**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

 

**Washington,D.C. 20549**

 

**FORM 10-Q**

 
| **ý**                                                                                                                                                                             | **QUARTERLY REPORT PURSUANT TO SECTION 13  OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**  |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|----------------------------------------------------------------------------------------------------|
| ** **                                                                                                                                                                             | ** **                                                                                         |
| **For  the quarterly period ended March 31, 2005**                                                                                                                                |
| ** **                                                                                                                                                                             | ** **                                                                                         |
| **OR**                                                                                                                                                                                 |
| ** **                                                                                                                                                                             | ** **                                                                                         |
| **o**                                                                                                                                                                                  | **TRANSITION REPORT PURSUANT TO SECTION 13  OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
| ** **                                                                                                                                                                             | ** **                                                                                         |
| **For  the transition period  from            to            ** |

 

**CommissionFile No. 000-30207**

 

**SEEBEYONDTECHNOLOGY CORPORATION**

(Exact name of Registrantas Specified in Its Charter)

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

 

Indicate by check mark whether the registrant:(1) has filed all reports required to be filed by Section 13 or 15(d)of the Securities Exchange Act of 1934 during the preceding 12 months (orfor such shorter period that the registrant was required to file such reports)and (2) has been subject to such filing requirements for the past90 days. Yes  ý No  o

 

Indicate by check mark whether the registrant is anaccelerated filer (as defined in Rule 12b-2 under the Act). Yes  ý No  o

 

The number of shares outstanding of the registrant’sCommon Stock, $0.0001 par value, as of May 5, 2005 was 85,790,851.

 

 

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**SeeBeyondTechnology Corporation and Subsidiaries**

 

**INDEX**

 
| **Part I - Financial  Information**               |
|---------------------------------------------------|
| Item 1.                                           | Financial Statements: |
|                                              | Condensed  Consolidated Balance Sheets as of March 31, 2005 (unaudited) and  December 31, 2004 |
|                                              | Condensed  Consolidated Statements of Operations (unaudited) for the three months March  31, 2005 and 2004 |
|                                              | Condensed  Consolidated Statements of Cash Flows (unaudited) for the three months ended  March 31, 2005 and 2004 |
|                                              | Notes  to Condensed Consolidated Financial Statements (unaudited) |
| Item  2.                                          | Management’s  Discussion and Analysis of Financial Condition and Results of Operations |
| Item  3.                                          | Quantitative  and Qualitative Disclosure About Market Risk |
| Item 4.                                           | Controls and  Procedures |
| **Part II - Other Information**                   |
| Item 1.                                           | Legal Proceedings |
| Item  2.                                          | Changes  in Securities and Use of Proceeds |
| Item 3.                                           | Defaults Upon  Senior Securities |
| Item  4.                                          | Submission  of Matters to a Vote of Security Holders |
| Item 5.                                           | Other Information |
| Item 6.                                           | Exhibits |
| **Signatures**                                    |
| **Certification  of the Chief Executive Officer** |
| **Certification  of the Chief Financial Officer** |

 

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**PART I —FINANCIAL INFORMATION**

 

**Item 1 . Financial Statements**

 

**SeeBeyondTechnology Corporation and Subsidiaries**

 

**CondensedConsolidated Balance Sheets**

(in thousands, exceptshare and per share amounts)

 

