**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

 

**Washington, D.C. 20549**

 

**FORM10-Q**

 
| **ý**                                                                                                                                                                            | **QUARTERLY REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**  |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-----------------------------------------------------------------------------------------------|
|                                                                                                                                                                                  |
| **For the quarterly period ended March 31, 2004**                                                                                                                                |
|                                                                                                                                                                                  |
| **OR**                                                                                                                                                                                |
|                                                                                                                                                                                  |
| **o**                                                                                                                                                                                 | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|                                                                                                                                                                                  |
| **For the transition period  from            to            ** |

 

**Commission File No. 000-30207**

 

**SEEBEYONDTECHNOLOGY CORPORATION**

(Exactname of Registrant as Specified in Its Charter)

 
| **Delaware**                                                                                                                                    |   | **95-4249153**                            |
|-------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------------------------|
| (State  or Other Jurisdiction of  Incorporation or Organization)                                                                                |   | (I.R.S.  Employer  Identification Number) |
|                                                                                                                                            |   |                                      |
| **800 E. Royal Oaks Drive  Monrovia, California 91016  (626) 471-6000**                                                                    |
|                                                                                                                                            |
| (Address,  including Zip Code, of Registrant’s Principal  Executive Offices  and Registrant’s Telephone Number, including Area  Code) |

 

Indicate by check markwhether the registrant: (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports) and (2) has been subject to such filingrequirements for the past 90 days. Yes  ý No  o

 

Indicate by check markwhether the registrant is an accelerated filer (as defined in Rule 12b-2 underthe Act). Yes  ý No  o

 

The number of sharesoutstanding of the registrant’s Common Stock, $0.0001 par value, as of May 5,2004 was 85,060,753.

 

 

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**SeeBeyond Technology Corporation and Subsidiaries**

 

**INDEX**

 
|                                              |                                                                                                             |
|---------------------------------------------------|------------------------------------------------------------------------------------------------------------------|
| **Part I - Financial  Information**               |                                                                                                             |
| Item 1.                                           | Financial Statements:                                                                                            | 3 |
|                                              | Condensed  Consolidated Balance Sheets as of March 31, 2004 (unaudited) and December 31,  2003                   | 3 |
|                                              | Condensed  Consolidated Statements of Operations (unaudited) for the three months ended  March 31, 2004 and 2003 | 4 |
|                                              | Condensed  Consolidated Statements of Cash Flows (unaudited) for the three months ended  March 31, 2004 and 2003 | 4 |
|                                              | Notes  to Condensed Consolidated Financial Statements (unaudited)                                                | 6 |
| Item 2.                                           | Management’s Discussion and  Analysis of Financial Condition and Results of Operations                      | 11 |
| Item 3.                                           | Quantitative and Qualitative  Disclosure About Market Risk                                                       | 24 |
| Item 4.                                           | Controls and Procedures                                                                                          | 24 |
| **Part II -  Other Information**                  | 25                                                                                                               |
| Item 1.                                           | Legal Proceedings                                                                                                | 25 |
| Item 2.                                           | Changes in Securities and  Use of Proceeds                                                                       | 25 |
| Item 4.                                           | Submission of Matters to  a Vote of Security Holders                                                             | 25 |
| Item 6.                                           | Exhibits and Reports on Form 8-K                                                                                 | 25 |
| **Signatures**                                    | 28                                                                                                               |
| **Certification of the Chief Executive  Officer** |                                                                                                             |
| **Certification of the Chief  Financial Officer** |                                                                                                             |

 

2

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**PART I****—FINANCIAL INFORMATION**

 

**Item 1****. Financial Statements**

 

**SeeBeyond Technology Corporation and Subsidiaries**

 

**Condensed Consolidated BalanceSheets**

(in thousands)

 
|                                                                                                                                                                                                                                       |   | **March 31,  2004** |    | **December  31,  2003** |   |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------|---------|-------------------------|--------|
|                                                                                                                                                                                                                                       |   | **(unaudited)**     |    |                    |   |
| Assets:                                                                                                                                                                                                                                    |   |                |    |                    |   |
| Current assets:                                                                                                                                                                                                                            |   |                |    |                    |   |
| Cash and cash equivalents                                                                                                                                                                                                                  |   | $                   | 73,760  |                    | $      | 70,135 |   |
| Accounts receivable, net of allowances of  $3,081 and $2,373 at March 31, 2004 and December 31, 2003, respectively                                                                                                                         |   | 24,288              |    | 34,333                  |   |
| Prepaid expenses and other current assets                                                                                                                                                                                                  |   | 4,503               |    | 4,596                   |   |
| Total current assets                                                                                                                                                                                                                       |   | 102,551             |    | 109,064                 |   |
| Property and equipment, net                                                                                                                                                                                                                |   | 14,874              |    | 15,224                  |   |
| Goodwill                                                                                                                                                                                                                                   |   | 1,391               |    | 1,391                   |   |
| Other assets                                                                                                                                                                                                                               |   | 1,995               |    | 2,068                   |   |
| Total assets                                                                                                                                                                                                                               |   | $                   | 120,811 |                    | $      | 127,747 |   |
| Liabilities and stockholders’ equity:                                                                                                                                                                                                 |   |                |    |                    |   |
| Current liabilities:                                                                                                                                                                                                                       |   |                |    |                    |   |
| Accounts payable                                                                                                                                                                                                                           |   | $                   | 6,546   |                    | $      | 5,120 |   |
| Accrued employee compensation and related  expenses                                                                                                                                                                                        |   | 9,858               |    | 12,675                  |   |
| Accrued expenses                                                                                                                                                                                                                           |   | 8,666               |    | 9,263                   |   |
| Deferred revenues                                                                                                                                                                                                                          |   | 31,676              |    | 31,221                  |   |
| Equipment line and advance payable                                                                                                                                                                                                         |   | 2,309               |    | 3,097                   |   |
| Capital lease payable - current portion                                                                                                                                                                                                    |   | 317                 |    | 310                     |   |
| Total current liabilities                                                                                                                                                                                                                  |   | 59,372              |    | 61,686                  |   |
| Capital lease payable                                                                                                                                                                                                                      |   | 447                 |    | 515                     |   |
| Total liabilities                                                                                                                                                                                                                          |   | 59,819              |    | 62,201                  |   |
| Commitments and contingencies                                                                                                                                                                                                              |   |                |    |                    |   |
| Stockholders’ equity:                                                                                                                                                                                                                 |   |                |    |                    |   |
| Common stock, $.0001 par value -  200,000,000 shares authorized;  86,147,860 shares issued and 84,278,522 shares outstanding as of March 31,  2004 and 85,548,522 shares issued and 83,826,520 shares outstanding as of  December 31, 2003 |   | 8                   |    | 8                       |   |
| Additional paid-in capital                                                                                                                                                                                                                 |   | 223,865             |    | 222,539                 |   |
| Treasury stock                                                                                                                                                                                                                             |   | (4,276              | )       | (3,632                  | )      |
| Deferred stock compensation                                                                                                                                                                                                                |   | —              |    | (47                     | )      |
| Accumulated other comprehensive loss                                                                                                                                                                                                       |   | 1,116               |    | 616                     |   |
| Accumulated deficit                                                                                                                                                                                                                        |   | (159,721            | )       | (153,938                | )      |
| Total stockholders’ equity                                                                                                                                                                                                            |   | 60,992              |    | 65,546                  |   |
| Total liabilities and stockholders’ equity                                                                                                                                                                                            |   | $                   | 120,811 |                    | $      | 127,747 |   |

 

*The accompanying notes are an integral part of thesefinancial statements.*

 

3

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**SeeBeyond Technology Corporation and Subsidiaries**

 

**Condensed Consolidated Statementsof Operations**

 

**(Unaudited)**

(in thousands except per share data)

 
|                                                                       |   | **Three  Months Ended  March 31,** |   |
|----------------------------------------------------------------------------|--------|------------------------------------|--------|
|                                                                       |   | **2004**                           |   | **2003** |   |
| Revenues:                                                                  |   |                               |   |   |   |
| License                                                                    |   | $                                  | 10,880 |   | $ | 12,990 |   |
| Services                                                                   |   | 10,510                             |   | 11,232 |   |
| Maintenance                                                                |   | 13,047                             |   | 11,600 |   |
| Total revenues                                                             |   | 34,437                             |   | 35,822 |   |
| Cost of revenues:                                                          |   |                               |   |   |   |
| License                                                                    |   | 277                                |   | 545 |   |
| Services and maintenance revenues                                          |   | 10,179                             |   | 11,548 |   |
| Total cost of revenues                                                     |   | 10,456                             |   | 12,093 |   |
| Gross profit                                                               |   | 23,981                             |   | 23,729 |   |
| Operating expenses:                                                        |   |                               |   |   |   |
| Research and development                                                   |   | 9,740                              |   | 10,627 |   |
| Sales and marketing                                                        |   | 15,004                             |   | 14,481 |   |
| General and administrative                                                 |   | 4,609                              |   | 4,626 |   |
| Amortization of sales and marketing  warrants                              |   | (14                                | )      | 111 |   |
| Amortization of stock-based compensation                                   |   | 97                                 |   | 101 |   |
| Total operating expenses                                                   |   | 29,436                             |   | 29,946 |   |
| Loss from operations                                                       |   | (5,455                             | )      | (6,217 | ) |
| Interest and other income (expense), net                                   |   | (213                               | )      | 311 |   |
| Interest expense                                                           |   | (72                                | )      | (141 | ) |
| Loss before income tax provision                                           |   | (5,740                             | )      | (6,047 | ) |
| Provision for income tax                                                   |   | 43                                 |   | 78 |   |
| Net loss                                                                   |   | $                                  | (5,783 | ) | $ | (6,125 | ) |
|                                                                       |   |                               |   |   |   |
| Basic and diluted net loss per share                                       |   | $                                  | (0.07  | ) | $ | (0.07 | ) |
| Number of shares used in calculating basic  and diluted net loss per share |   | 84,053                             |   | 82,616 |   |

 

*The accompanying notes are an integral part of thesefinancial statements.*

 

4

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**SeeBeyond Technology Corporation and Subsidiaries**

 

**Condensed Consolidated Statementsof Cash Flows**

 

