**UNITEDSTATESSECURITIES AND 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 September 30, 2003**                                                                                                                            |
|                                                                                                                                                                                  |
| **OR**                                                                                                                                                                                |
|                                                                                                                                                                                  |
| **o**                                                                                                                                                                                 |   | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITES 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 ofIncorporation or Organization)                                                                               |   | (I.R.S.  EmployerIdentification Number) |
|                                                                                                                                         |   |                                    |
| **800 E. Royal Oaks Drive****Monrovia,  California 91016****(626) 471-6000**                                                            |   |                                    |
| (Address,  including Zip Code, of Registrant’s Principal Executive Officesand 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 November12, 2003 was 83,510,972.

 

 

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**SeeBeyond Technology Corporation and Subsidiaries**

 

**INDEX**

 
|                                             | **Page**                                                                                                                             |
|--------------------------------------------------|--------------------------------------------------------------------------------------------------------------------------------------|
| **Part I -  Financial Information**              |                                                                                                                                 |
| Item 1.                                          | Financial Statements:                                                                                                                |   |
|                                             | Condensed  Consolidated Balance Sheets as of September 30, 2003 (unaudited) and December  31, 2002                                   | 3 |
|                                             | Condensed  Consolidated Statements of Operations (unaudited) for the three months and  nine months ended September 30, 2003 and 2002 | 4 |
|                                             | Condensed  Consolidated Statements of Cash Flows (unaudited) for the nine months ended  September 30, 2003 and 2002                  | 5 |
|                                             | Notes  to Condensed Consolidated Financial Statements (unaudited)                                                                    | 6 |
| Item 2.                                          | Management’s Discussion and  Analysis of Financial Condition and Results of Operations                                          | 12 |
| Item 3.                                          | Quantitative and Qualitative  Disclosure About Market Risk                                                                           | 25 |
| Item 4.                                          | Controls and Procedures                                                                                                              | 26 |
| **Part II -  Other Information**                 |                                                                                                                                 |
| Item 1.                                          | Legal  Proceedings                                                                                                                   | 27 |
| Item 2.                                          | Changes in  Securities and Use of Proceeds                                                                                           | 27 |
| Item  4.                                         | Submission  of Matters to a Vote of Security Holders                                                                                 | 27 |
| Item 6.                                          | Exhibits and  Reports on Form 8-K                                                                                                    | 27 |
| **Signatures**                                   |                                                                                                                                 |
| **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**

 

**CondensedConsolidated Balance Sheets**

 
|                                                                                                                                                                                                                                           |   | **September  30,  2003** |    | **December  31,  2002** |   |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------|---------|-------------------------|--------|
|                                                                                                                                                                                                                                           |   | **(Unaudited)**          |    |                    |   |
| Assets:                                                                                                                                                                                                                                        |   |                     |    |                    |   |
| Current assets:                                                                                                                                                                                                                                |   |                     |    |                    |   |
| Cash and cash equivalents                                                                                                                                                                                                                      |   | $                        | 69,730  |                    | $      | 94,114 |   |
| Accounts receivable, net of allowances of $2,541  and $2,539 at September 30, 2003 and December 31, 2002, respectively                                                                                                                         |   | 28,079                   |    | 33,550                  |   |
| Prepaid expenses and other current assets                                                                                                                                                                                                      |   | 4,760                    |    | 4,180                   |   |
| Total current assets                                                                                                                                                                                                                           |   | 102,569                  |    | 131,844                 |   |
| Property and equipment, net                                                                                                                                                                                                                    |   | 15,945                   |    | 22,429                  |   |
| Goodwill                                                                                                                                                                                                                                       |   | 1,391                    |    | 1,391                   |   |
| Other assets                                                                                                                                                                                                                                   |   | 2,673                    |    | 1,379                   |   |
| Total assets                                                                                                                                                                                                                                   |   | $                        | 122,578 |                    | $      | 157,043 |   |
| Liabilities and stockholders’ equity:                                                                                                                                                                                                     |   |                     |    |                    |   |
| Current liabilities:                                                                                                                                                                                                                           |   |                     |    |                    |   |
| Accounts payable                                                                                                                                                                                                                               |   | $                        | 6,024   |                    | $      | 11,343 |   |
| Accrued compensation and related expenses                                                                                                                                                                                                      |   | 10,751                   |    | 11,818                  |   |
| Accrued expenses                                                                                                                                                                                                                               |   | 8,661                    |    | 8,891                   |   |
| Deferred revenues                                                                                                                                                                                                                              |   | 29,241                   |    | 28,141                  |   |
| Equipment line and advance payable - current  portion                                                                                                                                                                                          |   | 3,151                    |    | 2,988                   |   |
| Capital lease payable - current portion                                                                                                                                                                                                        |   | 248                      |    | 214                     |   |
| Total current liabilities                                                                                                                                                                                                                      |   | 58,076                   |    | 63,395                  |   |
| Equipment line and advance payable                                                                                                                                                                                                             |   | 773                      |    | 3,260                   |   |
| Capital lease payable                                                                                                                                                                                                                          |   | 543                      |    | 750                     |   |
| Total liabilities                                                                                                                                                                                                                              |   | 59,392                   |    | 67,405                  |   |
| Commitments and contingencies                                                                                                                                                                                                                  |   |                     |    |                    |   |
| Stockholders’ equity:                                                                                                                                                                                                                     |   |                     |    |                    |   |
| Common stock, $.0001 par value - 200,000,000  shares authorized; 84,929,657  shares issued and 83,207,655 shares outstanding as of September 30, 2003 and  83,738,243 shares issued and 82,538,243 shares outstanding as of December 31,  2002 |   | 8                        |    | 8                       |   |
| Additional paid-in capital                                                                                                                                                                                                                     |   | 221,335                  |    | 219,246                 |   |
| Treasury stock                                                                                                                                                                                                                                 |   | (3,632                   | )       | (2,760                  | )      |
| Deferred stock compensation                                                                                                                                                                                                                    |   | (74                      | )       | (317                    | )      |
| Accumulated other comprehensive loss                                                                                                                                                                                                           |   | 246                      |    | (99                     | )      |
| Accumulated deficit                                                                                                                                                                                                                            |   | (154,697                 | )       | (126,440                | )      |
| Total stockholders’ equity                                                                                                                                                                                                                |   | 63,186                   |    | 89,638                  |   |
| Total liabilities and stockholders’ equity                                                                                                                                                                                                |   | $                        | 122,578 |                    | $      | 157,043 |   |

 

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

 

3

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**SeeBeyond Technology Corporation and Subsidiaries**

 

**CondensedConsolidated Statements of Operations**

 

**(Unaudited)**

 
|                                                                                                                                                                                      |   | **Three  Months Ended  September 30,** |   | **Nine  Months Ended  September 30,** |   |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------------|--------|---------------------------------------|--------|
| **In thousands, except per share data**                                                                                                                                                   |   | **2003**                               |   | **2002**                              |   | **2003** |   | **2002** |   |
| Revenues:                                                                                                                                                                                 |   |                                   |   |                                  |   |   |   |   |   |
| License                                                                                                                                                                                   |   | $                                      | 11,249 |                                  | $      | 13,427 |   | $ | 31,376 |   | $ | 48,765 |   |
| Services                                                                                                                                                                                  |   | 9,440                                  |   | 11,825                                |   | 30,495 |   | 32,530 |   |
| Maintenance                                                                                                                                                                               |   | 11,667                                 |   | 10,450                                |   | 35,164 |   | 28,959 |   |
| Total revenues                                                                                                                                                                            |   | 32,356                                 |   | 35,702                                |   | 97,035 |   | 110,254 |   |
| Cost of revenues:                                                                                                                                                                         |   |                                   |   |                                  |   |   |   |   |   |
| License                                                                                                                                                                                   |   | 299                                    |   | 707                                   |   | 1,120 |   | 1,896 |   |
| Services and maintenance revenues (exclusive of  stock-based compensation of $6 and $27 and $33 and $103 for the three and  nine months ended September 30, 2003 and 2002, respectively.) |   | 10,041                                 |   | 12,054                                |   | 32,161 |   | 32,750 |   |
| Total cost of revenues                                                                                                                                                                    |   | 10,340                                 |   | 12,761                                |   | 33,281 |   | 34,646 |   |
| Gross profit                                                                                                                                                                              |   | 22,016                                 |   | 22,941                                |   | 63,754 |   | 75,608 |   |
| Operating expenses:                                                                                                                                                                       |   |                                   |   |                                  |   |   |   |   |   |
| Research and development (exclusive of stock-based  compensation of $12 and $31 and $47 and $117 for the three and nine months  ended September 30, 2003 and 2002, respectively.)         |   | 10,142                                 |   | 8,980                                 |   | 31,218 |   | 24,744 |   |
| Sales and marketing (exclusive of stock-based  compensation of $19 and $98 and $114 and $379 for the three and nine months  ended September 30, 2003 and 2002, respectively.)             |   | 12,443                                 |   | 17,689                                |   | 40,883 |   | 49,295 |   |
| General and administrative (exclusive of  stock-based compensation of $4 and $13 and $19 and $50 for the three and nine  months ended September 30, 2003 and 2002, respectively.)         |   | 3,846                                  |   | 4,624                                 |   | 13,071 |   | 13,665 |   |
| Restructuring and impairment charges                                                                                                                                                      |   | —                                 |   | —                                |   | 6,386 |   | — |   |
| Amortization of sales and marketing warrants                                                                                                                                              |   | 48                                     |   | (56                                   | )      | 172 |   | 344 |   |
| Amortization of stock-based compensation                                                                                                                                                  |   | 41                                     |   | 169                                   |   | 213 |   | 649 |   |
| Total operating expenses                                                                                                                                                                  |   | 26,520                                 |   | 31,406                                |   | 91,943 |   | 88,697 |   |
| Loss from operations                                                                                                                                                                      |   | (4,504                                 | )      | (8,465                                | )      | (28,189 | ) | (13,089 | ) |
| Interest and other, net                                                                                                                                                                   |   | 11                                     |   | 336                                   |   | 374 |   | 868 |   |
| Loss before income tax provision                                                                                                                                                          |   | (4,493                                 | )      | (8,129                                | )      | (27,815 | ) | (12,221 | ) |
| Provision for income taxes                                                                                                                                                                |   | 356                                    |   | 27                                    |   | 442 |   | 106 |   |
| Net loss                                                                                                                                                                                  |   | $                                      | (4,849 | )                                     | $      | (8,156 | ) | $ | (28,257 | ) | $ | (12,327 | ) |
|                                                                                                                                                                                      |   |                                   |   |                                  |   |   |   |   |   |
| Basic and diluted net loss per share                                                                                                                                                      |   | $                                      | (0.06  | )                                     | $      | (0.10 | ) | $ | (0.34 | ) | $ | (0.15 | ) |
| Number of shares used in calculating basic and  diluted net loss per share                                                                                                                |   | 83,065                                 |   | 83,494                                |   | 82,841 |   | 81,861 |   |

