**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 June 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 Offices  and Registrant’s Telephone Number, including Area Code) |

 

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

 

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

 

The number of sharesoutstanding of the registrant’s Common Stock, $0.0001 par value, as of August13, 2003 was 82,924,258.

 

 

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**SeeBeyond Technology Corporation and Subsidiaries**

 

**INDEX**

 
|                                   |                                                                                                                                | **Page** |
|----------------------------------------|-------------------------------------------------------------------------------------------------------------------------------------|----------|
| **Part  I—Financial Information** | 3                                                                                                                                   |
| Item 1.                                | Financial Statements:                                                                                                               | 3        |
|                                   | Condensed Consolidated Balance Sheets as of  June 30, 2003 (unaudited) and December 31, 2002                              | 3        |
|                                   | Condensed Consolidated Statements of  Operations (unaudited) for the three months and six months ended  June 30, 2003 and 2002 | 4        |
|                                   | Condensed Consolidated Statements of Cash  Flows (unaudited) for the six months ended June 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                                                                          | 26       |
| Item 4.                                | Controls and Procedures                                                                                                             | 26       |
| **Part II—Other Information**     | 22                                                                                                                                  |
| 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**                         |                                                                                                                                | 30       |

 

2

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**PART I****—FINANCIAL INFORMATION**

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

**SeeBeyond Technology Corporation and Subsidiaries**

**CondensedConsolidated Balance Sheets**

 
|                                                                                                                                                                                                                                     |   | **June 30,  2003** |    | **December  31,  2002** |   |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------|---------|-------------------------|--------|
|                                                                                                                                                                                                                                     |   | **(Unaudited)**    |    |                    |   |
| Assets:                                                                                                                                                                                                                                  |   |               |    |                    |   |
| Current assets:                                                                                                                                                                                                                          |   |               |    |                    |   |
| Cash and cash equivalents                                                                                                                                                                                                                |   | $                  | 80,091  |                    | $      | 94,114 |   |
| Accounts receivable, net of allowances of $2,965  and $2,539 at June 30, 2003 and December 31, 2002, respectively                                                                                                                        |   | 20,350             |    | 33,550                  |   |
| Prepaid expenses and other current assets                                                                                                                                                                                                |   | 4,559              |    | 4,180                   |   |
| Total current assets                                                                                                                                                                                                                     |   | 105,000            |    | 131,844                 |   |
| Property and equipment, net                                                                                                                                                                                                              |   | 16,823             |    | 22,429                  |   |
| Goodwill                                                                                                                                                                                                                                 |   | 1,391              |    | 1,391                   |   |
| Other assets                                                                                                                                                                                                                             |   | 2,239              |    | 1,379                   |   |
| Total assets                                                                                                                                                                                                                             |   | $                  | 125,453 |                    | $      | 157,043 |   |
| Liabilities and stockholders’ equity:                                                                                                                                                                                               |   |               |    |                    |   |
| Current liabilities:                                                                                                                                                                                                                     |   |               |    |                    |   |
| Accounts payable                                                                                                                                                                                                                         |   | $                  | 6,305   |                    | $      | 11,343 |   |
| Accrued compensation and related expenses                                                                                                                                                                                                |   | 10,678             |    | 11,818                  |   |
| Accrued expenses                                                                                                                                                                                                                         |   | 8,734              |    | 8,891                   |   |
| Deferred revenues                                                                                                                                                                                                                        |   | 27,132             |    | 28,141                  |   |
| Equipment line and advance payable - current  portion                                                                                                                                                                                    |   | 3,151              |    | 2,988                   |   |
| Capital lease payable – current portion                                                                                                                                                                                             |   | 243                |    | 214                     |   |
| Total current liabilities                                                                                                                                                                                                                |   | 56,243             |    | 63,395                  |   |
| Equipment line and advance payable                                                                                                                                                                                                       |   | 1,522              |    | 3,260                   |   |
| Capital lease payable                                                                                                                                                                                                                    |   | 645                |    | 750                     |   |
| Total liabilities                                                                                                                                                                                                                        |   | 58,410             |    | 67,405                  |   |
| Commitments and contingencies                                                                                                                                                                                                            |   |               |    |                    |   |
| Stockholders’ equity:                                                                                                                                                                                                               |   |               |    |                    |   |
| Common stock, $.0001 par value - 200,000,000  shares authorized; 84,122,945 shares issued and 82,922,945 shares outstanding  as of June 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                                                                                                                                                                                                               |   | 219,962            |    | 219,246                 |   |
| Treasury stock                                                                                                                                                                                                                           |   | (2,760             | )       | (2,760                  | )      |
| Deferred stock compensation                                                                                                                                                                                                              |   | (128               | )       | (317                    | )      |
| Accumulated other comprehensive loss                                                                                                                                                                                                     |   | (191               | )       | (99                     | )      |
| Accumulated deficit                                                                                                                                                                                                                      |   | (149,848           | )       | (126,440                | )      |
| Total stockholders’ equity                                                                                                                                                                                                          |   | 67,043             |    | 89,638                  |   |
| Total liabilities and stockholders’ equity                                                                                                                                                                                          |   | $                  | 125,453 |                    | $      | 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  June 30,** |    | **Six Months  Ended  June 30,** |   |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------|---------|---------------------------------|--------|
| **In thousands, except per share data**                                                                                                                                             |   | **2003**                          |    | **2002**                        |   | **2003** |   | **2002** |   |
| Revenues:                                                                                                                                                                           |   |                              |    |                            |   |   |   |   |   |
| License                                                                                                                                                                             |   | $                                 | 7,137   |                            | $      | 14,269 |   | $ | 20,127 |   | $ | 35,338 |   |
| Services                                                                                                                                                                            |   | 9,823                             |    | 9,960                           |   | 21,055 |   | 20,705 |   |
| Maintenance                                                                                                                                                                         |   | 11,897                            |    | 9,441                           |   | 23,497 |   | 18,509 |   |
| Total revenues                                                                                                                                                                      |   | 28,857                            |    | 33,670                          |   | 64,679 |   | 74,552 |   |
| Cost of revenues:                                                                                                                                                                   |   |                              |    |                            |   |   |   |   |   |
| License                                                                                                                                                                             |   | 276                               |    | 130                             |   | 821 |   | 1,189 |   |
| Services and maintenance revenues (exclusive of  stock-based compensation of $11 and $34 and $27 and $76 for the three and six  months ended June 30, 2003 and 2002, respectively.) |   | 10,572                            |    | 10,729                          |   | 22,120 |   | 20,696 |   |
| Total cost of revenues                                                                                                                                                              |   | 10,848                            |    | 10,859                          |   | 22,941 |   | 21,885 |   |
| Gross profit                                                                                                                                                                        |   | 18,009                            |    | 22,811                          |   | 41,738 |   | 52,667 |   |
| Operating expenses:                                                                                                                                                                 |   |                              |    |                            |   |   |   |   |   |
| Research and development (exclusive of stock-based  compensation $17 and $39 and $35 and $86 for the three and six months ended  June 30, 2003 and 2002, respectively.)             |   | 10,449                            |    | 8,109                           |   | 21,076 |   | 15,764 |   |
| Sales and marketing (exclusive of stock-based  compensation of $36 and $125 and $95 and $281 for the three and six months  ended June 30, 2003 and 2002, respectively.)             |   | 13,959                            |    | 17,106                          |   | 28,440 |   | 31,606 |   |
| General and administrative (exclusive of  stock-based compensation $7 and $17 and $15 and $37 for the three and six  months ended June 30, 2003 and 2002, respectively.)            |   | 4,599                             |    | 4,831                           |   | 9,225 |   | 9,041 |   |
| Restructuring and impairment charges                                                                                                                                                |   | 6,386                             |    | —                          |   | 6,386 |   | — |   |
| Amortization of sales and marketing warrants                                                                                                                                        |   | 13                                |    | (41                             | )      | 124 |   | 400 |   |
| Amortization of stock-based compensation                                                                                                                                            |   | 71                                |    | 215                             |   | 172 |   | 480 |   |
| Total operating expenses                                                                                                                                                            |   | 35,477                            |    | 30,220                          |   | 65,423 |   | 57,291 |   |
| Loss from operations                                                                                                                                                                |   | (17,468                           | )       | (7,409                          | )      | (23,685 | ) | (4,624 | ) |
| Other income (expense):                                                                                                                                                             |   |                              |    |                            |   |   |   |   |   |
| Interest, net                                                                                                                                                                       |   | 193                               |    | 339                             |   | 363 |   | 532 |   |
| Loss before income tax provision                                                                                                                                                    |   | (17,275                           | )       | (7,070                          | )      | (23,322 | ) | (4,092 | ) |
| Provision for income taxes                                                                                                                                                          |   | 8                                 |    | (4                              | )      | 86 |   | 79 |   |
| Net loss                                                                                                                                                                            |   | $                                 | (17,283 | )                               | $      | (7,066 | ) | $ | (23,408 | ) | $ | (4,171 | ) |
|                                                                                                                                                                                |   |                              |    |                            |   |   |   |   |   |
| Basic and diluted net loss per share                                                                                                                                                |   | $                                 | (0.21   | )                               | $      | (0.08 | ) | $ | (0.28 | ) | $ | (0.05 | ) |
| Number of shares used in calculating basic and  diluted net loss per share                                                                                                          |   | 82,808                            |    | 83,360                          |   | 82,718 |   | 81,096 |   |

