employee stock options and increase of
shares under the employee stock purchase plan.
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Management's Discussion and Analysis of Financial Condition and Results of
Operations
Liquidity and Capital Resources
(Dollars in millions) 1997 Change 1996 Change 1995
Working capital $ 67.5 (28%) $ 93.1 (34%) $140.3
Cash, cash equivalents and cash investments $246.1 41% $174.5 (22%) $223.7
Net cash provided by operating activities $ 74.2 274% $ 19.8 (75%) $ 78.4
Net cash used for investing activities $109.6 45% $ 75.4 (24%) $ 99.1
Net cash provided by financing activities $ 73.7 116% $ 34.1 (29%) $ 47.9
Net cash provided by operating activities was $74.2 million in 1997 compared to
$19.8 million in 1996 and $78.4 million in 1995. Net cash provided by operating
activities during 1997 reflects a net loss of $55.4 million compared to a loss
of $79.0 million in 1996 and a loss of $19.5 million in 1995. Depreciation and
amortization, which are included in the net losses, but do not require the use
of cash, amounted to $104.7 million in 1997 compared to $97.8 million in 1996
and $75.2 million in 1995. The increase of depreciation and amortization over
these periods reflects a larger base of depreciable long-term assets.
Additionally, increased net cash provided by operating activities in 1997
compared to 1996 reflects a decrease in accounts receivable of $25.9 million in
1997 compared to increases of $49.0 million in 1996.
Net cash used for investing activities increased to $109.6 million in 1997
compared to $75.4 million in 1996 and $99.1 million in 1995. Investing
activities included capital expenditures of $36.4 million in 1997 compared to
$82.3 million in 1996 and $121.1 million in 1995. This reflects a decrease in
capital expenditures required to support the Company's employee base around the
world as well as systems and infrastructure investments. Additionally, in 1995
investing activities included a cash use of $37.3 million (net of cash acquired)
for business combinations, whereas in 1996 and 1997 these activities resulted in
a net cash inflow of $0.2 million and net cash outflow of $4.5 million,
respectively. During 1997 there was a net increase in cash investments in the
amount of $39.5 million compared to a net decrease of $25.1 million and $61.0
million in 1996 and 1995, respectively.
Net cash provided by financing activities for 1997 was $73.7 million compared to
$34.1 million in 1996 and $47.9 million in 1995. Net cash provided by financing
activities increased in 1997 due to amounts received from Japanese financial
institutions related to revenues which were subsequently reversed as a result of
restatement of quarterly results of operations of the Japanese subsidiary
discussed above. This was partially offset by a reduction in the issuance of
common stock associated with the exercise of stock options.
The Company engages in business operations around the world and is therefore
exposed to foreign currency fluctuations. As of December 31, 1997, the Company
had identifiable assets totaling $135.9 million associated with its European
operations and $87.9 million associated with its Intercontinental operations.
The Company experiences foreign exchange transaction exposures from certain
balances denominated in different currencies. The Company hedges certain of
these short-term exposures under a plan approved by the Board of Directors (see
Note One of Notes to Consolidated Financial Statements). The Company also
experiences foreign exchange translation exposure on its net assets denominated
in different currencies. As certain of these net assets are considered by
Sybase, the U.S. parent company, to be a permanent investment in the respective
subsidiaries, the related foreign currency translation gains and losses are
reflected in accumulated foreign translation adjustments in stockholders'
equity.
Cash, cash equivalents and cash investments totaled $246.1 million at December
31, 1997, compared to $174.5 million at December 31, 1996 and $223.7 million at
December 31, 1995.
On February 18, 1998, the Board of Directors authorized the repurchase of up to
$25 million of the Company's outstanding common stock. Subject to price and
market conditions, any such purchases will be made from time to time in open
market transactions using the Company's available cash balances.
On February 26, 1998, the Company announced a restructuring plan. On February
26, 1998, the Company announced a restructuring plan. The restructuring, which
is expected to reduce Sybase's cost structure in 1998, is intended to focus the
Company's core technology strengths around three market growth initiatives in
Web computing, occasionally connected computing and data warehousing.
The restructuring plan includes the discontinuation of certain product lines,
termination of employees, vacating certain facilities and cancellation of real
estate leases as a result of the employee terminations. On February 26, 1998,
the Company terminated approximately 600 employees as a part of the
restructuring. Restructuring charges to be incurred in 1998 are estimated to be
approximately $70 million.
During 1995, the Company entered into a five-year lease of a new research and
development facility in Boulder, Colorado. Payments under this lease, which
commenced during 1997, are based on LIBOR rates applied to the $ 13,016,000 cost
of the facility funded by the lessor. The Company has an option to renew the
lease for up to two five-year extensions, subject to certain conditions. If at
the end of the lease term, whether caused by expiration, default or otherwise,
the Company does not purchase the property, the Company would guarantee a
residual value to the lessor of up to the lessor's net investment in the
property. Under this lease, the Company is required to maintain compliance with
certain Financial covenants. As a result of net losses incurred in 1997, the
Company failed to comply with certain of these covenants and such noncompliance
has been waived by the lessor. In March 1998, the Company collateralized its
obligations to the lessor by pledging $ 13,276,000 in cash deposits.
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Management's Discussion and Analysis of Financial Condition and Results of
Operations
The Company believes that it has the financial resources needed to meet its
presently anticipated business requirements, including capital expenditures and
strategic operating programs, for the foreseeable future.
Future Operating Results
The Company's future operating results may vary substantially from period to
period. The price of the Company's common stock will fluctuate in the future,
and an investment in the Company's common stock is subject to a variety of
risks, including but not limited to the specific risks identified below. The
results of operations for the quarter and year ended December 31, 1997 are not
necessarily indicative of results for the quarter and fiscal year ending
December 31, 1998 or any other future period. Expectations, forecasts, and
projections by the Company or others are by nature forward-looking statements,
and future results cannot be guaranteed. Forward-looking statements that were
true at the time made may ultimately prove to be incorrect or false. Inevitably,
some investors in the Company's securities will experience gains while others
will experience losses depending on the prices at which they purchase and sell
securities. Prospective and existing investors are strongly urged to carefully
consider the various cautionary statements and risks set forth in this report.
The timing and amount of the Company's license fee revenues are subject to a
number of factors that make estimation of revenues and operating results prior
to the end of a quarter extremely uncertain. Sybase has experienced a seasonal
pattern of license fee decline between the fourth quarter and the succeeding
first quarter contributing to lower total revenues and operating earnings in the
first quarter compared to the prior fourth quarter. For example, the Company
currently anticipates that revenues and earnings in the first quarter of 1998
will be lower than in the fourth quarter of 1997. As a result of the seasonal
impact on revenues, an anticipated restructuring charge of approximately $70
million which the Company has announced it will incur in 1998, and forecasted
expenses, the Company anticipates it will incur both an operating loss and a net
loss in the first quarter of 1998. The Company has operated historically with
little or no backlog and, as a result, license fees in any quarter are dependent
on orders booked and shipped in that quarter. In addition, the timing of closing
of large license agreements increases the risk of quarter-to-quarter
fluctuations and the uncertainty of estimating quarterly operating results. The
Company has experienced a pattern of recording 50 percent to 70 percent of its
quarterly revenues in the third month of the quarter, with a concentration of
such revenues in the last two weeks of such third month. The Company's operating
expenses are based on projected annual and quarterly revenue levels and are
incurred approximately ratably throughout each quarter. Because the Company's
operating expenses are relatively fixed in the short term, if projected revenues
are not realized in the expected period, the Company's operating results for
that period would be adversely affected and could result in an operating loss,
as occurred in the first and second quarters of 1996. Failure to achieve
revenues, earnings, and other operating and financial results as forecast or
anticipated by brokerage firm and industry analysts could result in an immediate
and adverse effect on the market price of the Company's stock. The Company may
not achieve, in the future, the relatively high rates of growth experienced by
the Company in 1991 through 1994 or the rates of growth projected for the
software markets in which Sybase competes.
In 1998, the Company expects to make changes to the sales coverage model and
sales compensation programs, and focus on increasing the number of discrete
quota-carrying sales people. Although such changes are intended to enhance
overall revenues, such changes could, in the short-run, materially and adversely
affect the sales process and revenues. In February 1998, the Company appointed
Michael S. Gardner Senior Vice President of Worldwide Sales. In April 1998, Mr.
Gardner will assume responsibility for overseeing the Company's worldwide sales
force from Mike Forster, Senior Vice President of Worldwide Field Operations,
who will retire at the end of 1998. In the third quarter of 1997, John Chen
became the Company's President and Chief Operating Officer, and Mitchell
Kertzman, Chief Executive Officer, became Chairman of the Board. In February
1998, the Company created the office of the Chief Executive with shared
leadership responsibilities between Messrs. Kertzman and Chen, who now also
holds the title of Chief Executive Officer. The Company may make other
management and organization changes in the future. Organizational and management
changes are intended to enhance productivity and competitiveness. However, such
changes may not produce the desired results and could materially adversely
affect productivity, expenses and revenues.
