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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 June 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 July 31, 2004, 95,039,959shares of the Registrants Common Stock, $.001 par
value, were outstanding.




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SYBASE, INC.  QUARTER ENDED JUNE 30, 2004 INDEX PageForward-Looking Statements
    
    
    3Part I: Financial Information
    
    
    4Item 1: Financial Statements (Unaudited)
    
    
    4Condensed Consolidated Balance Sheets as of June 30, 2004 and December 31, 2003
    
    
    5Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2004 and 2003
    
    
    5Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2004 and 2003
    
    
    6Notes to Condensed Consolidated Financial Statements
    
    
    7Item 2: Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    18Item 3: Quantitative and Qualitative Disclosures of Market Risk
    
    
    35Item 4: Controls and Procedures
    
    
    36Part II: Other Information
    
    
    36Item 2: Changes in Securities and Use of Proceeds
    
    
    36Item 4: Submission of Matters to a Vote of Security Holders
    
    
    37Item 6: Exhibits and Reports on Form 8-K
    
    
    37Signatures
    
    
    38Exhibit Index
    
    
    39EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1
  2




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




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PART I: FINANCIAL INFORMATION 
 ITEM 1: FINANCIAL STATEMENTS SYBASE, INC. 
 CONDENSED CONSOLIDATED BALANCE SHEETS June 30,2004
    
    December 31,(Dollars in thousands, except share and per share data)
    
    (Unaudited)
    
    2003Current assets:Cash and cash equivalents
    
    $
    252,789
    
    
    $
    315,404Short-term cash investments
    
    
    132,253
    
    
    
    155,093Total cash, cash equivalents and short-term cash investments
    
    
    385,042
    
    
    
    470,497Restricted cash
    
    
    4,842
    
    
    
    4,747Accounts receivable, net
    
    
    116,555
    
    
    
    140,332Deferred income taxes
    
    
    11,705
    
    
    
    12,739Other current assets
    
    
    17,530
    
    
    
    16,167Total current assets
    
    
    535,674
    
    
    
    644,482Long-term cash investments
    
    
    66,428
    
    
    
    103,296Restricted long-term cash investments
    
    
    3,400
    
    
    
    3,400Property, equipment and improvements, net
    
    
    73,737
    
    
    
    67,462Deferred income taxes
    
    
    42,750
    
    
    
    58,506Capitalized software, net
    
    
    59,975
    
    
    
    58,947Goodwill, net
    
    
    213,989
    
    
    
    140,875Other purchased intangibles, net
    
    
    79,982
    
    
    
    38,715Other assets
    
    
    34,450
    
    
    
    35,673Total assets
    
    $
    1,110,385
    
    
    $
    1,151,356Current liabilities:Accounts payable
    
    $
    17,932
    
    
    $
    15,425Accrued compensation and related expenses
    
    
    36,124
    
    
    
    39,134Accrued income taxes
    
    
    32,047
    
    
    
    33,677Other accrued liabilities
    
    
    73,355
    
    
    
    94,611Deferred revenue
    
    
    220,184
    
    
    
    206,881Total current liabilities
    
    
    379,642
    
    
    
    389,728Other liabilities
    
    
    27,174
    
    
    
    15,129Minority interest
    
    
    5,030
    
    
    
    5,030Commitments and contingent liabilitiesStockholders equity:Preferred stock, $0.001 par value, 8,000,000 shares authorized; none issued or outstanding
    
    
    
    
    
    
    Common stock, $0.001 par value, 200,000,000 shares authorized; 105,337,362 shares issued and
95,976,651 outstanding (2003-105,337,362 shares issued and 98,525,464 outstanding)
    
    
    105
    
    
    
    105Additional paid-in capital
    
    
    940,797
    
    
    
    933,657Accumulated deficit
    
    
    (100,377
    )
    
    
    (126,385
    )Accumulated other comprehensive income
    
    
    19,074
    
    
    
    26,849Cost of 9,360,711 shares of treasury stock (2003-6,811,898 shares)
    
    
    (151,911
    )
    
    
    (87,672
    )Unearned compensation
    
    
    (9,149
    )
    
    
    (5,085
    )Total stockholders equity
    
    
    698,539
    
    
    
    741,469Total liabilities and stockholders equity
    
    $
    1,110,385
    
    
    $
    1,151,356
 See accompanying notes. 4




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SYBASE, INC. 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS  Three Months Ended
    
    Six Months EndedJune 30
    
    June 30(In thousands, except per share data)
    
    2004
    
    2003
    
    2004
    
    2003Revenues:License fees
    
    $
    60,427
    
    
    $
    63,897
    
    
    $
    118,332
    
    
    $
    124,771Services
    
    
    127,603
    
    
    
    128,135
    
    
    
    252,857
    
    
    
    248,808Total revenues
    
    
    188,030
    
    
    
    192,032
    
    
    
    371,189
    
    
    
    373,579Costs and expenses:Cost of license fees
    
    
    15,558
    
    
    
    14,589
    
    
    
    29,138
    
    
    
    28,518Cost of services
    
    
    41,455
    
    
    
    40,643
    
    
    
    83,039
    
    
    
    79,874Sales and marketing
    
    
    62,066
    
    
    
    59,666
    
    
    
    120,238
    
    
    
    118,162Product development and engineering
    
    
    29,121
    
    
    
    29,348
    
    
    
    59,769
    
    
    
    59,266General and administrative
    
    
    21,300
    
    
    
    20,471
    
    
    
    41,073
    
    
    
    42,571Amortization of other purchased intangibles
    
    
    1,285
    
    
    
    500
    
    
    
    1,785
    
    
    
    1,000Stock compensation expense
    
    
    1,544
    
    
    
    727
    
    
    
    2,846
    
    
    
    1,388Cost (reversal) of restructure
    
    
    (253
    )
    
    
    7957
    
    
    
    (128
    )
    
    
    7,748Total costs and expenses
    
    
    172,076
    
    
    
    173,901
    
    
    
    337,760
    
    
    
    338,527Operating income
    
    
    15,954
    
    
    
    18,131
    
    
    
    33,429
    
    
    
    35,052Interest income
    
    
    2,648
    
    
    
    2,872
    
    
    
    5,546
    
    
    
    5,699Interest expense and other, net
    
    
    (261
    )
    
    
    652
    
    
    
    431
    
    
    
    268Income before income taxes
    
    
    18,341
    
    
    
    21,655
    
    
    
    39,406
    
    
    
    41,019Provision for income taxes
    
    
    5,519
    
    
    
    7,096
    
    
    
    13,398
    
    
    
    13,486Net income
    
    $
    12,822
    
    
    $
    14,559
    
    
    $
    26,008
    
    
    $
    27,533Basic net income per share
    
    $
    0.13
    
    
    $
    0.16
    
    
    $
    0.27
    
    
    $
    0.29Shares used in computing basic net income per share
    
    
    96,130
    
    
    
    93,787
    
    
    
    96,710
    
    
    
    94,072Diluted net income per share
    
    $
    0.13
    
    
    $
    0.15
    
    
    $
    0.26
    
    
    $
    0.28Shares used in computing diluted net income per share
    
    
    98,612
    
    
    
    96,432
    
    
    
    99,826
    
    
    
    96,858See accompanying notes.
 5




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SYBASE, INC. 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS  Six Months EndedJune 30,(Dollars in thousands)
    
    2004
    
    2003Cash and cash equivalents, beginning of year
    
    $
    315,404
    
    
    $
    231,267Cash flows from operating activities:Net income
    
    
    26,008
    
    
    
    27,533Adjustments to reconcile net income to net cash provided by operating activities:Depreciation and amortization
    
    
    41,325
    
    
    
    42,127Write-off of assets in restructuring
    
    
    427
    
    
    
    343(Gain) Loss on disposal of assets
    
    
    224
    
    
    
    (168
    )Deferred income taxes
    
    
    (2,130
    )
    
    
    (2,675
    )Amortization of deferred stock-based compensation
    
    
    2,845
    
    
    
    1,388Changes in assets and liabilities:Accounts receivable
    
    
    28,868
    
    
    
    52,531Other current assets
    
    
    (580
    )
    
    
    778Accounts payable
    
    
    3,793
    
    
    
    (182
    )Accrued compensation and related expenses
    
    
    (4,113
    )
    
    
    (3,389
    )Accrued income taxes
    
    
    (1,299
    )
    
    
    1,773Other accrued liabilities
    
    
    (25,814
    )
    
    
    (23,433
    )Deferred revenues
    
    
    10,175
    
    
    
    20,826Other liabilities
    
    
    3,221
    
    
    
    2,414Net cash provided by operating activities
    
    
    82,950
    
    
    
    119,866Cash flows from investing activities:(Increase) Decrease in restricted cash
    
    
    (95
    )
    
    
    1,249Purchases of available-for-sale cash investments
    
    
    (101,307
    )
    
    
    (134,283
    )Maturities of available-for-sale cash investments
    
    
    88,134
    
    
    
    41,350Sales of available-for-sale cash investments
    
    
    71,673
    
    
    
    38,755Business combinations, net of cash acquired
    
    
    (81,270
    )
    
    
    (13,900
    )Purchases of property, equipment and improvements
    
    
    (14,553
    )
    
    
    (20,608
    )Proceeds from sale of fixed assets
    
    
    110
    
    
    
    141Capitalized software development costs
    
    
    (17,772
    )
    
    
    (15,130
    )Decrease in other assets
    
    
    1,323
    
    
    
    2,216Net cash used for investing activities
    
    
    (53,757
    )
    
    
    (100,210
    )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
    
    
    20,408
    
    
    
    13,853Purchases of treasury stock
    
    
    (84,417
    )
    
    
    (30,883
    )Net cash used for financing activities
    
    
    (86,182
    )
    
    
    (17,030
    )Effect of exchange rate changes on cash
    
    
    (5,626
    )
    
    
    15,177Net increase (decrease) in cash and cash equivalents
    
    
    (62,615
    )
    
    
    17,803Cash and cash equivalents, end of period
    
    
    252,789
    
    
    
    249,070Cash investments, end of period
    
    
    198,681
    
    
    