 

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

 

4

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**SeeBeyond Technology Corporation and Subsidiaries**

 

**CondensedConsolidated Statements of Cash Flows**

 

**(Unaudited)**

 
|                                                                             |   | **Nine Months  Ended  September 30,** |    |
|----------------------------------------------------------------------------------|--------|---------------------------------------|---------|
|                                                                             |   | **2003**                              |    | **2002** |   |
| Cash flows from operating activities:                                            |   |                                  |    |   |   |
| Net loss                                                                         |   | $                                     | (28,257 | ) | $ | (12,327 | ) |
| Adjustments to reconcile net loss to net cash used  in operating activities:     |   |                                  |    |   |   |
| Gain on disposal of fixed assets                                                 |   | (16                                   | )       | — |   |
| Depreciation and amortization                                                    |   | 4,406                                 |    | 4,269 |   |
| Provision for doubtful accounts receivable                                       |   | 82                                    |    | 354 |   |
| Amortization of sales and marketing warrants                                     |   | 172                                   |    | 344 |   |
| Amortization of stock-based compensation                                         |   | 213                                   |    | 649 |   |
| Non-cash restructuring and impairment charges                                    |   | 4,274                                 |    | — |   |
| Changes in assets and liabilities:                                               |   |                                  |    |   |   |
| Accounts receivable                                                              |   | 5,389                                 |    | 6,538 |   |
| Prepaid expenses and other current assets                                        |   | (580                                  | )       | (2,264 | ) |
| Accounts payable                                                                 |   | (3,044                                | )       | 674 |   |
| Accrued compensation and related expenses                                        |   | (1,297                                | )       | (2,604 | ) |
| Deferred revenues                                                                |   | 1,100                                 |    | 2,431 |   |
|                                                                             |   |                                  |    |   |   |
| Net cash used in operating activities:                                           |   | (17,558                               | )       | (1,936 | ) |
|                                                                             |   |                                  |    |   |   |
| Cash flows from investing activities:                                            |   |                                  |    |   |   |
| Purchases of property and equipment                                              |   | (4,416                                | )       | (7,883 | ) |
| Payments to acquire companies, net of cash acquired                              |   | —                                |    | (255 | ) |
| Related party receivable                                                         |   | —                                |    | 366 |   |
| Other                                                                            |   | (1,294                                | )       | (1,011 | ) |
|                                                                             |   |                                  |    |   |   |
| Net cash used in investing activities                                            |   | (5,710                                | )       | (8,783 | ) |
|                                                                             |   |                                  |    |   |   |
| Cash flows from financing activities:                                            |   |                                  |    |   |   |
| Net repayments on bank lines of credit                                           |   | (2,363                                | )       | (543 | ) |
| Proceeds from issuance of common stock pursuant to  public offering, net         |   | —                                |    | 59,012 |   |
| Proceeds from issuance of common stock pursuant to  employee stock option plan   |   | 1,600                                 |    | 3,471 |   |
| Proceeds from issuance of common stock pursuant to  employee stock purchase plan |   | 347                                   |    | 563 |   |
| Payments for the purchase of common stock                                        |   | (872                                  | )       | — |   |
| Repayments of capital lease obligation                                           |   | (173                                  | )       | — |   |
|                                                                             |   |                                  |    |   |   |
| Net cash (used in) provided by financing activities                              |   | (1,461                                | )       | 62,503 |   |
|                                                                             |   |                                  |    |   |   |
| Effect of exchange rate changes on cash and cash  equivalents                    |   | 345                                   |    | 823 |   |
|                                                                             |   |                                  |    |   |   |
| Net (decrease) increase in cash and cash  equivalents                            |   | (24,384                               | )       | 52,607 |   |
| Cash and cash equivalents at beginning of the  period                            |   | 94,114                                |    | 47,039 |   |
|                                                                             |   |                                  |    |   |   |
| Cash and cash equivalents at end of the period                                   |   | $                                     | 69,730  |   | $ | 99,646 |   |

 

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

 

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 generally accepted accountingprinciples have been condensed or omitted in accordance with such rules andregulations. In the opinion of management, the accompanying unaudited condensedconsolidated financial statements reflect all adjustments, consisting only ofnormal recurring adjustments, necessary to present fairly the financialposition of the Company, and its results of operations and cash flows. Thesecondensed consolidated financial statements should be read in conjunction withthe annual audited consolidated financial statements and notes as of and forthe year ended December 31, 2002 included in the Company’s Form 10-Kfiled with the Securities and Exchange Commission on March 28, 2003, asamended on April 9, 2003.

 

The results of operationsfor the three and nine months ended September 30, 2003 are not necessarilyindicative of the results that may be expected for the year endingDecember 31, 2003 or any other interim period, and the Company makes norepresentations 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 all elementshave 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 operate in customized environments. Services are generallyseparable from the other elements under the arrangement since the performanceof the services are not essential to the functionality (i.e. do not involvesignificant production, modification or customization of the software orbuilding complex interfaces) of any other element of the transaction and aredescribed in the contract such that the total price of the arrangement would beexpected to vary as the result of the inclusion or exclusion of the services.Revenues for services are recognized as the services are performed. Trainingservices are sold either on a per student basis or per class and are recognizedas classes are

 

6

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attended.

 

*MaintenanceRevenues:* Maintenancerevenues consist primarily of fees for providing unspecified software upgradeson a when-and-

if-available basis andtechnical support over a specified term, which is typically twelve months.Maintenance revenues are typically paid in advance and are recognized on astraight-line basis over the term of the contract.

 

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.    *Recently Issued Accounting Pronouncements***

 

In May 2003, the FinancialAccounting Standards Board (FASB) issued Statement of Financial AccountingStandards (SFAS) No. 150, “Accounting for Certain Financial Instrumentswith Characteristics of Both Liabilities and Equity.”  SFAS 150 requiresthat certain instruments with certain characteristics be classified asliabilities as opposed to equity. This statement is effective for financialinstruments entered into or modified after May 30, 2003, and otherwise iseffective July 1, 2003. We do not believe that the adoption of thisstandard will have a material impact on our financial position, results ofoperations and cash flows.

 

In January 2003, the FASBissued FASB Interpretation No. 46, “Consolidation of Variable InterestEntities” (FIN 46).  FIN 46 provides guidance on the identification ofentities for which control is achieved through means other than through votingrights, variable interest entities, and how to determine when and whichbusiness enterprises should consolidate variable interest entities.  Thisinterpretation applied immediately to variable interest entities created afterJanuary 31, 2003.  It applies in the first fiscal year or interim periodbeginning after June 15, 2003, to variable interest entities in which an enterpriseholds a variable interest that it acquired before February 1, 2003.  InOctober 2003, the FASB announced that the effective date of FIN 46 would bedeferred until the fourth quarter 2003. The adoption of this interpretation is not expected to have an impact onthe Company’s financial statements.

 

**Note 4.    *Operations by Reportable Segments andGeographic 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  September 30,** |   | **Nine  Months Ended  September 30,** |   |
|----------------|--------|----------------------------------------|--------|---------------------------------------|--------|
|           |   | **2003**                               |   | **2002**                              |   | **2003** |   | **2002** |   |
| Revenues:      |   |                                   |   |                                  |   |   |   |   |   |
| North America  |   | $                                      | 18,305 |                                  | $      | 22,066 |   | $ | 58,182 |   | $ | 72,098 |   |
| Europe         |   | 10,898                                 |   | 10,372                                |   | 29,123 |   | 28,869 |   |
| Pacific Rim    |   | 3,153                                  |   | 3,264                                 |   | 9,730 |   | 9,287 |   |
| Total revenues |   | $                                      | 32,356 |                                  | $      | 35,702 |   | $ | 97,035 |   | $ | 110,254 |   |

 
|                    |   | **September  30,  2003** |   | **December  31,  2002** |   |
|-------------------------|--------|--------------------------|--------|-------------------------|--------|
| Long-lived assets:      |   |                     |   |                    |   |
| North America           |   | $                        | 16,306 |                    | $      | 22,143 |   |
| Europe                  |   | 1,787                    |   | 2,047                   |   |
| Pacific Rim             |   | 1,916                    |   | 1,009                   |   |
| Total long-lived assets |   | $                        | 20,009 |                    | $      | 25,199 |   |

 

No single customer accountedfor more than 10% of the Company’s net revenues during the three months or ninemonths ended September 30, 2003 and 2002.

