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SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 FORM 10-Q  þ
    QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarter Ended March 31, 2005  o
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____________ to ______________ Commission File number 1-16493 SYBASE, INC.  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 þ No o Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of
the Exchange Act). Yes þ No o On April 30, 2005, 89,708,492 shares of the Registrants Common Stock, $.001 par value, were
outstanding.




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SYBASE, INC.
FORM 10-Q QUARTER ENDED MARCH 31, 2005 INDEX PageForward-Looking Statements
    
    
    2Part I: Financial Information
    
    
    3Item 1: Financial Statements (Unaudited)
    
    
    3Condensed Consolidated Balance Sheets as of March 31, 2005 and December 31, 2004
    
    
    3Condensed Consolidated Statements of Operations for the three months ended March 31, 2005 and 2004
    
    
    4Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2005 and 2004
    
    
    5Notes to Condensed Consolidated Financial StatementsItem 2: Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    13Item 3: Quantitative and Qualitative Disclosures of Market Risk
    
    
    28Item 4: Controls and Procedures
    
    
    29Part II: Other Information
    
    
    29Item 1: Legal Proceedings
    
    
    29Item 2: Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    29Item 6: Exhibits
    
    
    30Signatures
    
    
    31Exhibit Index
    
    
    32EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32
  1




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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 the performance of the global economy and growth in
software industry sales; market acceptance of the Companys products and services; possible
disruptive effects of organizational or personnel changes; shifts in our business strategy;
interoperability of our products with other software products; the success of certain business
combinations engaged in by us or by competitors; political unrest or acts of war; customer and
industry analyst perception of the Company and its technology vision and future prospects; and
other risks detailed from time to time in our Securities and Exchange Commission filings, including
those discussed in Managements Discussion and Analysis of Financial Condition and Results of
Operations (MD&A)- Overview, and MD&A  Future Operating Results, Part 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. 2




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PART I: FINANCIAL INFORMATION 
 ITEM 1: FINANCIAL STATEMENTS SYBASE, INC. 
 CONDENSED CONSOLIDATED BALANCE SHEETS March 31,2005
    
    
    December 31,(Dollars in thousands, except share and per share data)

    
    (Unaudited)
    
    
    2004Current assets:Cash and cash equivalents
    
    $
    394,886
    
    
    $
    321,417Short-term cash investments
    
    
    437,211
    
    
    
    158,217Total cash, cash equivalents and short-term cash investments
    
    
    832,097
    
    
    
    479,634Restricted cash
    
    
    5,438
    
    
    
    5,356Accounts receivable, net
    
    
    126,352
    
    
    
    157,897Deferred income taxes
    
    
    11,199
    
    
    
    11,205Prepaid expenses and other current assets
    
    
    21,318
    
    
    
    14,790Total current assets
    
    
    996,404
    
    
    
    668,882Long-term cash investments
    
    
    59,198
    
    
    
    33,998Restricted long-term cash investments
    
    
    2,600
    
    
    
    2,600Property, equipment and improvements, net
    
    
    61,013
    
    
    
    64,371Deferred income taxes
    
    
    41,529
    
    
    
    39,440Capitalized software, net
    
    
    64,038
    
    
    
    61,771Goodwill, net
    
    
    213,856
    
    
    
    214,110Other purchased intangibles, net
    
    
    60,820
    
    
    
    67,208Other assets
    
    
    39,752
    
    
    
    31,142Total assets
    
    $
    1,539,210
    
    
    $
    1,183,522Current liabilities:Accounts payable
    
    $
    12,557
    
    
    $
    11,962Accrued compensation and related expenses
    
    
    32,146
    
    
    
    43,632Accrued income taxes
    
    
    41,933
    
    
    
    32,595Other accrued liabilities
    
    
    74,180
    
    
    
    81,715Deferred revenue
    
    
    231,003
    
    
    
    208,741Total current liabilities
    
    
    391,819
    
    
    
    378,645Other liabilities
    
    
    35,118
    
    
    
    33,121Long-term deferred revenue
    
    
    6,966
    
    
    
    10,170Minority interest
    
    
    5,030
    
    
    
    5,030Long-term convertible debt
    
    
    460,000
    
    
    
    Commitments 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
89,471,914 outstanding (2004-105,337,362 shares issued and 95,518,977 outstanding)
    
    
    105
    
    
    
    105Additional paid-in capital
    
    
    952,621
    
    
    
    940,806Accumulated deficit
    
    
    (54,023
    )
    
    
    (66,690
    )Accumulated other comprehensive income
    
    
    38,133
    
    
    
    49,356Cost of 15,865,448 shares of treasury stock (2004-9,818,385 shares)
    
    
    (278,796
    )
    
    
    (159,617
    )Unearned compensation
    
    
    (17,763
    )
    
    
    (7,404
    )Total stockholders equity
    
    
    640,277
    
    
    
    756,556Total liabilities and stockholders equity
    
    $
    1,539,210
    
    
    $
    1,183,522
 See accompanying notes. 3




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SYBASE, INC. 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS  Three Months EndedMarch 31,(Dollars in thousands, per share data)
    
    2005
    
    
    2004Revenues:License fees
    
    $
    62,708
    
    
    $
    57,905Services
    
    
    129,203
    
    
    
    125,254Total revenues
    
    
    191,911
    
    
    
    183,159Costs and expenses:Cost of license fees
    
    
    14,258
    
    
    
    13,580Cost of services
    
    
    40,340
    
    
    
    41,629Sales and marketing
    
    
    59,578
    
    
    
    58,240Product development and engineering
    
    
    33,527
    
    
    
    30,667General and administrative
    
    
    22,233
    
    
    
    20,943Amortization of other purchased intangibles
    
    
    1,677
    
    
    
    500Cost (Reversal) of restructure
    
    
    (8
    )
    
    
    125Total costs and expenses
    
    
    171,605
    
    
    
    165,684Operating income
    
    
    20,306
    
    
    
    17,475Interest income
    
    
    4,995
    
    
    
    2,898Interest expense and other, net
    
    
    (1,887
    )
    
    
    691Income before income taxes
    
    
    23,414
    
    
    
    21,064Provision for income taxes
    
    
    10,068
    
    
    
    7,879Net income
    
    $
    13,346
    
    
    $
    13,185Basic net income per share
    
    $
    0.14
    
    
    $
    0.14Shares used in computing basic net income per share
    
    
    92,669
    
    
    
    97,291Diluted net income per share
    
    $
    0.14
    
    
    $
    0.13Shares used in computing diluted net income per share
    
    
    95,134
    
    
    
    101,054
 See accompanying notes. 4




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SYBASE, INC. 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS  Three Months EndedMarch 31,(Dollars in thousands)
    
    2005
    
    
    2004Cash and cash equivalents, beginning of year
    
    $
    321,417
    
    
    $
    315,404Cash flows from operating activities:Net income
    
    
    13,346
    
    
    
    13,185Adjustments to reconcile net income to net cash provided by operating activities:Depreciation and amortization
    
    
    20,539
    
    
    
    19,892Loss on disposal of assets
    
    
    327
    
    
    
    341Deferred income taxes
    
    
    (2,083
    )
    
    
    (1,324
    )Amortization of deferred stock-based compensation
    
    
    1,457
    
    
    
    1,302Amortization of note issuance costs
    
    
    202
    
    
    
    Changes in assets and liabilities:Accounts receivable
    
    
    29,853
    
    
    
    31,864Other current assets
    
    
    (6,527
    )
    
    
    (3,128
    )Other assets  operating
    
    
    877
    
    
    
    216Accounts payable
    
    
    595
    
    
    
    2,010Accrued compensation and related expenses
    
    
    (11,486
    )
    
    
    (9,235
    )Accrued income taxes
    
    
    9,472
    
    
    
    (1,321
    )Other accrued liabilities
    
    
    (7,747
    )
    
    
    (13,235
    )Deferred revenues
    
    
    19,058
    
    
    
    24,705Other liabilities
    
    
    2,082
    
    
    
    1,126Net cash provided by operating activities
    
    
    69,965
    
    
    
    66,398Cash flows from investing activities:Increase in restricted cash
    
    
    (82
    )
    
    
    (165
    )Purchases of available-for-sale cash investments
    
    
    (404,594
    )
    
    
    (25,336
    )Maturities of available-for-sale cash investments
    
    
    99,297
    
    
    
    22,286Sales of available-for-sale cash investments
    
    
    451
    
    
    
    45,561Purchases of property, equipment and improvements
    
    
    (3,757
    )
    
    
    (7,764
    )Proceeds from sale of fixed assets
    
    
    10
    
    
    
    68Capitalized software development costs
    
    
    (9,588
    )
    
    
    (8,157
    )(Increase) Decrease in other assets  investing
    
    
    1
    
    
    
    (26
    )Net cash provided by (used for) investing activities
    
    
    (318,262
    )
    
    
    26,467Cash flows from financing activities:Proceeds from the issuance of convertible subordinated notes, net of issuance costs
    
    
    450,529
    
    
    
    Payments on capital lease
    
    
    (79
    )
    
    
    Net proceeds from the issuance of common stock and reissuance of treasury stock
    
    
    10,085
    
    
    
    16,950Purchases of treasury stock
    
    
    (129,942
    )
    
    
    (53,946
    )Net cash provided by (used for) financing activities
    
    
    330,593
    
    
    
    (36,996
    )Effect of exchange rate changes on cash
    
    
    (8,827
    )
    
    
    (817
    )Net increase in cash and cash equivalents
    
    
    73,469
    
    
    
    55,052Cash and cash equivalents, end of period
    
    
    394,886
    
    
    
    370,456Cash investments, end of period
    
    
    496,409
    
    
    
    216,202Total cash, cash equivalents and cash investments, end of period
    
    $
    891,295
    
    
    $
    586,658Supplemental disclosures:Interest paid
    
    $
    335
    
    
    $
    33Income taxes paid
    
    $
    8,165
    
    
    $
    11,341
 See accompanying notes. 5




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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, 2004 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 the Companys audited consolidated financial statements included in
the Companys Annual Report on Form 10-K for the year ended December 31, 2004. The results of
operations for the three months ended March 31, 2005 are not necessarily indicative of results for
the entire fiscal year ending December 31, 2005. Certain previously reported amounts have been reclassified to conform to the current presentation
format. Specifically, certain amounts previously shown as stock based compensation are now
reflected within various other operating expense items (primarily general and administrative). 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 or
restricted stock 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. The unearned compensation balance at March 31, 2005 relates to awards of time based and
performance based restricted stock. Had compensation cost been charged to expense for grants to employees under the Companys fixed
stock option plans (including the Financial Fusion, Inc. (FFI) and iAnywhere Solutions, Inc. (iAS)
stock plans) and the Companys employee stock purchase plan based on the fair value at the grant
dates for awards under those plans, consistent with the method encouraged by FAS 123, the Companys
net income/(loss) and net income/(loss) per share would have been adjusted to the pro forma amounts
indicated below: Three
    
    
    ThreeMonths
    
    
    MonthsEnded
    
    
    Ended(Dollars in thousands, except per share data)
    
    3/31/05
    
    
    3/31/04As reported net income  stock-based employee compensation determined using the intrinsic
value method
    
    $
    13,346
    
    
    $
    13,185Add: Stock-based employee compensation cost, net of tax, included in net income as reported
    
    $
    1,457
    
    
    $
    1,302Less: Pro-forma stock-based employee compensation cost, net of tax, determined under the fair
value method
    
    $
    (4,451
    )
    
    $
    (6,853
    )Pro-forma net income  stock-based employee compensation determined under the fair value method
    
    $
    10,352
    
    
    $
    7,634Basic net income per shareAs reported
    
    $
    0.14
    
    
    $
    0.14Pro forma
    
    
    0.11
    
    
    
    0.08Diluted net income per shareAs reported
    
    $
    0.14
    
    
    $
    0.13Pro forma
    
    
    0.11
    
    
    
    0.08
 6




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The fair value employee compensation cost presented above was determined using the Black-Scholes
option-pricing model using the following weighted-average assumptions: Three
    
