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SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 FORM 10-Q [X]
    
    QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
 For the Quarter Ended March 31, 2004 [  ]
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the transition period from ____________ to ______________ Commission File number 0-19395 SYBASE, INC.  Delaware
(State or Other Jurisdiction of
Incorporation or Organization)
    

94-2951005
(I.R.S. Employer Identification No.)
 One Sybase Drive, Dublin, California 94568 
  Registrants Telephone Number, Including Area Code: (925) 236-5000 Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No
[   ] Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [X] No
[   ] On April 30, 2004, 96,911,916 shares of the Registrants Common Stock, $.001
par value, were outstanding.




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##### Table of Contents



SYBASE, INC.
FORM 10-Q QUARTER ENDED MARCH 31, 2004 INDEX PageForward-Looking Statements
    
    
    3Part I: Financial InformationItem 1: Financial Statements (Unaudited)Condensed Consolidated Balance Sheets as of March 31, 2004 and December 31, 2003
    
    
    4Condensed Consolidated Statements of Operations for the three months ended March 31, 2004 and 2003
    
    
    5Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2004 and 2003
    
    
    6Notes to Condensed Consolidated Financial Statements
    
    
    7Item 2: Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    16Item 3: Quantitative and Qualitative Disclosures of Market Risk
    
    
    35Item 4: Controls and Procedures
    
    
    36Part II: Other InformationItem 2: Purchases of Equity Securities by the Issuer and Affiliated Purchasers
    
    
    37Item 6: Exhibits and Reports on Form 8-K
    
    
    38Signatures
    
    
    38Exhibit Index
    
    
    39Exhibit 10.2Exhibit 10.3Exhibit 10.4Exhibit 10.5Exhibit 10.6Exhibit 10.7Exhibit 31.1Exhibit 31.2Exhibit 32
 2




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FORWARD-LOOKING STATEMENTS This report contains forward-looking statements that involve risk and
uncertainties that could cause the actual results of Sybase, Inc. and its
consolidated subsidiaries (Sybase, the Company, we or us) to differ
materially from those expressed or implied by such forward-looking statements.
These risks include a continued slow economic recovery in the U.S.; global
political unrest including acts of terrorism and continued hostilities in the
Middle East; sales productivity; possible disruptive effects of further
organizational changes and changes in Company management; shifts in our
business strategy, or market demand for our products and services; public
perception of Sybase, our technology vision or future prospects; rapid
technological changes; competitive factors; interoperability of our products
with other software products; risks inherent in acquiring other companies; the
ability to integrate acquired companies into our business and cultures; and
other risks detailed from time to time in our Securities and Exchange
Commission filings, including those discussed in Managements Discussion and
Analysis of Financial Condition and Results of Operations (MD&A)- Overview,
and MD&A  Future Operating Results, Part I, Item 2 of this Quarterly Report
on Form 10-Q. Expectations, forecasts, and projections that may be contained in this report
are by nature forward-looking statements, and future results cannot be
guaranteed. The words anticipate, believe, estimate, expect, intend,
will, and similar expressions in this document, as they relate to Sybase and
our management, may identify forward-looking statements. Such statements
reflect the current views of our management with respect to future events and
are subject to risks, uncertainties and assumptions. Forward-looking statements
that were true at the time made may ultimately prove to be incorrect or false,
or may vary materially from those described as anticipated, believed,
estimated, intended or expected. We do not intend to update these
forward-looking statements. 3




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PART I: FINANCIAL INFORMATION 
 ITEM 1: FINANCIAL STATEMENTS SYBASE, INC. 
 CONDENSED CONSOLIDATED BALANCE SHEETS March 31,2004
    
    December 31,(Dollars in thousands, except share and per share data)
    
    (Unaudited)
    
    2003Current assets:Cash and cash equivalents
    
    $
    370,456
    
    
    $
    315,404Short-term cash investments
    
    
    137,901
    
    
    
    155,093Total cash, cash equivalents and short-term cash investments
    
    
    508,357
    
    
    
    470,497Restricted cash
    
    
    4,912
    
    
    
    4,747Accounts receivable, net
    
    
    107,033
    
    
    
    140,332Deferred income taxes
    
    
    12,791
    
    
    
    12,739Other current assets
    
    
    19,295
    
    
    
    16,167Total current assets
    
    
    652,388
    
    
    
    644,482Long-term cash investments
    
    
    78,301
    
    
    
    103,296Restricted long-term cash investments
    
    
    3,400
    
    
    
    3,400Property, equipment and improvements, net
    
    
    75,260
    
    
    
    67,462Deferred income taxes
    
    
    59,778
    
    
    
    58,506Capitalized software, net
    
    
    58,846
    
    
    
    58,947Goodwill, net
    
    
    140,759
    
    
    
    140,875Other purchased intangibles, net
    
    
    34,384
    
    
    
    38,715Other assets
    
    
    35,476
    
    
    
    35,673Total assets
    
    $
    1,138,592
    
    
    $
    1,151,356Current liabilities:Accounts payable
    
    $
    16,435
    
    
    $
    15,425Accrued compensation and related expenses
    
    
    29,899
    
    
    
    39,134Accrued income taxes
    
    
    32,463
    
    
    
    33,677Other accrued liabilities
    
    
    81,570
    
    
    
    94,611Deferred revenue
    
    
    231,586
    
    
    
    206,881Total current liabilities
    
    
    391,953
    
    
    
    389,728Other liabilities
    
    
    24,774
    
    
    
    15,129Minority interest
    
    
    5,030
    
    
    
    5,030Commitments and contingent liabilitiesStockholders equity:Preferred stock, $0.001 par value, 8,000,000
shares authorized; none issued or outstanding
    
    
    
    
    
    
    Common stock, $0.001 par value, 200,000,000
shares authorized; 105,337,362 shares issued and 97,355,542
outstanding (2003-105,337,362 shares issued and 98,525,464
outstanding)
    
    
    105
    
    
    
    105Additional paid-in capital
    
    
    940,567
    
    
    
    933,657Accumulated deficit
    
    
    (111,523
    )
    
    
    (126,385
    )Accumulated other comprehensive income
    
    
    24,725
    
    
    
    26,849Cost of 7,981,820 shares of treasury stock (2003-6,811,898 shares)
    
    
    (126,346
    )
    
    
    (87,672
    )Unearned compensation
    
    
    (10,693
    )
    
    
    (5,085
    )Total stockholders equity
    
    
    716,835
    
    
    
    741,469Total liabilities and stockholders equity
    
    $
    1,138,592
    
    
    $
    1,151,356
 See accompanying notes. 4




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SYBASE, INC. 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited) Three Months EndedMarch 31,(In thousands, per share data)
    
    2004
    
    2003Revenues:License fees
    
    $
    57,905
    
    
    $
    60,875Services
    
    
    125,254
    
    
    
    120,672Total revenues
    
    
    183,159
    
    
    
    181,547Costs and expenses:Cost of license fees
    
    
    13,580
    
    
    
    13,928Cost of services
    
    
    41,584
    
    
    
    39,232Sales and marketing
    
    
    58,172
    
    
    
    58,496Product development and engineering
    
    
    30,648
    
    
    
    29,918General and administrative
    
    
    19,773
    
    
    
    22,100Amortization of other purchased intangibles
    
    
    500
    
    
    
    500Stock compensation expense
    
    
    1,302
    
    
    
    661Cost (Reversal) of restructure
    
    
    125
    
    
    
    (209
    )Total costs and expenses
    
    
    165,684
    
    
    
    164,626Operating income
    
    
    17,475
    
    
    
    16,921Interest income
    
    
    2,898
    
    
    
    2,827Interest expense and other, net
    
    
    691
    
    
    
    (384
    )Income before income taxes
    
    
    21,064
    
    
    
    19,364Provision for income taxes
    
    
    7,879
    
    
    
    6,390Net income
    
    $
    13,185
    
    
    $
    12,974Basic net income per share
    
    $
    0.14
    
    
    $
    0.14Shares used in computing basic net income per share
    
    
    97,291
    
    
    
    94,357Diluted net income per share
    
    $
    0.13
    
    
    $
    0.13Shares used in computing diluted net income per share
    
    
    101,054
    
    
    
    97,275
 See accompanying notes. 5




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SYBASE, INC. 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS  Three Months EndedMarch 31,(Dollars in thousands)
    
    2004
    
    2003Cash and cash equivalents, beginning of year
    
    $
    315,404
    
    
    $
    231,267Cash flows from operating activities:Net income
    
    
    13,185
    
    
    
    12,974Adjustments to reconcile net income to net cash provided by
operating activities:Depreciation and amortization
    
    
    19,892
    
    
    
    20,409(Gain) Loss on disposal of assets
    
    
    341
    
    
    
    (267
    )Deferred income taxes
    
    
    (1,324
    )
    
    
    (1,216
    )Amortization of deferred stock-based compensation
    
    
    1,302
    
    
    
    661Changes in assets and liabilities:Accounts receivable
    
    
    31,864
    
    
    
    52,519Other current assets
    
    
    (3,128
    )
    
    
    (412
    )Accounts payable
    
    
    2,010
    
    
    
    3,959Accrued compensation and related expenses
    
    
    (9,235
    )
    
    
    (7,980
    )Accrued income taxes
    
    
    (1,321
    )
    
    
    (714
    )Other accrued liabilities
    
    
    (13,235
    )
    
    
    (15,110
    )Deferred revenues
    
    
    24,705
    
    
    
    29,570Other liabilities
    
    
    1,126
    
    
    
    1,116Net cash provided by operating activities
    
    
    66,182
    
    
    
    95,509Cash flows from investing activities:(Increase) Decrease in restricted cash
    
    
    (165
    )
    
    

    84Purchases of available-for-sale cash investments
    
    
    (25,336
    )
    
    
    (17,637
    )Maturities of available-for-sale cash investments
    
    
    22,286
    
    
    
    1,267Sales of available-for-sale cash investments
    
    
    45,561
    
    
    
    36,014Business combinations, net of cash acquired
    
    
    
    
    
    
    (13,903
    )Purchases of property, equipment and improvements
    
    
    (7,764
    )
    
    
    (10,482
    )Proceeds from sale of fixed assets
    
    
    68
    
    
    
    9Capitalized software development costs
    
    
    (8,157
    )
    
    
    (6,562
    )(Increase) Decrease in other assets
    
    
    190
    
    
    
    (2,541
    )Net cash provided by (used for) investing activities
    
    
    26,683
    
    
    
    (13,751
    )Cash flows from financing activities:Net proceeds from the issuance of common stock and
reissuance of treasury stock
    
    
    16,950
    
    
    
    10,077Purchases of treasury stock
    
    
    (53,946
    )
    
    
    (9,535
    )Net cash provided by (used for) financing activities
    
    
    (36,996
    )
    
    
    542Effect of exchange rate changes on cash
    
    
    (817
    )
    
    
    5,538Net increase in cash and cash equivalents
    
    
    55,052
    
    
    