**(Unaudited)**

(inthousands)

 
|                                                                                       |   | **Three  Months Ended  March 31,** |   |
|--------------------------------------------------------------------------------------------|--------|------------------------------------|--------|
|                                                                                       |   | **2004**                           |   | **2003** |   |
| Cash flows from operating activities:                                                      |   |                               |   |   |   |
| Net loss                                                                                   |   | $                                  | (5,783 | ) | $ | (6,125 | ) |
| Adjustments to reconcile net loss to net  cash provided by (used in) operating activities: |   |                               |   |   |   |
| Gain on disposal of fixed assets                                                           |   | —                             |   | (30 | ) |
| Depreciation and amortization                                                              |   | 1,250                              |   | 1,435 |   |
| Provision for doubtful accounts receivable                                                 |   | 383                                |   | 84 |   |
| Amortization of sales and marketing  warrants                                              |   | (14                                | )      | 111 |   |
| Amortization of stock-based compensation                                                   |   | 97                                 |   | 101 |   |
| Changes in assets and liabilities:                                                         |   |                               |   |   |   |
| Accounts receivable                                                                        |   | 9,662                              |   | (320 | ) |
| Prepaid expenses and other current assets                                                  |   | 93                                 |   | 1,043 |   |
| Accounts payable                                                                           |   | 1,426                              |   | (1,829 | ) |
| Accrued compensation and related expenses                                                  |   | (3,414                             | )      | (2,002 | ) |
| Deferred revenues                                                                          |   | 455                                |   | 1,885 |   |
| Net cash provided by (used in) operating  activities:                                      |   | 4,155                              |   | (5,647 | ) |
|                                                                                       |   |                               |   |   |   |
| Cash flows from investing activities:                                                      |   |                               |   |   |   |
| Purchases of property and equipment                                                        |   | (900                               | )      | (400 | ) |
| Other                                                                                      |   | 73                                 |   | (704 | ) |
| Net cash used in investing activities                                                      |   | (827                               | )      | (1,104 | ) |
|                                                                                       |   |                               |   |   |   |
| Cash flows from financing activities:                                                      |   |                               |   |   |   |
| Net repayments on bank lines of credit                                                     |   | (788                               | )      | (787 | ) |
| Repayments of capital lease obligation                                                     |   | (61                                | )      | (14 | ) |
| Proceeds from issuance of common stock  pursuant to employee stock option plan             |   | 1,290                              |   | 216 |   |
| Payments for purchase of common stock                                                      |   | (644                               | )      | — |   |
| Net cash used in financing activities                                                      |   | (203                               | )      | (585 | ) |
|                                                                                       |   |                               |   |   |   |
| Effect of exchange rate changes on cash and  cash equivalents                              |   | 500                                |   | (164 | ) |
| Net increase (decrease) in cash and cash  equivalents                                      |   | 3,625                              |   | (7,500 | ) |
| Cash and cash equivalents at beginning of  the period                                      |   | 70,135                             |   | 94,114 |   |
| Cash and cash equivalents at end of the  period                                            |   | $                                  | 73,760 |   | $ | 86,614 |   |

 

*The accompanying notes are an integral part of these financialstatements.*

 

5

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**SeeBeyond Technology Corporation and Subsidiaries**

 

**Notes toCondensed Consolidated Financial Statements**

 

**(Unaudited)**

 

**Note 1.    *Basis of Presentation***

 

The accompanying unauditedcondensed consolidated financial statements have been prepared by SeeBeyondTechnology Corporation (the “Company” or “SeeBeyond”) in accordance with therules and regulations of the Securities and Exchange Commission. Certaininformation and footnote disclosures normally included in consolidatedfinancial statements prepared in accordance with accounting principlesgenerally accepted in the United States have been condensed or omitted inaccordance with such rules and regulations. In the opinion of management, the accompanyingunaudited condensed consolidated financial statements reflect all adjustments,consisting only of normal recurring adjustments, necessary to present fairlythe financial position of the Company, and its results of operations and cashflows. These condensed consolidated financial statements should be read inconjunction with the annual audited consolidated financial statements and notesas of and for the year ended December 31, 2003 included in the Company’sForm 10-K filed with the Securities and Exchange Commission onMarch 11, 2004.

 

The results of operationsfor the three months ended March 31, 2004 are not necessarily indicative of theresults that may be expected for the year ending December 31, 2004 or anyother interim period, and the Company makes no representations related thereto.

 

The consolidated financialstatements include the accounts of the Company and its subsidiaries. Allmaterial intercompany accounts and transactions have been eliminated inconsolidation.

 

Certain reclassificationshave been made to prior year information to conform to the current period’spresentation.

 

**Note 2.    *Revenue Recognition***

 

The Company recognizesrevenue when an agreement has been signed by both parties or other persuasiveevidence of an arrangement exists, the software has been shipped orelectronically delivered, the fees are fixed or determinable, collection of theresulting receivable is probable and no other significant obligations remain.For multiple element arrangements where vendor-specific objective evidence offair value exists for all undelivered elements, we account for the deliveredelements in accordance with the “residual method” prescribed by Statement ofPosition 98-9. Vendor-specific objective evidence of fair value is based on theprice a customer is required to pay when the element is sold separately. TheCompany enters into arrangements with end users, which may include the sale oflicenses of software, maintenance and services under the arrangement or variouscombinations of each element, including the sale of such elements separately.

 

For multi-elementarrangements, each element of the arrangement is analyzed and the Companyallocates a portion of the total fee under the arrangement to the undeliveredelements, primarily services and maintenance, using vendor-specific objectiveevidence of fair value of the element and the remaining portion of the fee isallocated to the delivered elements (i.e. generally the software license),regardless of any separate prices stated within the contract for each element,under the residual method prescribed by SOP 98-9. Vendor-specific objectiveevidence of fair value is based on the price the customer is required to paywhen the element is sold separately (i.e. hourly rates charged for consultingservices when sold separately from a software license and the renewal rate formaintenance arrangements). Each license agreement offers additional maintenancerenewal periods at a stated price. If vendor-specific objective evidence offair value does not exist for the undelivered elements, all revenue is deferredand recognized ratably over the service period if the undelivered element isservices, or over the period the maintenance is provided if the undeliveredelement is maintenance, or until sufficient objective evidence exists or allelements have been delivered.

 

*LicenseRevenues:* Amountsallocated to license revenues under the residual method are recognized at thetime of delivery of the software when vendor specific objective evidence offair value exists for the undelivered elements, if any, and all the otherrevenue recognition criteria discussed above have been met.

 

*ServicesRevenues:* Revenuesfrom services are comprised of consulting and implementation services and, to alimited extent, training. Services are generally sold on a time-and-materialsor fixed fee basis and include a range of services including installation ofoff-the-shelf software, data conversion and building non-complex interfaces toallow the software to

 

6

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operate in customizedenvironments. Services are generally separable from the other elements underthe arrangement since the performance of the services are not essential to thefunctionality (i.e. do not involve significant production, modification orcustomization of the software or building complex interfaces) of any otherelement of the transaction and are described in the contract such that thetotal price of the arrangement would be expected to vary as the result of the inclusionor exclusion of the services. Revenues for services are recognized as theservices are performed. Training services are sold either on a per studentbasis or per class and are recognized as classes are attended.

 

*MaintenanceRevenues:* Maintenancerevenues consist primarily of fees for providing unspecified software upgradeson a when-and-if-available basis and technical support over a specified term,which is typically twelve months. Maintenance revenues are typically paid inadvance and are recognized on a straight-line basis over the term of thecontract.

 

Revenues on sales made byalliance partners are generally recognized upon shipment of the software to theend user, if all other revenue recognition criteria noted above are met. Underlimited arrangements with certain distributors, when all the revenuerecognition criteria have been met upon delivery of the product to thedistributor, revenues are recognized at that time. The Company does not offer aright of return on its products.

 

**Note 3.    *Operations by Reportable Segments and Geographic Area***

 

SeeBeyond has developed acomprehensive solution for business integration, enabling the seamless flow ofinformation across systems applications and enterprises in real-time, on aglobal basis. The Company operates in one industry segment, which is thedevelopment and marketing of a comprehensive solution for business integrationwhere all key integration technologies, including application-to-application,business-to-business and business process management, are seamlesslyintegrated.  Revenues and long-livedassets by geographic area were as follows (in thousands):

 
|           |   | **Three  Months Ended  March 31,** |   |
|----------------|--------|------------------------------------|--------|
|           |   | **2004**                           |   | **2003** |   |
| Revenues:      |   |                               |   |   |   |
| North America  |   | $                                  | 16,854 |   | $ | 22,683 |   |
| Europe         |   | 15,225                             |   | 9,653 |   |
| Pacific Rim    |   | 2,358                              |   | 3,486 |   |
| Total revenues |   | $                                  | 34,437 |   | $ | 35,822 |   |

 
|                    |   | **March 31,  2004** |   | **December 31,  2003** |   |
|-------------------------|--------|---------------------|--------|------------------------|--------|
| Long-lived assets:      |   |                |   |                   |   |
| North America           |   | $                   | 14,967 |                   | $      | 15,341 |   |
| Europe                  |   | 1,861               |   | 1,894                  |   |
| Pacific Rim             |   | 1,432               |   | 1,448                  |   |
| Total long-lived assets |   | $                   | 18,260 |                   | $      | 18,683 |   |

 

One customer accounted for11% of the Company’s net revenues during the three months ended March 31, 2004and no single customer accounted for more than 10% of the Company’s netrevenues during the three months ended March 31, 2003.

 

**Note 4.    *Computation of Net Loss Per Share***

 

Basic net loss per share iscomputed on the basis of the weighted average number of common sharesoutstanding. Diluted net loss per share is computed on the basis of theweighted average number of common shares outstanding plus the effect ofoutstanding stock warrants and outstanding employee stock options using the“treasury stock” method.

 

The following table setsforth the components of basic and diluted net loss per share for the periodsindicated (in thousands, except per share amounts):

 

7

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|                                                                                          |   | **Three  Months Ended  March 31,** |   |
|-----------------------------------------------------------------------------------------------|--------|------------------------------------|--------|
|                                                                                          |   | **2004**                           |   | **2003** |   |
| Net loss                                                                                      |   | $                                  | (5,783 | ) | $ | (6,125 | ) |
| Weighted average outstanding shares of  common stock used to compute basic net loss per share |   | 84,053                             |   | 82,616 |   |
| Dilutive effect of:                                                                           |   |                               |   |   |   |
| Stock warrants                                                                                |   | —                             |   | — |   |
| Employee stock options                                                                        |   | —                             |   | — |   |
| Common stock and common stock equivalents                                                     |   | $                                  | 84,053 |   | $ | 82,616 |   |
| Basic and diluted net loss per share                                                          |   | $                                  | (0.07  | ) | $ | (0.07 | ) |

 

Options to purchase approximately18,716,000 shares of common stock for the three months ended March 31, 2004 andoptions to purchase approximately 18,729,000 shares of common stock for thethree months ended March 31, 2003 were not included in the calculations ofdiluted net loss per share because their effect would be antidilutive. Commonstock warrants to purchase 625,000 shares and 650,000 shares were not includedin the calculations of diluted net loss per share because their effect would beantidilutive for the three months ended March 31, 2004 and the three monthsended March 31, 2003, respectively.

 

**Note 5.    *Stock-Based Compensation***

 

As permitted under SFASNo. 123 “Accounting for Stock-based Compensation”, the Company continuesto apply the provisions of APB No. 25, “Accounting for Stock Issued toEmployees,” for its recording of stock-based compensation arrangements.Accordingly, the Company accounts for its stock-based compensation using theintrinsic value method, which requires recognition of expense when the option exerciseprice is less than the fair value of the stock at the date of grant. TheCompany provides the required pro forma net income (loss) and pro formaearnings (loss) per share disclosures for employee stock option grants made in1995 and future years as if the fair value based method defined in SFASNo. 123 had been applied. Under the fair value method stock options arevalued and expensed based on the fair value of the options determined under anoption-pricing model.

