**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

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### ** **

**FORM 10-Q**

 
| **(Mark  One)** |                                                                                               |
|-----------------|----------------------------------------------------------------------------------------------------|
|            |                                                                                               |
| **ý**      | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF  1934** |

 

**For the Quarterly Period Ended June 30, 2002**

 
| **o** | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF  1934** |
|-------|-----------------------------------------------------------------------------------------------------|

 

**For the transition periodfrom         to         **

 

**Commission file number 0-27794**

 

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| **SEGUE  SOFTWARE, INC.**                                                    |
|------------------------------------------------------------------------------|
| (Exact name of  registrant as specified in its charter)                      |
|                                                                         |   |   |
| **Delaware**                                                                 |   | **95-4188982** |
| (State or other  jurisdiction of incorporation or organization)              |   | (I.R.S. Employer  Identification No.) |
|                                                                         |   |   |
| **201 Spring Street, Lexington, MA  02421**                                  |
| (Address of principal  executive offices)                                    |
|                                                                         |   |   |
| Registrant’s telephone  number, including area code: **(781) 402-1000** |

 

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Indicate by check mark whether the registrant: (1) has filed allreports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such a shorterperiod that the registrant was required to file such reports) and (2) hasbeen subject to such filing requirements for the past 90 days. Yes ý  No o

 

The number of shares of Registrant’s Common Stockoutstanding as of August 5, 2002 was 9,558,399

 

 

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**SEGUE SOFTWARE, INC.**

 

**FORM 10-Q**

 

**FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2002**

 

**INDEX**
| PART I.    | FINANCIAL INFORMATION                                                                                                  |
|------------|------------------------------------------------------------------------------------------------------------------------|
|       |                                                                                                                   |
| Item  1.   | Condensed  Consolidated Financial Statements:                                                                          |
|       |                                                                                                                   |
|       | Condensed  Consolidated Balance Sheets (unaudited) June 30, 2002 and  December 31, 2001                      |
|       |                                                                                                                   |
|       | Condensed  Consolidated Statements of Operations (unaudited) Three Months and Six Months  Ended June 30, 2002 and 2001 |
|       |                                                                                                                   |
|       | Condensed  Consolidated Statements of Cash Flows (unaudited) Six Months Ended June 30,  2002 and 2001                  |
|       |                                                                                                                   |
|       | Notes  to Condensed Consolidated Financial Statements (unaudited)                                                      |
|       |                                                                                                                   |
| Item  2.   | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                            |
|       |                                                                                                                   |
| Item  3.   | Quantitative  and Qualitative Disclosures about Market Risk                                                            |
|       |                                                                                                                   |
| PART II.   | OTHER INFORMATION                                                                                                      |
|       |                                                                                                                   |
| Item  1.   | Legal  Proceedings                                                                                                     |
|       |                                                                                                                   |
| Item  4.   | Submission  of Matters to a Vote of Security Holders                                                                   |
|       |                                                                                                                   |
| Item  5.   | Other  Information                                                                                                     |
|       |                                                                                                                   |
| Item 6.    | Exhibits and  Reports on Form 8-K                                                                                 |
|       |                                                                                                                   |
| Signatures |

 

2

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**PARTI. FINANCIAL INFORMATION**

 

**ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

 

**SEGUE SOFTWARE, INC.**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

**(IN THOUSANDS, EXCEPT PER SHARE DATA)**

**(UNAUDITED)**

 
|                                                                                                                                                    |   | **June 30,  2002** |       | **December  31,  2001** |       |
|---------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------|------------|-------------------------|------------|
| **ASSETS**                                                                                                                                              |   |               | ** ** |                    | ** ** |
| Current assets:                                                                                                                                         |   |               |       |                    |       |
| Cash and cash equivalents                                                                                                                               |   | $                  | 6,401      |                    | $          | 2,326 |   |
| Short-term investments                                                                                                                                  |   | —             |       | 4,949                   |       |
| Accounts receivable, net of allowances of $283 and  $594, respectively                                                                                  |   | 3,854              |       | 5,332                   |       |
| Other current assets                                                                                                                                    |   | 1,340              |       | 1,384                   |       |
| Total current assets                                                                                                                                    |   | 11,595             |       | 13,991                  |       |
|                                                                                                                                                    |   |               |       |                    |       |
| Property and equipment, net                                                                                                                             |   | 2,926              |       | 3,730                   |       |
| Goodwill, net                                                                                                                                           |   | 1,506              |       | 1,506                   |       |
| Other assets                                                                                                                                            |   | 518                |       | 417                     |       |
| Total assets                                                                                                                                            |   | $                  | 16,545     |                    | $          | 19,644 |   |
|                                                                                                                                                    |   |               | ** ** |                    | ** ** |
| **LIABILITIES AND  STOCKHOLDERS’ EQUITY**                                                                                                          |   |               | ** ** |                    | ** ** |
| Current liabilities:                                                                                                                                    |   |               |       |                    |       |
| Accounts payable                                                                                                                                        |   | $                  | 1,202      |                    | $          | 1,903 |   |
| Accrued compensation and benefits                                                                                                                       |   | 1,737              |       | 1,184                   |       |
| Accrued lease obligations on excess space                                                                                                               |   | 2,280              |       | 2,405                   |       |
| Accrued expenses                                                                                                                                        |   | 1,484              |       | 1,601                   |       |
| Deferred revenue                                                                                                                                        |   | 7,215              |       | 8,072                   |       |
| Total current liabilities                                                                                                                               |   | 13,918             |       | 15,165                  |       |
|                                                                                                                                                    |   |               |       |                    |       |
| Commitments and contingencies (Note 10)                                                                                                                 |   | —             |       | —                  |       |
|                                                                                                                                                    |   |               |       |                    |       |
| Stockholders’ equity:                                                                                                                              |   |               |       |                    |       |
| Preferred stock,  par value $.01 per share; 9,000 shares authorized; 688 and 0 shares issued  and outstanding of Series B preferred stock, respectively |   | 7                  |       | —                  |       |
| Common stock, par value $.01 per share; 30,000 shares  authorized; 9,704 and 9,599 shares issued, respectively                                          |   | 97                 |       | 96                      |       |
| Additional paid-in capital                                                                                                                              |   | 60,339             |       | 58,150                  |       |
| Cumulative translation adjustment                                                                                                                       |   | (1                 | )          | (197                    | )          |
| Accumulated deficit                                                                                                                                     |   | (57,215            | )          | (52,970                 | )          |
|                                                                                                                                                    |   | 3,227              |       | 5,079                   |       |
| Less treasury stock, at cost, 145 and 145 shares,  respectively                                                                                         |   | (600               | )          | (600                    | )          |
| Total stockholders’ equity                                                                                                                         |   | 2,627              |       | 4,479                   |       |
| Total liabilities and stockholders’ equity                                                                                                         |   | $                  | 16,545     |                    | $          | 19,644 |   |

 

The accompanying notesare an integral part of the consolidated financial statements.

 

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**SEGUE SOFTWARE, INC.**

**CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS**

**(IN THOUSANDS, EXCEPT PER SHARE DATA)**

**(UNAUDITED)**

 
|                                                            |   | **Three Months Ended  June 30,** |   | **Six Months Ended  June 30,** |   |
|-----------------------------------------------------------------|--------|----------------------------------|--------|--------------------------------|--------|
|                                                            |   | **2002**                         |   | **2001**                       |   | **2002** |   | **2001** |   |
| Revenue:                                                        |   |                             |   |                           |   |   |   |   |   |
| Software                                                        |   | $                                | 2,514  |                           | $      | 3,657 |   | $ | 5,829 |   | $ | 9,179 |   |
| Services                                                        |   | 4,342                            |   | 6,041                          |   | 9,073 |   | 12,411 |   |
| Subtotal revenue                                                |   | 6,856                            |   | 9,698                          |   | 14,902 |   | 21,590 |   |
| Adjustment relating to  payment to customers                    |   | (25                              | )      | —                         |   | (1,025 | ) | — |   |
| Net revenue                                                     |   | 6,831                            |   | 9,698                          |   | 13,877 |   | 21,590 |   |
|                                                            |   |                             |   |                           |   |   |   |   |   |
| Cost of revenue:                                                |   |                             |   |                           |   |   |   |   |   |
| Cost of software                                                |   | 173                              |   | 156                            |   | 403 |   | 397 |   |
| Cost of services                                                |   | 1,453                            |   | 2,131                          |   | 2,708 |   | 4,710 |   |
| Total cost of revenue                                           |   | 1,626                            |   | 2,287                          |   | 3,111 |   | 5,107 |   |
|                                                            |   |                             |   |                           |   |   |   |   |   |
| Gross margin                                                    |   | 5,205                            |   | 7,411                          |   | 10,766 |   | 16,483 |   |
|                                                            |   |                             |   |                           |   |   |   |   |   |
| Operating expenses:                                             |   |                             |   |                           |   |   |   |   |   |
| Sales and marketing                                             |   | 4,023                            |   | 7,570                          |   | 8,449 |   | 15,932 |   |
| Research and development                                        |   | 1,563                            |   | 2,053                          |   | 2,865 |   | 4,530 |   |
| General and  administrative                                     |   | 1,303                            |   | 2,053                          |   | 2,781 |   | 4,586 |   |
| Amortization of  goodwill                                       |   | —                           |   | 377                            |   | — |   | 753 |   |
| Restructuring charges                                           |   | 147                              |   | 2,257                          |   | 830 |   | 2,257 |   |
| Total operating  expenses                                       |   | 7,036                            |   | 14,310                         |   | 14,925 |   | 28,058 |   |
|                                                            |   |                             |   |                           |   |   |   |   |   |
| Loss from operations                                            |   | (1,831                           | )      | (6,899                         | )      | (4,159 | ) | (11,575 | ) |
| Other income, net                                               |   | 22                               |   | 130                            |   | 43 |   | 347 |   |
|                                                            |   |                             |   |                           |   |   |   |   |   |
| Loss before provision  for income taxes                         |   | (1,809                           | )      | (6,769                         | )      | (4,116 | ) | (11,228 | ) |
| Provision for income  taxes                                     |   | 50                               |   | 66                             |   | 75 |   | 116 |   |
| Net loss                                                        |   | (1,859                           | )      | (6,835                         | )      | (4,191 | ) | (11,344 | ) |
| Dividends on preferred  stock                                   |   | 48                               |   | —                         |   | 54 |   | — |   |
|                                                            |   |                             |   |                           |   |   |   |   |   |
| Net loss applicable to  common shares                           |   | $                                | (1,907 | )                              | $      | (6,835 | ) | $ | (4,245 | ) | $ | (11,344 | ) |
|                                                            |   |                             |   |                           |   |   |   |   |   |
| Net loss per common  share - basic and diluted                  |   | $                                | (0.20  | )                              | $      | (0.73 | ) | $ | (0.45 | ) | $ | (1.21 | ) |
|                                                            |   |                             |   |                           |   |   |   |   |   |
| Weighted average common  shares outstanding - basic and diluted |   | 9,552                            |   | 9,388                          |   | 9,522 |   | 9,371 |   |

 

The accompanying notesare an integral part of the consolidated financial statements.