    87,838Cash and cash equivalents, end of period
    
    
    370,456
    
    
    
    319,105Cash investments, end of period
    
    
    216,202
    
    
    
    136,383Total cash, cash equivalents and cash investments, end of period
    
    $
    586,658
    
    
    $
    455,488Supplemental disclosures:Interest paid
    
    $
    33
    
    
    $
    13Income taxes paid
    
    $
    11,341
    
    
    $
    7,804
 See accompanying notes. 6




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SYBASE, INC. 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  1. Basis of Presentation. The accompanying unaudited condensed consolidated
financial statements include the accounts of Sybase, Inc. and its subsidiaries,
and, in the opinion of management, reflect all adjustments (consisting only of
normal recurring adjustments) necessary to fairly state the Companys
consolidated financial position, results of operations, and cash flows as of
and for the dates and periods presented. The condensed consolidated balance
sheet as of December 31, 2003 has been prepared from the Companys audited
consolidated financial statements. Certain information and footnote disclosures normally included in the annual
financial statements have been condensed or omitted. These unaudited condensed
consolidated financial statements should be read in conjunction with our
audited consolidated financial statements included in the Companys Annual
Report on Form 10-K for the year ended December 31, 2003. The results of
operations for the three months ended March 31, 2004 are not necessarily
indicative of results for the entire fiscal year ending December 31, 2004. 2. Stock-Based Compensation. Statement of Financial Accounting Standards No.
123, Accounting for Stock-Based Compensation, (FAS 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. Had compensation cost been charged to expense for grants to employees under the
Companys fixed stock option plans (including the Financial Fusion, Inc. (FFI)
and iAnywhere Solutions, Inc. (iAS) stock plans) and the Companys employee
stock purchase plan based on the fair value at the grant dates for awards under
those plans, consistent with the method encouraged by FAS 123, the Companys
net income/(loss) and net income/(loss) per share would have been adjusted to
the pro forma amounts indicated below: Three
    
    ThreeMonths
    
    MonthsEnded
    
    Ended(Dollars in thousands, except per share data)
    
    3/31/04
    
    3/31/03As reported
net income  stock-based employee
compensation determined using the intrinsic value method
    
    $
    13,185
    
    
    $
    12,974Add: Stock-based employee compensation cost, net of tax,
included in net income as reported
    
    $
    1,302
    
    
    $
    661Less: Pro-forma stock-based employee compensation cost,
net of tax, determined under the fair value method
    
    $
    (6,853
    )
    
    $
    (8,126
    )Pro-forma
net income  stock-based employee
compensation determined under the fair value method
    
    $
    7,634
    
    
    $
    5,509Basic net income per shareAs reported
    
    $
    0.14
    
    
    $
    0.14Pro forma
    
    
    0.08
    
    
    
    0.06Diluted net income per share
 7




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SYBASE, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  Three
    
    ThreeMonths
    
    MonthsEnded
    
    Ended(Dollars in thousands, except per share data)
    
    3/31/04
    
    3/31/03As reported
    
    $
    0.13
    
    
    $
    0.13Pro forma
    
    
    0.08
    
    
    
    0.06
 The fair value employee compensation cost presented above was determined using
the Black-Scholes option-pricing model using the following weighted-average
assumptions: Three
    
    ThreeMonths
    
    MonthsEnded
    
    Ended3/31/04
    
    3/31/03Expected volatility
    
    
    55.43
    %
    
    
    65.87
    %Risk-free interest rates
    
    
    2.58
    %
    
    
    2.49
    %Expected lives (years)
    
    
    4.25
    
    
    
    4.25Expected dividend yield
    
    
    
    
    
    
    
 3. Net income per share. Shares used in computing basic and diluted net income
(loss) per share are based on the weighted average shares outstanding in each
period, excluding treasury stock. Basic net income (loss) per share excludes
any dilutive effects of stock options. Diluted net income (loss) per share
includes the dilutive effect of the assumed exercise of stock options, and
restricted stock using the treasury stock method. The following table shows
the computation of basic and diluted net income (loss) per share: Three
    
    ThreeMonths
    
    MonthsEnded
    
    Ended(In thousands, except per share data)
    
    3/31/04
    
    3/31/03Net income
    
    $
    13,185
    
    
    $
    12,974Basic net income per share
    
    $
    0.14
    
    
    $
    0.14Shares used in computing basic net income per share
    
    
    97,291
    
    
    
    94,357Diluted net income per share
    
    $
    0.13
    
    
    $
    0.13Shares used in computing basic net income per share
    
    
    97,291
    
    
    
    94,357Dilutive effect of stock options
    
    
    3,763
    
    
    
    2,918Shares used in computing diluted net income per share
    
    
    101,054
    
    
    
    97,275
 4. Comprehensive Income (Loss). The following table sets forth the calculation
of comprehensive income (loss) for all periods presented: Three
    
    ThreeMonths
    
    MonthsEnded
    
    Ended(In thousands)
    
    3/31/04
    
    3/31/03Net income
    
    $
    13,185
    
    
    $
    12,974
 8




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SYBASE, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  Three
    
    ThreeMonths
    
    MonthsEnded
    
    Ended(In thousands)
    
    3/31/04
    
    3/31/03Foreign currency translation gains/(losses)
    
    
    (2,322
    )
    
    
    6,490Unrealized gains/(losses) on marketable securities
    
    
    198
    
    
    
    (118
    )Comprehensive income
    
    $
    11,061
    
    
    $
    19,346
 5. Effects of New Accounting Pronouncements. In January 2003, the Financial
Accounting Standards Board (FASB) issued Interpretation No. 46, Consolidation
of Variable Interest Entities, an Interpretation of Accounting Research
Bulletin (ARB) No. 51 (Interpretation 46). Interpretation 46, which
established accounting guidance for determining whether certain variable
interest entities (VIEs) are required to be consolidated by their investors,
sponsors or transferors. In general, variable interests are contractual,
ownership, or other interests in an entity that expose their holders to the
risks and rewards of the VIE. Variable interests include equity investments,
loans, leases, derivatives, guarantees and other instruments whose values
change with changes in the VIEs assets. The new rules determine control, and
the resulting need for consolidation, based on which holder bears the majority
of the potential variability in losses and gains of the VIE being evaluated.
These rules are now effective for any interest held by the Company in a VIE.
The adoption of the effective provisions of Interpretation 46 did not have any
impact on the Companys consolidated financial position or statement of
operations. 6. Segment Information. The Company is organized into three separate business
segments each of which focused on one of three key market segments:
Infrastructure Platform Group (IPG), which principally focuses on enterprise
class database servers, integration and development products; iAnywhere
Solutions, Inc. (iAS), which provides mobile database and mobile enterprise
solutions; and Financial Fusion, Inc. (FFI), which delivers integrated banking,
payment and trade messaging solutions to large financial institutions. The
Company discloses iAS, FFI, IPG as reportable segments in accordance with
Statement of Financial Accounting Standards No. 131, Disclosures about
Segments of an Enterprise and Related Information. Sybases
chief operating decision maker (CDOM), is the President and Chief Executive
Officer (CEO). While the CEO is apprised of a variety of financial metrics and
information, the Sybase business is principally managed on a segment basis,
with the CEO evaluating performance based upon segment operating profit or loss
that includes an allocation of common expenses, but excludes certain
unallocated expenses. Segment revenue includes transactions between the
segments. These revenues are transferred to the applicable segments less
amounts retained, which are intended to reflect the costs incurred by the
transferring segment. Certain common costs and expenses are allocated based on
measurable drivers of expense. Unallocated expenses represent corporate
expenditures or cost savings that are not specifically allocated to the
segments including reversals of restructuring expenses associated with
restructuring activities undertaken prior to 2003. The CEO does not view
segment results below operating profit (loss) before unallocated costs, and
therefore unallocated expenses, interest income, interest expense and other,
net, the provision for income taxes, and the cumulative effect of an accounting
change are not broken out by segment. Sybase does not account for, or report
to the CEO, assets or capital expenditures by segment. In accordance with SFAS
146, Accounting for Costs Associated with Exit or Disposal Activities, the
Company has allocated the costs associated with 2003 9




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SYBASE, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  restructuring activities
to each reportable segment. Prior to 2003, the Company did not track its
restructuring activities by segment and it is impracticable to now do so with
respect to these prior activities. Accordingly, restructuring related expenses
and reversals associated with restructuring activities undertaken before 2003
are not included in segment level operating results but instead are included in the
total for unallocated cost savings. A summary of the segment financial information reported to the CODM for the
three months ended March 31, 2004 is presented below: Consolidated(In thousands)
    
    IPG
    
    iAS
    
    FFI
    
    Elimination
    
    TotalRevenues:License feesInfrastructure
    
    $
    43,380
    
    
    $
    40
    
    
    $
    
    
    
    
    
    
    
    $
    43,420Mobile and Embedded
    
    
    5,052
    
    
    
    8,340
    
    
    
    
    
    
    
    
    
    
    
    13,392E-Finance
    
    
    102
    
    
    
    
    
    
    
    991
    
    
    
    
    
    
    
    1,093Subtotal license fees
    
    
    48,534
    
    
    
    8,380
    
    
    
    991
    
    
    
    
    
    
    
    57,905Intersegment license revenues
    
    
    53

    
    
    
    4,223
    
    
    
    104
    
    
    
    (4,380
    )
    
    
    Total license fees
    
    
    48,587
    
    
    
    12,603
    
    
    
    1,095
    
    
    
    (4,380
    )
    
    
    57,905Services
    
    
    119,069
    
    
    
    2,626
    
    
    
    3,559
    
    
    
    
    
    
    
    125,254Intersegment service revenues
    
    
    
    
    
    
    6,533
    
    
    
    1,235
    
    
    
    (7,768
    )
    
    
    Total services
    
    
    119,069
    
    
    
    9,159
    
    

    
    4,794
    
    
    
    (7,768
    )
    
    
    125,254Total revenues
    
    
    167,656
    
    
    
    21,762
    
    
    
    5,889
    
    
    
    (12,148
    )
    
    
    183,159Total allocated costs and expenses before cost
of restructure and amortization of customer
lists and purchased technology
    
    
    146,233
    
    
    
    20,386
    
    
    
    6,693
    
    
    
    (12,148
    )
    
    
    161,164Operating income (loss) before cost of
restructure and amortization of customer lists
and purchased technology
    
    
    21,423
    
    
    
    1,376
    
    
    
    (804
    )
    
    
    
    
    
    
    21,995Amortization of other purchased intangibles
    
    
    
    
    
    
    
    
    
    
    500
    
    
    
    
    
    
    
    500Amortization of purchased technology
    
    
    2,920
    
    
    
    100
    
    
    
    811
    
    
    
    
    
    
    
    3,831Operating income (loss) before unallocated costs
and cost of restructure
    
    
    18,503
    
    
    
    1,276
    
    
    
    (2,115
    )
    
    
    
    
    
    
    17,664Cost of
restructure  2004 Activity
    
    
    125
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    125Operating income (loss) before unallocated costs
    