 

*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)**

 
|                                                                                       |   | **Six Months  Ended  June 30,** |    |
|--------------------------------------------------------------------------------------------|--------|---------------------------------|---------|
|                                                                                       |   | **2003**                        |    | **2002** |   |
| Cash flows from operating activities:                                                      |   |                            |    |   |   |
| Net loss                                                                                   |   | $                               | (23,408 | ) | $ | (4,171 | ) |
| Adjustments to reconcile net loss to net cash (used  in) provided by operating activities: |   |                            |    |   |   |
| Gain on disposal of fixed assets                                                           |   | (21                             | )       | — |   |
| Depreciation and amortization                                                              |   | 3,005                           |    | 2,888 |   |
| Provision for doubtful accounts receivable                                                 |   | 433                             |    | 50 |   |
| Amortization of sales and marketing warrants                                               |   | 124                             |    | 400 |   |
| Amortization of stock-based compensation                                                   |   | 172                             |    | 480 |   |
| Non-cash restructuring and impairment charges                                              |   | 4,274                           |    | — |   |
| Changes in assets and liabilities:                                                         |   |                            |    |   |   |
| Accounts receivable                                                                        |   | 12,767                          |    | 8,705 |   |
| Prepaid expenses and other current assets                                                  |   | (379                            | )       | (2,033 | ) |
| Accounts payable                                                                           |   | (2,763                          | )       | (1,791 | ) |
| Accrued compensation and related expenses                                                  |   | (1,297                          | )       | (1,766 | ) |
| Deferred revenues                                                                          |   | (1,009                          | )       | 1,009 |   |
|                                                                                       |   |                            |    |   |   |
| Net cash (used in) provided by operating activities                                        |   | (8,102                          | )       | 3,771 |   |
|                                                                                       |   |                            |    |   |   |
| Cash flows from investing activities:                                                      |   |                            |    |   |   |
| Purchases of property and equipment                                                        |   | (3,888                          | )       | (4,670 | ) |
| Related party receivable                                                                   |   | —                          |    | 366 |   |
| Other                                                                                      |   | (860                            | )       | (995 | ) |
|                                                                                       |   |                            |    |   |   |
| Net cash used in investing activities                                                      |   | (4,748                          | )       | (5,299 | ) |
|                                                                                       |   |                            |    |   |   |
| Cash flows from financing activities:                                                      |   |                            |    |   |   |
| Net repayments on bank lines of credit                                                     |   | (1,575                          | )       | (326 | ) |
| Proceeds from issuance of common stock pursuant to  secondary public offering, net         |   | —                          |    | 59,012 |   |
| Proceeds from issuance of common stock pursuant to  employee stock option plan             |   | 264                             |    | 3,464 |   |
| Proceeds from issuance of common stock pursuant to  employee stock purchase plan           |   | 345                             |    | 563 |   |
| Repayments of capital lease obligation                                                     |   | (115                            | )       | — |   |
|                                                                                       |   |                            |    |   |   |
| Net cash (used in) provided by financing activities                                        |   | (1,081                          | )       | 62,713 |   |
|                                                                                       |   |                            |    |   |   |
| Effect of exchange rate changes on cash and cash  equivalents                              |   | (92                             | )       | 1,068 |   |
|                                                                                       |   |                            |    |   |   |
| Net (decrease) increase in cash and cash  equivalents                                      |   | (14,023                         | )       | 62,253 |   |
| Cash and cash equivalents at beginning of the  period                                      |   | 94,114                          |    | 47,039 |   |
|                                                                                       |   |                            |    |   |   |
| Cash and cash equivalents at end of the period                                             |   | $                               | 80,091  |   | $ | 109,292 |   |

 

*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 six months ended June 30, 2003 are not necessarily indicativeof the results that may be expected for the year ending December 31, 2003or any other interim period, and the Company makes no representations relatedthereto.

 

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

 

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

 

**Note 2****.    *Revenue Recognition***

 

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

 

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

 

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

 

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

 

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

 

6

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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***

 

InMay 2003, the Financial Accounting Standards Board (FASB) issued Statement ofFinancial Accounting Standards (SFAS) No. 150, “Accounting for CertainFinancial Instruments with Characteristics of Both Liabilities andEquity.”  SFAS 150 requires thatcertain instruments with certain characteristics be classified as liabilitiesas opposed to equity. This statement is effective for financial instrumentsentered into or modified after May 30, 2003, and otherwise is effectiveJuly 1, 2003. We do not believe that the adoption of this standard willhave a material impact on our financial position, results of operations andcash flows.

 

In January 2003, the FASB issued FASB Interpretation No. 46,“Consolidation of Variable Interest Entities” (FIN 46).  FIN 46 provides guidance on theidentification of entities for which control is achieved through means otherthan through voting rights, variable interest entities, and how to determinewhen and which business enterprises should consolidate variable interestentities.  This interpretation appliedimmediately to variable interest entities created after January 31, 2003.  It applies in the first fiscal year orinterim period beginning after June 15, 2003, to variable interest entities inwhich an enterprise holds a variable interest that it acquired before February1, 2003.  The adoption of thisinterpretation is not expected to have an impact on the Company’s financialstatements.

 

In December 2002, theFASB issued SFAS No. 148, “Accounting for Stock BasedCompensation—Transition and Disclosure—an Amendment to FAS 123.”SFAS 148 provides two additional transition methods for entities thatadopt the fair value method of accounting for stock-based compensation. Thestatement requires disclosure of comparable information for all companiesregardless of whether, when, or how an entity adopts the preferable, fair valuebased method of accounting. These disclosures are now required for interimperiods in addition to annual disclosure.  The Company adopted theadditional disclosure provision of SFAS No. 148 in the fourth quarter of 2002. As permitted, the Company has not adopted the fair value method and continuesto account for options under APB No. 25.