 

**Note 5.    *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

 

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share is computed on thebasis of the weighted average number of common shares outstanding plus theeffect of outstanding stock warrants and outstanding employee stock options usingthe “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):

 
|                                                                                          |   | **Three  Months Ended  September 30,** |   | **Nine  Months Ended  September 30,** |   |
|-----------------------------------------------------------------------------------------------|--------|----------------------------------------|--------|---------------------------------------|--------|
|                                                                                          |   | **2003**                               |   | **2002**                              |   | **2003** |   | **2002** |   |
| Net loss                                                                                      |   | $                                      | (4,849 | )                                     | $      | (8,156 | ) | $ | (28,257 | ) | $ | (12,327 | ) |
| Weighted average outstanding shares of common  stock used to compute basic net loss per share |   | 83,065                                 |   | 83,494                                |   | 82,841 |   | 81,861 |   |
| Dilutive effect of:                                                                           |   |                                   |   |                                  |   |   |   |   |   |
| Stock warrants                                                                                |   | —                                 |   | —                                |   | — |   | — |   |
| Employee stock options                                                                        |   | —                                 |   | —                                |   | — |   | — |   |
| Common stock and common stock equivalents                                                     |   | 83,065                                 |   | 83,494                                |   | 82,841 |   | 81,861 |   |
|                                                                                          |   |                                   |   |                                  |   |   |   |   |   |
| Net basic and diluted loss per share                                                          |   | $                                      | (0.06  | )                                     | $      | (0.10 | ) | $ | (0.34 | ) | $ | (0.15 | ) |

 

Options to purchaseapproximately 20,680,000 shares of common stock for the three months and ninemonths ended September 30, 2003 and options to purchase 19,756,000 shares ofcommon stock for the three months and nine months ended September 30, 2002 werenot included in the calculations of diluted net loss per share because theireffect would be antidilutive. Common stock warrants to purchase 650,000 shareswere not included in the calculations of diluted net loss per share becausetheir effect would be antidilutive for the three months and nine months endedSeptember 30, 2003 and the three months and nine months ended September 30,2002.

 

**Note 6.    *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 optionexercise price is less than the fair value of the stock at the date of grant.The Company 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  September 30,** |   | **Nine  Months Ended  September 30,** |   |
|--------------------------------------------------------------------------------------|--------|----------------------------------------|--------|---------------------------------------|--------|
|                                                                                 |   | **2003**                               |   | **2002**                              |   | **2003** |   | **2002** |   |
| Net loss, as reported                                                                |   | $                                      | (4,849 | )                                     | $      | (8,156 | ) | $ | (28,257 | ) | $ | (12,327 | ) |
| Stock-based employee compensation costs, included  in net loss, as reported          |   | 41                                     |   | 169                                   |   | 213 |   | 649 |   |
| Stock-based employee compensation costs if fair  value based method had been applied |   | (2,845                                 | )      | (4,071                                | )      | (9,522 | ) | (11,552 | ) |
| Pro forma net loss                                                                   |   | $                                      | (7,653 | )                                     | $      | (12,058 | ) | $ | (37,566 | ) | $ | (23,230 | ) |
| Earnings per share:                                                                  |   |                                   |   |                                  |   |   |   |   |   |
| Basic and diluted - as reported                                                      |   | $                                      | (0.06  | )                                     | $      | (0.10 | ) | $ | (0.34 | ) | $ | (0.15 | ) |
| Basic and diluted - pro forma                                                        |   | $                                      | (0.09  | )                                     | $      | (0.14 | ) | $ | (0.45 | ) | $ | (0.28 | ) |

 

 

**Note 7.    *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

 

8

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interest at an annual rateof either prime plus 0.5% or the London InterBank Offered Rate (“LIBOR”) rateplus 2.50% (payable monthly) and it expires May 31, 2004.  As ofSeptember 30, 2003, $9.4 million was available under the Line andthere were no borrowings outstanding. The Company may use up to$5.0 million of the Line to issue letters of credit. As ofSeptember 30, 2003, approximately $386,000 was available for the issuanceof letters 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. The Company was in compliance with all covenants at September 30, 2003.

 

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 September 30, 2003 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 September 30, 2003, there was approximately$760,000 outstanding under the Equipment Line. The Equipment Line is secured bycertain assets 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 September 30, 2003 was4.75%. As of September 30, 2003 the balance outstanding under thisEquipment Advance was approximately $3.1 million.

 

Future principal payments onthe Equipment Line and the Equipment Advance will aggregate approximately $790,000for the remainder of 2003 and approximately $3.1 million in 2004, based onthe total outstanding balance of approximately $3.9 million.

 

**LegalProceedings**

 

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 weresubsequently consolidated and a consolidated amended complaint was filedpurportedly brought on behalf of purchasers of common stock of SeeBeyondTechnology Corporation between December 10, 2001 and May 7, 2002. The complaint generally alleges that defendants made false statementsabout SeeBeyond’s operating results and business, while concealing material information.The plaintiffs seek unspecified monetary damages. The Company believes the suitto be without merit and intends to defend against it vigorously.

 

Beginning onSeptember 5, 2002, several derivative lawsuits were filed by purportedCompany shareholders in the Superior Court of California for the County of LosAngeles.  The complaints name certain of the Company’s present and formerofficers and directors as defendants and name the Company as a nominaldefendant. The complaints generally allege that the defendants breached theirfiduciary duties to the Company through the dissemination of allegedlymisleading and inaccurate information 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 8.    *Comprehensive Loss***

 

The Company accounts forcomprehensive loss using SFAS No. 130, “Reporting Comprehensive Income”.SFAS No. 130 establishes standards for reporting comprehensive income andits 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.

 

9

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Total comprehensive loss wasas follows (in thousands):

 
|                           |   | **Three  Months Ended  September 30,** |   | **Nine  Months Ended  September 30,** |   |
|--------------------------------|--------|----------------------------------------|--------|---------------------------------------|--------|
|                           |   | **2003**                               |   | **2002**                              |   | **2003** |   | **2002** |   |
| Net loss                       |   | $                                      | (4,849 | )                                     | $      | (8,156 | ) | $ | (28,257 | ) | $ | (12,327 | ) |
| Other comprehensive loss:      |   |                                   |   |                                  |   |   |   |   |   |
| Foreign translation adjustment |   | 437                                    |   | (245                                  | )      | 345 |   | 823 |   |
| Comprehensive loss             |   | $                                      | (4,412 | )                                     | $      | (8,401 | ) | $ | (27,912 | ) | $ | (11,504 | ) |

 

**Note 9.    *Stockholders’ Equity***

 

**SecondaryPublic Offering**

 

In February 2002, theCompany completed a public offering of 6,572,623 shares of common stock at $9.57per share and realized proceeds, net of underwriting discounts, commissions andissuance costs, of approximately $59.0 million.

 

**CommonStock Warrants**

 

In January 2002, astrategic alliance partner of the Company exercised its warrant and convertedits right to purchase 1,200,000 shares of common stock at $5.33 per share into666,337 shares of common stock of the Company.

 

In March 2002, awarrant agreement between another strategic alliance partner and the Companywas cancelled and all rights under the warrant agreement, including all fullyvested shares were forfeited.

 

**Treasury Stock**

 

In July 2003, the Companyrepurchased 522,002 shares of its common stock at an average price of $2.38 pershare.

 

**Note 10.    *Restructuring and Impairment Charges***

 

During the three monthsended December 31, 2002, the Company recorded restructuring and impairmentcharges totaling $6.6 million, consisting of $2.1 million foremployee termination benefits and related costs associated with headcountreductions, $2.7 million related to future rent obligations for propertiesabandoned in connection with facilities consolidation and $1.8 millionrelated to the write-down of leasehold improvements, furniture, computerequipment and software in connection with facilities consolidation andheadcount reductions.

 

The headcount reduction of57 employees was comprised of approximately 56% sales and marketing staff, 15%professional services staff, 19% general and administrative staff and 10%research and development staff.  The restructuring and impairment chargesrecorded in the three months ended December 31, 2002 were recorded under EITFNo. 94-3. Under EITF No. 94-3 the accrual for future rent obligations recordedin the three months ended December 31, 2002 was made when a commitment toabandon the facilities was reached in December 2002.

 

During the three monthsended June 30, 2003, the Company recorded restructuring and impairment chargestotaling $6.4 million,

consisting of $1.1 millionfor employee termination benefits and related costs associated with headcountreductions, $1.0 million related to future rent obligations for propertiesabandoned in connection with facilities consolidation and $4.3 million relatedto the write-down of leasehold improvements, furniture, computer equipment andsoftware in connection with the facilities consolidation and headcountreductions.

 

The headcount reduction of44 employees was comprised of approximately 34% sales and marketing staff, 52%professional services staff and 14% general and administrative staff.  Therestructuring and impairment charges recorded in the three months ended June30, 2003 were recorded under SFAS No. 146.  Under SFAS No. 146 the accrualfor future rent obligations recorded in the three months ended June 30, 2003was recorded when the facilities were abandoned.

 

These restructuring andimpairment charges were recorded to better align the company’s cost structurewith changing market conditions.

 

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The following table setsforth the Company’s accrued restructuring costs as of September 30, 2003 (inthousands).

 
|                                                                                       |   | **Future  rent  obligations** |   | **Asset  Impairment** |   | **Involuntary  termination  benefits** |   | **Total** |   |
|--------------------------------------------------------------------------------------------|--------|-------------------------------|--------|-----------------------|--------|----------------------------------------|--------|-----------|--------|
|                                                                                       |   |                          |   |                  |   |                                   |   |      |   |
| Balance at December 31, 2002                                                               |   | $                             | 3,100  |                  | $      | —                                 |   | $         | 870    |   | $ | 3,970 |   |
| Cash payments                                                                              |   | (543                          | )      | —                |   | (578                                   | )      | (1,121    | )      |
| Balance at March 31, 2003                                                                  |   | 2,557                         |   | —                |   | 292                                    |   | 2,849     |   |
| Restructuring and impairment charges recorded                                              |   | 981                           |   | 4,274                 |   | 1,131                                  |   | 6,386     |   |
| Non-cash write down of leasehold improvements,  furniture, computer equipment and software |   | —                        |   | (4,274                | )      | —                                 |   | (4,274    | )      |
| Cash payments                                                                              |   | (467                          | )      | —                |   | (977                                   | )      | (1,444    | )      |
| Balance at June 30, 2003                                                                   |   | 3,071                         |   | —                |   | 446                                    |   | 3,517     |   |
| Cash payments                                                                              |   | (910                          | )      | —                |   | (446                                   | )      | (1,356    | )      |
| Balance at September 30, 2003                                                              |   | $                             | 2,161  |                  | $      | —                                 |   | $         | — |   | $ | 2,161 |   |

 

Accrued future rentobligations represent the estimated future rent expense on abandoned excessfacilities, net of sublease income and is expected to be paid over the nexttwenty-eight months.