    
    18,378
    
    
    
    1,276
    
    
    
    (2,115
    )
    
    
    
    
    
    
    17,539Unallocated cost
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    64Operating income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    17,475Interest income, interest expense and other, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,589Income before income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    21,064
 A summary of the segment financial information reported to the CODM for the
three months ended March 31, 2003 is presented below: Consolidated(In thousands)
    
    IPG
    
    iAS
    
    FFI
    
    Elimination
    
    TotalRevenues:License feesInfrastructure
    
    $
    48,361
    
    
    $
    723
    
    
    $
    
    
    
    
    
    
    
    $
    49,084Mobile and Embedded
    
    
    4,826
    
    
    
    6,675
    
    
    
    
    
    
    
    
    
    
    
    11,501E-Finance
    
    
    148
    
    
    
    
    
    
    
    142
    
    
    
    
    
    
    
    290Subtotal license fees
    
    
    53,335
    
    
    
    7,398
    
    
    
    142
    
    
    
    
    
    
    
    60,875Intersegment license revenues
    
    
    22
    
    
    
    4,009
    
    
    
    141
    
    
    
    (4,172
    )
    
    
    Total license fees
    
    
    53,357
    
    
    
    11,407
    
    
    
    283
    
    
    
    (4,172
    )
    
    
    60,875
 10




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SYBASE, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  Consolidated(In thousands)
    
    IPG
    
    iAS
    
    FFI
    
    Elimination
    
    TotalServices
    
    
    116,402
    
    
    
    2,037
    
    
    
    2,233
    
    
    
    
    
    
    
    120,672Intersegment service revenues
    
    
    3
    
    
    
    5,978
    
    
    
    1,103
    
    
    
    (7,084
    )
    
    
    Total services
    
    
    116,405
    
    
    
    8,015
    
    
    
    3,336
    
    
    
    (7,084
    )
    
    
    120,672Total revenues
    
    
    169,762
    
    
    
    19,422
    
    
    
    3,619
    
    
    
    (11,256
    )
    
    
    181,547Total allocated costs and expenses before
amortization of customer lists and purchased
technology
    
    
    152,499
    
    
    
    15,963
    
    
    
    5,547
    
    
    
    (11,256
    )
    
    
    162,753Operating income (loss) before amortization of
customer lists and purchased technology
    
    
    17,263
    
    
    
    3,459
    
    
    
    (1,928
    )
    
    
    
    
    
    
    18,794Amortization of other purchased intangibles
    
    
    
    
    
    
    
    
    
    
    500
    
    
    
    
    
    
    
    500Amortization of purchased technology
    
    
    2,920
    
    
    
    33
    
    
    
    811
    
    
    
    
    
    
    
    3,764Operating income (loss) before unallocated costs
    
    
    14,343
    
    
    
    3,426
    
    
    
    (3,239
    )
    
    
    
    
    
    
    14,530Unallocated cost savings
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,391
    )Operating income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    16,921Interest income, interest expense and other, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,443Income before income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    19,364
 7. Accounting for Goodwill The following table reflects the changes in the carrying amount of goodwill
(including assembled workforce) by reporting unit. Consolidated(In thousands)
    
    IPG
    
    FFI
    
    iAS
    
    TotalBalance at January 1, 2004
    
    $
    103,260
    
    
    $
    29,281
    
    
    $
    8,334
    
    
    $
    140,875Foreign currency translation adjustments
    
    
    (116
    )
    
    
    
    
    
    
    
    
    
    
    (116
    )Balance at March 31, 2004
    
    $
    103,144
    
    
    $
    29,281
    
    
    $
    8,334
    
    
    $
    140,759
 The following table reflects intangible assets as of March 31, 2004 and
December 31, 2003: Gross
    
    
    
    
    
    
    
    
    
    Gross
    
    
    
    
    
    NetCarrying
    
    Accumulated
    
    Net
    
    Carrying
    
    Accumulated
    
    CarryingAmount
    
    Amortization
    
    Carrying Amount
    
    Amount
    
    Amortization
    
    Amount(In thousands)
    
    3/31/04
    
    3/31/04
    
    3/31/04
    
    12/31/03
    
    12/31/03
    
    12/31/03Purchased technology
    
    $
    79,100
    
    
    $
    (59,427
    )
    
    $
    19,673
    
    
    $
    79,100
    
    
    $
    (55,596
    )
    
    $
    23,504AvantGo tradenames
    
    
    3,100
    
    
    
    
    
    
    
    3,100
    
    
    
    3,100
    
    
    
    
    
    
    
    3,100Customer lists
    
    
    20,000
    
    
    
    (8,389
    )
    
    
    11,611
    
    
    
    20,000
    
    
    
    (7,889
    )
    
    
    12,111Totals
    
    $
    102,200
    
    
    $
    (67,816
    )
    
    $
    34,384
    
    
    $
    102,200
    
    
    $
    (63,485
    )
    
    $
    38,715
 The amortization expense on these intangible assets for the three months ended
March 31, 2004 was $4.3 million. Estimated amortization expense for each of
the next five years ending December 31, is as follows (dollars in thousands): 2004
    
    
    17,3252005
    
    
    8,7462006
    
    
    2,5672007
    
    
    2,4002008
    
    
    2,400
 11




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##### Table of Contents



SYBASE, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  The AvantGo tradenames were assigned an indefinite life and will not be
amortized but instead tested for impairment in the same manner as goodwill. 8. Litigation. Sybase is a party to various legal disputes and proceedings
arising in the ordinary course of business. In the opinion of management,
resolution of those matters is not expected to have a material adverse effect
on our results of operations or consolidated financial position. However,
depending on the amount and timing of such resolution, an unfavorable
resolution of some or all of these matters could materially affect our future
results of operations or cash flows in a particular period. 9. Future Commitments. Beginning in 1998, the Board of Directors authorized
Sybase to repurchase the Companys outstanding common stock from time to time,
subject to price and other conditions. During the first three months of 2004,
the Company repurchased approximately 2.5 million shares at a cost of
approximately $53.9 million. From the programs inception through March 31, 2004, the Company has used an
aggregate total of $434.7 million under the stock repurchase
program (of the total $600 million authorized) to repurchase an aggregate total
of 27.4 million shares. 10. Restructuring. The
Company has initiated restructuring activities in 2001, 2002 and
2003, and assumed certain restructuring program liabilities of
AvantGo, Inc. when it acquired that company in 2003. For descriptions
of each restructuring plan, see Note Thirteen to Consolidated
Financial Statements, Part II, Item 8 of the Companys
Annual Report on Form 10-K for the year ended December 31,
2003, which information is incorporated here by reference. Changes in
the restructuring liabilities under each plan during the quarter
ended March 31, 2004 are described below. 2003 Restructuring Activities The
following table summarizes the activity associated with the balance of the
accrued restructuring charges related to the 2003 restructuring plan through March 31, 2004: 12




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SYBASE, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  AccruedAccrued
    
    
    
    
    
    
    
    
    
    liabilitiesliabilities
    
    Amounts
    
    Amounts
    
    at(Dollars in millions)
    
    at 12/31/03
    
    paid
    
    accrued
    
    3/31/04Termination payments to employees
and other related costs
    
    $
    0.6
    
    
    $
    0.6
    
    
    $
    0.1
    
    
    $
    0.1Lease cancellations and commitments
    
    
    0.7
    
    
    
    0.2
    
    
    
    
    
    
    
    0.5$
    1.3
    
    
    $
    0.8
    
    
    $
    0.1
    
    
    $
    0.6
 2002 Restructuring Activities The
following table summarizes the activity associated with the balance of the
accrued restructuring charges related to the 2002 restructuring plan through March 31, 2004: AccruedAccrued
    
    
    
    
    
    liabilitiesliabilities
    
    Amounts
    
    at(Dollars in millions)
    
    at 12/31/03
    
    paid
    
    3/31/04Lease cancellations and
commitments
    
    $
    14.3
    
    
    $
    1.4
    
    
    $
    12.9Other
    
    
    0.2
    
    
    
    
    
    
    
    0.2$
    14.5
    
    
    $
    1.4
    
    
    $
    13.1
 13




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##### Table of Contents



SYBASE, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  2001 Restructuring Activities The
following table summarizes the activity associated with the balance of the
accrued restructuring charges associated with the 2001 restructuring plan through March 31,
2004: AccruedAccrued
    
    
    
    
    
    liabilitiesliabilities
    
    Amounts
    
    at(Dollars in millions)
    
    at 12/31/03
    
    paid
    
    3/31/04Lease cancellations and
commitments
    
    $
    12.8
    
    
    $
    0.8
    
    
    $
    12.0
 AvantGo Restructuring Reserves In
connection with the acquisition of AvantGo, Inc., the Company assumed certain
liabilities associated with AvantGos 2001 and 2002 restructuring programs.
These accrued restructure liabilities primarily related to excess space at
AvantGos Hayward, California and Chicago, 14




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SYBASE, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  Illinois facilities. The following
table summarizes the activity associated with the balance of the accrued
restructuring charges related to AvantGos restructuring actions: Accrued
    
    
    
    
    
    Accruedliabilities
    
    
    
    
    
    liabilitiesat
    
    Amounts
    
    at(Dollars in millions)
    
    12/31/03
    
    Paid
    
    3/31/04Lease cancellations and commitments
    
    $
    3.3
    
    
    $
    0.3
    
    
    $
    3.0
 11. Subsequent Events. On
April 30, 2004, Sybase acquired all the outstanding capital stock
of XcelleNet, Inc. (XcelleNet) a privately held provider of frontline
device management software, for approximately $95.2 million in
cash. The preliminary estimated excess of the purchase price over the
fair value of the net Xcellenet assets acquired is expected to be
approximately $100 million. On the same date, the Company also
acquired the intellectual property assets and certain tangible assets of Dejima, Inc., a private
software company providing mobile access using natural language
interface technology, for approximately $2.0 million. As a
result of these transactions, Sybase expects to strengthen its
position in the mobile middleware market and bring important
enhancements to its Unwired Enterprise offerings. The Company intends
to integrate XcelleNet and the Dejima technology into its iAnywhere
Solutions subsidiary. 15




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##### Table of Contents



ITEM 2: MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Overview  
    
    Our Business Our business is organized into three business segments: IPG, which principally
focuses on enterprise class database servers, integration and development
products; iAS, which provides mobile database and mobile enterprise solutions;
and FFI, which delivers integrated banking, payment and trade messaging
solutions to large financial institutions. During the three months ended March
31, 2004, approximately 54 percent of our revenues were generated from the U.S.
with the balance generated from our non-U.S. operations.  
    