 

In November 2002, the FASB issued Interpretation No. 45, “Guarantor’sAccounting and Disclosure Requirements for Guarantees, Including IndirectGuarantees of Indebtedness of Others”(FIN 45). FIN 45 elaborates on the disclosures to be made by a guarantor in itsinterim and annual financial statements about its obligations under certainguarantees it has issued.  It alsoclarifies that a guarantor is required to recognize, at the inception of aguarantee, a liability for the fair value of the obligation undertaken inissuing the guarantee.  The disclosurerequirements are effective for financial statements of interim or annualperiods ending after December 15, 2002. The recognition and measurement provisions of FIN 45 are applicable on aprospective basis to guarantees issued or modified after December 31,2002.  The application of FIN 45 is notexpected to materially impact the financial condition, results of operations,and cash flows of the Company.

 

In July 2002, the FASBissued SFAS No. 146, “Accounting for Costs Associated with Exit orDisposal Activities.” SFAS No. 146 requires a liability for costsassociated with an exit or disposal activity be recognized and measuredinitially at fair value only when the liability is incurred rather than thedate of commitment to an exit or disposal plan. SFAS No. 146 is effectivefor exit or disposal activities that are initiated after December 31,2002.  Restructuring and impairmentcharges recorded by the Company in the three months ended June 30, 2003, wererecorded under SFAS No. 146 and restructuring and impairment charges recordedin the three months ended December 31, 2002, were recorded under EmergingIssues Task Force No. 94-3.

 

**Note 4****.     *Operations by Reportable Segments and Geographic Area***

 

SeeBeyond has developed acomprehensive solution for business integration, enabling the seamless flow ofinformation across systems applications and enterprises in real-time, on aglobal basis. The Company operates in one industry segment, which is thedevelopment and marketing of a comprehensive solution for business integrationwhere all key integration technologies, including application-to-application,business-to-business and business process management, are seamlesslyintegrated.

 

7

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Revenues and long-livedassets by geographic area were as follows (in thousands):

 
|           |   | **Three  Months Ended  June 30,** |   | **Six Months  Ended  June 30,** |   |
|----------------|--------|-----------------------------------|--------|---------------------------------|--------|
|           |   | **2003**                          |   | **2002**                        |   | **2003** |   | **2002** |   |
| Revenues:      |   |                              |   |                            |   |   |   |   |   |
| North America  |   | $                                 | 17,194 |                            | $      | 21,828 |   | $ | 39,877 |   | $ | 50,032 |   |
| Europe         |   | 8,572                             |   | 9,286                           |   | 18,225 |   | 18,497 |   |
| Pacific Rim    |   | 3,091                             |   | 2,556                           |   | 6,577 |   | 6,023 |   |
| Total revenues |   | $                                 | 28,857 |                            | $      | 33,670 |   | $ | 64,679 |   | $ | 74,552 |   |

 
|                    |   | **June 30,  2003** |   | **December  31,  2002** |   |
|-------------------------|--------|--------------------|--------|-------------------------|--------|
| Long-lived assets:      |   |               |   |                    |   |
| North America           |   | $                  | 17,251 |                    | $      | 22,143 |   |
| Europe                  |   | 1,831              |   | 2,047                   |   |
| Pacific Rim             |   | 1,371              |   | 1,009                   |   |
| Total long-lived assets |   | $                  | 20,453 |                    | $      | 25,199 |   |

 

No single customer accountedfor more than 10% of the Company’s net revenues during the three months or sixmonths ended June 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 share is computed on the basis of theweighted average number of common shares outstanding plus the effect ofoutstanding stock warrants and outstanding employee stock options using the“treasury stock” method.

 

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

 
|                                                                                          |   | **Three  Months Ended  June 30,** |    | **Six Months  Ended  June 30,** |   |
|-----------------------------------------------------------------------------------------------|--------|-----------------------------------|---------|---------------------------------|--------|
|                                                                                          |   |                              |    |                            |   |   |   |   |   |
|                                                                                          |   | **2003**                          |    | **2002**                        |   | **2003** |   | **2002** |   |
| Net loss                                                                                      |   | $                                 | (17,283 | )                               | $      | (7,066 | ) | $ | (23,408 | ) | $ | (4,171 | ) |
| Weighted average outstanding shares of common  stock used to compute basic net loss per share |   | 82,808                            |    | 83,360                          |   | 82,718 |   | 81,096 |   |
| Dilutive effect of:                                                                           |   |                              |    |                            |   |   |   |   |   |
| Stock warrants                                                                                |   | —                            |    | —                          |   | — |   | — |   |
| Employee stock options                                                                        |   | —                            |    | —                          |   | — |   | — |   |
| Common stock and common stock equivalents                                                     |   | 82,808                            |    | 83,360                          |   | 82,718 |   | 81,096 |   |
|                                                                                          |   |                              |    |                            |   |   |   |   |   |
| Net basic and diluted loss per share                                                          |   | $                                 | (0.21   | )                               | $      | (0.08 | ) | $ | (0.28 | ) | $ | (0.05 | ) |

 

Options to purchaseapproximately 11,903,000 shares of common stock for the three months and sixmonths ended June 30, 2003 and options to purchase 12,720,000 shares of commonstock for the three months and six months ended June 30, 2002 were not includedin the calculations of diluted net loss per share because their effect would beantidilutive. Common stock warrants to purchase 650,000 shares for the threemonths and six months ended June 30, 2003 and common stock warrants to purchase1,850,000 shares for the three months and six months ended June 30, 2002 werenot included in the calculations of diluted net loss per share because theireffect would be antidilutive.

 

**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,

 

8

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the Company accounts for itsstock-based compensation using the intrinsic value method, which requiresrecognition of expense when the option exercise price is less than the fairvalue of the stock at the date of grant. The Company provides the required proforma net income (loss) and pro forma earnings (loss) per share disclosures foremployee stock option grants made in 1995 and future years as if the fair valuebased method defined in SFAS No. 123 had been applied. Under the fairvalue method stock options are valued and expensed based on the fair value ofthe options determined under an option-pricing model.

 

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

 
|                                                                                 |   | **Three  Months Ended  June 30,** |    | **Six Months  Ended  June 30,** |   |
|--------------------------------------------------------------------------------------|--------|-----------------------------------|---------|---------------------------------|--------|
|                                                                                 |   | **2003**                          |    | **2002**                        |   | **2003** |   | **2002** |   |
| Net loss, as reported                                                                |   | $                                 | (17,283 | )                               | $      | (7,066 | ) | $ | (23,408 | ) | $ | (4,171 | ) |
| Stock-based employee compensation costs, included  in net loss, as reported          |   | 71                                |    | 215                             |   | 172 |   | 480 |   |
| Stock-based employee compensation costs if fair  value based method had been applied |   | (3,322                            | )       | (4,043                          | )      | (6,677 | ) | (7,481 | ) |
| Pro forma net loss                                                                   |   | $                                 | (20,534 | )                               | $      | (10,894 | ) | $ | (29,913 | ) | $ | (11,172 | ) |
| Earning per share:                                                                   |   |                              |    |                            |   |   |   |   |   |
| Basic and diluted - as reported                                                      |   | $                                 | (0.21   | )                               | $      | (0.08 | ) | $ | (0.28 | ) | $ | (0.05 | ) |
| Basic and diluted - pro forma                                                        |   | $                                 | (0.25   | )                               | $      | (0.13 | ) | $ | (0.36 | ) | $ | (0.14 | ) |

 

**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 interest at an annual rate of eitherprime plus 0.5% or the London InterBank Offered Rate (“LIBOR”) rate plus 2.50%(payable monthly) and was to expire May 31, 2003.  In May 2003, the Company amended the Line to extend the expirationdate through May 31, 2004.  As of June 30, 2003, $7.0 millionwas available under the Line and there were no borrowings outstanding. TheCompany may use up to $5.0 million of the Line to issue letters of credit.As of June 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 June 30, 2003 was 4.75%. The Company could draw against theEquipment Line through November 30, 2001. Interest is payable monthly andprincipal is payable in 36 monthly installments commencing inDecember 2001. As of June 30, 2003, the balance outstanding underthis Equipment Line was approximately $923,000. The Equipment Line is securedby certain 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 June 30, 2003 was 4.75%. As ofJune 30, 2003 the balance outstanding under this Equipment Advance wasapproximately $3.8 million.