 

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**SEGUE SOFTWARE, INC**

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS**

**(IN THOUSANDS)**

**(UNAUDITED)**

 
|                                                                                       |   | **Six months  ended June 30,** |    |
|--------------------------------------------------------------------------------------------|--------|--------------------------------|---------|
|                                                                                       |   | **2002**                       |    | **2001** | ** ** |
| Increase  (decrease) in cash                                                               |   |                           |    |   |   |
|                                                                                       |   |                           |    |   |   |
| Cash flows from  operating activities:                                                     |   |                           |    |   |   |
| Net loss                                                                                   |   | $                              | (4,191  | ) | $ | (11,344 | ) |
| Adjustments to  reconcile net loss to net cash provided by (used in) operating activities: |   |                           |    |   |   |
| Depreciation and  amortization                                                             |   | 971                            |    | 2,039 |   |
| Changes in  operating assets and liabilities:                                              |   |                           |    |   |   |
| Accounts  receivable                                                                       |   | 1,539                          |    | 5,325 |   |
| Other current  assets                                                                      |   | 58                             |    | 32 |   |
| Accounts payable                                                                           |   | (713                           | )  | 136 |   |
| Accrued  expenses, lease obligations on excess  space, compensation, benefits and other    |   | 380                            |    | (900 | ) |
| Deferred revenue                                                                           |   | (916                           | )       | (2,359 | ) |
|                                                                                       |   |                           |    |   |   |
| Net cash used in  operating activities                                                     |   | (2,872                         | )       | (7,071 | ) |
|                                                                                       |   |                           |    |   |   |
| Cash flows from  investing activities:                                                     |   |                           |    |   |   |
| Additions to  property and equipment                                                       |   | (123                           | )       | (272 | ) |
| Maturities of  short-term investments                                                      |   | 5,749                          |    | 8,944 |   |
| Purchases of  short-term investments                                                       |   | (800                           | )       | (6,030 | ) |
| Other, net                                                                                 |   | (99                            | )  | (150 | ) |
|                                                                                       |   |                           |    |   |   |
| Net cash  provided by investing activities                                                 |   | 4,727                          |    | 2,492 |   |
|                                                                                       |   |                           |    |   |   |
| Cash flows from  financing activities:                                                     |   |                           |    |   |   |
| Proceeds from  exercise of stock options and stock purchase plan                           |   | 143                            |    | 371 |   |
| Proceeds from the  issuance of convertible preferred stock                                 |   | 2,000                          |    | — |   |
|                                                                                       |   |                           |    |   |   |
| Net cash  provided by financing activities                                                 |   | 2,143                          |    | 371 |   |
|                                                                                       |   |                           |    |   |   |
| Effect of  exchange rate changes on cash                                                   |   | 77                             |    | (1 | ) |
|                                                                                       |   |                           |    |   |   |
| Net increase  (decrease) in cash and cash equivalents                                      |   | 4,075                          |    | (4,209 | ) |
| Cash and cash  equivalents, beginning of period                                            |   | 2,326                          |    | 9,379 |   |
|                                                                                       |   |                           |    |   |   |
| Cash and cash  equivalents, end of period                                                  |   | $                              | 6,401   |   | $ | 5,170 |   |
|                                                                                            |        |                                |         |  |  |  |  |  |

 

The accompanying notesare an integral part of the consolidated financial statements.

 

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**SEGUE SOFTWARE, INC.**

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**(UNAUDITED)**

 

**1.****             BASISOF PRESENTATION**

 

The financialstatements included herein have been prepared by Segue, without audit, pursuantto the rules and regulations of the Securities and Exchange Commission. Certaininformation and footnote disclosures normally included in financial statementsprepared in accordance with generally accepted accounting principles have beencondensed or omitted pursuant to such rules and regulations.  We believe that the disclosures are adequateto make the information presented not misleading.  However, it is suggested that these financial statements be readin conjunction with Segue’s audited financial statements for the year endedDecember 31, 2001, included in its 2001 Annual Report on Form 10-K.

 

This financialinformation reflects, in the opinion of management, all adjustments of a normalrecurring nature necessary to present fairly the results for the interimperiods.  Results of interim periods maynot be indicative of results for the full year.

 

Certain prior year amounts havebeen reclassified to conform to the current year presentation.  These reclassifications had no effect on thepreviously reported results of operations or retained earnings.  In accordance with a new Emerging Issues Task Force (“EITF”) accountingpronouncement, which became effective January 1, 2002, the Company hasreclassified $224,000 and $310,000 of reimbursable travel as services revenueand cost of service for the three and six months ended June 30, 2001,respectively, to be consistent with current year presentation.

 

**2.****             LIQUIDITY**

 

The Company has generally incurred losses since it began operations,which has resulted in an accumulated deficit of approximately$57.2 million at June 30, 2002.  Asa result, the Company has used, and expects to continue to use, significantamounts of cash, cash equivalents and short-term investments to fund itsoperations.  See note 10 to thefinancial statements for contingencies and commitments.  The recoverability of a major portionof the recorded asset amounts shown in the accompanying balance sheet isdependent upon the continued operations of Segue, which in turn is dependentupon Segue’s ability to increase sales and to succeed in its futureoperations.  The financial statements donot include any adjustments relating to the recoverability and classificationof recorded asset amounts, and classification and amounts of liabilities thatmight be necessary should Segue be unable to continue operations.

 

Management hastaken significant steps to streamline its operations, as discussed in theaccompanying notes, and will continue to do so as the situation warrants.  These steps have included reducingheadcount, infrastructure and other expenses and limiting capitalexpenditures.  The Company must growrevenue above current levels to allow Segue to achieve and sustain profitability and to get to positive cash flow fromoperations, if it is to continue as a viable business. There are uncertaintiesas to whether or when this will occur.

 

In March 2002, the Company sold 666,667 shares of Preferred Stock to S-7Associates LLC, a company managed by the Chairman of Segue’s Board ofDirectors, for $2.0 million.  Withthis investment and assuming that Segue can execute on current plans to growrevenue, Segue believes there should be sufficient cash to meet its forecastedworking capital needs in the near future. Delays in the timing of future sales or sales levels below management’sexpectations may cause the Company to re-evaluate its cash position, adjust itsoperations and/or take other possible actions.

 

If businesscontinues at the same rate as in the current quarter and further actions arenot taken, Segue could run out of cash in the first or second quarter of 2003.

 

**3.****             RECENTACCOUNTING DEVELOPMENTS**

 

On July 20,2001, the Financial Accounting Standards Board (“FASB”) issued Statement ofFinancial Standards (“SFAS”) No. 141 “Business Combinations” (“SFASNo. 141”), and SFAS No. 142, “Goodwill and Intangible Assets” (“SFASNo. 142”).  SFAS No. 141 iseffective for all business combinations initiated after June 30, 2001.SFAS No. 142 is effective for fiscal years beginning afterDecember 15, 2001; however, certain provisions of this Statement apply togoodwill and other

 

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intangible assets acquired between July 1, 2001 and the effectivedate of SFAS No. 142.  Majorprovisions of these statements and their effective dates for Segue are asfollows:

 

•                                          All business combinations initiated afterJune 30, 2001 must use the purchase method of accounting.

 

•                                          Intangible assets acquired in a businesscombination must be recorded separately from goodwill, if they arise fromcontractual or other legal rights or are separable from the acquired entity andcan be sold, transferred, licensed, rented or exchanged, either individually oras part of a related contract, asset or liability.

 

•                                          Goodwill and intangible assets with indefinitelives, acquired after June 30, 2001, are not amortized.  Effective January 1, 2002, allpreviously recognized goodwill and intangible assets with indefinite lives willno longer be subject to amortization.

 

•                                          Effective January 1, 2002, goodwill andintangible assets with indefinite lives will be tested for impairment annuallyand whenever there is an impairment indicator.

 

•                                          All acquired goodwill must be assigned toreporting units for purposes of impairment testing and segment reporting.

 

Segue adopted SFASNo. 142 effective January 2002.  Seguecontinued to amortize goodwill recognized prior to July 1, 2001, under itsthen current method until December 31, 2001, after which date the annualand quarterly goodwill amortization of $1.5 million and $377,000,respectively, ceased to be amortized.  Segue’s goodwill arose from an acquisition, for which Segue obtained itsSilkPerformer product.  It is to thiscomponent that the goodwill is attached for purposes of determining fairvalue.  During the quarter ended June30, 2002, Segue performed an initial analysis of the transitional fair value ofthe goodwill.  No impairment existed atthe time of this initial test.  Anyfuture impairment loss that may occur would not exceed $1.5 million, whichis the net amount of goodwill that is on the balance sheet at June 30, 2002.