 

The following table setsforth pro forma net loss and pro forma loss per share (in thousands, except pershare amounts):

 
|                                                                                 |   | **Three  Months Ended  March 31,** |   |
|--------------------------------------------------------------------------------------|--------|------------------------------------|--------|
|                                                                                 |   | **2004**                           |   | **2003** |   |
| Net loss, as reported                                                                |   | $                                  | (5,783 | ) | $ | (6,125 | ) |
| Stock-based employee compensation costs,  included in net loss, as reported          |   | 97                                 |   | 101 |   |
| Stock-based employee compensation costs if  fair value based method had been applied |   | (3,218                             | )      | (3,355 | ) |
| Pro forma net loss                                                                   |   | (8,904                             | )      | (9,379 | ) |
| Earning per share:                                                                   |   |                               |   |   |   |
| Basic and diluted - as reported                                                      |   | $                                  | (0.07  | ) | $ | (0.07 | ) |
| Basic and diluted - pro forma                                                        |   | $                                  | (0.11  | ) | $ | (0.11 | ) |

 

**Note 6.    *Commitments, Contingencies and Debt***

 

**Bank Linesof Credit and Equipment Line Payable**

 

In November 2000, theCompany established a $15.0 million line of credit facility (the “Line”)with a lending institution that bears interest at an annual rate of eitherprime plus 0.5% or the London InterBank Offered Rate (“LIBOR”) rate plus 2.50%(payable monthly) and it expires May 31, 2004.  The Company is currentlyin negotiations with the lending institution to renew the Line.  As of March 31, 2004, $8.0 millionwas available under the Line and there were no borrowings outstanding. TheCompany may use up to $5.0 million of the Line to issue letters of credit.As of March 31, 2004, approximately $386,000 was available for theissuance of letters of credit. The Line is secured by intellectual propertyrights, accounts receivable and certain other assets and is subject to certainborrowing base restrictions. The Line requires maintenance of certain financialcovenants pertaining to key financial ratios. The Company was in compliance with all covenants at March 31, 2004.

 

8

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In October 2001, theCompany’s $3.0 million equipment line (the “Equipment Line”) with the samelending institution providing the Line was amended, reducing the maximum amountavailable for borrowing under the Equipment Line to $2.0 million. TheEquipment Line bears interest at an annual rate of prime plus 0.75%, or theLIBOR rate plus 2.75% (payable monthly) and expires on November 30, 2004.The interest rate at March 31, 2004 was 4.75%. The Company could drawagainst the Equipment Line through November 30, 2001. Interest is payablemonthly and principal is payable in 36 monthly installments commencing inDecember 2001. As of March 31, 2004, there was approximately $434,000outstanding under the Equipment Line. The Equipment Line is secured by certainassets of the Company.

 

In December 2002, theCompany’s credit facility was amended to include an equipment advance (the“Equipment Advance”) in the amount of $5.0 million from the same lendinginstitution. Interest on the Equipment Advance is payable monthly and principalis payable in 24 equal monthly installments, beginning January 31, 2003.The Equipment Advance bears interest at an annual rate of prime plus 0.75% orthe LIBOR rate plus 3.0%. The interest rate at March 31, 2004 was 4.75%.As of March 31, 2004, the balance outstanding under this Equipment Advancewas approximately $1.9 million.

 

Future principal payments onthe Equipment Line and the Equipment Advance will aggregate approximately$2.3 million in 2004, based on the total outstanding balance.

 

**Note 7.    *Restructuring***

 

In 2002, the Company recorded restructuring and impairment chargestotaling $6.6 million, consisting of $1.7 million for employeetermination benefits and related costs associated with headcount reductions,$2.7 million related to future rent obligations for properties abandonedin connection with facilities consolidation and $2.3 million related tothe write-down of leasehold improvements, furniture, computer equipment andsoftware and other assets in connection with facilities consolidation andheadcount reductions. The headcount reduction of 57 employees was made up of58% sales and marketing staff, 19% professional services staff, 14% researchand development staff and 9% general and administrative staff. Therestructuring and impairment charges recorded in 2002 and 2001 were recordedunder EITF No. 94-3, “Liability Recognition for Certain EmployeeTermination Benefits and Other Costs to Exit an Activity.” Under EITFNo. 94-3, the accrual for future rent obligations was recorded when thecommitment to abandon the facilities was reached.

 

In 2003, the Company recorded restructuring and impairment chargestotaling $7.4 million, consisting of $1.9 million for employeetermination benefits and related costs associated with headcount reductions,$1.2 million related to future rent obligations for properties abandonedin connection with facilities consolidation and $4.3 million related tothe write-down of leasehold improvements, furniture, computer equipment andsoftware in connection with the facilities consolidation and headcountreductions. The 2003 headcount reduction of 56 employees was comprised ofapproximately 48% sales and marketing staff, 41% professional services staffand 11% general and administrative staff. The Company also recoveredapproximately $944,000 in restructuring expenses that had previously beenreserved for. The restructuring and impairment charges recorded during 2003were recorded under SFAS No. 146, “Accounting for Costs Associated withExit or Disposal Activities.” Under SFAS No. 146, the accrual for futurerent obligations were recorded when the facilities were abandoned.

 

These restructuring and impairment charges were recorded to betteralign the Company’s cost structure with changing market conditions. Thefollowing table sets forth the Company’s accrued restructuring costs as ofMarch 31, 2004 (in thousands).

 
|                         |   | **Facilities  Consolidation** |   | **Termination  benefits** |   | **Total** |   |
|------------------------------|--------|-------------------------------|--------|---------------------------|--------|-----------|--------|
|                         |   |                          |   |                      |   |      |   |
| Balance at December 31, 2003 |   | $                             | 1,913  |                      | $      | 214       |   | $ | 2,127 |   |
| Cash utilized                |   | (424                          | )      | (214                      | )      | (638      | )      |
| Balance at March 31, 2004    |   | $                             | 1,489  |                      | $      | —    |   | $ | 1,489 |   |

 

Accruedfacilities consolidation costs represent future payment obligations onabandoned excess facilities, net of sublease income and is expected to be paidover the next twenty-two months.

 

**Note8.    Legal Proceedings**

 

Beginning on July 3,2002, several purported class action shareholder complaints were filed in theUnited States District Court for the Central District of California against theCompany and several of our officers and directors. The actions were

 

9

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subsequently consolidatedand a consolidated amended complaint was filed purportedly brought on behalf ofpurchasers of common stock of SeeBeyond Technology Corporation betweenDecember 10, 2001 and May 7, 2002.  The complaint generally allegesthat defendants made false statements about SeeBeyond’s operating resultsand business, while concealing material information. The plaintiffs seekunspecified monetary damages. The Company believes the suit to be without meritand intends to defend against it vigorously.

 

Beginning on September 5,2002, several derivative lawsuits were filed by purported Company shareholdersin the Superior Court of California for the County of Los Angeles.  Thecomplaints name certain of the Company’s present and former officers anddirectors as defendants and name the Company as a nominal defendant. Thecomplaints generally allege that the defendants breached their fiduciary dutiesto the Company through the dissemination of allegedly misleading and inaccurateinformation and other allegations.

 

Although we have begun toaccrue amounts relating to legal costs and expenses, we have not accrued anyamounts relating to potential damages associated with the putative class actionlawsuits.  However, because of uncertainties relating to litigation, ourdecision as to whether to accrue and the amount of our estimates could bewrong.  In addition, although we are unable to determine the amount, ifany, we may be required to pay in connection with the resolution of thelawsuits by settlement or otherwise, such a payment could seriously harm ourresults of operation, financial condition and liquidity.

 

The Company is party toclaims and suits brought against it in the ordinary course of business. In theopinion of management, such claims should not have any material adverse effectupon the results of operation, cash flows or the financial position of theCompany.

 

**Note 9.    *Comprehensive Loss***

 

SFAS No. 130 “ReportingComprehensive Income”.establishes standards for reporting comprehensive incomeand its components in financial statements. Comprehensive income, as defined,refers to revenues, expenses, gains and losses that are not included in netloss but rather are recorded directly in stockholders’ equity.

 

Total comprehensive loss wasas follows (in thousands):

 
|                           |   | **Three  Months Ended March 31,** |   |
|--------------------------------|--------|-----------------------------------|--------|
|                           |   | **2004**                          |   | **2003** |   |
| Net loss                       |   | $                                 | (5,783 | ) | $ | (6,125 | ) |
| Other comprehensive loss:      |   |                              |   |   |   |
| Foreign translation adjustment |   | 1,116                             |   | (263 | ) |
| Comprehensive loss             |   | $                                 | (4,667 | ) | $ | (6,388 | ) |

 

**Note 10.    *Stockholders’ Equity***

 

**Treasury Stock**

 

During thethree months ended March 31, 2004, the Company repurchased 147,336 shares ofits common stock at an average price of $4.31 per share.  As of March 31, 2004, the Company held1,869,338 shares of its common stock in treasury.

 

10

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**Item 2****..    Management’s Discussion and Analysis of FinancialCondition and Results of Operations**

 

You should read thefollowing discussion in conjunction with the consolidated financial statementsand related notes of SeeBeyond Technology Corporation appearing elsewhere inthis Form 10-Q. The following discussion contains forward-lookingstatements that involve risks and uncertainties, including statements regardinganticipated costs and expenses, mix of revenues and plans for introducing newproducts and services. Our actual results could differ materially from theresults contemplated by these forward-looking statements as a result of anumber of factors, including those discussed below, under “Risk Factors” andelsewhere in this Form 10-Q.

 

**GeneralOverview**

 

InOctober 2003 we announced the general availability of our new suite ofproducts, the SeeBeyond Integrated Composite Application Network version 5.0(“ICAN 5.0”).   ICAN 5.0 offers theintegration industry’s first fully integrated platform for the development anddeployment of composite applications. ICAN 5.0 helps organizations to rapidly assemble and deployenterprise-scale end-user composite applications built on existing systems andinfrastructure.

 

We sell our products and services on a global basis through our directsales force, and through alliances with leading systems integrators, and inother instances, through value-added software resellers and technology vendors.Our products are typically licensed directly to customers for a perpetual term,with pricing based on the number of systems or applications the customer isintegrating or connecting with our products.

 

Total revenue for the threemonths ended March 31, 2004 was $34.4 million compared to $35.8 million in thesame period of the prior year. License revenue for the three months ended March31, 2004 was $10.9 million compared to $13.0 million for the same period of theprior year.

 

We currentlyhave operations in sixteen countries outside of the United States. Revenuesderived from international sales were 51% and 37% for the three months endedMarch 31, 2004 and 2003, respectively. We believe international revenues willcontinue to be significant in future periods.

