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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 September 30, 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
    
    94-2951005(State or Other Jurisdiction of
    
    (I.R.S. Employer Identification No.)Incorporation or Organization)
 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 October 31, 2004, 95,117,507 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 SEPTEMBER 30, 2004 INDEX Forward-Looking StatementsPart I: Financial InformationItem 1: Financial Statements (Unaudited)Condensed Consolidated Balance Sheets as of September 30, 2004 and December 31, 2003Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2004 and 2003Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2004 and 2003Notes to Condensed Consolidated Financial StatementsItem 2: Managements Discussion and Analysis of Financial Condition and Results of OperationsItem 3: Quantitative and Qualitative Disclosures of Market RiskItem 4: Controls and ProceduresPart II: Other InformationItem 1:
Legal ProceedingsItem 2:
Unregistered Sales of Equity Securities and Use of ProceedsItem 6: ExhibitsSignaturesExhibit IndexEXHIBIT 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 mixed 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 September 30,2004
    
    December 31,(Dollars in thousands, except share and per share data)
    
    (Unaudited)
    
    2003Current assets:Cash and cash equivalents
    
    $
    243,554
    
    
    $
    315,404Short-term cash investments
    
    
    144,749
    
    
    
    155,093Total cash, cash equivalents and short-term cash investments
    
    
    388,303
    
    
    
    470,497Restricted cash
    
    
    4,812
    
    
    
    4,747Accounts receivable, net
    
    
    122,418
    
    
    
    140,332Deferred income taxes
    
    
    11,702
    
    
    
    12,739Other current assets
    
    
    15,743
    
    
    
    16,167Total current assets
    
    
    542,978
    
    
    
    644,482Long-term cash investments
    
    
    57,197
    
    
    
    103,296Restricted long-term cash investments
    
    
    3,400
    
    
    
    3,400Property, equipment and improvements, net
    
    
    66,228
    
    
    
    67,462Deferred income taxes
    
    
    44,831
    
    
    
    58,506Capitalized software, net
    
    
    61,544
    
    
    
    58,947Goodwill, net
    
    
    214,115
    
    
    
    140,875Other purchased intangibles, net
    
    
    73,595
    
    
    
    38,715Other assets
    
    
    32,331
    
    
    
    35,673Total assets
    
    $
    1,096,219
    
    
    $
    1,151,356Current liabilities:Accounts payable
    
    $
    17,846
    
    
    $
    15,425Accrued compensation and related expenses
    
    
    35,196
    
    
    
    39,134Accrued income taxes
    
    
    33,321
    
    
    
    33,677Other accrued liabilities
    
    
    68,519
    
    
    
    94,611Deferred revenue
    
    
    190,809
    
    
    
    200,612Total current liabilities
    
    
    345,691
    
    
    
    383,459Other liabilities
    
    
    30,377
    
    
    
    15,129Long-term deferred revenue
    
    
    10,179
    
    
    
    6,269Minority 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 95,077,896 outstanding (2003-105,337,362 shares issued and 98,525,464 outstanding)
    
    
    105
    
    
    
    105Additional paid-in capital
    
    
    940,631
    
    
    
    933,657Accumulated deficit
    
    
    (88,303
    )
    
    
    (126,385
    )Accumulated other comprehensive income
    
    
    25,740
    
    
    
    26,849Cost of 10,259,466 shares of treasury stock (2003-6,811,898 shares)
    
    
    (164,875
    )
    
    
    (87,672
    )Unearned compensation
    
    
    (8,356
    )
    
    
    (5,085
    )Total stockholders equity
    
    
    704,942
    
    
    
    741,469Total liabilities and stockholders equity
    
    $
    1,096,219
    
    
    $
    1,151,356
 See accompanying notes. 4




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SYBASE, INC. 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited) Three Months Ended
    
    Nine Months EndedSeptember 30
    
    September 30(In thousands, except per share data)
    
    2004
    
    2003
    
    2004
    
    2003Revenues:License fees
    
    $
    70,380
    
    
    $
    68,481
    
    
    $
    188,713
    
    
    $
    193,252Services
    
    
    128,338
    
    
    
    125,349
    
    
    
    381,195
    
    
    
    374,157Total revenues
    
    
    198,718
    
    
    
    193,830
    
    
    
    569,908
    
    
    
    567,409Costs and expenses:Cost of license fees
    
    
    15,566
    
    
    
    15,537
    
    
    
    44,704
    
    
    
    44,055Cost of services
    
    
    39,741
    
    
    
    40,652
    
    
    
    122,780
    
    
    
    120,526Sales and marketing
    
    
    59,171
    
    
    
    59,270
    
    
    
    179,409
    
    
    
    177,432Product development and engineering
    
    
    29,095
    
    
    
    29,045
    
    
    
    88,864
    
    
    
    88,311General and administrative
    
    
    23,526
    
    
    
    20,280
    
    
    
    64,600
    
    
    
    62,851Amortization of other purchased intangibles
    
    
    1,677
    
    
    
    500
    
    
    
    3,462
    
    
    
    1,500Stock compensation expense
    
    
    626
    
    
    
    695
    
    
    
    3,472
    
    
    
    2,083Reversal of purchase accounting accrual
    
    
    (2,677
    )
    
    
    
    
    
    
    (2,677
    )
    
    
    Cost of restructure
    
    
    10,479
    
    
    
    1,270
    
    
    
    10,351
    
    
    
    9,018Total costs and expenses
    
    
    177,204
    
    
    
    167,249
    
    
    
    514,965
    
    
    
    505,776Operating income
    
    
    21,514
    
    
    
    26,581
    
    
    
    54,943
    
    
    
    61,633Interest income
    
    
    2,562
    
    
    
    2,749
    
    
    
    8,108
    
    
    
    8,448Interest expense and other, net
    
    
    (44
    )
    
    
    3,521
    
    
    
    387
    
    
    
    3,789Income before income taxes
    
    
    24,032
    
    
    
    32,851
    
    
    
    63,438
    
    
    
    73,870Provision for income taxes
    
    
    6,201
    
    
    
    10,841
    
    
    
    19,599
    
    
    
    24,327Net income
    
    $
    17,831
    
    
    $
    22,010
    
    
    $
    43,839
    
    
    $
    49,543Basic net income per share
    
    $
    0.19
    
    
    $
    0.23
    
    
    $
    0.46
    
    
    $
    0.53Shares used in computing basic net income per share
    
    
    94,500
    
    
    
    94,525
    
    
    
    95,973
    
    
    
    94,223Diluted net income per share
    
    $
    0.19
    
    
    $
    0.23
    
    
    $
    0.44
    
    
    $
    0.51Shares used in computing diluted net income per share
    
    
    95,961
    
    
    
    97,437
    
    
    
    98,522
    
    
    
    96,694
 See accompanying notes. 5




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SYBASE, INC. 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) Nine Months EndedSeptember 30,(Dollars in thousands)
    
    2004
    
    2003Cash and cash equivalents, beginning of year
    
    $
    315,404
    
    
    $
    231,267Cash flows from operating activities:Net income
    
    
    43,839
    
    
    
    49,543Adjustments to reconcile net income to net cash provided by operating activities:Depreciation and amortization
    
    
    63,340
    
    
    
    63,208Write-off of assets in restructuring
    
    
    6,908
    
    
    
    379(Gain) Loss on disposal of assets
    
    
    575
    
    
    
    (263
    )Reversal of purchase accounting accrual
    
    
    (2,677
    )
    
    
    Deferred income taxes
    
    
    (4,208
    )
    
    
    (3,959
    )Amortization of deferred stock-based compensation
    
    
    3,472
    
    
    
    2,083Changes in assets and liabilities:Accounts receivable
    
    
    24,308
    
    
    
    67,593Other current assets
    
    
    1,117
    
    
    
    1,337Other assets  operating
    
    
    3,441
    
    
    
    Accounts payable
    
    
    3,707
    
    
    
    (1,907
    )Accrued compensation and related expenses
    
    
    (5,041
    )
    
    
    (5,960
    )Accrued income taxes
    
    
    (150
    )
    
    
    8,483Other accrued liabilities
    
    
    (27,984
    )
    
    
    (28,663
    )Deferred revenues
    
    
    (9,036
    )
    
    
    (8,276
    )Other liabilities
    
    
    6,481
    
    
    
    3,484Net cash provided by operating activities
    
    
    108,092
    
    
    
    147,082Cash flows from investing activities:(Increase) Decrease in restricted cash
    
    
    (65
    )
    
    
    1,203Purchases of available-for-sale cash investments
    
    
    (161,095
    )
    
    
    (186,129
    )Maturities of available-for-sale cash investments
    
    
    107,822
    
    
    
    137,907Sales of available-for-sale cash investments
    
    
    108,738
    
    
    
    45,162Business combinations, net of cash acquired
    
    
    (81,272
    )
    
    
    (13,900
    )Purchases of property, equipment and improvements
    
    
    (20,106
    )
    
    
    (26,043
    )Proceeds from sale of fixed assets
    
    
    193
    
    
    
    152Capitalized software development costs
    
    
    (27,918
    )
    
    
    (22,812
    )(Increase) Decrease in other assets
    
    
    2
    
    
    
    (184
    )Net cash used for investing activities
    
    
    (73,701
    )
    
    
    (64,644
    )Cash flows from financing activities:Repayments of long-term obligations
    
    
    (22,173
    )
    
    
    Net proceeds from the issuance of common stock and reissuance of treasury stock
    
    
    26,761
    
    
    
    33,315Purchases of treasury stock
    
    
    (109,491
    )
    
    
    (30,883
    )Net cash provided by (used for) financing activities
    
    
    (104,903
    )
    
    
    2,432Effect of exchange rate changes on cash
    
    
    (1,338
    )
    
    
    23,159Net increase (decrease) in cash and cash equivalents
    
    
    (71,850
    )
    
    
    108,029Cash and cash equivalents, end of period
    
    
    243,554
    
    
    
    339,296Cash investments, end of period
    
    
    201,946
    
    
    
    158,869Total cash, cash equivalents and cash investments, end of period
    
    $
    445,500
    
    
    $
    498,165Supplemental disclosures:Interest paid
    
    $
    87
    
    
    $
    46Income taxes paid
    
    $
    25,622
    
    
    $
    19,739
 See accompanying notes. 6




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SYBASE, INC. 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) 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 and nine months ended September 30, 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 plans 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
basic and diluted net income per share would have been adjusted to the pro
forma amounts indicated below: Three
    
    Three
    
    Nine
    
    NineMonths
    
    Months
    
    Months
    
    MonthsEnded
    
    Ended
    
    Ended
    
    Ended(Dollars in thousands, except per share data)
    
    9/30/04
    
    9/30/03
    
    9/30/04
    
    9/30/03As reported net income  stock-based
employee compensation determined using the
intrinsic value method
    
    $
    17,831
    
    
    $
    22,010
    
    
    $
    43,839
    
    
    $
    49,543Add: Stock-based employee compensation cost, net
of tax, included in net income as reported
    
    $
    626
    
    
    $
    695
    
    
    $
    3,472
    
    
    $
    2,083Less: Pro-forma stock-based employee
compensation cost, net of tax, determined under
the fair value method
    
    $
    (5,734
    )
    
    $
    (6,936
    )
    
    $
    (19,697
    )
    
    $
    (22,909
    )Pro-forma net income  stock-based
employee compensation determined under the fair
value method
    
    $
    12,723
    
    
    $
    15,769
    
    
    $
    27,614
    
    
    $
    28,717Basic net income per shareAs reported
    
    $
    0.19
    
    
    $
    0.23
    
    
    $
    0.46
    
    
    $
    0.53Pro forma
    
    
    0.13
    
    
    
    0.17
    
    
    
    0.29
    
    
    
    0.30Diluted net income per shareAs reported
    
    $
    0.19
    
    
    $
    0.23
    
    
    $
    0.44
    
    
    $
    0.51Pro forma
    
    
    0.13
    
    
    
    0.17
    
    
    
    0.28
    
    
    
    0.30
 7




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SYBASE, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) The fair value employee compensation cost presented above was determined using
the Black-Scholes option pricing model using the following weighted average
assumptions: Three
    