The market for the Company's stock is highly volatile. The trading price of the
Company's common stock fluctuated widely in 1995, 1996 and 1997 and may in the
future continue to be subject to wide fluctuations in response to quarterly
variations in operating and financial results, announcements of technological
innovations, new products, or customer contracts won by the Company or
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Management's Discussion and Analysis of Financial Condition and Results of
Operations
its competitors. Changes in prices of the Company's or its competitors' products
and services, changes in product mix, changes in the Company's revenues and
revenue growth rates for the Company as a whole or for individual geographic
areas, business units, products or product categories, as well as other events
or factors could also affect the Company's stock prices. Statements or changes
in opinions, ratings or earnings estimates made by brokerage firms and industry
analysts relating to the market in which the Company does business, the
Company's competitors, or the Company or its products specifically, have
resulted, and could in the future result, in an immediate and adverse effect on
the market price of the Company's common stock. For example, due to a variety of
factors, the Company's stock price declined significantly during the First
quarter of 1996 and 1998. In addition, the stock market has from time to time
experienced extreme price and volume fluctuation's that have particularly
affected the market price for many high-technology companies and which often
have been unrelated to the operating performance of these companies.
An increased portion of the Company's revenues in recent quarters has been
derived from its international operations. Several of the Company's
international subsidiaries have been only recently acquired or formed. For
example, the Company recently acquired operations in Chile, Argentina, Norway
and Peru. In addition there have been several management and organizational
changes within the international operations. For example, in 1998, the country
managers in Australia, Thailand and Japan resigned or were replaced.
International revenues, in absolute dollars and as a percentage of total
revenues, may fluctuate in part due to the growth and, in some cases, the
relative immaturity of international organizations. The Company's operations and
financial results could be significantly affected by factors associated with
international operations such as changes in foreign currency exchange rates and
uncertainties relative to regional economic circumstances, political instability
in emerging markets, and difficulties in staffing and managing foreign
operations, as well as by other risks associated with international activities.
For example, the economic unrest and currency devaluations in Asia in late 1997
adversely affected collection of receivables, particularly dollar denominated
receivables, and the recognition of revenue in the fourth quarter of 1997.
The market for the Company's software products and services is extremely
competitive and characterized by dynamic customer demands, rapid technological
and marketplace changes, and frequent product enhancements and new product
introductions. The Company competes with a number of companies, including Oracle
Corporation, Informix Corporation, Microsoft Corporation, IBM Corporation and
Computer Associates, Inc. Many of the Company's competitors and potential
competitors have significantly greater financial, technical, sales and marketing
resources, and a larger installed base than the Company. New or enhanced
products, many of which have been announced and many of which are continually
introduced by existing or future competitors in the software industry, could
increase the competition faced by the Company's products from time to time and
result in greater price pressure on certain of the Company's products,
especially to the extent that market acceptance for personal computer-oriented
technologies increases. A failure by the Company to compete successfully with
its existing competitors or with new competitors could have a material adverse
effect on the Company's business and results of operations and on the market
price of the Company's common stock.
Existing and future competition or changes by the Company in its product
offerings or product pricing structure could result in an immediate reduction in
the prices of the Company's products. For example, changes to the Company's
pricing and licensing structure in the First quarter of 1996 increased prices
for certain products, and reduced prices for others. The Company will introduce
price and licensing changes from time to time in the future. If such changes or
changes in the Company's products, or existing or future competition were to
result in significant revenue declines, the Company's business and financial
results could be adversely affected.
The Company's future results will depend in part on its ability to enhance its
existing products and to introduce new products on a timely and cost-effective
basis that meet dynamic customer requirements. Customer requirements for
products can rapidly change as a result of innovations or changes within the
computer hardware and software industries. For example, the widespread use of
the Internet is rapidly giving rise to new customer requirements as well as new
methods and practices of selling, marketing, and distributing products and
services. Sybase's future results will depend in part on its success in
developing new products, making generally available products that have been
previously announced, enhancing its existing products and adapting its existing
products to changing customer requirements, and ultimately gaining market
acceptance for such new or enhanced products. The Company recently announced the
development and anticipated availability dates of several products, including
Adaptive Server Anywhere for Windows CE, which is scheduled to become generally
available in the second quarter of 1998.
The Company has experienced delays in introducing some new products in the past.
For example, the commercial shipment of Sybase IQ(TM), which became commercially
available in February 1996, had been previously planned for the second half of
1995.
10
page 13
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Unanticipated delays in product availability schedules could result from various
factors including development or testing difficulties, feature changes, software
errors, shortages in appropriately skilled software engineers, and project
management problems. Delays in the scheduled availability of these or other
products, a lack of or decrease in market acceptance of new or enhanced
products, or the Company's failure to accurately anticipate customer demand or
to meet customer performance requirements or to anticipate competitive products
and developments could have a material adverse effect on the Company's business
and financial results. New products or new versions of existing products may,
despite testing, contain undetected errors or bugs that could delay the
introduction or adversely affect commercial acceptance of such products or give
rise to warranty or other customer claims, which could, in turn, adversely
affect the Company's financial results.
Sybase's results will also depend increasingly on the ability of its products to
interoperate and perform well with existing and future leading,
industry-standard application software products intended to be used in
connection with relational database management systems ("RDBMSs"). Failure to
meet existing or future interoperability and performance requirements of certain
independent vendors marketing such applications in a timely manner has in the
past and could in the future adversely affect the market for Sybase's products.
Certain leading applications will not be interoperable with Sybase RDBMSs until
certain features are added to the Company's RDBMS, and others may never be
available on Sybase's RDBMSs. In addition, the Company's application development
tools, database design tools, and certain connectivity products are designed for
use with RDBMSs offered by the Company's competitors. Vendors of non-Sybase
RDBMSs and related products may become less willing in the future to provide the
Company with access to products, technical information, and marketing and sales
support. If existing and potential customers of the Company who use non-Sybase
RDBMSs refrain from purchasing such products due to concerns that the
development, quality and support of products for non-Sybase RDBMSs will diminish
over time, the Company's business, results of operations, and financial
condition could be materially and adversely affected.
Commercial acceptance of the Company's products and services could be adversely
affected by critical or negative statements or reports by brokerage firms,
industry and financial analysts, and industry periodicals concerning the Company
and its products, business, or competitors, or by the advertising or marketing
efforts of competitors that could affect customer perception. In addition,
customer perception of Sybase and its products could be adversely affected by
financial results, particularly revenues and profitability, reported for the
1997 Fiscal year or future periods, by the market share of the Company's
products and by related press reports.
As the number of software products in the industry and the number of software
patents increase, the Company believes that software developers may become
increasingly subject to infringement claims. Third parties have in the past
asserted, and may in the future assert, that their patents or other proprietary
rights are violated by products offered or in development by the Company. Any
such claims, with or without merit, can be time consuming and expensive to
defend or settle, and could have an adverse effect on the Company's business and
results of operations.
The Company's ability to achieve its future revenues and earnings will depend in
part on the ability of its officers and key personnel to manage growth, costs,
and expenses successfully through the implementation of appropriate management
systems and controls. Failure to effectively implement or maintain such systems
and controls could adversely affect the Company's business and results of
operations. The success of the Company also depends in part on its ability to
attract and retain qualified technical, managerial, sales, and marketing
personnel. The competition for such personnel is intense in the software
industry and, Sybase believes, has increased substantially in recent years.
There were several changes in 1997 and early 1998 to the Company's executive
management team. For example, in the third quarter of 1997, John Chen became the
Company's President and Chief Operating Officer, and Mitchell Kertzman, Chief
Executive Officer, became Chairman of the Board. In February 1998, the Company
created the Office of the Chief Executive with shared leadership
responsibilities between Messrs. Kertzman and Chen, who now also holds the title
of Chief Executive Officer. Other management changes and additions were also
effected in late 1997 and early 1998, including the appointment of several new
Senior Vice Presidents in charge of several major business units. Further
changes in management, the Company's recent financial performance, and a
reduction in the overall number of Sybase employees made in February 1998 could
cause an increase in the amount of employee turnover.
The failure to effectively recruit, train, and retain qualified personnel or
high rates of employee turnover, particularly among engineering or sales staff,
could adversely affect the Company's product development efforts, product sales,
and other aspects of the Company's operations and results.
11
page 14
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Sybase currently ships most of its products in North America (other than its
Powersoft(R) products) from its Emeryville, California distribution facility.
Because of the pattern of recording a high percentage of quarterly revenues
within the last week or two weeks of the quarter, the closure or inoperability
of this facility during such weeks due to natural calamity or due to a systems
or power failure could have a material adverse effect on the Company's ability
to record revenues for such quarter.
The Company has acquired a number of companies in the past. Most recently, in
February 1998, the Company acquired Intellidex Systems, a provider of meta data
management technology for deploying and managing data warehouse environments.