 

In accordance withthe adoption of SFAS No. 142, the following table presents what the net lossand net loss per common share for each of the periods would have been exclusiveof the goodwill amortization.

 
|                                           |   | **For the  three months ended  June 30,** |   | **For the  six months ended  June 30,** |   |
|------------------------------------------------|--------|------------------------------------------------|--------|----------------------------------------------|--------|
|                                           |   | **2002**                                       |   | **2001**                                     |   | **2002** |   | **2001** |   |
| In thousands, except per share data            |   |                                           |   |                                         |   |   |   |   |   |
|                                           |   |                                           |   |                                         |   |   |   |   |   |
| Reported net  loss applicable to common shares |   | $                                              | (1,907 | )                                            | $      | (6,835 | ) | $ | (4,245 | ) | $ | (11,344 | ) |
| Add back:  Goodwill amortization               |   | —                                         |   | 377                                          |   | — |   | 753 |   |
| Adjusted net  loss applicable to common shares |   | $                                              | (1,907 | )                                            | $      | (6,458 | ) | $ | (4,245 | ) | $ | (10,591 | ) |
|                                           |   |                                           |   |                                         |   |   |   |   |   |
| Basic and  diluted loss per common share:      |   |                                           |   |                                         |   |   |   |   |   |
| Reported net  loss per common share            |   | $                                              | (0.20  | )                                            | $      | (0.73 | ) | $ | (0.45 | ) | $ | (1.21 | ) |
| Add back:  Goodwill amortization               |   | —                                         |   | 0.04                                         |   | — |   | .08 |   |
| Adjusted net  loss per common share            |   | $                                              | (0.20  | )                                            | $      | (0.69 | ) | $ | (0.45 | ) | $ | (1.13 | ) |

 

On October 3, 2001, the FASB issued SFAS No. 144, “Accountingfor the Impairment or Disposal of Long-Lived Assets”.  SFAS No. 144 addresses the accounting and reporting for theimpairment or disposal of long-lived assets. It replaces SFASNo. 121.  SFAS No. 144provides a single accounting model for the disposal of long-lived assets. Newcriteria must be met to classify the asset as an asset held-for-sale.  This statement also focuses on reporting theeffects of a disposal. This statement is effective for fiscal years beginningafter December 15, 2001.  TheCompany adopted this statement as of January 2002 and does not expect thisadoption to have a material impact to the Company’s financial position orresults of operations.

 

In November 2001, EITF Issue No. 01-9, “Accounting for ConsiderationGiven by a Vendor to a Customer (Including a Reseller of the Vendor’sProducts)” was issued.  This EITF provides guidance with respect tothe statement of operations classification, recognition and measurement ofconsideration given by a vendor to a customer or reseller.  This EITF presumes any consideration to bean adjustment of the selling prices of the vendor’s products or services, whichshould be deducted from revenue when recognized in the vendor’s statement ofoperations, unless there is an identifiable and quantifiable benefit received forthe consideration.  This EITF iseffective for annual and interim periods beginning after

 

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December 15, 2001.  Uponadoption, financial statements for prior periods presented for comparativepurposes should be reclassified to comply with the requirements under theEITF.   In January 2002, the Companyadopted this EITF.  During the quarterended March 31, 2002, the Company committed to making a payment of $1.0 millionto a customer.  Under the provisions ofEITF Issue No. 01-9, this $1.0 million was considered to be a reduction inrevenue and is presented in the statement of operations as such.  Per the contract with the customer, thispayment is a one-time expenditure.  Inaccordance with EITF Issue No. 01-9, in the second quarter ended June 30, 2002,we recorded as a revenue reduction amounts paid to resellers as referral feesfor sales.  There were no other materialpayments made by the Company in this quarter or prior quarters that would beconsidered for reclassification under the guidance in EITF Issue No. 01-9.

 

On July 30, 2002, FASB issued SFAS No. 146,“Accounting for Costs Associated with Exit or Disposal Activities” (“SFASNo. 146”). The standard requires companies to recognize costs associatedwith exit or disposal activities when they are incurred rather than at the dateof a commitment to an exit or disposal plan. Examples of costs covered by thestandard include lease termination costs and certain employee severance coststhat are associated with a restructuring, discontinued operation, plantclosing, or other exit or disposal activity. Statement 146 is to be applied prospectively to exit or disposalactivities initiated after December 31, 2002.

 

**4.****             OTHERASSETS**

 

Included in otherassets at June 30, 2002 and December 31, 2001 is an interest bearing promissorynote receivable of approximately $322,000 and $305,000, respectively, fromSegue’s chief executive officer. Interest on the outstanding balance is to becalculated on a monthly basis using the current prime rate as published in theWall Street Journal.  Interest shall bepayable on each anniversary of the note, beginning on March 22, 2002.  The Compensation Committee of the Company’sboard of directors approved adding the interest due on the loan as of March 22,2002 to the principal balance.  Theborrower must use the proceeds from any Company paid bonus or gain on the saleof shares of stock underlying options issued by the Company to pay any outstandingbalance on the note.  The note is payablein full on March 22, 2006 and is secured by a Second Mortgage and SecurityAgreement between Segue and its chief executive officer.

 

**5.****             PREFERRED STOCK**

 

On March 22, 2002, the Company and S-7 Associates LLC, a companymanaged by the Chairman of Segue’s Board of Directors, Dr. James H. Simons(“S-7 Associates”), signed an agreement under which S-7 Associates purchased666,667 shares of the Company’s Series B Preferred Stock (“Preferred Stock”) inconsideration for a payment of $2.0 million.  The Preferred Stock is senior to the common stock as to dividendand liquidation rights and is convertible at the option of the holder intoshares of common stock of Segue at a conversion price of $3.00 per share,subject to adjustment upon the occurrence of certain transactions.  The holders of the Preferred Stock areentitled to vote together with the common stock on an as-converted basis, andin addition, are entitled to elect one director of the Company as a separateclass.  Dividends on the Preferred Stockare 12% per annum and will be paid-in-kind semiannually.  The Preferred Stock is callable at theoption of the Company on or after March 31, 2004 at 133% of its face value(“Liquidation Preference”).  If there isa sale of all or substantially all of the Company’s assets or equity, thePreferred Stock can either be redeemed at the Liquidation Preference orconverted to common stock. Pursuant to a registration rights agreement, theCompany has agreed, subject to certain limitations, to register, under theSecurities Act of 1933, the resale of common stock into which the PreferredStock may be converted.  Theregistration rights expire on March 22, 2007. Based on written confirmation from Nasdaq, the Company did not need toseek shareholder approval of this transaction.

 

On June 30, 2002,21,533 shares of Preferred Stock were issued as dividends on the PreferredStock.

 

**6.****             RESTRUCTURING CHARGES**

 

Over the pastyear, Segue has executed various restructuring plans aimed at reducing theexpenses of the Company.  As a result,Segue has recorded restructuring charges for severance, other employee-relatedcosts, and costs for estimated lease obligations associated with excess officefacilities in our Lexington and Los Gatos offices, net of estimated subleaseincome.  The following table summarizesthe restructuring actions and charges incurred by quarter.

 

8

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| **Quarter** |   | **Severance  and  other employee  related costs** |      | **Number of  employees  terminated as part of  restructuring plan** |   | **%  Reduction  in  workforce** |   | **Cost of  estimated  facility obligations,  net of estimated  sublease income** |   | **Office for  which facility  costs accrued** |   | **Total  Restructuring  Charge** |   |
|-------------|--------|---------------------------------------------------|-----------|---------------------------------------------------------------------|--------|---------------------------------|--------|----------------------------------------------------------------------------------|--------|-----------------------------------------------|--------|----------------------------------|--------|
|        |   |                                              |      |                                                                |   |                            |   |                                                                             |   |                                          |   |                             |   |
| Q2 2002     |   | $                                                 | —    |                                                                | — |                            | — | %                                                                                | $      | 147,000                                       |   | Lexington                        |   | $ | 147,000 |   |
| Q1 2002     |   | 559,000                                           |      | 12                                                                  |   | 5                               |   | 124,000                                                                          |   | Lexington                                     |   | 683,000                          |   |
| Q4 2001     |   | —                                            |      | —                                                              |   | —                          |   | —                                                                           |   | —                                        |   | —                           |   |
| Q3 2001     |   | 485,000                                           |      | 42                                                                  |   | 14                              |   | 1,479,000                                                                        |   | Lexington                                     |   | 1,964,000                        |   |
| Q2 2001     |   | 859,000                                           |      | 73                                                                  |   | 20                              |   | 1,398,000                                                                        |   | Lexington and Los Gatos                       |   | 2,257,000                        |   |
|        |   |                                              |      |                                                                |   |                            |   |                                                                             |   |                                          |   |                             |   |
| Total       |   | $                                                 | 1,903,000 |                                                                |   |                            |   |                                                                             | $      | 3,148,000                                     |   |                             |   | $ | 5,051,000 |   |

 

As of June 30, 2002, the Company still had approximately $358,000accrued for severance and other employee related costs associated with theabove restructuring actions.

 

During the secondquarter of 2002, the $147,000 that was accrued for restructuring reflects anincremental estimated loss associated with additional excess space that theCompany made available in its Lexington facility, in anticipation of a subleasetransaction that the Company is currently negotiating.  At June 30, 2002, the accrual balancerelated to the obligations associated with all of the excess office space notedabove is approximately $2.3 million. This is comprised of an estimated $7.2 million for future rentspayable by Segue on unoccupied space, plus $372,000 in miscellaneous costsrelated to subleasing the space, less approximately $5.3 million ofestimated future sublease income.  Thisaccrual balance reflects signed subleases for the Los Gatos space and a smallportion of space in our Lexington facility, but the balance of the accrual isbased on the estimates of terms associated with a proposed sublease for theLexington facility that is not yet signed, but in active negotiations.    If this sublease is not signed or terms changein final negotiations, Segue may incur additional losses on this excess space.