 

Future principal payments onthe Equipment Line and the Equipment Advance will aggregate approximately$1.6 million for the remainder of 2003 and $3.1 million in 2004,based on the total outstanding balance of approximately $4.7 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 materialinformation. The plaintiffs seek unspecified monetary damages. The Companybelieves the suit to be without merit and intends to defend against itvigorously.

 

9

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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 ofuncertainties relating to litigation, our decision as to whether to accrue andthe amount of our estimates could be wrong. In addition, although we are unable to determine the amount, if any, wemay be required to pay in connection with the resolution of the lawsuits bysettlement or otherwise, such a payment could seriously harm our results ofoperation, financial condition and liquidity.

 

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.

 

Total comprehensive loss wasas follows (in thousands):

 
|                           |   | **Three  Months Ended  June 30,** |    | **Six Months  Ended  June 30,** |   |
|--------------------------------|--------|-----------------------------------|---------|---------------------------------|--------|
|                           |   | **2003**                          |    | **2002**                        |   | **2003** |   | **2002** |   |
| Net loss                       |   | $                                 | (17,283 | )                               | $      | (7,066 | ) | $ | (23,408 | ) | $ | (4,171 | ) |
| Other comprehensive loss:      |   |                              |    |                            |   |   |   |   |   |
| Foreign translation adjustment |   | 72                                |    | 1,154                           |   | (92 | ) | 1,068 |   |
| Comprehensive loss             |   | $                                 | (17,211 | )                               | $      | (5,912 | ) | $ | (23,500 | ) | $ | (3,103 | ) |

 

**Note 9****.     *Stockholders’ Equity***

 

**SecondaryPublic Offering**

 

In February 2002, theCompany completed a public offering of 6,572,623 shares of common stock at$9.57 per share and realized proceeds, net of underwriting discounts,commissions and issuance 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 fully vestedshares were forfeited.

 

**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 made up of approximately 56% sales and marketing staff, 15%professional services staff, 19% general and administrative staff and 10%research and development staff.  Therestructuring and impairment charges recorded in the three months endedDecember 31, 2002 were recorded under EITF No. 94-3. Under EITF No. 94-3 theaccrual for future rent obligations recorded in the three months ended December31, 2002 was made when a commitment to abandon the facilities was reached inDecember 2002.

 

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

 

10

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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 made up of approximately 34% sales and marketing staff, 52%professional services staff and 14% general and administrative staff.  The restructuring and impairment chargesrecorded in the three months ended June 30, 2003 were recorded under SFAS No.146.  Under SFAS No. 146 the accrual forfuture rent obligations recorded in the three months ended June 30, 2003 wasrecorded when the facilities were abandoned.

 

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

 

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

 
|                                                                                       |   | **Future  rent  obligations** |   | **Asset  Impairment** |   | **Involuntary  termination  benefits** |   | **Total** |   |
|--------------------------------------------------------------------------------------------|--------|-------------------------------|--------|-----------------------|--------|----------------------------------------|--------|-----------|--------|
| Balance at December 31, 2002                                                               |   | $                             | 3,100  |                  | $      | —                                 |   | $         | 870    |   | $ | 3,970 |   |
| Activity during three months ended March 31, 2003:                                         |   |                          |   |                  |   |                                   |   |      |   |
| Cash payments                                                                              |   | (543                          | )      | —                |   | (578                                   | )      | (1,121    | )      |
|                                                                                       |   |                          |   |                  |   |                                   |   |      |   |
| Balance at March 31, 2003                                                                  |   | 2,557                         |   | —                |   | 292                                    |   | 2,849     |   |
| Activity during three months ended June 30, 2003:                                          |   |                          |   |                  |   |                                   |   |      |   |
| 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 |   |

 

Accrued future rentobligations represent the estimated future rent expense on abandoned excessfacilities, net of sublease income, expected to be paid over the nextthirty-one months.  Accrued involuntarytermination benefits are expected to be paid during 2003.

 

11

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

 

You should read thefollowing discussion in conjunction with the consolidated financial statementsand related notes of SeeBeyond Technology Corporation appearing elsewhere inthis Form 10-Q. The following discussion contains forward-lookingstatements that involve risks and uncertainties, including statements regardinganticipated costs and expenses, mix of revenues and plans for introducing newproducts and services. Our actual results could differ materially from the resultscontemplated by these forward-looking statements as a result of a number offactors, including those discussed below, under “Risk Factors” and elsewhere inthis 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 target customersin other vertical markets, such as financial services/insurance, manufacturing,retail/e-Commerce/services, telecommunications, energy services and government.In November 1999 we launched the fourth generation of our product e*Gate4.0, which introduced a fully distributed, fault tolerant architecture. We arecurrently shipping an enhanced version of our eBusiness Integration Suite,version 4.5.3 to our customers and in March 2003 we announced our newsuite of products, the SeeBeyond Integrated Composite Application Network(“ICAN”) version 5.0, which we expect to begin shipping in the third quarter2003, however, the determination of when and if version 5.0 will be madeavailable remains at the sole discretion of the Company. We incurred significantlosses in fiscal years 2001, 2002 and in the first and second quarters offiscal 2003.  As of June 30, 2003, we had an accumulated deficit ofapproximately $149.9 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 38% of total revenues for the six months ended June30, 2003 compared to 33% of total revenues for the six months endedJune 30, 2002. We believe that international revenues will continue to besignificant in future periods. To date, we have not experienced significantseasonality of revenues. However, we expect that our future results willfluctuate 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 revenuesincludes cost of license revenues and cost of services and maintenancerevenues. Each category, except cost of license revenues, includes relatedexpenses for salaries, employee benefits, incentive compensation, bonuses,travel, telephone, communications, rent and allocated facilities andprofessional 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 six months ended June 30, 2003, our grossmargin was 96.1% and 95.9%, respectively on our license revenues and 51.3% and50.4%, respectively on our services and maintenance revenues. We expect in thefuture to continue to earn substantially higher gross margins on our licenserevenues as compared to our services and maintenance revenues. As a result, ouroverall 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 restructuring and impairment charges, sales andmarketing warrants and stock compensation.

 

12

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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 inMarch 2006 and 175,000 shares under the warrant were exercisableimmediately. The remaining 450,000 shares subject to the warrant areperformance based and vest and become exercisable over the thirty-six month periodfollowing the issuance of the warrant provided the warrant holder has achievedvarious milestones related to providing certain sales and marketing support.The unvested portion of the warrant was valued as of the date of issuance andis being amortized as a charge to marketing expense over the term of theco-marketing agreement. As of June 30, 2003, a total of 550,000 shares subjectto the warrant were vested. We recognized amortization of approximately $13,000and $(41,000) for the three months ended June 30, 2003 and 2002, respectivelyand $124,000 and $400,000 for the six months ended 2003 and 2002, respectively.The value of the unvested portion of the warrant will be adjusted in eachreporting period based on changes in the fair value of the warrants until suchdate as the warrants are fully vested. There is no obligation for GMC to makefuture product 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 $109,000 remains to be amortized as of June 30, 2003. This amountrepresents the difference between the exercise price and the deemed fair valueof our common stock on the date the options were granted multiplied by thenumber 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 $71,000 and$215,000 for the three months ended June 30, 2003 and 2002, respectivelyand  $172,000 and $480,000 for the sixmonths ended June 30, 2003 and 2002, respectively. The amortization of stockcompensation is classified as a separate component of operating expenses in ourconsolidated statement of operations.