    Our Results We reported total revenues of
$183.2 million for the three months ended March 31, 2004, which represented a slight increase from total revenues of $181.5
million for the same period last year. This increase was attributable
to a 4 percent year-over-year increase in technical services revenues that was offset
by a 5 percent year-over-year decrease in license revenues.
Overall, our revenues for Q1 2004 were lower than anticipated due to
our inability to close several large telecommunications transactions. Most
of these transactions are anticipated to close in future quarters.
Both net income and operating expenses for Q1 2004 remained
relatively unchanged compared to the same period in 2003. Despite relatively flat Q1 2004 revenues compared to the same period in 2003,
we were encouraged by a 16 percent year-over-year increase in license revenues
from our mobile and embedded products, and a 12 percent year-over-year increase
in total license revenues generated by our operations in Asia Pacific. During the quarter ended March 31, 2004 our overall financial position remained
strong. We generated net cash from operating activities of $66.2 million, and
had $586.7 million in cash, cash equivalents and cash investments at March 31,
2004. We had no outstanding debt as of March 31, 2004, with our long-term
liabilities comprised solely of certain lease obligations. For a discussion of factors that may impact our business, see Future
Operating Results, below.  
    
    Business Trends The market for new sales of enterprise infrastructure software continues to be
challenging due to various factors, including a maturing enterprise
infrastructure software market, changing patterns in information technology
spending, and mixed signs of U.S. and global economic recovery. As was the case in 2003, the majority of our license fees revenues during Q1
2004 came from sales to our existing customers. In recent years, fewer of our
clients have undertaken large-scale infrastructure investments requiring
significant investment in our core enterprise database products and related
services (this also contributed to a decline in our consulting and education 16




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##### Table of Contents



revenues). We believe this is partly due to market saturation in some of our
target markets (including financial services, insurance and telecommunications) where large
enterprises have invested heavily in their core database infrastructures during
the past 15 years. We continue to observe some notable changes to historical IT spending patterns.
Specifically, while we generally continue to see an overall increase in our transaction
volume for license revenues, the average dollar value of these transactions is
lower than historical amounts. This pattern supports our view that fiscally
cautious customers are purchasing products and services based more on present
need and less on fulfilling anticipated future needs. Overall, mixed signs of
a strong U.S. and global economic recovery make it difficult to project whether
the overall market for enterprise infrastructure software will materially
improve. Moving forward, we will continue to manage our operating expenses as we
aggressively pursue our business initiatives and strategic alliances with our
key partners including Hewlett-Packard, Intel, and others. For further
discussion of the effect of current business trends on our results of
operations, see Future Operation Results, below. Critical Accounting Policies and Estimates We prepare our financial
statements in accordance with generally accepted U.S. accounting principles (GAAP). These accounting principals require us
to make estimates and assumptions that affect the reported amounts of assets
and liabilities, and the disclosure of contingent assets and liabilities at the
date of our financial statements. We also are required to make certain
judgments that affect the reported amounts of revenues and expenses during each
reporting period. We periodically evaluate our estimates including those
relating to revenue recognition, impairment of goodwill and intangible assets,
the allowance for doubtful accounts, capitalized software, restructuring,
income taxes, stock-based compensation and contingencies and litigation. We
base our estimates on historical experience and various other assumptions that
we believe to be reasonable based on specific circumstances. Our management
has reviewed the development, selection, and disclosure of these estimates with
the Audit Committee of our Board of Directors. These estimates and assumptions
form the basis for our judgments about the carrying value of certain assets and
liabilities that are not readily apparent from other sources. Actual results
could differ from these estimates. Further, changes in accounting and legal
standards could adversely affect our future operating results (see Future
Operating Results, below).  
    
    Revenue Recognition Revenue recognition rules for software companies are very complex, and we
follow specific and detailed guidance in measuring revenue. Certain judgments,
however, affect the application of our revenue recognition policy. These judgments would
include, for example, the determination of a customers creditworthiness or
whether included services were essential to the functionality of a product
thereby requiring percentage of completion accounting. We recognize revenue in accordance with Statement of Position (SOP) 97-2,
Software Revenue Recognition, as amended by SOP 98-4 and SOP 98-9, and in
certain instances in accordance with SOP 81-1, Accounting for Performance of
Construction-Type and Certain Production-Type Contracts. 17




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We license software under non-cancelable license agreements. License fees
revenues are recognized when (a) a non-cancelable license agreement is in
force, (b)
the product has been shipped, (c) the license fee is fixed or determinable, and
(d) collection is reasonably assured. If the fee is not fixed or determinable,
revenue is recognized as payments become due from the customer. Residual Method Accounting. In software arrangements that include
multiple elements (e.g., license rights and technical support services),
we allocate the total fees among each of the elements using the
residual method of accounting. Under this method, revenue
allocated to undelivered elements is based on vendor-specific
objective evidence of fair value of such undelivered elements, and
the residual revenue is allocated to the delivered elements. Percentage of Completion Accounting. Fees from licenses sold together
with consulting services are generally recognized upon shipment of
the licenses, provided (i) the criteria described in
subparagraphs (a) through (d) above are met, (ii) payment of the
license fees is not dependent upon performance of the consulting
services, and (iii) the consulting services are not essential to
the functionality of the licensed software. If the services are
essential to the functionality of the software, or performance of
services is a condition to payment of license fees, both the software
license and consulting fees are recognized under the percentage
of completion method of contract accounting. Under this method,
we are required to estimate the number of total hours needed to
complete a project, and revenues and profits are recognized based on
the percentage of total contract hours as they are completed. As a
result, recognized revenues and profits are subject to revision as
contract phases are actually completed. Sublicense Revenues. We recognize sublicense fees as reported to us
by our licensees. License fees for certain application development and
data access tools are recognized upon direct shipment by us to the
end user or upon direct shipment to the reseller for resale to the
end user. If collection is not reasonably assured in advance, revenue
is recognized only when sublicense fees are actually collected. Service Revenues. Technical support revenues are recognized ratably
over the term of the related support agreement, which in most cases
is one year. Revenues from consulting services under time and
materials contracts, and for education, are recognized as services are
performed. Revenues from other contract services are generally
recognized under the percentage of completion method of
contract accounting described above.  
    
    Impairment of Goodwill and Other Intangible Assets Goodwill and intangible assets have generally resulted from our business
combinations accounted for as purchases. We are required to test amounts
recorded as goodwill at least annually for impairment. The review of
goodwill for potential impairment is highly subjective and requires us to
make numerous estimates to determine both the fair values and the carrying
values of our reporting units to which goodwill is assigned. For these
purposes, our reporting units equate to our reported segments. See
Note 6 to
Condensed Consolidated Financial Statements, Part I, Item 1, incorporated
here by reference. If the estimated fair value of a reporting unit is
determined to be less than its carrying value, we are required to 18




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perform an
analysis similar to a purchase price allocation for an acquired business in
order to determine the amount of goodwill impairment, if any. This analysis requires
a valuation of certain other intangible assets including in-process research
and development, and developed technology. As of March 31, 2004, our
goodwill balance totaled $140.8 million. We performed the annual impairment analysis as of December 31, 2003 for each
of our reporting units. This analysis indicated that the estimated fair
value of each reporting unit exceeded its carrying value. Therefore, we
were not required to recognize an impairment loss in 2003. However, changes in our internal business structure, changes in our future
revenue and expense forecasts, and certain other factors that directly
impact the valuation of our reporting units could result in a future
goodwill impairment charge. A goodwill impairment charge is based on the
value of a reporting unit at the testing date. Accordingly, reporting units
that previously reported an impairment charge (as was the case with
FFI in 2002) are
particularly prone to additional impairment charges if future revenue and
expense forecasts or market conditions worsen after the testing date.
This is because any subsequent reduction of fair value after a testing date would have a
strong likelihood of triggering an additional impairment charge. We continue to review our
other intangible assets (e.g., purchased technology,
trade names and customer lists) for indications of impairment whenever
events or changes in circumstances indicate the carrying amount of
any such asset may not be recoverable. For these purposes, recoverability of these
assets is measured by comparing their carrying values to the future
undiscounted cash flows the assets are expected to generate. This
methodology requires us to estimate future cash flows associated with
certain assets or groups of assets. Changes in these estimates could result
in impairment losses associated with other intangible assets.  
    
    Allowance for Doubtful Accounts We maintain an allowance for doubtful accounts to reflect the expected
non-collection of accounts receivable based on past collection history and
specific risks identified in our portfolio of receivables. Additional
allowances might be required if deteriorating economic conditions or other
factors affect our customers ability to make timely payments.  
    
    Capitalized Software We capitalize certain software development costs after a product becomes
technologically feasible and before its general release to customers.
Subjective judgment is required in determining when a product becomes
technologically feasible. Capitalized development costs are then
amortized over the products estimated life beginning upon
general release of the product.
Periodically, we compare a products unamortized capitalized cost to the
products net realizable value. To the extent unamortized capitalized cost
exceeds net realizable value based on the products estimated future gross
revenues (reduced by the estimated future costs of completing and
disposing of the product) the excess is written off. This analysis requires
us to estimate future gross revenues associated with certain products and
the future costs of completing and disposing of certain products. Changes
in these estimates could result in write-offs of capitalized software costs. 19




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
    
    Restructuring We have recorded significant accruals in connection with various
restructuring activities. These accruals include estimated net costs to
settle certain lease obligations based on the analysis of independent real
estate consultants. While we do not anticipate significant changes to these
estimates in the future, the actual costs may differ from the estimates.
For example, if we are able to negotiate more affordable termination fees,
if rental rates increase in the markets where the properties are located, or
if we are able to locate suitable sublease tenants more quickly than
expected, the actual costs could be lower than our estimates. In that case,
we would reduce our restructuring accrual with a corresponding credit to
cost of restructuring. Alternatively, if we are unable to negotiate
affordable termination fees, if rental rates continue to decrease in the
markets where the properties are located, or if it takes us longer than
expected to find suitable sublease tenants, the actual costs could exceed
our estimates. See Note 10 to Condensed Consolidated Financial Statements,
Part I, Item 1, incorporated here by reference.  
    
    Income Taxes We use the asset and liability approach to account for income taxes. This
methodology recognizes deferred tax assets and liabilities for the expected
future tax consequences of temporary differences between the carrying
amounts and the tax bases of assets and liabilities. We then record a
valuation allowance to reduce deferred tax assets to an amount that likely
will be realized. We consider future taxable income and ongoing prudent and
feasible tax planning strategies in assessing the need for the valuation
allowance. If we determine during any period that we could realize a larger
net deferred tax asset than the recorded amount, we would adjust the
deferred tax asset to increase income for the period. Conversely, if we
determine that we would be unable to realize a portion of our recorded
deferred tax asset, we would adjust the deferred tax asset to record a
charge to income for the period. Subjective judgment is required in
assessing the future tax consequences of events that have been recognized in
the Companys financial statements or tax returns. Fluctuations in the
actual outcome of these future tax consequences could materially impact our
financial position or results of operations.  
    