The Company will likely acquire other distributors, companies, products, or
technologies in the future. The achievement of the desired benefits of these and
future acquisitions will depend in part upon whether the integration of the
acquired businesses is achieved in an efficient and effective manner. The
successful combination of businesses will require, among other things,
integration of the companies' related product offerings and coordination of
their sales, marketing, and research and development efforts. The difficulties
of such coordination may be increased by the geographic distance between
separate organizations. The Company may be unable to integrate effectively these
or future acquired businesses and may not obtain the anticipated or desired
benefits of such acquisitions. Such acquisitions may result in costs,
liabilities or additional expenses that could adversely affect the Company's
results of operations and financial condition. In addition, acquisitions or
changes in business or market conditions may cause the Company to revise its
plans, which could result in unplanned expenses or a loss of anticipated
benefits from past investments.
In February 1998, the Company announced that it will incur a restructuring
charge of approximately $70 million in connection with a Company-wide
reorganization which is intended to reduce Sybase's cost structure by
approximately $100 million on an annualized basis. The Company will continue to
evaluate its business, products and results of operations, and accordingly, the
Company may incur further restructuring charges in the first quarter and in the
future. The actual amount of such charge could exceed the estimated amount and
actual expense savings in the future could be offset by other expense increases
or changes in the Company's business. However, as these are forward-looking
statements, future actual results may differ based on the factors described
above.
In October 1997, the American Institute of Certified Public Accountants issued
Statement of Position No. 97-2, "Software Revenue Recognition ("SOP 97-2"),
which supersedes SOP 91-1. The Company will be required to adopt this standard
in the first quarter of 1998. Restatement of prior financial statements is
prohibited. SOP 97-2 addresses software revenue recognition matters primarily
from a conceptual level and detailed implementation guidelines have not been
issued. Accordingly, the Company is not able to currently determine the effect,
if any, that adoption of SOP 97-2 will have on its existing revenue recognition
practices; depending on the implementation guidelines that ultimately emerge,
the amount and timing of revenue recognized could be adversely affected.
Year 2000
The Company is aware of and is addressing the issues associated with the
programming code in existing computer systems as the year 2000 approaches._
Systems that do not properly recognize such information could generate erroneous
data or cause a system to fail. . Failures of the Company's and/or third
parties' computer systems could have a material impact on the Company's ability
to conduct its business. Since the Company's infrastructure is modern, does not
depend on older Mainframe code, and its applications are based on its own
products, which are year 2000 complaint, the Company does not expect the same
level of cost or risk associated with companies who are based on older
technology.
The Company has completed an initial assessment of its worldwide infrastructure
systems (e.g. computer and telephone systems) and its business systems (e.g.
revenue, sales and marketing and finance functions) to determine what actions
are required to resolve the Year 2000 issue. As of February 1998, approximately
two-thirds of Company's systems had been tested or certified to be Year 2000
compatible. Of the remaining one-third, approximately half are scheduled for
upgrades from suppliers which will be installed over the coming year. The
Company anticipates completion of testing on the remaining systems in the second
quarter of 1998. For systems which are not either vendor-certified or internally
certified to be Year 2000 compatible, the Company will endeavor to upgrade or
modify those systems where possible, and otherwise retire systems where
necessary. The Company believes it will have identified solutions available for
all of its systems before the end of 1998, and expects to install all solutions
by April of 1999. The Company has initiated formal communications with all of
its significant suppliers and large customers to determine the extent to which
the Company's interface systems are vulnerable to those third parties' failure
to remediate their own Year 2000 Issues. There is no guarantee that the systems
of other companies on which the Company's systems rely will be timely converted
and would not have an adverse effect on the Company's systems. The Company does
not believe that the cost of such actions will have a material effect on the
Company's results of operations or financial condition. There are no assurances,
however, that there will not be a delay in, or increased cost associated with,
the implementation of such changes, and the Company's inability to implement
such changes could have an adverse effect on future results of operations.
Factors that could cause unusual costs and delays include the availability and
cost of personnel trained in this area, the ability to locate and correct all
relevant computer codes and other uncertainties.
12
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Report of Independent Auditors
The Board of Directors and Stockholders
Sybase, Inc.
We have audited the accompanying consolidated balance sheets of Sybase, Inc., as
of December 31, 1997 and 1996 and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the three years in
the period ended December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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 consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Sybase,
Inc. at December 31, 1997 and 1996, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted accounting principles.
/s/ ERNST & YOUNG
Walnut Creek, California
January 28, 1998 except for Note Thirteen
as to which the date is
February 26, 1998.
13
page 16
Consolidated Balance Sheets
For the years ended December 31,
(In thousands, except per share data) 1997 1996 1995
Revenues:
License fees $ 471,036 $ 605,491 $ 615,642
Services 432,901 406,054 340,944
Total revenues 903,937 1,011,545 956,586
Costs and expenses:
Cost of license fees 31,356 29,859 29,736
Cost of services 248,625 246,273 205,019
Sales and marketing 469,161 523,159 481,404
Product development and engineering 138,590 164,676 151,902
General and administrative 62,607 72,561 67,888
Cost of restructuring -- 49,232 --
Cost of merger -- -- 24,017
Purchase of in-process technology -- -- 19,965
Total costs and expenses 950,339 1,085,760 979,931
Operating loss (46,402) (74,215) (23,345)
Interest income 9,184 9,243 8,936
Interest expense and other, net (3,538) (1,736) (333)
Loss before income taxes (40,756) (66,708) (14,742)
Provision for income taxes 14,668 12,298 4,760
Net loss $ (55,424) $ (79,006) $ (19,502)
Basic and diluted net loss per share $ (0.70) $ (1.05) $ (0.27)
Shares used in computing basic and diluted net loss per share 78,794 75,160 71,292
See accompanying notes
14
page 17
Consolidated Statements of Operations
December 31,
(In thousands, except share data) 1997 1996
Assets
Current assets:
Cash and cash equivalents $ 188,876 $ 156,796
Short-term cash investments 47,127 17,726
Total cash, cash equivalents and short-term cash investments 236,003 174,522
Accounts receivable, less allowance for doubtful accounts of $30,673 (1996 - $28,242) 204,411 239,466
Deferred income taxes 16,973 13,729
Other current assets 18,274 17,551
Total current assets 475,661 445,268
Long-term cash investments 10,134 --
Property, equipment and improvements, net 149,661 191,328
Deferred income taxes 24,077 27,406
Capitalized software, net 44,208 19,974
Other assets 77,884 67,915
Total assets $ 781,625 $ 751,891
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 19,521 $ 21,563
Accrued compensation and related expenses 43,974 47,829
Accrued income taxes 31,800 26,952
Other accrued liabilities 95,476 89,386
Deferred revenue 170,473 166,482
Other current liabilities 46,907 --
Total current liabilities 408,151 352,212
Other liabilities 1,959 2,871
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; 79,998,287 shares issued
and outstanding (1996 - 76,608,794) 80 77
Additional paid-in capital 397,925 359,161
Retained earnings (9,343) 46,081
Accumulated translation adjustments (17,147) (8,511)
Total stockholders' equity 371,515 396,808
Total liabilities and stockholders' equity $ 781,625 $ 751,891
See accompanying notes
15
page 18
Consolidated Statements of Stockholders' Equity
Three years ended December 31, 1997 Additional Accumulated
Common stock paid-in Retained translation
(In thousands) Shares Amount capital earnings adjustments Total
Balances at December 31, 1994 69,359 $ 69 $ 259,158 $151,100 $ (2,712) $ 407,615
Common stock issued in connection with
business combinations 497 -- 8,051 (3,343) -- 4,708
Common stock issued under stock option
and stock purchase plans 2,790 3 34,497 -- -- 34,500
Tax benefit of exercise of stock options -- -- 13,358 -- -- 13,358
Foreign currency translation adjustments -- -- -- -- (1,030) (1,030)
Net loss -- -- -- (19,502) -- (19,502)
Balances at December 31, 1995 72,646 72 315,064 128,255 (3,742) 439,649
Common stock issued in connection with
business combinations 971 1 9,970 (3,168) -- 6,803
Common stock issued under stock option
and stock purchase plans 2,992 4 34,127 -- -- 34,131
Foreign currency translation adjustments -- -- -- -- (4,769) (4,769)
Net loss -- -- -- (79,006) -- (79,006)
Balances at December 31, 1996 76,609 77 359,161 46,081 (8,511) 396,808
Common stock issued in connection with
business combinations 750 1 11,999 -- -- 12,000
Common stock issued under stock option
and stock purchase plans 2,639 2 26,765 -- -- 26,767
Foreign currency translation adjustments -- -- -- -- (8,636) (8,636)
Net loss -- -- -- (55,424) -- (55,424)
Balances at December 31, 1997 79,998 $ 80 $ 397,925 $ (9,343) $ (17,147) $ 371,515
See accompanying notes
16
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Consolidated Statements of Cash Flows
For the years ended December 31,
(In thousands) 1997 1996 1995
Cash and cash equivalents, beginning of year $ 156,796 $ 180,877 $ 152,211
Cash flows from operating activities:
Net loss (55,424) (79,006) (19,502)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization 104,739 97,835 75,178
Write-off of assets in restructuring -- 17,600 --
Deferred income taxes 85 (100) (21,710)
Changes in assets and liabilities:
Accounts receivable 25,876 (49,034) (9,926)
Other current assets (589) 1,378 1,413
Accounts payable (2,042) (15,551) 6,044
Accrued compensation and related expenses (3,855) 5,422 5,164
Accrued income taxes 4,848 (1,421) (5,454)
Other accrued liabilities 1,152 17,358 13,744
Deferred revenue 2,521 28,218 37,450
Other (3,130) (2,871) (4,005)
Net cash provided by operating activities 74,181 19,828 78,396
Cash flows used for investing activities:
Purchases of available-for-sale cash investments (76,652) (59,883) (143,101)
Maturity of available-for-sale cash investments 20,385 67,751 73,924
Sale of available-for-sale cash investments 16,732 17,250 130,184
Business combinations, net of cash acquired (4,533) 201 (37,342)
Purchase of property, equipment and improvements (36,362) (82,258) (121,094)
Capitalized software development costs (21,658) (13,838) (13,376)
Decrease (increase) in other assets (7,516) (4,627) 11,734
Net cash used for investing activities (109,604) (75,404) (99,071)
Cash flows provided by Financing activities:
Increase in other current liabilities 46,907 -- --
Net proceeds from issuance of common stock 26,767 34,131 34,500
Tax benefit of exercise of stock options -- -- 13,358
Net cash provided by Financing activities 73,674 34,131 47,858
Effect of exchange rate changes on cash (6,171) (2,636) 1,483
Net increase (decrease) in cash and cash equivalents 32,080 (24,081) 28,666
Cash and cash equivalents, end of year 188,876 156,796 180,877
Cash investments, end of year 57,261 17,726 42,844
Total cash, cash equivalents and cash investments, end of year $ 246,137 $ 174,522 $ 223,721
Supplemental disclosures:
Acquisition of Purchase Net, Inc. in exchange for common stock $ 12,000 $ -- $ --
Interest paid $ 1,168 $ 399 $ 410
Income taxes paid $ 15,987 $ 12,842 $ 18,546
See accompanying notes
17
page 20
Notes to Consolidated Financial Statements
Note One: Summary of Significant Accounting Policies
The Company Sybase, Inc. ("Sybase" or the "Company") develops, markets and
supports software products and services for client/"server, Internet and
intranet transaction processing and data mart and data warehousing applications.