    Three
    
    Nine
    
    NineMonths
    
    Months
    
    Months
    
    MonthsEnded
    
    Ended
    
    Ended
    
    Ended9/30/04
    
    9/30/03
    
    9/30/04
    
    9/30/03Expected volatility
    
    
    53.85
    %
    
    
    62.92
    %
    
    
    54.53
    %
    
    
    64.68
    %Risk-free interest rates
    
    
    3.21
    %
    
    
    2.67
    %
    
    
    3.07
    %
    
    
    2.55
    %Expected lives (years)
    
    
    4.25
    
    
    
    4.25
    
    
    
    4.25
    
    
    
    4.25Expected dividend yield
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
 3. Business Combinations. 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 $92.6
million in cash, including $0.7 million in merger-related transaction expenses.
As a result of the acquisition, Sybase expects to strengthen its position in
the mobile middleware market and bring important enhancements to its Unwired
Enterprise offerings. The results of XcelleNet are included in the Companys
iAS reporting segment from May 1, 2004 onward. The excess of the purchase
price over the fair value of the net tangible assets acquired is approximately
$121.9 million. This amount is subject to change pending the final analysis of
the fair values of the assets acquired and the liabilities assumed, including
the valuation of certain tax assets acquired that are dependent upon the filing
of XcelleNets final federal and state income tax returns. Of the estimated $121.9 million excess, $22.8 million was allocated to
developed technology, $19.9 million was allocated to customer lists, $4.0
million was allocated to the XcelleNet family of trade names, $2.8 million was
allocated to covenant not to compete, and $72.4 million was allocated to
goodwill. The developed technology and customer lists were assigned useful
lives of seven years, the covenant not to compete was assigned a useful life of
18 months, and an indefinite life was assigned to the trade names. The
allocation and assignment of useful lives was based on a valuation prepared by
an independent third-party appraiser. Included in the goodwill is
approximately $18.1 million which has an offsetting amount allocated to
long-term deferred tax liability for the tax effect of the amortization of the
developed technology, customer lists, and covenant not to compete, which is not
deductible for tax purposes. The following unaudited pro forma quarterly financial information presents the
combined results of operations of Sybase and XcelleNet as if the acquisition of
XcelleNet had occurred as of the beginning of 2004 and 2003, respectively. The
pro forma quarterly financial information gives effect to certain adjustments,
including the amortization of purchased intangibles and the elimination of
XcelleNets amortization of purchased intangibles. The pro forma financial
information does not necessarily reflect the results of operations that would
have occurred had the two companies constituted a single entity during such
periods. 8




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SYBASE, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) Nine
    
    NineMonths
    
    MonthsEnded
    
    Ended(In thousands, except per share data)
    
    9/30/04
    
    9/30/03Revenue
    
    $
    581,364
    
    
    $
    595,509Net income
    
    $
    38,687
    
    
    $
    45,264Basic net income per share
    
    $
    0.40
    
    
    $
    0.48Diluted net income per share
    
    $
    0.39
    
    
    $
    0.47
 On April 30, 2004, the Company also acquired the intellectual property assets
and certain tangible assets of Dejima, Inc. (Dejima), a private software company
providing mobile access using natural language interface technology, for
approximately $2.0 million in cash. This purchase price exceeds the fair value
of the net tangible assets acquired by $2.8 million. Of this excess, $2.0
million was allocated to developed technology with a useful life of seven
years, and $0.8 million was assigned to goodwill. The Company intends to
integrate the Dejima technology into its iAS subsidiary. 4. 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
    
    Three
    
    Nine
    
    NineMonths
    
    Months
    
    Months
    
    MonthsEnded
    
    Ended
    
    Ended
    
    Ended(In thousands, except per share data)
    
    9/30/04
    
    9/30/03
    
    9/30/04
    
    9/30/03Net income
    
    $
    17,831
    
    
    $
    22,010
    
    
    $
    43,839
    
    
    $
    49,543Basic net income per share
    
    $
    0.19
    
    
    $
    0.23
    
    
    $
    0.46
    
    
    $
    0.53Shares used in computing basic net income per share
    
    
    94,500
    
    
    
    94,525
    
    
    
    95,973
    
    
    
    94,223Diluted net income per share
    
    $
    0.19
    
    
    $
    0.23
    
    
    $
    0.44
    
    
    $
    0.51Shares used in computing basic net income per share
    
    
    94,500
    
    
    
    94,525
    
    
    
    95,973
    
    
    
    94,223Dilutive effect of stock options and restricted stock
    
    
    1,461
    
    
    
    2,912
    
    
    
    2,549
    
    
    
    2,471Shares used in computing diluted net income per share
    
    
    95,961
    
    
    
    97,437
    
    
    
    98,522
    
    
    
    96,694
 5. Comprehensive Income. The following table sets forth the calculation of
comprehensive income for all periods presented: Three
    
    Three
    
    Nine
    
    NineMonths
    
    Months
    
    Months
    
    MonthsEnded
    
    Ended
    
    Ended
    
    Ended(In thousands)
    
    9/30/04
    
    9/30/03
    
    9/30/04
    
    9/30/03Net income
    
    $
    17,831
    
    
    $
    22,010
    
    
    $
    43,839
    
    
    $
    49,543Foreign currency translation gains/(losses)
    
    
    6,437
    
    
    
    4,538
    
    
    
    (507
    )
    
    
    22,268Unrealized gains/(losses) on marketable securities
    
    
    229
    
    
    
    (204
    )
    
    
    (601
    )
    
    
    (306
    )Comprehensive income
    
    $
    24,497
    
    
    $
    26,344
    
    
    $
    42,731
    
    
    $
    71,505
 9




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SYBASE, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) 6. Guarantees. The Company is required to recognize the fair value for certain
guarantees and indemnification arrangements issued or modified after December
31, 2002. In addition, the Company is required to monitor the conditions that
are subject to the guarantees and indemnifications in order to identify if a
loss has occurred. If the Company determines it is probable that a loss has
occurred then any such estimable loss would be recognized under those
guarantees and indemnifications. Under its standard software license agreement
(SWLA), the Company agrees to indemnify, defend and hold harmless its licensees
from and against certain losses, damages and costs arising from claims alleging
the licensees use of Company software infringes the intellectual property
rights of a third party. Historically, the Company has not been required to pay
material amounts in connection with claims asserted under these provisions and,
accordingly, the Company has not recorded a liability relating to such
provisions. Under the SWLA, the Company also represents and warrants to
licensees that its software products operate substantially in accordance with
published specifications. Under its standard consulting and development
agreement, the Company warrants that the services it performs will be
undertaken by qualified personnel in a professional manner conforming to
generally accepted industry standards and practices. Historically, only
minimal costs have been incurred relating to the satisfaction of product
warranty claims and, as such, no accruals for warranty claims have been made.
Other guarantees include promises to indemnify, defend and hold harmless each
of the Companys executive officers, non-employee directors and certain key
employees from and against losses, damages and costs incurred by each such
individual in administrative, legal or investigative proceedings arising from
alleged wrongdoing by the individual while acting in good faith within the
scope of his or her job duties on behalf of the Company. Historically minimal
costs have been incurred relating to such indemnifications and, as such, no
accruals for these guarantees have been made. 7. Segment Information. The Company is organized into three separate business
segments each of which focuses on a key market segment:
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 (CODM), 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 2004 and 2003 restructuring
activities to each reportable segment. Additionally, the Company has allocated
restructuring expenses incurred in accordance with SFAS 112, Employers
Accounting for Postemployment Benefits, 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. 10




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SYBASE, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) A summary of the segment financial information reported to the CODM for the
three months ended September 30, 2004 is presented below: Consolidated(In thousands)
    
    IPG
    
    iAS
    
    FFI
    
    Elimination
    
    TotalRevenues:License feesInfrastructure
    
    $
    51,844
    
    
    $
    10
    
    
    $
    
    
    
    
    
    
    
    $
    51,854Mobile and Embedded
    
    
    6,226
    
    
    
    11,641
    
    
    
    
    
    
    
    
    
    
    
    17,867E-Finance
    
    
    178
    
    
    
    
    
    
    
    481
    
    
    
    
    
    
    
    659Subtotal license fees
    
    
    58,248
    
    
    
    11,651
    
    
    
    481
    
    
    
    
    
    
    
    70,380Intersegment license revenues
    
    
    22
    
    
    
    5,163
    
    
    
    148
    
    
    
    (5,333
    )
    
    
    Total license fees
    
    
    58,270
    
    
    
    16,814
    
    
    
    629
    
    
    
    (5,333
    )
    
    
    70,380Services
    
    
    117,758
    
    
    
    6,925
    
    
    
    3,655
    
    
    
    
    
    
    
    128,338Intersegment service revenues
    
    
    
    
    
    
    6,743
    
    
    
    1,209
    
    
    
    (7,952
    )
    
    
    Total services
    
    
    117,758
    
    
    
    13,668
    
    
    
    4,864
    
    
    
    (7,952
    )
    
    
    128,338Total revenues
    
    
    176,028
    
    
    
    30,482
    
    
    
    5,493
    
    
    
    (13,285
    )
    
    
    198,718Total allocated costs and expenses before cost of
restructure and amortization of customer lists,
covenant not to compete, and purchased technology
    
    
    141,483
    
    
    
    26,825
    
    
    
    7,557
    
    
    
    (13,285
    )
    
    
    162,580Operating income (loss) before cost of restructure
and amortization of customer lists, covenant not
to compete, and purchased technology
    
    
    34,545
    
    
    
    3,657
    
    
    
    (2,064
    )
    
    
    
    
    
    
    36,138Amortization of other purchased intangibles
    
    
    
    
    
    
    1,177
    
    
    
    500
    
    
    
    
    
    
    
    1,677Amortization of purchased technology
    
    
    2,920
    
    
    
    979
    
    
    
    811
    
    
    
    
    
    
    
    4,710Operating income (loss) before unallocated costs
and cost of restructure
    
    
    31,625
    
    
    
    1,501
    
    
    
    (3,375
    )
    
    
    
    
    
    
    29,751Cost of restructure  2004 restructuring activities
    
    
    10,437
    
    
    
    143
    
    
    
    40
    
    
    
    
    
    
    
    10,620Operating income (loss) before unallocated costs
    
    $
    21,188
    
    
    $
    1,358
    
    
    $
    (3,415
    )
    
    
    
    
    
    
    19,131Unallocated cost savings
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,383
    )Operating income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    21,514Interest income, interest expense and other, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,518Income before income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    24,032
 11




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SYBASE, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) A summary of the segment financial information reported to the CODM for the
three months ended September 30, 2003 is presented below: Consolidated(In thousands)
    
    IPG
    
    iAS
    
    FFI
    
    Elimination
    
    TotalRevenues:License feesInfrastructure
    
    $
    50,768
    
    
    $
    11
    
    
    $
    
    
    
    
    
    
    
    $
    50,779Mobile and Embedded
    
    
    7,208
    
    
    
    9,160
    
    
    
    
    
    
    
    
    
    
    
    16,368E-Finance
    
    
    236
    
    
    
    
    
    
    
    1,098
    
    
    
    
    
    
    
    1,334Subtotal license fees
    
    
    58,212
    
    
    
    9,171
    
    
    
    1,098
    
    
    
    
    
    
    
    68,481Intersegment license revenues
    
    
    21
    
    
    
    6,073
    
    
    
    197
    
    
    
    (6,291
    )
    
    
    Total license fees
    
    
    58,233
    
    
    
    15,244
    
    
    
    1,295
    
    
    
    (6,291
    )
    
    
    68,481Services
    
    
    119,258
    
    
    
    2,699
    
    
    
    3,392
    
    
    
    
    
    
    
    125,349Intersegment service revenues
    
    
    
    
    
    
    6,431
    
    
    
    1,186
    
    
    
    (7,617
    )
    
    
    Total services
    
    
    119,258
    
    
    
    9,130
    
    
    
    4,578
    
    
    
    (7,617
    )
    
    
    125,349Total revenues
    
    
    177,491
    
    
    
    24,374
    
    
    
    5,873
    
    
    
    (13,908
    )
    
    
    193,830Total allocated costs and expenses before cost of
restructure and amortization of customer lists and
purchased technology
    