    Contingencies and Liabilities We are involved from time to time in various proceedings, lawsuits and
claims involving our customers, products, intellectual property,
stockholders and employees, among other things. When we reasonably
determine that a liability has been or will be incurred, and can reasonably
estimate the range of potential losses in these matters, we are
required to maintain adequate reserves to provide for these loss
contingencies. Even if we are not able to estimate the amount of
potential loss in these matters, if a matter is considered
potentially material, we are required to disclose that there is a
reasonable possibility that a loss has been incurred. Our financial
position or results of operations could be materially and adversely
affected if we have underestimated the scope of potential liability
in any matter or have failed to maintain adequate reserves to cover
the actual loss contingency. 20




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Results of Operations Revenues
(Dollars in millions) Three
    
    ThreeMonths
    
    MonthsEnded
    
    Ended
    
    Percent3/31/04
    
    3/31/03
    
    ChangeLicense fees
    
    $
    57.9
    
    
    $
    60.9
    
    
    
    (5
    %)Percentage of total revenues
    
    
    32
    %
    
    
    34
    %Services
    
    $
    125.3
    
    
    $
    120.7
    
    
    
    4
    %Percentage of total revenues
    
    
    68
    %
    
    
    66
    %Total revenues
    
    $
    183.2
    
    
    $
    181.5
    
    
    
    1
    %
 License fees decreased 5 percent for the three months ended March 31, 2004
compared to the same period last year. The decrease in license fees
revenues during the quarter is primarily due to a 12 percent decline in license
revenues from products included in the IPG segment, partially offset by an
increase in license revenues from products included in the iAS product lines.
License revenue was adversely impacted by several large telecom transactions
that did not close this quarter. Most of these transactions are
expected to close in future quarters. Services revenues (derived from technical support, education, and professional
services) increased 4 percent for the three months ended March 31, 2004
compared to the three months ended March 31, 2003.The
4 percent increase in services revenues for the three months
ended March 31, 2004 is primarily due to a 4 percent rise
in technical support revenues resulting from an increase in the
value of licensed products subject to technical support services
agreements in the period. Services revenues as a percentage of total revenues increased to 68 percent for
the three months ended March 31, 2004, as compared to 66 percent for the same
period in 2003. Technical support revenues comprised approximately 77 percent
of total services revenue for the three months periods ended March 31, 2003 and
2004. 21




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##### Table of Contents



Geographical Revenues
(Dollars in millions) Three
    
    ThreeMonths
    
    MonthsEnded
    
    Ended
    
    Percent3/31/04
    
    3/31/03
    
    ChangeNorth American
    
    $
    105.6
    
    
    $
    105.9
    
    
    
    *Percentage of total revenues
    
    
    58
    %
    
    
    58
    %International
EMEA (Europe, Middle East
and Africa)
    
    $
    50.7
    
    
    $
    50.9
    
    
    
    *Percentage of total revenues
    
    
    28
    %
    
    
    28
    %Intercontinental (Asia Pacific and
Latin America)
    
    $
    26.9
    
    
    $
    24.7
    
    
    
    9
    %Percentage of total revenues
    
    
    14
    %
    
    
    14
    %Total International
    
    $
    77.6
    
    
    $
    75.6
    
    
    
    3
    %Percentage of total revenues
    
    
    42
    %
    
    
    42
    %Total revenues
    
    $
    183.2
    
    
    $
    181.5
    
    
    
    1
    %
   *
    
    Not meaningful North American revenues (United States, Canada and Mexico) remained relatively
flat for the same period last year, compared to the three months
ended March 31, 2003. There was a decline in license fees revenues from
integration products included in the IPG segment that was partially offset by
an increase in professional services revenues. EMEA (Europe, Middle East and Africa) revenues for the three months ended March
31, 2004 remained relatively flat compared to the three months ended March 31,
2003. There was a drop in license fees revenues from enterprise database
products included in the IPG segment, partially offset by an increase in
technical support revenues. The increase in Intercontinental (Asia Pacific and
Latin America) revenues for the three months ended March 31, 2004 was primarily
attributable to an increase in license fees revenues from enterprise database
and data warehouse products, and an increase in services revenues primarily
relating to technical support. The increase in total international revenues
was largely due to an increase in technical support revenues. International
revenues comprised 42 percent of total revenues for the three months ended
March 31, 2004 and 2003. In EMEA and the Intercontinental region, most revenues and expenses are
denominated in local currencies. During the three months ended March 31, 2004,
foreign currency exchange rate changes from the same period last
year resulted in a 5 percent increase in our revenues and a 4 percent increase in
our operating expenses. The change was primarily due to the weakness of the
U.S. dollar against certain European currencies. Our business and results of operations could be materially and adversely
affected by fluctuations in foreign currency exchange rates, even though we
take into account changes in exchange rates over time in our pricing strategy.
Additionally, changes in foreign currency exchange rates, the strength of local
economies, and the general volatility of worldwide software markets could
result in a higher or lower proportion of international revenues as a
percentage of total revenues in the future. For additional risks associated
with currency fluctuations, see Future Operating Results, below, and
Quantitative and Qualitative Disclosures of Market Risk, Part I, Item 3. 22




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Costs and Expenses
(Dollars in millions) Three
    
    ThreeMonths
    
    MonthsEnded
    
    Ended
    
    Percent3/31/04
    
    3/31/03
    
    ChangeCost of license fees
    
    $
    13.6
    
    
    $
    13.9
    
    
    
    (2
    %)Percentage of license fees revenues
    
    
    23
    %
    
    
    23
    %Cost of services
    
    $
    41.6
    
    
    $
    39.2
    
    
    
    6
    %Percentage of services revenues
    
    
    33
    %
    
    
    32
    %Sales and marketing
    
    $
    58.2
    
    
    $
    58.5
    
    
    
    *Percentage of total revenues
    
    
    32
    %
    
    
    32
    %Product development and engineering
    
    $
    30.6
    
    
    $
    29.9
    
    
    
    2
    %Percentage of total revenues
    
    
    17
    %
    
    
    16
    %General and administrative
    
    $
    19.8
    
    
    $
    22.1
    
    
    
    (10
    %)Percentage of total revenues
    
    
    11
    %
    
    
    12
    %Amortization of other purchased
intangibles
    
    $
    0.5
    
    
    $
    0.5
    
    
    
    *Percentage of total revenues
    
    
    *
    
    
    
    *Stock compensation expense
    
    $
    1.3
    
    
    $
    0.7
    
    
    
    86
    %Percentage of total revenues
    
    
    1
    %
    
    
    *Cost (Reversal) of restructure
    
    $
    0.1
    
    
    $
    (0.2
    )
    
    
    *Percentage of total revenues
    
    
    *
    
    
    
    *
   *
    
    Not meaningful Cost of License Fees.Cost of license fees consists primarily of product costs
(media and documentation), amortization of capitalized software development
costs and purchased technology, and third-party royalty costs. These costs were
$13.6 million for the same period last year, down from $13.9
million for the three months ended March 31, 2003. Such costs were 23 percent
of license fees revenue in both the three months ended March 31, 2004 and 2003.
The decrease in the cost of license fees for the three months ended March 31,
2004 was primarily due to a decrease in third-party royalties, partially offset
by an increase in amortization of capitalized software development costs.
Amortization of capitalized software development costs included in cost of
license fees was $8.3 million for the three months ended March 31, 2004 as
compared to $6.5 million for the three months ended March 31, 2003.The
increase in amortization of capitalized software costs for the three months
ended March 31, 2004 was primarily due to certain products included in the IPG
segment that we began amortizing after the first quarter of 2003. Amortization
of purchased technology acquired was $3.8 million for the three months ended
March 31, 2004 and 2003. Cost of Services.Cost of services consists primarily of our cost to provide
technical support, education and professional services and, to a lesser
degree, services-related product costs (media and documentation). These costs
were $41.6 million for the three months ended March 31, 2004 as compared to
$39.2 million for the three months ended March 31, 2003. These costs were 33
percent and 32 percent of services revenues for the three months ended March
31, 2004 and 2003, respectively. The increase in cost of services in absolute
dollars and as a percentage of 23




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services revenues for the three months ended March 31, 2004 is primarily due to
an increase in costs associated with third party consultants. Sales and Marketing.Sales and marketing expenses decreased slightly to $58.2
million for the three months ended March 31, 2004 as compared to $58.5 million
for same period last year. These costs were 32 percent of total
revenues for both the three months ended March 31, 2004 and 2003. The decrease
in sales and marketing expenses in absolute dollars for the three and months
ended March 31, 2004 was primarily due to a reduction in spending on marketing
programs. Product Development and Engineering.Product development and engineering
expenses (net of capitalized software development costs) increased 2 percent to
$30.6 million for the three months ended March 31, 2004 as
compared to $29.9 million for the same period last year. These costs were 17 percent
and 16 percent of total revenues for the three months ended March 31, 2004 and
2003, respectively. The increase in product development and engineering costs
in absolute dollars and as a percentage of total revenues for the three months
ended March 31, 2004 is primarily due to an increase in product
development and engineering headcount attributable in part to our
acquisition of AvantGo in the second quarter of 2003. We capitalized approximately $8.2 million of software development costs for the
three months ended March 31, 2004 compared to $6.6 million for the three months
ended March 31, 2003. For the three months ended March 31, 2004, capitalized
software costs included costs incurred for the development of the Adaptive
Server ® Enterprise 12.5.2 and 15.0, Corporate Banking 2.1.1, and PowerBuilder®
10.0. We believe product development and engineering expenditures are essential
to technology and product leadership and expect product development and
engineering expenditures to continue to be significant, both in absolute
dollars and as a percentage of total revenues. General and Administrative.General and administrative expenses, which include
IT, legal, business operations, finance and administrative functions, were
$19.8 for the three months ended March 31, 2004 compared to $22.1 million for
the three months ended March 31, 2003. These costs represented 11 percent and
12 percent of total revenues for the three months ended March 31, 2004 and
2003, respectively. The decrease in absolute dollars and as a percentage of
total revenues for the three months ended March 31, 2004 was primarily due to
an 8 percent decrease in the number of general and administrative personnel
resulting from our 2003 restructuring activities and discretionary spending
reductions. Amortization of Other Purchased Intangibles.Amortization of other purchased
intangibles reflects the amortization of the established customer list
associated with the acquisition in 2000 of Home Financial Network, Inc. (now
FFI). Stock Compensation Expense.Stock compensation expense reflects non-cash
compensation expense associated with restricted stock purchase rights granted
to certain Sybase executives in the second quarter of 2001 and in the first
quarters of 2003 and 2004, and the amortization of the value assigned to
certain unvested stock options assumed in the acquisition of 24




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##### Table of Contents



NEN in 2001. The increase in
this amount relates to the
restricted stock granted in the first quarter of 2004. Cost/(Reversal) of Restructuring. 2003 Restructuring Activities.During the quarter ended March 31, 2004, the
Company recorded restructuring charges of $0.1 million for severance paid in
connection with a foreign employee who was terminated under the 2003 Plan. For further discussion
regarding our restructuring activities, see Note 10 to
Condensed Consolidated Financial Statements, Part I, Item I, incorporated here
by reference. Operating Income
(Dollars in millions) Three
    