    
    ThreeMonths
    
    
    MonthsEnded
    
    
    Ended3/31/05
    
    
    3/31/04Expected volatility
    
    
    49.91
    %
    
    
    55.43
    %Risk-free interest rates
    
    
    3.75
    %
    
    
    2.58
    %Expected lives (years)
    
    
    4.25
    
    
    
    4.25Expected dividend yield
    
    
    
    
    
    
    
 On December 16, 2004, FASB issued FASB Statement No. 123 (revised 2004), Share-Based Payment, which
is a revision of FAS123 .Statement 123(R) supersedes APB Opinion No. 25, Accounting for Stock
Issued to Employees, and amends FASB Statement No. 95, Statement of Cash Flows. Generally, the
approach in Statement 123(R) is similar to the approach described in Statement 123. However,
Statement 123(R) requires all share-based payments to employees, including grants of employee stock
options, to be recognized in the income statement based on their fair values. Disclosure in
financial footnotes of the pro forma impact of the fair value of share-based payments, as permitted
by APB 25, is not a permitted alternative under Statement 123(R). Statement 123(R) will be effective for Sybases 2006 calendar year. Statement 123(R) permits
public companies to adopt its requirements using either the modified prospective method of the
modified retrospective method. Under the modified prospective method, compensation cost is
recognized for all share-based payments granted after the effective date as well as for all
share-based payments granted prior to the effective date which remain unvested on the effective
date. Under the modified retrospective method, the provisions of the modified prospective method
would apply but the Company could also restate its earnings in certain previous periods based on
the stock compensation amounts included in its previous proforma disclosures. The adoption of Statement 123(R)s fair value method will have a significant impact on the
Companys results of operations, although it will have no impact on the Companys overall financial
position. The impact of adoption of Statement 123(R) cannot be predicted at this time because it
will depend on levels of share-based payments granted in the future. However, had the Company
adopted 123(R) in prior periods, the impact of that standard would have approximated the pro forma
impact described above. Statement 123(R) also requires the benefit of tax deductions in excess of
recognized compensation cost to be reported as a financing cash flow, rather than as an operating
cash flow as required under the current literature. This requirement will reduce net operating
cash flows and increase net financing cash flows in periods after adoption. The Company cannot
estimate what those amounts will be in the future (because they depend on, among other things, when
employees exercise stock options). In the past, the operating cash flows of the Company have not
benefited from such excess deductions. 3. Net income per share.Shares used in computing basic and diluted net income per share
are based on the weighted average shares outstanding in each period, excluding treasury stock.
Basic net income per share excludes any dilutive effects of stock options. Diluted net income 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 per share: Three
    
    
    ThreeMonths
    
    
    MonthsEnded
    
    
    Ended(In thousands, except per share data)
    
    3/31/05
    
    
    3/31/04Net income
    
    $
    13,346
    
    
    $
    13,185Basic net income per share
    
    $
    0.14
    
    
    $
    0.14Shares used in computing basic net income per share
    
    
    92,669
    
    
    
    97,291Diluted net income per share
    
    $
    0.14
    
    
    $
    0.13Shares used in computing basic net income per share
    
    
    92,669
    
    
    
    97,291Dilutive effect of stock options
    
    
    2,465
    
    
    
    3,763Shares used in computing diluted net income per share
    
    
    95,134
    
    
    
    101,054
 The Company issued contingently convertible subordinated notes (Notes during the quarter ended
March 31, 2005 as described in Note 11 Convertible subordinated notes, below. Under the
conversion provisions of the Notes, no shares would be issued upon conversion until the Companys
stock price exceeds $25.22. If this threshold is exceeded during a reporting period, the Company
will include in its computation of diluted earnings per share, the dilutive effect of the Notes
based on the maximum number of shares issuable upon conversion assuming the conversion premium is
paid solely in shares. The anti-dilutive weighted average shares that were excluded from the shares used in computing
diluted net income (loss) per share, were 6.2 million and 3.8 million for the three month periods
ended March 31, 2005 and March 31, 2004, respectively. 7




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4. Comprehensive Income. The following table sets forth the calculation of comprehensive
income for all periods presented: Three
    
    
    ThreeMonths
    
    
    MonthsEnded
    
    
    Ended(In thousands)
    
    3/31/05
    
    
    3/31/04Net income
    
    $
    13,346
    
    
    $
    13,185Foreign currency translation losses
    
    
    (10,973
    )
    
    
    (2,322
    )Unrealized gains/(losses) on marketable securities
    
    
    (250
    )
    
    
    198Comprehensive income
    
    $
    2,123
    
    
    $
    11,061
 5. Guarantees. Under its standard software license agreement (SWLA), the Company agrees to
indemnify, defend and hold harmless its licensees from and against certain losses, damages and
costs arising from claims alleging the licensees use of Company software infringes the
intellectual property rights of a third party. Historically, the Company has not been required to
pay material amounts in connection with claims asserted under these provisions and, accordingly,
the Company has not recorded a liability relating to such provisions. Under the SWLA, the Company
also represents and warrants to licensees that its software products operate substantially in
accordance with published specifications. Under its standard consulting and development agreement,
the Company warrants that the services it performs will be undertaken by qualified personnel in a
professional manner conforming to generally accepted industry standards and practices.
Historically, only minimal costs have been incurred relating to the satisfaction of product
warranty claims and, as such, no accruals for warranty claims have been made. Other guarantees
include promises to indemnify, defend and hold harmless each of the Companys executive officers,
non-employee directors and certain key employees from and against losses, damages and costs
incurred by each such individual in administrative, legal or investigative proceedings arising from
alleged wrongdoing by the individual while acting in good faith within the scope of his or her job
duties on behalf of the Company. Historically minimal costs have been incurred relating to such
indemnifications and, as such, no accruals for these guarantees have been made. 6. Segment Information. The Company is organized into three separate reportable business
segments each of which focused on one of three key market segments: Infrastructure Platform Group
(IPG), which principally focuses on enterprise class database servers, integration and development
products; iAnywhere Solutions, Inc. (iAS), which provides mobile database and mobile enterprise
solutions; and Financial Fusion, Inc. (FFI), which delivers integrated banking, payment and trade
messaging solutions to large financial institutions. Sybases chief operating decision maker, is the President and Chief Executive Officer (CEO). While
the CEO is apprised of a variety of financial metrics and information, the Sybase business is
principally managed on a segment basis, with the CEO evaluating performance based upon segment
operating profit or loss that includes an allocation of common expenses, but excludes certain
unallocated expenses. The CEO does not view segment results below operating profit (loss) before
unallocated costs, and therefore unallocated expenses, interest income, interest expense and other,
net, and the provision for income taxes are not broken out by segment. Sybase does not account
for, or report to the CEO, assets or capital expenditures by segment. Segment revenues include transactions between the segments which in the most common instance
relates to the sale of iAS and FFI products and services by the IPG segment. In the case of such a
transaction, the segment recording the sale also records an inter-company expense on the
transaction, with a corresponding inter-company revenue amount recorded by the segment whose
product was sold. The net amount retained by the segment that recorded the sale is intended to
reflect the costs incurred by such transferring segment. The total transfers between the segments
are captured in Eliminations. 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 Company has
allocated the costs associated with 2004 restructuring activities to each reportable segment. 8




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A summary of the segment financial information reported to the CEO for the three months ended March
31, 2005 is presented below: Consolidated(In thousands)
    
    IPG
    
    
    iAS
    
    
    FFI
    
    
    Elimination
    
    
    TotalRevenues:License feesInfrastructure
    
    $
    46,861
    
    
    $
    11
    
    
    $
    
    
    
    
    
    
    
    $
    46,872Mobile and Embedded
    
    
    5,422
    
    
    
    10,120
    
    
    
    
    
    
    
    
    
    
    
    15,542E-Finance
    
    
    
    
    
    
    
    
    
    
    294
    
    
    
    
    
    
    
    294Subtotal license fees
    
    
    52,283
    
    
    
    10,131
    
    
    
    294
    
    
    
    
    
    
    
    62,708Intersegment license revenues
    
    
    21
    
    
    
    4,510
    
    
    
    
    
    
    
    (4,531
    )
    
    
    Total license fees
    
    
    52,304
    
    
    
    14,641
    
    
    
    294
    
    
    
    (4,531
    )
    
    
    62,708Services
    
    
    114,648
    
    
    
    8,939
    
    
    
    5,616
    
    
    
    
    
    
    
    129,203Intersegment service revenues
    
    
    5
    
    
    
    6,499
    
    
    
    1,004
    
    
    
    (7,508
    )
    
    
    Total services
    
    
    114,653
    
    
    
    15,438
    
    
    
    6,620
    
    
    
    (7,508
    )
    
    
    129,203Total revenues
    
    
    166,957
    
    
    
    30,079
    
    
    
    6,914
    
    
    
    (12,039
    )
    
    
    191,911Total allocated costs and expenses before cost of restructure and
amortization of customer lists and purchased technology
    
    
    142,266
    
    
    
    27,457
    
    
    
    7,600
    
    
    
    (12,039
    )
    
    
    165,284Operating income (loss) before cost of restructure and amortization of
customer lists and purchased technology
    
    
    24,691
    
    
    
    2,622
    
    
    
    (686
    )
    
    
    
    
    
    
    26,627Amortization of other purchased intangibles
    
    
    
    
    
    
    1,177
    
    
    
    500
    
    
    
    
    
    
    
    1,677Amortization of purchased technology
    
    
    2,920
    
    
    
    979
    
    
    
    811
    
    
    
    
    
    
    
    4,710Operating income (loss) before unallocated costs and cost of restructure
    
    
    21,771
    
    
    
    466
    
    
    
    (1,997
    )
    
    
    
    
    
    
    20,240Cost of restructure  2005 Activity
    
    
    (8
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (8
    )Operating income (loss) before unallocated costs
    
    
    21,779
    
    
    
    466
    
    
    
    (1,997
    )
    
    
    
    
    
    
    20,248Unallocated cost savings
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (58
    )Operating income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    20,306Interest income, interest expense and other, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,108Income before income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    23,414
 A summary of the segment financial information reported to the CEO for the three months ended March
31, 2004 is presented below: Consolidated(In thousands)
    
    IPG
    
    
    iAS
    
    
    FFI
    
    
    Elimination
    
    
    TotalRevenues:License feesInfrastructure
    
    $
    43,380
    
    
    $
    40
    
    
    $
    
    
    
    
    
    
    
    $
    43,420Mobile and Embedded
    
    
    5,052
    
    
    
    8,340
    
    
    
    
    
    
    
    
    
    
    
    13,392E-Finance
    
    
    102
    
    
    
    
    
    
    
    991
    
    
    
    
    
    
    
    1,093Subtotal license fees
    
    
    48,534
    
    
    
    8,380
    
    
    
    991
    
    
    
    
    
    
    
    57,905Intersegment license revenues
    
    
    53
    
    
    
    4,223
    
    
    
    104
    
    
    
    (4,380
    )
    
    
    Total license fees
    
    
    48,587
    
    
    
    12,603
    
    
    
    1,095
    
    
    
    (4,380
    )
    
    
    57,905Services
    
    
    119,069
    
    
    
    2,626
    
    
    
    3,559
    
    
    
    
    
    
    
    125,254Intersegment service revenues
    
    
    
    
    
    
    6,533
    
    
    
    1,235
    
    
    
    (7,768
    )
    
    
    Total services
    
    
    119,069
    
    
    
    9,159
    
    
    
    4,794
    
    
    
    (7,768
    )
    
    
    125,254Total revenues
    
    
    167,656
    
    
    
    21,762
    
    
    
    5,889
    
    
    
    (12,148
    )
    
    
    183,159Total allocated costs and expenses before cost of restructure and
amortization of customer lists and purchased technology
    
    
    146,233
    
    
    
    20,386
    
    
    
    6,693
    
    
    
    (12,148
    )
    
    
    161,164Operating income (loss) before cost of restructure and amortization of
customer lists and purchased technology
    
    
    21,423
    
    
    
    1,376
    
    
    
    (804
    )
    
    
    
    
    