    
    152,254
    
    
    
    18,902
    
    
    
    6,386
    
    
    
    (13,908
    )
    
    
    163,634Operating income (loss) before cost of restructure and
amortization of customer lists and purchased technology
    
    
    25,237
    
    
    
    5,472
    
    
    
    (513
    )
    
    
    
    
    
    
    30,196Amortization of other purchased intangibles
    
    
    
    
    
    
    
    
    
    
    500
    
    
    
    
    
    
    
    500Amortization of purchased technology
    
    
    2,920
    
    
    
    100
    
    
    
    811
    
    
    
    
    
    
    
    3,831Operating income (loss) before unallocated costs and
cost of restructure
    
    
    22,317
    
    
    
    5,372
    
    
    
    (1,824
    )
    
    
    
    
    
    
    25,865Cost of restructure  2003 restructuring activity
    
    
    1,285
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,285Operating income (loss) before unallocated costs
    
    $
    21,032
    
    
    $
    5,372
    
    
    $
    (1,824
    )
    
    
    
    
    
    
    24,580Unallocated cost savings
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,001
    )Operating income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    26,581Interest income, interest expense and other, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,270Income before income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    32,851
 12




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##### Table of Contents



SYBASE, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) A summary of the segment financial information reported to the CODM for the
nine months ended September 30, 2004 is presented below: Consolidated(In thousands)
    
    IPG
    
    iAS
    
    FFI
    
    Elimination
    
    TotalRevenues:License feesInfrastructure
    
    $
    133,967
    
    
    $
    56
    
    
    $
    
    
    
    
    
    
    
    $
    134,023Mobile and Embedded
    
    
    19,225
    
    
    
    31,310
    
    
    
    
    
    
    
    
    
    
    
    50,535E-Finance
    
    
    690
    
    
    
    
    
    
    
    3,465
    
    
    
    
    
    
    
    4,155Subtotal license fees
    
    
    153,882
    
    
    
    31,366
    
    
    
    3,465
    
    
    
    
    
    
    
    188,713Intersegment license revenues
    
    
    96
    
    
    
    16,134
    
    
    
    594
    
    
    
    (16,824
    )
    
    
    Total license fees
    
    
    153,978
    
    
    
    47,500
    
    
    
    4,059
    
    
    
    (16,824
    )
    
    
    188,713Services
    
    
    356,209
    
    
    
    13,809
    
    
    
    11,177
    
    
    
    
    
    
    
    381,195Intersegment service revenues
    
    
    11
    
    
    
    19,933
    
    
    
    3,539
    
    
    
    (23,483
    )
    
    
    Total services
    
    
    356,220
    
    
    
    33,742
    
    
    
    14,716
    
    
    
    (23,483
    )
    
    
    381,195Total revenues
    
    
    510,198
    
    
    
    81,242
    
    
    
    18,775
    
    
    
    (40,307
    )
    
    
    569,908Total allocated costs and expenses before cost
of restructure and amortization of customer
lists, covenant not to compete, and purchased
technology
    
    
    437,890
    
    
    
    73,026
    
    
    
    21,468
    
    
    
    (40,307
    )
    
    
    492,077Operating income (loss) before cost of
restructure and amortization of customer lists,
covenant not to compete, and purchased
technology
    
    
    72,308
    
    
    
    8,216
    
    
    
    (2,693
    )
    
    
    
    
    
    
    77,831Amortization of other purchased intangibles
    
    
    
    
    
    
    1,962
    
    
    
    1,500
    
    
    
    
    
    
    
    3,462Amortization of purchased technology
    
    
    8,760
    
    
    
    1,915
    
    
    
    2,433
    
    
    
    
    
    
    
    13,108Operating income (loss) before unallocated costs
and cost of restructure
    
    
    63,548
    
    
    
    4,339
    
    
    
    (6,626
    )
    
    
    
    
    
    
    61,261Cost of restructure  2004 restructuring activity
    
    
    10,991
    
    
    
    140
    
    
    
    40
    
    
    
    
    
    
    
    11,171Operating income (loss) before unallocated costs
    
    $
    52,557
    
    
    $
    4,199
    
    
    $
    (6,666
    )
    
    
    
    
    
    
    50,090Unallocated cost savings
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,853
    )Operating income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    54,943Interest income, interest expense and other, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,495Income before income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    63,438
 13




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##### Table of Contents



SYBASE, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) A summary of the segment financial information reported to the CODM for the
nine months ended September 30, 2003 is presented below: Consolidated(In thousands)
    
    IPG
    
    iAS
    
    FFI
    
    Elimination
    
    TotalRevenues:License feesInfrastructure
    
    $
    147,363
    
    
    $
    742
    
    
    $
    
    
    
    
    
    
    
    $
    148,105Mobile and Embedded
    
    
    18,133
    
    
    
    24,104
    
    
    
    
    
    
    
    
    
    
    
    42,237E-Finance
    
    
    1,177
    
    
    
    
    
    
    
    1,733
    
    
    
    
    
    
    
    2,910Subtotal license fees
    
    
    166,673
    
    
    
    24,846
    
    
    
    1,733
    
    
    
    
    
    
    
    193,252Intersegment license revenues
    
    
    64
    
    
    
    15,169
    
    
    
    999
    
    
    
    (16,232
    )
    
    
    Total license fees
    
    
    166,737
    
    
    
    40,015
    
    
    
    2,732
    
    
    
    (16,232
    )
    
    
    193,252Services
    
    
    358,925
    
    
    
    7,417
    
    
    
    7,815
    
    
    
    
    
    
    
    374,157Intersegment service revenues
    
    
    3
    
    
    
    19,097
    
    
    
    3,470
    
    
    
    (22,570
    )
    
    
    Total services
    
    
    358,928
    
    
    
    26,514
    
    
    
    11,285
    
    
    
    (22,570
    )
    
    
    374,157Total revenues
    
    
    525,665
    
    
    
    66,529
    
    
    
    14,017
    
    
    
    (38,802
    )
    
    
    567,409Total allocated costs and expenses before cost of
restructure and amortization of customer lists and
purchased technology
    
    
    459,494
    
    
    
    53,417
    
    
    
    17,917
    
    
    
    (38,802
    )
    
    
    492,026Operating income (loss) before cost of restructure and
amortization of customer lists and purchased technology
    
    
    66,171
    
    
    
    13,112
    
    
    
    (3,900
    )
    
    
    
    
    
    
    75,383Amortization of other purchased intangibles
    
    
    
    
    
    
    
    
    
    
    1,500
    
    
    
    
    
    
    
    1,500Amortization of purchased technology
    
    
    8,759
    
    
    
    233
    
    
    
    2,434
    
    
    
    
    
    
    
    11,426Operating income (loss) before unallocated costs and
cost of restructure
    
    
    57,412
    
    
    
    12,879
    
    
    
    (7,834
    )
    
    
    
    
    
    
    62,457Cost of restructure  2003 restructuring activity
    
    
    9,577
    
    
    
    341
    
    
    
    13
    
    
    
    
    
    
    
    9,931Operating income (loss) before unallocated costs
    
    $
    47,835
    
    
    $
    12,538
    
    
    $
    (7,847
    )
    
    
    
    
    
    
    52,526Unallocated cost savings
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (9,107
    )Operating income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    61,633Interest income, interest expense and other, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12,237Income before income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    73,870
 8. Accounting for Goodwill The following table reflects the changes in the carrying amount of goodwill by
reporting unit. Consolidated(In thousands)
    
    IPG
    
    FFI
    
    iAS
    
    TotalBalance at January 1, 2004
    
    $
    103,260
    
    
    $
    29,281
    
    
    $
    8,334
    
    
    $
    140,875Goodwill recorded on XcelleNet acquisition
    
    
    
    
    
    
    
    
    
    
    72,451
    
    
    
    72,451Goodwill recorded on Dejima acquisition
    
    
    
    
    
    
    
    
    
    
    837
    
    
    
    837Foreign currency translation adjustments
    
    
    (48
    )
    
    
    
    
    
    
    
    
    
    
    (48
    )Balance at September 30, 2004
    
    $
    103,212
    
    
    $
    29,281
    
    
    $
    81,622
    
    
    $
    214,115
 14




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##### Table of Contents



SYBASE, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) The following table reflects intangible assets as of September 30, 2004 and
December 31, 2003: Gross
    
    
    
    
    
    Net
    
    Gross
    
    
    
    
    
    NetCarrying
    
    Accumulated
    
    Carrying
    
    Carrying
    
    Accumulated
    
    CarryingAmount
    
    Amortization
    
    Amount
    
    Amount
    
    Amortization
    
    Amount(In thousands)
    
    9/30/04
    
    9/30/04
    
    9/30/04
    
    12/31/03
    
    12/31/03
    
    12/31/03Purchased technology
    
    $
    103,850
    
    
    $
    (68,704
    )
    
    $
    35,146
    
    
    $
    79,100
    
    
    $
    (55,596
    )
    
    $
    23,504AvantGo tradenames
    
    
    3,100
    
    
    
    
    
    
    
    3,100
    
    
    
    3,100
    
    
    
    
    
    
    
    3,100XcelleNet tradenames
    
    
    4,000
    
    
    
    
    
    
    
    4,000
    
    
    
    
    
    
    
    
    
    
    
    Covenant not to compete
    
    
    2,800
    
    
    
    (778
    )
    
    
    2,022
    
    
    
    
    
    
    
    
    
    
    
    Customer lists
    
    
    39,900
    
    
    
    (10,573
    )
    
    
    29,327
    
    
    
    20,000
    
    
    
    (7,889
    )
    
    
    12,111Totals
    
    $
    153,650
    
    
    $
    (80,055
    )
    
    $
    73,595
    
    
    $
    102,200
    
    
    $
    (63,485
    )
    
    $
    38,715
 The amortization expense on these intangible assets for the three and nine
months ended September 30, 2004 was $6.4 million and $16.6 million,
respectively. Estimated amortization expense for each of the next five years
ending December 31, is as follows (dollars in thousands): 2004
    
    $
    22,8082005
    
    
    16,6582006
    
    
    8,9242007
    
    
    8,7572008
    
    
    8,757
 The tradenames of XcelleNet and AvantGo, Inc. (AvantGo), which the
Company acquired in February 2003, were assigned an indefinite life and will
not be amortized but instead tested for impairment in the same manner as
goodwill. 9. Litigation. A former employee, who was terminated as part of a position
elimination in February 2003, filed a civil action in the Superior Court for
the State of California, Alameda County, alleging discrimination on the basis
of gender, national origin, and race. She also alleged retaliation for
discussing her working conditions with senior managers. The parties were not
able to settle the matter and trial commenced on August 27, 2004. Sybases
motion for non-suit on the retaliation claim was granted and that claim was
dismissed. On October 5, 2004, the jury found in favor of the plaintiff on the remaining claims and
awarded her $1,845,000 in damages. Plaintiff is also entitled to recover her
attorneys fees, but the amount of such fees has not yet been
submitted to the Court.
Sybase has filed a motion to set aside the jury verdict or, in the
alternative, for a new trial. The motion is set for hearing on November 23,
2004. The Company remains committed to pursuing all legal avenues available to
eliminate or reduce the verdict. As of September 30, 2004, management believes
it has adequately accrued for this matter, and it does not believe that an
unfavorable outcome in this matter will have a material adverse effect on
Sybases financial condition or operations. Sybase is a party to various other 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. 10. 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 nine months of 2004,
the Company repurchased approximately 6.0 million shares at a cost of
approximately $109.5 million. From the programs inception through September
30, 2004, the Company has used an aggregate total of $490.3 million under the
stock repurchase program (of the total $600 million authorized) to repurchase
an aggregate total of 30.9 million shares. 15