    ThreeMonths
    
    MonthsEnded
    
    Ended
    
    Percent3/31/04
    
    3/30/03
    
    ChangeOperating income
    
    $
    17.5
    
    
    $
    16.9
    
    
    
    4
    %Percentage of total revenues
    
    
    10
    %
    
    
    9
    %
 Operating income was $17.5 million for the three months ended March 31, 2004
compared to operating income of $16.9 million for the three months ended March
31, 2003. The increase in operating income for the three months ended March 31,
2004 is primarily due to the various factors discussed under Costs
and Expenses, above. Other Income (Expense), Net
(Dollars in millions) Three
    
    ThreeMonths
    
    MonthsEnded
    
    Ended
    
    Percent3/31/04
    
    3/31/03
    
    ChangeInterest income
    
    $
    2.9
    
    
    $
    2.8
    
    
    
    4
    %Percentage of total revenues
    
    
    2
    %
    
    
    2
    %Interest expense and other, net
    
    $
    0.7
    
    
    $
    (0.4
    )
    
    
    *Percentage of total revenues
    
    
    *
    
    
    
    *
   *
    
    Not meaningful Interest income increased 4 percent to $2.9 million for the three months ended
March 31, 2004 compared to $2.8 million for the same period
last year. Interest income consists primarily of interest earned on our
investments. The increase in interest income in the first quarter of
2004 is primarily due to the increase
in the cash balances invested, offset somewhat by lower interest rate yields on
the invested funds. Interest expense and other, net was $0.7 million for the three months ended
March 31, 2004 compared to $(0.4) million for the three months ended March 31,
2003. Interest expense and other, net, primarily includes: net gains and losses
resulting from foreign currency transactions 25




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and the related hedging activities; the cost of hedging foreign currency
exposures; bank fees; and gains from the disposition of certain real estate and
investments. The net improvement in interest expense and other, net was
primarily the result of an increase in the realized foreign currency gains
incurred in the quarter ended March 31, 2004. Provision for Income Taxes
(Dollars in millions) Three
    
    ThreeMonths
    
    MonthsEnded
    
    Ended
    
    Percent3/31/04
    
    3/31/03
    
    ChangeProvision for income taxes
    
    $
    7.9
    
    
    $
    6.4
    
    
    
    23
    %
 For the three months ended March 31, 2004, the income tax provision was
recorded at a rate of approximately 37 percent on operating income. Our
effective tax rate differs from the statutory rate of 35 percent primarily due
to the impact of state taxes. In the same period a year ago, the
income tax provision was recorded at a rate of 33 percent, which
differed from the statutory tax rate primarily due to the benefits of
certain low tax foreign earnings that we were able to realize in 2003. Net Income Per Share
(Dollars and shares in millions, except per share data) Three
    
    ThreeMonths
    
    MonthsEnded
    
    Ended
    
    Percent3/31/04
    
    3/31/03
    
    ChangeNet income
    
    $
    13.2
    
    
    $
    13.0
    
    
    
    2
    %Percentage of total revenues
    
    
    7
    %
    
    
    7
    %Basic net income per share
    
    $
    0.14
    
    
    $
    0.14
    
    
    
    *Diluted net income per share
    
    $
    0.13
    
    
    $
    0.13
    
    
    
    *Shares used in computing basic net income per share
    
    
    97.3
    
    
    
    94.4
    
    
    
    3
    %Shares used in computing diluted net income per share
    
    
    101.1
    
    
    
    97.3
    
    
    
    4
    %
   *
    
    Not meaningful We reported net income of $13.2 million for the three months ended March 31,
2004 compared to net income of $13.0 million for the same period
last year. The increase in net income for the three months ended March 31, 2004
is due to the various factors discussed under Costs and
Expenses,above. Basic net income per share was $0.14 for the three months ended March 31, 2004
and 2003. Diluted net income per share was $0.13 for the three months ended
March 31, 2004 and 2003. Shares used in computing basic net income per share increased 3 percent for the
three months ended March 31, 2004 compared to the same period
last year due primarily to the ongoing exercise of employee stock options, partially
offset by shares repurchased under our stock repurchase program (See Note 9 to
Condensed Consolidated Financial Statements, Part I, Item 1, incorporated here
by reference). 26




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Shares used in computing diluted net income per share increased 4 percent for
the three months ended March 31, 2004 compared to the three months ended March
31, 2003 due primarily for the reasons stated above. Liquidity and Capital Resources
(Dollars in millions) Three
    
    ThreeMonths
    
    MonthsEnded
    
    Ended
    
    Percent3/31/04
    
    3/31/03
    
    ChangeWorking capital
    
    $
    260.4
    
    
    $
    118.4
    
    
    
    120
    %Cash, cash equivalents and cash investments
    
    $
    586.7
    
    
    $
    455.5
    
    
    
    29
    %Net cash provided by operating activities
    
    $
    66.2
    
    
    $
    95.5
    
    
    
    (31
    %)Net cash provided by (used for) investing activities
    
    $
    26.7
    
    
    $
    (13.8
    )
    
    
    *Net cash provided by (used for) financing activities
    
    $
    (37.0
    )
    
    $
    0.5
    
    
    
    *
   *
    
    Not meaningful Net cash provided by operating activities decreased 31 percent for the three
months ended March 31, 2004 compared to the three months ended March 31, 2003.
The decrease in net cash provided by operating activities was primarily due to
aggressive collection efforts which significantly reduced our accounts
receivables, and generated a significant cash benefit in the first quarter of
2003, and a lower increase in deferred revenues for the three months ended
March 31, 2004 compared to the three months ended March 31, 2003. Net cash provided by investing activities was $26.7 million for the three
months ended March 31, 2004 compared to net cash used for investing activities
of $13.8 million for the three months ended March 31, 2003. The shift from net
cash used for investing activities to net cash provided by investing activities
is primarily due to net dispositions of cash investments of $42.5 million
during the three months ended March 31, 2004, compared to net dispositions of
$19.6 million in cash investments during the three months ended March 31, 2003.
In addition, $13.9 million in net cash was used for the acquisition of AvantGo
during the three months ended March 31, 2003 compared to no cash used for
acquisitions in the current quarter. We anticipate that the XcelleNet
acquisition will result in a net cash outlay of approximately $85.0 million Net cash used for financing activities was $37.0 million for the three months
ended March 31, 2004 compared to net cash provided by financing activities of
$0.5 million for the three months ended March 31, 2003. The shift from net cash
provided by financing activities to net cash used for financing activities was
primarily the result of a $44.4 million increase in the cash used to repurchase
our common stock during the three months ended March 31, 2004, compared to the
cash used for a similar purpose during the same period in 2003. During the three months ended March 31, 2004, we repurchased 2.5 million shares
of our common stock for $53.9 million pursuant to the Board of Directors
authorization. For additional 27




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information regarding our stock repurchase program, see Note 9 to Consolidated
Financial Statements, Part I, Item 1, incorporated here by reference. We had no significant commitments for future capital expenditures at March 31,
2004. There have been no significant changes to the contractual obligations we
disclosed in our Annual Report on Form 10-K for the year ended December 31,
2003. We engage in global business operations and are therefore exposed to foreign
currency fluctuations. As of March 31, 2004, we had identifiable net assets
totaling $165.5 million associated with our European operations and $64.5
million associated with our Asia and Latin American operations. We experience
foreign exchange transaction exposure on our net assets and liabilities
denominated in currencies other than the US dollar. The related foreign currency
translation gains and losses are reflected in Accumulated other comprehensive
income/(loss) under Stockholders equity on the balance sheet. We also
experience foreign exchange translation exposure from certain balances that are
denominated in a currency other than the functional currency of the entity on
whose books the balance resides. We hedge certain of these short-term exposures
under a plan approved by the Board of Directors (see Qualitative and
Quantitative Disclosure of Market Risk, Part I, Item 3). Future Operating Results Our future operating results may vary substantially from period to period due
to a variety of significant risks, some of which are discussed below and
elsewhere in this Report on Form 10-Q. We strongly urge current and prospective
investors to carefully consider the cautionary statements and risks contained
in this Report including those regarding forward-looking statements described
on Page 3. Significant variation in the timing and amount of our revenues may cause
fluctuations in our quarterly operating results and accurate estimation of our
revenues is difficult. Our operating results have varied from quarter to quarter in the past and may
vary in the future depending upon a number of factors described below and
elsewhere in this offering memorandum, including many that are beyond our
control. As a result, we believe that quarter-to-quarter comparisons of our
financial results should not be relied on to indicate our future performance.
We operate with little or no backlog, and our quarterly license revenues depend
largely on orders booked and shipped in that quarter. Historically, we have
recorded a majority of our quarterly license revenues in the last month of each
quarter, particularly during the final two weeks. During 2003, we experienced
an overall increase in the volume of license revenue transactions but an
overall decrease in the average dollar value of these deals. Although many of
our customers are larger enterprises, an apparent trend toward more
conservative IT spending among our customers could result in fewer of these
large customers making substantial investments in our products and services in
any given period. Therefore, if one or more significant orders do not close in
a particular quarter, our results of operations could be materially and
adversely affected, as was the case in the quarter ended March 31, 2004. Our operating expenses are based on projected annual and quarterly revenue
levels, and are generally incurred ratably throughout each quarter. Since our
operating expenses are relatively 28




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fixed in the short term, failure to realize projected revenues for a specified
period could adversely impact operating results, reducing net income or causing
an operating loss for that period. The deferral or non-occurrence of such
revenues would materially adversely affect our operating results for that
quarter and could impair our business in future periods. Because we do not
know when, or if, our potential customers will place orders and finalize
contracts, we cannot accurately predict our revenue and operating results for
future quarters. In addition to the above factors, the timing and amount of our revenues are
subject to a number of factors that make it difficult to accurately estimate
revenues and operating results on a quarterly or annual basis. In our
experience, revenues from license fees tend to decline between the fourth
quarter of one year and the first quarter of the next year. In the past, this
seasonality has contributed to lower total revenues and earnings in the first
quarter compared to the prior fourth quarter, and we cannot assure you that
estimates of our revenues and operating results can be made with certain
accuracy or predictability. Fluctuation in our operating results may
contribute to volatility in our stock price, which would in turn adversely
affect the trading price of the notes. Economic conditions in the U.S. and worldwide could adversely affect our
revenues. Our revenues and operating results depend on the overall demand for our
products and services. General weakening of the U.S. and worldwide economy in
recent years has contributed to a decrease in our revenues and revenue growth
rates overall. The current mixed signs of world and U.S. economic recovery
have caused many of our customers to delay or significantly reduce
discretionary spending for larger infrastructure IT projects, which has also
contributed to the decline in our revenues. Continued uncertainty in the
economy, either alone or in tandem with other factors beyond the Companys
control (including war, political unrest, shifts in market demand for our
products, etc.) could result in a continued decrease in our future revenues and
revenue growth rates. If we fail to maintain or expand our relationships with strategic partners and
indirect distribution channels our license revenues could decline. We currently derive a significant portion of our license revenue from sales of
our products and services through non-exclusive distribution channels,
including strategic partners, systems integrators (SIs), original equipment
manufacturers (OEMs) and value-added resellers (VARs). We generally anticipate
that sales of our products through these channels will account for a
substantial portion of our license revenues in the foreseeable future. Because
most of our channel relationships are non-exclusive, there is a risk that some
or all of them could promote or sell our competitors products instead of ours,
or that they will be unable to sell effectively new products that we may
introduce. Additionally, if we are unable to expand our indirect channels, or
these indirect channels fail to generate significant revenues in the future,
our business could be harmed. Our development, marketing and distribution strategies also depend in part on
our ability to form strategic relationships with other technology companies.
If these companies change their business focus, enter into strategic alliances
with other companies or are acquired by our 29