    210,255Total cash, cash equivalents and cash investments, end of period
    
    $
    451,470
    
    
    $
    459,325Supplemental disclosures:Interest paid
    
    $
    61
    
    
    $
    34Income taxes paid
    
    $
    18,918
    
    
    $
    13,768
 See accompanying notes. 6




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SYBASE, INC. 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  1. Basis of Presentation. The accompanying unaudited condensed consolidated
financial statements include the accounts of Sybase, Inc. and its subsidiaries,
and, in the opinion of management, reflect all adjustments (consisting only of
normal recurring adjustments) necessary to fairly state the Companys
consolidated financial position, results of operations, and cash flows as of
and for the dates and periods presented. The condensed consolidated balance
sheet as of December 31, 2003 has been prepared from the Companys audited
consolidated financial statements. Certain information and footnote disclosures normally included in the annual
financial statements have been condensed or omitted. These unaudited condensed
consolidated financial statements should be read in conjunction with our
audited consolidated financial statements included in the Companys Annual
Report on Form 10-K for the year ended December 31, 2003. The results of
operations for the three and six months ended June 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 plan based on the fair value at the grant dates for awards under
those plans, consistent with the method encouraged by FAS 123, the Companys
basic and diluted net income per share would have been adjusted to the pro
forma amounts indicated below: Three
    
    Three
    
    Six
    
    SixMonths
    
    Months
    
    Months
    
    MonthsEnded
    
    Ended
    
    Ended
    
    Ended(Dollars in thousands, except per share data)
    
    6/30/04
    
    6/30/03
    
    6/30/04
    
    6/30/03As reported net income  stock-based
employee compensation determined using the
intrinsic value method
    
    $
    12,822
    
    
    $
    14,559
    
    
    $
    26,008
    
    
    $
    27,533Add: Stock-based employee compensation cost, net
of tax, included in net income as reported
    
    $
    1,544
    
    
    $
    727
    
    
    $
    2,846
    
    
    $
    1,388Less: Pro-forma stock-based employee
compensation cost, net of tax, determined under
the fair value method
    
    $
    (7,110
    )
    
    $
    (7,847
    )
    
    $
    (13,963
    )
    
    $
    (15,973
    )Pro-forma net income  stock-based
employee compensation determined under the fair
value method
    
    $
    7,256
    
    
    $
    7,439
    
    
    $
    14,891
    
    
    $
    12,948Basic net income per shareAs reported
    
    $
    0.13
    
    
    $
    0.16
    
    
    $
    0.27
    
    
    $
    0.29Pro forma
    
    
    0.08
    
    
    
    0.08
    
    
    
    0.15
    
    
    
    0.14Diluted net income per shareAs reported
    
    $
    0.13
    
    
    $
    0.15
    
    
    $
    0.26
    
    
    $
    0.28Pro forma
    
    
    0.07
    
    
    
    0.08
    
    
    
    0.15
    
    
    
    0.14
 7




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SYBASE, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  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
    
    Six
    
    SixMonths
    
    Months
    
    Months
    
    MonthsEnded
    
    Ended
    
    Ended
    
    Ended6/30/04
    
    6/30/03
    
    6/30/04
    
    6/30/03Expected volatility
    
    
    54.32
    %
    
    
    64.72
    %
    
    
    54.80
    %
    
    
    65.81
    %Risk-free interest rates
    
    
    3.35
    %
    
    
    2.17
    %
    
    
    3.02
    %
    
    
    2.47
    %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 for the period May 1 through June 30, 2004. 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. The amount allocated to in-process
research and development was charged to expense as a non-recurring charge in
the second quarter of 2004 since the in-process research and development had
not yet reached technological feasibility and had no alternative future uses.
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  Six
    
    SixMonths
    
    MonthsEnded
    
    Ended(In thousands, except per share data)
    
    6/30/04
    
    6/30/03Revenue
    
    $
    382,645
    
    
    $
    392,348Net income
    
    $
    20,851
    
    
    $
    24,114Basic net income per share
    
    $
    0.22
    
    
    $
    0.26Diluted net income per share
    
    $
    0.21
    
    
    $
    0.25
 On April 30, 2004, the Company also acquired the intellectual property assets
and certain tangible assets of Dejima, Inc., a private software company
providing mobile access using natural language interface technology, for
approximately $2.0 million 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 iAnywhere Solutions 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
    
    Six
    
    SixMonths
    
    Months
    
    Months
    
    MonthsEnded
    
    Ended
    
    Ended
    
    Ended(In thousands, except per share data)
    
    6/30/04
    
    6/30/03
    
    6/30/04
    
    6/30/03Net income
    
    $
    12,822
    
    
    $
    14,559
    
    
    $
    26,008
    
    
    $
    27,533Basic net income per share
    
    $
    0.13
    
    
    $
    0.16
    
    
    $
    0.27
    
    
    $
    0.29Shares used in computing basic net income per share
    
    
    96,130
    
    
    
    93,787
    
    
    
    96,710
    
    
    
    94,072Diluted net income per share
    
    $
    0.13
    
    
    $
    0.15
    
    
    $
    0.26
    
    
    $
    0.28Shares used in computing basic net income per share
    
    
    96,130
    
    
    
    93,787
    
    
    
    96,710
    
    
    
    94,072Dilutive effect of stock options and restricted stock
    
    
    2,482
    
    
    
    2,645
    
    
    
    3,116
    
    
    
    2,786Shares used in computing diluted net income per share
    
    
    98,612
    
    
    
    96,432
    
    
    
    99,826
    
    
    
    96,858
 5. Comprehensive Income. The following table sets forth the calculation of
comprehensive income for all periods presented: Three
    
    Three
    
    Six
    
    SixMonths
    
    Months
    
    Months
    
    MonthsEnded
    
    Ended
    
    Ended
    
    Ended(In thousands)
    
    6/30/04
    
    6/30/03
    
    6/30/04
    
    6/30/03Net income
    
    $
    12,822
    
    
    $
    14,559
    
    
    $
    26,008
    
    
    $
    27,533Foreign currency translation gains/(losses)
    
    
    (4,622
    )
    
    
    11,240
    
    
    
    (6,944
    )
    
    
    17,730Unrealized gains/(losses) on marketable securities
    
    
    (1,028
    
    
    
    16
    
    
    
    (830
    )
    
    
    (102
    )Comprehensive income
    
    $
    7,172
    
    
    $
    25,815
    
    
    $
    18,234
    
    
    $
    45,161
 9




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SYBASE, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  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 focused on one of three key market segments:
Infrastructure Platform Group (IPG), which principally focuses on enterprise
class database servers, integration and development products; iAnywhere
Solutions, Inc. (iAS), which provides mobile database and mobile enterprise
solutions; and Financial Fusion, Inc. (FFI), which delivers integrated banking,
payment and trade messaging solutions to large financial institutions. The
Company discloses iAS, FFI, IPG as reportable segments in accordance with
Statement of Financial Accounting Standards No. 131, Disclosures about
Segments of an Enterprise and Related Information. Sybases chief operating decision maker (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 2003 restructuring activities
to each reportable segment. Prior to 2003, the Company did not track its
restructuring activities by segment and it is impracticable to now do so with
respect to these prior activities. Accordingly, restructuring related expenses
and reversals associated with restructuring activities undertaken before 2003
are not included in segment level operating results but instead are included in
the total for unallocated cost savings.SYBASE, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  A summary of the segment financial information reported to the CODM for the
three months ended June 30, 2004 is presented below: 10




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##### Table of Contents



Consolidated(In thousands)
    
    IPG
    
    iAS
    
    FFI
    
    Elimination
    
    TotalRevenues:License feesInfrastructure
    
    $
    38,742
    
    
    $
    6
    
    
    $
    
    
    
    
    
    
    
    $
    38,748Mobile and Embedded
    
    
    7,947
    
    
    
    11,330
    
    
    
    
    
    
    
    
    
    
    
    19,277E-Finance
    
    
    410
    
    
    
    
    
    
    
    1,992
    
    
    
    
    
    
    
    2,402Subtotal license fees
    
    
    47,099
    
    
    
    11,336
    
    
    
    1,992
    
    
    
    
    
    
    
    60,427Intersegment license revenues
    
    
    21
    
    
    
    6,748
    
    
    
    342
    
    
    
    (7,111
    )
    
    
    Total license fees
    
    
    47,120
    
    
    
    18,084
    
    
    
    2,334
    
    
    
    (7,111
    )
    
    
    60,427Services
    
    
    119,382
    
    
    
    4,258
    
    
    
    3,963
    
    
    
    
    
    
    
    127,603Intersegment service revenues
    
    
    11
    
    
    
    6,656
    
    
    
    1,096
    
    
    
    (7,763
    )
    
    
    Total services
    
    
    119,393
    
    
    
    10,914
    
    
    
    5,059
    
    
    
    (7,763
    )
    
    
    127,603Total revenues
    
    
    166,513
    
    
    
    28,998
    
    
    
    7,393
    
    
    
    (14,874
    )
    
    
    188,030Total allocated costs and expenses before cost of restructure and
amortization of customer lists, covenant not to compete, and purchased
technology
    
    
    150,174
    
    
    
    25,814
    
    
    
    7,217
    
    
    
    (14,874
    )
    
    
    168,331Operating income before cost of restructure and amortization of
customer lists, covenant not to compete, and purchased technology
    
    
    16,339
    
    
    
    3,184
    
    
    
    176
    
    
    
    
    
    
    
    19,699Amortization of other purchased intangibles
    
    
    
    
    
    
    785
    
    
    
    500
    
    
    
    
    
    
    
    1,285Amortization of purchased technology
    
    
    2,920
    
    
    
    836
    
    
    
    811
    
    
    
    
    
    
    
    4,567Operating income (loss) before unallocated costs and cost of restructure
    
    
    13,419
    
    
    
    1,563
    
    
    
    (1,135
    )
    
    
    
    
    
    
    13,847Cost of restructure  2003 restructuring activities
    
    
    429
    
    
    
    (2
    )
    
    
    
    
    
    
    
    
    
    
    427Operating income (loss) before unallocated costs
    
    $
    12,990
    
    
    $
    1,565
    
    
    $
    (1,135
    )
    
    
    
    
    
    
    13,420Unallocated cost savings
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,534
    )Operating income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15,954Interest income, interest expense and other, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,387Income before income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    18,341
 11




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SYBASE, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  A summary of the segment financial information reported to the CODM for the
three months ended June 30, 2003 is presented below: Consolidated(In thousands)
    