    
    21,995Amortization of other purchased intangibles
    
    
    
    
    
    
    
    
    
    
    500
    
    
    
    
    
    
    
    500Amortization of purchased technology
    
    
    2,920
    
    
    
    100
    
    
    
    811
    
    
    
    
    
    
    
    3,831Operating income (loss) before unallocated costs and cost of restructure
    
    
    18,503
    
    
    
    1,276
    
    
    
    (2,115
    )
    
    
    
    
    
    
    17,664Cost of restructure  2004 Activity
    
    
    125
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    125Operating income (loss) before unallocated costs
    
    
    18,378
    
    
    
    1,276
    
    
    
    (2,115
    )
    
    
    
    
    
    
    17,539Unallocated cost
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    64Operating income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    17,475Interest income, interest expense and other, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,589Income before income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    21,064
 9




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7. Accounting for Goodwill. The following table reflects the changes in the carrying amount of goodwill (including assembled
workforce) by reporting unit. Consolidated(In thousands)
    
    IPG
    
    
    FFI
    
    
    iAS
    
    
    TotalBalance at January 1, 2005
    
    $
    101,588
    
    
    $
    29,281
    
    
    $
    83,241
    
    
    $
    214,110Reduction in goodwill recorded on XcelleNet acquisition
    
    
    
    
    
    
    
    
    
    
    (8
    )
    
    
    (8
    )Foreign currency translation adjustments
    
    
    (246
    )
    
    
    
    
    
    
    
    
    
    
    (246
    )Balance at March 31, 2005
    
    $
    101,342
    
    
    $
    29,281
    
    
    $
    83,233
    
    
    $
    213,856
 The following table reflects intangible assets as of March 31, 2005 and December 31, 2004: Gross
    
    
    
    
    
    
    
    
    
    
    Gross
    
    
    
    
    
    
    NetCarrying
    
    
    Accumulated
    
    
    Net
    
    
    Carrying
    
    
    Accumulated
    
    
    CarryingAmount
    
    
    Amortization
    
    
    Carrying Amount
    
    
    Amount
    
    
    Amortization
    
    
    Amount(In thousands)
    
    3/31/05
    
    
    3/31/05
    
    
    3/31/05
    
    
    12/31/04
    
    
    12/31/04
    
    
    12/31/04Purchased technology
    
    $
    103,850
    
    
    $
    (78,124
    )
    
    $
    25,726
    
    
    $
    103,850
    
    
    $
    (73,414
    )
    
    $
    30,436AvantGo tradenames
    
    
    3,100
    
    
    
    
    
    
    
    3,100
    
    
    
    3,100
    
    
    
    
    
    
    
    3,100XcelleNet tradenames
    
    
    4,000
    
    
    
    
    
    
    
    4,000
    
    
    
    4,000
    
    
    
    
    
    
    
    4,000Covenant not to compete
    
    
    2,800
    
    
    
    (1,711
    )
    
    
    1,089
    
    
    
    2,800
    
    
    
    (1,244
    )
    
    
    1,556Customer lists
    
    
    39,900
    
    
    
    (12,995
    )
    
    
    26,905
    
    
    
    39,900
    
    
    
    (11,784
    )
    
    
    28,116Totals
    
    $
    153,650
    
    
    $
    (92,830
    )
    
    $
    60,820
    
    
    $
    153,650
    
    
    $
    (86,442
    )
    
    $
    67,208
 The amortization expense on these intangible assets for the three months ended March 31, 2005 was
$6.4 million, of which $4.7.is included within cost of license fees on the Companys income
statement. Estimated amortization expense for each of the next five years ending December 31, is as
follows (dollars in thousands): 2005
    
    $
    16,6582006
    
    
    8,9242007
    
    
    8,7572008
    
    
    8,7572009
    
    
    8,424
 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. 8. Litigation.A former employee, who was terminated as part of a position elimination in
February 2003, filed a civil action in the Superior Court for the State of California, Alameda
County, alleging discrimination on the basis of gender, national origin, and race. The former
employee also alleged retaliation for discussing her working conditions with senior managers. The
parties were not able to settle the matter and trial commenced on August 27, 2004. Sybases motion
for non-suit on the retaliation claim was granted and that claim was dismissed. On October 5, 2004,
the jury found in favor of the plaintiff on the remaining claims and awarded her $1,845,000 in
damages. Plaintiff is also entitled to recover her attorneys fees, but the amount of such fees has
not yet been submitted to the Court. Sybase filed a motion to set aside the jury verdict or, in the
alternative, for a new trial. The motion also asked the judge to set aside the punitive damage part
of the award in the amount of $500,000. On December 7, 2004, the judge issued a decision denying
the motion to set the verdict aside and order a new trial, but he did grant that part of the motion
asking to set aside the $500,000 punitive damage award, reducing the damage amount to $1,345,000.
Plaintiffs counsel has filed a motion for $40,000 in costs which Sybase will oppose. Plaintiff
has not yet filed its motion for attorney fees, but is expected to do so shortly. Sybase filed a
notice of appeal of the $1,345,000 jury verdict and will appeal any attorney fees awarded in the
case as not being supported by the jury verdict being appealed by the Company. On August 20, 1999, Medaphis Corporation (now PerSe Technologies) initiated a civil action against
Sybase in the District Court for Harris County, Texas for negligent misrepresentation and common
law fraud. The claims are based on misrepresentations allegedly made by Sybase in 1996 and 1997
with regard to its ability to provide a product with certain replication functionality. In its
Second Amended Petition (filed in June 2003), Medaphis estimates its damages to be $16,761,470. In
addition, the Second Amended Petition seeks punitive damages in an unspecified amount. Sybases
motion for summary judgment in the matter was granted, dismissing the case in its entirety, on
November 13, 2003. PerSe appealed that judgment. The parties are awaiting a decision from the
appellate court. 10




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##### Table of Contents



Sybase is a party to various other legal disputes and proceedings arising in the ordinary course of
business. In the opinion of management, resolution of these matters, including the above mentioned
legal matters, is not expected to have a material adverse effect on our consolidated financial
position or results of operations as the Company believes it has adequately accrued for these
matters at March 31, 2005. However, depending on the amount and timing of such resolution, an
unfavorable resolution of some or all of these matters could materially affect our future results
of operations or cash flows in a particular period. 9.Future Commitments. Beginning in 1998, the Board of Directors authorized Sybase to
repurchase the Companys outstanding common stock from time to time, subject to price and other
conditions. During the first three months of 2005, the Company repurchased 250,000 shares at a cost
of approximately $4.9 million under the stock repurchase program. From the programs inception
through March 31, 2005, the Company has used an aggregate total of $501.3 million under the stock
repurchase program (of the total $600 million authorized) to repurchase an aggregate total of 31.5
million shares. During the first quarter of 2005, the Company also repurchased approximately 6.7 million shares at
a cost of $125.0 million using net proceeds the Company received from its private offering of
convertible subordinated notes (see Note 11  Convertible Subordinated Notes). The repurchase of
these shares are not part of the Companys stock repurchase program and was authorized by the Board
of Directors in connection with the convertible subordinated note offering. 10. Restructuring. The Company undertook restructuring activities in 2004, 2003, 2002 and 2001 as a means of managing
its operating expenses and assumed certain restructuring program liabilities of AvantGo when Sybase
acquired that company in 2003. For descriptions of each restructuring plan, see Note 13 to
Consolidated Financial Statements, Part II, Item 8 of the Companys Annual Report on Form 10-K for
the year ended December 31, 2004, which information is incorporated here by reference. Changes in
the restructuring liabilities under each plan during the quarter ended March 31, 2005 are described
below. 2004 Restructuring Activities The following table summarizes the activity associated with the balance of the accrued
restructuring charges related to the 2004 restructuring plan through March 31, 2005: AccruedAccrued
    
    
    
    
    
    
    liabilitiesliabilities
    
    
    Amounts
    
    
    at(Dollars in millions)
    
    at 12/31/04
    
    
    paid
    
    
    3/31/05Termination payments to employees and other related costs
    
    $
    0.3
    
    
    $
    0.3
    
    
    $
    Lease cancellations and commitments
    
    
    7.2
    
    
    
    0.6
    
    
    
    6.6$
    7.5
    
    
    $
    0.9
    
    
    $
    6.6
 2003 Restructuring Activities The following table summarizes the activity associated with the balance of the accrued
restructuring charges related to the 2003 restructuring plan through March 31, 2005: AccruedAccrued
    
    
    
    
    
    
    liabilitiesliabilities
    
    
    Amounts
    
    

    at(Dollars in millions)
    
    at 12/31/04
    
    
    paid
    
    
    3/31/05Lease cancellations and commitments
    
    $
    0.2
    
    
    
    
    
    
    $
    0.2
 11




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##### Table of Contents



2002 Restructuring Activities The following table summarizes the activity associated with the balance of the accrued
restructuring charges related to the 2002 restructuring plan through March 31, 2005: AccruedAccrued
    
    
    
    
    
    
    liabilitiesliabilities
    
    
    Amounts
    
    
    at(Dollars in millions)
    
    at 12/31/04
    
    
    paid
    
    
    3/31/05Lease cancellations and commitments
    
    $
    12.7
    
    
    $
    0.8
    
    
    $
    11.9Other
    
    
    0.2
    
    
    
    
    
    
    
    0.2$
    12.9
    
    
    $
    0.8
    
    
    $
    12.1
 2001 Restructuring Activities The following table summarizes the activity associated with the balance of the accrued
restructuring charges associated with the 2001 restructuring plan through March 31, 2005: AccruedAccrued
    
    
    
    
    
    
    liabilitiesliabilities
    
    
    Amounts
    
    
    at(Dollars in millions)
    
    at 12/31/04
    
    
    paid
    
    
    3/31/05Lease cancellations and commitments
    
    $
    7.3
    
    
    $
    0.8
    
    
    $
    6.5
 AvantGo Restructuring Reserves In connection with the 2003 acquisition of AvantGo, the Company assumed certain liabilities
associated with AvantGos 2001 and 2002 restructuring programs, primarily related to excess space
at AvantGos Hayward, California and Chicago, Illinois facilities. At the time of acquisition, the
Company also accrued additional amounts for lease obligations, net of the expected sublease
revenue, associated with AvantGos remaining facilities in Hayward which would be vacated upon the
expected move of all personnel to Sybases facilities in Dublin, California. The following table
summarizes the activity associated with the balance of the accrued restructuring charges related to
AvantGos restructuring actions: Accrued
    
    
    
    
    
    
    Accruedliabilities
    
    
    
    
    
    
    liabilitiesat
    
    
    Amounts
    
    
    at(Dollars in millions)
    
    12/31/04
    
    
    Paid
    
    
    3/31/05Lease cancellations and commitments
    
    $
    3.4
    
    
    $
    0.3
    
    
    $
    3.1
 11. Convertible Subordinated Notes. On February 22, 2005, the Company issued through a
private offering to qualified institutional buyers in the U.S., $460 million of convertible
subordinated notes (Notes) pursuant to exemptions from registration afforded by the Securities
Act of 1933, as amended. These notes have an interest rate of 1.75 percent and are subordinated to
all of the Companys future senior indebtedness. The notes mature on February 22, 2025 unless
earlier redeemed by the Company at its option, or converted or put to the Company at the option of
the holders. Interest is payable semi-annually in arrears on February 22 and August 22 of each
year, commencing on August 22, 2005. The Company may redeem all or a portion of the notes at par on and after March 1, 2010. The
holders may require that the Company repurchase notes at par on February 22, 2010, February 22,
2015 and February 22, 2020. Holders may convert the notes into the right to receive the conversion value (i) when the Companys
stock price exceeds 130% of the $25.22 per share initial conversion price for a specified time,
(ii) in certain change in control transactions, (iii) if the notes are redeemed by the Company (iv)
in certain specified corporate transactions, and (v) when the trading price of the notes does not
exceed a minimum price level. For each $1,000 principal amount of notes, the conversion value
represents the amount equal to 39.6511 shares multiplied by the per share price of the Companys
common stock at the time of conversion. If the conversion value exceeds $1,000 per $1,000 in
principal of notes, the Company will pay $1,000 in cash and may pay the amount exceeding $1,000 in
cash, stock or a combination of cash and stock, at the Companys election. 12