 

**7.****             PROVISION FOR INCOMETAXES**

 

Segue recordedprovisions for foreign and state income taxes of $50,000 and $75,000 for thethree and six months ended June 30, 2002, respectively, and $66,000 and$116,000 for the same periods last year. There was no tax benefit recorded forlosses generated in the U.S. in either period due to the uncertainty ofrealizing such benefits.

 

**8.****             NETLOSS PER COMMON SHARE**

 

The followingtable sets forth the computation of basic and diluted loss per share (inthousands, except per share data):

 
|                                                                       |   | **Three  months ended June 30,** |   | **Six months  ended June 30,** |   |
|----------------------------------------------------------------------------|--------|----------------------------------|--------|--------------------------------|--------|
|                                                                       |   | **2002**                         |   | **2001**                       |   | **2002** |   | **2001** |   |
| Net loss  applicable to common shares                                      |   | $                                | (1,907 | )                              | $      | (6,835 | ) | $ | (4,245 | ) | $ | (11,344 | ) |
| Weighted average  shares used in net loss per share—basic and diluted |   | 9,552                            |   | 9,388                          |   | 9,522 |   | 9,371 |   |
| Net loss per  common share—basic and diluted                          |   | $                                | (0.20  | )                              | $      | (0.73 | ) | $ | (0.45 | ) | $ | (1.21 | ) |

 

Excluded from thecalculation of diluted earnings per share for the three and six months endedJune 30, 2002 and 2001 were options to purchase 3,444,641 and 3,427,977shares of common stock, respectively, and 688,200 and 0 shares of common stockissuable upon the conversion of preferred stock, respectively, because theirinclusion would be anti-dilutive.

 

9

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**9.****             COMPREHENSIVELOSS**

 

SFAS No. 130,“Reporting Comprehensive Income” (“SFAS 130”) requires the reporting ofcomprehensive income in addition to net income from operations.  Comprehensive income is a more inclusivereporting methodology that includes disclosure of certain financial informationthat historically has not been recognized in the calculation of netincome.  To date, Segue’s comprehensiveincome items have consisted exclusively of foreign translationadjustments.  The following table setsforth the computation of comprehensive loss (in thousands):

 
|                             |   | **Three  months ended June 30,** |   | **Six months  ended June 30,** |   |
|----------------------------------|--------|----------------------------------|--------|--------------------------------|--------|
|                             |   | **2002**                         |   | **2001**                       |   | **2002** |   | **2001** |   |
| Net loss                         |   | $                                | (1,859 | )                              | $      | (6,835 | ) | $ | (4,191 | ) | $ | (11,344 | ) |
| Foreign  translation adjustments |   | 99                               |   | 194                            |   | 196 |   | 4 |   |
| Comprehensive  loss              |   | $                                | (1,760 | )                              | $      | (6,641 | ) | $ | (3,995 | ) | $ | (11,340 | ) |

 

**10.****          COMMITMENTSAND CONTINGENCIES**

 

Under theprovisions of Segue’s lease at its Lexington facility, Segue has an obligationto provide a security deposit if Segue’s current assets, as defined in the lease, become less than $20.0 million, asevidenced by Segue’s annual audited financial statements as of eachDecember 31st.  As ofJune 30, 2002, current assets, as defined in the lease, were$10.3 million.  The amount of thesecurity deposit declines by $350,000 for each year that passes from thecommencement of the lease.  At June 30,2002, the amount of the security deposit required is approximately$1.5 million, which is currently under negotiation with the landlord.

 

In January 2002, Segue entered into an agreement to be theexclusive external remote hosting application performance monitoring andscalability testing software provider to IBM Global Infrastructure and SystemsManagement Services (ISM), a division within IBM Global Services, for theinfrastructure used by ISM for this service for a period of three years throughDecember 31, 2004.  As part of thisagreement, the Company agreed to pay $1.0 million to IBM to be used tohelp fund the costs of deploying the remote monitoring infrastructure.  This amount was charged to earnings, as areduction to revenue, in the first quarter of 2002 and the payment was made inApril 2002.  Segue also agreed toprovide certain amounts of training to IBM employees at no charge.

 

In September 2001, the Company signed a distributionagreement with T-Plan Ltd., of the United Kingdom.  Under the agreement, Segue will sell andmarket the T-Plan product that has been modified to integrate with other Segue products,under the name SilkPlan, for which Segue will pay T-Plan Ltd. a royaltyfor each unit sold.  Under the terms ofthe agreement, Segue must pay T-Plan Ltd. a minimum quarterly royalty of$45,000 for the period ending March 31, 2002, $75,000 for the periodending June 30, 2002, and $100,000 for subsequent quarters.  Either party may cancel the agreement at anytime by giving the other party written notice to that effect at least ninetydays prior to such termination.  Otherremaining royalty arrangements are not significant.

 

As of October 15,2001, the Company’s employer’s practices liability insurance policyexpired.  Due to insurance marketconditions, the Company did not renew the policy, but purchased a one-yearextended reporting provision that covered claims made during the period October15, 2001 through October 15, 2002, arising from occurrences prior to October15, 2001.  In March 2002, the Companypurchased a new employer’s practices liability insurance policy with anexclusion for claims made that were based on occurrences before March 15,2002.  Based on the coverage under theextended reporting endorsement and the new policy, the Company is self-insuredfor any claims made that are based on occurrences between October 15, 2001 andMarch 15, 2002.  The Company is notaware of the assertion of any claims based on occurrences during this period.

 

**11.****          SEGMENTREPORTING**

 

The Companyconsiders that it has the following reportable operating segments based ondifferences in products and services.  Operatingsegments are defined as components of the enterprise about which separatefinancial information is available that is reviewed regularly by the chiefoperating decision maker, or decision–making group, in deciding how toallocate resources and in assessing their performance. Software licensessubstantially consist of sales of our Silk product line.  These operating segments are reviewed onlyto the gross margin level.  The companydoes not maintain and cannot separate balance sheet information or full profitand loss information for these segments. The following table sets forth the reportable operating segments (inthousands):

 

10

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|                                          |   | **Three  months ended June 30,** |       | **Six months  ended June 30,** |       |
|-----------------------------------------------|--------|----------------------------------|------------|--------------------------------|------------|
|                                          |   | **2002**                         |       | **2001**                       |       | **2002** |   | **2001** |   |
|                                          |   | **Revenue**                      | ** ** | **Gross  Margin**              | ** ** | **Revenue** | ** ** | **Gross  Margin** | ** ** | **Revenue** | ** ** | **Gross  Margin** | ** ** | **Revenue** | ** ** | **Gross  Margin** | ** ** |
|                                          |   |                             |       |                           |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Software licenses                             |   | $                                | 2,514      |                           | $          | 2,341 |   | $ | 3,657 |   | $ | 3,501 |   | $ | 5,829 |   | $ | 5,426 |   | $ | 9,179 |   | $ | 8,782 |   |
|                                          |   |                             |       |                           |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Training and consulting                       |   | 1,050                            |       | 331                            |       | 2,427 |   | 1,103 |   | 2,352 |   | 942 |   | 4,914 |   | 1,962 |   |
| Maintenance                                   |   | 3,292                            |       | 2,558                          |       | 3,614 |   | 2,807 |   | 6,721 |   | 5,423 |   | 7,497 |   | 5,739 |   |
|                                          |   |                             |       |                           |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Total services                                |   | 4,342                            |       | 2,889                          |       | 6,041 |   | 3,910 |   | 9,073 |   | 6,365 |   | 12,411 |   | 7,701 |   |
|                                          |   |                             |       |                           |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Adjustment relating to  payment to a customer |   | (25                              | )          | (25                            | )          | — |   | — |   | (1,025 | ) | (1,025 | ) | — |   | — |   |
|                                          |   |                             |       |                           |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Total revenue                                 |   | $                                | 6,831      |                           | $          | 5,205 |   | $ | 9,698 |   | $ | 7,411 |   | $ | 13,877 |   | $ | 10,766 |   | $ | 21,590 |   | $ | 16,483 |   |

 

The followingtable presents revenue and long-lived asset information by geographic area asof and for the quarters and six months ended June 30 (in thousands):

 
|          |   | **Total Revenue**                |       |                           |       |
|---------------|--------|----------------------------------|------------|--------------------------------|------------|
|          |   | **Three months ended  June 30,** |       | **Six months ended  June 30,** |       | **Long Lived Assets  June 30,** |   |
|          |   | **2002**                         | ** ** | **2001**                       | ** ** | **2002** | ** ** | **2001** |   | **2002** | ** ** | **2001** | ** ** |
|          |   |                             |       |                           |       |   |   |   |   |   |   |   |   |
| United States |   | $                                | 5,863      |                           | $          | 8,570 |   | $ | 11,882 |   | $ | 18,664 |   | $ | 2,778 |   | $ | 3,951 |   |
| Foreign       |   | 968                              |       | 1,128                          |       | 1,995 |   | 2,926 |   | 666 |   | 907 |   |
|          |   | $                                | 6,831      |                           | $          | 9,698 |   | $ | 13,877 |   | $ | 21,590 |   | $ | 3,444 |   | $ | 4,858 |   |

 

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**ITEM2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OFOPERATIONS**

 

**CRITICALACCOUNTING POLICIES**

 

Segue believes its most critical accountingpolicies are as follows:

 

**REVENUERECOGNITION**—Segue’srevenue recognition policy follows the guidance prescribed in Statement ofPosition 97-2 (SOP 97-2) and Statement of Position 98-9 (SOP 98-9). These callfor the residual method of revenue for multi–element arrangements whenthe vendor–specific objective evidence (VSOE) of the fair value does notexist for one of the delivered elements. Under the residual method, thearrangement fee is recognized as follows: (1) the total fair value of theundelivered elements, as indicated by VSOE, is deferred and subsequentlyrecognized in accordance with relevant sections of SOP 97-2 and (2) thedifference between the total arrangement fee and the amount deferred for theundelivered elements is recognized as revenue related to the deliveredelements.