 
| ** **                                                                                                                                                               | ** ** | **March 31,  2005** | ** ** | **December 31,  2004** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------|------------|------------------------|------------|
| ** **                                                                                                                                                               | ** ** | **(unaudited)**     | ** ** | ** **             | ** ** |
| Assets:                                                                                                                                                                  | ** ** | ** **          | ** ** | ** **             | ** ** |
| Current assets:                                                                                                                                                          |       |                |       |                   |       |
| Cash and cash equivalents                                                                                                                                                |       | $                   | 73,566     |                   | $          | 73,148 |   |
| Accounts receivable, net of allowances of $1,632 and $1,606 at March 31, 2005 and  December 31, 2004, respectively                                                  |       | 32,399              |       | 37,995                 |       |
| Prepaid expenses and other current assets                                                                                                                                |       | 3,682               |       | 3,680                  |       |
| Total current assets                                                                                                                                                     |       | 109,647             |       | 114,823                |       |
| Property and equipment, net                                                                                                                                              |       | 11,661              |       | 12,728                 |       |
| Goodwill                                                                                                                                                                 |       | 1,391               |       | 1,391                  |       |
| Other assets                                                                                                                                                             |       | 2,075               |       | 2,152                  |       |
| Total assets                                                                                                                                                             |       | $                   | 124,774    |                   | $          | 131,094 |   |
| Liabilities and stockholders’ equity:                                                                                                                               |       |                |       |                   |       |
| Current liabilities:                                                                                                                                                     |       |                |       |                   |       |
| Accounts payable                                                                                                                                                         |       | $                   | 6,041      |                   | $          | 6,739 |   |
| Accrued employee compensation and related expenses                                                                                                                       |       | 12,813              |       | 13,861                 |       |
| Accrued expenses                                                                                                                                                         |       | 3,838               |       | 5,808                  |       |
| Deferred revenues                                                                                                                                                        |       | 35,000              |       | 36,537                 |       |
| Capital lease payable - current portion                                                                                                                                  |       | 497                 |       | 748                    |       |
| Total current liabilities                                                                                                                                                |       | 58,189              |       | 63,693                 |       |
| Capital lease payable                                                                                                                                                    |       | 24                  |       | 28                     |       |
| Total liabilities                                                                                                                                                        |       | 58,213              |       | 63,721                 |       |
| Commitments and contingencies                                                                                                                                            |       |                |       |                   |       |
| Stockholders’ equity:                                                                                                                                               |       |                |       |                   |       |
| Common stock, $.0001 par value - 200,000,000 shares authorized;                                                                                                          |       |                |       |                   |       |
| 88,414,444 shares issued and 85,785,492 shares outstanding as of  March 31, 2005 and 87,559,663 shares issued and 84,930,711 shares outstanding  as of December 31, 2004 |       | 8                   |       | 8                      |       |
| Additional paid-in capital                                                                                                                                               |       | 228,615             |       | 226,481                |       |
| Treasury stock                                                                                                                                                           |       | (6,510              | )          | (6,510                 | )          |
| Accumulated other comprehensive income                                                                                                                                   |       | 625                 |       | 990                    |       |
| Accumulated deficit                                                                                                                                                      |       | (156,177            | )          | (153,596               | )          |
| Total stockholders’ equity                                                                                                                                          |       | 66,561              |       | 67,373                 |       |
| Total liabilities and stockholders’ equity                                                                                                                          |       | $                   | 124,774    |                   | $          | 131,094 |   |

 

*Theaccompanying notes are an integral part of these financial statements.*

 

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**SeeBeyondTechnology Corporation and Subsidiaries**

 

**CondensedConsolidated Statements of Operations**

 

**(Unaudited)**

(inthousands, except per share data)

 

 
| ** **                                                                 | ** ** | **Three Months Ended  March 31,** | ** ** |
|----------------------------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                                                 | ** ** | **2005**                          | ** ** | **2004** | ** ** |
| Revenues:                                                                  |       |                              |       |   |   |
| License                                                                    |       | $                                 | 13,749     |   | $ | 10,880 |   |
| Services                                                                   |       | 9,657                             |       | 10,510 |   |
| Maintenance                                                                |       | 13,902                            |       | 13,047 |   |
| Total revenues                                                             |       | 37,308                            |       | 34,437 |   |
| Cost of revenues:                                                          |       |                              |       |   |   |
| License                                                                    |       | 333                               |       | 277 |   |
| Services and maintenance revenues                                          |       | 10,710                            |       | 10,179 |   |
| Total cost of revenues                                                     |       | 11,043                            |       | 10,456 |   |
| Gross profit                                                               |       | 26,265                            |       | 23,981 |   |
| Operating expenses:                                                        |       |                              |       |   |   |
| Research and development                                                   |       | 10,011                            |       | 9,740 |   |
| Sales and marketing                                                        |       | 13,707                            |       | 15,004 |   |
| General and administrative                                                 |       | 5,161                             |       | 4,609 |   |
| Amortization of sales and marketing warrants                               |       | —                            |       | (14 | ) |
| Amortization of stock-based compensation                                   |       | 1                                 |       | 97 |   |
| Total operating expenses                                                   |       | 28,880                            |       | 29,436 |   |
| Loss from operations                                                       |       | (2,615                            | )          | (5,455 | ) |
| Interest income and other income (expense), net                            |       | 286                               |       | (213 | ) |
| Interest expense                                                           |       | (29                               | )          | (72 | ) |
| Loss before income tax provision                                           |       | (2,358                            | )          | (5,740 | ) |
| Income tax provision                                                       |       | 223                               |       | 43 |   |
| Net loss                                                                   |       | $                                 | (2,581     | ) | $ | (5,783 | ) |
|                                                                       |       |                              |       |   |   |
| Basic and diluted net loss per share                                       |       | $                                 | (0.03      | ) | $ | (0.07 | ) |
| Number of shares used in calculating basic and diluted net loss per  share |       | 85,358                            |       | 84,053 |   |

 

*Theaccompanying notes are an integral part of these financial statements.*

 

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**SeeBeyondTechnology Corporation and Subsidiaries**

 

**CondensedConsolidated Statements of Cash Flows**

 

**(Unaudited)**

(in thousands)