 

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**Item 2****.    Management’sDiscussion and Analysis of Financial Condition 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.

 

**Overview**

 

We were founded in 1989 andsold our first products and services in 1991 under the name “SoftwareTechnologies Corporation.” From 1991 to 1998 our sales and marketing effortswere primarily focused on customers in the healthcare industry. In 1998, webegan to significantly increase our sales and marketing expenses to targetcustomers in other vertical markets, such as financial services/insurance,manufacturing, retail/e-Commerce/services, telecommunications, energy servicesand government. In November 1999 we launched the fourth generation of ourproduct e*Gate 4.0, which introduced a fully distributed, fault tolerantarchitecture. Through the end of September, 2003 we were shipping an enhancedversion of our eBusiness Integration Suite, version 4.5.3 to our customers, andin October 2003 we announced the general availability of our new suite ofproducts, the SeeBeyond Integrated Composite Application Network (“ICAN”)version 5.0.  We incurred significantlosses in fiscal years 2001, 2002 and in the first, second and third quarters offiscal 2003.  As of September 30, 2003, we had an accumulated deficitof approximately $154.7 million.

 

We derive revenues primarilyfrom three sources: licenses, services and maintenance. We market our productsand services on a global basis through our direct sales force, and augment ourmarketing efforts through relationships with systems integrators, and in otherinstances, through value-added resellers and technology vendors. Our productsare typically licensed directly to customers for a perpetual term, with pricingbased on the number of systems or applications the customer is integrating orconnecting with our products. We record license revenues when a licenseagreement has been signed by both parties, the fee is fixed or determinable,collection of the fee is probable, delivery of our products has occurred and noother significant obligations remain. Payments for licenses, services andmaintenance received in advance of revenue recognition are recorded as deferredrevenue.

 

We currently have operationsin sixteen countries outside of the United States. Revenues derived frominternational sales were 40% of total revenues for the nine months endedSeptember 30, 2003 compared to 34% of total revenues for the nine months endedSeptember 30, 2002. We believe that international revenues will continueto be significant in future periods. To date, we have not experiencedsignificant seasonality of revenues. However, we expect that our future resultswill fluctuate in response to the fiscal or quarterly budget cycles of ourcustomers.

 

Revenues from servicesinclude consulting and implementation services, training and reimbursableout-of-pocket expenses. A majority of our customers use third-party systemsintegrators to implement our products. Customers also typically purchaseadditional consulting services from us to support their implementationactivities. These consulting services are generally sold on a time andmaterials or fixed fee basis, and services revenues are recognized as theservices are performed. We also offer training services, which are sold on aper student basis and for which revenues are recognized as the classes areattended.

 

Customers who license ourproducts normally purchase maintenance contracts. These contracts provideunspecified software upgrades and technical support over a fixed term, which istypically 12 months. Maintenance contracts are usually paid in advance,and revenues from these contracts are recognized ratably over the term of thecontract.

 

Our cost of revenues includescost of license revenues and cost of services and maintenance revenues. Eachcategory, except cost of license revenues, includes related expenses forsalaries, employee benefits, incentive compensation, bonuses, travel,telephone, communications, rent and allocated facilities and professional fees.

 

Cost of license revenuesincludes the cost of third-party licensed software embedded or bundled with ourproducts. Cost of services and maintenance revenues consists of compensationand related overhead costs for personnel engaged in implementation consultingand services and maintenance and support activities, training and out-of-pocketexpenses. For the three months and nine months ended September 30, 2003, ourgross margin was 97.3% and 96.4%, respectively on our license revenues and52.4% and 51.0%, respectively on our services and maintenance revenues. Weexpect in the future to continue to earn substantially higher gross margins onour license revenues as compared to our services and maintenance revenues. As aresult, our overall gross margin depends significantly on our revenue mix.

 

Our sales and marketingexpenses include additional expenditures specific to the marketing group, suchas public relations and advertising, trade shows, and marketing collateralmaterials and expenditures specific to the sales group, such as commissions.

 

To date, all softwareproduct development costs have been expensed as incurred. Also included in ourtotal costs and expenses are

 

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restructuring and impairmentcharges, sales and marketing warrants and stock compensation.

 

In March 2001, weentered into a four-year co-marketing agreement with General Motors Corporation(“GMC”) and issued GMC a warrant to purchase 625,000 shares of common stock atan exercise price of $11.34 per share. As a result of the December 2001private placement of 2,574,298 shares of our common stock, the exercise priceof this warrant was adjusted to $5.83 per share. The warrant expires in March 2006and 175,000 shares under the warrant were exercisable immediately. Theremaining 450,000 shares subject to the warrant are performance based and vestand become exercisable over the thirty-six month period following the issuanceof the warrant provided the warrant holder has achieved various milestonesrelated to providing certain sales and marketing support. The unvested portionof the warrant was valued as of the date of issuance and is being amortized asa charge to marketing expense over the term of the co-marketing agreement. Asof September 30, 2003, a total of 587,500 shares subject to the warrant werevested. We recognized amortization of approximately $48,000 and $172,000 forthe three months ended September 30, 2003 and 2002, respectively and $(56,000)and $344,000 for the nine months ended 2003 and 2002, respectively. The valueof the unvested portion of the warrant will be adjusted in each reportingperiod based on changes in the fair value of the warrants until such date asthe warrants are fully vested. There is no obligation for GMC to make futureproduct purchases from us.

 

In connection with stockoption grants to our employees, we have recorded deferred stock compensationtotaling $8.5 million through December 31, 2000, of whichapproximately $68,000 remains to be amortized as of September 30, 2003. Thisamount represents the difference between the exercise price and the deemed fairvalue of our common stock on the date the options were granted multiplied bythe number of option shares granted. This amount is included as a component ofstockholders’ equity and is being amortized by charges to operations over thevesting period of the options, consistent with the method described inFinancial Accounting Standards Board Interpretation No. 28. We recognizedamortization of deferred compensation expense of approximately $41,000 and$213,000 for the three months ended September 30, 2003 and 2002, respectivelyand  $169,000 and $649,000 for the nine months ended September 30, 2003and 2002, respectively. The amortization of stock compensation is classified asa separate component of operating expenses in our consolidated statement ofoperations.

 

**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, 2002 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, 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.

 

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 product becomingtechnologically obsolete before the payments become due and the likelihood ofthe customer asking for a refund. If we determine the fee is not fixed ordeterminable we defer the revenue until the payments under the arrangementbecome due. We assess whether collection is probable based on a number offactors, 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.

 

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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 amountsdue to 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 we estimate, which is not expected to be realized. Taxbenefits will not be realized if we do not generate sufficient taxable incomein the future to apply the deferred tax balance against. As ofSeptember 30, 2003, a valuation allowance equal to the value of thedeferred tax assets was maintained.  In the event we were to determinethat we would be able to realize our deferred tax assets in the future inexcess of its net recorded amount, an adjustment to the deferred tax assetwould increase income in the period 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 ofOperations**

 

The following table setsforth our results of operations for the three and nine months ended September30, 2003 and 2002, respectively, expressed as a percentage of total revenues:

 
|                                         |   | **Three  Months Ended  September 30,** |   | **Nine  Months Ended  September 30,** |   |
|----------------------------------------------|--------|----------------------------------------|--------|---------------------------------------|--------|
|                                         |   | **2003**                               |   | **2002**                              |   | **2003** |   | **2002** |   |
| Revenues:                                    |   |                                   |   |                                  |   |   |   |   |   |
| License                                      |   | 35                                     | %      | 38                                    | %      | 33 | % | 44 | % |
| Services                                     |   | 29                                     |   | 33                                    |   | 31 |   | 30 |   |
| Maintenance                                  |   | 36                                     |   | 29                                    |   | 36 |   | 26 |   |
| Total revenues                               |   | 100                                    |   | 100                                   |   | 100 |   | 100 |   |
| Cost of revenues:                            |   |                                   |   |                                  |   |   |   |   |   |
| License                                      |   | 1                                      |   | 2                                     |   | 1 |   | 2 |   |
| Services and maintenance                     |   | 31                                     |   | 34                                    |   | 33 |   | 29 |   |
| Total cost of revenues                       |   | 32                                     |   | 36                                    |   | 34 |   | 31 |   |
| Gross profit                                 |   | 68                                     |   | 64                                    |   | 66 |   | 69 |   |
| Operating expenses:                          |   |                                   |   |                                  |   |   |   |   |   |
| Research and development                     |   | 31                                     |   | 25                                    |   | 32 |   | 22 |   |
| Sales and marketing                          |   | 39                                     |   | 51                                    |   | 42 |   | 45 |   |
| General and administrative                   |   | 12                                     |   | 12                                    |   | 14 |   | 12 |   |
| Restructuring charge                         |   | —                                 |   | —                                |   | 7 |   | — |   |
| Amortization of sales and marketing warrants |   | —                                 |   | —                                |   | — |   | — |   |
| Amortization of stock-based compensation     |   | —                                 |   | —                                |   | — |   | 1 |   |
| Total operating expenses                     |   | 82                                     |   | 88                                    |   | 95 |   | 80 |   |
| Loss from operations                         |   | (14                                    | )      | (24                                   | )      | (29 | ) | (11 | ) |
| Interest and other, net                      |   | —                                 |   | 1                                     |   | — |   | — |   |
| Loss before income tax provision             |   | (14                                    | )      | (23                                   | )      | (29 | ) | (11 | ) |
| Provision for income taxes                   |   | 1                                      |   | —                                |   | — |   | — |   |
| Net loss                                     |   | (15                                    | )%     | (23                                   | )%     | (29 | )% | (11 | )% |

 

**Results ofoperations for the three months ended September 30, 2003 and 2002:**

 

**Revenues**

 

*Totalrevenues.* Totalrevenues for the three months ended September 30, 2003 decreased 9% from thesame period last year, from $35.7 million to $32.4 million. Totalrevenues for the three months ended September 30, 2003 decreased primarily dueto the decrease in license revenues as a result of delayed purchasing decision-makingby our customers due to cost-cutting pressures, reduced capital spendingbudgets and general economic weakness and in part resulting from our customersdelaying the decision to purchase from us because of the upcoming release ofour new SeeBeyond ICAN suite of products which was made generally available inOctober 2003.