Sybase's products include databases, middleware, and application development
tools and are marketed under the brand names of Sybase and Powersoft. The
Company also offers consulting and customer support and technical services;
demand for such services is predominantly dependent upon the base of customers
with installed license products.
Basis of Presentation. The consolidated financial statements include the
accounts of Sybase and its subsidiaries. All significant intercompany
transactions and balances have been eliminated in consolidation.
In January 1998, the Company discovered that certain accounting practices in its
Japanese subsidiary were not in accordance with U.S. generally accepted
accounting principles and the Company's policies. As a result of these
irregularities, the Company has restated its revenues and results of operations
for the quarters ended September 30, 1997, June 30, 1997 and March 31, 1997. The
restatement resulted in a decrease in previously reported revenues for those
quarters totaling approximately $43.0 million. Other current liabilities in the
consolidated balance sheet at December 31, 1997 represent amounts accrued
related to actual and potential liabilities to Japanese financial institutions
resulting from these irregularities.
The Company translates the accounts of its foreign subsidiaries using the local
foreign currency as the functional currency. For foreign subsidiaries in
countries with highly inflationary economies the accounts are translated as if
the U.S. dollar was the functional currency. The assets and liabilities of
foreign subsidiaries are translated into U.S. dollars using current exchange
rates, and gains and losses from this translation process are credited or
charged to the "accumulated translation adjustments" account included in
stockholders' equity. Foreign currency transaction gains and losses, which have
not been material, are included in interest expense and other 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 foreign currency
forward exchange contracts. For the most part, these exposures consist of
intercompany accounts receivable owed to the Company as a result of local sales
of software licenses by the Company's international subsidiaries. The majority
of these exposures are denominated in European and Asia Pacific currencies,
primarily the Dutch guilder and the Hong Kong dollar. 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 in the consolidated statement of operations and are offset by
corresponding foreign currency gains and losses on hedged balances.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
Property, Equipment and Improvements. Property, equipment and improvements are
stated at cost. Depreciation and amortization are computed using the
straight-line method over the shorter of the estimated useful life of the asset
or the lease term.
Capitalized Software. The Company capitalizes software development costs
incurred subsequent to the release of the product for acceptance testing. 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
$69,421,000, $51,831,000 and $37,911,000 at December 31, 1997, 1996 and 1995,
respectively, and related accumulated amortization was $25,213,000, $31,857,000
and $20,684,000, respectively. Software amortization charges included in cost of
license fees were $9,683,000, $7,364,000 and $5,265,000, for 1997, 1996 and
1995, respectively.
Intangible Assets. Intangible assets, which have generally resulted from
business combinations accounted for as purchases (Note Ten), are recorded at
amortized cost. Amortization is computed using the straight-line method over
periods of three to eight years. Management periodically reviews the carrying
amounts of the Company's intangible assets for indications of impairment.
18
page 21
Notes to Consolidated Financial Statements
Long-Lived Assets. Effective January 1, 1996 the Company adopted Financial
Accounting Standards Board (FASB) Statement of Financial Accounting Standards
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of," which requires impairment losses to be recorded on
long-lived assets used in operations, such as property, equipment and
improvements, and 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. The adoption of this statement did
not have a material effect on the Company's consolidated financial statements.
Revenue Recognition. Sybase licenses software under noncancellable license
agreements. License fee revenues are recognized when a noncancellable license
agreement is in force, the product has been shipped, the license fee is fixed or
determinable, and collectibility is reasonably assured. Sublicense fees are
recognized as reported to the Company by its licensees. License fee revenues
are for certain application development and data access tools are recognized
upon direct shipment to the end user or through an initial reseller channel to
the end user. Maintenance and 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 training are
recognized as services are performed. Revenues from other contract services are
generally recognized under the percentage-of-completion method. The Company's
revenue recognition policy is in accordance with the provisions of the American
Institute of Certified Public Accountant's Statement of Position 91-1, "Software
Revenue Recognition"(SOP 91-1).
In October 1997, the American Institute of Certified Public Accountants issued
Statement of Position No. 97-2, "Software Revenue Recognition"(SOP 97-2), which
supersedes SOP 91-1. The Company will be required to adopt this statement in the
first quarter of 1998. Restatement of prior financial statements is prohibited.
SOP 97-2 addresses software revenue recognition matters primarily from a
conceptual level and detailed implementation guidelines have not been issued.
Accordingly, the Company is not able to currently determine the effect, if any,
that adoption of SOP 97-2 will have on its existing revenue recognition
practices.
Product Development. Revenues recognized under vendor and end-user funding
arrangements amounted to $984,000 and $2,237,000 for 1996 and 1995,
respectively. There were no such revenues recognized in 1997. Company-funded
product development, calculated as total product development expenses including
amounts capitalized for financial reporting purposes, less revenues recognized
under the vendor and end-user funding arrangements discussed above, amounted to
$157,900,000, $177,613,000 and $162,278,000 for 1997, 1996 and 1995,
respectively.
Transfer of Financial Assets. The Company finances certain software license and
service agreements with customers through the sale, assignment and transfer of
the future payments under those agreements to Financing institutions,
principally on a non-recourse basis. The Company records such transfers as sales
of the related accounts receivable when it is considered to have surrendered
control of such receivables under the provisions of Statement of Financial
Accounting Standards No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities," (Statement 125). The
Company adopted Statement 125 effective January 1, 1997. The adoption of this
statement did not have a material effect on the Company's consolidated financial
statements.
Stock-Based Compensation Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation," (Statement 123) encourages, but does
not require, companies to record compensation cost for stock-based employee
compensation plans at fair value. The Company has chosen to continue to 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. Accordingly,
compensation cost for stock options granted to employees is measured as the
excess, if any, of the quoted market price of the Company's stock at the date of
the grant over the amount an employee must pay to acquire the stock.
Net Income (Loss) Per Share. In 1997, the FASB issued Statement of Financial
Accounting Standards No. 128, "Earnings per Share," (Statement 128) which
replaced the calculation of primary and fully diluted earnings per share with
basic and diluted earnings per share. Unlike primary earnings per share, basic
earnings per share excludes any dilutive effects of options, warrants and
convertible securities. Diluted earnings per share is very similar to the
previously reported fully diluted earnings per share and includes the dilutive
effect of the assumed exercise of stock options using the treasury stock method.