 

 
| ** **                                                                                 | ** ** | **Three Months Ended  March 31,** | ** ** |
|--------------------------------------------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                                                                 | ** ** | **2005**                          | ** ** | **2004** | ** ** |
| Cash flows from operating activities:                                                      |       |                              |       |   |   |
| Net loss                                                                                   |       | $                                 | (2,581     | ) | $ | (5,783 | ) |
| Adjustments to reconcile net loss to net cash (used in) provided by  operating activities: |       |                              |       |   |   |
| Loss on disposal of fixed assets                                                           |       | 5                                 |       | — |   |
| Depreciation and amortization                                                              |       | 1,135                             |       | 1,250 |   |
| Provision for doubtful accounts receivable                                                 |       | 173                               |       | 383 |   |
| Amortization of sales and marketing warrants                                               |       | —                            |       | (14 | ) |
| Amortization of stock-based compensation                                                   |       | 1                                 |       | 97 |   |
| Changes in assets and liabilities:                                                         |       |                              |       |   |   |
| Accounts receivable                                                                        |       | 5,423                             |       | 9,662 |   |
| Prepaid expenses and other current assets                                                  |       | (2                                | )          | 93 |   |
| Accounts payable                                                                           |       | (698                              | )          | 1,426 |   |
| Accrued compensation and related expenses                                                  |       | (1,048                            | )          | (2,838 | ) |
| Accrued expenses                                                                           |       | (1,970                            | )          | (576 | ) |
| Deferred revenues                                                                          |       | (1,537                            | )          | 455 |   |
| Net cash (used in) provided by operating activities                                        |       | (1,099                            | )          | 4,155 |   |
|                                                                                       |       |                              |       |   |   |
| Cash flows from investing activities:                                                      |       |                              |       |   |   |
| Purchases of property and equipment                                                        |       | (73                               | )          | (900 | ) |
| Other                                                                                      |       | 77                                |       | 73 |   |
| Net cash provided by (used in) investing activities                                        |       | 4                                 |       | (827 | ) |
|                                                                                       |       |                              |       |   |   |
| Cash flows from financing activities:                                                      |       |                              |       |   |   |
| Net repayments on bank lines of credit                                                     |       | —                            |       | (788 | ) |
| Repayments of capital lease obligation                                                     |       | (255                              | )          | (61 | ) |
| Proceeds from issuance of common stock pursuant to employee stock  option plan             |       | 2,133                             |       | 1,290 |   |
| Payments for purchase of common stock                                                      |       | —                            |       | (644 | ) |
| Net cash provided by (used in) financing activities                                        |       | 1,878                             |       | (203 | ) |
|                                                                                       |       |                              |       |   |   |
| Effect of exchange rate changes on cash and cash equivalents                               |       | (365                              | )          | 500 |   |
| Net increase in cash and cash equivalents                                                  |       | 418                               |       | 3,625 |   |
| Cash and cash equivalents at beginning of the period                                       |       | 73,148                            |       | 70,135 |   |
| Cash and cash equivalents at end of the period                                             |       | $                                 | 73,566     |   | $ | 73,760 |   |

 

*Theaccompanying notes are an integral part of these financial statements.*

 

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**SeeBeyondTechnology Corporation and Subsidiaries**

 

**Notes toCondensed Consolidated Financial Statements**

 

**(Unaudited)**

 

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

 

The accompanying unaudited condensed consolidatedfinancial statements have been prepared by SeeBeyond Technology Corporation(the “Company” or “SeeBeyond”) in accordance with the rules and regulations ofthe Securities and Exchange Commission. Certain information and footnote disclosuresnormally included in consolidated financial statements prepared in accordancewith accounting principles generally accepted in the United States have beencondensed or omitted in accordance with such rules and regulations. In theopinion of management, the accompanying unaudited condensed consolidatedfinancial statements reflect all adjustments, consisting only of normalrecurring adjustments, necessary to present fairly the financial position ofthe Company, and its results of operations and cash flows. These condensedconsolidated financial statements should be read in conjunction with the annualaudited consolidated financial statements and notes as of and for the yearended December 31, 2004 included in the Company’s Form 10-K filedwith the Securities and Exchange Commission on March 9, 2005.

 

The results of operations for the three months March31, 2005 are not necessarily indicative of the results that may be expected forthe year ending December 31, 2005 or any other interim period, and theCompany makes no representations related thereto.

 

The consolidated financial statements include theaccounts of the Company and its subsidiaries. All material intercompanyaccounts and transactions have been eliminated in consolidation.

 

Certain reclassifications have been made to prior yearinformation to conform to the current period’s presentation.