 

Net loss for the three months ended March 31, 2004 was $5.8 million, or$(0.07) per share compared to a net loss of $6.1 million, or $(0.07) per sharein the same period of the prior year.

 

SeeBeyond closedfifty-four customer transactions in the quarter, bringing its total customerbase to approximately 1,900. With license revenue generated across keyverticals including financial services and insurance, healthcare andmanufacturing, the following customers represent new and existing business inthe quarter: Banca IMI, British Telecommunications PLC  / U.K. National Health Service (NHS),Celesio, DirecTV, District of Columbia, Eagle Global Logistics, ERCOT,Halliburton, Heidelberg, Hyundai, Kroger, Raytheon, Spar, Telekom Malaysia andTXU.

 

**CriticalAccounting Policies**

 

The discussion and analysisof our financial condition and results of operations are based upon ourconsolidated financial statements, which have been prepared in accordance withaccounting principles generally accepted in the United States. The preparationof these financial statements requires us to make estimates and judgments thataffect the reported amounts of assets and liabilities, revenues and expenses,and related disclosure of contingent assets and liabilities at the date of ourfinancial statements. Actual results may differ from these estimates underdifferent assumptions or conditions.

 

Our significant accountingpolicies are described in Note 1 to the annual consolidated financialstatements as of and for the year ended December 31, 2003 in Item 8:Financial Statements and Supplementary Data. We believe our most criticalaccounting policies include the following:

 

•              revenue recognition,

 

•              estimating allowance for doubtful accounts,

 

•              accounting for income taxes

 

*Revenuerecognition.* Werecognize revenue when an agreement has been signed by both parties or otherpersuasive evidence of an arrangement exists, the software has been shipped orelectronically delivered, the fees are fixed or determinable,

 

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collection of the resultingreceivable is probable, and no other significant obligations remain. Formultiple element arrangements where vendor specific objective evidence of fairvalue exists for all undelivered elements, we account for the deliveredelements in accordance with the “residual method” prescribed by Statement ofPosition 98-9. Vendor-specific objective evidence of fair value is based on theprice a customer is required to pay when the element is sold separately.

 

We assess whether the fee isfixed and determinable and collection is probable at the time of thetransaction. In assessing whether the fee is fixed and determinable we analyzethe payment terms of the transaction and other factors, including the natureand class of customer, our historical experience of collecting under ourpayment terms without granting a concession, the possibility of the productbecoming technologically obsolete before the payments become due and thelikelihood of the customer asking for a refund. If we determine the fee is notfixed or determinable, we defer the revenue until the payments under thearrangement become due. We assess whether collection is probable based on anumber of factors, including the customer’s past transaction history and creditworthiness. If we determine that collection of a fee is not probable, we deferthe fee and recognize revenue at the time collection become probable, which isgenerally upon the receipt of cash.

 

Maintenance revenues consistprimarily of fees for providing unspecified software upgrades on awhen-and-if-available basis and technical support over a specified term, whichis typically twelve months. Maintenance revenues are typically paid in advanceand are recognized on a straight-line basis over the specified term.

 

Revenues on sales made byalliance partners are generally recognized upon shipment of the software to theend user, if all other revenue recognition criteria noted above are met. Underlimited arrangements with certain distributors when all the revenue recognitioncriteria have been met upon delivery of the product to the distributor,revenues are recognized at that time. The Company does not offer a right ofreturn on its products.

 

The fair value of servicessuch as consulting or training is based upon separate sales of these services.Consulting and training services are generally sold on a time-and-materials orfixed fee basis and are generally recognized as the services are performed.Consulting services primarily consist of implementation services related to theinstallation of the Company’s products and generally do not involve significantproduction, modification or customization to or development of the software.

 

Significant managementjudgments and estimates must be made in connection with determination of therevenue to be recognized in any accounting period. If we made differentjudgments or estimates for any period, material differences in the amount andtiming of revenue could result.

 

*Allowancefor doubtful accounts.* Wemaintain allowances for doubtful accounts based on our analyses of thelikelihood that our customers will not pay us all the money they owe. Incircumstances where there is knowledge of a specific customer’s inability tomeet its financial obligations, a specific reserve is recorded against amounts dueto reduce the net recognized receivable to the amount that is reasonablybelieved to be collected. For all our customers we perform analyses, whichinclude a review of their credit profiles, the terms and conditions of thecontracts with our customers, and the current economic trends and paymenthistory. We reassess these allowances each accounting period. If actual paymentexperience with our customers is different than our estimates, adjustments tothese allowances may be necessary resulting in additional charges to our incomestatement.

 

*Accountingfor income taxes.* Werecord a valuation allowance to reduce our deferred tax assets by an estimatedamount of tax benefits, which is not expected to be realized. Tax benefits willnot be realized if we do not generate sufficient taxable income in the futureto apply against the deferred tax balance. As of March 31, 2004, avaluation allowance equal to the value of the deferred tax assets wasmaintained.  In the event we were to determine that we would be able torealize our deferred tax assets in the future in excess of its net recordedamount, an adjustment to the deferred tax asset would increase income in theperiod such a determination was made.

 

Significant managementjudgment is required in determining our provision for income tax assets andliabilities and our future taxable income for purposes of assessing our abilityto realize any future benefit from our deferred tax assets. In the event actualresults differ from these estimates or we adjust these estimates in futureperiods, our operating results and financial position could be materiallyaffected.

 

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**Results of Operations**

The following table setsforth our results of operations for the three ended March 31, 2004 and 2003,respectively, expressed as a percentage of total revenues:

 
|                                          |   | **Three  Months Ended  March 31,** |   |
|-----------------------------------------------|--------|------------------------------------|--------|
|                                          |   | **2004**                           |   | **2003** |   |
| Revenues:                                     |   |                               |   |   |   |
| License                                       |   | 31                                 | %      | 36 | % |
| Services                                      |   | 31                                 |   | 31 |   |
| Maintenance                                   |   | 38                                 |   | 33 |   |
| Total revenues                                |   | 100                                |   | 100 |   |
| Cost of revenues:                             |   |                               |   |   |   |
| License                                       |   | 1                                  |   | 2 |   |
| Services and maintenance                      |   | 30                                 |   | 32 |   |
| Total cost of revenues                        |   | 31                                 |   | 34 |   |
| Gross profit                                  |   | 69                                 |   | 66 |   |
| Operating expenses:                           |   |                               |   |   |   |
| Research and development                      |   | 28                                 |   | 30 |   |
| Sales and marketing                           |   | 44                                 |   | 40 |   |
| General and administrative                    |   | 13                                 |   | 13 |   |
| Amortization of sales and marketing  warrants |   | —                             |   | — |   |
| Amortization of stock-based compensation      |   | —                             |   | — |   |
| Total operating expenses                      |   | 85                                 |   | 83 |   |
| Loss from operations                          |   | (16                                | )      | (17 | ) |
| Interest and other income (expense), net      |   | —                             |   | — |   |
| Loss before income tax provision              |   | (16                                | )      | (17 | ) |
| Provision for income tax                      |   | —                             |   | — |   |
| Net loss                                      |   | (16                                | )%     | (17 | )% |

 

**Revenues**

 

***Total revenues***(in thousandsexcept percentages):

 
|           |   | **Three  Months Ended March 31,** |   |     |   |
|----------------|--------|-----------------------------------|--------|----------|--------|
|           |   | **2004**                          |   | **2003** |   | **Change** |   |
| Total revenues |   | $                                 | 34,437 |     | $      | 35,822 |   | $ | (1,385 | ) | (4 | )% |
|                |        |                                   |        |          |        |  |  |  |  |  |  |  |

 

Total revenues decreased forthe three months ended March 31, 2004 as compared to the same period of theprior year primarily due to decreases in license and services revenues,partially offset by an increase in maintenance revenues.  The decreases in license and servicesrevenues were primarily due to decreases in license and services revenue inNorth America, partially offset by increases in license and services revenuesin Europe.

 

***License revenue***(in thousandsexcept percentages):

*** ***
|            |   | **Three Months  Ended March 31,** |   |     |   |       |   |
|-----------------|--------|-----------------------------------|--------|----------|--------|------------|--------|
|            |   | **2004**                          |   | **2003** |   | **Change** |   |
| License revenue |   | $                                 | 10,880 |     | $      | 12,990     |   | $ | (2,110 | ) | (16 | )% |
|                 |        |                                   |        |          |        |            |        |  |  |  |  |  |

 

License revenues decreasedfor the three months ended March 31, 2004 as compared to the same period in theprior year primarily due to a decrease in North American license revenues.  The decrease in North American licenserevenues was due to a relatively new sales force that was hired at the end ofthe prior quarter as well as delayed purchasing cycles of some of our customersat the end of the quarter.

 

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***Services revenue***(in thousands except percentages):

 

Revenues from services include consulting and implementation services,training and reimbursable out-of-pocket expenses. A majority of our customersuse third-party systems integrators to implement our products. Customersalso typically purchase additional consulting services from us to support theirimplementation activities. These consulting services are generally sold on atime and materials or fixed fee basis, and services revenues are recognized asthe services are performed. We also offer training services, which are sold ona per student basis and for which revenues are recognized as the classes areattended.

*** ***
|             |   | **Three  Months Ended March 31,** |   |     |   |       |   |
|------------------|--------|-----------------------------------|--------|----------|--------|------------|--------|
|             |   | **2004**                          |   | **2003** |   | **Change** |   |
| Services revenue |   | $                                 | 10,510 |     | $      | 11,232     |   | $ | (722 | ) | (6 | )% |
|                  |        |                                   |        |          |        |            |        |  |  |  |  |  |

 

Services revenues decreasedfor the three months ended March 31, 2004 as compared to the same period of theprior year primarily due to a decrease in North American servicesrevenues.  This decrease primarilyresulted from a lower demand for our consulting service from our customers inNorth America due to lower license revenues during the current and precedingquarterly periods.

 

***Maintenance revenue***(in thousands except percentages):

 

Customers who license our products normally purchase maintenancecontracts. These contracts provide unspecified software upgrades and technicalsupport over a fixed term, which is typically 12 months. Maintenancecontracts are usually paid in advance, and revenues from these contracts arerecognized ratably over the term of the contract.

*** ***
|                |   | **Three  Months Ended March 31,** |   |     |   |       |   |
|---------------------|--------|-----------------------------------|--------|----------|--------|------------|--------|
|                |   | **2004**                          |   | **2003** |   | **Change** |   |
| Maintenance revenue |   | $                                 | 13,047 |     | $      | 11,600     |   | $ | 1,447 |   | 12 | % |
|                     |        |                                   |        |          |        |            |        |  |  |  |  |  |

 

Maintenance revenues for thethree months ended March 31, 2004 increased as compared to the same period ofthe prior year primarily due to renewals of prior period maintenance contractsassociated with the increase in our cumulative license revenues.

 

**Cost ofrevenues**(in thousands except percentages):

 

Cost of revenues consists primarily ofroyalties for third-party products embedded or bundled with our products andcompensation and related overhead costs for personnel engaged in implementationservices and maintenance support activities, training and out-of-pocketexpenses. Such costs include salaries, employee benefits, incentivecompensation, bonuses, travel, rent and allocated facilities and professionalfees.