    IPG
    
    iAS
    
    FFI
    
    Elimination
    
    TotalRevenues:License feesInfrastructure
    
    $
    48,235
    
    
    $
    9
    
    
    $
    
    
    
    
    
    
    
    $
    48,244Mobile and Embedded
    
    
    6,099
    
    
    
    8,268
    
    
    
    
    
    
    
    
    
    
    
    14,367E-Finance
    
    
    792
    
    
    
    
    
    
    
    494
    
    
    
    
    
    
    
    1,286Subtotal license fees
    
    
    55,126
    
    
    
    8,277
    
    
    
    494
    
    
    
    
    
    
    
    63,897Intersegment license revenues
    
    
    22
    
    
    
    5,087
    
    
    
    660
    
    
    
    (5,769
    )
    
    
    Total license fees
    
    
    55,148
    
    
    
    13,364
    
    
    
    1,154
    
    
    
    (5,769
    )
    
    
    63,897Services
    
    
    123,264
    
    
    
    2,681
    
    
    
    2,190
    
    
    
    
    
    
    
    128,135Intersegment service revenues
    
    
    
    
    
    
    6,688
    
    
    
    1,180
    
    
    
    (7,868
    )
    
    
    Total services
    
    
    123,264
    
    
    
    9,369
    
    
    
    3,370
    
    
    
    (7,868
    )
    
    
    128,135Total revenues
    
    
    178,412
    
    
    
    22,733
    
    
    
    4,524
    
    
    
    (13,637
    )
    
    
    192,032Total allocated costs and expenses before cost of restructure and
amortization of customer lists and purchased technology
    
    
    154,740
    
    
    
    18,552
    
    
    
    5,984
    
    
    
    (13,637
    )
    
    
    165,639Operating income (loss) before cost of restructure and amortization of
customer lists and purchased technology
    
    
    23,672
    
    
    
    4,181
    
    
    
    (1,460
    )
    
    
    
    
    
    
    26,393Amortization of other purchased intangibles
    
    
    
    
    
    
    
    
    
    
    500
    
    
    
    
    
    
    
    500Amortization of purchased technology
    
    
    2,920
    
    
    
    100
    
    
    
    811
    
    
    
    
    
    
    
    3,831Operating income (loss) before unallocated costs and cost of restructure
    
    
    20,752
    
    
    
    4,081
    
    
    
    (2,771
    )
    
    
    
    
    
    
    22,062Cost of restructure  2003 restructuring activity
    
    
    8,291
    
    
    
    341
    
    
    
    13
    
    
    
    
    
    
    
    8,645Operating income (loss) before unallocated costs
    
    $
    12,461
    
    
    $
    3,740
    
    
    $
    (2,784
    )
    
    
    
    
    
    
    13,417Unallocated cost savings
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,714
    )Operating income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    18,131Interest income, interest expense and other, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,524Income before income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    21,655
 12




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##### Table of Contents



SYBASE, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  A summary of the segment financial information reported to the CODM for the six
months ended June 30, 2004 is presented below: Consolidated(In thousands)
    
    IPG
    
    iAS
    
    FFI
    
    Elimination
    
    TotalRevenues:License feesInfrastructure
    
    $
    82,122
    
    
    $
    46
    
    
    $
    
    
    
    
    
    
    
    $
    82,168Mobile and Embedded
    
    
    13,000
    
    
    
    19,669
    
    
    
    
    
    
    
    
    
    
    
    32,669E-Finance
    
    
    512
    
    
    
    
    
    
    
    2,983
    
    
    
    
    
    
    
    3,495Subtotal license fees
    
    
    95,634
    
    
    
    19,715
    
    
    
    2,983
    
    
    
    
    
    
    
    118,332Intersegment license revenues
    
    
    74
    
    
    
    10,971
    
    
    
    446
    
    
    
    (11,491
    )
    
    
    Total license fees
    
    
    95,708
    
    
    
    30,686
    
    
    
    3,429
    
    
    
    (11,491
    )
    
    
    118,332Services
    
    
    238,451
    
    
    
    6,885
    
    
    
    7,521
    
    
    
    
    
    
    
    252,857Intersegment service revenues
    
    
    11
    
    
    
    13,189
    
    
    
    2,331
    
    
    
    (15,531
    )
    
    
    Total services
    
    
    238,462
    
    
    
    20,074
    
    
    
    9,852
    
    
    
    (15,531
    )
    
    
    252,857Total revenues
    
    
    334,170
    
    
    
    50,760
    
    
    
    13,281
    
    
    
    (27,022
    )
    
    
    371,189Total allocated costs and expenses before cost of restructure and
amortization of customer lists, covenant not to compete, and purchased
technology
    
    
    296,407
    
    
    
    46,199
    
    
    
    13,910
    
    
    
    (27,022
    )
    
    
    329,494Operating income (loss) before cost of restructure and amortization of
customer lists, covenant not to compete, and purchased technology
    
    
    37,763
    
    
    
    4,561
    
    
    
    (629
    )
    
    
    
    
    
    
    41,695Amortization of other purchased intangibles
    
    
    
    
    
    
    785
    
    
    
    1,000
    
    
    
    
    
    
    
    1,785Amortization of purchased technology
    
    
    5,840
    
    
    
    936
    
    
    
    1,622
    
    
    
    
    
    
    
    8,398Operating income (loss) before unallocated costs and cost of restructure
    
    
    31,923
    
    
    
    2,840
    
    
    
    (3,251
    )
    
    
    
    
    
    
    31,512Cost of restructure  2003 restructuring activity
    
    
    555
    
    
    
    (2
    )
    
    
    
    
    
    
    
    
    
    
    553Operating income (loss) before unallocated costs
    
    $
    31,368
    
    
    $
    2,842
    
    
    $
    (3,251
    )
    
    
    
    
    
    
    30,959Unallocated cost savings
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,470
    )Operating income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    33,429Interest income, interest expense and other, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,977Income before income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    39,406
 13




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##### Table of Contents



SYBASE, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  A summary of the segment financial information reported to the CODM for the six
months ended June 30, 2003 is presented below: Consolidated(In thousands)
    
    IPG
    
    iAS
    
    FFI
    
    Elimination
    
    TotalRevenues:License feesInfrastructure
    
    $
    96,595
    
    
    $
    732
    
    
    $
    
    
    
    
    
    
    
    $
    97,327Mobile and Embedded
    
    
    10,925
    
    
    
    14,943
    
    
    
    
    
    
    
    
    
    
    
    25,868E-Finance
    
    
    941
    
    
    
    
    
    
    
    635
    
    
    
    
    
    
    
    1,576Subtotal license fees
    
    
    108,461
    
    
    
    15,675
    
    
    
    635
    
    
    
    
    
    
    
    124,771Intersegment license revenues
    
    
    43
    
    
    
    9,096
    
    
    
    802
    
    
    
    (9,941
    )
    
    
    Total license fees
    
    
    108,504
    
    
    
    24,771
    
    
    
    1,437
    
    
    
    (9,941
    )
    
    
    124,771Services
    
    
    239,667
    
    
    
    4,718
    
    
    
    4,423
    
    
    
    
    
    
    
    248,808Intersegment service revenues
    
    
    3
    
    
    
    12,666
    
    
    
    2,284
    
    
    
    (14,953
    )
    
    
    Total services
    
    
    239,670
    
    
    
    17,384
    
    
    
    6,707
    
    
    
    (14,953
    )
    
    
    248,808Total revenues
    
    
    348,174
    
    
    
    42,155
    
    
    
    8,144
    
    
    
    (24,894
    )
    
    
    373,579Total allocated costs and expenses before cost of
restructure and amortization of customer lists and
purchased technology
    
    
    307,240
    
    
    
    34,515
    
    
    
    11,531
    
    
    
    (24,894
    )
    
    
    328,392Operating income (loss) before cost of restructure and
amortization of customer lists and purchased technology
    
    
    40,934
    
    
    
    7,640
    
    
    
    (3,387
    )
    
    
    
    
    
    
    45,187Amortization of other purchased intangibles
    
    
    
    
    
    
    
    
    
    
    1,000
    
    
    
    
    
    
    
    1,000Amortization of purchased technology
    
    
    5,840
    
    
    
    133
    
    
    
    1,622
    
    
    
    
    
    
    
    7,595Operating income (loss) before unallocated costs and cost
of restructure
    
    
    35,094
    
    
    
    7,507
    
    
    
    (6,009
    )
    
    
    
    
    
    
    36,592Cost of restructure  2003 restructuring activity
    
    
    8,291
    
    
    
    341
    
    
    
    13
    
    
    
    
    
    
    
    8,645Operating income (loss) before unallocated costs
    
    $
    26,803
    
    
    $
    7,166
    
    
    $
    (6,022
    )
    
    
    
    
    
    
    27,947Unallocated cost savings
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7,105
    )Operating income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    35,052Interest income, interest expense and other, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,967Income before income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    41,019
 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
    
    
    
    
    
    
    
    
    
    
    72,440
    
    
    
    72,440Goodwill recorded on Dejima acquisition
    
    
    
    
    
    
    
    
    
    
    837
    
    
    
    837Foreign currency translation adjustments
    
    
    (163
    )
    
    
    
    
    
    
    
    
    
    
    (163
    )Balance at June 30, 2004
    
    $
    103,097
    
    
    $
    29,281
    
    
    $
    81,611
    
    
    $
    213,989
 14




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##### Table of Contents



SYBASE, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  The following table reflects intangible assets as of June 30, 2004 and December
31, 2003: Gross
    
    
    
    
    
    
    
    
    
    Gross
    
    
    
    
    
    NetCarrying
    
    Accumulated
    
    Net
    
    Carrying
    
    Accumulated
    
    CarryingAmount
    
    Amortization
    
    Carrying Amount
    
    Amount
    
    Amortization
    
    Amount(In thousands)
    
    6/30/04
    
    6/30/04
    
    6/30/04
    
    12/31/03
    
    12/31/03
    
    12/31/03Purchased technology
    
    $
    103,900
    
    
    $
    (64,044
    )
    
    $
    39,856
    
    
    $
    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
    
    
    
    (311
    )
    
    
    2,489
    
    
    
    
    
    
    
    
    
    
    
    Customer lists
    
    
    39,900
    
    
    