 

Segue reviews of the VSOE of undelivered itemssemi-annually. If the average VSOE is substantially different from the standardVSOE, the Company adjusts the standards to be more reflective of the actualVSOE. This change may result in more or less revenue being recognized relatedto the initial delivery. To date, the difference between Segue’s standard VSOEand the actual VSOE has been immaterial.

 

**BAD DEBTRESERVE—**On a periodicbasis, Segue reviews its accounts receivable aging to determine which accountsappear to be uncollectible and records an appropriate reserve. Thisdetermination is based on a complete review of all accounts greater than60 days old and an estimate of default based upon historical rates for allaccounts less than 60 days old.

 

**RESTRUCTURINGCHARGES**—Another criticalaccounting policy relates to the recording of restructuring losses. Seguefollows the guidance prescribed in EITF 94-3, “Liability Recognition forCertain Employee Termination Benefits and Other Costs to Exit an Activity(Including Certain Costs Incurred in a Restructuring)”. As such, Segue recordedas restructuring charges an estimated loss on unused space in our Lexington andLos Gatos facilities that resulted from workforce reductions. Refer toNote 6 in our Condensed Consolidated Financial Statements in thisForm 10-Q for additional information. This estimate was based on manyfactors that may be subject to change in the future including rental rates inthe commercial office market and the estimated timeframe in which we expect tosublease the space. Segue obtained local real estate market data and consultedwith its real estate advisor on these factors to help determine an appropriatereserve for potential losses on the unused space.  At June 30, 2002, the accrual balance related to theobligations associated with all of the excess office space is approximately$2.3 million.  This is comprised ofan estimated $7.2 million for future rents payable by Segue on unoccupiedspace, plus $372,000 in miscellaneous costs related to subleasing the space,less approximately $5.3 million of estimated future sublease income.  This accrual balance reflects signedsubleases for the Los Gatos space and a small portion of space in our Lexingtonfacility, but the balance of the accrual is based on the estimates of termsassociated with a proposed sublease for the Lexington facility that is not yetsigned, but in active negotiations.  Ifthis sublease is not signed or terms change in final negotiations, Segue mayincur additional losses on this excess space. Segue is under a lease for theLexington facility until October 2007. If the commercial real estatemarket changes significantly, then the factors that Segue used to estimate theloss may need to be revised, which could cause Segue to adjust the accrual thathas been recorded. Segue monitors this on a quarterly basis.

 

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**RESULTSOF OPERATIONS**

 

The followingtable sets forth certain unaudited quarterly results of operations expressed asa percentage of total revenue for the periods indicated:

 
|                                          |   | **Percentage  of Revenue for  Three Months Ended June 30,** |       | **Percentage  of Revenue for  Six Months Ended June 30,** |       |
|-----------------------------------------------|--------|-------------------------------------------------------------|------------|-----------------------------------------------------------|------------|
|                                          |   | **2002**                                                    | ** ** | **2001**                                                  | ** ** | **2002** | ** ** | **2001** |   |
|                                          |   |                                                        |       |                                                      |       |   |   |   |   |
| Revenue:                                      |   |                                                        |       |                                                      |       |   |   |   |   |
| Software                                      |   | 36.8                                                        | %          | 37.7                                                      | %          | 42.0 | % | 42.5 | % |
| Services                                      |   | 63.6                                                        |       | 62.3                                                      |       | 65.4 |   | 57.5 |   |
| Subtotal revenue                              |   | 100.4                                                       |       | 100.0                                                     |       | 107.4 |   | 100.0 |   |
| Adjustment relating to  payment to a customer |   | (0.4                                                        | )          | —                                                    |       | (7.4 | ) | — |   |
| Net revenue                                   |   | 100.0                                                       |       | 100.0                                                     |       | 100.0 |   | 100.0 |   |
|                                          |   |                                                        |       |                                                      |       |   |   |   |   |
| Cost of revenue:                              |   |                                                        |       |                                                      |       |   |   |   |   |
| Cost of software                              |   | 2.5                                                         |       | 1.6                                                       |       | 2.9 |   | 1.8 |   |
| Cost of services                              |   | 21.3                                                        |       | 22.0                                                      |       | 19.5 |   | 21.8 |   |
| Total cost of revenue                         |   | 23.8                                                        |       | 23.6                                                      |       | 22.4 |   | 23.6 |   |
|                                          |   |                                                        |       |                                                      |       |   |   |   |   |
| Gross margin                                  |   | 76.2                                                        |       | 76.4                                                      |       | 77.6 |   | 76.4 |   |
|                                          |   |                                                        |       |                                                      |       |   |   |   |   |
| Operating expenses:                           |   |                                                        |       |                                                      |       |   |   |   |   |
| Sales and marketing                           |   | 58.9                                                        |       | 78.0                                                      |       | 60.9 |   | 73.8 |   |
| Research and  development                     |   | 22.9                                                        |       | 21.2                                                      |       | 20.7 |   | 21.0 |   |
| General and  administrative                   |   | 19.1                                                        |       | 21.2                                                      |       | 20.0 |   | 21.2 |   |
| Amortization of  goodwill                     |   | —                                                      |       | 3.9                                                       |       | — |   | 3.5 |   |
| Restructuring and other  charges              |   | 2.1                                                         |       | 23.3                                                      |       | 6.0 |   | 10.5 |   |
| Total operating  expenses                     |   | 103.0                                                       |       | 147.6                                                     |       | 107.6 |   | 130.0 |   |
|                                          |   |                                                        |       |                                                      |       |   |   |   |   |
| Loss from operations                          |   | (26.8                                                       | )          | (71.2                                                     | )          | (30.0 | ) | (53.6 | ) |
| Other income net                              |   | 0.3                                                         |       | 1.3                                                       |       | 0.3 |   | 1.6 |   |
| Loss before provision for  income taxes       |   | (26.5                                                       | )          | (69.9                                                     | )          | (29.7 | ) | (52.0 | ) |
| Provision for income  taxes                   |   | 0.7                                                         |       | 0.6                                                       |       | 0.5 |   | 0.5 |   |
| Net loss                                      |   | (27.2                                                       | )%         | (70.5                                                     | )%         | (30.2 | )% | (52.5 | )% |

 

**SOFTWARE REVENUE**

 

Software revenuedecreased 31% to $2.5 million during the second quarter of 2002 from $3.7 millionfor the same period in 2001. For the six months ended June 30, 2002, softwarerevenue decreased 36% to $5.8 million from $9.2 million for the six monthsended June 30, 2001.  The major factorscontributing to the decrease in software revenue, as compared to the sameperiods in 2001, were the continued softness in Information Technology (“IT”)spending environment, longer time frames to close sales transactions andincreased competition leading to greater discounts on sales.  The majority of Segue’s software licenserevenue comes from only two of its products, SilkTest and SilkPerformer.  International software revenue accounted for21%, or $521,000, and 19%, or $1.1 million, of total software revenue for thethree and six months ended June 30, 2002, respectively, as compared to 16%, or$569,000 and 20%, or $1.9 million for the same periods in 2001.  The decrease in international softwarerevenue, in absolute dollars, was due to the slowdown in the European marketand increased competition.

 

**SERVICES REVENUE**

 

Services revenue,which consists of training, consulting and maintenance, decreased 28% to$4.3 million during the second quarter of 2002 from $6.0 million inthe same quarter of 2001. For the six months ended June 30, 2002, servicesrevenue decreased 27% to $9.1 million, as compared to $12.4 million for the sixmonths ended June 30, 2001.  As comparedto the three and six months ended June 30, 2001, training and consultingrevenue decreased 57% and 52% for the same

 

13

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periods in 2002, respectively. The decrease in training and consulting revenue in 2002, as compared tothe same prior-year periods, was mostly due to slower sales of product, whichis a major driver for these services. Additionally, the Company has encountered some resistance fromcustomers, who are unwilling to spend money for services in this tight spendingenvironment.  For the three and sixmonths ended June 30, 2002, recognized maintenance revenue decreased 9% and 10%respectively, as compared to the same periods in 2001.  The decrease in recognized maintenancerevenue was largely attributable to lower sales of new maintenance thataccompany sales of software licenses, which have been slow.

 

**COST OF SOFTWARE**

 

Cost of software increased11% to $173,000 during the second quarter of 2002 from $156,000 in the samequarter of 2001. For the six months ended June 30, 2002, cost of softwareincreased 2% to $403,000 from $397,000 in the same period of 2001. As apercentage of software revenue, cost of software in the second quarter of 2002and the six months ended June 30, 2002 increased to 7% from 4% in the sameperiods last year. The increase in cost of software, both in amount and as apercentage of software revenue, was primarily due to the increase in royaltiesassociated with the agreement with T-Plan Ltd, which requires Segue to payminimum quarterly royalties for the right to sell a modified version ofT-Plan’s product, which Segue has called SilkPlan.  The increase in cost of software in 2002 is partially offset bydecreases in personnel related costs and lower fulfillment costs that are theresult of the lower volume of sales of software licenses.