Shares used in computing basic and diluted net loss per share are based on the
weighted average shares outstanding in each period. The effect of outstanding
stock options (Note Six) is excluded from the calculation of diluted net loss
per share as their inclusion would be antidilutive. Net income (loss) per share
amounts for all periods have been presented, and where appropriate, restated to
conform to the Statement 128 requirements.
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Notes to Consolidated Financial Statements
Comprehensive Income. In 1997, the FASB issued Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income," (Statement 130) which
requires that all items that are required to be recognized under accounting
standards as components of comprehensive income (revenues, expenses, gains and
losses) be reported in a financial statement that is displayed with the same
prominence as other financial statements. The Company will comply with the
requirements of Statement 130 for the year ending December 31, 1998.
Disclosures about Segments of an Enterprise. In 1997, the FASB issued Statement
of Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information," (Statement 131) which establishes standards
for the way public business enterprises report information about operating
segments in annual financial statements and requires that those enterprises
report selected information about operating segments in interim financial
reports issued to stockholders. In addition, it establishes standards for
related disclosures about products and services, geographic areas and major
customers. The Company will comply with the requirements of Statement 131 for
the year ending December 31, 1998.
Note Two: Financial Instruments
Cash and Cash Equivalents. Cash equivalents are highly liquid investments with
insignificant interest rate risk and original maturities of three months or less
and are stated at amounts which approximate fair value, based on quoted market
prices. Cash equivalents consist principally of taxable, short-term money market
instruments.
Cash Investments. Cash investments consist principally of taxable, short-term
money market instruments with maturities of up to two years and are stated at
amounts which approximate fair value, based on quoted market prices.
In accordance with Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities" (Statement
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, 1997, the Company has classified all of its
debt and equity securities as available-for-sale pursuant to Statement 115. The
available-for-sale securities are recorded as follows at December 31 (in
thousands):
1997 1996
Cash and cash equivalents $ 99,982 $ 71,023
Short-term cash investments (maturities of one year or less) 47,127 17,726
Cash investments (maturities of one to two years) 10,134 --
$157,243 $ 88,749
Unrealized gains and losses at December 31, 1997 and 1996 and realized gains and
losses for the years then ended were not material. Accordingly, the Company has
not made a provision for such amounts in its consolidated balance sheets. The
cost of securities sold is based on the specific identification method.
Foreign Currency Forward Exchange Contracts. At December 31, 1997, the Company
had outstanding forward exchange contracts, all having maturities of
approximately 30 days, to exchange various foreign currencies for U.S. dollars,
Dutch guilders and Hong Kong dollars in the amounts of $28,933,552, $40,355,396
and $6,634,436, respectively, and to exchange U.S. dollars and Dutch guilders
into various foreign currencies in the amounts of $22,821,723 and $8,152,284,
respectively. At December 31, 1996, the Company had outstanding forward exchange
contracts, all having maturities of approximately 30 days, to exchange various
foreign currencies for U.S. dollars and Dutch guilders in the amounts of
$19,830,300 and $35,681,104, respectively, and to exchange U.S. dollars and
Dutch guilders into various foreign currencies in the amounts of $14,886,528 and
$5,140,480, respectively. Neither the cost nor the fair value of these foreign
currency forward exchange contracts was material at December 31, 1997 or 1996.
One major U.S. multinational bank is counterparty to substantially all of these
contracts.
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Note Three: Property, Equipment and Improvements
The components of property, equipment and improvements are as follows at
December 31 (in thousands):
Estimated
1997 1996 useful lives
Real property $ 8,203 $ 9,899 20-25 years
Computer equipment and software 279,377 263,694 3 years
Furniture and fixtures 81,113 84,404 5 years
Leasehold improvements 47,027 46,865 lease term
415,720 404,862
Less accumulated depreciation (266,059) (213,534)
Net property, equipment and improvements $ 149,661 $191,328
Depreciation expense amounted to $81,542,000, $76,919,000 and
$57,941,000 in 1997, 1996 and 1995, respectively.
Note Four: Other Assets
The components of other assets are as follows at December 31 (in thousands):
1997 1996
Intangible assets, less accumulated amortization of $43,488 (1996 - $28,965) $53,849 $51,408
Deposits 6,044 8,130
Other 17,991 8,377
$77,884 $67,915
Note Five: Lease Obligations and Other Liabilities and Commitments
The Company leases certain office facilities and certain furniture and equipment
under operating leases expiring through 2004, which generally require Sybase to
pay operating costs, including property taxes, insurance and maintenance. These
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. Capital lease
obligations incurred for equipment acquisitions have not been material.
Future minimum lease payments under noncancellable operating leases having
initial terms in excess of one year as of December 31, 1997 are as follows (in
thousands):
1998 $ 44,253
1999 32,037
2000 21,995
2001 17,204
2002 12,927
Thereafter 6,396
Total minimum lease payments $134,812
21
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Notes to Consolidated Financial Statements
During 1995, the Company entered into a five-year lease of a new research and
development facility in Boulder, Colorado. Payments under this lease, which
commenced during 1997, are based on LIBOR rates applied to the $13,016,000 cost
of the facility funded by the lessor. The Company has an option to renew the
lease for up to two five-year extensions, subject to certain conditions. If at
the end of the lease term, whether caused by expiration, default or otherwise,
the Company does not purchase the property, the Company would guarantee a
residual value to the lessor of up to the lessor's net investment in the
property. Under this lease, the Company is required to maintain compliance with
certain financial covenants. As a result of net losses incurred in 1997, the
Company failed to comply with certain of these covenants and such noncompliance
has been waived by the lessor. In March 1998, the Company collateralized its
obligations to the lessor by pledging $13,276,000 in cash deposits.
Facility rent expense amounted to approximately $42,322,000, $47,389,000 and
$42,347,000 in 1997, 1996 and 1995, respectively.
At December 31, 1997, other liabilities included accrued rent expense under the
Company's facilities leases ($1,461,000), noncurrent liabilities related to
business combinations ($460,000) and other obligations ($38,000).
At December 31, 1997, the Company had outstanding letters of credit in the
amount of $4,877,000.
Note Six: Stockholders' Equity
Preferred Stock Rights. Under the Company's stockholder rights plan, each
stockholder receives one right to purchase one one-thousandth of a share of
Series A Participating Preferred Stock (a "Right") for each share of common
stock owned by the stockholder. Holders of the Rights are entitled to purchase
for $250.00 one one-thousandth of one share of the Company's Series A
Participating Preferred Stock in certain limited circumstances involving
acquisitions of, or offers for 15 percent or more of, the Company's common
stock. After any such acquisition is completed, each Right entitles its holder
to purchase for $250.00 an amount of common stock of the Company, or in certain
circumstances securities of the acquirer, having a then current market value of
two times the exercise price of the Right. In connection with the stockholder
rights plan, the Company has designated 200,000 shares of its 8,000,000 shares
of authorized but unissued Preferred Stock as "Series A Participating Preferred
Stock." Each one one-thousandth of each share of Series A Participating
Preferred Stock will generally be afforded economic rights similar to one share
of the Company's common stock. The Rights are redeemable for a specified period
at a price of $.01 per Right and expire in March 2002.
Stock Option Plans. Pursuant to the terms of the Company's 1988 Stock Option
Plan, an aggregate of 17,995,493 shares of common stock has been issued or
reserved for issuance 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. The exercise price per share of all incentive stock options granted
under the Plan must be at least equal to the fair market value of the shares at
the date of the grant. Options granted prior to January 1, 1997 generally expire
over terms not exceeding ten years from the grant date, one month after
termination of employment, and six months after death or permanent disability of
the optionee. Options granted subsequent to January 1, 1997 generally expire
over terms not exceeding ten years from the grant date, three months after
termination of employment, two years after death, and one year after permanent
disability of the optionee. Options, in all of these cases, are exercisable to
the extent vested. Vesting generally occurs at the rate of 12.5 percent after 6
months and the balance in equal installments over the following 42 months.
22
page 25
Notes to Consolidated Financial Statements
Pursuant to the 1996 Stock Option Plan an aggregate of 5,427,000 shares of
common stock were reserved for issuance upon the exercise of options granted to
qualified employees and consultants of the Company as of December 31, 1997. The
Board of Directors, directly or through committees, administers the Plan and
establishes the terms of option grants. The exercise price per share of all
incentive stock options granted under the Plan must be at least equal to the
fair market value of the shares at the date of the grant. The exercise price of
all nonstatutory stock options granted under the 1996 Stock Option Plan must be
at least 85% of the fair market value of the Common Stock on the date granted.
Options generally expire over terms not exceeding ten years from the grant date,
three months after termination of employment, two years after death, one year
after permanent disability, or at the end of the option's term in the case of
retirement. Options are exercisable to the extent vested. Vesting generally
occurs at the rate of 12.5 percent after 6 months and the balance in equal
installments over the following 42 months.