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SYBASE, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) 11. Restructuring. 2004 Restructuring Actions In the third quarter of 2004, after two straight quarters of failing to meet
revenue and earnings expectations, the Company embarked on a restructuring plan
(2004 Plan) aimed at reducing its annual expenses (primarily employee related)
by approximately $15 million. Of this amount, approximately $13 million in
annual savings is expected to result from headcount reductions and
approximately $2 million in annual savings is expected to result from facility
consolidation and the avoidance of software maintenance costs. These
2004 Plan activities
include the termination of approximately 155 employees worldwide, the
closure or consolidation of approximately 5 facilities worldwide and
the write-off of certain enterprise software purchased from a third
party. It is anticipated that the
total costs, once the restructuring activities prescribed under the 2004 Plan
are fully completed, will be $18.7 million. In general, these expenses will be
incurred over a 12-month period although certain expenses may extend beyond
this time frame depending upon
when the costs associated with the sublease of certain facilities are incurred.
For the quarter ended September 30, 2004, the Company recorded restructuring
charges of $10.6 million as follows: SegmentCash/
    
    
    
    
    
    
    
    
    
    Consolidated(Dollars in millions)
    
    Non-Cash
    
    IPG
    
    IAS
    
    TotalEmployee termination costs
    
    Cash
    
    $
    4.0
    
    
    $
    0.1
    
    
    $
    4.1Write off of computer software
    
    Non-cash
    
    
    6.5
    
    
    
    
    
    
    
    6.5$
    10.5
    
    
    $
    0.1
    
    
    $
    10.6
 The Companys restructuring activities in the third quarter of 2004 focused
largely on reducing headcount to sufficiently reduce the operating expenses of
the business units, which will allow them to meet operating margin
targets, and
eliminating certain software that will not be utilized in the newly restructured
organization. The Company expects to continue such restructuring activities in
the fourth quarter of 2004. Termination payments to employees and other related costs During the third quarter of 2004, the Company recorded restructuring charges of
$4.1 million for severance payments, termination benefits and related expenses
incurred in connection with the termination of approximately 140 employees
worldwide. Severance payments and termination benefits were accrued and charged
to restructuring costs in the period that the amounts were determined and
communicated to the affected employees. The Company expects to recognize additional restructuring charges of
approximately $0.9 million in the fourth quarter due to continued restructuring
activities, and due to certain severance amounts that are expected to be
recognized in the fourth quarter in connection with the termination of certain
non-U.S. employees during the third quarter. Write-off of assets During the quarter ended September 30, 2004, the Company
recorded restructuring charges of approximately $6.5 million
related to the costs previously incurred and capitalized for certain
enterprise software acquired from a third party. In conjunction with
the Companys restructuring activities during the quarter,
management decided to halt its plans to complete the implementation
of this software. This decision was made after ongoing
reorganizations within the Companys sales organization caused
management to reassess the needs of this organization going forward.
Management ultimately determined the software would no longer
effectively fulfill its intended purposes and that the
softwares high cost of implementation and ownership could no
longer be supported by the Companys strategy for development of
the sales organization. As a result, the plan to implement the
software was terminated. 16




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SYBASE, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) Lease cancellations and commitments As a result of the termination of employees referred to above, and in connection
with further streamlining the Companys infrastructure, a number of Sybase
facilities were identified for closure or consolidation as part of
the 2004 Plan. These include
properties located in Massachusetts, Michigan, Georgia, Spain and the United
Kingdom. In all cases, the Company did not begin vacating the identified
facilities until after October 1, 2004. The restructuring charge
expected to be taken in
the fourth quarter relating to these facilities will be approximately $5.9M
(with $1.3M in accretion expenses to be taken in later years). The Company also initiated restructuring activities in 2001, 2002 and 2003, and
assumed certain restructuring program liabilities of AvantGo 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 September
30, 2004 are described below. 17




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SYBASE, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) 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
September 30, 2004: Terminationpayments to
    
    Leaseemployees
    
    cancellationsand other
    
    and(Dollars in millions)
    
    related costs
    
    commitments
    
    TOTALAccrued liabilities at December 31, 2003
    
    $
    0.6
    
    
    $
    0.7
    
    
    $
    1.3Amounts paid
    
    
    0.6
    
    
    
    0.2
    
    
    
    0.8Amounts accrued
    
    
    0.1
    
    
    
    
    
    
    
    0.1Accrued liabilities at March 31, 2004
    
    $
    0.1
    
    
    $
    0.5
    
    
    $
    0.6Amounts paid
    
    
    0.1
    
    
    
    0.5
    
    
    
    0.6Amounts accrued
    
    
    
    
    
    
    0.4
    
    
    
    0.4Accrued liabilities at June 30, 2004
    
    $
    
    
    
    $
    0.4
    
    
    $
    0.4Amounts paid
    
    
    
    
    
    
    0.1
    
    
    
    0.1Accrued liabilities at September 30, 2004
    
    $
    
    
    
    $
    0.3
    
    
    $
    0.3
 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
September 30, 2004: Leasecancellationsand(Dollars in millions)
    
    commitments
    
    Other
    
    TOTALAccrued liabilities at December 31, 2003
    
    $
    14.3
    
    
    $
    0.2
    
    
    $
    14.5Amounts paid
    
    
    1.4
    
    
    
    
    
    
    
    1.4Accrued liabilities at March 31, 2004
    
    $
    12.9
    
    
    $
    0.2
    
    
    $
    13.1Amounts paid
    
    
    0.9
    
    
    
    
    
    
    
    0.9Amounts reversed
    
    
    0.7
    
    
    
    
    
    
    
    0.7Accrued liabilities at June 30, 2004
    
    $
    11.3
    
    
    $
    0.2
    
    
    $
    11.5Amounts paid
    
    
    0.8
    
    
    
    
    
    
    
    0.8Amounts reversed
    
    
    0.1
    
    
    
    
    
    
    
    0.1Accrued liabilities at September 30, 2004
    
    $
    10.4
    
    
    $
    0.2
    
    
    $
    10.6
 18




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SYBASE, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) 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 September 30, 2004: Leasecancellationsand(Dollars in millions)
    
    commitmentsAccrued liabilities at December 31, 2003
    
    $
    12.8Amounts paid
    
    
    0.8Accrued liabilities at March 31, 2004
    
    $
    12.0Amounts paid
    
    
    1.4Accrued liabilities at June 30, 2004
    
    $
    10.6Amounts paid
    
    
    1.1Accrued liabilities at September 30, 2004
    
    $
    9.5
 AvantGo Restructuring Reserves In connection with the 2003 acquisition of AvantGo, the Company assumed
certain liabilities associated with AvantGos 2001 and 2002 restructuring
programs. These accrued restructure liabilities primarily related to excess
space at AvantGos Hayward, California and Chicago, Illinois facilities. The
following table summarizes the activity associated with the balance of the
accrued restructuring charges related to AvantGos restructuring actions: Leasecancellationsand(Dollars in millions)
    
    commitmentsAccrued liabilities at December 31, 2003
    
    $
    3.3Amounts paid
    
    
    0.3Accrued liabilities at March 31, 2004
    
    $
    3.0Amounts paid
    
    
    0.5Accrued liabilities at June 30, 2004
    
    $
    2.5Amounts paid
    
    
    0.3Amounts reversed
    
    
    0.2Accrued liabilities at September 30, 2004
    
    $
    2.0
 12. Reversal of Purchase Accounting Accrual. In connection with the
acquisition of AvantGo in February 2003, the Company established certain
liabilities for the incremental costs associated with excess space in
AvantGos Hayward, California facility that was to be vacated. This liability was
established based on the analysis of an independent real estate consultant, and
resulted in an increased to the goodwill recorded as part of the AvantGo
acquisition. During the third quarter of 2004, Sybase was able to sublease
this facility earlier than anticipated, and on more favorable terms
than anticipated at the time of the closing of the purchase
accounting period. As a result of this occurrence,
we have reversed the excess purchase price accrual through operations. 13. Recent Accounting Pronouncements. On October 13, 2004, the FASB concluded that Statement 123R, Share-Based
Payment, (Statement 123R), which would require all companies to measure
compensation cost for all share-based payments at fair value, would be
effective for most public companies for interim or annual periods beginning
after June 15, 2005. Sybase will therefore be required to apply Statement 123R
beginning July 1, 2005 and could choose to apply Statement 123R retroactively
from January 1, 2005 to June 30, 2005. The Company is in the process of
analyzing Statement 123R to
determine whether it will apply the Statement prospectively or retroactively.
The cumulative effect of adoption, if any, would be measured and recognized on
July 1, 2005. 19




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ITEM 2: MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS Overview  
    
    Our Business We are a global enterprise software company that derives revenues primarily
from the sale and support of enterprise and mobile software solutions to
business and government users. Our value proposition involves enabling the Unwired Enterprise through
integrated applications and solutions designed to manage information across the
enterprise, allowing customers to extract more value from their information
technology (IT) investments. Our solutions unlock, integrate, and seamlessly
deliver nearly all types of data, whether in a database, a transaction, or
an application, anywhere, anytime and on any platform. We deliver a full range
of mobile enterprise solutions that includes mobile databases, middleware,
synchronization, and management software. 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.  
    
    Our Results We reported total revenues of $198.7 million for the third quarter of fiscal
2004, reflecting an increase from total revenues of $193.8 million for the same
period last year. The year-over-year increase in revenues for the
three-month period is primarily attributable to a $1.5 million
increase in our iAS license revenue and a $4.6 million increase in iAS service revenue compared to the same period in 2003. Growth in iAS revenues for the
third quarter was largely attributable to the Companys
acquisition of XcelleNet on April 30, 2004. For the first nine months of
fiscal 2004, our total revenues were $569.9 million compared to
$567.4 million for the same nine-month period in 2003. For the
nine months ended September 30, 2004, a 22 percent increase in
iAS revenues and 34 percent growth in FFI revenues was largely offset
by a 3 percent decline in the revenues generated by our IPG segment
in the same period. Without consideration of XcelleNet, the iAS
growth rate would have been 5 percent for the nine month period ended
September 30, 2004. We believe our iAS revenues will remain
strong as we continue to integrate and leverage our XcelleNet
acquisition, and as our Unwired Enterprise initiative gains momentum.
The increase in FFI license revenues was largely the result of
several significant transactions with financial institutions that
occurred during the second quarter in North America. The decline in
the revenue of our IPG segment was attributable to an 8 percent
decline in license revenues primarily those derived from our core database
products. While we expect the market for our core database products
to remain challenging, we are encouraged by the sales and interest
generated by several products that became generally available during
the third quarter, including our real-time database ASE 12.5.2
and Mirror Activator  . For the nine months ended September 30, 2004, a 22 percent increase in revenues
associated with our iAS segment and 34 percent growth in revenue associated
with our FFI segment was largely offset by a 3 percent decline in the revenues
generated by our IPG segment in the same period. Without consideration of
XcelleNet, the iAS growth rate would have been 5 percent for the nine month
period. We believe our iAS revenues will remain strong as we continue to
integrate and leverage our XcelleNet acquisition, and as our Unwired Enterprise
initiative continues to gain momentum. The increase in license revenues for the
FFI segment was largely the result of several significant transactions with
financial institutions that occurred during the second quarter in North
America. The decline in the revenue of our IPG segment was attributable to an
8 percent decline in license revenues primarily derived from our core
enterprise database products. While we expect the market for our core database
products to remain challenging, we are encouraged by the sales and interest
generated by several products that became generally available during the third
quarter, including our real-time database ASE 12.5.2 and Mirror Activator  . Our operating margin was 10.8 percent for the third quarter of 2004, and 9.6
percent for the first nine months of 2004, compared to 13.7 percent and 10.9
percent for the same periods in 2003. The decrease in our operating margin for
the three month period in 2004 was primarily attributable to the cost of restructuring
incurred in the quarter netted against the reversal of prior period purchase
accounting accruals (4 percent), compared to a 1 percent decrease attributable
to similar items in the same period in 2003. For the nine month period,
the decrease was partially attributable to the restructuring costs discussed
above, and partially attributable to the inclusion of operating losses of
XcelleNet. The acquisition of XcelleNet had an adverse impact of approximately
1 percent on our operating margins for both the three and nine
month periods of 2004.
We believe that the restructuring activities we identified during the third
quarter will enable the Companys margins to remain stable despite the
challenging environment in the enterprise software market. For the nine months ended September 30, 2004, approximately 55 percent of our
revenues were generated from the U.S. with the balance generated from our
non-U.S. operations. This percentage was consistent with the geographic
revenue mix in the same period in 2003. Our overall financial position remains strong. We generated net cash from
operating activities of $108.1 million in the first nine 20




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months of 2004, and had $445.5 million in cash, cash equivalents and cash
investments at September 30, 2004. We had no outstanding debt, with our
long-term liabilities comprised of certain lease obligations and long-term
deferred revenues. For a discussion of certain
factors that may impact our business and financial results, 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 continued mixed signs of U.S. and global economic recovery. As was the case in 2003, the majority of our license fees revenues during 2004
have come 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
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 a
changing trend in historical IT spending patterns.
Specifically, while we 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 generally are continuing to purchase 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
and to what extent 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 Unwired Enterprise initiative and strategic alliances
with our key partners including SAP, 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 U.S. generally accepted
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 and assumptions
including those relating to revenue recognition, impairment of goodwill and
intangible assets, the allowance for doubtful accounts, capitalized software,
restructuring, income taxes, stock-based compensation and contingencies and
litigation. We base our estimates on historical experience and various other
assumptions that we believe to be reasonable based on specific circumstances.
Our management has reviewed the development, selection, and disclosure of these
estimates with the Audit Committee of our Board of Directors. These estimates
and assumptions form the basis for our judgments about the carrying value of
certain assets and liabilities that are not readily apparent from other
sources. Actual results could differ from these estimates. Further, changes in
accounting and legal standards could adversely affect our future operating
results (see Future Operating Results, below).  
    