    (9,363
    )
    
    
    30,537
    
    
    
    20,000
    
    
    
    (7,889
    )
    
    
    12,111Totals
    
    $
    153,700
    
    
    $
    (73,718
    )
    
    $
    79,982
    
    
    $
    102,200
    
    
    $
    (63,485
    )
    
    $
    38,715
 The amortization expense on these intangible assets for the three and six
months ended June 30, 2004 was $5.9 million and $10.2 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 AvantGo and XcelleNet tradenames were assigned an indefinite life and will
not be amortized but instead tested for impairment in the same manner as
goodwill. 9. Litigation. Sybase is a party to various legal disputes and proceedings
arising in the ordinary course of business. In the opinion of management,
resolution of those matters is not expected to have a material adverse effect
on our results of operations or consolidated financial position. However,
depending on the amount and timing of such resolution, an unfavorable
resolution of some or all of these matters could materially affect our future
results of operations or cash flows in a particular period. 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 six months of 2004, the
Company repurchased approximately 4.3 million shares at a cost of approximately
$84.4 million. From the programs inception through June 30, 2004, the Company
has used an aggregate total of $465.2 million under the stock repurchase
program (of the total $600 million authorized) to repurchase an aggregate total
of 29.1 million shares. 11. Restructuring. The Company has initiated restructuring activities in 2001, 2002 and 2003, and
assumed certain restructuring program liabilities of AvantGo, Inc. when it
acquired that company in 2003. For descriptions of each restructuring plan, see
Note Thirteen to Consolidated Financial Statements, Part II, Item 8 of the
Companys Annual Report on Form 10-K for the year ended December 31, 2003,
which information is incorporated here by reference. Changes in the
restructuring liabilities under each plan during the quarter ended June 30,
2004 are described below. 2003 Restructuring Activities The following table summarizes the activity associated with the balance of the
accrued restructuring charges related to the 2003 restructuring plan through
June 30, 2004: 15




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SYBASE, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  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
    
    
    $
    0.4
 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
June 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
    
    
    $
    11.5
 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 June 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
    
    $
    10.6
 16




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SYBASE, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  AvantGo Restructuring Reserves In connection with the acquisition of AvantGo, Inc., the Company assumed
certain liabilities associated with AvantGos 2001 and 2002 restructuring
programs. These accrued restructure liabilities primarily related to excess
space at AvantGos Hayward, California and Chicago, 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
    
    $
    2.5
 17




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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 primarily derives our revenues
from sales of enterprise and mobile software solutions to business and
government users. Our value proposition to our customers involves enabling the
Unwired Enterprise. The first step toward achieving the Unwired Enterprise is managing information
across the enterprise. Our proven and extensive track record in information
management, information access, application development and integration
solutions allows our customers to extract more value from their information
technology (IT) investments. Our solutions unlock, integrate, and seamlessly
deliver just about any type of data, whether in a database, a transaction, or
an application. The second step to enabling the Unwired Enterprise is to allow for the access
and use of information assets when and where they are needed. Our mobility
solutions allow information to flow freely and to be delivered to the point of
action, 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. During the quarter we strengthened our Unwired Enterprise offerings through the
acquisition of XcelleNet, Inc. (XcelleNet) a privately held provider of
frontline device management software for approximately
$93 million and substantially all the assets of Dejima, Inc. (Dejima)
a private software company providing mobile
access using natural language interface technology for approximately $2
million. We have integrated XcelleNet and Dejima into our iAS segment and
believe these acquisitions will generate further growth opportunities within
this segment, and for our Unwired Enterprise initiative.  
    
    Our Results We reported total revenues of $188.0 million for the second quarter of fiscal
2004, a slight decrease from total revenues of $192.0 million for the same
period last year. For the first six months of fiscal 2004 total revenues were
$371.2 million compared to $373.6 million for the same six month period in
2003. The decrease in revenue for the three and six month periods is primarily
attributable to a decline in license revenues in our IPG segment, partially
offset by increased license revenues within our iAS and FFI segments. The
license revenue of the IPG segment, which decreased by approximately 15 percent
and 12 percent for the three and six month periods ended June 30, 2004 compared
to the same periods in 2003, was especially impacted by a variety of factors
that pushed larger transactions out and lengthened the sales cycle. Some of
these included internal sales execution issues associated with solution selling
that we are now addressing, customers making smaller purchases and taking
longer to make purchasing decisions, and customers exploring different pricing
models such as subscription pricing. The license revenues of the iAS segment increased by approximately 35 percent
and 24 percent for the three and six month periods ended June 30, 2004 compared
to the same periods in 2003. Without consideration of Xcellenet, which was
purchased on April 30, 2004, the growth rates for the three and six month
periods would have been 16 percent and 13 percent, respectively. We believe
the increase in iAS license revenues signals increasing momentum for our
Unwired Enterprise initiative. The license revenues for the FFI segment increased by approximately 92 percent
and 143 percent for the three and six month periods ended June 30, 2004
compared to the same periods in 2003. The increases were the result of several
significant transactions with financial institutions that occurred during the
quarter in North America. Our operating margin was 8.5 percent for the second quarter of 2004, and 9.0
percent for the first six months of 2004, compared to 9.4 percent for the same
two periods in 2003. The decrease in our operating margin was largely
attributable to the inclusion of losses 18




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##### Table of Contents



from the operations of XcelleNet and Dejima in the second quarter of 2004.
These acquisitions had an adverse impact of 1.4 percent and 0.7 percent on the
operating margins for our three and six month results, respectively. For the six months ended June 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 2003. Our overall financial position remains strong. We generated net cash from
operating activities of $83.0 million in the first six months of 2004, and had
$451.5 million in cash, cash equivalents and cash investments at June 30, 2004.
We had no outstanding debt, with our long-term liabilities comprised solely of
certain lease obligations. For a discussion of factors that may impact our business, see Future Operating
Results, below.  
    
    Business Trends The market for new sales of enterprise infrastructure software continues to be
challenging due to various factors, including a maturing enterprise
infrastructure software market, changing patterns in information technology
spending, and mixed signs of U.S. and global economic recovery. As was the case in 2003, the majority of our license fees revenues during 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 some notable changes to 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 are purchasing products and services based
more on present need and less on fulfilling anticipated future needs. Overall,
mixed signs of a strong U.S. and global economic recovery make it difficult to
project whether the overall market for enterprise infrastructure software will
materially improve. Moving forward, we will continue to manage our operating expenses as we
aggressively pursue our 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. 19




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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 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. 20




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
    
    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 7 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 June 30, 2004, our goodwill balance totaled
$212.7 million. We performed the annual impairment analysis as of December 31, 2003 for each of
our reporting units. This analysis indicated that the estimated fair value of
each reporting unit exceeded its carrying value. Therefore, we were not
required to recognize an impairment loss in 2003. However, changes in our internal business structure, changes in our future
revenue and expense forecasts, and certain other factors that directly impact
the valuation of our reporting units could result in a future goodwill
impairment charge. A goodwill impairment charge is based on the value of a
reporting unit at the testing date. Accordingly, reporting units that
previously reported an impairment charge (as was the case with FFI in 2002) are
particularly prone to additional impairment charges if future revenue and
expense forecasts or market conditions worsen after the testing date. This is
because any subsequent reduction of fair value after a testing date would have
a strong likelihood of triggering an additional impairment charge. We continue to review our other intangible assets (e.g., purchased technology,
trade names and customer lists) for indications of impairment whenever events
or changes in circumstances indicate the carrying amount of any such asset may
not be recoverable. For these purposes, recoverability of these assets is
measured by comparing their carrying values to the future undiscounted cash
flows the assets are expected to generate. This methodology requires us to
estimate future cash flows associated with certain assets or groups of assets.
Changes in these estimates could result in impairment losses associated with
other intangible assets.  
    
    Allowance for Doubtful Accounts We maintain an allowance for doubtful accounts to reflect the expected
non-collection of accounts receivable based on past collection history and
specific risks identified in our portfolio of receivables. Additional
allowances might be required if deteriorating economic conditions or other
factors affect our customers ability to make timely payments.  
    
    Capitalized Software We capitalize certain software development costs after a product becomes
technologically feasible and before its general release to customers.
Subjective judgment is required in determining when a product becomes
technologically feasible. Capitalized development costs are then amortized
over the products estimated life beginning upon general release of the
product. Periodically, we compare a products unamortized capitalized cost to
the products net realizable value. To the extent unamortized capitalized cost
exceeds net realizable value based on the products estimated future gross
revenues (reduced by the estimated future costs of completing and disposing of
the product) the excess is written off. This analysis requires us to estimate
future gross revenues associated with certain products and the future costs of
completing and disposing of certain products. Changes in these estimates could
result in write-offs of capitalized software costs.  
    
    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 21




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expected to find suitable sublease tenants, the actual costs could exceed our
estimates. See Note 11 to Condensed Consolidated Financial Statements, Part I,
Item 1, incorporated here by reference.  
    
    Income Taxes We use the asset and liability approach to account for income taxes. This
methodology recognizes deferred tax assets and liabilities for the expected
future tax consequences of temporary differences between the carrying amounts
and the tax bases of assets and liabilities. We then record a valuation
allowance to reduce deferred tax assets to an amount that likely will be
realized. We consider future taxable income and ongoing prudent and feasible
tax planning strategies in assessing the need for the valuation allowance. If
we determine during any period that we could realize a larger net deferred tax
asset than the recorded amount, we would adjust the deferred tax asset to
increase income for the period. Conversely, if we determine that we would be
unable to realize a portion of our recorded deferred tax asset, we would adjust
the deferred tax asset to record a charge to income for the period. Subjective
judgment is required in assessing the future tax consequences of events that
have been recognized in the Companys financial statements or tax returns.
Fluctuations in the actual outcome of these future tax consequences could
materially impact our financial position or results of operations.  
    