An aggregate of 700,000 shares of common stock has been issued or reserved for
issuance under the 1992 Director Stock Option Plan. All grants of options under
the Plan are automatic and nondiscretionary and may be granted only to
nonemployee directors. The exercise price of all options granted under the Plan
must be the fair market value of the shares at the date of grant. Options expire
in ten years from the date of grant and vest ratably over four years from the
grant date.
Price data and activity for the Company's option plans, including options
assumed by Sybase in mergers with Powersoft and other companies (adjusted for
the merger exchange ratio) are summarized as follows:
Outstanding options Weighted average
Number of shares Exercise price per share
Balance at December 31, 1994 11,240,513 $ --
Assumed in merger 33,345 13.92
Granted 8,098,360 29.98
Exercised (2,081,293) 6.70
Cancelled (5,361,881) 39.06
Balance at December 31, 1995 11,929,044 22.30
Assumed in merger 135,496 5.07
Granted 11,412,135 19.19
Exercised (1,911,037) 7.27
Cancelled (8,803,446) 27.10
Balance at December 31, 1996 12,762,192 18.27
Granted 4,090,400 14.87
Exercised (1,402,285) 7.43
Cancelled (4,764,338) 21.14
Balance at December 31, 1997 10,685,969 $17.11
At December 31, 1997, options to purchase 4,500,296 shares were exercisable at
prices ranging from $2.20 to $49.38. Shares available for grant totaled
5,658,969 at December 31, 1997.
In September 1996, the Board of Directors approved a stock option repricing
program pursuant to which all employees of the Company (excluding certain
executive officers) could elect to exchange or amend their then outstanding
employee stock options for new employee stock options having an exercise price
of $19.25 per share (equal to the then fair market value), with exercisability
generally prohibited until July 21, 1997. A total of 5,259,938 options with
exercise prices ranging from $20.50 to $47.75 per share were exchanged or
amended under the program. The exchange of such options are presented in the
preceding table as cancellations and subsequent grants.
23
page 26
Notes to Consolidated Financial Statements
In June 1995, the Board of Directors approved a stock option repricing program
pursuant to which employees of the Company (excluding certain executive
officers) could elect to exchange or amend their then outstanding employee stock
options for new employee stock options having an exercise price of $26.88 per
share (equal to the then fair market value), with exercisability generally
prohibited until January 30, 1996. A total of 4,298,471 options with exercise
prices ranging from $27.38 to $52.88 per share were exchanged or amended under
the program. The exchange of such options are presented in the preceding table
as cancellations and subsequent grants.
The income tax benefits that accrue to the Company from exercises of
nonqualified stock options and disqualifying dispositions of incentive stock
options are recorded as additional paid-in capital.
Employee Stock Purchase Plans. The Company has an Employee Stock Purchase Plan
and a Foreign Subsidiary Employee Stock Purchase Plan (collectively the
"Plans"), which allow eligible employees to purchase common stock through
payroll deductions. The Plans consist of consecutive 24-month offering periods
composed of four 6-month exercise periods. The shares can be purchased at the
lower of 85 percent of the fair market value of the common stock at the date of
commencement of this two-year offering period or at 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 Plans.
As of December 31, 1997, an aggregate of 6,000,000 shares of common stock had
been reserved under the Plans, of which 945,260 shares remained available for
issuance. Employees purchased 1,238,696 shares in 1997, 1,088,620 shares in 1996
and 708,785 shares in 1995.
Pro Forma Disclosures of the Effect of Stock-Based Compensation Plans. The
Company applies APB Opinion 25 and related Interpretations in accounting for
grants to employees under its stock-based compensation plans, described above.
As a result, no compensation cost has been recognized for grants to employees
under its fixed stock option plans or its employee stock purchase plan.
Compensation cost for the estimated fair value of grants to nonemployee
consultants of stock-based compensation has not been material. Had compensation
cost been charged to expense for grants to employees under the Company's fixed
stock option plans and its employee stock purchase plan based on the fair value
at the grant dates for awards under those plans, consistent with the method
encouraged by SFAS 123, the Company's net loss and net loss per share would have
been increased to the pro forma amounts indicated below:
1997 1996 1995
Net loss (in thousands) As reported $(55,424) $ (79,006) $(19,502
Pro forma $(63,797) $(115,399) $(36,512)
Basic and diluted
net loss per share As reported $ (0.70) $ (1.05) $ (0.27)
Pro forma $ (0.81) $ (1.54) $ (0.51)
Because SFAS 123 is applicable only to options granted subsequent to December
31, 1994, its pro forma effects will not be fully reflected until 1998. The fair
value of each option grant is estimated on the date of the grant using the
Black-Scholes option-pricing model with the following weighted-average
assumption:
Stock option plans Purchase plans
1997 1996 1995 1997 1996 1995
Expected volatility 54.90% 51.50% 52.00% 54.90% 51.50% 52.00%
Risk-free interest rates 6.50% 5.90% 5.90% 5.60% 5.20% 5.60%
Expected lives (years) 4.25 3.24 3.31 .05 .05 .05
Expected dividend yield -- -- -- -- -- --
The weighted-average grant date fair value of options granted 1997, 1996 and
1995 was $7.52, $6.22 and $9.55, respectively.
24
page 27
Notes to Consolidated Financial Statements
The following table summarizes information about fixed stock options outstanding
at December 31, 1997:
Options Outstanding Options Exercisable
Weighted
Average Weighted Weighted
Remaining Average Average
Contractual Exercise Exercise
Ranges of Exercisable Prices Shares Life Price Shares Price
$ 2.20 to $14.50 2,294,223 8.46 $12.96 637,993 $11.71
$14.69 to $15.63 2,323,388 9.05 $15.33 514,943 $15.32
$16.00 to $18.75 1,889,133 8.64 $16.86 733,482 $16.64
$19.25 to $19.25 3,464,385 7.05 $19.25 2,291,321 $19.25
$19.75 to $49.38 714,840 7.77 $26.53 322,557 $31.73
$ 2.20 to $49.38 10,685,969 8.12 $17.11 4,500,296 $18.20
Note Seven: 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
income taxes (including intercompany royalties and expenses) by income tax
jurisdiction (in thousands):
1997 1996 1995
United States $(30,899) $(80,347) $(14,993)
Foreign (9,857) 13,639 251
Total $(40,756) $(66,708) $(14,742)
The provisions (credits) for income taxes consist of the following (in
thousands):
1997 1996 1995
Federal
Current $ (4,496) $ -- $ 10,118
Deferred -- -- (17,422)
(4,496) -- (7,304)
State
Current 750 560 3,340
Deferred -- (100) (3,229)
750 460 111
Foreign
Current 18,329 11,838 13,012
Deferred 85 -- (1,059)
18,414 11,838 11,953
Total $ 14,668 $ 12,298 $ 4,760
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page 28
Notes to Consolidated Financial Statements
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 (in thousands):
1997 1996 1995
Tax (credit) at U.S. statutory rate $(14,265) $(23,348) $ (5,160)
State tax, net of federal benefit, before valuation allowance (401) (3,232) 72
Effect of foreign operations 21,035 9,714 5,469
Amortization of intangible assets 2,435 1,537 1,212
Tax-exempt interest -- (57) (1,919)
Nondeductible merger costs -- -- 4,415
Research and development tax credits -- -- (1,000)
Effect of valuation allowance 3,272 24,376 --
Other 2,592 3,308 1,671
Total $ 14,668 $ 12,298 $ 4,760
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 (in thousands):
1997 1996
Depreciation $ 11,531 $ 3,303
Deferred revenue 10,903 8,336
Accrued expenses 9,288 10,490
Allowance for doubtful accounts 7,163 6,882
Purchased software 2,641 5,439
Net operating loss carryovers and tax credits carryforwards 41,403 46,635
Other assets (liabilities) (8,466) (3,269)
Total before valuation allowance 74,463 77,816
Valuation allowance (33,413) (36,681)
Net deferred tax assets $ 41,050 $ 41,135
Recorded as: Current deferred tax assets $ 16,973 $ 13,729
Noncurrent deferred tax assets 24,077 27,406
$ 41,050 $ 41,135
26
page 29
Notes to Consolidated Financial Statements
The valuation allowance decreased by $3,268,000 in 1997, including reductions of
deferred tax assets and the related valuation allowance previously recorded
($9,189,000), additions to the valuation allowance for deferred tax assets
arising from tax benefits associated with stock option plans ($2,649,000) and
additions included in the provision for income taxes ($3,272,000). The
valuation allowance as of December 31, 1997 includes approximately $11,830,000
associated with stock option activity for which any subsequently recognized tax
benefits will be credited directly to shareholders' equity. As of December 31,
1997, the Company had federal net operating losses of $38,600,000 expiring in
years from 2003 through 2112, research and development tax credits of $9,400,000
which expire in years from 2006 through 2010 and foreign tax credits of
$9,400,000 expiring in 1999 and 2000.
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. The amount of deferred tax assets considered
realizable is subject to adjustment in future periods if estimates of future
taxable income are reduced
No provision has been made for federal income taxes on unremitted earnings of
certain of the Company's foreign subsidiaries (approximately $14,370,000 at
December 31, 1997) since the Company plans to permanently reinvest all such
earnings.