 

*Licenserevenues.* Licenserevenues for the three months ended September 30, 2003, decreased 16% from thesame period last year, from $13.4 million to $11.2 million. Licenserevenues for the three months ended September 30, 2003 as a percentage of totalrevenues were 35%, as compared to 38% for the same period in the previous year.The decreases in license revenues were due primarily to delayed purchasingdecision-making by our customers due to cost-cutting pressures, reduced capitalspending budgets and general economic weakness and in part resulting from ourcustomers delaying the decision to purchase from us because of the upcomingrelease of our new SeeBeyond ICAN suite of products which was made generallyavailable in October 2003.

 

*Servicesrevenues.* Servicesrevenues for the three months ended September 30, 2003, decreased 20% from thesame period last year, from $11.8 million to $9.4 million. Servicesrevenues for the three months ended September 30, 2003 as a percentage of totalrevenues were 29% as compared to 33% for the same period in the previous year.The decrease in the absolute dollar amount of services revenues was due tolower demand for our consulting services from our customers, in part resultingfrom our customers delaying the decision to purchase consulting services fromus because of the upcoming release of our new SeeBeyond ICAN suite of products

 

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which was made generallyavailable in October 2003.

 

*Maintenancerevenues.* Maintenancerevenues for the three months ended September 30, 2003 increased 11% from thesame period last year, from $10.5 million to $11.7 million. Maintenancerevenues for the three months ended September 30, 2003, as a percentage oftotal revenues were 36%, as compared to 29% for the same period in the previousyear. The increase in the absolute dollar amount of maintenance revenues wasdue primarily to the renewals of prior period maintenance contacts associatedwith the increase in our cumulative license revenues.

 

**Cost ofrevenues**

 

*Cost oflicense revenues.* Costof license revenues for the three months ended September 30, 2003 wasapproximately $299,000, compared to $707,000 in the same period in the previousyear. Cost of license revenues consists primarily of the cost of third-partylicensed software embedded or bundled with our products. The decrease was dueto a corresponding decrease in revenues during the three months ended September30, 2003 from the sale of our products with third-party embedded or bundledsoftware, as compared to the three months ended September 30, 2002.

 

*Cost ofservices and maintenance revenues.* Cost of services and maintenance revenues for the three monthsended September 30, 2003 decreased 17% from the same period in the previousyear, from $12.1 million to $10.0 million. Cost of services andmaintenance revenues for the three months ended September 30, 2003 as apercentage of total revenues were 31%, as compared to 34% for the same periodin the previous year. The decrease in the absolute dollar amount was dueprimarily to a decrease in the use of third-party contractors during the threemonths ended September 30, 2003, as compared to the same period in the previousyear. We expect that cost of services and maintenance revenues will increaseslightly in absolute dollars during the fourth quarter of 2003.

 

**Operatingexpenses**

 

*Researchand development expenses.* Research and development expenses for the three months endedSeptember 30, 2003 increased 12% from the same period in the previous year,from $9.0 million to $10.1 million. Research and development expensesas a percentage of total revenues were 31% for the quarter ended June 30, 2003as compared to 25% for the same period in the prior year. The increase inresearch and development expenses was due primarily to the increase in thenumber of software developers and quality assurance personnel to support ourproduct development, documentation and testing activities related to thedevelopment of the SeeBeyond ICAN version 5.0 products. We anticipate thatresearch and development expenses will remain flat as we transition our productdevelopment efforts to new products due to the completion of ICAN 5.0.

 

*Sales andmarketing expenses.* Salesand marketing expenses for the three months ended September 30, 2003 decreased30% from the same period in the previous year, from $17.7 million to$12.4 million.  Sales and marketing expenses as a percentage of totalrevenues were 39% for the quarter ended September 30, 2003 as compared to 51%for the same period in the prior year. The decrease in the absolute dollaramount of sales and marketing expenses was due primarily to lower headcount anda decrease in promotional and public relations activities, as well as adecrease in sales commissions that resulted from lower license revenues duringthe three months ended September 30, 2003.  We anticipate our sales andmarketing expenses to increase in absolute dollars during Q4 due to our annualHorizons user conference and the addition of our new sales headcount.

 

*Generaland administrative expenses.* General and administrative expenses for the three months endedSeptember 30, 2003 decreased 17% from the same period in the previous year,from $4.6 million to $3.8 million. General and administrativeexpenses as a percentage of total revenues were 12% for the quarter endedSeptember 30, 2003 as compared to 12% for the same period in the prior year.The decrease in the absolute dollar amount of general and administrativeexpenses was due primarily to lower headcount during the quarter endedSeptember 30, 2003, as compared to the same period in the previous year. Weanticipate general and administrative expenses increase slightly in absolutedollars during the fourth quarter of 2003.

 

*Amortizationof sales and marketing warrants.* Amortization of warrants for the three months ended September 30,2003, was $48,000, compared to $(56,000) for the same period in the prior year.The increase in amortization of warrants was a result of a decrease during theprior year period in the value of the unvested portion of a warrant issued to astrategic marketing partner. The amortization of warrant expense for the threemonths ended September 30, 2003, and the remaining warrant expense to berecognized going forward, relate to this warrant issued under a four-yearco-marketing agreement with a strategic partner. The value of the unvestedportion of the warrant will be adjusted in each reporting period based onchanges in the fair value of the warrant until such date as the warrant isfully vested and therefore the amount of amortization for such warrant issubject to fluctuation based on the value of our stock.

 

*Amortizationof stock-based compensation.* Amortization of stock-based compensation for the three monthsended September 30, 2003, was approximately $41,000, compared to $169,000 forthe same period in the previous year.

 

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**Interestand Other Income (Expense), net**

 

Interest and other income(expense), net consists primarily of interest earned on cash balances, interestpaid and accrued on our equipment lines, foreign currency gains and losses andother miscellaneous income and expense items. Interest and other income(expense), net for the three months ended September 30, 2003 was approximately$11,000 compared to $336,000 for the same period last year. The decrease wasdue to a decrease in interest income as a result of lower interest rates and loweraverage cash balances during the three months ended September 30, 2003 ascompared to the three months ended September 30, 2002, as well as foreignexchange losses in some of our international subsidiaries.

 

**Results ofoperations for the nine months ended September 30, 2003 and 2002:**

 

**Revenues**

 

*Totalrevenues.* Totalrevenues for the nine months ended September 30, 2003 decreased 12% from thesame period last year, from $110.3 million to $97.0 million. Totalrevenues for the nine months ended September 30, 2003 decreased primarily dueto the decrease in license revenues as a result of delayed purchasingdecision-making by our customers due to cost-cutting pressures, reduced capitalspending budgets, general economic weakness and in part resulting from our customersdelaying the decision to purchase from us because of the upcoming release ofour new SeeBeyond ICAN suite of products which was made generally available inOctober 2003.

 

*Licenserevenues.* Licenserevenues for the nine months ended September 30, 2003 decreased 36% from thesame period last year, from $48.8 million to $31.4 million. Licenserevenues for the nine months ended September 30, 2003, as a percentage of totalrevenues were 33%, as compared to 44% for the same period in the previous year.The decrease in license revenues was due primarily to delayed purchasingdecision-making by our customers due to cost-cutting pressures, reduced capitalspending budgets, general economic weakness and in part resulting from ourcustomers delaying the decision to purchase from us because of the upcomingrelease of our new SeeBeyond ICAN suite of products which was made generallyavailable in October 2003.

 

*Servicesrevenues.* Servicesrevenues for the nine months ended September 30, 2003 decreased 6% from thesame period in the previous year, from $32.5 million to$30.5 million. Services revenues for the nine months ended September 30,2003 as a percentage of total revenues were 31% as compared to 30% for the sameperiod in the previous year. The decrease in the absolute dollar amount ofservices revenues was due to lower demand for our consulting services from ourcustomers, in part resulting from our customers delaying the decision topurchase consulting services from us because of the upcoming release of our newSeeBeyond ICAN suite of products which was made generally available in October2003.

 

*Maintenancerevenues.* Maintenancerevenues for the nine months ended September 30, 2003 increased 21% from thesame period in the previous year, from $29.0 million to$35.2 million. Maintenance revenues for the nine months ended September30, 2003 as a percentage of total revenues were 36%, as compared to 26% for thesame period in the previous year. The increase in the absolute dollar amount ofmaintenance revenues was due primarily to the renewals of prior periodmaintenance contacts associated with the increase in our cumulative licenserevenues.

 

**Cost ofrevenues**

 

*Cost oflicense revenues.* Costof license revenues for the nine months ended September 30, 2003 wasapproximately $1.1 million, compared to $1.9 million in the same period in theprevious year. Cost of license revenues consists primarily of the cost ofthird-party licensed software embedded or bundled with our products. Thedecrease was due to a decrease in revenues during the nine months endedSeptember 30, 2003 from the sale of our products with third-party embedded orbundled software, as compared to the nine months ended September 30, 2002.