    Contingencies and Liabilities We are involved from time to time in various proceedings, lawsuits and claims
involving our customers, products, intellectual property, stockholders and
employees, among other things. When we reasonably determine that a liability
has been or will be incurred, and can reasonably estimate the range of
potential losses in these matters, we are required to maintain adequate
reserves to provide for these loss contingencies. Even if we are not able to
estimate the amount of potential loss in these matters, if a matter is
considered potentially material, we are required to disclose that there is a
reasonable possibility that a loss has been incurred. Our financial position or
results of operations could be materially and adversely affected if we have
underestimated the scope of potential liability in any matter or have failed to
maintain adequate reserves to cover the actual loss contingency. Results of Operations Revenues
(Dollars in millions) Three
    
    Three
    
    
    
    
    
    Six
    
    SixMonths
    
    Months
    
    
    
    
    
    Months
    
    MonthsEnded
    
    Ended
    
    Percent
    
    Ended
    
    Ended
    
    Percent6/30/04
    
    6/30/03
    
    Change
    
    6/30/04
    
    6/30/03
    
    ChangeLicense fees by segment:IPG
    
    $
    47.1
    
    
    $
    55.1
    
    
    
    (15
    %)
    
    $
    95.7
    
    
    $
    108.5
    
    
    
    (12
    %)IAS
    
    
    18.1
    
    
    
    13.4
    
    
    
    35
    %
    
    
    30.7
    
    
    
    24.8
    
    
    
    24
    %FFI
    
    
    2.3
    
    
    
    1.2
    
    
    
    92
    %
    
    
    3.4
    
    
    
    1.4
    
    
    
    143
    %Eliminations
    
    
    (7.1
    )
    
    
    (5.8
    )
    
    
    22
    %
    
    
    (11.5
    )
    
    
    (9.9
    )
    
    
    16
    %Total license fees
    
    $
    60.4
    
    
    $
    63.9
    
    
    
    (5
    %)
    
    $
    118.3
    
    
    $
    124.8
    
    
    
    (5
    %)Percentage of total revenues
    
    
    32
    %
    
    
    33
    %
    
    
    
    
    
    
    32
    %
    
    
    33
    %Services by segment:IPG
    
    $
    119.4
    
    
    $
    123.3
    
    
    
    (3
    %)
    
    $
    238.5
    
    
    $
    239.7
    
    
    
    (1
    %)IAS
    
    
    10.9
    
    
    
    9.3
    
    
    
    17
    %
    
    
    20.1
    
    
    
    17.4
    
    
    
    16
    %FFI
    
    
    5.1
    
    
    
    3.4
    
    
    
    50
    %
    
    
    9.8
    
    
    
    6.7
    
    
    
    46
    %Eliminations
    
    
    (7.8
    )
    
    
    (7.9
    )
    
    
    (1
    %)
    
    
    (15.5
    )
    
    
    (15.0
    )
    
    
    3
    %Total Services
    
    $
    127.6
    
    
    $
    128.1
    
    
    
    *
    
    
    $
    252.9
    
    
    $
    248.8
    
    
    
    2
    %Percentage of total revenues
    
    
    68
    %
    
    
    67
    %
    
    
    
    
    
    
    68
    %
    
    
    67
    %Total revenues
    
    $
    188.0
    
    
    $
    192.0
    
    
    
    (2
    %)
    
    $
    371.2
    
    
    $
    373.6
    
    
    
    (1
    %)
   *
    
    Not meaningful Total license fees decreased 5 percent for the three and six months ended June
30, 2004 compared to the same periods last year. The decrease in license fees
revenues during the quarter and year to date is primarily attributable to a
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 during Q2 and the first six months of 2004 was mostly attributable to
a decline in license revenues associated to our Adaptive Server Enterprise
product. Our views regarding the overall reasons for the decline in IPG
license revenues are discussed above in the 22




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Overview section. Without consideration of Xcellenet, which was purchased on April 30, 2004, the
growth rates for the iAS segment during the three and six month periods would
have been 16 percent and 13 percent, respectively. The increase in iAS license
revenues (excluding Xcellenet) during Q2 and the first six months of 2004 was
primarily attributable to increase sales of the SQL Anywhere product by the iAS
direct sales force. The increase in FFI license revenues for the three and six
months was primarily attributable to increased sales of the segments core
banking application product 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) slightly declined for the three months ended June 30,
2004, and increased by 2 percent for the six months ended June 30, 2004 as
compared to the same periods in 2003.Approximately 77 percent of services
revenues for Q2 and the six month period ended June 30, 2004 related to
technical support revenues. These percentages are consistent with the
percentages for the comparable periods in 2003. Overall, technical support
revenue was flat for Q2, and up slightly for the six month period ended June
30, 2004. The deferred revenue related to technical support contracts at the
end of Q2 was relatively unchanged from the deferred revenue related to such
contracts at June 30, 2003. Other services revenues were down slightly for Q2, and up slightly for the six
month period ended June 30, 2004 when compared to the same periods of 2003.
During both the three and six month periods, the revenues from professional
services were up slightly (largely attributable to the FFI segment) while the
revenues from education services declined. The slight decrease in service revenues for the three months ended June 30,
2004 was primarily due to a 3 percent decline in overall services revenues in
the IPG segment (primarily technical support revenues), partially offset by an
increase in technical support revenues in the iAS segment and an increase in
North America professional services revenues in the FFI segment. The 2 percent
increase in services revenues for the six months ended June 30, 2004 was
primarily due to a rise in technical support revenues in the IPG and iAS
segments resulting from an increase in the value of licensed products subject
to technical support services agreements in the period, and an increase in
professional services revenues in the FFI segment, partially offset by a
decline in education and professional services revenues in the IPG segment.
XcelleNet contributed $1.5 million to the iAS segments service revenues in Q2. Geographical Revenues
(Dollars in millions) Three
    
    Three
    
    
    
    
    
    Six
    
    SixMonths
    
    Months
    
    
    
    
    
    Months
    
    MonthsEnded
    
    Ended
    
    Percent
    
    Ended
    
    Ended
    
    Percent6/30/04
    
    6/30/03
    
    Change
    
    6/30/04
    
    6/30/03
    
    ChangeNorth American
    
    $
    110.9
    
    
    $
    111.1
    
    
    
    *
    
    
    $
    216.5
    
    
    $
    217.1
    
    
    
    *Percentage of total revenues
    
    
    59
    %
    
    
    58
    %
    
    
    
    
    
    
    58
    %
    
    
    58
    %International EMEA (Europe, Middle East and Africa)
    
    $
    49.8
    
    
    $
    54.8
    
    
    
    (9
    %)
    
    $
    100.5
    
    
    $
    105.7
    
    
    
    (5
    %)Percentage of total revenues
    
    
    26
    %
    
    
    28
    %
    
    
    
    
    
    
    27
    %
    
    
    28
    %Intercontinental (Asia Pacific and Latin America)
    
    $
    27.3
    
    
    $
    26.1
    
    
    
    5
    %
    
    $
    54.2
    
    
    $
    50.8
    
    
    
    7
    %Percentage of total revenues
    
    
    15
    %
    
    
    14
    %
    
    
    
    
    
    
    15
    %
    
    
    14
    %Total International
    
    $
    77.1
    
    
    $
    80.9
    
    
    
    (5
    %)
    
    $
    154.7
    
    
    $
    156.5
    
    
    
    (1
    %)Percentage of total revenues
    
    
    41
    %
    
    
    42
    %
    
    
    
    
    
    
    42
    %
    
    
    42
    %Total revenues
    
    $
    188.0
    
    
    $
    192.0
    
    
    
    (2
    %)
    
    $
    371.2
    
    
    $
    373.6
    
    
    
    (1
    %)
   *
    
    Not meaningful North American revenues (United States, Canada and Mexico) remained relatively
flat for the three and six months ended June 30, 2004 as 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 and FFI segments and an increase in professional services revenues. 23




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##### Table of Contents



EMEA (Europe, Middle East and Africa) revenues for the three and six months
ended June 30, 2004 decreased 9 percent and 5 percent, respectively, as
compared to the same periods in 2003. There was a drop in license fees revenues
from enterprise database products included in the IPG segment and a decline in
professional services revenues, partially offset by an increase in license fees
revenues from products included in the iAS segment and an increase in technical
support revenues. Decreased revenues in Germany, the UK and Spain during Q2
contributed most to the overall decrease. The increase in Intercontinental
(Asia Pacific and Latin America) revenues for the three and six months ended
June 30, 2004 was primarily attributable to an increase in license fees
revenues from enterprise database products. The results of our operations in
China, Australia and India contributed most significantly to the increased
revenue, offsetting lower revenues in Japan. The decrease in total international revenues was largely due to a decline in
license fees revenues from enterprise database products and a decrease in
professional services revenues, partially offset by an increase in license fees
revenues from products included in the iAS segment and an increase in technical
support revenues. International revenues comprised 41 percent and 42 percent of
total revenues for the three and six months ended June 30, 2004, respectively,
and 42 percent of total revenues for the same periods in 2003. In EMEA and the Intercontinental region, most revenues and expenses are
denominated in local currencies. During the three months ended June 30, 2004,
foreign currency exchange rate changes from the same period last year resulted
in a 2 percent increase in our revenues and a 2 percent increase in our
operating expenses. During the six months ended June 30, 2004, foreign currency
exchange rate changes from the same period last year resulted in a 4 percent
increase in our revenues and a 3 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. 24




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##### Table of Contents



Costs and Expenses
(Dollars in millions) Three
    
    Three
    
    
    
    
    
    Six
    
    SixMonths
    
    Months
    
    
    
    
    
    Months
    
    MonthsEnded
    
    Ended
    
    Percent
    
    Ended
    
    Ended
    
    Percent6/30/04
    
    6/30/03
    
    Change
    
    6/30/04
    
    6/30/03
    
    ChangeCost of license fees
    
    $
    15.6
    
    
    $
    14.6
    
    
    
    7
    %
    
    $
    29.1
    
    
    $
    28.5
    
    
    
    2
    %Percentage of license fees revenues
    
    
    26
    %
    
    
    23
    %
    
    
    
    
    
    
    25
    %
    
    
    23
    %Cost of services
    
    $
    41.5
    
    
    $
    40.6
    
    
    
    2
    %
    
    $
    83.0
    
    
    $
    79.9
    
    
    
    4
    %Percentage of services revenues
    
    
    32
    %
    
    
    32
    %
    
    
    
    
    
    
    33
    %
    
    
    32
    %Sales and marketing
    
    $
    62.1
    
    
    $
    59.7
    
    
    
    4
    %
    
    $
    120.2
    
    
    $
    118.2
    
    
    
    2
    %Percentage of total revenues
    
    
    33
    %
    
    
    31
    %
    
    
    