 

**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 of Position98-9. Vendor-specific objective evidence of fair value is based on the price acustomer 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 the transaction.In assessing whether the fee is fixed and determinable we analyze the paymentterms of the transaction and other factors, including the nature and class of customer,our historical experience of collecting under our payment terms withoutgranting a concession, the possibility of the product becoming technologicallyobsolete before the payments become due and the likelihood of the customerasking for a refund. If we determine the fee is not fixed or determinable wedefer the revenue until the payments under the arrangement become due. Weassess whether collection is probable based on a number of factors, includingthe customer’s past transaction history and credit worthiness. If we determinethat collection of a fee is not probable, we defer the fee and recognizerevenue at the time collection become probable, which is generally upon thereceipt 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.

 

13

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Revenues on sales made by alliancepartners are generally recognized upon shipment of the software to the enduser, 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, whichincludes 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 of June 30,2003, a valuation allowance equal to the value of the deferred tax assets wasmaintained.  In the event we were todetermine that we would be able to realize our deferred tax assets in thefuture in excess of its net recorded amount, an adjustment to the deferred taxasset would 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 six months ended June 30,2003 and 2002, respectively, expressed as a percentage of total revenues:

 
|                                         |   | **Three  Months Ended  June 30,** |   | **Six Months  Ended  June 30,** |   |
|----------------------------------------------|--------|-----------------------------------|--------|---------------------------------|--------|
|                                         |   | **2003**                          |   | **2002**                        |   | **2003** |   | **2002** |   |
| Revenues:                                    |   |                              |   |                            |   |   |   |   |   |
| License                                      |   | 25                                | %      | 42                              | %      | 31 | % | 47 | % |
| Services                                     |   | 34                                |   | 30                              |   | 33 |   | 28 |   |
| Maintenance                                  |   | 41                                |   | 28                              |   | 36 |   | 25 |   |
| Total revenues                               |   | 100                               |   | 100                             |   | 100 |   | 100 |   |
| Cost of revenues:                            |   |                              |   |                            |   |   |   |   |   |
| License                                      |   | 1                                 |   | —                          |   | 1 |   | 2 |   |
| Services and maintenance                     |   | 37                                |   | 32                              |   | 34 |   | 28 |   |
| Total cost of revenues                       |   | 38                                |   | 32                              |   | 35 |   | 30 |   |
| Gross profit                                 |   | 62                                |   | 68                              |   | 65 |   | 70 |   |
| Operating expenses:                          |   |                              |   |                            |   |   |   |   |   |
| Research and development                     |   | 36                                |   | 24                              |   | 33 |   | 21 |   |
| Sales and marketing                          |   | 48                                |   | 51                              |   | 44 |   | 42 |   |
| General and administrative                   |   | 16                                |   | 14                              |   | 14 |   | 12 |   |
| Restructuring and impairment charges         |   | 22                                |   | —                          |   | 10 |   | — |   |
| Amortization of sales and marketing warrants |   | —                            |   | —                          |   | — |   | — |   |
| Amortization of stock-based compensation     |   | —                            |   | 1                               |   | — |   | 1 |   |
| Total operating expenses                     |   | 122                               |   | 90                              |   | 101 |   | 76 |   |
| Loss from operations                         |   | (60                               | )      | (22                             | )      | (36 | ) | (6 | ) |
| Other income (expense), net                  |   | —                            |   | 1                               |   | — |   | 1 |   |
| Loss before income tax provision             |   | (60                               | )      | (21                             | )      | (36 | ) | (5 | ) |
| Provision for income taxes                   |   | —                            |   | —                          |   | — |   | (1 | ) |
| Net loss                                     |   | (60                               | )%     | (21                             | )%     | (36 | )% | (6 | )% |

 

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

 

**Revenues**

 

*Totalrevenues.*  Totalrevenues for the three months ended June 30, 2003 decreased 14% from the sameperiod last year, from $33.7 million to $28.9 million. Total revenuesfor the three months ended June 30, 2003 decreased primarily due to thedecrease 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.

 

*Licenserevenues.*  Licenserevenues for the three months ended June 30, 2003, decreased 50% from the sameperiod last year, from $14.3 million to $7.1 million. Licenserevenues for the three months ended June 30, 2003 as a percentage of totalrevenues were 25%, as compared to 42% 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.

 

*Servicesrevenues.*  Servicesrevenues for the three months ended June 30, 2003, decreased 2% from the sameperiod last year, from $10.0 million to $9.8 million. Servicesrevenues for the three months ended June 30, 2003 as a percentage of totalrevenues were 34% as compared to 30% for the same period in the previous year. Thedecrease in the absolute dollar amount of services revenues was small due toconsistent demand for our consulting services from our customers in certainindustry verticals, including healthcare.

 

*Maintenancerevenues.*  Maintenancerevenues for the three months ended June 30, 2003 increased 27% from the sameperiod last year, from $9.4 million to $11.9 million. Maintenance revenuesfor the three months ended June 30, 2003, as a percentage of total 

 

15

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revenues were 41%, ascompared to 28% for the same period in the previous year. The increase in theabsolute dollar amount of maintenance revenues was due primarily to therenewals of prior period maintenance contacts associated with the increase inour cumulative license revenues.

 

**Cost ofrevenues**

 

*Cost oflicense revenues.*  Costof license revenues for the three months ended June 30, 2003 was approximately$276,000, compared to $130,000 in the same period in the previous year. Cost oflicense revenues consists primarily of the cost of third-party licensedsoftware embedded or bundled with our products. The increase was due to anincrease in revenues during the three months ended June 30, 2003 from the saleof our products with third-party embedded or bundled software, as compared tothe three months ended June 30, 2002.

 

*Cost ofservices and maintenance revenues.*  Cost of services and maintenance revenues for the threemonths ended June 30, 2003 decreased 1% from the same period in the previousyear, from $10.7 million to $10.6 million. Cost of services andmaintenance revenues for the three months ended June 30, 2003 as a percentageof total revenues were 37%, as compared to 32% for the same period in theprevious year. The decrease in the absolute dollar amount was due primarily toa decrease in the use of third-party contractors during the three months endedJune 30, 2003, as compared to the same period in the previous year. We expectthat cost of services and maintenance revenues will decrease slightly inabsolute dollars for the remainder of 2003.

 

**Operatingexpenses**

 

*Researchand development expenses.*  Research and development expenses for the three monthsended June 30, 2003 increased 30% from the same period in the previous year,from $8.1 million to $10.5 million. Research and development expensesas a percentage of total revenues were 36% for the quarter ended June 30, 2003as compared to 24% 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 continue to increase in absolute dollarsfor the remainder of 2003 as we continue to invest in the development of newproducts.

 

*Sales andmarketing expenses.*  Salesand marketing expenses for the three months ended June 30, 2003 decreased 18%from the same period in the previous year, from $17.1 million to$14.0 million.  Sales and marketing expenses as a percentage of totalrevenues were 48% for the quarter ended June 30, 2003 as compared to 51% forthe same period in the prior year. The decrease in the absolute dollar amountof sales and marketing expenses was due primarily to lower headcount and adecrease in promotional and public relations activities, as well as a decreasein sales commissions that resulted from lower license revenues during the threemonths ended June 30, 2003.  We anticipate our sales and marketingexpenses will decrease slightly in absolute dollars for the remainder of 2003.