 

*Cost ofservices and maintenance revenues.* Cost of services and maintenance revenues for the nine monthsended September 30, 2003 decreased 2% from the same period in the previousyear, from $32.8 million to $32.2 million. Cost of services andmaintenance revenues for the nine months ended September 30, 2003, as apercentage of total revenues were 33%, as compared to 29% for the same periodin the previous year The decrease in the absolute dollar amount was dueprimarily to a decrease in the use of third-party contractors during the ninemonths ended September 30, 2003, as compared to the same period in the previousyear. We expect that cost of services and maintenance revenues will increaseslightly in absolute dollars during the fourth quarter of 2003.

 

**Operatingexpenses**

 

*Researchand development expenses.* Research and development expenses for the nine months endedSeptember 30, 2003 increased 26% from the same period in the previous year,from $24.7 million to $31.2 million. Research and developmentexpenses as a percentage of total revenues were 32% for the nine months endedSeptember 30, 2003 as compared to 22% for the same period in the prior year.The increase in research and development expenses was due primarily to theincrease in the number of software developers and quality assurance personnelto support our product development, documentation and testing activitiesrelated to the development of the SeeBeyond ICAN 5.0 version products.

 

*Sales andmarketing expenses.* Salesand marketing expenses for the nine months ended September 30, 2003 decreased17% from the

 

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same period in the previousyear, from $49.3 million to $40.9 million.  Sales and marketingexpenses as a percentage of total revenues were 42% for the nine months endedSeptember 30, 2003 as compared to 45% for the same period in the prior year.The decrease in the absolute dollar amount of sales and marketing expenses wasdue primarily to lower headcount and a decrease in promotional and publicrelations activities, as well as a decrease in sales commissions that resultedfrom lower license revenues during the nine months ended September 30, 2003.

 

*Generaland administrative expenses.* General and administrative expenses for the nine months endedSeptember 30, 2003 decreased 4% from the same period in the previous year, from$13.7 million to $13.1 million. General and administrative expensesas a percentage of total revenues were 14% for the nine months ended September30, 2003 as compared to 12% for the same period in the prior year. This deceasein the absolute dollar amount of general and administrative expenses wasprimarily due to lower headcount during the nine months ended September 30,2003, as compared to the same period in 2002.

 

*Restructuringand impairment charges. *Restructuring and impairment charges for the nine months endedSeptember 30, 2003, was $6.4 million, compared to $0 for the same period in theprevious year.  During the six monthsended December 31, 2002, the Company recorded restructuring and impairmentcharges totaling $6.6 million, consisting of $2.1 million foremployee termination benefits and related costs associated with headcountreductions, $2.7 million related to future rent obligations for propertiesabandoned in connection with facilities consolidation and $1.8 millionrelated to the write-down of leasehold improvements, furniture, computerequipment and software in connection with facilities consolidation andheadcount reductions.

 

The headcount reduction of57 employees was comprised of approximately 56% sales and marketing staff, 15%professional services staff, 19% general and administrative staff and 10%research and development staff.  The restructuring and impairment chargesrecorded in the six months ended December 31, 2002 were recorded under EITF No.94-3. Under EITF No. 94-3 the accrual for future rent obligations recorded inthe six months ended December 31, 2002 was made when a commitment to abandonthe facilities was reached in December 2002.

 

During the nine months endedSeptember 30, 2003, the Company recorded restructuring and impairment chargestotaling $6.4 million, consisting of $1.1 million for employee terminationbenefits and related costs associated with headcount reductions, $1.0 millionrelated to future rent obligations for properties abandoned in connection withfacilities consolidation and $4.3 million related to the write-down ofleasehold improvements, furniture, computer equipment and software inconnection with the facilities consolidation and headcount reductions.

 

The headcount reduction of44 employees was comprised of approximately 34% sales and marketing staff, 52%professional services staff and 14% general and administrative staff.  Therestructuring and impairment charges recorded in the nine months endedSeptember 30, 2003 were recorded under SFAS No. 146.  Under SFAS No. 146the accrual for future rent obligations recorded in the nine months endedSeptember 30, 2003 was recorded when the facilities were abandoned.

 

These restructuring andimpairment charges were recorded to better align the company’s cost structurewith changing market conditions.

 
|                                                                                       |   | **Future  rent  obligations** |   | **Asset  Impairment** |   | **Involuntary  termination  benefits** |   | **Total** |   |
|--------------------------------------------------------------------------------------------|--------|-------------------------------|--------|-----------------------|--------|----------------------------------------|--------|-----------|--------|
|                                                                                       |   |                          |   |                  |   |                                   |   |      |   |
| Balance at December 31, 2002                                                               |   | $                             | 3,100  |                  | $      | —                                 |   | $         | 870    |   | $ | 3,970 |   |
| Cash payments                                                                              |   | (543                          | )      | —                |   | (578                                   | )      | (1,121    | )      |
| Balance at March 31, 2003                                                                  |   | 2,557                         |   | —                |   | 292                                    |   | 2,849     |   |
| Restructuring and impairment charges recorded                                              |   | 981                           |   | 4,274                 |   | 1,131                                  |   | 6,386     |   |
| Non-cash write down of leasehold improvements,  furniture, computer equipment and software |   | —                        |   | (4,274                | )      | —                                 |   | (4,274    | )      |
| Cash payments                                                                              |   | (467                          | )      | —                |   | (977                                   | )      | (1,444    | )      |
| Balance at June 30, 2003                                                                   |   | 3,071                         |   | —                |   | 446                                    |   | 3,517     |   |
| Cash payments                                                                              |   | (910                          | )      | —                |   | (446                                   | )      | (1,356    | )      |
| Balance at September 30, 2003                                                              |   | $                             | 2,161  |                  | $      | —                                 |   | $         | — |   | $ | 2,161 |   |

 

Accrued future rentobligations represent the estimated future rent expense on abandoned excessfacilities, net of sublease income and is expected to be paid over the nexttwenty-eight months.

 

*Amortizationof sales and marketing warrants.* Amortization of sales and marketing warrants for the nine monthsended September 30, 2003, was $172,000, compared to $344,000 for the sameperiod in the previous year. The decrease in amortization of sales andmarketing warrants was a result of warrants issued to strategic alliancepartners being fully amortized or cancelled during 2002, as well as a decreasein the value of the unvested portion of a warrant issued to a strategicmarketing partner. The amortization of sales

 

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and marketing warrant expensefor the nine months ended September 30, 2003, and the remaining warrant expenseto be recognized going forward, relate to this warrant issued under a four-yearco-marketing agreement with a strategic partner. The value of the unvestedportion of the warrant will be adjusted in each reporting period based onchanges in the fair value of the warrant until such date as the warrant isfully vested and therefore the amount of amortization for such warrant issubject to fluctuation based on the value of our stock.

 

*Amortizationof stock-based compensation.* Amortization of stock-based compensation for the nine monthsended September 30, 2003 was approximately $213,000, compared to $649,000 forthe same period in the previous year.

 

**Interestand Other Income (Expense), net**

 

Interest and other income(expense), net consists primarily of interest earned on cash balances, interestpaid and accrued on our equipment lines, foreign currency gains and losses andother miscellaneous income and expense items. Interest and other income(expense), net for the nine months ended September 30, 2003 was approximately$374,000 compared to $868,000 for the same period last year. The decrease wasdue to a decrease in interest income as a result of lower interest rates andlower average cash balances during the nine months ended September 30, 2003 ascompared to the nine months ended September 30, 2002, as well as foreignexchange losses in some of our international subsidiaries.

 

**Liquidityand capital resources**

 

As of September 30, 2003, wehad cash and cash equivalents of $69.7 million, a decrease of$24.4 million from $94.1 million held as of December 31, 2002.

 

Net cash used in operatingactivities was $17.6 million during the nine months ended September 30,2003, as compared with $1.9 million in the same period in the previous year.This period over period increase in cash used in operating activities reflectsan increase in net loss and decreases in accounts payable and accruedcompensation and related expenses, partially offset by non-cash restructuringand impairment charges and a decrease in accounts receivable.

 

During the nine months endedSeptember 30, 2003, accounts receivable decreased by approximately $5.4million, primarily due to lower revenues recorded and the timing of receivablecollections during the nine months ended September 30, 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 $5.7 million during the nine months ended September 30,2003, as compared with $8.8 million in the same period in the previousyear. The decrease primarily was due to a decrease in capital expenditures. Weexpect capital expenditures in the next three months to remain flat compared tothe previous three months.

 

Net cash used in financingactivities was $1.5 million during the nine months ended September 30, 2003, ascompared with $62.5 million net cash provided by financing activities inthe same period in the previous year. This decrease was due primarily to thecompletion of the secondary public stock offering in February 2002.

 

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.  As of September 30,2003, $9.4 million was available under the Line and there were noborrowings outstanding. The Company may use up to $5.0 million of the Lineto issue letters of credit. As of September 30, 2003, approximately$386,000 was available for the issuance of letters of credit. The Line issecured by intellectual property rights, accounts receivable and certain otherassets and is subject to certain borrowing base restrictions. The Line requiresmaintenance of certain financial covenants 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 September 30, 2003 was 4.75%. The Company could draw againstthe Equipment Line through November 30, 2001. Interest is payable monthlyand principal is payable in 36 monthly installments commencing inDecember 2001. As of September 30, 2003, there was approximately$760,000 outstanding under the Equipment Line. The Equipment Line is secured bycertain assets 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 September 30, 2003 was 4.75%. As ofSeptember 30, 2003 the balance outstanding under this Equipment Advancewas approximately $3.1 million.

 

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Future principal payments onthe Equipment Line and the Equipment Advance will aggregate approximately$790,000 for the remainder of 2003 and $3.1 million in 2004, based on thetotal outstanding balance of approximately $3.9 million.

 

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.