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competitors or others, support for our products could be reduced or eliminated,
which could have a material adverse effect on our business and financial
condition. Industry consolidation and other competitive pressures could affect prices or
demand for our products and services, and our business may be adversely
affected. The IT industry and the market for our core database infrastructure products
and services is becoming increasingly competitive due to a variety of factors
including a maturing enterprise infrastructure software market, changes in
customer IT spending habits, and a slow economic recovery in the U.S. There
also appears to be a growing trend toward consolidation in the software
industry, as evidenced by PeopleSofts 2003 acquisition of J.D. Edwards, IBMs
2001 acquisition of the Informix database business and Oracles ongoing efforts
to acquire PeopleSoft. Continued consolidation within the software industry
could create opportunities for larger software companies, such as IBM,
Microsoft and Oracle, to increase their market share through the acquisition of
companies that dominate certain lucrative market niches or that have loyal
installed customer bases. Such consolidation activity could pose a significant
competitive disadvantage to us. The significant purchasing and market power of larger companies may also
subject us to increased pricing pressures. Many of our competitors may have
greater financial, technical, sales and marketing resources, and a larger
installed customer base than us. In addition, our competitors advertising and
marketing efforts could overshadow our own and/or adversely influence customer
perception of our products and services, and harm our business and prospects as
a result. To remain competitive, we must develop and promote new products and
businesses, enhance existing products and retain competitive pricing policies,
all in a timely manner. Our failure to compete successfully with new or
existing competitors in these and other areas could have a material adverse
impact on our ability to generate new revenues or sustain existing revenue
levels. The ability to rapidly develop and bring to market advanced products and
services to respond to changing business needs is crucial to maintaining our
competitive position. Increasing use of the Internet and fast-growing market demand for mobile and
wireless solutions may significantly alter the manner in which business is
conducted in the future. In light of these developments, our ability to timely
meet the demand for new or enhanced products and services to support wireless
and mobile business operations at competitive prices could significantly impact
our ability to generate future revenues. We acquired AvantGo in 2003, as well
as XcelleNet and certain assets of Dejima in April 2004, to
enhance our mobile, wireless and embedded solutions that form the foundation of
our Unwired Enterprise initiative. However, if the market for unwired solutions
does not continue to develop as we anticipate, or if our solutions and services
do not successfully compete in the relevant markets, we may not be able to
timely or successfully respond to evolving business needs, and our operating
results could be adversely affected. 30




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If our existing customers cancel or fail to renew their technical support
agreements, or if customers do not license new or additional products, our
technical support revenues could be adversely affected. We currently derive a significant portion of our overall revenues from
technical support services, which are included in service revenues. The terms
of our standard software license arrangements provide for the payment of
license fees and prepayment of first-year technical support fees. Support is
renewable annually at the option of the end user. Therefore, if our existing
customers cancel or fail to renew their technical support agreements, or if we
are unable to generate additional support fees through the license of new
products to existing or new customers, our business and future operating
results could be adversely affected. Any delays in our sales cycles could result in significant fluctuations in our
quarterly operating results. The length of our sales cycles varies significantly from product to product.
The sales cycle for some of our products can take up to 18 months to complete.
Any delay in the sale of a large license or a number of smaller licenses could
result in significant fluctuations in our quarterly operating results. The
length of the sales cycle may vary depending on a number of factors over which
we may have little or no control, including the size and complexity of a
potential transaction, the level of competition that we encounter in our
selling activities and our potential customers internal budgeting processing.
Our sales cycle can be further extended for product sales made through third
party distributors. As a result of the lengthy sale cycle, we may expend
significant efforts over a long period of time in an attempt to obtain an
order, but ultimately not complete the sale, or not recognize some or all of
the anticipated revenue. We may encounter difficulties completing or integrating our acquisitions and
strategic relationships, which could adversely affect our operating results. We regularly explore possible acquisitions and other strategic ventures to
expand and enhance our business. We have recently acquired or invested in a
number of companies and formed certain strategic relationships. For example,
we acquired XcelleNet and certain assets of Dejima in April 2004. We expect to continue to pursue acquisitions of complimentary business
product lines and technologies. We may not achieve the desired benefits of our acquisitions and investments.
For example, we may be unable to successfully assimilate an acquired companys
management team, employees or business infrastructure. Also, dedication of
additional resources to execute acquisitions and handle these integration tasks
could temporarily divert attention from other important business. Such
acquisitions could also result in costs, liabilities, or additional expenses
that could harm our results of operations and financial condition. In addition,
we may not be able to maintain customer, supplier or other favorable business
relationships of ours, or of our acquired operations, or be able to terminate
or restructure unfavorable relationships. With respect to our investments in
other companies, we may not realize a return on our investments, or the value
of our investments may decline if the businesses in which we invest are not
successful. Future acquisitions may also result in dilutive issuances of
equity securities, the incurrence of additional debt, restructuring charges
relating to the consolidation of operations and the creation of 31




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goodwill and other intangible assets that could result in amortization expense
or impairment charges, any of which could adversely affect our operating
results. Restructuring activities and reorganizations in our sales model may not succeed
in increasing revenues and operating results. We believe that our restructuring activities over the past several years and
our management of operating expenses have contributed to an increase in
operating margins from 2002 to 2003. However, we do not believe we can further
reduce our current cost structure in any material respects without
fundamentally changing elements of our current business. If we were unable to
generate increased revenues or control our operating expenses going forward,
our results of operations would be adversely affected. Our sales model has evolved significantly during the past few years to keep
pace with new and developing markets and changing business environments. If we
have overestimated demand for our products and services in our target markets,
or if we are unable to coordinate our sales efforts in a focused and efficient
way, our business and prospects could be materially and adversely affected.
For example, in January 2003, we reorganized our sales focus with the creation
of the Infrastructure Platform Group (IPG), which was designed to integrate and
provide synergies among our different products lines and to focus on increasing
our market presence and revenue through indirect channels such as SIs, OEMs and
VARs and other resellers. In the process of this reorganization, we brought
three of our former divisions, ESD, eBD and BID, under a single umbrella, and
reduced the number of our business divisions from five to three. Other
organizational changes in our sales or divisional model could have a direct
effect on our results of operations depending on whether and how quickly and
effectively our employees and management are able to adapt to and maximize the
advantages these changes are intended to create. We cannot assure you that
these or other organizational changes in our sales or divisional model will
result in any increase in revenues or profitability, and they could adversely
affect our business. Our results of operations may depend on the compatibility of our products with
other software developed by third parties. Our future results may be affected if our products cannot interoperate and
perform well with software products of other companies. Certain leading
applications currently are not, and may never be, interoperable with our
products. In addition, many of our principal products are designed for use with
products offered by competitors. In the future, vendors of non-Sybase products
may become less willing to provide us with access to their products, technical
information, and marketing and sales support, which could harm our business and
prospects. We are subject to risks arising from our international operations. We derive a substantial portion of our revenues from our international
operations, and we plan to continue expanding our business in international
markets in the future. In 2003, revenues outside North America represented 41
percent of our total revenues. As a result of our international operations, we
are affected by economic, regulatory and political conditions in foreign
countries, including changes in IT spending generally, the imposition of
government controls, changes or 32




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limitations in trade protection laws, unfavorable changes in tax treaties or
laws, natural disasters, labor unrest, earnings expatriation restrictions,
misappropriation of intellectual property, acts of terrorism and continued
unrest and war in the Middle East and other factors, which could have a
material impact on our international revenues and operations. Our revenues outside North America could also fluctuate due to the relative
immaturity of some markets, rapid growth in other markets, and organizational
changes we have made to accommodate these conditions. We face exposure to adverse movements in foreign currency exchange rates. We experience foreign exchange translation exposure on our net assets and
transactions denominated in currencies other than the U.S. dollar. As of
December 31, 2003, we had identified net assets totaling $143.2 million
associated with our EMEA operations, and $60.6 million associated with our Asia
Pacific and Latin America operations. For further discussion, see
Quantitative and Qualitative Disclosures of Market Risk  Foreign Exchange
Risk, Part I, Item 3, below. If we are unable to protect our intellectual property, or if we infringe or
are alleged to infringe a third partys intellectual property, our operating
results may be adversely affected. We rely on a combination of copyright, patent, trademark and trade secret laws
and contractual restrictions on disclosure to protect our intellectual property
rights. We cannot be certain that the steps we have taken will prevent
unauthorized use of our technology. Our inability to obtain adequate
copyright, patent or trade secret protection for our products in certain
countries could diminish the competitive advantages we derive from our
proprietary technology and may have a material adverse impact on future
operating results. In addition, as the number of software products and
associated patents increase, it is possible that software developers will
become subject to more frequent infringement claims. We have in the past received, and may in the future receive, claims by third
parties asserting that our products violate their patents or other proprietary
rights. It is likely that such claims will be asserted in the future. In
addition, to the extent we acquire other intellectual property rights, whether
directly from third parties or through acquisitions of other companies, we face
the possibility that such intellectual property will be found to infringe or
violate the proprietary rights of others. For example, a trademark infringement
and dilution case filed in 1999 against NEN, which we acquired in April 2001,
resulted in a multi-million dollar judgment against NEN and an injunction
against NENs use of the trade name NEON. The action was settled in September
2001 for a lesser amount as well as certain other concessions. Regardless of
whether these claims have merit, they can be time consuming and expensive to
defend or settle, and can harm the Companys business and reputation. We do not
believe our products infringe any third party patents or proprietary rights,
but there is no guarantee that we can avoid claims or findings of infringement
in the future. 33