    Revenue Recognition Revenue recognition rules for software companies are very complex. We
follow specific and detailed guidance in measuring revenue, although certain
judgments affect the application of our revenue recognition policy. These
judgments would include, for example, the determination of a customers
creditworthiness 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. 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 delivered, (c) the license fee is fixed or determinable, and (d)
collection is reasonably assured. If the fee is not fixed or determinable,
revenue is recognized as payments become due from the customer. Residual Method Accounting. In software arrangements that include multiple
elements (e.g., license rights and technical support 21




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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 Seven 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 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 September 30, 2004, our goodwill balance
totaled $214.1 million. We performed our 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. 22




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
    
    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.  
    
    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 Eleven 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.  
    
    Stock-Based Compensation SFAS 123, Accounting
for Stock-Based Compensation, currently encourages, but does not
require, companies to record compensation cost for stock-based employee
compensation plans at fair value. We have continued to account for
stock-based employee compensation using the intrinsic value method.
Under that method, compensation cost for stock options granted to employees is
measured as the excess, if any, of the quoted market price of the Company stock
at the date of the grant over the amount an employee must pay to acquire the
stock. However, as of July 1, 2005, we will be required to apply
FASB Statement 123R, Share-Based Payment, which will
require us to measure compensation cost for all share-based payments
at fair value. See Note Two to Condensed Consolidated Financial Statements 
Stock-Based Compensation, Part I, Item 1, incorporated here by reference.  
    
    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 23




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##### Table of Contents



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. For further discussion
of contingencies and liabilities, see Future Operating
Results, below, and Note Nine to Condensed Consolidated
Financial Statements, Part I, Item 1. Results of Operations Revenues
(Dollars in millions) Three
    
    Three
    
    
    
    
    
    Nine
    
    NineMonths
    
    Months
    
    
    
    
    
    Months
    
    MonthsEnded
    
    Ended
    
    Percent
    
    Ended
    
    Ended
    
    Percent9/30/04
    
    9/30/03
    
    Change
    
    9/30/04
    
    9/30/03
    
    ChangeLicense fees by segment:IPG
    
    $
    58.3
    
    
    $
    58.2
    
    
    
    *
    
    
    $
    154.0
    
    
    $
    166.7
    
    
    
    (8
    %)iAS
    
    
    16.8
    
    
    
    15.3
    
    
    
    10
    %
    
    
    47.5
    
    
    
    40.0
    
    
    
    19
    %FFI
    
    
    0.6
    
    
    
    1.3
    
    
    
    (54
    %)
    
    
    4.0
    
    
    
    2.7
    
    
    
    48
    %Eliminations
    
    
    (5.3
    )
    
    
    (6.3
    )
    
    
    (16
    %)
    
    
    (16.8
    )
    
    
    (16.2
    )
    
    
    4
    %Total license fees
    
    $
    70.4
    
    
    $
    68.5
    
    
    
    3
    %
    
    $
    188.7
    
    
    $
    193.2
    
    
    
    (2
    %)Percentage of total revenues
    
    
    35
    %
    
    
    35
    %
    
    
    
    
    
    
    33
    %
    
    
    34
    %Services by segment:IPG
    
    $
    117.7
    
    
    $
    119.2
    
    
    
    (1
    %)
    
    $
    356.2
    
    
    $
    358.9
    
    
    
    (1
    %)iAS
    
    
    13.7
    
    
    
    9.1
    
    
    
    51
    %
    
    
    33.8
    
    
    
    26.5
    
    
    
    28
    %FFI
    
    
    4.9
    
    
    
    4.6
    
    
    
    7
    %
    
    
    14.7
    
    
    
    11.3
    
    
    
    30
    %Eliminations
    
    
    (8.0
    )
    
    
    (7.6
    )
    
    
    5
    %
    
    
    (23.5
    )
    
    
    (22.5
    )
    
    
    4
    %Total Services
    
    $
    128.3
    
    
    $
    125.3
    
    
    
    2
    %
    
    $
    381.2
    
    
    $
    374.2
    
    
    
    2
    %Percentage of total revenues
    
    
    65
    %
    
    
    65
    %
    
    
    
    
    
    
    67
    %
    
    
    66
    %Total revenues
    
    $
    198.7
    
    
    $
    193.8
    
    
    
    3
    %
    
    $
    569.9
    
    
    $
    567.4
    
    
    
    *
   *
    
    Not meaningful Total license fees increased 3 percent and decreased 2 percent for the three
and nine months ended September 30, 2004, respectively, compared to the same
periods last year. The increase in license fees revenues during the
third quarter is
primarily attributable to increased iAS license revenues as
a result of the XcelleNet acquisition. The decrease in license fees revenues
for the year to date is primarily attributable to an 8 percent decline in
license revenues in our IPG segment, partially offset by increased license
revenues within our iAS and FFI segments. The decline in IPG license revenues
for the first nine months of 2004 was mostly attributable to a decline in
license revenues associated with our Adaptive Server® Enterprise product. Our
views regarding the overall reasons for the decline in IPG license revenues for
the first nine months of 2004 are discussed above in Overview. Without consideration of
XcelleNet and Dejima, the license revenues of the iAS
segment would have decreased 10 percent and increased 5 percent for the three
and nine month periods, respectively. The increase in iAS license revenues
(excluding XcelleNet) during the first nine months of 2004 was primarily
attributable to increased sales of the SQL Anywhere® product by the iAS direct
sales force. FFI license revenues are largely dependent upon closing large
transactions. As a result, the year-over-year results for FFI tend to fluctuate
greatly. The increase in FFI license revenues for the nine month period was
primarily attributable to increased sales of the segments core banking
application in North America. Segment revenue includes transactions between the segments, and in the most
common instance relates to the sale of iAS and FFI products and services by the
IPG segment. These revenues are transferred to the applicable segments less
amounts retained, which are intended to reflect the costs incurred by the
transferring segments. The total transfers between the segments are captured
in Eliminations. Total services revenues (derived from technical support, education, and
professional services) increased 2 percent for the three and nine months
ended September 30, 2004 compared to the same periods in 2003.
Approximately 78 percent and 77 percent of services
revenues for the three month and nine month periods ended September 30, 2004 related to technical support
revenues, as compared to 76 percent and 77 percent for the comparable periods
in 2003. Overall, technical support revenue increased 4 percent and 2 percent
for the three and nine month periods ended September 30, 2004, respectively.
The deferred revenue related to technical support 24




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##### Table of Contents



contracts at the end of the
third quarter of 2004 was up 3 percent from the deferred revenue related
to such contracts at September 30, 2003. Other services revenues
declined 3 percent during the third quarter, and were up slightly for the
nine month period ended September 30, 2004 when compared to the
same periods in 2003. During both the three and nine month periods, the revenues from education
services declined. Professional services revenues decreased slightly for the
third quarter, but
increased by 2 percent (largely attributable to the FFI segment) for the nine
months ended September 30, 2004. The 2 percent increase
in service revenues for the three months ended September 30,
2004 was primarily due to an increase in iAS technical support revenues, partially offset by a 6 percent decline in IPG
education and professional services revenues. The 2 percent increase in
total services revenues for the nine months ended September 30, 2004 was primarily
due to a rise in iAS technical support revenues resulting from
the addition of technical support service revenues associated with the
XcelleNet business, and a 132 percent increase in FFI professional services
revenues, partially offset by a 5 percent decline in
IPG education and professional services revenues. XcelleNet
contributed $4.1 million and $5.6 million to the iAS segments service revenues in the
three and nine months ended September 30, 2004, respectively. Geographical Revenues
(Dollars in millions) Three
    
    Three
    
    
    
    
    
    Nine
    
    NineMonths
    
    Months
    
    
    
    
    
    Months
    
    MonthsEnded
    
    Ended
    
    Percent
    
    Ended
    
    Ended
    
    Percent9/30/04
    
    9/30/03
    
    Change
    
    9/30/04
    
    9/30/03
    
    ChangeNorth American
    
    $
    114.2
    
    
    $
    119.4
    
    
    
    (4
    %)
    
    $
    330.7
    
    
    $
    336.5
    
    
    
    (2
    %)Percentage of total revenues
    
    
    57
    %
    
    
    62
    %
    
    
    
    
    
    
    58
    %
    
    
    59
    %International EMEA (Europe, Middle East and Africa)
    
    $
    55.5
    
    
    $
    46.0
    
    
    
    21
    %
    
    $
    156.0
    
    
    $
    151.7
    
    
    
    3
    %Percentage of total revenues
    
    
    28
    %
    
    
    24
    %
    
    
    
    
    
    
    27
    %
    
    
    27
    %Intercontinental (Asia Pacific and Latin America)
    
    $
    29.0
    
    
    $
    28.4
    
    
    
    2
    %
    
    $
    83.2
    
    
    $
    79.2
    
    
    
    5
    %Percentage of total revenues
    
    
    15
    %
    
    
    14
    %
    
    
    
    
    
    
    15
    %
    
    
    14
    %Total International
    
    $
    84.5
    
    
    $
    74.4
    
    
    
    14
    %
    
    $
    239.2
    
    
    $
    230.9
    
    
    
    4
    %Percentage of total revenues
    
    
    43
    %
    
    
    38
    %
    
    
    
    
    
    
    42
    %
    
    
    41
    %Total revenues
    
    $
    198.7
    
    
    $
    193.8
    
    
    
    3
    %
    
    $
    569.9
    
    
    $
    567.4
    
    
    
    *
   *
    
    Not meaningful North American revenues (United States, Canada and Mexico) decreased 4 percent
and 2 percent for the three and nine months ended September 30, 2004,
respectively, compared to the same periods in 2003. There was a decline in
license fees revenues from both enterprise database products and third party
royalties associated with certain integration products included in the IPG
segment. This decrease was largely offset by an increase in license fees
revenues from products included in the iAS segment and an increase in
professional services revenues. EMEA (Europe, Middle East and Africa) revenues for the three and nine months
ended September 30, 2004 increased 21 percent and 3 percent, respectively, compared to the same periods in 2004. The increase in Q3 was due to a 63
percent increase in license fees revenues from enterprise database products
included in the IPG segment, a 55 percent increase in iAS license fees revenues,
and an 11 percent increase in
technical support services revenues, partially offset by a 16 percent decline in
professional services revenues. For the nine months ended September 30, 2004,
the increase was due to a 29 percent increase in license fees revenues from
products included in the iAS segment and a 7 percent increase in technical
support services revenues, partially offset by a 7 percent drop in license fees revenues
from enterprise database products and a 20 percent decline in professional
services revenues. Increased revenues in Germany and the UK contributed most
to the overall increase for both comparable periods. The increase in
Intercontinental (Asia Pacific and Latin America) revenues for the three and
nine months ended September 30, 2004 was primarily attributable to an increase
in license fees revenues from enterprise database products. The results of our
operations in China, Australia, India, and New Zealand contributed most
significantly to the increased revenue, offsetting lower revenues in Japan. The increase in total international revenues was largely due to an increase in
license fees revenues from enterprise database products, an increase
in iAS license
fees revenues, and an increase in
technical support revenues, partially offset by a decrease in professional
services revenues. International revenues comprised 43 percent and 42 percent
of total revenues for the three and nine months ended September 30, 2004,
respectively, and 38 percent and 41 percent of total revenues for 25