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The Company has recorded these notes as long-term debt. Offering fees and expenses associated with
the debt offering were approximately $9.7 million. These amounts are recorded in other assets in
the Companys condensed consolidated Balance Sheets
at March 31, 2005. This asset will be amortized into interest expenses on a straight-line basis
over a five-year period which corresponds to the earliest put date. This approximates the
effective interest method. The Company used $125 million of the offering proceeds to repurchase approximately 6.7 million
shares of its common stock. The Company intends to use the remaining proceeds for working capital
and general corporate purposes which may include the acquisition of businesses, products, product
rights or technologies, strategic investments or additional purchases of its common stock. 
 ITEM 2: MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Overview  
    Our Business We are a global enterprise software company that derives revenues primarily from the sale and
support of enterprise and mobile software solutions to business and government users. Our value proposition involves enabling the Unwired Enterprise through integrated applications and
solutions designed to manage information across the enterprise, allowing customers to extract more
value from their information technology (IT) investments. Our solutions unlock, integrate, and
seamlessly deliver nearly all types of data, whether in a database, a transaction, or an
application, anywhere, anytime and on any platform. We deliver a full range of mobile enterprise
solutions that includes mobile databases, middleware, synchronization, and management software. Our business is organized into three business segments: IPG, which principally focuses on
enterprise class database servers, integration and development products, iAS, which provides mobile
database and mobile enterprise solutions, and FFI, which delivers integrated banking, payment and
trade messaging solutions to large financial institutions. In the first three months of 2005,
approximately 54 percent of our revenues were generated from the U.S. with the balance generated
from our non-U.S. operations.  
    Our Results We reported total revenues of $191.9 million for the three months ended March 31, 2005, which
represented a 5 percent increase from total revenues of $183.2 million for the same period last
year. The year-over-year increase in revenues for the three-month period was primarily attributable
to a $8.3 million (38 percent) increase in total iAS revenues and a $3.7 million (8 percent)
increase in IPG license revenues. The increase was partially offset by a $4.4 million (4 percent)
decline in year-over-year IPG services revenues. The growth in iAS revenues was partly
attributable to our acquisition of XcelleNet on April 30, 2004. We believe our iAS revenues will
remain strong as we continue to leverage our XcelleNet acquisition, and as our Unwired Enterprise
initiative gains momentum. The increase in IPG license revenues was primarily derived from growth
in our core database products. We reported net income of $13.3 million for the first quarter of 2005, compared to net income of
$13.2 million for the same period last year. Our operating margin for the first quarter of 2005
was 10.6 percent compared to 9.5 percent for the same period in 2004. The increase in operating
margin for the first quarter of 2005 was primarily attributable to the $8.7 million increase in
total revenues, partially offset by the $5.9 million increase in operating expenses. During the quarter ended March 31, 2005, our overall financial position remained strong. We
generated net cash from operating activities of $70.0 million, and had $899.3 million in cash, cash
equivalents and cash investments (including $5.4 million in restricted cash) at March 31, 2005. On
February 22, 2005, we issued through a private offering to qualified institutional buyers in the
U.S., $460 million of convertible subordinated notes (see Note 11 to Condensed Consolidated
Financial Statements, Part I, Item 1, incorporated here by reference ). We used $125 million of
the net proceeds from the offering to purchase approximately 6.7 million shares of our common
stock. The balance of the net proceeds will be used for working capital and general corporate
purposes, which may include the acquisition of businesses, products, product rights or
technologies, strategic investments, or additional purchases of our common stock. 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, and changing
patterns in information technology spending. 13




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As was the case in 2004, the majority of our license fees revenues during Q1 2005 came from sales
to our existing customers. In recent years, fewer of our clients have undertaken large-scale
infrastructure investments requiring significant investment in our core enterprise database
products and related services (this also contributed to a decline in our consulting and education
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. In the future,
we believe that much of the industrys growth will be generated by sales to middle market
companies. We believe we are positioned to exploit this growth opportunity with various
initiatives including our strategic partnership with SAP focused on providing enterprise level
software to small and medium sized businesses. We continue to observe a changing trend in historical IT spending patterns. Specifically, while we
continue to see an overall increase in our transaction volume for license revenues, the average
dollar value of these transactions is lower than historical amounts. This pattern supports our view
that fiscally cautious customers generally are continuing to purchase products and services based
more on present need and less on fulfilling anticipated future needs. Overall, mixed signs of a
strong and sustained U.S. and global economic recovery make it difficult to project whether and to
what extent the overall market for enterprise infrastructure software will materially improve. Moving forward, we will continue to manage our operating expenses as we aggressively pursue our
Unwired Enterprise initiative and strategic alliances with our key partners including SAP, Intel,
and others. For further discussion of the effect of current business trends on our results of
operations, see Future Operation Results, below. We also believe that we are well positioned to
compete within several growing market segments including mobility solutions, data analytic tools,
and Linux based enterprise software. Critical Accounting Policies and Estimates We prepare our financial statements in accordance with U.S. generally accepted accounting
principles (GAAP). These accounting principles require us to make estimates and assumptions that
affect the reported amounts of assets and liabilities, and the disclosure of contingent assets and
liabilities at the date of our financial statements. We also are required to make certain judgments
that affect the reported amounts of revenues and expenses during each reporting period. We
periodically evaluate our estimates and assumptions including those relating to revenue
recognition, impairment of goodwill and intangible assets, the allowance for doubtful accounts,
capitalized software, restructuring, income taxes, stock-based compensation and contingencies and
litigation. We base our estimates on historical experience and various other assumptions that we
believe to be reasonable based on specific circumstances. Our management has reviewed the
development, selection, and disclosure of these estimates with the Audit Committee of our Board of
Directors. These estimates and assumptions form the basis for our judgments about the carrying
value of certain assets and liabilities that are not readily apparent from other sources. Actual
results could differ from these estimates. Further, changes in accounting and legal standards could
adversely affect our future operating results (see Future Operating Results, below). Our
critical accounting policies include: revenue recognition, impairment of goodwill and other
intangible assets, allowance for doubtful accounts, capitalized software, restructuring, income
taxes, stock-based compensation, and contingencies and liabilities, each of which are discussed
below.  
    Revenue RecognitionRevenue recognition rules for software companies are very complex. We follow specific and
detailed guidance in measuring revenue, although certain judgments affect the application of our
revenue recognition policy. These judgments would include, for example, the determination of a
customers creditworthiness, whether two separate transactions with a customer should be
accounted for as a single transaction, or whether included services are essential to the
functionality of a product thereby requiring percentage of completion accounting rather than
software 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 fee revenues
are recognized when (a) a non-cancelable license agreement is in force, (b) the product has been
delivered, (c) the license fee is fixed or determinable, and (d) collection is reasonably
assured. If the fee is not fixed or determinable, revenue is recognized as payments become due
from the customer.Residual Method Accounting. In software arrangements that include multiple elements
(e.g., license rights and technical support services), we allocate the total fees among each of
the elements using the residual method of accounting. Under this method, revenue allocated to
undelivered elements is based on vendor-specific objective evidence of fair value of such
undelivered elements, and the residual revenue is allocated to the delivered elements. Vendor
specific objective evidence of fair value for such undelivered elements is based upon the price
we charge for such product or service when it is sold separately. We may modify our pricing
practices in the future, which would result in changes to our vendor specific objective
evidence. As a result, future revenue associated with multiple element arrangements could
differ significantly from our historical results. 14




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##### Table of Contents



Percentage of Completion Accounting. Fees from licenses sold together with
consulting services are generally recognized upon shipment of the licenses, provided (i) the
criteria described in subparagraphs (a) through (d) above are met, (ii) payment of the license
fee is not dependent upon performance of the consulting services, and (iii) the consulting
services are not essential to the functionality of the licensed software. If the services are
essential to the functionality of the software, or performance of services is a condition to
payment of license fees, both the software license and consulting fees are recognized under the
percentage of completion method of contract accounting. Under this method, we are required to
estimate the number of total hours needed to complete a project, and revenues and profits are
recognized based on the percentage of total contract hours as they are completed. Due to the
complexity involved in the estimating process, revenues and profits recognized under the
percentage of completion method of accounting are subject to revision as contract phases are
actually completed. Historically, these revisions have not been material.Sublicense Revenues. We recognize sublicense fees as reported to us by our
licensees. License fees for certain application development and data access tools are recognized
upon direct shipment by us to the end user or upon direct shipment to the reseller for resale to
the end user. If collection is not reasonably assured in advance, revenue is recognized only
when sublicense fees are actually collected.Service Revenues. Technical support revenues are recognized ratably over the term
of the related support agreement, which in most cases is one year. Revenues from consulting
services under time and materials contracts, and for education, are recognized as services are
performed. Revenues from other contract services are generally recognized based on the
proportional performance of the project, with performance measured based on hours of work
performed.
    Impairment of Goodwill and Other Intangible AssetsGoodwill and intangible assets have generally resulted from our business combinations accounted
for as purchases. We are required to test amounts recorded as goodwill or recorded as intangible
assets with indeterminate lives, at least annually for impairment. The review of goodwill and
indeterminate lived intangibles for potential impairment is highly subjective and requires us to
make numerous estimates to determine both the fair values and the carrying values of our
reporting units to which goodwill is assigned. For these purposes, our reporting units equate to
our reported segments. See Note 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. We performed our annual
impairment analysis as of December 31, 2004 for each of our reporting units and for each
indeterminate lived intangible. This analysis indicated that the estimated fair value of each
reporting unit or indeterminate lived intangible exceeded its carrying value As of March 31,
2005, our goodwill balance totaled $213.9 million. Changes in our internal business structure,
changes in our future revenue and expense forecasts, and certain other factors that directly
impact the valuation of our reporting units could result in a future impairment charge.We continue to review our other intangible assets (e.g., purchased technology 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 AccountsWe 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 SoftwareWe capitalize certain software development costs after a product becomes technologically
feasible and before its general release to customers. Significant judgment is required in
determining when a product becomes technologically feasible. Capitalized development costs are
then amortized over the products estimated life beginning upon general release of the product.
Quarterly, we compare a products unamortized capitalized cost to the products net realizable
value. To the extent unamortized capitalized cost exceeds net realizable value based on the
products estimated future gross revenues (reduced by the estimated future costs of completing
and selling the product) the excess is written off. This analysis requires us to estimate future
gross revenues associated 15