 

**RisksRelated 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 that we currently deemimmaterial, may also impair our business operations.

 

Our business, financialcondition or results of operations could be adversely affected by any of theserisks. The trading price of our common stock could decline due to any of theserisks.

 

***A continued downturn in the general economy or a continuation of theindustry trend toward reducing or delaying additional information technologyspending due to cost-cutting pressures could reduce demand for our products andservices.***

 

We rely significantly uponcustomers making large information technology purchasing decisions as a sourceof revenue. During 2001, 2002 and the first three quarters of 2003, weexperienced a general slow-down in the level of capital spending by some of ourcustomers due to the general economic downturn, which has adversely affectedour revenues. This slow-down in capital spending, if sustained in futureperiods, could result in reduced sales or the postponement of sales to ourcustomers. There can be no assurance that the level of spending on informationtechnology in general, or on business integration software by our customers andpotential customers in particular, will increase or remain at current levels infuture periods. Lower spending on information technology could result inreduced license sales to our customers, reduced overall revenues, diminishedmargin levels, and could impair our operating results in future periods.

 

***We have a large accumulated deficit, we may incur future losses and wemay not achieve or maintain profitability.***

 

We have incurred substantiallosses since 1998 as we increased funding of the development of our productsand technologies and expanded our sales and marketing organization. As ofSeptember 30, 2003, we had an accumulated deficit of approximately$154.7 million. We may continue to incur losses in future periods and wemay not achieve or maintain profitability on a quarterly or annual basis.

 

***Our operating results fluctuate significantly, and an unanticipateddecline in revenues or gross margin may disappoint securities analysts orinvestors and result in a decline in our stock price.***

 

Our quarterly 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 revenues and operatingresults depend upon the volume and timing of customer orders and payments andthe date of product delivery. Historically, a substantial portion of ourrevenues 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, with lowerrevenues in the summer months. Although this seasonality has not had a materialimpact on our operating results in the past, we cannot assure you our operatingresults will not fluctuate in the future as a result of these and otherinternational trends.

 

We record as deferredrevenue payments from customers that do not meet our revenue recognition policyrequirements. Since only a small portion of our revenues each quarter isrecognized from deferred revenue, our quarterly results depend primarily upon enteringinto new contracts to generate revenues for that quarter. New contracts may notresult in revenues in the quarter in which the contract was signed, and we maynot be able to predict accurately when revenues from these contracts will berecognized. If our operating results are below the expectations of securitiesanalysts or investors for these or other reasons, our stock price would likelydecline, perhaps substantially.

 

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***We experience long and variable sales cycles, which could have anegative impact on our results of operations for any given quarter.***

 

Our products are often usedby our customers throughout their organizations to address critical businessproblems. Customers generally consider a wide range of issues before committingto purchase our products, including product benefits, the ability to operatewith existing and future computer systems, the ability to accommodate increasedtransaction volumes and product reliability. Many customers are addressingthese issues for the first time when they consider whether to buy our productsand services. As a result, we or other parties, including systems integrators,must educate potential customers on the use and benefits of our products andservices. In addition, the purchase of our products generally involves asignificant commitment of capital and other resources by a customer. Thiscommitment often requires significant technical review, assessment ofcompetitive products and approval at a number of management levels within acustomer’s organization. Our sales cycle may vary based on the industry inwhich the potential customer operates and is difficult to predict for anyparticular license transaction. The length and variability of our sales cyclemakes it difficult to predict whether particular sales will be concluded in anygiven quarter. If one or more of our license transactions are not consummatedin a given quarter, our results of operations for that quarter may be below ourexpectations and the expectations of analysts and investors.

 

***Our operating results are highly dependent on license revenues from onesoftware suite, and our business could be materially harmed by factors thatadversely affect the pricing and demand for this software suite.***

 

Substantially all of ourlicense revenues have been, and are expected to continue to be, derived fromthe license of our Business Integration Suite. Accordingly, our futureoperating results will depend on the demand for our Business Integration Suite byfuture customers, including new and enhanced releases that are subsequentlyintroduced. Our latest version of the Business Integration Suite, called ourSeeBeyond Integrated Composite Application Network (ICAN) Suite version 5.0,was announced in March 2003 and we announced its general availability inOctober of 2003. If our competitors release new products that are superior toour Business Integration Suite in performance or price, or if we fail toenhance our Business Integration Suite and introduce new products in a timelymanner, demand for our products may decline, and we may have to reduce thepricing 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 haveexperienced delays in the commencement of commercial releases of our BusinessIntegration Suite.  In the future, we may fail to introduce or deliver newproducts on a timely basis. If new releases or products are delayed or do notachieve market acceptance, we could experience customer dissatisfaction or adelay 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, as we releaseenhanced versions of our products, we may not be successful in upgrading ourcustomers who purchased previous versions of our Business Integration Suite tothe current version. We also may not be successful in selling add-on modulesfor our products to existing customers. Any failure to continue to upgradeexisting customers’ products or sell new modules, if and when they are introduced,could negatively impact customer satisfaction and our revenues.

 

***Our revenues will likely decline if we do not develop and maintainsuccessful relationships with our systems integration partners and otherpartners, who also have relationships with our competitors.***

 

We have entered intoagreements with a number of systems integrators for them to install and deployour products and perform custom integration of systems and applications. Thesesystems integrators also engage in joint marketing and sales efforts with us.If these relationships fail, we will have to devote substantially moreresources to the sales and marketing and implementation and support of ourproducts than we would otherwise, and our efforts may not be as effective asthose of the systems integrators. In many cases, these parties have extensiverelationships with our existing and potential customers and influence thedecisions of these

customers. We rely uponthese firms to recommend our products during the evaluation stage of thepurchasing process, as well as for implementation and customer supportservices.

 

These systems integratorsare not contractually required to implement our products, and competition forthese resources may preclude us from obtaining sufficient resources to providethe necessary implementation services to support our needs. If the number ofinstallations of our products exceeds our access to the resources provided bythese systems integrators, we will be required to provide these servicesinternally, which would increase our expenses and significantly limit ourability 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 ofour competitors 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 to establish ormaintain systems integrator relationships would significantly harm our abilityto license and successfully implement our software products. In addition, werely on the industry expertise and customer contacts of these firms in order to

 

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market our products moreeffectively. Therefore, any failure of these relationships would also harm ourability to increase revenues in key commercial markets. We are currentlyinvesting, and plan to continue to invest, significant resources to developthese relationships. Our operating results could be adversely affected if theseefforts do not generate license and service revenues necessary to offset thisinvestment.

 

***Our markets are highly competitive and, if we do not competeeffectively, we may suffer price reductions, reduced gross margins and loss ofmarket share.***

 

The market for our productsis intensely competitive, evolving and subject to rapid technological change.We expect the intensity of competition to increase in the future. As a resultof increased competition, we may have to reduce the price of our products andservices, and we may experience reduced gross margins and loss of market share,any one of which could significantly reduce our future revenues and operatingresults. Our current competitors include vendors offering e-Businessapplication integration and traditional electronic data interchange, or EDI,software products, as well as “in house” information technology departments ofpotential customers that have developed or may develop systems that providesome or all of the functionality of our Business Integration Suite. We may alsoencounter competition from major enterprise software developers in the future.

 

Many of our existing andpotential competitors have more resources, broader customer relationships andbetter-established brands than we do. In addition, many of these competitorshave extensive knowledge of our industry. Some of our competitors haveestablished or may establish cooperative relationships among themselves or withthird parties to offer a single solution and increase the ability of theirproducts to address customer needs.

 

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

 

Revenues from the sale ofproducts and services outside the United States accounted for 40% of our totalrevenues for the first nine months of 2003 and 34% of our total revenues forthe same period in the prior year. Revenues from the sale of products andservices in the United Kingdom as a percent of our total revenues were 13% forthe nine months ending September 30, 2003 and 13% for the same period in theprior year. We believe revenues from sales outside the United States willcontinue to account for a material portion of our total revenues for theforeseeable future. We are exposed to several risks inherent in conductingbusiness internationally, such as:

 

•                              fluctuations in currency exchange rates,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 staffing andmanaging international operations;

 

•                              political and economic instability, whichcould result in increasing governmental ownership or regulation of businessesor other instrumentalities of commerce, wage and price controls, higherinterest rates and spiraling inflation; and

 

•                              reduced protection for intellectual propertyrights in some countries.

 

Any of these factors couldadversely affect our international operations and, consequently, our operatingresults.

 

***We could suffer losses and negative publicity if new versions orreleases of our products contain errors or defects.***

 

Our products and theirinteractions with customers’ software applications and IT systems are complexand, accordingly, there may be undetected errors or failures when our productsare introduced or as new versions are released. In the past we have discovered

software errors in our newreleases and new products after their introduction, which have resulted inadditional product development expenses. To date, these additional expenseshave not been material. These errors have resulted in product release delays,delayed revenues and customer dissatisfaction. In the future we may discovererrors, including performance limitations, in new releases or new productsafter the commencement of commercial shipments. Since many customers are usingour products for mission-critical business operations, any of these occurrencescould seriously harm our business and generate negative publicity, which couldhave a negative impact on future sales. Although we maintain product liabilityand errors and omissions insurance, we cannot assure you these policies will besufficient to compensate for losses caused by any of these occurrences.

 

***If our products do not operate with the many hardware and softwareplatforms used by our customers and keep pace with technological change, ourbusiness may fail.***

 

We currently serve acustomer base with a wide variety of constantly changing hardware, softwareapplications and networking 

 

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platforms. If our productsfail to gain broad market acceptance due to an inability to support a varietyof these platforms, our operating results may suffer. Our business depends on anumber of factors, including the following:

 

•                                    our ability to integrate our products withmultiple platforms and existing, or legacy, systems and to modify our productsas new versions of software applications are introduced;

 

•                                    the portability of our products, particularlythe number of operating systems and databases our products can source ortarget;

 

•                                    our ability to anticipate and support newstandards, especially Internet standards;

 

•                                    the integration of additional softwaremodules under development with our existing products; and

 

•                                    our management of software being developed bythird parties for our customers for use with our products.