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the same periods in 2003. In EMEA and the
Intercontinental region, most revenues and expenses are
denominated in local currencies. During the three and nine months ended
September 30, 2004, foreign currency exchange rate changes from the same
periods last year resulted in a 3 percent increase in our revenues and a 2
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. Costs and Expenses
(Dollars in millions) Three
    
    Three
    
    
    
    
    
    Nine
    
    NineMonths
    
    Months
    
    
    
    
    
    Months
    
    MonthsEnded
    
    Ended
    
    Percent
    
    Ended
    
    Ended
    
    Percent9/30/04
    
    9/30/03
    
    Change
    
    9/30/04
    
    9/30/03
    
    ChangeCost of license fees
    
    $
    15.6
    
    
    $
    15.5
    
    
    
    1
    %
    
    $
    44.7
    
    
    $
    44.1
    
    
    
    1
    %Percentage of license fees revenues
    
    
    22
    %
    
    
    23
    %
    
    
    
    
    
    
    24
    %
    
    
    23
    %Cost of services
    
    $
    39.7
    
    
    $
    40.7
    
    
    
    (2
    %)
    
    $
    122.8
    
    
    $
    120.5
    
    
    
    2
    %Percentage of services revenues
    
    
    31
    %
    
    
    32
    %
    
    
    
    
    
    
    32
    %
    
    
    32
    %Sales and marketing
    
    $
    59.2
    
    
    $
    59.3
    
    
    
    *
    
    
    $
    179.4
    
    
    $
    177.4
    
    
    
    1
    %Percentage of total revenues
    
    
    30
    %
    
    
    31
    %
    
    
    
    
    
    
    31
    %
    
    
    31
    %Product development and engineering
    
    $
    29.1
    
    
    $
    29.0
    
    
    
    *
    
    
    $
    88.9
    
    
    $
    88.3
    
    
    
    1
    %Percentage of total revenues
    
    
    15
    %
    
    
    15
    %
    
    
    
    
    
    
    16
    %
    
    
    16
    %General and administrative
    
    $
    23.5
    
    
    $
    20.3
    
    
    
    16
    %
    
    $
    64.6
    
    
    $
    62.9
    
    
    
    3
    %Percentage of total revenues
    
    
    12
    %
    
    
    10
    %
    
    
    
    
    
    
    11
    %
    
    
    11
    %Amortization of other purchased intangibles
    
    $
    1.7
    
    
    $
    0.5
    
    
    
    240
    %
    
    $
    3.5
    
    
    $
    1.5
    
    
    
    133
    %Percentage of total revenues
    
    
    1
    %
    
    
    *
    
    
    
    
    
    
    
    1
    %
    
    
    *Stock compensation expense
    
    $
    0.6
    
    
    $
    0.7
    
    
    
    (14
    %)
    
    $
    3.5
    
    
    $
    2.1
    
    
    
    67
    %Percentage of total revenues
    
    
    *
    
    
    
    *
    
    
    
    
    
    
    
    1
    %
    
    
    *Reversal of purchase accounting accrual
    
    $
    (2.7
    )
    
    
    
    
    
    
    *
    
    
    $
    (2.7
    )
    
    
    
    
    
    
    *Percentage of total revenues
    
    
    (1
    %)
    
    
    
    
    
    
    
    
    
    
    *
    
    
    
    Cost of restructure
    
    $
    10.5
    
    
    $
    1.3
    
    
    
    708
    %
    
    $
    10.4
    
    
    $
    9.0
    
    
    
    16
    %Percentage of total revenues
    
    
    5
    %
    
    
    1
    %
    
    
    
    
    
    
    2
    %
    
    
    2
    %
   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
$15.6 million and $44.7 million for the three and nine months ended September
30, 2004, respectively, up from $15.5 million and $44.1 million for the same
periods in 2003. Such costs were 22 percent and 24 percent of license fees
revenues for the three and nine months ended September 30, 2004, respectively,
as compared to 23 percent for the same periods in 2003. The increase in the
cost of license fees for the three and nine months ended September 30, 2004 was
primarily due to an increase in amortization of capitalized software
development costs and an increase in amortization of purchased technology
acquired as a result of the purchase of XcelleNet, partially offset by a
decrease in third party royalties. Amortization of capitalized software
development costs included in cost of license fees was $8.5 million and $25.3
million for the three and nine months ended September 30, 2004, respectively,
as compared to $7.9 million and $21.7 million for the same periods in 2003.The
increase in amortization of capitalized software costs for the three and nine
months ended September 30, 2004 was primarily due to certain
products included in the IPG segment that we began amortizing in the second half of 2003 and in
2004. Amortization of purchased technology was $4.7 million and $13.1
million for the three and nine months ended September 30, 2004, respectively,
as compared to $3.8 million and $11.4 million for the same periods in 2003.
The increase was attributable to the amortization of developed technology
acquired in the XcelleNet acquisition. 26




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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
$39.7 million and $122.8 million for the three and nine months ended September
30, 2004, respectively, as compared to $40.7 million and $120.5 million for the
same periods in 2003. These costs were 31 percent and 32 percent of services
revenues for the three and nine months ended September 30, 2004, respectively,
as compared to 32 percent for the same periods in 2003. The decrease in cost of
services in absolute dollars and as a percentage of services revenues for the
three months ended September 30, 2004 is primarily due to a reduction in
technical support and professional services headcount as a result of the 2004
Plan (see Cost of Restructuring  2004 Restructuring
Actions, below). The increase in cost of services in absolute dollars for
the nine months ended September 30, 2004 is primarily due to an increase in
costs associated with third party consultants used in professional services
engagements. Sales and Marketing.Sales and marketing expenses were $59.2 million and $179.4
million for the three and nine months ended September 30, 2004, respectively,
as compared to $59.3 million and $177.4 million for same periods last year.
These costs were 30 percent and 31 percent of total revenues for the three and
nine months ended September 30, 2004, respectively, as compared to 31 percent
for the same periods in 2003. Sales and marketing expenses for the three month
period remained relatively flat compared to the same period last year. The
increase in sales and marketing expenses in absolute dollars for the nine
months ended September 30, 2004 was due to an increase in sales commissions and
marketing programs. Product Development and Engineering.Product development and engineering
expenses (net of capitalized software development costs) increased slightly to
$29.1 million for the three months ended September 30, 2004 as compared to
$29.0 million for the same period last year. Product development and
engineering expenses increased 1 percent to $88.9 million for the nine months
ended September 30, 2004 as compared to $88.3 million for the nine months ended
September 30, 2003. These costs were 15 percent and 16 percent of total
revenues for the three and nine months ended September 30, 2004 and 2003,
respectively. The increase in product development and engineering costs in
absolute dollars for the three and nine months ended September 30, 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 and our acquisition of XcelleNet in the second quarter of 2004, partially offset by an increase in
capitalized software development costs. We capitalized approximately $10.1 million and $27.9 million of software
development costs for the three and nine months ended September 30, 2004,
respectively, as compared to $7.7 million and $22.8 million for the same
periods in 2003. For the nine months ended September 30, 2004, capitalized
software costs included costs incurred for the development of Adaptive
Server ® Enterprise 12.5.2 and 15.0, Financial Fusion® Corporate Banking Solutions 2.20, EDI
Server 4.2, Sybase® IQ 12.6, PowerBuilder® 10.0, and PowerDesigner® 11.0. 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
$23.5 million and $64.6 million for the three and nine months ended September
30, 2004, respectively, as compared to $20.3 million and $62.9 million for the
same periods in 2003. These costs represented 12 percent and 11 percent of
total revenues for the three and nine months ended September 30, 2004,
respectively, as compared to 10 percent and 11 percent for the same periods in
2003. The increase in absolute dollars for the three and nine months ended
September 30, 2004 is primarily due to an increase in the total number of
general and administrative personnel attributable in part to our acquisition of
XcelleNet and an increase in legal expenses. 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) and the amortization of the established customer list and covenant not to
compete associated with the acquisition of XcelleNet. 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 NEN in 2001. Reversal of purchase accounting accrual.In connection with our acquisition of
AvantGo in 2003 we determined to vacate their corporate
headquarters in Hayward, California and move all personnel to our facilities in
Dublin, California. As a result, we accrued certain purchase accounting
liabilities associated with the lease obligations on this facility, net of
our expected sublease revenue, based on an analysis performed by an independent
real estate consultant. During the quarter ended September 30, 2004, we were
able to sublease the facility on terms much better than those
anticipated at the time of the closing of the purchase accounting
period. As a result, 27




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##### Table of Contents



we reversed $2.7 million in purchase accounting liabilities related to this
facility. The original establishment of the accrual in purchase accounting
increased the goodwill we recorded on the AvantGo acquisition. Cost/ of Restructuring 2004 Restructuring Actions In the third quarter of 2004, after two straight quarters of failing to meet
revenue and earnings expectations, we embarked on a restructuring plan (2004 Plan)
aimed at reducing our annual expenses (primarily employee related) by
approximately $15 million. Of this amount, approximately $13 million in annual
savings is expected to result from headcount reductions and approximately $2
million in annual savings is expected to result from facility consolidation and
the avoidance of software maintenance costs. The 2004 Plan activities include the
termination of approximately 155 employees worldwide, the closure or consolidation of approximately 5 facilities worldwide and the
write-off of certain enterprise software purchased from a third party. It is anticipated that the
total costs, once the restructuring activities prescribed under the 2004 Plan
are fully completed, will be $18.7 million. In general, these expenses will be
incurred over a 12-month period although certain expenses may extend beyond
this time frame depending upon when the costs associated with the
sublease of certain facilities are incurred. For the quarter ended September
30, 2004, we recorded restructuring charges of $10.6 million as follows: Cash/
    
    Segment
    
    Consolidated(Dollars in millions)
    
    Non-Cash
    
    IPG
    
    IAS
    
    TotalEmployee termination costs
    
    Cash
    
    $
    4.0
    
    
    $
    0.1
    
    
    $
    4.1Write off of computer software
    
    Non-cash
    
    
    6.5
    
    
    
    
    
    
    
    6.5$
    10.5
    
    
    $
    0.1
    
    
    $
    10.6
 The Companys restructuring activities in the third quarter of 2004 focused
largely on reducing headcount to sufficiently reduce the operating expenses of
the business units, which will allow them to meet operating margin targets, and
eliminating certain software that will not be utilized in the newly restructured
organization. The Company expects to continue such restructuring activities in
the fourth quarter of 2004. Termination payments to employees and other related costs During the third quarter we recorded restructuring charges of $4.1 million for
severance payments, termination benefits and related expenses incurred in
connection with the termination of approximately 140 employees worldwide.
Severance payments and termination benefits were accrued and charged to
restructuring costs in the period that the amounts were determined and
communicated to the affected employees. The Company expects to recognize additional restructuring charges of
approximately $0.9 million in the fourth quarter due to continued restructuring
activities, and due to certain severance amounts that are expected to be
recognized in the fourth quarter in connection with the termination of certain
non-U.S. employees during the third quarter. Write-off of assets During the quarter ended
September 30, 2004, we recorded restructuring charges
of approximately $6.5 million related to the costs
previously incurred and capitalized for certain enterprise software
acquired from a third party. In conjunction with our restructuring activities
during the quarter, management decided to halt its plan to complete the
implementation of this software. This decision was made after ongoing
reorganizations within our sales organization caused
management to reassess the needs of this organization going forward.
Management ultimately determined the software would no longer effectively fulfill its intended purposes and that the
softwares high cost of implementation and ownership could
no longer be supported by our strategy for development
of the sales organization. As a result, the plan to implement the
software was terminated. 28