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with certain products and the future costs of completing and selling
certain products. Changes in these estimates could result in write-offs of capitalized software
costs.
    RestructuringWe have recorded significant accruals in connection with various restructuring activities. These
accruals include estimated net costs to settle certain lease obligations based on analysis of
independent real estate consultants. While we do not anticipate significant changes to these
estimates in the future, the actual costs may differ from estimates. For example, if we are able
to negotiate more affordable termination fees, if rental rates increase in the markets where the
properties are located, or if we are able to locate suitable sublease tenants more quickly than
expected, the actual costs could be lower than our estimates. In that case, we would reduce our
restructuring accrual with a corresponding credit to cost of restructuring. Alternatively, if we
are unable to negotiate affordable termination fees, if rental rates decrease in the markets
where the properties are located, or if it takes us longer than expected to find suitable
sublease tenants, the actual costs could exceed our estimates. For example, in the fourth
quarter of 2004 we added approximately $0.7 million to our facility related restructuring
accruals due to revisions to expected sublease income provided by our real estate consultants
with respect to a property located in Colorado. See Note 10 to Condensed Consolidated Financial
Statements, Part I, Item 1, incorporated here by reference.
    Income TaxesWe use the asset and liability approach to account for income taxes. This methodology recognizes
deferred tax assets and liabilities for the expected future tax consequences of temporary
differences between the carrying amounts and the tax bases of assets and liabilities. We then
record a valuation allowance to reduce deferred tax assets to an amount that likely will be
realized. We consider future taxable income and ongoing prudent and feasible tax planning
strategies in assessing the need for the valuation allowance. If we determine during any period
that we could realize a larger net deferred tax asset than the recorded amount, we would adjust
the deferred tax asset and record a corresponding reduction to our income tax expense for the
period. Conversely, if we determine that we would be unable to realize a portion of our recorded
deferred tax asset, we would adjust the deferred tax asset and record a charge to income tax
expense for the period. Significant judgment is required in assessing the future tax
consequences of events that have been recognized in the Companys financial statements or tax
returns. Fluctuations in the actual outcome of these future tax consequences (e.g,, the income
we earn within the United States) could materially impact our financial position or results of
operations.
    Stock-Based CompensationSFAS 123, Accounting for Stock-Based Compensation, currently encourages, but does not require,
companies to record compensation cost for stock-based employee compensation plans at fair value.
We have continued to account for stock-based employee compensation using the intrinsic value
method. Under that method, compensation cost for stock options granted to employees is measured
as the excess, if any, of the quoted market price of the Company stock at the date of the grant
over the amount an employee must pay to acquire the stock. However, as of January 1, 2006, we
will be required to apply FASB Statement 123R, Share-Based Payments, which will require us to
measure compensation cost for all share-based payments at fair value. See Note 2 and Note 5 to
Condensed Consolidated Financial Statements, Part I, Item 1, incorporated here by reference.
    Contingencies and LiabilitiesWe are involved from time to time in various proceedings, lawsuits and claims involving our
customers, products, intellectual property, stockholders and employees, among other things. We
routinely review the status of each significant matter and assess our potential financial
exposure. When we reasonably determine that a loss associated with any of these matters is
probable, and can reasonably estimate the loss, we record a reserve to provide for such loss
contingencies. If we are unable to record a reserve because we are not able to estimate the
amount of a potential loss in a matter, or if we determine that a loss is not probable, we are
nevertheless required to disclose certain information regarding such matter if we determine that
there is a reasonable possibility that a loss has been incurred. Because of the inherent
uncertainties related to these types of matters, we base our loss reserves on the best
information available at the time. As additional information becomes available, we may
reevaluate our assessment regarding the probability of a matter or its expected loss. Our
financial position or results of operations could be materially and adversely affected by such
revisions in our estimates. For further discussion of contingencies and liabilities, see Future
Operating Results, below. 16




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Results of Operations Revenues
(Dollars in millions) Three
    
    
    ThreeMonths
    
    
    MonthsEnded
    
    
    Ended
    
    
    Percent3/31/05
    
    
    3/31/04
    
    
    ChangeLicense fees by segment:IPG
    
    $
    52.3
    
    
    $
    48.6
    
    
    
    8
    %IAS
    
    
    14.6
    
    
    
    12.6
    
    
    
    16
    %FFI
    
    
    0.3
    
    
    
    1.1
    
    
    
    (73
    %)Eliminations
    
    
    (4.5
    )
    
    
    (4.4
    )
    
    
    2
    %Total license fees
    
    $
    62.7
    
    
    $
    57.9
    
    
    
    8
    %Percentage of total revenues
    
    
    33
    %
    
    
    32
    %Services by segment:IPG
    
    $
    114.7
    
    
    $
    119.1
    
    
    
    (4
    %)IAS
    
    
    15.4
    
    
    
    9.2
    
    
    
    67
    %FFI
    
    
    6.6
    
    
    
    4.8
    
    
    
    38
    %Eliminations
    
    
    (7.5
    )
    
    
    (7.8
    )
    
    
    (4
    %)Total Services
    
    $
    129.2
    
    
    $
    125.3
    
    
    
    3
    %Percentage of total revenues
    
    
    67
    %
    
    
    68
    %Total revenues
    
    $
    191.9
    
    
    $
    183.2
    
    
    
    5
    %
 License fees increased 8 percent for the three months ended March 31, 2005 compared to the same
period last year. The increase in license fees revenues during the quarter was primarily
attributable to a $4.3 million (22 percent) increase in IPG license revenues from our Adaptive
Server® Enterprise product and $3.3 million in iAS license revenues generated by products acquired
in the XcelleNet acquisition. This increase was partially offset by a $ 1.9 million decline in IAS
license revenues generated by the SQL Anywhere product, and a $0.8 million decline in FFI license
revenues. The growth in revenues from our Adaptive Server® Enterprise product was largely due to
a major European government arrangement that closed in the first quarter of 2005 and the growth
from new customers using the Linux operating system. FFI license revenues are largely dependent
upon closing large (multi-million dollar) transactions. As a result, year-over-year results for
FFI tend to fluctuate greatly. The decrease in FFI license revenues for the first quarter of 2005
was primarily attributable to decreased sales of the segments core banking application in North
America. Segment revenues 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. In the case of such a
transaction, the segment recording the sale also records an inter-company expense on the
transaction, with a corresponding inter-company revenue amount recorded by the segment whose
product was sold. The net amount retained by the segment that recorded the sale is intended to
reflect the costs incurred by such transferring segment. The total transfers between the segments
are captured in Eliminations. Total services revenues (derived from technical support, education, and professional services)
increased $3.9 million (3 percent) for the three months ended March 31, 2005 compared to the three
months ended March 31, 2004.The increase in services revenues was primarily due to a $5.5 million
increase in iAS technical support revenues and a $2.5 million increase in FFI professional services
revenues, partially offset by an 11 percent ($2.7 million) decline in IPG education and
professional services revenues and a $1.8 million (2 percent) in technical support revenues. The
rise in iAS technical support revenues was due to the technical support revenues associated with
XcelleNet products. The increase in FFI professional services revenues primarily resulted from
several large ongoing consulting engagements in North America. The decrease in IPG education and
professional services revenues was primarily attributable to the reasons discussed in the Business
Trends section in Overview, above. Technical support revenue for the three months ended March 31, 2005 increased 3 percent ($3.3
million) from the same period in 2004 and the deferred revenue related to technical support
contracts at March 31, 2005 was up 5 percent from the deferred revenue related to such contracts at
March 31, 2004. Technical support revenues comprised approximately 78 percent and 77 percent of
total services revenues for the three months ended March 31, 2005 and 2004, respectively. Other services revenues increased 2 percent for the three months ended March 31, 2005 compared to
the same period in 2004. The increase in FFIs professional services revenues discussed above and
a $0.9 million rise in iAS professional services revenues were offset by the decline in the IPG
education and professional services revenues discussed above. 17




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Geographical Revenues(Dollars in millions) Three
    
    
    ThreeMonths
    
    
    MonthsEnded
    
    
    Ended
    
    
    Percent3/31/05
    
    
    3/31/04
    
    
    ChangeNorth American
    
    $
    110.0
    
    
    $
    105.6
    
    
    
    4
    %Percentage of total revenues
    
    
    57
    %
    
    
    58
    %International: EMEA (Europe, Middle East and Africa)
    
    $
    54.5
    
    
    $
    50.7
    
    
    
    7
    %Percentage of total revenues
    
    
    29
    %
    
    
    28
    %Intercontinental (Asia Pacific and Latin America)
    
    $
    27.4
    
    
    $
    26.9
    
    
    
    2
    %Percentage of total revenues
    
    
    14
    %
    
    
    14
    %Total Outside North America
    
    $
    81.9
    
    
    $
    77.6
    
    
    
    6
    %Percentage of total revenues
    
    
    43
    %
    
    
    42
    %Total revenues
    
    $
    191.9
    
    
    $
    183.2
    
    
    
    5
    %
   *
    
    Not meaningful North American revenues (United States, Canada and Mexico) increased $4.4 million (4 percent) for
the three months ended March 31, 2005 compared to the same period last year due to a $2.3 million
(17 percent) increase in license fees revenues from enterprise database products included in the
IPG segment, a $1.8 million (29 percent) increase in license fees revenues from products included
in the iAS segment, and a $1.7 million (3 percent) increase in technical support revenues. The
increase was offset by a $0.7 million (70 percent) decline in license fees revenues from FFI
products and a combined $0.8 million decrease in license fees revenues from integration and
datawarehouse products included in the IPG segment. EMEA (Europe, Middle East and Africa) revenues for the three months ended March 31, 2005 increased
$3.8 million (7 percent) compared to the three months ended March 31, 2004. The increase was
primarily due to a $2.9 million (32 percent) increase in license fees revenues from enterprise
database products and a $0.9 million increase in technical support revenues. Increased revenues in
The Netherlands contributed most to the overall increase in the first quarter of 2005. The $0.5
million (2 percent) increase in Intercontinental (Asia Pacific and Latin America) revenues for the
three months ended March 31, 2005 was primarily attributable to a $1.3 million increase in
technical support and professional services revenues and a $0.3 million increase in license fees
revenues from integration and datawarehouse products, offset by a $1.2 million decline in license
fees revenues from enterprise database products. The results of our operations in Korea contributed
most significantly to the increased revenue. International revenues comprised 43 percent and 42
percent of total revenues for the three months ended March 31, 2005 and 2004, respectively. In EMEA and the Intercontinental region, most revenues and expenses are denominated in local
currencies. During the three months ended March 31, 2005, 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. 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. 18




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Costs and Expenses(Dollars in millions) Three
    
    
    ThreeMonths
    
    
    MonthsEnded
    
    
    Ended
    
    
    Percent3/31/05
    
    
    3/31/04
    
    
    ChangeCost of license fees
    
    $
    14.3
    
    
    $
    13.6
    
    
    
    5
    %Percentage of license fees revenues
    
    
    23
    %
    
    
    23
    %Cost of services
    
    $
    40.3
    
    
    $
    41.6
    
    
    
    (3
    %)Percentage of services revenues
    
    
    31
    %
    
    
    33
    %Sales and marketing
    
    $
    59.6
    
    
    $
    58.2
    
    
    
    2
    %Percentage of total revenues
    
    
    31
    %
    
    
    32
    %Product development and engineering
    
    $
    33.5
    
    
    $
    30.7
    
    
    
    9
    %Percentage of total revenues
    
    
    17
    %
    
    
    17
    %General and administrative
    
    $
    22.2
    
    
    $
    20.9
    
    
    
    6
    %Percentage of total revenues
    
    
    12
    %
    
    
    11
    %Amortization of other purchased intangibles
    
    $
    1.7
    
    
    $
    0.5
    
    
    
    240
    %Percentage of total revenues
    
    
    1
    %
    
    
    *Cost (Reversal) of restructure
    
    $
    *
    
    
    $
    0.1
    
    
    
    *Percentage of total revenues
    
    
    *
    
    
    
    *
   *
    
    Not meaningful Cost of License Fees.Cost of license fees consists primarily of product costs (media and
documentation), amortization of capitalized software development costs and purchased technology,
and third-party royalty costs. These costs were $14.3 million for the three months ended March 31,
2005, up from $13.6 million for the three months ended March 31, 2004. Such costs were 23 percent
of license fees revenue in both the three months ended March 31, 2005 and 2004. The increase in the
cost of license fees for the three months ended March 31, 2005 was primarily due to a $0.8 million
increase in third-party royalties and amortization of $0.8 million on purchased technology acquired
as a result of the XcelleNet acquisition in the second quarter of 2004, partially offset by a $0.9
million decrease in amortization of capitalized software development costs. Amortization of
capitalized software development costs included in cost of license fees was $7.3 million for the
three months ended March 31, 2005 as compared to $8.3 million for the three months ended March 31,
2004.The decrease in amortization of capitalized software costs for the three months ended March
31, 2005 was primarily due to certain products included in the IPG segment that became fully
amortized in the fourth quarter of 2004. Amortization of purchased technology acquired was $4.7
million and $3.8 million for the three months ended March 31, 2005 and 2004, respectively. Cost of Services.Cost of services consists primarily of the cost of our personnel who provide
technical support, education and professional services and, to a lesser degree, services-related
product costs (media and documentation). These costs were $40.3 million for the three months ended
March 31, 2005 as compared to $41.6 million for the three months ended March 31, 2004. These costs
were 31 percent and 33 percent of services revenues for the three months ended March 31, 2005 and
2004, respectively. The decrease in cost of services in absolute dollars and as a percentage of
services revenues for the three months ended March 31, 2005 is primarily due to a reduction in
technical support and professional services headcount as a result of our 2004 restructuring
activities. The headcount reflected in this expense category was approximately 11 percent lower at
March 31, 2005 compared to March 31, 2004. Sales and Marketing.Sales and marketing expenses increased to $59.6 million for the three months
ended March 31, 2005 as compared to $58.2 million for the same period last year. These costs were
31 percent and 32 percent of total revenues for the three months ended March 31, 2005 and 2004,
respectively. The increase in sales and marketing expenses in absolute dollars for the three months
ended March 31, 2005 was primarily due to a $0.8 million increase in sales commissions and a $0.5
million increase in costs association with a 2005 sales training initiative. Product Development and Engineering.Product development and engineering expenses (net of
capitalized software development costs) increased 9 percent to $33.5 million for the three months
ended March 31, 2005 as compared to $30.7 million for the same period last year. These costs were
17 percent of total revenues for the three months ended March 31, 2005 and 2004. The increase in
product development and engineering costs in absolute dollars for the three months ended March 31,
2005 is primarily due to an increase in product development and engineering headcount largely
attributable to our acquisition of XcelleNet in the second quarter of 2004 partially offset by an
increase in capitalized software development costs. The headcount reflected in this expense
category was approximately 13 percent higher at March 31, 2005 compared to March 31, 2004. 19