** **
|                   |   | **Three  Months Ended March 31,** |   |     |   |       |   |
|------------------------|--------|-----------------------------------|--------|----------|--------|------------|--------|
|                   |   | **2004**                          |   | **2003** |   | **Change** |   |
| Total cost of revenues |   | $                                 | 10,456 |     | $      | 12,093     |   | $ | (1,637 | ) | (14 | )% |
|                        |        |                                   |        |          |        |            |        |  |  |  |  |  |

 

Total cost of revenuesdecreased for the three months ended March 31, 2004 as compared to the sameperiod of the prior year primarily due to a decrease in professional servicesrelated headcount as part of cost-cutting exercises during the third and fourthquarters of 2003.

 

**Operating expenses**

 

***Research and development expenses*******(in thousandsexcept percentages):

 

Research anddevelopment expenses consist primarily of personnel, third party contractorsand related costs associated with the development and enhancement of ourproducts.

 
|                              |   | **Three  Months Ended March 31,** |   |     |   |       |   |
|-----------------------------------|--------|-----------------------------------|--------|----------|--------|------------|--------|
|                              |   | **2004**                          |   | **2003** |   | **Change** |   |
| Research and development expenses |   | $                                 | 9,740  |     | $      | 10,627     |   | $ | (887 | ) | (8 | )% |
|                                   |        |                                   |        |          |        |            |        |  |  |  |  |  |

 

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Research and developmentexpenses decreased for the three months ended March 31, 2004 as compared to thesame period of the prior year primarily due to a slight decrease in developmentexpenses during the post-release development period of ICAN 5.0.  We anticipate research and developmentexpenses to increase slightly in absolute dollars in the foreseeable future.

 

***Sales and marketing expenses***(in thousandsexcept percentages):

 

Salesand marketing expenses consist primarily of personnel and related costs of ourdirect sales force and marketing staff and the cost of expenditures specific tothe marketing group, such as public relations and advertising, trade shows andmarketing collateral materials and expenditures.

 
|                         |   | **Three  Months Ended March 31,** |   |     |   |       |   |
|------------------------------|--------|-----------------------------------|--------|----------|--------|------------|--------|
|                         |   | **2004**                          |   | **2003** |   | **Change** |   |
| Sales and marketing expenses |   | $                                 | 15,004 |     | $      | 14,481     |   | $ | 523 |   | 4 | % |
|                              |        |                                   |        |          |        |            |        |  |  |  |  |  |

 

Sales andmarketing expenses increased for the three months ended March 31, 2004as compared to the same period of the prior year primarily due to an increasein promotional and public relations activities related to the marketing of ICAN5.0, as well as an increase in sales headcount.  We anticipate sales and marketing expenses to increase slightlyin absolute dollars for the foreseeable future.

 

***General and administrative expenses*** (inthousands except percentages):

 

Generaland administrative expenses consist primarily of personnel and related costsfor corporate, executive, human resources, legal, finance and accountingfunctions.

 
|                                |   | **Three  Months Ended March 31,** |   |     |   |       |   |
|-------------------------------------|--------|-----------------------------------|--------|----------|--------|------------|--------|
|                                |   | **2004**                          |   | **2003** |   | **Change** |   |
| General and administrative expenses |   | $                                 | 4,609  |     | $      | 4,626      |   | $ | (17 | ) | 0 | % |
|                                     |        |                                   |        |          |        |            |        |  |  |  |  |  |

 

General andadministrative expenses for the three months ended March 31, 2004remained unchanged as compared to the same period of the prior year with nosignificant year over year changes in any particular general and administrativeexpense items.  We anticipate generaland administrative expenses to remain flat for the foreseeable future.

 

***Amortization ofsales and marketing warrants***(in thousands except percentages):

*** ***
|                                          |   | **Three  Months Ended March 31,** |   |     |   |       |   |
|-----------------------------------------------|--------|-----------------------------------|--------|----------|--------|------------|--------|
|                                          |   | **2004**                          |   | **2003** |   | **Change** |   |
| Amortization of sales and marketing  warrants |   | $                                 | (14    | )        | $      | 111        |   | $ | (125 | ) | (113 | )% |
|                                               |        |                                   |        |          |        |            |        |  |  |  |  |  |

 

The amortization of sales and marketingwarrant expense for the three months ended March 31, 2004 and the three monthsended March 31, 2004, relate to a warrant issued under a four-year co-marketingagreement with a strategic partner. The warrant was fully vested on March 15,2004 and fully amortized as of March 31, 2004.

 

***Amortization ofstock-based compensation***(in thousands except percentages):

*** ***
|                               |   | **Three  Months Ended March 31,** |   |     |   |       |   |
|------------------------------------|--------|-----------------------------------|--------|----------|--------|------------|--------|
|                               |   | **2004**                          |   | **2003** |   | **Change** |   |
| Amortization of stock-compensation |   | $                                 | 97     |     | $      | 101        |   | $ | (4 | ) | (4 | )% |
|                                    |        |                                   |        |          |        |            |        |  |  |  |  |  |

 

Amortization of stock-based compensationremained flat as compared to the same period in the prior year. Amortization ofstock-based compensation for the three months ended March 31, 2004 includesapproximately $54,000 of expense related to certain changes that were made tostock options previously granted to a non-employee director of the company. There was no remaining deferred stock compensation as of March 31, 2004.

 

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***Interest andother income (expense), net***(in thousands except percentages):

 

Interest and other income (expense), netconsists primarily of interest earned on cash balances, foreign currency gainsand losses and other miscellaneous income and expense items.

*** ***
|                                     |   | **Three  Months Ended March 31,** |   |     |   |       |   |
|------------------------------------------|--------|-----------------------------------|--------|----------|--------|------------|--------|
|                                     |   | **2004**                          |   | **2003** |   | **Change** |   |
| Interest and other income (expense), net |   | $                                 | (213   | )        | $      | 311        |   | $ | (524 | ) | (168 | )% |
|                                          |        |                                   |        |          |        |            |        |  |  |  |  |  |

 

Interest and other income(expense), net decreased as compared to the same period in the prior yearprimarily due to an increase in foreign exchange losses in several of ourinternational subsidiaries and a decrease in interest income as a result oflower interest rates and lower average cash balances.

 

**Liquidityand capital resources**

 

As of March 31, 2004, we hadcash and cash equivalents of $73.8 million, an increase of$3.7 million from $70.1 million held as of December 31, 2003.

 

Net cash provided byoperating activities was $4.2 million during the three months ended March31, 2004, as compared with net cash used by operating activities of $5.7million in the same period in the previous year. This period over periodincrease in cash provided by operating activities primarily reflects decreasesin net loss and accounts receivable and an increase in accounts payable anddeferred revenue offset in part by a decrease in accrued compensation andrelated expenses.

 

During the three monthsended March 31, 2004, accounts receivable decreased by approximately $10.0million, primarily due to lower revenues recorded and the timing of receivablecollections during the three months ended March 31, 2003. The timing ofreceivable collections and revenue recorded within a given quarter or periodwill affect our accounts receivable going forward.

 

Net cash used in investingactivities was $827,000 during the three months ended March 31, 2004, ascompared with $1.1 million in the same period in the previous year. Thedecrease primarily was due to a decrease in capital expenditures. We expectcapital expenditures in the next three months to remain flat compared to theprevious three months.

 

Net cash used in financingactivities was $203,000 during the three months ended March 31, 2004, ascompared with $585,000 net cash used in financing activities in the same periodin the previous year. This decrease in cash used in financing activities wasdue primarily to an increase in proceeds from stock options exercises,partially offset by payments for the purchase of common stock.

 

In November 2000, theCompany established a $15.0 million line of credit facility (the “Line”)with a lending institution that bears interest at an annual rate of eitherprime plus 0.5% or the London InterBank Offered Rate (“LIBOR”) rate plus 2.50%(payable monthly) and it expires May 31, 2004.  The Company is currentlyin negotiations with the lending institution to renew the Line.  As of March 31, 2004, $8.0 millionwas available under the Line and there were no borrowings outstanding. TheCompany may use up to $5.0 million of the Line to issue letters of credit.As of March 31, 2004, approximately $386,000 was available for the issuance ofletters of credit. The Line is secured by intellectual property rights,accounts receivable and certain other assets and is subject to certainborrowing base restrictions. The Line requires maintenance of certain financialcovenants pertaining to key financial ratios.

 

In October 2001, theCompany’s $3.0 million equipment line (the “Equipment Line”) with the samelending institution providing the Line was amended, reducing the maximum amountavailable for borrowing under the Equipment Line to $2.0 million. TheEquipment Line bears interest at an annual rate of prime plus 0.75%, or theLIBOR rate plus 2.75% (payable monthly) and expires on November 30, 2004.The rate at March 31, 2004 was 4.75%. The Company could draw against theEquipment Line through November 30, 2001. Interest is payable monthly andprincipal is payable in 36 monthly installments commencing inDecember 2001. As of March 31, 2004, there was approximately $434,000outstanding under the Equipment Line. The Equipment Line is secured by certainassets of the Company.

 

In December 2002, theCompany’s credit facility was amended to include an equipment advance (the“Equipment Advance”) in the amount of $5.0 million from the same lendinginstitution. Interest on the Equipment Advance is payable monthly and principalis payable in 24 equal monthly installments, beginning January 31, 2003.The Equipment Advance bears interest at an annual rate of prime plus 0.75% orthe LIBOR rate plus 3.0%. The rate at March 31,

 

16

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2004 was 4.75%. As of March31, 2004 the balance outstanding under this Equipment Advance was approximately$1.9 million.

 

Future principal payments onthe Equipment Line and the Equipment Advance will aggregate approximately $2.3million in 2004, based on the total outstanding balance.

 

We believe that our currentcash and cash equivalents balance will be sufficient to meet our workingcapital and capital expenditure requirements for at least the next twelvemonths. However, we may need to raise additional funds, and we may not be ableto obtain additional debt or equity financing on favorable terms, if at all. Inaddition, we may also utilize cash resources to fund acquisitions orinvestments in complementary businesses, technologies or product lines.

 

**Risks Related to SeeBeyond**

 

You should carefullyconsider the risks described below in evaluating the other statements madeherein. The risks described below are not the only ones facing our company.Additional risks not presently known to us, or we currently deem immaterial,may also impair our business operations.

 

Our business,financial condition or results of operations could be adversely affected by anyof these risks. The trading price of our common stock could decline due to anyof these risks.

 

***Acontinued downturn in the general economy or a continuation of the industrytrend toward reducing or delaying additional information technology spendingdue to cost-cutting pressures could reduce demand for our products andservices.***

 

We relysignificantly upon customers making large information technology purchasingdecisions as a source of revenue. During the past several years including thefirst three months of 2004, we experienced a general slow-down in the level ofcapital spending by some of our customers due to the general economic downturn,which has adversely affected our revenues. This slow-down in capital spending,if sustained in future periods, could result in reduced sales or thepostponement of sales to our customers. There can be no assurance the level ofspending on information technology in general or on business integrationsoftware by our customers and potential customers in particular, will increaseor remain at current levels in future periods. Lower spending on informationtechnology could result in reduced license sales to our customers, reducedoverall revenues, diminished margin levels, and could impair our operatingresults in future periods.