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##### Table of Contents



Lease cancellations and commitments As a result of the termination of employees referred to above, and in connection
with further streamlining our infrastructure, a number facilities were
identified for closure or consolidation as part of the 2004 Plan. These include properties located in
Massachusetts, Michigan, Georgia, Spain and the United Kingdom. In all cases,
the Company did not begin vacating the identified facilities
until after October 1, 2004. The restructuring charge expected to be taken in the fourth quarter relating to
these facilities will be approximately $5.9M (with $1.3M in accretion expenses
to be taken in later years). 2003 Restructuring Activities.During the quarter ended March 31, 2004, we
recorded restructuring charges of $0.1 million for severance paid in connection
with a foreign employee who was terminated under the 2003
restructuring plan (2003 Plan). During the quarter ended June 30, 2004, we recorded restructuring charges of
approximately $0.4 million for the write-off of certain leasehold improvements
associated with facilities included in our 2003 Plan, which was vacated in Q2
2004. 2002 Restructuring Activities.During the quarter ended September 30, 2004, we
reversed $0.1 million in restructuring accruals related to excess reverses
remaining at the conclusion of leases and space taken out of restructuring
associated with properties located in the United Kingdom. During the quarter ended June 30, 2004, approximately $0.7 million in
restructuring accruals were reversed by a corresponding credit to restructuring
expense. The credit to lease cancellations and commitments accrual primarily
related to space taken out of restructuring as a result of consolidation
associated with the XcelleNet acquisition, and reserves released upon the
conclusion of lease negotiations associated with our Paris, France facility. AvantGo Restructuring
Reserves. During the quarter ended September 30, 2004, we recorded net reversals of $0.2
million in restructuring accruals by a corresponding credit to operating
expense. The net reversal included additional charges of $0.2 million related
to the Chicago, Illinois facility and reversals of $0.4 million related to the Hayward, California facility, where we were able to locate a suitable subtenant. Operating Income
(Dollars in millions) Three
    
    Three
    
    
    
    
    
    Nine
    
    NineMonths
    
    Months
    
    
    
    
    
    Months
    
    MonthsEnded
    
    Ended
    
    Percent
    
    Ended
    
    Ended
    
    Percent9/30/04
    
    9/30/03
    
    Change
    
    9/30/04
    
    9/30/03
    
    ChangeOperating income by segment:IPG
    
    $
    21.2
    
    
    $
    21.0
    
    
    
    1
    %
    
    $
    52.6
    
    
    $
    47.8
    
    
    
    10
    %iAS
    
    
    1.3
    
    
    
    5.4
    
    
    
    (76
    %)
    
    
    4.2
    
    
    
    12.5
    
    
    
    (66
    %)FFI
    
    
    (3.4
    )
    
    
    (1.8
    )
    
    
    89
    %
    
    
    (6.7
    )
    
    
    (7.8
    )
    
    
    (14
    %)Unallocated cost savings
    
    
    2.4
    
    
    
    2.0
    
    
    
    20
    %
    
    
    4.8
    
    
    
    9.1
    
    
    
    (47
    %)Total operating income:
    
    $
    21.5
    
    
    $
    26.6
    
    
    
    (19
    %)
    
    $
    54.9
    
    
    $
    61.6
    
    
    
    (11
    %)Percentage of total revenues
    
    
    11
    %
    
    
    14
    %
    
    
    
    
    
    
    10
    %
    
    
    11
    %
 Operating income was $21.5 million and $54.9 million for the three and nine
months ended September 30, 2004, respectively, compared to operating income of
$26.6 million and $61.6 million for the same periods in 2003. The increase in
operating income in the IPG segment for both comparable periods is primarily
due to the decrease in operating expenses as a result of the 2003 Plan. The increase for the nine month period was partially offset by a
decline in license fees revenues as a result of factors discussed under
Revenues, above. The decline in operating income for the iAS segment was
primarily due to an increase in operating expenses largely
attributable to the XcelleNet and Dejima transactions, offset by an increase in total revenues.
The operating margin associated with XcelleNet and Dejima in the three and nine
months ended September 30, 2004 was ($1.7) million and ($4.4) million,
respectively, of which ($2.1) million and ($3.6) million were related to the
amortization of intangibles acquired in these acquisitions. The operating loss
in the FFI segment increased in the three months ended September 30, 2004 due
to a decline in license fees revenues and an increase in operating expenses.
The operating loss in the FFI segment dropped for the nine months ended
September 30, 2004 due to an increase in both license and professional services
revenues. 29




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Certain common costs and expenses are allocated to the various segments based
on measurable drivers of expense. Unallocated expenses represent corporate
expenditures or cost savings that are not specifically allocated to the segment
including reversals or restructuring expenses associated with restructuring
activities undertaken prior to 2003. Other Income (Expense), Net
(Dollars in millions) Three
    
    Three
    
    
    
    
    
    Nine
    
    NineMonths
    
    Months
    
    
    
    
    
    Months
    
    MonthsEnded
    
    Ended
    
    Percent
    
    Ended
    
    Ended
    
    Percent9/30/04
    
    9/30/03
    
    Change
    
    9/30/04
    
    9/30/03
    
    ChangeInterest income
    
    $
    2.6
    
    
    $
    2.7
    
    
    
    (4
    %)
    
    $
    8.1
    
    
    $
    8.4
    
    
    
    (4
    %)Percentage of total revenues
    
    
    1
    %
    
    
    1
    %
    
    
    
    
    
    
    1
    %
    
    
    1
    %Interest expense and other, net
    
    $
    (0.0
    )
    
    $
    3.5
    
    
    
    *
    
    
    $
    0.4
    
    
    $
    3.8
    
    
    
    (89
    %)Percentage of total revenues
    
    
    *
    
    
    
    2
    %
    
    
    
    
    
    
    *
    
    
    
    *
   *
    
    Not meaningful Interest income decreased 4 percent to $2.6 million and $8.1 million for the
three and nine months ended September 30, 2004, respectively, compared to $2.7
million and $8.4 million for the same periods last year. Interest income
consists primarily of interest earned on our investments. The decrease in
interest income for both comparable periods is primarily due to the decrease in
the cash balances invested. Our invested cash balances declined as a
result of cash used in our stock repurchase program and for the
XcelleNet and Dejima acquisitions. See Condensed
Consolidated Statements of Cash Flows (unaudited), Part I,
Item 1. Interest expense and other, net was $(0.0) million and $0.4 million for the
three and nine months ended September 30, 2004, respectively, compared to $3.5
million and $3.8 million for the same periods in 2003. Interest expense and
other, net, primarily includes: net gains and losses resulting from foreign
currency transactions and the related hedging activities; the cost of hedging
foreign currency exposures; bank fees; and gains from the disposition of
certain real estate and investments. The net decrease in interest expense and
other, net for the three and nine months ended September 30, 2004 was primarily
due to the gain of approximately $3.2 million recorded in the third quarter of
2003 relating to the realization of a note receivable originally generated from
our sale of certain Swiss subsidiaries. Provision for Income Taxes (Dollars in millions) Three
    
    Three
    
    
    
    
    
    Nine
    
    NineMonths
    
    Months
    
    
    
    
    
    Months
    
    MonthsEnded
    
    Ended
    
    Percent
    
    Ended
    
    Ended
    
    Percent9/30/04
    
    9/30/03
    
    Change
    
    9/30/04
    
    9/30/03
    
    ChangeProvision for income taxes
    
    $
    6.2
    
    
    $
    10.8
    
    
    
    (43
    %)
    
    $
    19.6
    
    
    $
    24.3
    
    
    
    (19
    %)
 We recorded an income tax provision for the third quarter equal to
approximately 26 percent of pre-tax book income. Our rate for
the nine months ended September 30, 2004 was 31 percent.
The reduction in the tax rate from the second
quarter was largely attributable to the reversal of approximately $1.5 million
in reserves associated with various tax exposures for which the statute of
limitations has now expired. These rates compare to approximately 33 percent
for the comparable three and nine month periods in 2003. In 2004, our effective
tax rate differs from the statutory rate of 35 percent primarily due to the
benefits of the reserve reversal discussed above and certain low tax
non-U.S.
earnings which we plan to permanently reinvest, partially offset by the impact
of state taxes in the U.S. In 2003, our effective tax rate differed from the statutory
rate primarily due to the benefits of certain low tax
non-U.S. earnings that we
were able to realize in 2003, once again partially offset by the impact of
state taxes in the U.S. 30




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##### Table of Contents



Net Income Per Share
(Dollars and shares in millions, except per share data) Three
    
    Three
    
    
    
    
    
    Nine
    
    NineMonths
    
    Months
    
    
    
    
    
    Months
    
    MonthsEnded
    
    Ended
    
    Percent
    
    Ended
    
    Ended
    
    Percent9/30/04
    
    9/30/03
    
    Change
    
    9/30/04
    
    9/30/03
    
    ChangeNet income
    
    $
    17.8
    
    
    $
    22.0
    
    
    
    (19
    %)
    
    $
    43.8
    
    
    $
    49.5
    
    
    
    (12
    %)Percentage of total revenues
    
    
    9
    %
    
    
    11
    %
    
    
    
    
    
    
    8
    %
    
    
    9
    %Basic net income per share
    
    $
    0.19
    
    
    $
    0.23
    

    
    
    (17
    %)
    
    $
    0.46
    
    
    $
    0.53
    
    
    
    (13
    %)Diluted net income per share
    
    $
    0.19
    
    
    $
    0.23
    
    
    
    (17
    %)
    
    $
    0.44
    
    
    $
    0.51
    
    
    
    (14
    %)Shares used in computing basic net income per share
    
    
    94.5
    
    
    
    94.5
    
    
    
    0
    %
    
    
    96.0
    
    
    
    94.2
    
    
    
    2
    %Shares used in computing diluted net income per share
    
    
    96.0
    
    
    
    97.4
    
    
    
    (1
    %)
    
    
    98.5
    
    
    
    96.7
    
    
    
    2
    %
 We reported net income of $17.8 million and $43.8 million for the three and
nine months ended September 30, 2004, respectively, compared to net income of
$22.0 million and $49.5 million for the same periods last year. The decrease in
net income for both comparable periods is due to the various factors discussed
above. Basic net income per share was $0.19 and $0.46 for the three and nine months
ended September 30, 2004, respectively, as compared to $0.23 and $0.53 for the
same periods in 2003. Diluted net income per share was $0.19 and $0.44 for the
three and nine months ended September 30, 2004, respectively, as compared to
$0.23 and $0.51 for the same periods in 2003. Shares used in computing basic net income per share remained flat and increased
2 percent for the three and nine months ended September 30, 2004, respectively,
as compared to the same periods last year. The increase for the nine months
ended September 30, 2004 was due primarily to the ongoing exercise of employee
stock options, partially offset by shares repurchased under our stock
repurchase program (See Note Ten to Condensed Consolidated Financial Statements,
Part I, Item 1, incorporated here by reference). Shares used in computing
diluted net income per share decreased 1 percent and increased 2 percent for
the three and nine months ended September 30, 2004, respectively, compared to
the same periods in 2003. The decrease for the three month period ended
September 30, 2004 was primarily due to a decline in the dilutive effect of
stock options and restricted stock. For the nine month period, the increase
was primarily due to the ongoing exercise of employee stock options, partially
offset by shares repurchased under our stock repurchase program. Liquidity and Capital Resources
(Dollars in millions) Nine
    
    NineMonths
    
    MonthsEnded
    
    Ended
    
    Percent9/30/04
    
    9/30/03
    
    ChangeWorking capital
    
    $
    197.3
    
    
    $
    192.0
    
    
    
    3
    %Cash, cash equivalents and cash investments
    
    $
    445.5
    
    
    $
    498.2
    
    
    
    (11
    %)Net cash provided by operating activities
    
    $
    108.1
    
    
    $
    147.1
    
    
    
    (27
    %)Net cash used for investing activities
    
    $
    73.7
    
    
    $
    64.6
    
    
    
    14
    %Net cash provided by (used for) financing activities
    
    $
    (104.9
    )
    
    $
    2.4
    
    
    