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We capitalized approximately $9.6 million of software development costs for the three months ended
March 31, 2005 compared to $8.2 million for the three months ended March 31, 2004. For the three
months ended March 31, 2005, capitalized software costs included costs incurred for the development
of the Adaptive Server ® Enterprise 15.0 and Unwired Orchestrator 4.5. We believe product development and engineering expenditures are essential to technology and product
leadership and expect product development and engineering expenditures to continue to be
significant, both in absolute dollars and as a percentage of total revenues. General and Administrative.General and administrative expenses, which include IT, legal, business
operations, finance and administrative functions, were $22.2 million for the three months ended
March 31, 2005 compared to $20.9 million for the three months ended March 31, 2004. These costs
represented 12 percent and 11 percent of total revenues for the three months ended March 31, 2005
and 2004, respectively. The increase in absolute dollars and as a percentage of total revenues for
the three months ended March 31, 2005 was primarily due an increase in external costs associated
with Sarbanes-Oxley compliance. General and administrative expenses for the three month period
ended March 31, 2005 included approximately $1.3 million attributable to stock based compensation,
compared to $1.2 million in stock based compensation for the three months ended March 31, 2004. 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 our acquisition of XcelleNet in the second quarter of 2004. Cost/(Reversal) of Restructuring. 2003 Restructuring Activities.During the quarter ended March 31, 2004, the Company recorded
restructuring charges of $0.1 million for severance paid in connection with a foreign employee who
was terminated under the 2003 Plan. For further discussion regarding our restructuring activities, see Note 10 to Condensed
Consolidated Financial Statements, Part I, Item I, incorporated here by reference. Operating Income(Dollars in millions) Three
    
    
    ThreeMonths
    
    
    MonthsEnded
    
    
    Ended
    
    
    Percent3/31/05
    
    
    3/31/04
    
    
    ChangeOperating income by segment:IPG
    
    $
    21.8
    
    
    $
    18.4
    
    
    
    18
    %IAS
    
    
    0.5
    
    
    
    1.3
    
    
    
    (62
    %)FFI
    
    
    (2.0
    )
    
    
    (2.1
    )
    
    
    (5
    %)Unallocated cost
    
    
    0.0
    
    
    
    (0.1
    )
    
    
    *Total operating income:
    
    $
    20.3
    
    
    $
    17.5
    
    
    
    16
    %Percentage of total revenues
    
    
    10.6
    %
    
    
    9.5
    %
   *
    
    Not meaningful Operating income was $20.3 million for the three months ended March 31, 2005 compared to operating
income of $17.5 million for the three months ended March 31, 2004. The increase in operating income
for the three months ended March 31, 2005 is primarily due to the various factors discussed under
Revenues and Costs and Expenses, above. The operating margin for the IPG segment was 13.0
percent for the three months ended March 31, 2005, compared to 11.0 percent for the three months
ended March 31, 2004. The increase in operating income in the IPG segment for the three months
ended March 31, 2005 was primarily due to the decrease in employee and facilities related operating
expenses in North America as a result of our restructuring activities in 2004, and an increase in
capitalized software expenses. The operating margin for the IAS segment was 1.5 percent for the
three months ended March 31, 2005, compared to 5.9 percent for the same period in 2004. The
decline in operating income for the iAS segment was primarily due to an increase in operating
expenses, largely attributable to the XcelleNet and Dejima acquisitions in the second quarter of
2004 (including $2.0 million in amortization of intangibles acquired in the Xcellenet acquisition),
offset by an increase in total revenues. The operating loss for the FFI segment decreased in the three months ended March 31, 2005 due to an
increase in services revenues offset by an increase in operating expenses. Certain common costs and expenses are allocated to the various segments based on measurable drivers
of expense. Unallocated expenses represent corporate expenditures or cost savings that are not
specifically allocated to the segments including reversals or restructuring expenses associated
with restructuring activities undertaken prior to 2003. 20




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Other Income (Expense), Net(Dollars in millions) Three
    
    
    ThreeMonths
    
    
    MonthsEnded
    
    
    Ended
    
    
    Percent3/31/05
    
    
    3/31/04
    
    
    ChangeInterest income
    
    $
    5.0
    
    
    $
    2.9
    
    
    
    72
    %Percentage of total revenues
    
    
    3
    %
    
    
    2
    %Interest expense and other, net
    
    $
    (1.9
    )
    
    $
    0.7
    
    
    
    *Percentage of total revenues
    
    
    (1
    %)
    
    
    *
   *
    
    Not meaningful Interest income increased 72 percent to $5.0 million for the three months ended March 31, 2005
compared to $2.9 million for the same period last year. Interest income consists primarily of
interest earned on our investments. The increase in interest income in the first quarter of 2005 is
primarily due to the increase in the cash balances invested. Our invested cash balances increased
as a result of the net proceeds from our private offering of convertible subordinated notes. Interest expense and other, net was an expense of $1.9 million for the three months ended March 31,
2005 compared to $0.7 million in income for the three months ended March 31, 2004. Interest expense
and other, net, primarily includes: interest expense on the convertible subordinated notes;
amortization of deferred offering expenses associated with these notes; net gains and losses
resulting from foreign currency transactions and the related hedging activities; the cost of
hedging foreign currency exposures; bank fees; and gains from the disposition of certain real
estate and investments. The net change in interest expense and other, net was primarily the result
of the $1.0 million interest expense incurred on the convertible subordinated notes in the three
months ended March 31, 2005 and a $0.8 million increase in the net foreign currency remeasurement
loss. Provision for Income Taxes(Dollars in millions) Three
    
    
    ThreeMonths
    
    
    MonthsEnded
    
    
    Ended
    
    
    Percent3/31/05
    
    
    3/31/04
    
    
    ChangeProvision for income taxes
    
    $
    10.1
    
    
    $
    7.9
    
    
    
    28
    %
 For the three months ended March 31, 2005, the income tax provision was recorded at a rate of
approximately 43 percent on income before taxes. Our effective tax rate differed from the
statutory rate of 35 percent primarily due to the impact of state taxes, additional tax reserves
relating mainly to foreign transfer pricing exposures and utilization of net operating loss carry
forwards (the benefit of which is recorded as a reduction of acquired goodwill) in priority to
foreign tax credits. In the same period a year ago, the income tax provision was recorded at a rate of 37 percent, which
differed from the statutory tax rate primarily due to the impact of states taxes. We have not yet completed our analysis of the impact of the repatriation provisions under the
American Jobs Creation Act 2004 on our plans for repatriation. As such, we are not in a position
to decide whether, and to what extent, we might repatriate foreign earnings that have not been
remitted to the U.S. under the Act. We expect to be in a position to finalize our assessment by
the end of the second quarter of 2005. Net Income Per Share(Dollars and shares in millions, except per share data) Three
    
    
    ThreeMonths
    
    
    MonthsEnded
    
    
    Ended
    
    
    Percent3/31/05
    
    
    3/31/04
    
    
    ChangeNet income
    
    $
    13.3
    
    
    $
    13.2
    
    
    
    1
    %Percentage of total revenues
    
    
    7
    %
    
    
    7
    %Basic net income per share
    
    $
    0.14
    
    
    $
    0.14
    
    
    
    *Diluted net income per share
    
    $
    0.14
    
    
    $
    0.13
    
    
    
    8
    %Shares used in computing basic net income per share
    
    
    92.7
    
    
    
    97.3
    
    
    
    (5
    %)Shares used in computing diluted net income per share
    
    
    95.1
    
    
    
    101.1
    
    
    
    (6
    %)
   *
    
    Not meaningful 21




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We reported net income of $13.3 million for the three months ended March 31, 2005 compared to net
income of $13.2 million for the same period last year. The increase in net income for the three
months ended March 31, 2005 is due to the various factors discussed above. Basic net income per share was $0.14 for the three months ended March 31, 2005 and 2004. Diluted
net income per share was $0.14 and $0.13 for the three months ended March 31, 2005 and 2004,
respectively. Shares used in computing basic net income per share decreased 5 percent for the three months ended
March 31, 2005 compared to the same period last year due primarily to shares repurchased under our
stock repurchase program (See Note 9 to Condensed Consolidated Financial Statements, Part I, Item
1, incorporated here by reference) and 6.7 million shares repurchased during the first quarter of
2005 with $125 million of proceeds from the issuance of the convertible subordinated notes,
partially offset by the ongoing exercise of employee stock options. Shares used in computing
diluted net income per share decreased 6 percent for the three months ended March 31, 2005 compared
to the three months ended March 31, 2004 due primarily for the reasons stated above. Liquidity and Capital Resources(Dollars in millions) Three
    
    
    ThreeMonths
    
    
    MonthsEnded
    
    
    Ended
    
    
    Percent3/31/05
    
    
    3/31/04
    
    
    ChangeWorking capital
    
    $
    604.6
    
    
    $
    269.4
    
    
    
    124
    %Cash, cash equivalents and cash investments
    
    $
    891.3
    
    
    $
    586.7
    
    
    
    52
    %Net cash provided by operating activities
    
    $
    70.0
    
    
    $
    66.4
    
    
    
    5
    %Net cash provided by (used for) investing activities
    
    $
    (318.3
    )
    
    $
    26.5
    
    
    
    *Net cash provided by (used for) financing activities
    
    $
    330.6
    
    
    $
    (37.0
    )
    
    
    *
   *
    
    Not meaningful Net cash provided by operating activities increased 5 percent for the three months ended March 31,
2005 compared to the three months ended March 31, 2004. The increase in net cash provided by
operating activities was primarily due to an increase in accrued income taxes, partially offset by
a lower increase in deferred revenues for the three months ended March 31, 2005 compared to the
three months ended March 31, 2004. Net cash used for investing activities was $318.3 million for the three months ended March 31, 2005
compared to net cash provided by investing activities of $26.5 million for the three months ended
March 31, 2004. The shift from net cash provided by investing activities to net cash used for
investing activities is primarily due to net purchases of cash investments of $304.8 million during
the three months ended March 31, 2005, compared to net dispositions of $42.5 million in cash
investments during the three months ended March 31, 2004. The high amount of net purchases in cash
investments during the three months ended March 31, 2005 was due to the investment of the net
proceeds that we had received from our private offering of the convertible subordinated notes. Net cash provided by financing activities was $330.6 million for the three months ended March 31,
2005 compared to net cash used for financing activities of $37.0 million for the three months ended
March 31, 2004. The shift from net cash used for financing activities to net cash provided by
financing activities was primarily the result of the $450.5 million net proceeds received from our
private offering of convertible subordinated notes (see Note 11 to Consolidated Financial
Statements, Part I, Item 1, incorporated here by reference) partially offset by the $76.0 million
increase in the cash used to repurchase our stock during the three months ended March 31, 2005
compared to the cash used for a similar purpose during the same period in 2004. The increase in
repurchases of our stock was attributable to $125.0 million in proceeds from the convertible
subordinated notes used to repurchase approximately 6.7 million shares of our common stock. During
the three months ended March 31, 2005, we also repurchased 250,000 shares of our common stock for
$4.9 million pursuant to the Board of Directors authorization. We had no significant commitments for future capital expenditures at March 31, 2005. 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, 2004. We engage in global business operations and are therefore exposed to foreign currency fluctuations.
As of March 31, 2005, we had identifiable net assets totaling $243.0 million associated with our
European operations and $77.5 million associated with our Asia and Latin American operations. We
experience foreign exchange transaction exposure on our net assets and liabilities denominated in
currencies other than the US dollar. The related foreign currency translation gains and losses are
reflected in Accumulated other comprehensive income/(loss) under Stockholders equity on the
balance sheet. We also experience foreign exchange translation exposure from certain balances that
are denominated in a currency other than the functional currency of the entity on whose books the 22