Note Eight: Retirement Plan
The Company has a retirement plan under Section 401(k) of the Internal Revenue
Code. Discretionary Company contributions are based on achieving certain
operating profit goals. There were no discretionary Company contributions in
1997, 1996 or 1995.
Note Nine: Segment and Geographical Information
The Company operates in one industry segment (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 Americas, Europe, Asia and Australia. Interarea revenues, which are
eliminated in the consolidated financial statements, represent royalties from
license and service fees generated by the foreign operations. Intercontinental
includes operations in Asia, Australia, New Zealand and Latin America.
27
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Notes to Consolidated Financial Statements
The following table presents a summary of operating information and certain
year-end balance sheet information by geographic region (in thousands):
1997 1996 1995
Revenues:
Unaffiliated customers:
United States, Canada and Mexico $ 571,525 $ 615,663 $ 588,827
Europe 232,560 238,810 239,842
Intercontinental 99,852 157,072 127,917
Total $ 903,937 $ 1,011,545 $ 956,586
Interarea $ 36,592 $ 58,014 $ 52,891
Operating income (loss):
United States, Canada and Mexico $ (83,238) $ (154,116) $ (75,677)
Europe 51,215 36,241 22,673
Intercontinental (14,379) 43,660 29,659
Total $ (46,402) $ (74,215) $ (23,345)
Cash, cash equivalents and cash investments:
United States, Canada and Mexico $ 171,240 $ 110,955 $ 166,292
Europe 40,735 42,378 36,638
Intercontinental 34,162 21,189 20,791
Total $ 246,137 $ 174,522 $ 223,721
Accounts receivable, net:
United States, Canada and Mexico $ 105,308 $ 121,710 $ 105,541
Europe 69,508 69,438 60,147
Intercontinental 29,595 48,318 28,236
Total $ 204,411 $ 239,466 $ 193,924
Identifiable assets:
United States, Canada and Mexico $ 557,882 $ 514,569 $ 563,135
Europe 135,850 136,405 126,927
Intercontinental 87,893 100,917 76,230
Total $ 781,625 $ 751,891 $ 766,292
28
page 31
Notes to Consolidated Financial Statements
Note Ten: Business Combinations
On February 21, 1997 the Company acquired Purchase Net, Inc., a developer of
application development software. The Company issued 750,000 shares of its
common stock with a fair market value of approximately $12,000,000 for all the
outstanding shares of common stock of Purchase Net, Inc. The transaction was
accounted for as a purchase. The total purchase cost was $12,763,000, including
direct cost and expenses related to the acquisition, of which $12,693,000 was
allocated to purchased software and included in capitalized software in the
consolidated balance sheet. The results of operations of Purchase Net,
Inc., which have not been material in relation to those of the Company, have
been included in the consolidated results of operations for periods subsequent
to the acquisition date.
In February 1996, Sybase acquired Visual Components, Inc. ("Visual"), a
developer and marketer of components for software developers. Sybase issued
733,178 shares of its common stock for all the outstanding shares of common
stock of Visual Components, Inc. and assumed outstanding options to acquire
135,496 shares of Sybase common stock based on the merger exchange ratio. The
transaction has been accounted for as a pooling of interests. The operating
results of Visual Components, Inc. prior to the combination were not material in
relation to those of Sybase. Therefore, prior period Financial information of
Sybase has not been restated.
In May 1995, Sybase, through a wholly-owned subsidiary, acquired SDP, S.A.
("SDP") a French company that develops and markets database modeling and design
tools. Under the terms of the acquisition agreement, Sybase paid $32,500,000 in
cash to the stockholders of SDP (approximately $26,500,000 upon consummation of
the acquisition and approximately $6,000,000 in decreasing annual installments
through 1998, subject to satisfaction of certain conditions) for all of the
outstanding shares of the company. Approximately $12,000,000 of the purchase
price has been allocated to intangible assets, which are being amortized over
periods of three to seven years, and approximately $20,000,000 has been
allocated to in-process technology and charged to operations in 1995. Sybase
accounted for the acquisition as a purchase. The historical results of
operations of SDP, which have not been material in relation to those of Sybase,
are included in the consolidated results of operations for periods subsequent to
the acquisition date. In 1996, pursuant to the terms of the acquisition
agreement, Sybase made a payment of $1,850,000.
In February 1995, Sybase, through a wholly-owned subsidiary, merged with
Powersoft, a U.S.-based company that provides a family of scalable client/server
application development and data access tools. Sybase issued 17,801,092 shares
of its common stock for all of the outstanding common stock of Powersoft (based
on a merger exchange ratio of 1.6 shares of Sybase common stock for each share
of Powersoft common stock) and assumed all outstanding obligations for the
issuance of up to 2,840,155 additional shares of Sybase common stock based on
the merger exchange ratio. The merger was accounted for as a pooling of
interests and the historical consolidated Financial statements of Sybase for
prior periods were restated to include the Financial position, results of
operations and cash flows of Powersoft. Revenue and net income of Powersoft for
the period from January 1 through February 13, 1995 were approximately
$14,660,000 and $790,000, respectively. Costs of the merger were charged to
operations in 1995.
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page 32
Notes to Consolidated Financial Statements
In addition to the transactions discussed above, in 1995, Sybase acquired
several technology companies and distributors of their products in transactions
which were accounted for as poolings of interests. In connection with these
transactions, Sybase issued 279,045 shares of its common stock during 1995. Also
in 1997 and 1995, Sybase acquired several distributors of their products in
various countries in transactions accounted for as purchases. Sybase paid cash
for the businesses totaling $4,290,000 in 1997 and $8,270,000 in 1995, and
issued 40,880 shares of Sybase common stock in 1995. There were no such
purchases in 1996. Amounts recorded as intangible assets from these transactions
were $8,272,000 in 1997 and $14,036,000 in 1995. These intangible assets are
being amortized over periods of five to seven years, which amounts were recorded
as additional intangible assets. During 1997, Sybase paid approximately
$2,827,000 related to earn-out provisions for transactions consummated in prior
years, which were recorded as additional intangible assets. At December 31,
1997, an additional $5,030,000 may be payable by Sybase contingent upon
achievement of certain financial objectives by these businesses. The results of
operations of these entities prior to the acquisitions were not material in
relation to those of Sybase. Results of operations of these entities have been
included in the consolidated results of operations for the periods subsequent to
the respective acquisition dates.
Note Eleven: Litigation
Following the Company's announcements on January 2, 1998 and January 21, 1998
regarding its preliminary results of operations for the quarter and year ended
December 31, 1997, several class action lawsuits were filed against the Company
and certain of its officers and directors in the United States District Court,
Northern District of California. The complaints are similar and allege
violations of federal and state securities laws and request unspecified monetary
damages.
On January 27, 1998, a purported shareholder derivative action was filed in the
Superior Court of the State of California, County of Alameda. The complaint
alleges that certain of the Company's present and former officers and/or
directors breached fiduciary duties owed to the Company in connection with the
underlying circumstances alleged in the securities class action complaint
described above. Sybase is a nominal defendant in the action and no damages are
sought from it.
Following the Company's announcement on April 3, 1995, of its preliminary
results for the First Fiscal quarter ended March 31, 1995, several class action
lawsuits were filed against the Company and certain of its officers in the U.S.
District Court, Northern District of California. The complaints are similar to
one another and alleged violations of federal and state securities laws and
request unspecified monetary damages. These actions have been consolidated and a
consolidated amended class action complaint was served on August 7, 1995. The
parties are in pretrial discovery.
Management believes that the claims alleged against it in all of the foregoing
actions are without merit and intends to defend against the claims vigorously.
In the opinion of management, resolution of such litigation is not expected to
have a material adverse effect on the financial position of the Company.
However, depending on the amount and timing, an unfavorable resolution of such
litigation could materially affect the Company's future results of operations or
cash flows in a particular period.
The Company is also a party to various legal disputes and proceedings arising
from the ordinary course of business activities. In the opinion of management,
resolution of these matters is not expected to have a material adverse effect on
the financial position of the Company. However, depending on the amount and
timing, an unfavorable resolution of some or all of these matters could
materially affect the Company's future results of operations or cash flows in a
particular period.
30
page 33
Notes to Consolidated Financial Statements
Note Twelve: Restructuring
In July 1996, the Company announced and implemented a restructuring plan aimed
at reducing costs, and focusing the Company's products around its core
businesses. The Company's restructuring actions consisted primarily of
terminating certain product lines, terminating employees and vacating certain
facilities, and cancelling real estate leases as a result of these employee
terminations. These actions resulted in a charge of $49,200,000, including
approximately $17,000,000 for severance and related items, $15,700,000 for
vacating facilities and cancelling real estate leases, $13,900,000 for expenses
related to discontinued products, and $2,600,000 for other restructuring related
items. Of this amount $22,300,000 was paid in 1996, $9,300,000 in 1997 and
$17,600,000 consisted of write-offs of property, equipment and improvements,
capitalized software development costs and other assets.