 

**COST OF SERVICES**

 

Cost of servicesdecreased 32% to $1.5 million during the second quarter of 2002 from$2.1 million in the same quarter of 2001. For the six months ended June 30, 2002, cost of services decreased 43%to $2.7 million from $4.7 million in the same period in 2001.  Cost of services consists primarily of costsof providing customer technical support, training and consulting. During thesecond quarter of 2002, cost of services as a percentage of services revenuedecreased to 33% from 35% in the same quarter last year.  For the six months ended June 30, 2002, costof services as a percentage of services revenue decreased to 30% from 38% inthe corresponding prior-year period. Cost of services as a percentage of services revenue may vary based onthe profitability of individual consulting engagements and the utilization rateof in-house consultants. Cost of training and consulting in the second quarterof 2002 decreased 46% to $719,000 from $1.3 million for the same quarter of2001. For the six months ended June 30, 2002, cost of training and consultingdecreased 52% to $1.4 million as compared to $3.0 million for the correspondingprior-year period. The decrease is primarily attributable to lower personnelrelated expenses, as a result of the workforce reductions during the past year,and reductions in travel related expenses, as a result of a lower number oftraining and consulting engagements and cost savings programs.  For the three and six months ended June 30,2002, cost of maintenance decreased 9% and 26% to $734,000 and  $1.3 million, respectively, as compared to$807,000 and $1.8 million, respectively, for the same periods in 2001. Thedecreases are mainly in personnel related costs, which are the result of pastreductions in workforce and further shifting of support responsibilities to theglobal technical support center in Northern Ireland, where operating expensesare generally lower.

 

**SALES AND MARKETING**

 

Sales andmarketing expenses decreased 47% to $4.0 million during the second quarterof 2002 from $7.6 million in the second quarter of 2001.  For the six months ended June 30, 2002,sales and marketing expenses decreased 47% to $8.4 million from $15.9 millionin the corresponding prior-year period. The main reasons for the decreases are lower personnel related costs dueto restructurings over the past year, less spending on marketing programs,reduced commissions because of lower revenue and decreased travel relatedexpenses.

 

**RESEARCH AND DEVELOPMENT**

 

Research anddevelopment expenses decreased 24% to $1.6 million during the second quarter of2002 from $2.1 million in the same quarter of 2001.  For the six months ended June 30, 2002, research and developmentexpenses decreased 37% to $2.9 million from $4.5 million in the correspondingprior-year period.  The decreases aremainly in personnel related costs, due to the workforce reductions of the pastyear, including the closing of the development lab in California.

 

**GENERAL AND ADMINISTRATIVE**

 

General andadministrative expenses decreased 37% from $2.1 million for the secondquarter of 2001 to $1.3 million for the quarter ended June 30, 2002.  For the six months ended June 30, 2002,general and administrative expenses decreased 39% to $2.8 million from $4.6million in the corresponding prior-year period.  The decreases in expenses are a result of lower personnel relatedexpenses due to the restructuring actions in 2001, reduced consulting expensesthat were part of the cost

 

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savings plans, and bad debt recoveries of $196,000 in the first sixmonths of 2002 as compared to bad debt expense for the same period in 2001.

 

**AMORTIZATIONOF GOODWILL**

 

As required bySFAS No. 142, Segue discontinued the amortization of goodwill effective January1, 2002.  During the quarter ended June30, 2002, Segue performed an initial analysis of the transitional fair value ofthe goodwill.  No impairment existed atthe time of this initial test.  For thethree and six months ended June 30, 2001, amortization of goodwill was $377,000and $753,000, respectively.

 

**RESTRUCTURING CHARGES**

 

During the secondquarter of 2002, Segue recorded as restructuring charges $147,000 for anincrease in the estimate of the loss associated with excess office facilities.For the six months ended June 30, 2002, the Company recorded restructuringcharges of $830,000, which included $559,000 for a reduction in workforce ofapproximately 5% and approximately $271,000 for facility–related costs,which included the accrual of estimated lease obligations associated with theexcess office facilities in our Lexington office, net of anticipated subleasingincome.  For the three and six monthsended June 30, 2001, Segue recorded $2.3 million for restructuring charges,including $859,000 for severance and employee related costs associated with areduction in force of approximately 20% and $1.4 million for estimated leaseobligations associated with the excess office facilities in our Lexington andLos Gatos offices, net of anticipated subleasing income.

 

**OTHERINCOME, NET**

 

Other income, netdecreased 83% to $22,000 during the second quarter of 2002 from $130,000 in thesame quarter of 2001.  For the sixmonths ended June 30, 2002, net other income decreased 88% to $43,000 from$347,000 in the same period last year. Other income consists mainly of interest income on cash equivalents andshort-term investments.  The decrease ininterest income was primarily due to lower balances of cash equivalents andshort-term investments in 2002 in comparison to the same period in 2001, andlower interest rates on those investments.

 

**PROVISIONFOR INCOME TAXES**

 

We recorded aprovision for foreign and state income taxes of $50,000 and $75,000 for thethree and six months ended June 30, 2002, respectively, as compared to $66,000and $116,000 for the same periods in 2001. There was no tax benefit recorded for losses generated in the U. S. inany period due to the uncertainty of realizing such benefits.

 

**LIQUIDITYAND CAPITAL RESOURCES**

 

As of June 30,2002, our principal sources of liquidity included cash, cash equivalents andshort-term investments totaling $6.4 million, as compared to$7.3 million as of December 31, 2001.

 

During the firstsix months of 2002, we used $2.9 million for operating activities, resultingfrom our net loss, adjusted for depreciation of fixed assets, as well asdecreases in accounts payable and deferred revenue, offset by increases inaccrued expenses and decreases in accounts receivable and other current assets.

 

Our investing activities generated cash of $4.7 million in thefirst half of 2002, which primarily came from maturing short-term investments.We continued to keep purchases of property and equipment low during thequarter.  In the future, Segue may needto make increased expenditures on property and equipment as present equipmentages.

 

We generated fundsfrom financing activities of $2.1 million during the first quarter of2002.  $2.0 million of this is relatedto the issuance of convertible preferred stock, and the balance is from theissuance of stock under the employee stock purchase plan and the exercise ofstock options.

 

In 2001 and the first half of 2002, Segue had executed variousrestructuring actions, for which we had accrued severance, benefits andestimated lease obligations on excess office space, net of estimated subleasingincome.  During the first half of 2002,we paid approximately $338,000 for the severance and termination benefitsassociated with all of the restructuring actions.  At June 30, 2002, we still had approximately $358,000 accrued forseverance and benefits associated with all of the restructuring actions.  During the first quarter of 2002, we enteredinto a sublease with a private company for a small amount of the space in ourLexington office. The term of the sublease is from May 2002 through October2007, which is the end of Segue’s

 

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lease in Lexington.   At June 30, 2002, the accrual balance related to theobligations associated with all of the excess office space noted above isapproximately $2.3 million.  Thisis comprised of an estimated $7.2 million for future rents payable bySegue on unoccupied space, plus $372,000 in miscellaneous costs related tosubleasing the space, less approximately $5.3 million of estimated futuresublease income.  This accrual balancereflects signed subleases for the Los Gatos space and a small portion of spacein our Lexington facility, but the balance of the accrual is based on theestimates of terms associated with a proposed sublease for the Lexingtonfacility that is not yet signed, but in active negotiations.  If this sublease is not signed or termschange in final negotiations, Segue may incur additional losses on this excessspace.

 

In January 2002, Segue entered into an agreement to be theexclusive external remote hosting application performance monitoring andscalability testing software provider to IBM Global Infrastructure and SystemsManagement Services (ISM), a division within IBM Global Services, for theinfrastructure used by ISM for this service for a period of three years throughDecember 31, 2004. As part of this agreement, the Company agreed to pay$1.0 million to IBM to be used to help fund the costs of deploying theremote monitoring infrastructure.   Thisamount was paid in April 2002.

 

Under theprovision of Segue’s lease obligation at its Lexington facility, Segue has anobligation to provide a security deposit if Segue’s current assets, as defined in the lease, become less than$20.0 million, as evidenced by Segue’s annual audited financial statementsas of each December 31st. As of June 30, 2002, current assets, as defined in the lease, were$10.3 million.  The amount of thesecurity deposit declines by $350,000 for each year that passes from thecommencement of the lease.  At June 30,2002, the amount of the security deposit required is approximately$1.5 million, which is currently under negotiation with the landlord.

 

Long-term cash requirements, other than for normal operating expensesand those described above, are anticipated for the development of new softwareproducts and enhancements of existing products, and the possible acquisition ofsoftware products or technologies complementary to our business.

 

We have historically had losses. This, accompanied by the currenteconomic downturn, the slowdown of IT capital spending and increasedcompetition, has resulted in lower sales volume, which has required Segue tocontinue utilizing significant amounts of cash and cash equivalents to fundoperations.

 

Segue actively pursued additional financing to fund working capitalrequirements. On March 22, 2002, the Company and S-7 Associates LLC, acompany managed by the Chairman of Segue’s Board of Directors, Dr. JamesH. Simons (“S-7 Associates”), signed an agreement under which S-7 Associatespurchased 666,667 shares of the Company’s Series B Preferred Stock(“Preferred Stock”) in consideration for a payment of $2.0 million. ThePreferred Stock is senior to the common stock as to dividend and liquidationrights and is convertible at the option of the holder into shares of common stockof Segue at a conversion price of $3.00 per share, subject to adjustment uponthe occurrence of certain transactions. The holders of the Preferred Stock areentitled to vote together with the common stock on an as-converted basis, andin addition, are entitled to elect one director of the Company as a separateclass. Dividends on the Preferred Stock are 12% per annum and will bepaid-in-kind semiannually. The Preferred Stock is callable on or afterMarch 31, 2004 at 133% of its face value (“Liquidation Preference”). Ifthere is a sale of all or substantially all of the Company’s assets or equity,the Preferred Stock can either be redeemed at the Liquidation Preference orconverted to common stock. Pursuant to a registration rights agreement, theCompany has agreed, subject to certain limitations, to register, under theSecurities Act of 1933, the resale of common stock into which the PreferredStock may be converted. The registration rights expire on March 22, 2007.