    
    
    
    32
    %
    
    
    32
    %Product development and engineering
    
    $
    29.1
    
    
    $
    29.3
    
    
    
    (1
    %)
    
    $
    59.8
    
    
    $
    59.3
    
    
    
    1
    %Percentage of total revenues
    
    
    15
    %
    
    
    15
    %
    
    
    
    
    
    
    16
    %
    
    
    16
    %General and administrative
    
    $
    21.3
    
    
    $
    20.5
    
    
    
    4
    %
    
    $
    41.1
    
    
    $
    42.6
    
    
    
    (4
    %)Percentage of total revenues
    
    
    11
    %
    
    
    11
    %
    
    
    
    
    
    
    11
    %
    
    
    11
    %Amortization of other purchased intangibles
    
    $
    1.3
    
    
    $
    0.5
    
    
    
    160
    %
    
    $
    1.8
    
    
    $
    1.0
    
    
    
    80
    %Percentage of total revenues
    
    
    1
    %
    
    
    *
    
    
    
    
    
    
    
    *
    
    
    
    *Stock compensation expense
    
    $
    1.5
    
    
    $
    0.7
    
    
    
    114
    %
    
    $
    2.8
    
    
    $
    1.4
    
    
    
    100
    %Percentage of total revenues
    
    
    1
    %
    
    
    *
    
    
    
    
    
    
    
    1
    %
    
    
    *Cost (Reversal) of restructure
    
    $
    (0.3
    )
    
    $
    8.0
    
    
    
    *
    
    
    $
    (0.1
    )
    
    $
    7.7
    
    
    
    *Percentage of total revenues
    
    
    *
    
    
    
    4
    %
    
    
    
    
    
    
    *
    
    
    
    2
    %
   *
    
    Not meaningful Cost of License Fees.Cost of license fees consists primarily of product costs
(media and documentation), amortization of capitalized software development
costs and purchased technology, and third-party royalty costs. These costs were
$15.6 million and $29.1 million for the for the three and six months ended June
30, 2004, respectively, up from $14.6 million and $28.5 million for the same
periods in 2003. Such costs were 26 percent and 25 percent of license fees
revenues for the three and six months ended June 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 six months ended June 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 XcelleNet acquisition, 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 $16.8 million for the three and six
months ended June 30, 2004, respectively, as compared to $7.3 million and $13.8
million for the same periods in 2003.The increase in amortization of
capitalized software costs for the three and six months ended June 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 acquired was $4.6 million and $8.4 million for the three and six
months ended June 30, 2004, respectively, as compared to $3.8 million and $7.6
million for the same periods in 2003. The increase was attributable to the
amortization of developed technology acquired in our acquisition of Xcellenet. Cost of Services.Cost of services consists primarily of our cost to provide
technical support, education and professional services and, to a lesser degree,
services-related product costs (media and documentation). These costs were
$41.5 million and $83.0 million for the three and six months ended June 30,
2004, respectively, as compared to $40.6 million and $79.9 million for the same
periods in 2003. These costs were 32 percent and 33 percent of services
revenues for the three and six months ended June 30, 2004, respectively, as
compared to 32 percent for the same periods in 2003. The increase in cost of
services in absolute dollars for the three and six months ended June 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 increased to $62.1 million
and $120.2 million for the three and six months ended June 30, 2004,
respectively, as compared to $59.7 million and $118.2 million for same periods
last year. These costs were 33 percent and 32 percent of total revenues for the
three and six months ended June 30, 2004, respectively, as compared to 31
percent and 32 percent for the same periods in 2003. The increase in sales and
marketing expenses in absolute dollars for the three and six months ended June
30, 2004 was primarily due to an increase in spending on third party marketing
programs, including the Sybase Big Apple Classic which occurred during Q2. 25




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##### Table of Contents



Product Development and Engineering.Product development and engineering
expenses (net of capitalized software development costs) decreased 1 percent to
$29.1 million for the three months ended June 30, 2004 as compared to $29.3
million for the same period last year. Product development and engineering
expenses increased 1 percent to $59.8 million for the six months ended June 30,
2004 as compared to $59.3 million for the six months ended June 30, 2003.
These costs were 15 percent and 16 percent of total revenues for the three and
six months ended June 30, 2004 and 2003, respectively. The slight decrease in
product and engineering costs in absolute dollars for the three months ended
June 30, 2004 is primarily due to a decrease in allocated common costs and an
increase in capitalized software development costs, partially offset
by an increase in personnel related expenses caused by a 10
percent increase in product development and engineering headcount attributable
in part to our acquisition of XcelleNet. We allocate various common costs,
primarily certain telecommunications and facilities related expenses, to sales
and marketing, product development and engineering, and general and
administrative expenses. The increase in product development and engineering
costs in absolute dollars for the six months ended June 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, partially offset by an increase in
capitalized software development costs. We capitalized approximately $9.6 million and $17.8 million of software
development costs for the three and six months ended June 30, 2004,
respectively, as compared to $8.5 million and $15.1 million for the same
periods in 2003. For the six months ended June 30, 2004, capitalized software
costs included costs incurred for the development of the Adaptive Server ®
Enterprise 12.5.2 and 15.0, Corporate Banking 2.1.1, IQ 12.6, and PowerBuilder®
10.0. We believe product development and engineering expenditures are essential to
technology and product leadership and expect product development and
engineering expenditures to continue to be significant, both in absolute
dollars and as a percentage of total revenues. General and Administrative.General and administrative expenses, which include
IT, legal, business operations, finance and administrative functions, were
$21.3 million and $41.1 million for the three and six months ended June 30,
2004, respectively, as compared to $20.5 million and $42.6 million for the same
periods in 2003. These costs represented 11 percent of total revenues for the
three and six months ended June 30, 2004 and 2003. The increase in absolute
dollars for the three months ended June 30, 2004 is primarily
due to a $0.9 million increase in personnel related expenses
resulting from a 9
percent increase in the total number of general and administrative personnel
attributable in part to our acquisition of XcelleNet. The decrease in absolute
dollars for the six months ended June 30, 2004 is primarily due to
discretionary spending reductions. Amortization of Other Purchased Intangibles.Amortization of other purchased
intangibles reflects the amortization of the established customer list
associated with the acquisition in 2000 of Home Financial Network, Inc. (now
FFI) 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. The
increase in this amount relates to the restricted stock granted in the first
quarter of 2004. Cost/(Reversal) of Restructuring. 2003 Restructuring Activities.During the quarter ended March 31, 2004, we
recorded restructuring charges of $0.1 million for severance paid in connection
with a foreign employee who was terminated under the 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. For further discussion regarding our restructuring activities, see Note 11 to
Condensed Consolidated Financial Statements, Part I, Item I, incorporated here
by reference. 2002 Restructuring Activities.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 facility. 26




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##### Table of Contents



Operating Income
(Dollars in millions) Three
    
    Three
    
    
    
    
    
    Six
    
    SixMonths
    
    Months
    
    
    
    
    
    Months
    
    MonthsEnded
    
    Ended
    
    Percent
    
    Ended
    
    Ended
    
    Percent6/30/04
    
    6/30/03
    
    Change
    
    6/30/04
    
    6/30/03
    
    ChangeOperating income by segment:IPG
    
    $
    13.0
    
    
    $
    12.5
    
    
    
    4
    %
    
    $
    31.4
    
    
    $
    26.8
    
    
    
    17
    %iAS
    
    
    1.6
    
    
    
    3.7
    
    
    
    (57
    %)
    
    
    2.8
    
    
    
    7.2
    
    
    
    (61
    %)FFI
    
    
    (1.1
    )
    
    
    (2.8
    )
    
    
    (61
    %)
    
    
    (3.3
    )
    
    
    (6.0
    )
    
    
    (45
    %)Unallocated cost savings
    
    
    2.5
    
    
    
    4.7
    
    
    
    (47
    %)
    
    
    2.5
    
    
    
    7.1
    
    
    
    (65
    %)Total operating income:
    
    $
    16.0
    
    
    $
    18.1
    
    
    
    (12
    %)
    
    $
    33.4
    
    
    $
    35.1
    
    
    
    (5
    %)Percentage of total revenues
    
    
    8
    %
    
    
    9
    %
    
    
    
    
    
    
    9
    %
    
    
    9
    %
 Operating income was $16.0 million and $33.4 million for the three and six
months ended June 30, 2004, respectively, compared to operating income of $18.1
million and $35.1 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 our 2003 restructuring
activities, 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 acquisitions of XcelleNet and Dejima, offset by an
increase in total revenues. The operating margin associated with Xcellenet and
Dejima in Q2 was ($2.6 ) million of which ($1.5) million was related to the
amortization of intangibles acquired in these acquisitions. The operating loss
in the FFI segment dropped for both comparable periods due to an increase in
both license and professional services revenues. Certain common costs and expenses are allocated to the various segments based
on measurable drivers of expense. Unallocated expenses represent corporate
expenditures or cost savings that are not specifically allocated to the segment
including reversals or restructuring expenses associated with restructuring
activities undertaken prior to 2003. Other Income (Expense), Net
(Dollars in millions) Three
    
    Three
    
    
    
    
    
    Six
    
    SixMonths
    
    Months
    
    
    
    
    
    Months
    
    MonthsEnded
    
    Ended
    
    Percent
    
    Ended
    
    Ended
    
    Percent6/30/04
    
    6/30/03
    
    Change
    
    6/30/04
    
    6/30/03
    
    ChangeInterest income
    
    $
    2.6
    
    
    $
    2.9
    
    
    
    (10
    %)
    
    $
    5.5
    
    
    $
    5.7
    
    
    
    (4
    %)Percentage of total revenues
    
    
    1
    %
    
    
    1
    %
    
    
    
    
    
    
    1
    %
    
    
    2
    %Interest expense and other, net
    
    $
    (0.3
    )
    
    $
    0.7
    
    
    
    *
    
    
    $
    0.4
    
    
    $
    0.3
    
    
    
    33
    %Percentage of total revenues
    
    
    *
    
    
    
    *
    
    
    
    
    
    
    
    *
    
    
    