Note Thirteen: Subsequent Events
On February 2, 1998, Sybase acquired Intellidex Systems, LLC. (Intellidex), a
provider of data management technology for deploying and managing data warehouse
environments. Under the terms of the acquisition agreement, Sybase paid
$5,000,000 in cash for certain assets and assumed certain liabilities of
Intellidex. Of this amount paid, $3,737,000 was allocated to purchased software
and the balance of $1,263,000 was allocated to intangible assets. In addition,
pursuant to the terms of the agreement, Sybase is obligated to make contingent
payments based on certain operating performance criteria. The maximum amount
payable over a three year period is $10,000,000. The transaction has been
accounted for as a purchase. The results of operations of Intellidex, which have
not been material in relation to those of the Company will be included in the
consolidated results of operations for periods subsequent to the acquisition
date.
On February 18, 1998, the Board of Directors authorized the repurchase of up to
$25 million of the Company's outstanding common stock. Subject to price and
market conditions, these purchases will be made from time to time in open market
transactions using available cash balances.
On February 26, 1998, the Company announced a restructuring plan. On February
26, 1998, the Company announced a restructuring plan. The restructuring, which
is expected to reduce Sybase's cost structure in 1998, is intended to focus the
Company's core technology strengths around three market growth initiatives in
Web computing, occasionally connected computing and data warehousing.
The restructuring plan includes the discontinuation of certain product lines,
termination of employees, vacating certain facilities and cancellation of real
estate leases as a result of the employee terminations. On February 26, 1998,
the Company terminated approximately 600 employees as a part of the
restructuring. Restructuring charges to be incurred in 1998 are estimated to be
approximately $70 million.
31
page 34
Quarterly Financial Information (Unaudited)
In January 1998, the Company discovered that certain accounting practices in its
Japanese subsidiary were not in accordance with U.S. generally accepted
accounting principles and the Company's policies. As a result of these
irregularities, the Company has restated its revenues and results of operations
for the quarters ended September 30, 1997, June 30, 1997 and March 31, 1997. The
restatement resulted in a decrease in revenues totaling approximately $43.0
million for the nine months ended September 30, 1997. Revenues, as previously
reported, were $241,902,000, $237,638,000 and $244,199,000 for the quarters
ended March 31, 1997, June 30, 1997 and September 30, 1997, respectively. Net
income, as previously reported, was $3,541,000, $4,376,000 and $5,216,000 for
the quarters ended March 31, 1997, June 30, 1997 and September 30, 1997,
respectively.
(In thousands) March 31 June 30, September 30, December 31
1997 1997 1997 1997 1997
Revenues:
License fees $ 127,392 $ 110,591 $ 122,550 $ 110,503 $ 471,036
Service 104,809 104,890 110,473 112,729 432,901
Total revenues: 232,201 215,481 233,023 223,232 903,937
Costs and expenses:
Cost of license fees 8,058 6,148 6,563 10,587 31,356
Cost of service fees 61,878 61,673 63,435 61,639 248,625
Sales and marketing 114,597 116,674 118,015 119,875 469,161
Product development and engineering 35,300 33,707 33,871 35,712 138,590
General and administrative 17,363 14,443 15,410 15,391 62,607
Total costs and expenses 237,196 232,645 237,294 243,204 950,339
Operating loss (4,995) (17,164) (4,271) (19,972) (46,402)
Interest income and expense, net 1,006 1,729 1,516 1,395 5,646
Loss before income taxes (3,989) (15,435) (2,755) (18,577) (40,756)
Provision for income taxes 2,171 2,357 3,195 6,945 14,668
Net loss $ (6,160) $ (17,792) $ (5,950) $ (25,522) $ (55,424)
Basic and diluted net loss per share $ (0.08) $ (0.23) $ (0.08) $ (0.32) $ (0.70)
Stock prices:
High $ 20.00 $ 16.88 $ 20.75 $ 23.50 $ 23.50
Low $ 13.25 $ 12.50 $ 12.50 $ 12.00 $ 12.00
32
page 35
Quarterly Financial Information (Unaudited)
page 35
(In thousands) March 31 June 30, September 30, December 31,
1996 1996 1996 1996 1996
Revenues:
License fees $ 147,945 $ 150,454 $ 147,219 $ 159,873 $ 605,491
Services 95,719 99,433 102,994 107,908 406,054
Total revenues: 243,664 249,887 250,213 267,781 1,011,545
Costs and expenses:
Cost of license fees 7,117 7,585 6,963 8,194 29,859
Cost of service fees 56,139 62,846 62,906 64,382 246,273
Sales and marketing 130,293 137,197 123,373 132,296 523,159
Product development and engineering 43,091 46,085 39,217 36,283 164,676
General and administrative 18,726 19,735 17,163 16,937 72,561
Cost of restructuring -- -- 49,232 -- 49,232
Total costs and expenses 255,366 273,448 298,854 258,092 1,085,760
Operating income (loss) (11,702) (23,561) (48,641) 9,689 (74,215)
Interest income and expense, net 2,494 2,197 1,112 1,704 7,507
Income (loss) before income taxes (9,208) (21,364) (47,529) 11,393 (66,708)
Provision (benefit) for income taxes (2,302) 3,200 5,100 6,300 12,298
Net income (loss) $ (6,906) $ (24,564) $ (52,629) $ 5,093 $ (79,006)
Basic net income (loss) per share $ (0.09) $ (0.33) $ (0.69) $ 0.07 $ (1.05)
Diluted net income (loss) per share $ (0.09) $ (0.33) $ (0.69) $ 0.07 $ (1.05)
Stock prices:
High $ 37.13 $ 27.38 $ 20.00 $ 20.50 $ 37.13
Low $ 22.25 $ 21.50 $ 14.38 $ 13.88 $ 13.88
33
Corporate Information
Board of Directors
Mitchell E. Kertzman
Chairman of the Board and Chief
Executive officer
Director since 1995
John S. Chen
President and Chief Executive Officer
Director since 1997
Robert S. Epstein
Executive Vice President and
Chief Information Officer
Director since 1984
Richard C. Alberding(1)
Retired, Executive Vice President
Hewlett-Packard Company
Director since 1993
L. William Krause(1)
President and Chief Executive Officer
Storm Technology, Inc.
Director since 1995
David E. Liddle, Ph.D.(1)
President and Chief Executive Officer
Interval Research Corporation
Director since 1984
Alan B. Salisbury(2)
President and General Manager
Learning Tree International USA, Inc.
Director since 1993
Robert P. Wayman(2)
Executive Vice President
Finance and Administration, and Chief
Financial Officer
Hewlett-Packard Company
Director since 1995
Jeffrey T. Webber(2)
President
R.B. Webber & Company, Inc.
Director since 1993
Corporate Officers
Mitchell E. Kertzman
Chairman of the Board and Chief
Executive Officer
John S. Chen
President and Chief Executive Officer
Jack L. Acosta
Executive Vice President and Chief
Financial Officer
Robert S. Epstein
Executive Vice President and Chief
Information Officer
Steven M. Capelli
Senior Vice President,
Business Development
Michael Gardner
Senior Vice President,
Worldwide Sales
Richard N. LaBarbera
Senior Vice President,
Worldwide Customer Service and Support
Eric L. Miles
Senior Vice President, Product Operations
Raj Nathan
Senior Vice President,
Corporate Programs Office
L. Mindi Butterfield
Vice President, Marketing
Mitchell L. Gaynor
Vice President,
General Counsel, and Secretary
Michael Regan
Vice President,
Worldwide Professional Services
Pieter Van der Vorst
Vice President and Corporate Controller
Nita C. White-Ivy,
Vice President,
Worldwide Human Resources
Stockholder Information
A copy of the Company's Annual Report, Form 10-K, and other financial documents
will be on file as of March 31, 1998, with the Securities and Exchange
Commission and are available on request. Please direct your request to any of
the following:
By written request:
Sybase, Inc.
Investor Relations Department
6475 Christie Avenue
Emeryville, California 94608 U.S.A.
By telephone:
+1 510 922 5399
Via the World Wide Web:
www.sybase.com
Registrar and Transfer Agent
Equiserve
Shareholder Services
Mail Stop: 45-01-23
P.O. Box 644
Boston, Massachusetts 02102 U.S.A.
+1 617 575 3120
www.equiserve.com
Annual Meeting
The annual meeting of stockholders will be held at 10:00 a.m. on May 27, 1998,
at the Company's offices at 6425 Christie Avenue, Emeryville, California.
Stock Information
As of December 31, 1997, the Company had 2,003 stockholders of record. The
Company has never paid cash dividends.
Stock Listing
Sybase, Inc., is traded on the
NASDAQ/National Market System, NASDAQ Symbol: SYBS
Independent Auditors
Ernst & Young LLP
Walnut Creek, California
1 Member of Compensation Committee
2 Member of Audit Committee