 

*Generaland administrative expenses.*  General and administrative expenses for the three monthsended June 30, 2003 decreased 4% from the same period in the previous year,from $4.8 million to $4.6 million. General and administrativeexpenses as a percentage of total revenues were 16% for the quarter ended June30, 2003 as compared to 14% for the same period in the prior year. The decreasein the absolute dollar amount of general and administrative expenses was dueprimarily to lower headcount during the quarter ended June 30, 2003. Weanticipate general and administrative expenses to remain flat or decreaseslightly in absolute dollars for the remainder of 2003.

 

*Restructuringand impairment charges. *During the three months ended December 31, 2002, the Company recordedrestructuring and impairment charges totaling $6.6 million, consisting of$2.1 million for employee termination benefits and related costsassociated with headcount reductions, $2.7 million related to future rentobligations for properties abandoned in connection with facilitiesconsolidation and $1.8 million related to the write-down of leaseholdimprovements, furniture, computer equipment and software in connection withfacilities consolidation and headcount 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.  Therestructuring and impairment charges recorded in the three months endedDecember 31, 2002 were recorded under EITF No. 94-3. Under EITF No. 94-3 theaccrual for future rent obligations recorded in the three months ended December31, 2002 was made when a commitment to abandon the facilities was reached inDecember 2002.

 

During the three monthsended June 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.  The restructuring and impairment chargesrecorded in the three months ended June 30, 

 

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2003 were recorded underSFAS No. 146.  Under SFAS No. 146 theaccrual for future rent obligations recorded in the three months ended June 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.

 

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

 
|                                                                                       |   | **Future  rent  obligations** |   | **Asset  Impairment** |   | **Involuntary  termination  benefits** |   | **Total** |   |
|--------------------------------------------------------------------------------------------|--------|-------------------------------|--------|-----------------------|--------|----------------------------------------|--------|-----------|--------|
| Balance at December 31, 2002                                                               |   | $                             | 3,100  |                  | $      | —                                 |   | $         | 870    |   | $ | 3,970 |   |
| Activity during three months ended March 31, 2003:                                         |   |                          |   |                  |   |                                   |   |      |   |
| Cash payments                                                                              |   | (543                          | )      | —                |   | (578                                   | )      | (1,121    | )      |
|                                                                                       |   |                          |   |                  |   |                                   |   |      |   |
| Balance at March 31, 2003                                                                  |   | 2,557                         |   | —                |   | 292                                    |   | 2,849     |   |
| Activity during three months ended June 30, 2003:                                          |   |                          |   |                  |   |                                   |   |      |   |
| 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 |   |

 

Accrued future rentobligations represents the estimated future rent expense on abandoned excess facilities,net of sublease income, expected to be paid over the next thirty-onemonths.  Accrued involuntary terminationbenefits are expected to be paid during 2003.

 

*Amortizationof sales and marketing warrants.*  Amortization of warrants for the three months ended June30, 2003, was $13,000, compared to $(41,000) for the same period in the prioryear. The increase in amortization of warrants was a result of a decreaseduring the prior year period in the value of the unvested portion of a warrantissued to a strategic marketing partner. The amortization of warrant expensefor the three months ended June 30, 2003, and the remaining warrant expense tobe 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 threemonths ended June 30, 2003, was approximately $71,000, compared to $215,000 forthe same period in the previous year.

 

**Otherincome**

 

Other income consistsprimarily of interest income (expense). Other income for the three months endedJune 30, 2003 was approximately $193,000 compared to $339,000 for the sameperiod last year. The decrease was primarily due to a decrease in interestincome as a result of lower interest rates and lower average cash balancesduring the three months ended June 30, 2003 as compared to the three monthsended June 30, 2002.

 

**Results ofoperations for the six months ended June 30, 2003 and 2002:**

 

**Revenues**

 

*Totalrevenues.*  Totalrevenues for the six months ended June 30, 2003 decreased 13% from the sameperiod last year, from $74.6 million to $64.7 million. Total revenuesfor the six months ended June 30, 2003 decreased primarily due to the decreasein license revenues as a result of delayed purchasing decision making by ourcustomers due to cost-cutting pressures, reduced capital spending budgets andgeneral economic weakness.

 

*Licenserevenues.*  Licenserevenues for the six months ended June 30, 2003 decreased 43% from the sameperiod last year, from $35.3 million to $20.1 million. Licenserevenues for the six months ended June 30, 2003, as a percentage of totalrevenues were 31%, as compared to 47% 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 and general economic

 

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weakness.

 

*Servicesrevenues.*  Servicesrevenues for the six months ended June 30, 2003 increased 2% from the sameperiod in the previous year, from $20.7 million to $21.1 million.Services revenues for the six months ended June 30, 2003 as a percentage oftotal revenues were 33% as compared to 28% for the same period in the previousyear. The small increase in the absolute dollar amount of services revenues wasdue to consistent demand for our consulting services from our customers in certainindustry verticals, including healthcare.

 

*Maintenancerevenues.*  Maintenancerevenues for the six months ended June 30, 2003 increased 27% from the sameperiod in the previous year, from $18.5 million to $23.5 million.Maintenance revenues for the six months ended June 30, 2003 as a percentage oftotal revenues were 36%, as compared to 25% 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 six months ended June 30, 2003 was approximately$821,000, compared to $1,189,000 in the same period in the previous year. Costof license revenues consists primarily of the cost of third-party licensedsoftware embedded or bundled with our products. The decrease was due to adecrease in revenues during the six months ended June 30, 2003 from the sale ofour products with third-party embedded or bundled software, as compared to thesix months ended June 30, 2002.

 

*Cost ofservices and maintenance revenues.*  Cost of services and maintenance revenues for the sixmonths ended June 30, 2003 increased 7% from the same period in the previousyear, from $20.7 million to $22.1 million. Cost of services andmaintenance revenues for the six months ended June 30, 2003, as a percentage oftotal revenues were 34%, as compared to 28% for the same period in the previousyear. The increase in the absolute dollar amount was due primarily to anincrease in the use of third-party contractors during the first three months ofthe six months ended June 30, 2003, as compared to the same period in theprevious year.

 

**Operatingexpenses**

 

*Researchand development expenses.*  Research and development expenses for the six months endedJune 30, 2003 increased 34% from the same period in the previous year, from$15.8 million to $21.1 million. Research and development expenses asa percentage of total revenues were 33% for the six months ended June 30, 2003as compared to 21% 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 5.0 version products.

 

*Sales andmarketing expenses.*  Salesand marketing expenses for the six months ended June 30, 2003 decreased 10%from the same period in the previous year, from $31.6 million to$28.4 million.  Sales and marketing expenses as a percentage of totalrevenues were 44% for the six months ended June 30, 2003 as compared to 42% forthe same period in the prior year. The decrease in the absolute dollar amountof sales and marketing expenses was due primarily to lower headcount and adecrease in promotional and public relations activities, as well as a decreasein sales commissions that resulted from lower license revenues during the sixmonths ended June 30, 2003.

 

*Generaland administrative expenses.*  General and administrative expenses for the six monthsended June 30, 2003 increased 2% from the same period in the previous year,from $9.0 million to $9.2 million. General and administrativeexpenses as a percentage of total revenues were 14% for the six months endedJune 30, 2003 as compared to 12% for the same period in the prior year.However, general and administrative expenses for the six months ended June 30,2003, decreased 4% from the six months ended December 31, 2002, from $9.6million to $9.2 million. This decease was primarily due to lower headcountduring the six months ended June 30, 2003, as compared to the six months endedDecember 31, 2002.