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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, 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. In recent periods, we have experienced
fluctuations in the purchasing patterns of our customers. For example, during 2003 and the first
half of 2004, we experienced an overall increase in the volume of license revenue transactions but
an overall decrease in the average dollar value of these transactions. Although many of our
customers are larger enterprises, an apparent trend toward more conservative IT spending could
result in fewer of these customers making substantial investments in our products and services in
any given period. Therefore, if one or more significant orders do not close in a particular
quarter, our results of operations could be materially and adversely affected, as was the case in
the first and second quarters of 2004. Our operating expenses are based on projected annual and quarterly revenue levels, and are
generally incurred ratably throughout each quarter. Since our operating expenses are relatively
fixed in the short term, failure to realize projected revenues for a specified period could
adversely impact operating results, reducing net income or causing an operating loss for that
period. The deferral or non-occurrence of such revenues would materially adversely affect our
operating results for that quarter and could impair our business in future periods. Because we do
not know when, or if, our potential customers will place orders and finalize contracts, we cannot
accurately predict our revenue and operating results for future quarters. In addition to the above factors, the timing and amount of our revenues are subject to a number of
factors that make it difficult to accurately estimate revenues and operating results on a quarterly
or annual basis. For example, in the first and second quarters of fiscal 2004, our results fell
short of our previously announced forecasts for those periods. In our experience revenues in the
fourth quarter benefit from large enterprise customers placing orders before the expiration of
budgets tied to the calendar year. As a result, revenues from license fees tend to decline from the
fourth quarter of one year to the first quarter of the next year. In the past, this seasonality has
contributed to lower total revenues and earnings in the first quarter compared to the prior fourth
quarter. We cannot assure you that estimates of our revenues and operating results can be made with
certain accuracy or predictability. Fluctuations in our operating results may contribute to
volatility in our stock price. Economic conditions in the U.S. and worldwide could adversely affect our revenues. Our revenues and operating results depend on the overall demand for our products and services.
General weakening of the U.S. and worldwide economy in recent years contributed to a decrease in
our revenues from 2000 to 2003. Economic uncertainty caused many of our customers to delay or
significantly reduce discretionary spending for larger infrastructure IT projects, which
contributed to the decline in our revenues from 2000 to 2003. In part due to improvements in the
worldwide economy, our first quarter 2005 revenues exceeded first quarter 2004 revenues by 5%. If
the U.S. and worldwide economies do not continue to stabilize and improve, or if these economies
weaken, either alone or in tandem with other factors beyond our control (including war, political
unrest, shifts in market demand for our products, etc.), we may not be able to maintain or expand
our recent revenue growth. If we fail to maintain or expand our relationships with strategic partners and indirect
distribution channels our license revenues could decline. We currently derive a significant portion of our license revenues from sales of our products and
services through non-exclusive distribution channels, including strategic partners, systems
integrators (SIs), original equipment manufacturers (OEMs) and value-added resellers (VARs). We
generally anticipate that sales of our products through these channels will account for a
substantial portion of our license revenues in the foreseeable future. Because most of our channel
relationships are non-exclusive, there is a risk that some or all of them could promote or sell our
competitors products instead of ours, or that they will be unable to effectively sell new products
that we may introduce. Additionally, if we are unable to expand our indirect channels, or these
indirect channels fail to generate significant revenues in the future, our business could be
harmed. 23




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Our development, marketing and distribution strategies also depend in part on our ability to form
strategic relationships with other technology companies. If these companies change their business
focus, enter into strategic alliances with other companies or are acquired by our competitors or
others, support for our products could be reduced or eliminated, which could have a material
adverse effect on our business and financial condition. Industry consolidation and other competitive pressures could affect prices or demand for our
products and services, and our business may be adversely affected. The IT industry and the market for our core database infrastructure products and services is
becoming increasingly competitive due to a variety of factors including a maturing enterprise
infrastructure software market, changes in customer IT spending habits, and mixed economic recovery
in the U.S. There also appears to be a growing trend toward consolidation in the software industry,
as evidenced by Oracles acquisition of PeopleSoft, Symantecs pending acquisition of Veritas,
PeopleSofts 2003 acquisition of J.D. Edwards, and IBMs 2001 acquisition of the Informix database
business. 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. Because of Oracles acquisition of PeopleSoft, we anticipate that a
limited number of our customers that use PeopleSoft products will choose to run these applications
on Oracle products rather than on our products. Continued consolidation activity could pose a
significant competitive disadvantage to us. The significant purchasing and market power of larger companies may also subject us to increased
pricing pressures. Many of our competitors have greater financial, technical, sales and marketing
resources, and a larger installed customer base than us. In addition, our competitors advertising
and marketing efforts could overshadow our own and/or adversely influence customer perception of
our products and services, and harm our business and prospects as a result. To remain competitive,
we must develop and promote new products and solutions, enhance existing products and retain
competitive pricing policies, all in a timely manner. Our failure to compete successfully with new
or existing competitors in these and other areas could have a material adverse impact on our
ability to generate new revenues or sustain existing revenue levels. The ability to rapidly develop and bring to market advanced products and services that are
successful is crucial to maintaining our competitive position. Widespread use of the Internet and fast-growing market demand for mobile and wireless solutions may
significantly alter the manner in which business is conducted in the future. In light of these
developments, our ability to timely meet the demand for new or enhanced products and services to
support wireless and mobile business operations at competitive prices could significantly impact
our ability to generate future revenues. We acquired AvantGo in 2003, as well as XcelleNet and
certain assets of Dejima in April 2004, to enhance our mobile, wireless and embedded solutions that
form the foundation of our Unwired Enterprise initiative. In 2004 we introduced more new and
enhanced products than in any previous year. If the market for unwired solutions does not continue
to develop as we anticipate, if our solutions and services do not successfully compete in the
relevant markets, or our new products are not widely adopted and successful, our competitive
position and our operating results could be adversely affected. If our existing customers cancel or fail to renew their technical support agreements, or if
customers do not license new or additional products on terms favorable to us, our technical support
revenues could be adversely affected. We currently derive a significant portion of our overall revenues from technical support services,
which are included in service revenues. The terms of our standard software license arrangements
provide for the payment of license fees and prepayment of first-year technical support fees.
Support is renewable annually at the option of the end user. We have recently been experiencing
increasing pricing pressure from customers when purchasing or renewing technical support agreements
and this pressure may result in our reducing support fees or in lost support fees if we refuse to
reduce our pricing, either of which could result in reduced revenue. If our existing customers
cancel or fail to renew their technical support agreements, or if we are unable to generate
additional support fees through the license of new products to existing or new customers, our
business and future operating results could be adversely affected. Unanticipated delays or accelerations in our sales cycles could result in significant fluctuations
in our quarterly operating results. The length of our sales cycles varies significantly from product to product. The sales cycle for
some of our products can take up to 18 months to complete. Any delay or unanticipated acceleration
in the closing of a large license or a number of smaller licenses could result in significant
fluctuations in our quarterly operating results. For example, in the second quarter of 2004, the
license revenue in IPG declined 15% from the prior year period, in part due to larger sales being
delayed and a lengthening sales cycle. The length of the sales cycle may vary depending on a number
of factors over which we may have little or no control, including the size and complexity of a
potential transaction, the level of competition that we encounter in our selling activities and our
potential customers internal 24




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budgeting process. Our sales cycle can be further extended for product sales made through third
party distributors. As a result of the lengthy sales cycle, we may expend significant efforts over
a long period of time in an attempt to obtain an order, but ultimately not complete the sale, or
the order ultimately received may be smaller than anticipated. We may encounter difficulties completing or integrating our acquisitions and strategic
relationships and may incur acquisition-related charges that could adversely affect our operating
results. We regularly explore possible acquisitions and other strategic ventures to expand and enhance our
business. Additionally, we have in the past and may in the future make strategic investments in
other companies. We have recently acquired a number of companies and formed certain strategic
relationships. For example, we acquired AvantGo in 2003 and XcelleNet and certain assets of Dejima
in April 2004. We expect to continue to pursue acquisitions of complimentary or strategic business
product lines, assets and technologies. We may not achieve the desired benefits of our acquisitions and investments. For example, we may be
unable to successfully assimilate an acquired companys management team, employees or business
infrastructure. Also, dedication of additional resources to execute acquisitions and handle
integration tasks could temporarily divert attention from other important business. Such
acquisitions could also result in costs, liabilities, or additional expenses that could harm our
results of operations and financial condition. In addition, we may not be able to maintain
customer, supplier or other favorable business relationships of ours, or of our acquired
operations, or be able to terminate or restructure unfavorable relationships. Under Statement of Financial Accounting Standard No. 142 we no longer amortize goodwill but
evaluate goodwill recorded in connection with acquisitions at least annually for impairment. As of
March 31, 2005, we had approximately $214 million of goodwill recorded on our balance sheet, none
of which was determined to be impaired as of that date. Goodwill impairments are based on the value
of our reporting units and reporting units that previously recognized impairment charges (as was
the case with FFI in 2002) are prone to additional impairment charges if future revenue and expense
forecasts or market conditions worsen after an impairment is recognized. If goodwill is determined
to be impaired in the future we will be required to take a non-cash charge to earnings to write-off
impaired goodwill, which could significantly impact our net income. With respect to our investments in other companies, we may not realize a return on our investments,
or the value of our investments may decline if the businesses in which we invest are not
successful. Future acquisitions may also result in dilutive issuances of equity securities, the
incurrence of debt, restructuring charges relating to the consolidation of operations and the
creation of other intangible assets that could result in amortization expense or impairment
charges, any of which could adversely affect our operating results. Restructuring activities and reorganizations in our sales model may not succeed in increasing
revenues and operating results. Since 2000, we have implemented several restructuring plans in an effort to align our expense
structure to our expected revenue. As a result of these restructuring activities, we have recorded
restructuring charges totaling approximately $116 million through March 31, 2005. Our ability to
significantly reduce our current cost structure in any material respects through future
restructurings may be difficult without fundamentally changing elements of our current business. If
we are unable to generate increased revenues or control our operating expenses going forward, our
results of operations will be adversely affected. Our sales model has evolved significantly during the past few years to keep pace with new and
developing markets and changing business environments. If we have overestimated demand for our
products and services in our target markets, or if we are unable to coordinate our sales efforts in
a focused and efficient way, our business and prospects could be materially and adversely affected.
For example, in January 2003, we reorganized our sales focus with the creation of the IPG, which
was designed to integrate and provide synergies among our different products lines and to focus on
increasing our market presence and revenue through indirect channels such as SIs, OEMs and VARs and
other resellers. In the process of this reorganization, we brought three of our former divisions,
ESD, eBD and BID, under a single umbrella, and reduced the number of our business divisions from
five to three. In early 2005 the IPG sales organization was restructured into two organizations,
North America and International. Other organizational changes in our sales or divisional model
could have a direct effect on our results of operations depending on whether and how quickly and
effectively our employees and management are able to adapt to and maximize the advantages these
changes are intended to create. We cannot assure that these or other organizational changes in our
sales or divisional model will result in any increase in revenues or profitability, and they could
adversely affect our business. Our results of operations may depend on the compatibility of our products with other software
developed by third parties. Our future results may be affected if our products cannot interoperate and perform well with
software products of other companies. Certain leading applications currently are not, and may never
be, interoperable with our products. In addition, many of our principal products are designed for
use with products offered by competitors. In the future, vendors of non-Sybase products may become
less willing to provide us with access to their products, technical information, and marketing and
sales support, which could harm our business and prospects. 25