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Our key personnel are critical to our business, and we cannot assure you that
they will remain with us. Our success depends on the continued service of our executive officers and
other key personnel. In recent years, we have made additions and changes to
our executive management team and further changes involving executives and
managers resulting from acquisitions, mergers and other events could increase
the current rate of employee turnover, particularly in consulting, engineering
and sales. We cannot assure you that we will retain our officers and key
employees. In particular, our inability to hire and retain qualified
technical, managerial, sales and other employees could adversely affect our
product development and sales efforts, other aspects of our operations, and our
financial results. Competition for highly skilled personnel in the software
industry is intense. Our financial and stock price performance relative to the
companies with whom we compete for employees, and the high cost of living in
the San Francisco Bay Area, where our headquarters is located, could also
impact the degree of future employee turnover. Changes in accounting and legal standards could adversely affect our future
operating results. During the past several years, various accounting guidance has been issued with
respect to revenue recognition rules in the software industry. However, much of
this guidance addresses software revenue recognition primarily from a
conceptual level, and is silent as to specific implementation requirements. As
a consequence, accounting firms and their clients have been required to make
assumptions and judgments, in certain circumstances, regarding application of
the rules to transactions not addressed by the existing rules. We believe our
current business arrangements and contract terms have been properly reported
under the current rules. However, if final interpretations of, or changes to,
these rules necessitate a change in our current revenue recognition practices,
our results of operations, financial condition and business could be materially
and adversely affected. In the last half of 2003, the Financial Accounting Standards Board, or FASB,
made several significant decisions regarding its ongoing project on accounting
for stock-based compensation. We currently account for stock-based employee
compensation using the intrinsic value method prescribed in Accounting
Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to
Employees, and Related Interpretations. However, it is expected that FASB will
issue new rules sometime in the third quarter of 2004 requiring companies to
expense employee stock options and other equity-based compensation using the
fair value method beginning in January 2005. These rulings likely will affect
the accounting for our current employee stock option and stock purchase plans,
and could have an adverse effect on our accounting for compensation expenses if
we are unable to modify our plans in an appropriate or timely manner. In addition to the changes discussed above, the U.S. Congress enacted the
Sarbanes-Oxley Act of 2002, or the SOA, in July 2002, providing for or
mandating the implementation of extensive corporate governance reforms relating
to public company financial reporting, corporate ethics, and oversight of the
accounting profession, among other areas. Many of these new SEC-mandated rules
and procedures became effective during the latter half of 2002 and during 2003,
and we are now required to comply with these requirements. We are also subject
to additional rules and regulations, including those enacted by the New York
Stock Exchange where our 34




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common stock is traded, starting in 2004. We believe our corporate practices
and standards meet the current rules and regulations currently in effect.
However, compliance with existing or new rules that influence significant
adjustments to our business practices and procedures could adversely affect our
results of operations. Our operations and financial results could be severely harmed by certain
natural disasters. Our headquarters and some of our major customers facilities are located near
major earthquake faults. We have not been able to maintain earthquake
insurance coverage at reasonable costs. Instead, we rely on self-insurance and
preventative safety measures. We currently ship most of our products from our
Dublin, California facility near the site of our corporate headquarters. If a
major earthquake or other natural disaster occurs, disruption of operations at
that facility could directly harm our ability to record revenues for such
quarter. This could, in turn, have an adverse impact on operating results. The market price of our common stock is highly volatile and you may not be able
to resell your shares of our stock at or about the price you paid, or at all. Our ability to exceed, or our failure to achieve, expected operating results
for any period could significantly adversely impact our stock price. As a
result, some investors will experience gains while others will experience
losses depending on the timing of their investments. The market for our common
stock and for stocks of companies in technology-related industries generally
has been highly volatile, and the trading price of our common stock has
fluctuated widely in recent years. This volatility may be exaggerated if the
trading volume of our common stock is low. In addition, the market price for
our common stock may fluctuate dramatically in response to a variety of
factors, including but not limited to the following:  
    
    Shortfalls in revenues, revenue growth rates or net income compared
to those forecast by us or estimated by securities analysts
    
    Announcements of new products by us or our competitors
    
    Quarterly fluctuations in our financial results or the results of
other software companies, including our direct competitors
    
    The publics reaction to our press releases, announcement and our filings with the SEC
    
    Acquisitions or entry into strategic alliances by us or our competitors
    
    The level and changing nature of terrorist activity and continued
war and political unrest in the Middle East
    
    The gain or loss of significant customer or strategic relationships
    
    Announcement of technological or competitive developments 
 ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES OF MARKET RISK The following discussion about our risk management activities includes
forward-looking statements that involve risks and uncertainties, as more fully
described on Page 3 of this Report. 35




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Foreign Exchange Risk As a global concern, we face exposure to adverse movements in foreign currency
exchange rates. These exposures may change over time as business practices
evolve and could have a material adverse impact on our financial position and
results of operations. Historically, our primary exposures have related to non
dollar-denominated sales and expenses in Europe, Asia Pacific, and Latin
America. In order to reduce the effect of foreign currency fluctuations, we
utilize foreign currency forward exchange contracts (forward contracts) to
hedge certain foreign currency transaction exposures outstanding during the
period (approximately 30 days). The gains and losses on the forward contracts
mitigate the gains and losses on our outstanding foreign currency transactions.
We do not enter into forward contracts for trading purposes. All foreign
currency transactions and all outstanding forward contracts are
marked-to-market at the end of the period with unrealized gains and losses
included in interest expense and other, net. The unrealized gain (loss) on the
outstanding forward contracts as of March 31, 2004 was immaterial to our
consolidated financial statements. Interest Rate Risk Our exposure to market risk for changes in interest rates relates to our
investment portfolio, which consists of taxable, short-term money market
instruments and debt securities with maturities between 90 days and three
years. We do not use derivative financial instruments in our investment
portfolio. We place our investments with high-credit quality issuers and, by
policy, we limit the amount of credit exposure to any one issuer. We mitigate default risk by investing in only the safe and high-credit quality
securities and by monitoring the credit rating of investment issuers. The
portfolio includes only marketable securities with active secondary or resale
markets to ensure portfolio liquidity. These securities are generally
classified as available for sale, and consequently, are recorded on the balance
sheet at fair value with unrealized gains or losses reported, as a separate
component of stockholders equity, net of tax. Losses realized from the less
than temporary decline in the value of specific marketable securities are
recorded in interest expenses and other, net on the income statement. Neither
realized nor unrealized gains and losses at March 31, 2004 were material. We have no cash flow exposure due to rate changes for cash equivalents and cash
investments as all of these investments are at fixed interest rates. There has been no material change in our interest rate exposure since December
31, 2003. 
 ITEM 4: CONTROLS AND PROCEDURES Evaluation of Disclosure Controls and Procedures Our management, including our Chief Executive Officer and Chief Financial
Officer, carried out an evaluation of the effectiveness of our disclosure
controls and procedures, as of the end of the period covered by this Quarterly
Report on Form 10-Q. Based on this evaluation, our Chief Executive Officer and
our Chief Financial Officer concluded that our disclosure controls and
procedures were effective to ensure that information required to be included in
the reports that 36




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we file or submit pursuant to the Securities and Exchange Act of 1934 is
recorded, processed, summarized and reported within the timeframe specified by
the Securities and Exchange Commission rules and forms. Changes in Internal Control over Financial Reporting There have been no changes in our internal controls or in other factors that
materially affected, or are reasonably likely to materially affect, our
internal controls over financial reporting. 
 PART II: OTHER INFORMATION 
 ITEM 2: CHANGES IN SECURITIES AND USE OF PROCEEDS  (e)
    
    Purchases of Equity Securities by the Issuer and
Affiliated Purchasers During the quarter ended March 31, 2004, the Company made the following
repurchases of its Common Stock: ISSUER PURCHASES OF EQUITY SECURITIES (d) Maximum(c) Total
    
    Number (orNumber of
    
    ApproximateShares (or
    
    Dollar Value)Units)
    
    of Shares (or(a) Total
    
    
    
    
    
    Purchased as
    
    Units) that MayNumber of
    
    (b) Average
    
    Part of Publicly
    
    Yet BeShares (or
    
    Price Paid per
    
    Announced
    
    PurchasedPeriod
    
    Units)
    
    Share (or Unit)
    
    Plans or
    
    Under the Plans(2004)
    
    Purchased (#)
    
    ($)
    
    Programs (#)
    
    or Programs ($)January 1 - 31
    
    
    311,000
    
    
    $
    21.50
    
    
    
    311,000
    
    
    $
    20,164,000February 1  29
    
    
    2,178,000
    
    
    
    21.68
    
    
    
    2,178,000
    
    
    
    165,279,000
    *March 1  31
    
    
    0
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    2,469,000
    
    
    $
    21.62
    
    
    
    2,489,000
    
    
    $
    165,279,000
   * Includes the addition of $200 million for the Companys stock repurchase
program authorized by the Companys Board of Directors in February 2004. For a
description of the stock repurchase program, see Note 9 to Condensed
Consolidated Financial Statements, Part I, Item 1. 37




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ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K  (a)
    
    Exhibits furnished pursuant to Section 601 of
Regulation S-K The information required by this item is incorporated here by reference to the
Exhibit Index attached to this Report on Form 10-Q.  (b)
    
    Reports on Form 8-K: (i) On January 30, 2004, we filed a Report on Form 8-K in
connection with our press release announcing our results for the
year ended December 31, 2003. 
 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized. May 7, 2004
    SYBASE, INC.By
    /s/ PIETER VAN DER VORSTPieter Van der VorstSenior Vice President and Chief Financial Officer
(Principal Financial Officer) By
    /s/ MARTIN J. HEALYMartin J. HealyVice President and Corporate Controller
(Principal Accounting Officer) 38




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EXHIBIT INDEX Exhibit No.
    
    Description3.1
    (1)
    
    Restated Certificate of Incorporation of Registrant, as amended3.2
    (2)
    
    Bylaws of Registrant, amended and restated as of February 4, 200410.1
    (3)
    
    Sybase, Inc. Amended and Restated 2003 Stock Plan10.2
    
    
    Letter dated February 9, 2004 to John Chen
regarding 2004 compensation10.3
    
    
    Letter dated February 9, 2004 to Pieter Van der
Vorst regarding 2004 compensation10.4
    
    
    Letter dated February 9, 2004 to Marty Beard
regarding 2004 compensation10.5
    
    
    Letter dated February 9, 2004 to Raj Nathan
regarding 2004 compensation10.6
    
    
    Letter dated February 9, 2004 to Thomas Volk
regarding 2004 compensation10.7
    
    
    2004 Sales Compensation Plan Summary for Thomas
Volk effective January 1, 200431.1
    
    
    Certification of Chief Executive Officer pursuant
to Securities Exchange Act Rule 13a-14 or 15d-14, as adopted
pursuant to Section 302(a) of the Sarbanes-Oxley Act of 200231.2
    
    
    Certification of Chief Financial Officer pursuant
to Securities Exchange Act Rule 13a-14 or 15d-14, as adopted
pursuant to Section 302(a) of the Sarbanes-Oxley Act of 200232
    
    
    Certification of Chief Executive Officer and
Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
    (1)
    
    Incorporated by reference to exhibits filed in response to Item
14(a) Exhibits, of the Companys Annual Report on Form 10-K for the
year ended December 31, 2001.(2)
    
    Incorporated by reference to exhibits filed in response to Part
IV, Item 15(a) Exhibits, to the Companys Annual Report on Form 10-K
for the year ended December 31, 2003.(3)
    
    Incorporated by reference to Appendix 2 to the Companys 2004
Proxy Statement dated April 19, 2004, filed with Securities and
Exchange Commission on April 21, 2004. 39