 

***Wehave a large accumulated deficit, we may incur future losses and we may notachieve or maintain profitability.***

 

We haveincurred substantial losses since 1998 as we increased funding of thedevelopment of our products and technologies and expanded our sales andmarketing organization. As of March 31, 2004, we had an accumulateddeficit of approximately $159.7 million. We may continue to incur lossesin future periods and we may not achieve or maintain profitability on aquarterly or annual basis.

 

***Ouroperating results fluctuate significantly, and an unanticipated decline inrevenues or gross margin may disappoint securities analysts or investors andresult in a decline in our stock price.***

 

Our operatingresults have fluctuated significantly in the past and may vary significantly inthe future. We believe period-to-period comparisons of our historical resultsof operations are not a good predictor of our future performance.

 

Our revenuesand operating results depend upon the volume and timing of customer orders andpayments and the date of product delivery. Historically, a substantial portionof our revenues in a given quarter has been recorded in the final month of thatquarter, with a concentration of these revenues in the last two weeks of thefinal month. We expect this trend to continue and, therefore, any failure ordelay in the closing of orders would have a material adverse effect on ourquarterly operating results. Since our operating expenses are based onanticipated revenues and because a high percentage of these expenses arerelatively fixed, a delay in the recognition of revenues from one or morelicense transactions could cause significant variations in operating resultsfrom quarter to quarter and cause a decline in our stock price. We realizesubstantially higher gross margins on our license revenues compared to ourservices and maintenance revenues. Thus, our margins for any particular quarterwill be highly dependent on our revenue mix in that quarter. In ourinternational markets, we have experienced some seasonality of revenues, withlower revenues in the summer months. Although this seasonality has not had amaterial impact on our operating results in the past, we cannot assure you ouroperating results will not fluctuate in the future as a result of these andother international trends.

 

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We record asdeferred revenue, payments from customers that do not meet our revenuerecognition policy requirements. Since only a small portion of our revenueseach quarter is recognized from deferred revenue, our quarterly results dependprimarily upon entering into new contracts to generate revenues for thatquarter. New contracts may not result in revenues in the quarter in which thecontract was signed, and we may not be able to predict accurately when revenuesfrom these contracts will be recognized. If our operating results are below theexpectations of securities analysts or investors for these or other reasons,our stock price would likely decline, perhaps substantially.

 

***Weexperience long and variable sales cycles, which could have a negative impacton our results of operations for any given quarter.***

 

Our productsare often used by our customers throughout their organizations to addresscritical business problems. Customers generally consider a wide range of issuesbefore committing to purchase our products, including product benefits, theability to operate with existing and future computer systems, the ability toaccommodate increased transaction volumes and product reliability. Manycustomers are addressing these issues for the first time when they considerwhether to buy our products and services. As a result, we or other parties,including systems integrators, must educate potential customers on the use andbenefits of our products and services. In addition, the purchase of ourproducts generally involves a significant commitment of capital and otherresources by a customer. This commitment often requires significant technicalreview, assessment of competitive products and approval at a number ofmanagement levels within a customer’s organization. Our sales cycle may vary basedon the industry in which the potential customer operates and is difficult topredict for any particular license transaction. The length and variability ofour sales cycle makes it difficult to predict whether particular sales will beconcluded in any given quarter. If one or more of our license transactions arenot consummated in a given quarter, our results of operations for that quartermay be below our expectations and the expectations of analysts and investors.

 

***Ouroperating results are highly dependent on license revenues from one softwaresuite, and our business could be materially harmed by factors that adverselyaffect the pricing and demand for this software suite.***

 

Substantiallyall of our license revenues have been, and are expected to continue to be,derived from the license of our Business Integration Suite. Accordingly, ourfuture operating results will depend on the demand for our Business IntegrationSuite by future customers, including new and enhanced releases that aresubsequently introduced. Our latest version of the Business Integration Suite,ICAN 5.0, was announced in March 2003 and made generally available tocustomers in October of 2003. If our competitors release new products that aresuperior to our Business Integration Suite in performance or price, or if wefail to enhance our Business Integration Suite and introduce new products in atimely manner, demand for our products may decline, and we may have to reducethe pricing of our products. A decline in demand or pricing for our BusinessIntegration Suite as a result of these or other factors would significantlyreduce our revenues.

 

In the past,we have experienced delays in the commencement of commercial releases of ourBusiness Integration Suite. In the future, we may fail to introduce or delivernew products on a timely basis. If new releases or products are delayed or donot achieve market acceptance, we could experience customer dissatisfaction ora delay or loss of revenues. For example, the introduction of new enterprise andbusiness applications requires us to introduce new e*Way adapters to supportthe integration of these applications. Our failure to introduce these or othermodules in a timely manner could cause our revenues and market share todecline. In addition, customers may delay purchases of our products inanticipation of future releases. If customers defer material orders inanticipation of new releases or new product introductions, our revenues maydecline.

 

Moreover, aswe release enhanced versions of our products, we may not be successful inupgrading our customers who purchased previous versions of our BusinessIntegration Suite to the current version. We also may not be successful inselling add-on modules for our products to existing customers. Any failure tocontinue to upgrade existing customers’ products or sell new modules, if andwhen they are introduced, could negatively impact customer satisfaction and ourrevenues.

 

***Ourrevenues will likely decline if we do not develop and maintain successfulrelationships with our systems integration partners and other partners, whoalso have relationships with our competitors.***

 

We haveentered into agreements with a number of systems integrators for them toinstall and deploy our products and perform custom integration of systems andapplications. These systems integrators also engage in joint marketing andsales efforts with us. If these relationships fail, we will have to devotesubstantially more resources to the sales and marketing and implementation andsupport of our products than we would otherwise, and our efforts may not be aseffective as those of the systems integrators. In many cases, these partieshave extensive relationships with our existing and potential customers and

 

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influence the decisions ofthese customers. We rely upon these firms to recommend our products during theevaluation stage of the purchasing process, as well as for implementation andcustomer support services.

 

These systemsintegrators are not contractually required to implement our products, andcompetition for these resources may preclude us from obtaining sufficientresources to provide the necessary implementation services to support ourneeds. If the number of installations of our products exceeds our access to theresources provided by these systems integrators, we will be required to providethese services internally, which would increase our expenses and significantlylimit our ability to meet our customers’ implementation needs. A number of ourcompetitors have stronger relationships with some of these systems integratorsand, as a result, these systems integrators might be more likely to recommendcompetitors’ products and services instead of ours. In addition, a number of ourcompetitors have relationships with a greater number of these systemsintegrators or have stronger systems integrator relationships based on specificvertical markets and, therefore, have access to a broader base of customers.

 

Our failure toestablish or maintain systems integrator relationships would significantly harmour ability to license and successfully implement our software products. Inaddition, we rely on the industry expertise and customer contacts of thesefirms in order to market our products more effectively. Therefore, any failureof these relationships would also harm our ability to increase revenues in keycommercial markets. We are currently investing, and plan to continue to invest,significant resources to develop these relationships. Our operating resultscould be adversely affected if these efforts do not generate license andservice revenues necessary to offset this investment.

 

***Ourmarkets are highly competitive and, if we do not compete effectively, we maysuffer price reductions, reduced gross margins and loss of market share.***

 

The market forour products is intensely competitive, evolving and subject to rapidtechnological change. We expect the intensity of competition to increase in thefuture. As a result of increased competition, we may have to reduce the priceof our products and services, and we may experience reduced gross margins andloss of market share, any one of which could significantly reduce our futurerevenues and operating results. Our current competitors include vendorsoffering e-Business application integration and traditional electronic datainterchange, or EDI, software products, as well as “in house” informationtechnology departments of potential customers that have developed or maydevelop systems that provide some or all of the functionality of our BusinessIntegration Suite. We may also encounter competition from major enterprisesoftware developers in the future.

 

Many of ourexisting and potential competitors have more resources, broader customerrelationships and better-established brands than we do. In addition, manyof these competitors have extensive knowledge of our industry. Some of ourcompetitors have established or may establish cooperative relationships amongthemselves or with third parties to offer a single solution and increase theability of their products to address customer needs.

 

***Oursubstantial and expanding international operations are subject touncertainties, which could adversely affect our operating results.***

 

Revenues fromthe sale of products and services outside the United States accounted for 51%and 37% for the three months ended March 31, 2004 and 2003, respectively.Revenues from the sale of products and services in the United Kingdom as apercent of our total revenues were 27% and 15% for the three months ended March31, 2004 and 2003, respectively. We believe revenues from sales outside theUnited States will continue to account for a material portion of our totalrevenues for the foreseeable future. We are exposed to several risks inherentin conducting business internationally, such as:

 

•              fluctuations in currency exchangerates, which could result in increased expenses;

 

•              unexpected changes in regulatoryrequirements, including imposition of currency exchange controls, applicable toour business or to the Internet, which could result in increased costs of doingbusiness overseas;

 

•              difficulties and costs of staffingand managing international operations;

 

•              political and economicinstability, which could result in increasing governmental ownership orregulation of businesses or other instrumentalities of commerce, wage and pricecontrols, higher interest rates and spiraling inflation; and

 

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•              reduced protection for intellectualproperty rights in some countries.

 

Any of thesefactors could adversely affect our international operations and, consequently,our operating results.

 

***Wecould suffer losses and negative publicity if new versions or releases of ourproducts contain errors or defects.***

 

Our productsand their interactions with customers’ software applications and IT systems arecomplex and, accordingly, there may be undetected errors or failures when ourproducts are introduced or as new versions are released. In the past we havediscovered software errors in our new releases and new products after theirintroduction, which have resulted in additional product development expenses.To date, these additional expenses have not been material. These errors haveresulted in product release delays, delayed revenues and customerdissatisfaction. In the future we may discover errors, including performancelimitations, in new releases or new products after the commencement ofcommercial shipments. Since many customers are using our products for mission-criticalbusiness operations, any of these occurrences could seriously harm our businessand generate negative publicity, which could have a negative impact on futuresales. Although we maintain product liability and errors and omissionsinsurance, we cannot assure you these policies will be sufficient to compensatefor losses caused by any of these occurrences.

 

***Ifour products do not operate with the many hardware and software platforms usedby our customers and keep pace with technological change, our business mayfail.***

 

We currentlyserve a customer base with a wide variety of constantly changing hardware,software applications and platforms. If our products fail to gain broad marketacceptance due to an inability to support a variety of these platforms, ouroperating results may suffer. Our business depends on a number of factors,including the following:

 

•              our ability to integrate ourproducts with multiple platforms and existing, or legacy, systems and to modifyour products as new versions of software applications are introduced;

 

•              the portability of our products,particularly the number of operating systems and databases our products cansource or target;

 

•              our ability to anticipate andsupport new standards, especially Internet standards;

 

•              the integration of additionalsoftware modules under development with our existing products; and

 

•              our management of software beingdeveloped by third parties for our customers for use with our products.