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We are subject to risks arising from our international operations. We derive a substantial portion of our revenues from our international operations, and we plan to
continue expanding our business in international markets in the future. In 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. In 2004, our net income and revenues benefited from the
decline in the value of the U.S. dollar against a number of foreign currencies, including the Euro
and the Japanese Yen. We do not utilize foreign currency hedging contracts to smooth the impact of
converting non-U.S. dollar denominated revenues into U.S. dollars for financial reporting. Because
we do not anticipate entering into currency hedges for non-U.S. dollar revenues, our future results
will fluctuate based on the appreciation or depreciation of the U.S. dollar against major foreign
currencies. As of March 31, 2005, we had identified net assets totaling $243.0 million associated with our
EMEA operations, and $77.5 million associated with our Asia Pacific and Latin America operations.
Accordingly, we may experience fluctuations in operating results as a result of translation gains
and losses associated with these asset and liability values. In order to reduce the effect of
foreign currency fluctuations on our and certain of our subsidiaries balance sheets, we utilize
foreign currency forward exchange contracts (forward contracts) to hedge certain foreign currency
transaction exposures. Specifically, we enter into forward contracts with a maturity of
approximately 30 days to hedge against the foreign exchange exposure created by certain balances
that are denominated in a currency other than the principal reporting currency of the entity
recording the transaction. The gains and losses on the forward contracts are intended to mitigate
the gains and losses on these outstanding foreign currency transactions and we do not enter into
forward contracts for trading purposes. However, our efforts to manage these risks may not be
successful. Failure to adequately manage our currency exchange rate exposure could adversely impact
our financial condition and results of operations. Growing market acceptance of open source software could cause a decline in our revenues and
operating margins. Growing market acceptance of open source software has presented both benefits and challenges to the
commercial software industry in recent years. Open source software is made widely available by
its authors and is licensed as is for a nominal fee or, in some cases, at no charge. For example,
Linux is a free Unix-type operating system, and the source code for Linux is freely available. We
have developed certain products to operate on the Linux platform, which has created additional
sources of revenues. Additionally, we have incorporated other types of open source software into
our products, allowing us to enhance certain solutions without incurring substantial additional
research and development costs. Thus far, we have encountered no unanticipated material problems
arising from our use of open source software. However, as the use of open source software becomes
more widespread, certain open source technology could become competitive with our proprietary
technology, which could cause sales of our products to decline or force us to reduce the fees we
charge for our products, which could have a material adverse impact on our revenues and operating
margins. If we are unable to protect our intellectual property, or if we infringe or are alleged to infringe
a third partys intellectual property, our operating results may be adversely affected. We rely on a combination of copyright, patent, trademark and trade secret laws and contractual
restrictions on disclosure to protect our intellectual property rights. We cannot be certain that
the steps we have taken will prevent unauthorized use of our technology. Our inability to obtain
adequate copyright, patent or trade secret protection for our products in certain countries could
diminish the competitive advantages we derive from our proprietary technology and may have a
material adverse impact on future operating results. In addition, as the number of software
products and associated patents increase, it is possible that software developers will become
subject to more frequent infringement claims. We have in the past received claims by third parties asserting that our products violate their
patents or other proprietary rights. It is likely that such claims will be asserted in the future.
In addition, to the extent we acquire other intellectual property rights, whether directly from
third parties or through acquisitions of other companies, we face the possibility that such
intellectual property will be found to infringe or violate the proprietary rights of others. 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 26




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concessions. Regardless of whether these claims have merit, they can be time consuming and
expensive to defend or settle, and can harm our business and reputation. We do not believe our
products infringe any third party patents or proprietary rights, but there is no guarantee that we
can avoid claims or findings of infringement in the future. We currently license our software products to end users directly, or through a number of reseller
channels including OEMs, VARs and SIs. Under our standard software license agreements, we
contractually agree to indemnify our licensees against claims that our software infringe the
intellectual property rights of third parties. Some of our products, including our core enterprise
database product, incorporate intellectual property licensed from third parties or open source
software. We attempt to exclude open source software and other products for which no IP indemnity
is provided by the licensor from the scope of our indemnification obligations. However, if we fail
to successfully exclude such technology from our indemnification obligations, claims that such open
source or third party technology infringes the intellectual property rights of a third party could
materially and adversely affect our business and financial condition. Our key personnel are critical to our business, and we cannot assure that they will remain with us. Our success depends on the continued service of our executive officers and other key personnel. In
recent years, we have made additions and changes to our executive management team. For example, in
August 2004, Martin J. Healy, Vice President and Corporate Controller, retired and was replaced by
Jeffrey G. Ross, formerly Group Director of Tax and Accounting. Further changes involving
executives and managers resulting from acquisitions, mergers and other events could increase the
current rate of employee turnover, particularly in consulting, engineering and sales. We cannot be
certain that we will retain our officers and key employees. In particular, if we are unable to hire
and retain qualified technical, managerial, sales and other employees it could adversely affect our
product development and sales efforts, other aspects of our operations, and our financial results.
Competition for highly skilled personnel in the software industry is intense. Our financial and
stock price performance relative to the companies with whom we compete for employees, and the high
cost of living in the San Francisco Bay Area, where our headquarters is located, could also impact
the degree of future employee turnover. Changes in accounting and legal standards could adversely affect our future operating results. During the past several years, various accounting guidance has been issued with respect to revenue
recognition rules in the software industry. However, much of this guidance addresses software
revenue recognition primarily from a conceptual level, and is silent as to specific implementation
requirements. As a consequence, we have been required to make assumptions and judgments, in certain
circumstances, regarding application of the rules to transactions not addressed by the existing
rules. We believe our current business arrangements and contract terms have been properly reported
under the current rules. However, if final interpretations of, or changes to, these rules
necessitate a change in our current revenue recognition practices, our results of operations,
financial condition and business could be materially and adversely affected. In October 2004, the FASB concluded that Statement 123R, Share-Based Payment Statement 123(R)
requiring companies to measure compensation cost for all share-based payments at fair value, would
be effective for most public companies for interim or annual periods beginning after June 15, 2005.
In April 2005 the SEC extended the implementation date to annual periods commencing after June 15,
2005. We currently account for stock-based employee compensation using the intrinsic value method
prescribed in Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to
Employees, and Related Interpretations. However, we will be required to measure and recognize the
cumulative effect, if any, from the adoption of Statement 123R beginning January 1, 2006.
Statement 123(R) 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, internal controls,
corporate ethics, and oversight of the accounting profession, among other areas. These SEC-mandated
rules and procedures became effective starting in the latter half of 2002, and new rules are
expected to evolve and become implemented over the next several years. We are also subject to
additional rules and regulations, including those enacted by the New York Stock Exchange where our
common stock is traded. Compliance with existing or new rules that influence significant
adjustments to our business practices and procedures could result in significant expense and may
adversely affect our results of operations. Failure to comply with these rules could result in
delayed financial statements and might adversely impact the price of our common stock. 27




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The unfavorable outcome of litigation and other claims against us could have a material adverse
impact on our financial condition and results of operations. We are subject to a variety of claims and lawsuits from time to time, some of which arise in the
ordinary course of our business. Adverse outcomes in some or all of such pending cases may result
in significant monetary damages or injunctive relief against us. While management currently
believes that resolution of these matters, individually or in the aggregate, will not have a
material adverse impact on our financial position or results of operations, the ultimate outcome of
litigation and other claims noted are subject to inherent uncertainties, and managements view of
these matters may change in the future. It is possible that our financial condition and results of
operations could be materially adversely affected in any period in which the effect of an
unfavorable final outcome becomes probable and reasonably estimable. Our operations and financial results could be severely harmed by certain natural disasters. Our headquarters and some of our major customers facilities are located near major earthquake
faults. We have not been able to maintain earthquake insurance coverage at reasonable costs.
Instead, we rely on self-insurance and preventative safety measures. We currently ship most of our
products from our Dublin, California facility near the site of our corporate headquarters. If a
major earthquake or other natural disaster occurs, disruption of operations at that facility could
directly harm our ability to record revenues for such quarter. This could, in turn, have an adverse
impact on operating results. Provisions of our corporate documents have anti-takeover effects that could prevent a change in
control. Provisions of our certificate of incorporation, bylaws, stockholder rights plan and Delaware law
could make it more difficult for a third party to acquire us, even if doing so would be beneficial
to our stockholders. These provisions include authorizing the issuance of preferred stock without
stockholder approval, prohibiting cumulative voting in the election of directors, prohibiting the
stockholders from calling stockholders meetings and prohibiting stockholder actions by written
consent. 
 ITEM 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 March 31, 2005 was immaterial to our consolidated
financial statements. Interest Rate Risk Our exposure to market risk for changes in interest rates relates to our investment portfolio,
which consists of taxable, short-term money market instruments and debt securities with maturities
between 90 days and three years. We do not use derivative financial instruments in our investment
portfolio. We place our investments with high-credit quality issuers and, by policy, we limit the
amount of credit exposure to any one issuer. We mitigate default risk by investing in only the safe and high-credit quality securities and by
monitoring the credit rating of investment issuers. The portfolio includes only marketable
securities with active secondary or resale markets to ensure portfolio liquidity. These securities
are generally classified as available for sale, and consequently, are recorded on the balance sheet
at fair value with unrealized gains or losses reported, as a separate component of stockholders
equity, net of tax. Losses realized from the less than temporary decline in the value of specific
marketable securities are recorded in interest expenses and other, net on the income statement.
Neither realized nor unrealized gains and losses at March 31, 2005 were material. We have no cash flow exposure due to rate changes for cash equivalents and cash investments as all
of these investments are at fixed interest rates. There has been no material change in our interest rate exposure since December 31, 2004. 28




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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 1: LEGAL PROCEEDINGS The material set forth in Note 8 of Notes to Condensed Financial Statements in Part I, Item 1 of
the Form 10-Q is incorporated herin by reference. 
 ITEM 2: UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS (e) Purchases of Equity Securities by the Issuer and Affiliated Purchasers During the quarter ended March 31, 2005, the Company made the following repurchases of its Common
Stock: ISSUER PURCHASES OF EQUITY SECURITIES (d) Maximum(c) Total
    
    
    Number (orNumber of
    
    
    ApproximateShares (or
    
    
    Dollar Value)Units)
    
    
    of Shares (or(a) Total
    
    
    
    
    
    
    Purchased as
    
    
    Units) that MayNumber of
    
    
    (b) Average
    
    
    Part of Publicly
    
    
    Yet BeShares (or
    
    
    Price Paid per
    
    
    Announced
    
    
    PurchasedPeriod
    
    Units)
    
    
    Share (or Unit)
    
    
    Plans or
    
    
    Under the Plans(2004)
    
    Purchased (#)
    
    
    ($)
    
    
    Programs (#)
    
    
    or Programs ($)January 1  31
    
    
    50,000
    
    
    $
    19.57
    
    
    
    50,000
    
    
    $
    102,684,000February 1  28
    
    
    6,891,649
    
    
    
    18.71
    
    
    
    200,000
    
    
    
    98,721,000March 1  31
    
    
    0
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    6,941,649
    
    
    $
    18.72
    
    
    
    250,000
    
    
    $
    98,721,000
 29




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ITEM 6: EXHIBITS (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. 30




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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. May 9, 2005
    
    SYBASE, INC.By
    
    /s/ PIETER VAN DER VORSTPieter Van der VorstSenior Vice President and Chief Financial Officer
(Principal Financial Officer)By
    
    /s/ JEFFREY G. ROSSJeffrey G. RossVice President and Corporate Controller
(Principal Accounting Officer)
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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
 32