 

Management hastaken significant steps to streamline its operations and will continue to do soas the situation warrants.  These stepshave included reducing headcount, infrastructure and other expenses andlimiting capital expenditures.  TheCompany must grow revenue above current levels to allow Segue to achieve and sustain profitability and to get topositive cash flow from operations, if it is to continue as a viable business.There are uncertainties as to whether or when this will occur.

 

Assuming that Segue can execute on current plans to grow revenue throughits restructured sales program, its focus on enterprise customers, its newalliances with IBM and ASG and its introduction and success of new and enhancedproducts, and the business climate for IT spending does not worsen, we believethat with current cash and cash equivalents, that Segue should have sufficientresources to meet its forecasted working capital requirements in the nearfuture.  However, if Segue can not growits revenue or the economy worsens, we may need to take other actions in orderto fund our working capital resource requirements.   These actions may possibly include further reductions inworkforce, other cost reductions or raising additional capital.  At this time, Segue has no plans to takesuch actions.  If the Company needsadditional financing, there is no assurance that it could raise capital onterms acceptable to it.

 

If businesscontinues at the same rate as in the current quarter and further actions arenot taken, Segue could run out

 

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of cash in the first orsecond quarter of 2003.

 

Additionally, the financial statements do not include any adjustmentsrelating to the recoverability and classification of recorded asset amounts,and classification and amounts of liabilities that might be necessary shouldSegue be unable to continue funding its operations.

 

To date, inflation has not had a material impact on our financialresults.

 

**FACTORSTHAT MAY AFFECT FUTURE RESULTS**

 

The Company’sbusiness is subject to many uncertainties and risks. This Form 10-Qcontains certain forward-looking statements within the meaning of the PrivateSecurities Reform Act of 1995.  TheCompany’s future results may differ materially from its current results andactual results could differ materially from those projected in the forward–lookingstatements as a result of certain risk factors, including but not limited tothose set forth below, other one-time events and other important factorsdisclosed previously and from time to time in Segue’s other filings with theSEC.

 

***Our quarterly results may fluctuate.***  Segue’squarterly revenue and operating results are difficult to predict and mayfluctuate significantly from quarter to quarter.  If our quarterly revenue or operating results fall below the expectationsof investors or public market analysts, the price of our common stock couldfall substantially.  Our quarterlyrevenue may fluctuate significantly for several reasons, including: the timingand success of introductions of our new products or product enhancements orthose of our competitors; uncertainty created by changes in the market,including the decline in IT spending, and decline of the general businessclimate, which make it difficult to predict the size and timing of individualorders; software bugs or other product quality problems; competition andpricing; customer order deferrals or reductions as a result of general businessconditions and budget freezes; ability to increase sales from enterprisecompanies; and general economic conditions. Substantial portions of Segue’soperating expenses are related to personnel, facilities and marketing and salesprograms.  The level of spending forsuch expenses cannot be adjusted quickly and is based, in significant part, onour expectations of future revenues.  Ifactual revenue levels are below management’s expectations, results ofoperations are likely to be adversely affected.  Furthermore, Segue has often recognized a substantial portion ofits product revenues in the last month of a quarter, with these revenuesfrequently concentrated in the last weeks or days of a quarter.  As a result, product revenues in any quarterare substantially dependent on orders booked and shipped in the latter part ofthat quarter and revenues from any future quarter are not predictable with anysignificant degree of accuracy.  Seguetypically does not experience order backlog. For these reasons, Segue believesthat quarter-to-quarter comparisons of its results of operations are notnecessarily meaningful and should not be relied upon as indications of futureperformance.

 

***We may not be profitable in thefuture.***  Since Segue began operations, it hasgenerally experienced losses.  Losseshave resulted in an accumulated deficit of approximately $57.2 million asof June 30, 2002.  For the first sixmonths of 2002, we experienced significant revenue shortfalls from the sameperiod in prior year. We initiated aggressive cost savings throughout 2001 andcontinued this in 2002, in an effort to reduce expenses, enhance the possibilityof breakeven, and conserve cash. These cost saving measures may not beeffective, and are not necessarily indicative of future operating results.Failure to achieve profitability may adversely affect the market price ofSegue’s common stock.

 

***Continued decline in businessconditions and Information Technology (IT) spending could cause further declinein revenue.*** The level of future IT spending in themarketplace remains very uncertain particularly in light of the decline in thebusiness climate throughout 2001 and 2002. If IT spending continues to decline, Segue’s revenues could be furtheradversely impacted.

 

***Segue may not derive substantialincremental revenue from its alliances and SilkElite Partner Program.***   In aneffort to augment product revenue derived from the efforts of its direct salesforce, Segue has focused on expanding its key strategic alliances and onbuilding a successful SilkElite Partner Program. The SilkElite Partner Programfocuses on resellers, consulting partners and distributors.  SilkElite Partners both resell Segueproducts and use Segue software products in the delivery of consultingservices.  The success of the expansionof key strategic alliances and the SilkElite Partner Program is uncertain,faces strong competition, and takes time and significant resources todevelop.  Should Segue fail to generatesubstantial incremental revenue from its strategic alliances or its SilkElitePartner Program, the financial results and stock price could be adverselyaffected.

 

***Segue may not generate substantialincremental revenue from the expanded relationship with IBM.***   Seguesigned an expanded contract with IBM Corporation under which Segue is theexclusive external provider of software for IBM Global Infrastructure andSystems Management Services’ new remote infrastructure analysis offering.  IBM will use Segue’s recently

 

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introduced monitoring product, SilkVision and Segue’s enhancedscalability product, SilkPerformer V. Segue invested significant resources in the alliance, including$1.0 million paid in April 2002, to accelerate the availability of the newIBM service offering.  Should the IBMservice offering not be successful, Segue will not generate substantialincremental revenue and its business could be materially adversely affected.

 

***Selling products and services throughalliances and partnerships may limit our control and interaction with end usersof our products.***  As a result, our ability to forecast salesaccurately, evaluate customer satisfaction and recognize emerging customerrequirements may be limited.  Ourability to develop and maintain customer goodwill could also be affected.  Finally, we will have to resolve potentialchannel selling conflicts among our sales force and business partners in orderto make the partner program successful.

 

***Our future success will depend on ourability to respond rapidly and effectively to technological and other marketchanges, including the successful introduction of new and enhanced products.***   Thenature of the web-based automated software testing and e-business testingmarkets in which we compete is characterized by rapidly changing technology,rapidly evolving customer needs and desires, changes in industry standards andpractices and frequent releases of new product or enhancements bycompetitors.  To be competitive, Seguemust develop and introduce product enhancements and new products that addressthe increasingly sophisticated and varied needs of our existing and potential customers.Over 90% of Segue’s product revenue in the first six months of 2002 and all of2001 was generated from its SilkPerformer and SilkTest products.  In 2001, we introduced our new web-basedenterprise-monitoring product, SilkVision, and our enhanced scalability testingproduct SilkPerformer V.  Segue alsoannounced an alliance to integrate and resell a test management tool fromT-Plan Ltd, that we named SilkPlan. In addition, Segue also introduced a Unicode multi–lingual testingcapability for the Company’s regression testing tool, SilkTestInternational.  If these new productsare not successful or if we fail to continue to develop and introduce newproducts and enhancements on a timely basis, or maintain our level of productrevenue from SilkPerformer and SilkTest, or fail to generate substantialincremental revenue from our new products, our business may be materiallyadversely affected.

 

***We may face liquidity issues.***  We havetaken steps to conserve our cash, including significantly reducing headcount,infrastructure and other expenses, and limiting capital expenditures in orderto compensate in part for our recent decline in revenues, to improve ourliquidity and to achieve greater efficiencies. Segue believes that based on potential incremental revenue from itsstrategic alliances, its SilkElite Partner Program, the expanded IBMrelationship, and its new products and product enhancements, that future saleswill be sufficient to allow us to continue as a viable business.  Revenue in the first half of 2002 declinedby approximately 36% from revenue in the same period last year.  If future sales do not grow above currentlevels or revenue continues to decline, however, we may have to raiseadditional financing to fund working capital needs.  If we fail to generate incremental revenue, or we are notsuccessful in raising additional financing on terms acceptable to us, we maynot have sufficient working capital resources in the near future, and ourbusiness may be materially adversely affected.

 

***We may not be successful insubletting excess office space.***  Segue istaking aggressive steps to sublet its excess office space.  The real estate market is changing rapidlyand there is significant excess capacity in the Greater Boston market.  These efforts may not be successful or maytake significant time and resources.  Ifthese efforts are not successful, Segue will not realize its estimated costsavings or the amount of estimated future subleasing income (estimated to be$5.3 million at June 30, 2002) used in the restructuring reservecalculation, and real estate costs will continue to affect cash flow.

 

***We may have difficulty managingorganizational change and operating the business efficiently with fewerresources.***   In 2001 and 2002, Segue reorganized its salesforce; appointed new leaders in its support services consulting and productdevelopment areas; appointed a new head of international sales; hired a newVice President of Product Marketing, who was recently terminated; hired a newSenior Vice President of Worldwide Sales, who was terminated in 2002;terminated the Senior Vice President of Marketing; eliminated the inside salesgroup in 2001 and re-formed a smaller inside sales group in 2002; created a newstrategic alliance program; shifted research and development resources; andconsolidated several of its activities as a result of reduced headcount.  During 2001, Segue reduced its headcount byapproximately 37% and in the first quarter of 2002 further reduced headcount byan additional 5%.  The success of theseorganizational and other changes is uncertain and Segue’s ability to manage itsbusiness efficiently or develop new products and upgrades with fewer resourcescould adversely affect its business.