 

Our industry ischaracterized 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.

 

***The market for business integration software may not grow as quickly aswe anticipate, which would cause our revenues to fall below expectations.***

 

The market for businessintegration software is rapidly evolving. We earn substantially all of ourlicense 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-party products,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.

 

***Pending or future litigation could have a material adverse impact onour results of operation and financial condition.***

 

From time to time, we havebeen subject to litigation. Several putative securities class action lawsuitsare currently pending against us, our directors and officers. The plaintiffs inthese suits allege we and the other defendants made false statements about ouroperating results and business, while concealing material information. Webelieve these lawsuits are without merit and we intend to defend against themvigorously. The complaint does not specify the amount of damages the plaintiffsseek, and as a result, we are unable to estimate the possible range of damagesthat might be incurred as a result of the lawsuit. The uncertainty associatedwith these unresolved lawsuits could harm our business, financial condition andreputation. Negative developments with respect to the lawsuits could cause ourstock price to decline. In addition to the related cost and use of cash,pending or future litigation could cause the diversion of management’sattention and resources. Although we have begun to accrue amounts relating tolegal costs and expenses, we have not accrued any amounts relating to potentialdamages associated with the putative class action lawsuits. However, because ofuncertainties relating to litigation, our decision as to whether to accrue andthe amount of our estimates could be wrong. In addition, although we are unableto determine the amount, if any, we may be required to pay in connection withthe resolution of the lawsuits by settlement or otherwise, such a payment couldseriously harm our results of operation, financial condition and liquidity.

 

***If we fail to adequately protect our proprietary rights, we may losethese rights and our business may be seriously harmed.***

 

We depend upon our abilityto develop and protect our proprietary technology and intellectual propertyrights to distinguish our

product from ourcompetitors’ products. The unauthorized use by others of our proprietary rightscould materially harm our business. We rely on a combination of copyright,trademark and trade secret laws, as well as confidentiality agreements andlicensing arrangements, to establish and protect our proprietary rights. Wecurrently have no issued patents. Despite our efforts to protect ourproprietary rights, existing laws afford only limited protection. Attempts maybe made to copy or reverse engineer aspects of our products or to obtain anduse information we regard as proprietary. Accordingly, we cannot be certain wewill be able to protect our proprietary rights against unauthorized third partycopying or use. Furthermore, policing the unauthorized use of our products isdifficult, and expensive litigation may be necessary in the future to enforceour intellectual property rights.

 

***Our products could infringe the intellectual property rights of others,causing costly litigation and the loss of significant rights.***

 

Third parties may claim wehave infringed their current or future intellectual property rights. We expectsoftware developers in our 

 

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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.

 

***Failure to raise additional capital or generate the significant capitalnecessary to expand our operations and invest in new products could reduce ourability to compete and result in lower revenues.***

 

We currently expect ourcurrent cash resources, together with the net proceeds from this offering, willbe sufficient to meet our working capital and capital expenditure needs for atleast the next 12 months. After that, we may need to raise additionalfunds, and we cannot be certain we will be able to obtain additional debt orequity financing on favorable terms, or at all. If we raise additional equityfinancing, our stockholders may experience significant dilution of theirownership interests and the per share value of our common stock could decline.If we engage in debt financing, we may be required to accept terms thatrestrict our ability to incur additional indebtedness and force us to maintainspecified liquidity or other ratios, any of which could harm our business. Ifwe need additional capital and cannot raise it on acceptable terms, we may notbe able to, among other things:

 

•                                    develop or enhance our products and services;

 

•                                    maintain or expand our sales and marketingorganizations;

 

•                                    acquire complementary technologies, productsor businesses;

 

•                                    expand operations, in the United States orinternationally;

 

•                                    hire, train and retain employees; or

 

•                                    respond to competitive pressures orunanticipated working capital requirements.

 

Our failure to do any ofthese things could result in lower revenues and could seriously harm ourbusiness.

 

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

 

We depend on the continuedservice of our key technical, sales and senior management personnel, includingour founder and Chief Executive Officer, James T. Demetriades. Most ofthese persons are not bound by an employment agreement, and we do not maintainkey person life insurance on any of these persons, other thanMr. Demetriades. The loss of any of our senior management or other keyproduct development or sales and marketing personnel could adversely affect ourfuture operating results. In addition, we must attract, retain and motivatehighly skilled employees, including sales personnel and software engineers. Weface significant competition for individuals with the skills required todevelop, market and support our products and services. We may not be able torecruit and retain sufficient numbers of these highly skilled employees. If wefail to do so, our ability to compete will be significantly harmed.  Furthermore, we have recently hired a numberof senior executives, including Carv Moore, President and Chief OperatingOfficer, Thor Culverhouse, Senior Vice President - North American Sales, MikeMansbach, Senior Vice President - Marketing, and Ross Altman, Chief TechnologyOfficer.  If we cannot effectivelyintegrate these key management employees into our existing operations, ourbusiness could suffer and our ability to compete could be harmed.

 

***Our growth continues to place a significant strain on our managementsystems and resources. If we fail to manage our growth, our ability to marketand sell our products and develop new products may be harmed.***

 

We must plan and manage ourgrowth effectively in order to offer our products and services and achieverevenue growth and profitability in a rapidly evolving market. Our growth hasand will continue to place a significant strain on our management systems andresources, and we may not be able to effectively manage our growth in thefuture.

 

Furthermore, if ourrelationships with systems integrators succeed and we are able to penetrateadditional commercial markets, we may need additional sales and marketing andprofessional services resources to support these customers. The growth of ourcustomer base will require us to invest significant resources in the trainingand development of our employees and our systems integration partners. If theseorganizations fail to keep pace with the number and demands of the customersthat license our products, our ability to market and sell our products andservices and our ability to develop new products and services will be harmed.To manage our business, we must continue to:

 

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•                              effectively manage our direct sales force;

 

•                              effectively manage our professional servicesorganization;

 

•                              hire and retain qualified software engineers;

 

•                              improve our operational, financial andmanagement controls;

 

•                              improve our reporting systems and procedures;

 

•                              enhance our management and informationcontrol systems; and

 

•                              effectively manage, train and motivate ourworkforce.

 

In addition, if we acquireor invest in other companies, we may experience further strain on our resourcesand face risks inherent in integrating two corporate cultures, product lines,operations and businesses.

 

***We have implemented anti-takeover provisions that could discourage orprevent a takeover, even if an acquisition would be beneficial to ourstockholders.***

 

Some provisions of Delawarelaw and our certificate of incorporation and bylaws could have the effect ofdelaying or preventing a third party from acquiring us, even if a change incontrol would be beneficial to our stockholders. For example, our certificateof incorporation provides for a classified board of directors whose membersserve staggered three-year terms and does not provide for cumulative voting inthe election of directors. Our board of directors has the authority, withoutfurther action by our stockholders, to fix the rights and preferences of andissue shares of preferred stock. In addition, our stockholders are unable toact by written consent. These and other provisions could make it more difficultfor a third party to acquire us, even if doing so would benefit ourstockholders.

 

***Concentration of ownership among our existing executive officers anddirectors may prevent new investors from influencing significant corporatedecisions.***

 

Our Chief Executive Officer,James T. Demetriades beneficially owns approximately 32% of our outstandingcommon stock. Our executive officers and directors beneficially own, in theaggregate, approximately 41% of our outstanding common stock. As a result,these stockholders will be able to exercise a significant level of control overall matters requiring stockholder approval, including the election of directorsand approval of significant corporate transactions. This could have the effectof delaying or preventing a change of control of SeeBeyond and will make sometransactions difficult or impossible without the support of these stockholders.

 

***External factors such as potential terrorist attacks could have a materialadverse affect on the U.S. and global economics.***

 

The possibility of potentialterrorist attacks could have an adverse effect upon an already weakened worldeconomy and could cause U.S. and foreign businesses to slow spending onproducts and services and delay sales cycles. The economic uncertaintyresulting from any such future attacks and other responses associated with suchattacks may continue to negatively impact short-term consumer and businessconfidence.

 

**Item 3 :****    Quantitativeand Qualitative Disclosure About Market Risk**

 

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 ofDecember 31, 2002, 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 

 

25

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Netherlands, New Zealand,Singapore, Spain, Sweden, Switzerland and the United Kingdom. Transaction gainsor losses have not been significant in the past and we do not participate inany hedging activity on foreign currencies. We would not experience a materialforeign exchange loss based on a hypothetical 10% adverse change in the priceof any of the local currencies of these countries. Consequently, we do notexpect that a reduction in the value of such accounts denominated in foreigncurrencies resulting from a sudden or significant fluctuation in foreignexchange rates would have a direct material impact 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 andprocedures are effective to ensure that information we are required to disclosein reports that we file or submit under the Exchange Act is recorded,processed, summarized and reported within the time periods specified inSecurities and Exchange Commission rules and forms. There was no change in ourinternal control over financial reporting (as defined in Rule 13a–15(f) underthe Exchange 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’sbusiness, financial condition or results of operation.

 

Information with respect tothis item is incorporated by reference to Note 7 (“—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.

 

**Item6.    Exhibits andreports 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                                                      |

 

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| 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)                                                                                                                    |
|        |   |                                                                                                                                                                                                                                              |
| 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)    |   | 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.   |

 

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| (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. |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                 |
| (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.       |

 

(b)                                        Reports on Form 8-K.

 

On July 7, 2003, SeeBeyondfiled a report on Form 8-K furnishing the press release that announced itspreliminary second fiscal quarter 2003 financial results.

 

On July 23, 2003, SeeBeyondfiled a report on Form 8-K furnishing the press release that announced itssecond fiscal quarter 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 November 14, 2003.

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

 

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