 

Our industryis characterized by very rapid technological change, frequent new productintroductions and enhancements, changes in customer demands and evolvingindustry standards. We have also found the technological life cycles of ourproducts are difficult to estimate. We believe we must continue to enhance ourcurrent products and concurrently develop and introduce new products thatanticipate emerging technology standards and keep pace with competitive andtechnological developments. Failure to do so will harm our ability to compete.As a result, we are required to continue to make substantial productdevelopment investments.

 

***Themarket for business integration software may not grow as quickly as weanticipate, which would cause our revenues to fall below expectations.***

 

The market forbusiness integration software is rapidly evolving. We earn substantially all ofour license revenues from sales of our Business Integration Suite. We expect toearn substantially all of our revenues in the foreseeable future from sales ofour Business Integration Suite and related products and services. Our futurefinancial performance will depend on continued growth in the number oforganizations demanding software and services for application integration andbusiness integration solutions and seeking outside vendors to develop, manageand maintain this software for their critical applications. Many of ourpotential customers have made significant investments in internally developedsystems and would incur significant costs in switching to third-partyproducts, which may substantially inhibit the growth of the market for businessintegration software. If this market fails to grow, or grows more slowly thanwe expect, our revenues will be adversely affected.

 

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***Pendingor future litigation could have a material adverse impact on our results ofoperation and financial condition.***

 

From time totime, we have been subject to litigation. Several putative securities classaction lawsuits are currently pending against us, our directors and officers.The plaintiffs in these suits allege we and the other defendants made falsestatements about our operating results and business, while concealing materialinformation. We believe these lawsuits are without merit and we intend todefend against them vigorously. The complaint does not specify the amount ofdamages the plaintiffs seek, and as a result, we are unable to estimate thepossible range of damages that might be incurred as a result of the lawsuit.The uncertainty associated with these unresolved lawsuits could harm ourbusiness, financial condition and reputation. Negative developments withrespect to the lawsuits could cause our stock price to decline. In addition tothe related cost and use of cash, pending or future litigation could cause thediversion of management’s attention and resources. Although we have begun toaccrue amounts relating to legal costs and expenses, we have not accrued anyamounts relating to potential damages associated with the putative class actionlawsuits. However, because of uncertainties relating to litigation, ourdecision as to whether to accrue and the amount of our estimates could bewrong. In addition, although we are unable to determine the amount, if any, wemay be required to pay in connection with the resolution of the lawsuits bysettlement or otherwise, such a payment could seriously harm our results ofoperation, financial condition and liquidity.

 

***Ifwe fail to adequately protect our proprietary rights, we may lose these rightsand our business may be seriously harmed.***

 

We depend uponour ability to develop and protect our proprietary technology and intellectualproperty rights to distinguish our product from our competitors’ products. Theunauthorized use by others of our proprietary rights could materially harm ourbusiness. We rely on a combination of copyright, trademark and trade secretlaws, as well as confidentiality agreements and licensing arrangements, toestablish and protect our proprietary rights. We currently have no issuedpatents. Despite our efforts to protect our proprietary rights, existing lawsafford only limited protection. Attempts may be made to copy or reverseengineer aspects of our products or to obtain and use information we regard asproprietary. Accordingly, we cannot be certain we will be able to protect ourproprietary rights against unauthorized third party copying or use.Furthermore, policing the unauthorized use of our products is difficult, andexpensive litigation may be necessary in the future to enforce our intellectualproperty rights.

 

***Ourproducts could infringe the intellectual property rights of others, causingcostly litigation and the loss of significant rights.***

 

Third partiesmay claim we have infringed their current or future intellectual propertyrights. We expect software developers in our market will increasingly besubject to infringement claims as the number of products in different softwareindustry segments overlap. Any claims, with or without merit, could betime-consuming, result in costly litigation, prevent product shipment or causedelays, or require us to enter into royalty or licensing agreements, any ofwhich could harm our business. Patent litigation in particular has complextechnical issues and inherent uncertainties. In the event an infringement claimagainst us is successful and we cannot obtain a license on acceptable terms,license a substitute technology or redesign our products to avoid infringement,our business would be harmed. Furthermore, former employers of our current andfuture employees may assert our employees have improperly disclosed to us orare using their confidential or proprietary information.

 

***Failureto raise additional capital or generate the significant capital necessary toexpand our operations and invest in new products could reduce our ability tocompete and result in lower revenues.***

 

We currentlyexpect our current cash resources will be sufficient to meet our workingcapital and capital expenditure needs for at least the next twelve months. Afterthat, we may need to raise additional funds, and we cannot be certain we willbe able to obtain additional debt or equity financing on favorable terms, or atall. If we raise additional equity financing, our stockholders may experiencesignificant dilution of their ownership interests and the per share value ofour common stock could decline. If we engage in debt financing, we may berequired to accept terms that restrict our ability to incur additionalindebtedness and force us to maintain specified liquidity or other ratios, anyof which could harm our business. If we need additional capital and cannotraise it on acceptable terms, we may not be able to, among other things:

 

•              develop or enhance our productsand services;

 

•              maintain or expand our sales andmarketing organizations;

 

•              acquire complementarytechnologies, products or businesses;

 

•              expand operations, in the UnitedStates or internationally;

 

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•              hire, train and retain employees;or

 

•              respond to competitive pressuresor unanticipated working capital requirements.

 

Our failure todo any of these things could result in lower revenues and could seriously harmour business.

 

***Ifwe fail to attract, retain and integrate qualified personnel, our ability tocompete will be harmed.***

 

We depend onthe continued service of our key technical, sales and senior managementpersonnel, including our founder and Chief Executive Officer, James T.Demetriades. Most of these persons are not bound by an employment agreement,and we do not maintain key person life insurance on any of these persons, otherthan Mr. Demetriades. The loss of any of our senior management or otherkey product development or sales and marketing personnel could adversely affectour future operating results. Additionally, we recently experiencedsignificant turnover in our North American sales force, including new staff andmanagement.  Our ability to effectivelytrain and integrate this new North American sales force could pose continuingchallenges to our business.  If we failto do so, our operating results, particularly in the short term, could benegatively impacted.  Inaddition, we must attract, retain and motivate highly skilled employees,including sales personnel and software engineers. We face significantcompetition for individuals with the skills required to develop, market andsupport our products and services. We may not be able to recruit and retainsufficient numbers of these highly skilled employees. If we fail to do so, ourability to compete will be significantly harmed.

 

***Ourgrowth continues to place a significant strain on our management systems andresources. If we fail to manage our growth, our ability to market and sell ourproducts and develop new products may be harmed.***

 

We must planand manage our growth effectively in order to offer our products and servicesand achieve revenue growth and profitability in a rapidly evolving market. Ourgrowth has and will continue to place a significant strain on our managementsystems and resources, and we may not be able to effectively manage our growthin the future.

 

Furthermore,if our relationships with systems integrators succeed and we are able topenetrate additional commercial markets, we may need additional sales andmarketing and professional services resources to support these customers. Thegrowth of our customer base will require us to invest significant resources inthe training and development of our employees and our systems integrationpartners. If these organizations fail to keep pace with the number and demandsof the customers that license our products, our ability to market and sell ourproducts and services and our ability to develop new products and services willbe harmed. To manage our business, we must continue to:

 

•              effectively manage our directsales force;

 

•              effectively manage ourprofessional services organization;

 

•              hire and retain qualified softwareengineers;

 

•              improve our operational, financialand management controls;

 

•              improve our reporting systems andprocedures;

 

•              enhance our management andinformation control systems; and

 

•              effectively manage, train andmotivate our workforce.

 

In addition,if we acquire or invest in other companies, we may experience further strain onour resources and face risks inherent in integrating two corporate cultures,product lines, operations and businesses.

 

***Wehave implemented anti-takeover provisions that could discourage or prevent atakeover, even if an acquisition would be beneficial to our stockholders.***

 

Someprovisions of Delaware law and our certificate of incorporation and bylawscould have the effect of delaying or preventing a third party from acquiringus, even if a change in control would be beneficial to our stockholders. Forexample, our

 

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certificate of incorporationprovides for a classified board of directors whose members serve staggeredthree-year terms and does not provide for cumulative voting in the election ofdirectors. Our board of directors has the authority, without further action byour stockholders, to fix the rights and preferences of and issue shares ofpreferred stock. In addition, our stockholders are unable to act by writtenconsent. These and other provisions could make it more difficult for a thirdparty to acquire us, even if doing so would benefit our stockholders.

 

***Concentrationof ownership among our existing executive officers and directors may preventnew investors from influencing significant corporate decisions.***

 

Our Chief ExecutiveOfficer, James T. Demetriades beneficially owns approximately 32% of ouroutstanding common stock. Our executive officers and directors beneficiallyown, in the aggregate, approximately 41% of our outstanding common stock. As aresult, these stockholders will be able to exercise a significant level ofcontrol over all matters requiring stockholder approval, including the electionof directors and approval of significant corporate transactions. This couldhave the effect of delaying or preventing a change of control of SeeBeyond andwill make some transactions difficult or impossible without the support ofthese stockholders.

 

***Externalfactors such as potential terrorist attacks could have a material adverseaffect on the U.S. and global economics.***

 

Thepossibility of potential terrorist attacks could have an adverse effect upon analready weakened world economy and could cause U.S. and foreign businesses toslow spending on products and services and delay sales cycles. The economicuncertainty resulting from any such future attacks and other responsesassociated with such attacks may continue to negatively impact short-termconsumer and business confidence.

 

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**Item 3****:    Quantitative and Qualitative Disclosure About MarketRisk**

 

We are exposed to a varietyof risks, including changes in interest rates affecting the return on ourinvestments and foreign currency fluctuations. We have established policies andprocedures to manage our exposure to fluctuations in interest rates and foreigncurrency exchange rates.

 

*Interestrate risk.* Wemaintain our funds in money market and certificate of deposit accounts atfinancial institutions. Our exposure to market risk due to fluctuations ininterest rates relates primarily to our interest earnings on our cash deposits.These securities are subject to interest rate risk in as much as their fairvalue may fall if market interest rates increase. If market interest rates wereto increase immediately and uniformly by 10% from the levels prevailing as ofMarch 31, 2004, the fair value of the portfolio would not decline by amaterial amount. We do not use derivative financial instruments to mitigaterisks. However, we do have an investment policy that would allow us to investin short-term and long-term investments such as money market instruments andcorporate debt securities. Our policy attempts to reduce such risks bytypically limiting the maturity date of such securities, placing ourinvestments with high credit quality issuers and limiting the amount of creditexposure with any one issuer.