    *
   *
    
    Not meaningful Net cash provided by operating activities decreased 27 percent for the nine
months ended September 30, 2004 compared to the nine months ended September 30,
2003. The decrease in net cash provided by operating activities was primarily
due to aggressive collection efforts in 2003 which significantly reduced our
accounts receivables, and generated a significant cash benefit in the first
nine months of 2003 (DSO was reduced from 72 days in Q4 2002 to 51 days in Q3
2003 compared to a much smaller decrease in DSO between Q4 2003 and Q3 2004). Net cash used for investing
activities was $73.7 million and $64.6 million for the nine
months ended September 30, 2004 and 2003, respectively. The increase in net
cash used for investing activities is primarily due to the net cash outlay of
$81.3 million for the XcelleNet and Dejima transactions in the second quarter
of 2004, as compared to the $13.9 million in net cash was used for the 31




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acquisition of AvantGo during the three months ended March 31, 2003. The
increase was partially offset by the net dispositions of cash investments of
$55.5 million during the nine months ended September 30, 2004, compared to net
purchases of $3.1 million in cash investments during the nine months ended
September 30, 2003. Net cash used for financing activities was $104.9 million for the nine months
ended September 30, 2004 compared to net cash provided by financing activities
of $2.4 million for the nine months ended September 30, 2003. The shift from
net cash provided by financing activities to net cash used for financing
activities was primarily the result of a $78.6 million increase in the cash
used to repurchase our stock during the nine months ended September 30,
2004, compared to the cash used for a similar purpose during the same period in
2003. In addition, we paid off $22.2 million of long-term obligations assumed
as part of the XcelleNet acquisition during the second quarter of 2004. During the nine months ended September 30, 2004, we repurchased 6.0 million
shares of our common stock for $109.5 million pursuant to the Board of
Directors authorization. For additional information regarding our stock
repurchase program, see Note Ten to Consolidated Financial Statements, Part I,
Item 1, incorporated here by reference. We had no significant commitments for future capital expenditures at September
30, 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 September 30, 2004, we had identifiable net assets
totaling $205.2 million associated with our European operations and $69.5
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 Report on Form 10-Q, 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 and the
first half of 2004, we experienced an overall increase in the volume of license
revenue transactions but an overall decrease in the average dollar value of
these deals. Although many of our customers are larger enterprises, an apparent
trend toward more conservative IT spending could result in
fewer of these customers making substantial investments in our products
and services in any given period. Therefore, if one or more significant orders
do not close in a particular quarter, our results of operations could be
materially and adversely affected, as was the case in the quarters ended March
31 and June 30, 2004. Our operating expenses are based on projected annual and quarterly revenue
levels, and are generally incurred ratably throughout each quarter. Since our
operating expenses are relatively fixed in the short term, failure to realize
projected revenues for a specified period could adversely impact operating
results, reducing net income or causing an operating loss for that period. The
deferral or non-occurrence of such revenues would materially adversely affect
our operating results for that quarter and could impair our business in future
periods. Because we do not know when, or if, our potential customers will place
orders and finalize contracts, we cannot accurately predict our revenue and
operating results for future quarters. 32




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##### Table of Contents



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. We cannot assure
you that estimates of our revenues and operating results can be made with
certain accuracy or predictability. 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 continue 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 revenues from sales of
our products and services through non-exclusive distribution channels,
including strategic partners, systems integrators (SIs), original equipment
manufacturers (OEMs) and value-added resellers (VARs). We generally anticipate
that sales of our products through these channels will account for a
substantial portion of our license revenues in the foreseeable future. Because
most of our channel relationships are non-exclusive, there is a risk that some
or all of them could promote or sell our competitors products instead of ours,
or that they will be unable to effectively sell new products that we may
introduce. Additionally, if we are unable to expand our indirect channels, or
these indirect channels fail to generate significant revenues in the future,
our business could be harmed. Our development, marketing and distribution strategies also depend in part on
our ability to form strategic relationships with other technology companies. If
these companies change their business focus, enter into strategic alliances
with other companies or are acquired by our competitors or others, support for
our products could be reduced or eliminated, which could have a material
adverse effect on our business and financial condition. Industry consolidation and other competitive pressures could affect prices or
demand for our products and services, and our business may be adversely
affected. The IT industry and the market for our core database infrastructure products
and services is becoming increasingly competitive due to a variety of factors
including a maturing enterprise infrastructure software market, changes in
customer IT spending habits, and mixed economic recovery in the U.S. There
also appears to be a growing trend toward consolidation in the software
industry, as evidenced by 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. Widespread use of the Internet and fast-growing market demand for mobile and
wireless solutions may significantly alter the manner in which business is
conducted in the future. In light of these developments, our ability to timely
meet the demand for new or enhanced 33




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##### Table of Contents



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. 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 process.
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 investments in other companies
in addition to other strategic ventures to expand and enhance our business. We
have recently acquired a number of companies and formed certain strategic
relationships. For example, we acquired AvantGo in 2003 and XcelleNet and certain assets of Dejima
in April 2004. 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 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 and
our management of operating expenses have contributed, and will
continue to contribute to, an increase in
our operating margins. Our ability to significantly reduce our current cost
structure in any material respects through future restructurings may be
difficult without fundamentally changing elements of our current business. If
we 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 34




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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 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 the first nine months of 2004, revenues outside North
America represented 42 percent of our total revenues. As a result of our
international operations, we are affected by economic, regulatory and political
conditions in foreign countries, including changes in IT spending generally,
the imposition of government controls, changes or limitations in trade
protection laws, unfavorable changes in tax treaties or laws, natural
disasters, labor unrest, earnings expatriation restrictions, misappropriation
of intellectual property, acts of terrorism and continued unrest and war in the
Middle East and other factors, which could have a material impact on our
international revenues and operations. Our revenues outside North America could also fluctuate due to the relative
immaturity of some markets, rapid growth in other markets, and organizational
changes we have made to accommodate these conditions. 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
September 30, 2004, we had identified net assets totaling $179.1 million
associated with our EMEA operations, and $59.4 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. Growing market
acceptance of open source software could cause a decline
in our revenues and operating margins Growing market acceptance of
open source software has presented both benefits and challenges to
the commercial software industry in recent years. Open
source software is made widely available by its authors and is
licensed as is for a nominal fee or, in some cases, at no
charge. For example, Linux is a free Unix-type operating system, and
the source code for Linux is freely available. We have developed
certain products to operate on the Linux platform, which has created
additional sources of revenues. Additionally, we have incorporated
other types of open source software into other products, allowing us
to enhance certain solutions without incurring substantial additional
research and development costs. Thus far, we have encountered no
unanticipated material problems arising from our use of open source
software. However, as the use of open source software becomes more
widespread, certain open source technology could become competitive
with our proprietary technology, which could cause sales of our
products to decline or force us to reduce the fees we charge for our
products, which could have a material adverse impact on our revenues and
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If we are unable to protect our intellectual property, or if we infringe or are
alleged to infringe a third partys intellectual property, our operating
results may be adversely affected. We rely on a combination of copyright, patent, trademark and trade secret laws
and contractual restrictions on disclosure to protect our intellectual property
rights. We cannot be certain that the steps we have taken will prevent
unauthorized use of our technology. Our inability to obtain adequate copyright,
patent or trade secret protection for our products in certain countries could
diminish the competitive advantages we derive from our proprietary technology
and may have a material adverse impact on future operating results. In
addition, as the number of software products and associated patents increase,
it is possible that software developers will become subject to more frequent
infringement claims. We have in the past received, 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. We currently license our software products to end users directly, or through a
number of reseller channels including OEMs, VARs and SIs. Under our standard
software license agreements, we contractually agree to indemnify our licensees
against claims that our software infringe the intellectual property rights of
third parties. Some of our products, including our core enterprise database
product, incorporate intellectual property licensed from third parties or open
source software. We attempt to exclude open source software and other products
for which no IP indemnity is provided by the licensor from the scope of our
indemnification obligations. However, if we fail to successfully exclude such
technology from our indemnification obligations, claims that such open source
or third party technology infringes the intellectual property rights of a third
party could materially and adversely affect our business and
financial condition. Our key personnel are critical to our business, and we cannot assure that
they will remain with the Company. Our success depends on the continued service of our executive officers and
other key personnel. In recent years, we have made additions and changes to our
executive management team. For example, in August 2004, Martin J.
Healy, Vice President and Corporate Controller, retired and was
replaced by Jeffrey G. Ross, formerly Group Director of Tax and
Accounting. Further changes involving executives and managers
resulting from acquisitions, mergers and other events could increase the
current rate of employee turnover, particularly in consulting, engineering and
sales. We cannot assure 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 36




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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 October 2004, the FASB concluded that Statement 123R, Share-Based Payment
(Statement 123R) requiring companies to measure compensation cost for all
share-based payments at fair value, will be effective for most public companies
for interim or annual periods beginning after June 15, 2005. The Company
currently accounts for stock-based employee compensation using the intrinsic
value method prescribed in Accounting Principles Board (APB) Opinion No. 25,
Accounting for Stock Issued to Employees, and Related Interpretations.
However, we will be required to measure and recognize the cumulative effect, if
any, from the adoption of Statement 123R beginning July 1, 2005. Statement
123R 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. See also Note Two to Condensed Consolidated
Financial Statements, Part I, Item 1, above. 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. These SEC-mandated rules
and procedures became effective starting in the latter half of 2002,
and new rules are expected to evolve and become implemented over the
next several years. We are also subject
to additional rules and regulations, including those enacted by the New York
Stock Exchange where our common stock is traded. 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. The unfavorable outcome
of litigation and other claims against the Company could have a
material adverse impact on our financial condition and results of
operations. We are subject to a variety
of claims and lawsuits from time to time, some of which arise in the
ordinary course of our business. Adverse outcomes in some or all of
such pending cases may result in significant monetary damages or
injunctive relief against us. While management currently believes
that resolution of these matters, individually or in the aggregate,
will not have a material adverse impact on our financial position or
results of operations, the ultimate outcome of litigation and other
claims noted are subject to inherent uncertainties, and
managements view of these matters may change in the future. It
is possible that our financial condition and results of operations
could be materially adversely affected in any period in which the
effect of an unfavorable final outcome becomes probable and reasonably
estimable. Our operations and financial results could be severely harmed by certain
natural disasters. Our headquarters and some of our major customers facilities are located near
major earthquake faults. We have not been able to maintain earthquake insurance
coverage at reasonable costs. Instead, we rely on self-insurance and
preventative safety measures. We currently ship most of our products from our
Dublin, California facility near the site of our corporate headquarters. If a
major earthquake or other natural disaster occurs, disruption of operations at
that facility could directly harm our ability to record revenues for such
quarter. This could, in turn, have an adverse impact on operating results. The market price of our common stock is highly volatile and you may not be able
to resell your shares of our stock at 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 37




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
    
    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 on Form 10-Q. 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 September 30, 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 September 30, 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 we file or submit pursuant to the Securities and 38




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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 1: LEGAL PROCEEDINGS See Note Nine to Condensed Consolidated Financial Statements, Part I, Item
1, incorporated here by this reference. 
 ITEM 2: UNREGISTERED SALES
OF EQUITY SECURITIES AND USE OF PROCEEDS (c)  Purchases of Equity Securities by the Issuer and Affiliated Purchasers During the quarter ended September 30, 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 ($)July 1 - 31
    
    
    1,342,000
    
    
    $
    14.33
    
    
    
    1,342,000
    
    
    $
    115,581,000August 1  31
    
    
    430,200
    
    
    
    13.59
    
    
    
    430,200
    
    
    
    109,734,000September 1  30
    
    
    0
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    1,772,200
    
    
    $
    14.15
    
    
    
    1,772,200
    
    
    $
    109,734,000
 
 ITEM 6: EXHIBITS Exhibits
furnished pursuant to Section 601 of Regulation S-K are incorporated here by reference to the
Exhibit Index attached to this Report on
Form 10-Q. 39




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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. November 9, 2004
    
    SYBASE, INC.By
    
    /s/ PIETER VAN DER VORSTPieter Van der VorstSenior Vice President and Chief Financial Officer(Principal Financial Officer)By
    
    /s/ JEFFREY G. ROSSJeffrey G. RossVice President and Corporate Controller(Principal Accounting Officer)
 40




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EXHIBIT INDEX Exhibit No.
    
    Description31.1
    
    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
 41