    *
   *
    
    Not meaningful Interest income decreased 10 percent to $2.6 million and 4 percent to $5.5
million for the three and six months ended June 30, 2004, respectively,
compared to $2.9 million and $5.7 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. Interest expense and other, net was $(0.3) million and $0.4 million for the
three and six months ended June 30, 2004, respectively, compared to $0.7
million and $0.3 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 months ending June 30, 2004 was primarily due to the
realized foreign currency losses incurred in the quarter 27




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##### Table of Contents



ended June 30, 2004. The net improvement in interest expense and other, net
for the six months ended June 30, 2004 was primarily the result of an increase
in the realized foreign currency gains incurred in the quarter ended March 31,
2004. Provision for Income Taxes (Dollars in millions) Three
    
    Three
    
    
    
    
    
    Six
    
    SixMonths
    
    Months
    
    
    
    
    
    Months
    
    MonthsEnded
    
    Ended
    
    Percent
    
    Ended
    
    Ended
    
    Percent6/30/04
    
    6/30/03
    
    Change
    
    6/30/04
    
    6/30/03
    
    ChangeProvision for income taxes
    
    $
    5.5
    
    
    $
    7.1
    
    
    
    (23
    %)
    
    $
    13.4
    
    
    $
    13.5
    
    
    
    (1
    %)
 We recorded an income tax provision for Q2 equal to approximately 30 percent of
pre-tax book income. Our rate for the six month period was 34 percent. The
reduction in the tax rate between the second quarter was largely attributable
on our assumptions regarding the geographic mix our earnings. These rates
compare to approximately 33 percent for the comparable three and six month
periods in 2003. In 2004, our effective tax rate differs from the statutory
rate of 35 percent primarily due to the benefits of certain low tax foreign
earnings which we plan to permanently reinvest, partially offset by the impact
of state taxes. In 2003, our effective tax rate differed from the statutory
rate primarily due to the benefits of certain low tax foreign earnings that we
were able to realize in 2003, once again partially offset by the impact of
state taxes. Net Income Per Share
(Dollars and shares in millions, except per share data) Three
    
    Three
    
    
    
    
    
    Six
    
    SixMonths
    
    Months
    
    
    
    
    
    Months
    
    MonthsEnded
    
    Ended
    
    Percent
    
    Ended
    
    Ended
    
    Percent6/30/04
    
    6/30/03
    
    Change
    
    6/30/04
    
    6/30/03
    
    ChangeNet income
    
    $
    12.8
    
    
    $
    14.6
    
    
    
    (12
    %)
    
    $
    26.0
    
    
    $
    27.5
    
    
    
    (5
    %)Percentage of total revenues
    
    
    7
    %
    
    
    8
    %
    
    
    
    
    
    
    7
    %
    
    
    7
    %Basic net income per share
    
    $
    0.13
    
    
    $
    0.16
    
    
    
    (19
    %)
    
    $
    0.27
    
    
    $
    0.29
    
    
    
    (7
    %)Diluted net income per share
    
    $
    0.13
    
    
    $
    0.15
    
    
    
    (13
    %)
    
    $
    0.26
    
    
    $
    0.28
    
    
    
    (7
    %)Shares used in computing basic net income per share
    
    
    96.1
    
    
    
    93.8
    
    
    
    2
    %
    
    
    96.7
    
    
    
    94.1
    
    
    
    3
    %Shares used in computing diluted net income per share
    
    
    98.6
    
    
    
    96.4
    
    
    
    2
    %
    
    
    99.8
    
    
    
    96.9
    
    
    
    3
    %
 We reported net income of $12.8 million and $26.0 million for the three and six
months ended June 30, 2004, respectively, compared to net income of $14.6
million and $27.5 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 $0.13 and $0.27 for the three and six months
ended June 30, 2004, respectively, as compared to $0.16 and $0.29 for the same
periods in 2003. Diluted net income per share was $0.13 and $0.26 for the three
and six months ended June 30, 2004, respectively, as compared to $0.15 and
$0.28 for the same periods in 2003. Shares used in computing basic net income per share increased 2 percent and 3
percent for the three and six months ended June 30, 2004, respectively, as
compared to the same periods last year due primarily to the ongoing exercise of
employee stock options, partially offset by shares repurchased under our stock
repurchase program (See Note 10 to Condensed Consolidated Financial Statements,
Part I, Item 1, incorporated here by reference). Shares used in computing
diluted net income per share increased 2 percent and 3 percent for the three
and six months ended June 30, 2004, respectively, compared to the same periods
in 2003 due primarily for the reasons stated above. Liquidity and Capital Resources
(Dollars in millions) Six
    
    SixMonths
    
    MonthsEnded
    
    Ended
    
    Percent6/30/04
    
    6/30/03
    
    ChangeWorking capital
    
    $
    156.0
    
    
    $
    143.6
    
    
    
    9
    %Cash, cash equivalents and cash investments
    
    $
    451.5
    
    
    $
    459.3
    
    
    
    (2
    %)Net cash provided by operating activities
    
    $
    83.0
    
    
    $
    119.9
    
    
    
    (31
    %)Net cash used for investing activities
    
    $
    53.8
    
    
    $
    100.2
    
    
    
    (46
    %)Net cash used for financing activities
    
    $
    86.2
    
    
    $
    17.0
    
    
    
    407
    %
 28




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##### Table of Contents



Net cash provided by operating activities decreased 31 percent for the six
months ended June 30, 2004 compared to the six months ended June 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 six months
of 2003 (DSO was reduced from 72 days in Q4 2002 to 59 days in Q2 2003 compared
to a much smaller decrease in DSO between Q4 2003 and Q2 2004), and a lower
increase in deferred revenues for the six months ended June 30, 2004 compared
to the six months ended June 30, 2003. Net cash used for investing activities was $53.8 and $100.2 million for the six
months ended June 30, 2004 and 2003, respectively. The decrease in net cash
used for investing activities is primarily due to net dispositions of cash
investments of $58.5 million during the six months ended June 30, 2004,
compared to net purchases of $54.2 million in cash investments during the six
months ended June 30, 2003. The decrease was partially offset by the net cash
outlay of $81.3 million for the XcelleNet and Dejima acquisitions in the second
quarter of 2004, as compared to the $13.9 million in net cash was used for the
acquisition of AvantGo during the three months ended March 31, 2003. Net cash used for financing activities was $86.2 million for the six months
ended June 30, 2004 compared to $17.0 million for the six months ended June 30,
2003. The increase in net cash used for financing activities was primarily the
result of a $53.5 million increase in the cash used to repurchase our common
stock during the six months ended June 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 six months ended June 30, 2004, we repurchased 4.3 million shares of
our common stock for $84.4 million pursuant to the Board of Directors
authorization. For additional information regarding our stock repurchase
program, see Note 10 to Consolidated Financial Statements, Part I, Item 1,
incorporated here by reference. We had no significant commitments for future capital expenditures at June 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 June 30, 2004, we had identifiable net assets
totaling $179.1 million associated with our European operations and $59.4
million associated with our Asia and Latin American operations. We experience
foreign exchange transaction exposure on our net assets and liabilities
denominated in currencies other than the US dollar. The related foreign
currency translation gains and losses are reflected in Accumulated other
comprehensive income/(loss) under Stockholders equity on the balance sheet.
We also experience foreign exchange translation exposure from certain balances
that are denominated in a currency other than the functional currency of the
entity on whose books the balance resides. We hedge certain of these short-term
exposures under a plan approved by the Board of Directors (see Qualitative and
Quantitative Disclosure of Market Risk, Part I, Item 3). Future Operating Results Our future operating results may vary substantially from period to period due
to a variety of significant risks, some of which are discussed below and
elsewhere in this Report on Form 10-Q. We strongly urge current and prospective
investors to carefully consider the cautionary statements and risks contained
in this Report including those regarding forward-looking statements described
on Page 3. Significant variation in the timing and amount of our revenues may cause
fluctuations in our quarterly operating results and accurate estimation of our
revenues is difficult. Our operating results have varied from quarter to quarter in the past and may
vary in the future depending upon a number of factors described below and
elsewhere in this offering memorandum, including many that are beyond our
control. As a result, we believe that quarter-to-quarter comparisons of our
financial results should not be relied on to indicate our future performance.
We operate with little or no backlog, and our quarterly license revenues depend
largely on orders booked and shipped in that quarter. Historically, we have
recorded a majority of our quarterly license revenues in the last month of each
quarter, particularly during the final two weeks. During 2003 and the first two
quarters 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 among our customers could result in
fewer of these large customers making substantial investments in our products
and services in any given period. Therefore, if one or more significant orders
do not close in a particular 29




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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. 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. Fluctuation in our operating results may
contribute to volatility in our stock price. Economic conditions in the U.S. and worldwide could adversely affect our
revenues. Our revenues and operating results depend on the overall demand for our
products and services. General weakening of the U.S. and worldwide economy in
recent years has contributed to a decrease in our revenues and revenue growth
rates overall. The current mixed signs of world and U.S. economic recovery have
caused many of our customers to delay or significantly reduce discretionary
spending for larger infrastructure IT projects, which has also contributed to
the decline in our revenues. Continued uncertainty in the economy, either alone
or in tandem with other factors beyond the Companys control (including war,
political unrest, shifts in market demand for our products, etc.) could result
in a continued decrease in our future revenues and revenue growth rates. If we fail to maintain or expand our relationships with strategic partners and
indirect distribution channels our license revenues could decline. We currently derive a significant portion of our license revenue from sales of
our products and services through non-exclusive distribution channels,
including strategic partners, systems integrators (SIs), original equipment
manufacturers (OEMs) and value-added resellers (VARs). We generally anticipate
that sales of our products through these channels will account for a
substantial portion of our license revenues in the foreseeable future. Because
most of our channel relationships are non-exclusive, there is a risk that some
or all of them could promote or sell our competitors products instead of ours,
or that they will be unable to sell effectively new products that we may
introduce. Additionally, if we are unable to expand our indirect channels, or
these indirect channels fail to generate significant revenues in the future,
our business could be harmed. Our development, marketing and distribution strategies also depend in part on
our ability to form strategic relationships with other technology companies. If
these companies change their business focus, enter into strategic alliances
with other companies or are acquired by our competitors or others, support for
our products could be reduced or eliminated, which could have a material
adverse effect on our business and financial condition. Industry consolidation and other competitive pressures could affect prices or
demand for our products and services, and our business may be adversely
affected. The IT industry and the market for our core database infrastructure products
and services is becoming increasingly competitive due to a variety of factors
including a maturing enterprise infrastructure software market, changes in
customer IT spending habits, and a slow economic recovery in the U.S. There
also appears to be a growing trend toward consolidation in the software
industry, as evidenced by PeopleSofts 2003 acquisition of J.D. Edwards, IBMs
2001 acquisition of the Informix database business and Oracles ongoing efforts
to acquire PeopleSoft. Continued consolidation within the software industry
could create opportunities for larger software companies, such as IBM,
Microsoft and Oracle, to increase their market share through the acquisition of
companies that dominate certain lucrative market niches or that have loyal
installed customer bases. Such consolidation activity could pose a significant
competitive disadvantage to us. The significant purchasing and market power of larger companies may also
subject us to increased pricing pressures. Many of our competitors may have
greater financial, technical, sales and marketing resources, and a larger
installed customer base than us. In addition, our competitors advertising and
marketing efforts could overshadow our own and/or adversely influence customer
perception of our products and services, and harm our business and prospects as
a result. To remain competitive, we must develop and 30