 

*Foreigncurrency exchange rate risk.* Our exposure to market risk due to fluctuations in foreigncurrency exchange rates relates primarily to the intercompany balances with oursubsidiaries located in Australia, Belgium, France, Germany, Italy, Japan,Korea, The Netherlands, New Zealand, Singapore, Spain, Sweden, Switzerland andthe United Kingdom. Transaction gains or losses have not been significant inthe past and we do not participate in any hedging activity on foreigncurrencies. We would not experience a material foreign exchange loss based on ahypothetical 10% adverse change in the price of any of the local currencies ofthese countries. Consequently, we do not expect that a reduction in the valueof such accounts denominated in foreign currencies resulting from a sudden orsignificant fluctuation in foreign exchange rates would have a direct materialimpact on our financial position, results of operations or cash flows.

 

**Item 4****..    Controls and Procedures**

 

Our management evaluated,with the participation of our chief executive officer and chief financialofficer, the effectiveness of our disclosure controls and procedures (asdefined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the“Exchange Act”)) as of the end of the period covered by this Quarterly Reporton Form 10-Q.  Based upon this evaluation, our chief executive officer andchief financial officer have concluded that our disclosure controls and proceduresare effective to ensure that information we are required to disclose in reportsthat we file or submit under the Exchange Act is recorded, processed,summarized and reported within the time periods specified in Securities andExchange Commission rules and forms. There was no change in our internalcontrol over financial reporting (as defined in Rule 13a–15(f) under theExchange Act) during the period covered by this Quarterly Report on Form 10-Qthat has materially affected, or is reasonably likely to materially affect, ourinternal control over financial reporting.

 

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**PART II****—OTHER INFORMATION**

 

**Item1.    Legal Proceedings**

 

The Company is party toroutine claims and suits brought against it in the ordinary course of businessincluding disputes arising over the ownership of intellectual property rightsand collection matters. In the opinion of management, the outcome of suchroutine claims will not have a material adverse effect on the Company’s business,financial condition or results of operation.

 

Information with respect tothis item is incorporated by reference to Note 8 (“—Legal Proceedings”) ofthe Notes to the Condensed Consolidated Financial Statements included in thisReport on Form 10-Q.

 
| **Item 2.**    | **Changes in****Securities and Use of Proceeds**           |
|----------------|------------------------------------------------------------|
|           |                                                       |
| **(a)**        | **Modification  of Constituent Instruments**               |
| Not applicable |
| **(b)**        | **Change in  Rights**                                      |
| Not applicable |
| **(c)**        | **Changes  in Securities**                                 |
| Not applicable |
|           |
| **Item 4.**    | **Submission****of Matters to a Vote of Security Holders** |
|                |                                                            |  |

 

None.

 

**Item 6****.    Exhibitsand reports on Form 8-K**

 

(a)                                         Exhibits.

 
| **Exhibit   No.** |   | **Description**                                                                                                                                                 |
|-------------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1(f)            |   | Restated Articles of  Incorporation of the Registrant                                                                                                           |
| 3.2(f)            |   | Bylaws of the Registrant                                                                                                                                        |
| 4.1(a)            |   | Specimen common stock  certificates                                                                                                                             |
| 10.1(f)           |   | Form of Indemnification  Agreement between the Registrant and each of its directors and officers                                                                |
| 10.2(a)(c)        |   | 1998 Stock Plan                                                                                                                                                 |
| 10.3(a)(c)        |   | 2000 Employee Stock  Purchase Plan and form of agreements there under                                                                                           |
| 10.5(a)           |   | Registration Rights  Agreement dated May 8, 1998, as amended                                                                                                    |
| 10.6(a)           |   | Lease Agreement dated June  6, 1997 between the Registrant and Boone/Fetter/Occidental I for premises in  Monrovia, California                                  |
| 10.7(a)           |   | Lease Agreement dated June  10, 1999 between the Registrant and Franklin Select Realty Trust for premises  in Redwood Shores, California                        |
| 10.8(a)           |   | Lease Agreement dated  December 30, 1991 between the Registrant and the Demetriades Family Trust  (dated December 20, 1983) for premises in Arcadia, California |
| 10.9(b)           |   | Lease Agreement between  The Employees Retirement System of The State of Hawaii and the Registrant  dated July 21, 2000 for premises in Monrovia, California    |
| 10.10(b)          |   | Lease Agreement between  Grant Regent, LLC and the Registrant dated August 2, 2000 for premises in New  York, New York                                          |
| 10.11(e)          |   | Lease Agreement dated  October 9, 2000 between S & F Huntington Millennium LLC and the  Registrant for premises in Monrovia, California                     |
| 10.12(e)          |   | Loan and Security  Agreement, dated December 4, 2000, between the Registrant and Comerica  Bank—California                                                 |
| 10.13(d)          |   | Warrant Purchase Agreement  and Warrant dated March 16, 2001 issued to General Motors Corporation                                                               |
| 10.14(f)          |   | Amendment to the Loan and  Security Agreement dated as of June 25, 2001, between the Registrant and  Comerica Bank-California                                   |

 

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| 10.15(f)    |   | Second amendment to the  Loan and Security Agreement dated October 31, 2001, between the Registrant  and Comerica Bank-California                                                                                                                |
|-------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.16(f)    |   | Lease Agreement dated as  of February 24, 2001 between MWB Business Eschange Limited and the Registrant  for premises in Berkshire, United Kingdom                                                                                               |
| 10.17(f)    |   | Lease Agreement as of July  1, 2001 between Trust Company of Australia Limited and the Registrant for  premises in Melbourne, Australia                                                                                                          |
| 10.18(g)    |   | Lease Agreement between  Monrovia Technology Campus LLC and the Registrant dated November 28, 2000 for  premises in Monrovia, California                                                                                                         |
| 10.19(g)    |   | Sublease Agreement between  the Registrant (Tenant) and The Employees Retirement System of The State Of Hawaii  (Landlord) and Loopnet (Subtenant) dated April 23, 2002 for premises in  Monrovia, California                                    |
| 10.20(g)    |   | Third Amendment to the  Loan and Security Agreement dated as of June 30, 2002 between the Registrant  and Comerica Bank-California                                                                                                               |
| 10.21(h)    |   | Sublease Agreement between  the Registrant (Sublessor) and Fidelity National Information Services  (Sublessee) and The Employees Retirement System of the State of Hawaii  (Lessor) dated December 17, 2002 for premises in Monrovia, California |
| 10.22(h)    |   | First Amendment to the  Lease Agreement between Monrovia Technology Campus LLC and the Registrant  dated January 23, 2002                                                                                                                        |
| 10.23(h)    |   | Second Amendment to the  Lease Agreement between Foothill Technology Center LLC,  (Boone/Fetter/Occidental I) and the Registrant dated October 25, 2002                                                                                          |
| 10.24(h)    |   | Fourth Amendment to the  Loan and Security Agreement dated December 24, 2002 between the Registrant  and Comerica Bank-California                                                                                                                |
| 10.25(c)(h) |   | Change of Control Letter  Agreement between Alex Demetriades and the Registrant dated March 19,  2001                                                                                                                                       |
| 10.26(c)(k) |   | Form of Change of Control  Letter Agreement between the Registrant and certain of its executive  officers.                                                                                                                                       |
| 10.27(c)(l) |   | Employment Letter  Agreement between the Registrant and H. Carvel Moore dated July 21, 2003.                                                                                                                                                     |
| 10.28(l)    |   | Fifth Amendment to the  Loan and Security Agreement dated December 24, 2002 between the Registrant  and Comerica Bank-California dated March 26, 2003                                                                                            |
| 10.29(l)    |   | Sixth Amendment to the  Loan and Security Agreement dated December 24, 2002 between the Registrant  and Comerica Bank-California dated May 30, 2003                                                                                              |
| 10.30(c)(m) |   | Employment Letter  Agreement between the Registrant and Thor Culverhouse dated September 8,  2003.                                                                                                                                               |
| 31.1        |   | Certification of Chief  Executive Officer and Chief Financial Officer pursuant to Section 302 of the  Sarbanes-Oxley Act.                                                                                                                        |
| 32.1        |   | Certification of Chief  Executive Officer and Chief Financial Officer pursuant to Section 906 of the  Sarbanes-Oxley Act.                                                                                                                        |
|        |   |                                                                                                                                                                                                                                             |
|        | (a)    | Incorporated by reference  to an exhibit in the Registrant’s Registration Statement on Form S-1 File No.  333-330648.                                                                                                                       |
|        | (b)    | Incorporated by reference  to an exhibit in the Registrant’s Quarterly Report on Form 10-Q filed with  the Commission on November 14, 2000.                                                                                                 |
|        | (c)    | Denotes a management  contract or compensatory plan arrangement.                                                                                                                                                                                 |
|        | (d)    | Incorporated by reference  to an exhibit in the Registrant’s Quarterly Report on Form 10-Q filed with  the Commission on May 15, 2001.                                                                                                      |
|        | (e)    | Incorporated by reference  to an exhibit in the Registrant’s Annual Report on Form 10-K filed with the  Commission on March 30, 2001.                                                                                                       |
|        | (f)    | Incorporated by reference  to an exhibit in the Registrant’s Annual Report on Form 10-K filed with the  Commission on February 8, 2002.                                                                                                     |
|        | (g)    | Incorporated by reference  to an exhibit in the Registrant’s Quarterly Report on Form 10-Q filed with  the Commission on August 14, 2002.                                                                                                   |
|        | (h)    | Incorporated by reference  to an exhibit in the Registrant’s Annual Report on Form 10-K filed with  the Commission on March 28, 2003.                                                                                             |

 

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|   | (k) | Incorporated by reference  to an exhibit in the Registrant’s Annual Report on Form 10-K/A filed with the  Commission on May 30, 2003.       |
|--------|-----|--------------------------------------------------------------------------------------------------------------------------------------------------|
|   | (l) | Incorporated by reference  to an exhibit in the Registrant’s Quarterly Report on Form 10-Q filed with  the Commission on August 14, 2003.   |
|   | (m) | Incorporated by reference  to an exhibit in the Registrant’s Quarterly Report on Form 10-Q filed with  the Commission on November 14, 2003. |

 

(b)       Reports on Form 8-K.

 

On January 8, 2004,SeeBeyond filed a report on Form 8-K furnishing the press release that announcedits preliminary fourth fiscal quarter and full year 2003 financial results.

 

On January 28, 2004,SeeBeyond filed a report on Form 8-K furnishing the press release thatannounced its fourth fiscal quarter and full year 2003 financial results.

 

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**Signature**

 

Pursuant to the requirementsof Section 13 or 15(d) of the Securities Exchange Act of 1934, theRegistrant has duly caused this report to be signed on its behalf by theundersigned thereunto duly authorized, on May 7, 2004.

 
| **SeeBeyond  Technology Corporation**                                                                 |
|-------------------------------------------------------------------------------------------------------|
| /s/   BARRY J.  PLAGA                                                                       |   |
| Barry J. Plaga                                                                                        |
| *Executive  Vice President and Chief Financial Officer  (Principal Financial and Accounting Officer)* |

 

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