 

***Segue facessignificant competition from other software companies.*** The market for web-basedsoftware quality management and testing tools is evolving, intenselycompetitive and subject to rapid technological change.  We expect competition to intensify in thefuture.  Segue currently encounterscompetition from a number of public and private companies, including MercuryInteractive Corporation, Rational Software Corporation and CompuwareCorporation.  Many of our current andpotential competitors have longer operating histories, greater namerecognition, larger installed customer bases, and significantly greaterfinancial, technical and marketing resources than we do and, therefore, theymay be able to

 

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respond more quickly to new or changing opportunities, technologies,standards or customer requirements or they may be able to devote greaterresources to the promotion and sale of their products than Segue can.  An increase in competition could result inprice reductions and loss of market share. Such competition and any resulting reduction in profitability could havea material adverse effect on our business, operating results and financialcondition.

 

***Segue’s businesscould be adversely affected if its products contain errors.***  Software products as complex as ours may contain undetectederrors or “bugs”, which could result in product failures.  The occurrence of errors could result inloss of or delay in revenue, loss of market share, failure to achieve marketacceptance, diversion of development resources, significant repair andreplacement costs, injury to our reputation, or damage to our efforts to buildbrand awareness, any of which could have a material adverse effect on ourbusiness, operating results and financial condition.

 

***We must hire and retain skilled personnel in a difficulteconomic environment.***  Qualified personnel remain in demand throughout the softwareindustry.  Our success depends in largepart upon our ability to attract, train, motivate and retain highly skilledemployees, particularly sales and marketing personnel, software engineers andother senior personnel.  The failure toattract and retain the highly skilled personnel that are integral to our directsales, product development, service and support teams may limit the rate atwhich we can generate sales and develop new products or productenhancements.  Our ability to attractand retain our qualified staff may be further impacted by our financialresults.  All of this could have amaterial adverse effect on our business, operating results and financialcondition.

 

***We face many risksassociated with international business activities.***  We derived approximately 19% of totalsoftware sales from international customers in the first half of 2002.  The international market for software productsis highly competitive and we expect to face substantial competition in thismarket from established and emerging companies.  Segue faces many risks associated with international businessactivities including currency fluctuations, imposition of government controls,export license requirements, restrictions on the export of critical technology,political and economic instability, tailoring of products to localrequirements, trade restrictions, changes in tariffs and taxes, difficulties instaffing and managing international operations, longer accounts receivablepayment cycles and the burdens of complying with a wide variety of foreign lawsand regulations.  To the extent we areunable to continue to expand international sales in a timely and cost-effectivemanner, our business could be materially adversely affected.

 

***Segue’s successdepends on our ability to protect our software and other proprietary technology**.***  Theunauthorized reproduction or other misappropriation of our proprietarytechnology could enable third parties to benefit from Segue’s technologywithout paying us for it.  This couldhave a material adverse effect on our business, operating results and financialcondition.  Although we have taken stepsto protect our proprietary technology, these efforts may be inadequate.  We currently rely on a combination ofpatent, trademark, copyright and trade secret laws and contractual provisionsto protect our proprietary rights in our products.  Currently, we have three issued patents and a fourth pending.  There can be no assurance that these patentswould be upheld if challenged. Moreover, the laws of other countries in which we market our productsmay afford little or no effective protection of our intellectual property.  If we resort to legal proceedings to enforceour intellectual property rights, the proceedings could be burdensome andexpensive and could involve a high degree of risk.  If we were to discover that any of Segue products violated thirdparty proprietary rights, or protect our trade secrets, there can be noassurance that we would be able to obtain licenses on commercially reasonableterms to continue licensing our software without substantial reengineering orthat any effort to undertake such reengineering would be successful.  Any claim of infringement could cause Segueto incur substantial costs defending against the claim, even if the claim isinvalid, and could distract management resources from our business.  Furthermore, a party making such a claimcould secure a judgment that requires us to pay substantial damages or resultin an injunction.  Any of these eventscould have a material adverse effect on our business, operating results andfinancial condition.

 

**ITEM3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

The followingdiscussion about our market risk disclosures involves forward-lookingstatements.  Actual results could differmaterially from those discussed in the forward–looking statements.  We are exposed to market risk related tochanges in interest rates and foreign currency exchange rates.  We do not use derivative financialinstruments for speculative or trading purposes.

 

INTEREST RATE RISK.  Segue isexposed to market risk from changes in interest rates primarily through itsinvesting activities.  In addition, ourability to finance future transactions may be impacted if we are unable toobtain appropriate financing at acceptable rates.  Our investing strategy to manage interest rate and marketexposure is to invest in short-term, highly secure and liquid investments.  We maintain a portfolio of highly liquidcash equivalents and short-term investments (primarily in high-grade corporatecommercial paper). As of June 30, 2002, we had no short-term investments, onlycash and cash equivalents.

 

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FOREIGN CURRENCYRISK.  Segue faces exposure to movementsin foreign currency exchange rates. These exposures may change over time as business practices evolve andcould have a material adverse effect on our business, financial condition andresults of operations.  We do not usederivative financial instruments or other financial instruments to hedgeeconomic exposures or for trading. Historically, our primary exposures have been related to the operationsof our foreign subsidiaries.  During thefirst half of 2002, we incurred expenses of approximately $165,000 related toforeign currency.  The expense effect offoreign currency in the first half in 2001 was approximately $190,000.  As of June 30, 2002, the cumulativetranslation of foreign currency changes recorded against stockholders’ equitywas $1,000.  On January 1, 2002,the Euro became the local currency for two of our operating subsidiaries,Austria and Germany.  We anticipate thatthe impact of the Euro will have a larger effect than in the past, as we willhave both transactions and translation related to this currency.

 

### **PART II. OTHERINFORMATION**

 

**ITEM 1. LEGAL PROCEEDINGS**

 

There are no pending lawsuits which management believes will have amaterial adverse affect on the financial position or results of operations ofSegue.

 

**ITEM4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS**

 

The 2002 Annual Meeting of Stockholders of Segue Software, Inc. (the“Annual Meeting”) was held on May 31, 2002.

 

At the Annual Meeting, the following individuals were elected toSegue’s Board of Directors, constituting all members of Segue’s Board ofDirectors:

 
|                   |   | **Votes For** |   | **Votes  Withheld** |   |
|------------------------|--------|---------------|--------|---------------------|--------|
| Leonard E. Baum        |   | 8,568,836     |   | 107,813             |   |
| Stephen B.  Butler     |   | 8,568,836     |   | 107,813             |   |
| Edmund F. Kelly        |   | 8,434,081     |   | 242,568             |   |
| John R. Levine         |   | 8,568,836     |   | 107,813             |   |
| Howard L. Morgan       |   | 8,568,836     |   | 107,813             |   |
| Robert W.  Powers, Jr. |   | 8,568,836     |   | 107,813             |   |
| Jyoti Prakash          |   | 8,568,836     |   | 107,813             |   |
| James H. Simons        |   | 8,568,836     |   | 107,813             |   |

 

The following additional proposals were considered at the AnnualMeeting:

 
|                                                                                                                               |   | **Votes  For** |   | **Votes  Against** |   | **Votes  Withheld** |   |
|------------------------------------------------------------------------------------------------------------------------------------|--------|----------------|--------|--------------------|--------|---------------------|--------|
| Ratification of the appointment of Grant Thornton LLP independent  public accountants for the fiscal year ending December 31, 2002 |   | 8,587,044      |   | 61,734             |   | 27,871              |   |

 

**ITEM 5. OTHER INFORMATION**

 

Not applicable.

 

**ITEM6. EXHIBITS AND REPORTS ON FORM 8-K**

 
| (a)    | Exhibits                 |
|--------|--------------------------|
|   | None.                    |
|   |                     |
| (b)    | Reports on Form 8-K |
|   | None.                    |

 

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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 theundersigned thereunto duly authorized.

 

Date: August 14, 2002.

 
|   | **SEGUE  SOFTWARE, INC.** |
|--------|---------------------------|
|   |                      |   |
|   | By:                       | /s/ STEPHEN B. BUTLER |   |
|   |                      |   |
|   |                      | Stephen B. Butler |
|   |                      | Chief Executive Officer, President and Director |
|   |                      |   |
|   | By:                       | /s/ DOUGLAS ZACCARO |   |
|   |                      |   |
|   |                      | Douglas Zaccaro |
|   |                      | Chief Financial Officer and Treasurer |

 

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CERTIFICATION PURSUANT TO

18 U.S.C. §1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THESARBANES-OXLEY ACT OF 2002

 

In connection with the Quarterly Report on Form 10-Qof Segue Software, Inc. (the “Company”) for the quarter ended June 30, 2002, asfiled with the Securities and Exchange Commission on the date hereof (the“Report”), each of the undersigned Chief Executive Officer, President andDirector and Chief Financial Officer and Treasurer of the Company, certifies,to the best knowledge and belief of the signatory, pursuant to 18 U.S.C. §1350,as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

 

(1)           TheReport fully complies with the requirements of Section 13(a) or 15(d) of theSecurities Exchange Act of 1934; and

 

(2)           Theinformation contained in the Report fairly presents, in all material respects,the financial condition and results of operations of the Company.

 

 
| /s/ STEPHEN B. BUTLER                           |                                  | /s/ DOUGLAS ZACCARO |
|-------------------------------------------------|---------------------------------------|---------------------|
|                                            |                                  |
| Stephen B. Butler                               | Douglas Zaccaro                       |
| Chief Executive Officer, President and Director | Chief Financial Officer and Treasurer |
|                                            |                                  |
| Date: August 14, 2002                           | Date: August 14, 2002                 |

 

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