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promote new products and businesses, enhance existing products and retain
competitive pricing policies, all in a timely manner. Our failure to compete
successfully with new or existing competitors in these and other areas could
have a material adverse impact on our ability to generate new revenues or
sustain existing revenue levels. The ability to rapidly develop and bring to market advanced products and
services to respond to changing business needs is crucial to maintaining our
competitive position. Increasing use of the Internet and fast-growing market demand for mobile and
wireless solutions may significantly alter the manner in which business is
conducted in the future. In light of these developments, our ability to timely
meet the demand for new or enhanced products and services to support wireless
and mobile business operations at competitive prices could significantly impact
our ability to generate future revenues. We acquired AvantGo in 2003, as well
as XcelleNet and certain assets of Dejima in April 2004, to enhance our mobile,
wireless and embedded solutions that form the foundation of our Unwired
Enterprise initiative. However, if the market for unwired solutions does not
continue to develop as we anticipate, or if our solutions and services do not
successfully compete in the relevant markets, we may not be able to timely or
successfully respond to evolving business needs, and our operating results
could be adversely affected. If our existing customers cancel or fail to renew their technical support
agreements, or if customers do not license new or additional products, our
technical support revenues could be adversely affected. We currently derive a significant portion of our overall revenues from
technical support services, which are included in service revenues. The terms
of our standard software license arrangements provide for the payment of
license fees and prepayment of first-year technical support fees. Support is
renewable annually at the option of the end user. Therefore, if our existing
customers cancel or fail to renew their technical support agreements, or if we
are unable to generate additional support fees through the license of new
products to existing or new customers, our business and future operating
results could be adversely affected. Any delays in our sales cycles could result in significant fluctuations in our
quarterly operating results. The length of our sales cycles varies significantly from product to product.
The sales cycle for some of our products can take up to 18 months to complete.
Any delay in the sale of a large license or a number of smaller licenses could
result in significant fluctuations in our quarterly operating results. The
length of the sales cycle may vary depending on a number of factors over which
we may have little or no control, including the size and complexity of a
potential transaction, the level of competition that we encounter in our
selling activities and our potential customers internal budgeting processing.
Our sales cycle can be further extended for product sales made through third
party distributors. As a result of the lengthy sale cycle, we may expend
significant efforts over a long period of time in an attempt to obtain an
order, but ultimately not complete the sale, or not recognize some or all of
the anticipated revenue. We may encounter difficulties completing or integrating our acquisitions and
strategic relationships, which could adversely affect our operating results. We regularly explore possible acquisitions and 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 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 over the past several years and
our management of operating expenses have contributed to 31




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an increase in operating margins. Our ability to significantly reduce our
current cost structure in any material respects through future restructurings
would 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 designed to integrate and
provide synergies among our different products lines and to focus on increasing
our market presence and revenue through indirect channels such as SIs, OEMs and
VARs and other resellers. In the process of this reorganization, we brought
three of our former divisions, ESD, eBD and BID, under a single umbrella, and
reduced the number of our business divisions from five to three. Other
organizational changes in our sales or divisional model could have a direct
effect on our results of operations depending on whether and how quickly and
effectively our employees and management are able to adapt to and maximize the
advantages these changes are intended to create. We cannot assure you that
these or other organizational changes in our sales or divisional model will
result in any increase in revenues or profitability, and they could adversely
affect our business. Our results of operations may depend on the compatibility of our products with
other software developed by third parties. Our future results may be affected if our products cannot interoperate and
perform well with software products of other companies. Certain leading
applications currently are not, and may never be, interoperable with our
products. In addition, many of our principal products are designed for use with
products offered by competitors. In the future, vendors of non-Sybase products
may become less willing to provide us with access to their products, technical
information, and marketing and sales support, which could harm our business and
prospects. We are subject to risks arising from our international operations. We derive a substantial portion of our revenues from our international
operations, and we plan to continue expanding our business in international
markets in the future. In the first six 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 June
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. 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 32




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intellectual property rights, whether directly from third parties or through
acquisitions of other companies, we face the possibility that such intellectual
property will be found to infringe or violate the proprietary rights of others.
For example, a trademark infringement and dilution case filed in 1999 against
NEN, which we acquired in April 2001, resulted in a multi-million dollar
judgment against NEN and an injunction against NENs use of the trade name
NEON. The action was settled in September 2001 for a lesser amount as well as
certain other concessions. Regardless of whether these claims have merit, they
can be time consuming and expensive to defend or settle, and can harm the
Companys business and reputation. We do not believe our products infringe any
third party patents or proprietary rights, but there is no guarantee that we
can avoid claims or findings of infringement in the future. 33




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




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The market price of our common stock is highly volatile and you may not be able
to resell your shares of our stock at or about the price you paid, or at all. Our ability to exceed, or our failure to achieve, expected operating results
for any period could significantly adversely impact our stock price. As a
result, some investors will experience gains while others will experience
losses depending on the timing of their investments. The market for our common
stock and for stocks of companies in technology-related industries generally
has been highly volatile, and the trading price of our common stock has
fluctuated widely in recent years. This volatility may be exaggerated if the
trading volume of our common stock is low. In addition, the market price for
our common stock may fluctuate dramatically in response to a variety of
factors, including but not limited to the following:  
    
    Shortfalls in revenues, revenue growth rates or net income
compared to those forecast by us or estimated by securities analysts
    
    Announcements of new products by us or our competitors
    
    Quarterly fluctuations in our financial results or the results
of other software companies, including our direct competitors
    
    The publics reaction to our press releases, announcement and
our filings with the SEC
    
    Acquisitions or entry into strategic alliances by us or our
competitors
    
    The level and changing nature of terrorist activity and
continued war and political unrest in the Middle East
    
    The gain or loss of significant customer or strategic relationships
    
    Announcement of technological or competitive developments 
 ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES OF MARKET RISK The following discussion about our risk management activities includes
forward-looking statements that involve risks and uncertainties, as more fully
described on Page 3 of this Report. 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 June 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 June 30, 2004 were material. 35




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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 Exchange Act
of 1934 is recorded, processed, summarized and reported within the timeframe
specified by the Securities and Exchange Commission rules and forms. Changes in Internal Control over Financial Reporting There have been no changes in our internal controls or in other factors that
materially affected, or are reasonably likely to materially affect, our
internal controls over financial reporting. 
 PART II: OTHER INFORMATION 
 ITEM 2: CHANGES IN SECURITIES AND USE OF PROCEEDS (e) Purchases of Equity Securities by the Issuer and Affiliated
Purchasers During the quarter ended June 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 ($)April 1
 30
    
    
    564,100
    
    
    $
    17.82
    
    
    
    564,100
    
    
    $
    155,229,000May 1  31
    
    
    1,203,500
    
    
    
    16.97
    
    
    
    1,203,500
    
    
    
    134,809,000June 1  30
    
    
    0
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    1,767,600
    
    
    $
    17.24
    
    
    
    1,767,600
    
    
    $
    134,809,000
 36




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ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Our Annual Meeting of Stockholders was held on May 27, 2004. At the Annual
Meeting, the following matters were submitted to a vote of stockholders and
were approved, with the votes cast on each matter indicated:  1.
    
    Election of three Class III directors, each to serve a three-year
term expiring at the 2007 Annual Meeting of Stockholders or until a
successor is duly elected and qualified. Cecilia Claudio, L. William
Krause and Robert P. Wayman were the only nominees, and each was elected
(90,023,282 votes were cast for the election of Ms. Claudio and
1,242,375 were withheld; 88,254,990 votes were cast for the election of
Mr. Krause and 3,010,667 were withheld; and 90,519,955 votes were cast
for the election of Mr. Wayman and 745,702 were withheld). There were no
abstentions or broker non-votes. In addition to these directors, our
boards other incumbent directors (John S. Chen, Alan B. Salisbury,
Richard C. Alberding, Linda K. Yates and Jack E. Sum) had terms that
continued after the 2004 Annual Meeting.2.
    
    Adoption of the Sybase, Inc. Amended and Restated 2003 Stock Plan
(58,187,182 votes for; 20,813,352 against; 134,075 abstentions and no
broker non-votes).3.
    
    Ratification of the appointment of Ernst & Young LLP as independent
auditors for the year ending December 31, 2004 (88,058,498 for;
3,177,935 against; 29,224 abstentions and no broker non-votes). 
 ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits furnished pursuant to Section 601 of Regulation S-K The information required by this item is incorporated here by reference to the
Exhibit Index attached to this Report on Form 10-Q. (b) Reports on Form 8-K:  (i)
    
    On April 4, 2004 we filed a Report on Form 8-K in
connection with our press release pre-announcing our results for
the quarter ended March 31, 2004.(ii)
    
    On April 27, 2004 we filed a Report on Form 8-K in
connection with our press release announcing our results for the
quarter ended March 31, 2004. 37




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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. August 6, 2004
    
    SYBASE, INC.By
    
    /s/ PIETER VAN DER VORSTPieter Van der VorstSenior Vice President and Chief Financial Officer(Principal Financial Officer)By
    
    /s/ MARTIN J. HEALYMartin J. HealyVice President and Corporate Controller(Principal Accounting Officer)
 38




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EXHIBIT INDEX Exhibit No.
    
    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
   39