 

*Restructuringand impairment charges. *During the six months ended December 31, 2002, the Company recordedrestructuring and impairment charges totaling $6.6 million, consisting of$2.1 million for employee termination benefits and related costsassociated with headcount reductions, $2.7 million related to future rentobligations for properties abandoned in connection with facilitiesconsolidation and $1.8 million related to the write-down of leaseholdimprovements, furniture, computer equipment and software in connection withfacilities consolidation and headcount 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.  Therestructuring and impairment charges recorded in the six months ended December31, 2002 were recorded under EITF No. 94-3. Under EITF No. 94-3 the accrual forfuture rent obligations recorded in the six months ended December 31, 2002 wasmade when a commitment to abandon the facilities was reached in December 2002.

 

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During the six months endedJune 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.  The restructuring and impairment chargesrecorded in the six months ended June 30, 2003 were recorded under SFAS No.146.  Under SFAS No. 146 the accrual forfuture rent obligations recorded in the three months ended June 30, 2003 wasrecorded when the facilities were abandoned.

 

These restructuring andimpairment charges were recorded to better align the company’s cost structurewith changing market conditions. Accrued future rent obligations were $3.1 million of June 30, 2003 andrepresent the estimated future rent expense on abandoned excess facilities, netof sublease income, expected to be paid over the next thirty-one months.  Accrued involuntary termination benefitswere $446,000 as of June 30, 2003 and are expected to be paid during 2003.

 

*Amortizationof sales and marketing warrants.*  Amortization of sales and marketing warrants for the sixmonths ended June 30, 2003, was $124,000, compared to $400,000 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 and marketing warrant expense forthe six months ended June 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 six monthsended June 30, 2003 was approximately $172,000, compared to $480,000 for thesame period in the previous year.

 

**Otherincome**

 

Other income for the sixmonths ended June 30, 2003 was approximately $363,000 compared to $532,000 forthe same period last year. The decrease was primarily due to a decrease ininterest income as a result of lower interest rates and lower average cashbalances during the six months ended June 30, 2003 as compared to the sixmonths ended June 30, 2002.

 

**Liquidityand capital resources**

 

As of June 30, 2003, we hadcash and cash equivalents of $80.1 million, a decrease of$14.0 million from $94.1 million held as of December 31, 2002.

 

Netcash used in operating activities was $8.1 million during the six monthsended June 30, 2003, as compared with $3.8 million net cash provided byoperating activities in the same period last year. This period overperiod increase in cash used in operating activities reflects an increase innet loss and decreases in accounts payable, accrued compensation and relatedexpenses and deferred revenue, partially offset by non-cash restructuring andimpairment charges and a decrease in accounts receivable.

 

During the six months ended June 30, 2003, accounts receivabledecreased by approximately $12.8 million, primarily due to lower revenuesrecorded and the timing of receivable collections during the six months endedJune 30, 2003 as compared to the six months ended December 31, 2002. The timingof receivable collections and revenue recorded within a given quarter willaffect our accounts receivable going forward.

 

Net cash used in investingactivities was $4.7 million during the six months ended June 30, 2003, ascompared with $5.3 million in the same period in the previous year. Thedecrease primarily was due to a decrease in capital expenditures. We expectcapital expenditures in the next six months to decrease slightly compared tothe last six months.

 

Net cash used in financingactivities was $1.1 million during the six months ended June 30, 2003, ascompared with $62.7 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 June 30, 2003,$7.0 million was available under the Line and there were no borrowingsoutstanding. The Company may use up to $5.0 million of the Line to issueletters of credit. As of June 30, 2003, approximately $386,000 wasavailable for the issuance of letters of credit. The Line is secured byintellectual property rights, accounts receivable and 

 

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certain other assets and issubject to certain borrowing base restrictions. The Line requires maintenanceof 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 June 30, 2003 was 4.75%. The Company could draw against theEquipment Line through November 30, 2001. Interest is payable monthly andprincipal is payable in 36 monthly installments commencing inDecember 2001. As of June 30, 2003, there was approximately $923,000outstanding under the Equipment Line. The Equipment Line is secured by certainassets of the Company.

 

In December 2002, theCompany’s credit facility was amended to include an equipment advance (the“Equipment Advance”) in the amount of $5.0 million from the same lendinginstitution. Interest on the Equipment Advance is payable monthly and principalis payable in 24 equal monthly installments, beginning January 31, 2003.The Equipment Advance bears interest at an annual rate of prime plus 0.75% orthe LIBOR rate plus 3.0%. The rate at June 30, 2003 was 4.75%. As ofJune 30, 2003 the balance outstanding under this Equipment Advance wasapproximately $3.8 million.

 

Future principal payments onthe Equipment Line and the Equipment Advance will aggregate approximately$1.6 million for the remainder of 2003 and $3.1 million in 2004,based on the total outstanding balance of approximately $4.7 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 six months of 2003, we experienceda general slow-down in the level of capital spending by some of our customersdue to the general economic downturn, which has adversely affected ourrevenues. This slow-down in capital spending, if sustained in future periods,could result in reduced sales or the postponement of sales to our customers.There can be no assurance that the level of spending on information technologyin general, or on business integration software by our customers and potentialcustomers in particular, will increase or remain at current levels in futureperiods. Lower spending on information technology could result in reducedlicense sales to our customers, reduced overall revenues, diminished marginlevels, 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 ofJune 30, 2003, we had an accumulated deficit of approximately$149.9 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 

 

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revenues from one or morelicense transactions could cause significant variations in operating resultsfrom quarter to quarter and cause a decline in our stock price. We realizesubstantially higher gross margins on our license revenues compared to ourservices and maintenance revenues. Thus, our margins for any particular quarterwill be highly dependent on our revenue mix in that quarter. In ourinternational markets, we have experienced some seasonality of revenues, withlower revenues in the summer months. Although this seasonality has not had amaterial impact on our operating results in the past, we cannot assure you ouroperating results will not fluctuate in the future as a result of these andother international trends.

 

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 uponentering into new contracts to generate revenues for that quarter. Newcontracts may not result in revenues in the quarter in which the contract wassigned, and we may not be able to predict accurately when revenues from thesecontracts will be recognized. If our operating results are below theexpectations of securities analysts or investors for these or other reasons,our stock price would likely decline, perhaps substantially.

 

***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 of competitiveproducts and approval at a number of management levels within a customer’sorganization. Our sales cycle may vary based on the industry in which thepotential customer operates and is difficult to predict for any particularlicense transaction. The length and variability of our sales cycle makes itdifficult to predict whether particular sales will be concluded in any givenquarter. If one or more of our license transactions are not consummated in agiven 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 Suiteby future 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 currently expect to begin shipping it tocustomers in the third quarter of 2003. If our competitors release new productsthat are superior to our Business Integration Suite in performance or price, orif we fail to enhance our Business Integration Suite and introduce new productsin a timely manner, demand for our products may decline, and we may have toreduce the pricing of our products. A decline in demand or pricing for ourBusiness Integration Suite as a result of these or other factors wouldsignificantly reduce our revenues.

 

In the past, we haveexperienced delays in the commencement of commercial releases of our BusinessIntegration Suite.  In the future, wemay fail to introduce or deliver new products on a timely basis. If newreleases or products are delayed or do not achieve market acceptance, we couldexperience customer dissatisfaction or a delay or loss of revenues. Forexample, the introduction of new enterprise and business applications requiresus to introduce new e*Way adapters to support the integration of theseapplications. Our failure to introduce these or other modules in a timelymanner could cause our revenues and market share to decline. In addition,customers may delay purchases of our products in anticipation of futurereleases. If customers defer material orders in anticipation of new releases ornew product introductions, our revenues may decline.

 

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 areintroduced, 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 

 

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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 tomarket our products more effectively. Therefore, any failure of theserelationships would also harm our ability to increase revenues in keycommercial markets. We are currently investing, and plan to continue to invest,significant resources to develop these relationships. Our operating resultscould be adversely affected if these efforts do not generate license andservice revenues necessary to offset this investment.

 

***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-Business applicationintegration and traditional electronic data interchange, or EDI, softwareproducts, as well as “in house” information technology departments of potentialcustomers that have developed or may develop systems that provide some or allof the functionality of our Business Integration Suite. We may also encountercompetition 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 38% of our totalrevenues for the first six months of 2003 and 33% of our total revenues for thesame period in the prior year. Revenues from the sale of products and servicesin the United Kingdom as a percent of our total revenues were 14% for the sixmonths ending June 30, 2003 and 12% for the same period in the prior year. Webelieve revenues from sales outside the United States will continue to accountfor a material portion of our total revenues for the foreseeable future. We areexposed to several risks inherent in conducting business internationally, suchas:

 

•                                          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

 

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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 platforms. If our products fail to gain broadmarket acceptance due to an inability to support a variety of these platforms,our operating results may suffer. Our business depends on a number 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 and businessintegration solutions and seeking outside vendors to develop, manage andmaintain this software for their critical applications. Many of our potentialcustomers have made significant investments in internally developed systems andwould incur significant costs in switching to third-party products, which maysubstantially inhibit the growth of the market for business integrationsoftware. If this market fails to grow, or grows more slowly than we 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 associated withthese 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

 

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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 and useinformation we regard as proprietary. Accordingly, we cannot be certain we willbe 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 market will increasingly be subject to infringementclaims as the number of products in different software industry segmentsoverlap. Any claims, with or without merit, could be time-consuming, result incostly litigation, prevent product shipment or cause delays, or require us toenter into royalty or licensing agreements, any of which could harm ourbusiness. Patent litigation in particular has complex technical issues andinherent uncertainties. In the event an infringement claim against us issuccessful and we cannot obtain a license on acceptable terms, license asubstitute technology or redesign our products to avoid infringement, ourbusiness 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 to develop,market and support our products and services. We may not be able to recruit andretain sufficient numbers of these highly skilled employees. If we fail to doso, our ability to compete will be significantly 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 the future.

 

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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:

 

•                                          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 our stockholders.

 

***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 42% 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 amaterial adverse 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.

 

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**Item 3 :    Quantitative andQualitative 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 Netherlands, New Zealand, Singapore, Spain, Sweden, Switzerland andthe United Kingdom. Transaction gains or losses have not been significant inthe past and we do not participate in any hedging activity on foreigncurrencies. We would not experience a material foreign exchange loss based on ahypothetical 10% adverse change in the price of any of the local currencies ofthese countries. Consequently, we do not expect that a reduction in the valueof such accounts denominated in foreign currencies resulting from a sudden orsignificant fluctuation in foreign exchange rates would have a direct materialimpact on our financial position, results of operations or cash flows.

 

**Item 4 .    Controls andProcedures**

 

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 thisevaluation, our chief executive officer and chief financial officer haveconcluded that our disclosure controls and procedures are effective to ensurethat information we are required to disclose in reports that we file or submitunder the Exchange Act is recorded, processed, summarized and reported withinthe time periods specified in Securities and Exchange Commission rules andforms. There was no change in our internal control over financial reporting (asdefined in Rule 13a–15(f) under the Exchange Act) during the period covered bythis Quarterly Report on Form 10-Q that has materially affected, or isreasonably likely to materially affect, our internal control over financialreporting.

 

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**PART II—OTHER INFORMATION**

 

**Item 1.    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** |
|-------------|---------------------------------------------------------|

 

The annual meeting ofSeeBeyond Technology Corporation stockholders was held on May 15, 2003, duringwhich the following two proposals were voted on:

 

***Proposal one: *****Election of two Class IIIDirectors for the ensuing three-year term**

 

***Directors standing for election:***

 
|                  |   | **For**    |   | **Withheld  Authority  To Vote** |   |
|-----------------------|--------|------------|--------|----------------------------------|--------|
| James  T. Demetriades |   | 71,642,314 |   | 4,298,002                        |   |
| Raymond  J. Lane      |   | 70,217,814 |   | 5,722,502                        |   |

 

***Proposal two: *****Ratification of theappointment of Ernst & Young LLP as independent auditors**

 
| FOR:     |   | 71,394,487 |   |
|----------|--------|------------|--------|
| AGAINST: |   | 4,529,524  |   |
| ABSTAIN: |   | 16,305     |   |

 

**Item 6.    Exhibits and reports onForm 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 |

 

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| 10.8(a)     |   | Lease  Agreement dated December 30, 1991 between the Registrant and the Demetriades  Family Trust (dated December 20, 1983) for premises in Arcadia, California                                                                                  |
|-------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.9(b)     |   | Lease  Agreement between The Employees Retirement System of The State of Hawaii and  the Registrant dated July 21, 2000 for premises in Monrovia, California                                                                                     |
| 10.10(b)    |   | Lease  Agreement between Grant Regent, LLC and the Registrant dated August 2, 2000  for premises in New York, New York                                                                                                                           |
| 10.11(e)    |   | Lease  Agreement dated October 9, 2000 between S & F Huntington Millennium LLC  and the Registrant for premises in Monrovia, California                                                                                                      |
| 10.12(e)    |   | Loan  and Security Agreement, dated December 4, 2000, between the Registrant and  Comerica Bank-California                                                                                                                                       |
| 10.13(d)    |   | Warrant  Purchase Agreement and Warrant dated March 16, 2001 issued to General Motors  Corporation                                                                                                                                               |
| 10.14(f)    |   | Amendment  to the Loan and Security Agreement dated as of June 25, 2001, between the  Registrant and Comerica Bank—California)                                                                                                              |
| 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)    |   | Employment  Letter Agreement between the Registrant and H. Carvel Moore dated July 21,  2003.                                                                                                                                                    |
| 10.28       |   | 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       |   | Sixth  Amendment to the Loan and Security Agreement dated December 24, 2002 between  the Registrant and Comerica Bank-California dated May 30, 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.                                                                                                                        |

 

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| (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. |

 

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| (c) |   | Denotes  a management contract or compensatory plan arrangement.                                                                                     |
|-----|--------|------------------------------------------------------------------------------------------------------------------------------------------------------|
| (d) |   | Incorporated  by reference to an exhibit in the Registrant’s Quarterly Report on Form 10-Q  filed with the Commission on May 15, 2001.          |
| (e) |   | Incorporated  by reference to an exhibit in the Registrant’s Annual Report on Form 10-K  filed with the Commission on March 30, 2001.           |
| (f) |   | Incorporated  by reference to an exhibit in the Registrant’s Annual Report on Form 10-K  filed with the Commission on February 8, 2002.         |
| (g) |   | Incorporated  by reference to an exhibit in the Registrant’s Quarterly Report on Form 10-Q  filed with the Commission on August 14, 2002.       |
| (h) |   | Incorporated  by reference to an exhibit in the Registrant’s Annual Report on  Form 10-K filed with the Commission on March 28, 2003. |
| (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.           |

 

(b)                                        Reports on Form 8-K.

 

On April 7, 2003, SeeBeyondfiled a report on Form 8-K announcing its preliminary first fiscal quarter 2003financial results.

 

On April 22, 2003, SeeBeyondfiled a report on Form 8-K announcing its first fiscal quarter 2003 financialresults.

 

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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 August 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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