 

**Note 2.           *Revenue Recognition***

 

The Company recognizes revenue when an agreement hasbeen signed by both parties or other persuasive evidence of an arrangementexists, the software has been shipped or electronically delivered, the fees arefixed or determinable, collection of the resulting receivable is probable andno other significant obligations remain. For multiple element arrangementswhere vendor-specific objective evidence of fair value exists for allundelivered elements, we account for the delivered elements in accordance withthe “residual method” prescribed by Statement of Position 98-9. Vendor-specificobjective evidence of fair value is based on the price a customer is requiredto pay when the element is sold separately. The Company enters intoarrangements with end users, which may include the sale of licenses ofsoftware, maintenance and services under the arrangement or variouscombinations of each element, including the sale of such elements separately.

 

For multiple element arrangements, each element of thearrangement is analyzed and the Company allocates a portion of the total feeunder the arrangement to the undelivered elements, primarily services andmaintenance, using vendor-specific objective evidence of fair value of theelement and the remaining portion of the fee is allocated to the deliveredelements (i.e., generally the software license), regardless of any separateprices stated within the contract for each element, under the residual methodprescribed by SOP 98-9. Vendor-specific objective evidence of fair value isbased on the price the customer is required to pay when the element is soldseparately (i.e., hourly rates charged for consulting services when soldseparately from a software license and the renewal rate for maintenancearrangements). Each license agreement offers additional maintenance renewalperiods at a stated price. If vendor-specific objective evidence of fair value doesnot exist for the undelivered elements, all revenue is deferred and recognizedratably over the service period if the undelivered element is services, or overthe period the maintenance is provided if the undelivered element ismaintenance, or until sufficient objective evidence exists or all elements havebeen delivered.

 

*License Revenues:* Amounts allocated to licenserevenues under the residual method are recognized at the time of delivery ofthe software when vendor specific objective evidence of fair value exists forthe undelivered elements, if any, and all the other revenue recognitioncriteria discussed above have been met.

 

*Services Revenues:* Revenues from services arecomprised of consulting and implementation services and, to a limited extent,training. Services are generally sold on a time-and-materials or fixed feebasis and include a range of services including installation of off-the-shelfsoftware, data conversion and building non-complex interfaces to allow thesoftware to operate in customized environments. Services are generallyseparable from the other elements under the arrangement since the performanceof the services is not essential to the functionality (i.e., do not involvesignificant production, modification or customization of the software orbuilding

 

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complex interfaces) of any other element of thetransaction and are described in the contract such that the total price of thearrangement would be expected to vary as the result of the inclusion orexclusion of the services. Revenues for services are recognized as the servicesare performed. Training services are sold either on a per student basis or perclass and are recognized as classes are attended.

 

*Maintenance Revenues:* 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 term of the contract.

 

Revenues on sales made by alliance partners aregenerally recognized upon shipment of the software to the end user, if allother revenue recognition criteria noted above are met. Under limited arrangementswith certain distributors when all the revenue recognition criteria have beenmet and upon delivery of the product to the distributor, revenues arerecognized at that time. The Company does not offer a right of return on itsproducts.

 

**Note 3.           *Operations byReportable Segments and Geographic Area***

 

SeeBeyond has developed a comprehensive solution forbusiness integration, enabling the seamless flow of information across systemsapplications and enterprises in real-time, on a global basis. The Companyoperates in one industry segment, which is the development and marketing of acomprehensive solution for business integration where all key integrationtechnologies, including application-to-application, business-to-business andbusiness process management, are seamlessly integrated.  Revenues and long-lived assets by geographicarea were as follows (in thousands):

 

 

 

| ** **              | ** ** | **Three Months Ended  March 31,** | ** ** |
|-------------------------|------------|-----------------------------------|------------|
| ** **              | ** ** | **2005**                          | ** ** | **2004** | ** ** |
| Revenues:               |       |                              |       |   |   |
| North America           |       | $                                 | 21,473     |   | $ | 16,854 |   |
| Europe                  |       | 11,195                            |       | 15,225 |   |
| Pacific Rim             |       | 4,640                             |       | 2,358 |   |
| Total revenues          |       | $                                 | 37,308     |   | $ | 34,437 |   |
|                    |       |                              |       |   |   |
| ** **              | ** ** | **March 31,  2005**               | ** ** | **December  31,  2004** | ** ** |
| Long-lived assets:      |       |                              |       |   |   |
| North America           |       | $                                 | 12,523     |   | $ | 13,392 |   |
| Europe                  |       | 1,443                             |       | 1,617 |   |
| Pacific Rim             |       | 1,161                             |       | 1,262 |   |
| Total long-lived assets |       | $                                 | 15,127     |   | $ | 16,271 |   |

 

No single customer accounted for more than 10% of theCompany’s net revenues during the three months ended March 31, 2005 while onecustomer accounted for 11% of the Company’s net revenues during the threemonths ended March 31, 2004.

 

**Note 4.           *Computation of Net LossPer Share***

 

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

 

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The following table sets forth the components of basicand diluted net loss per share for the periods indicated (in thousands, exceptper share amounts):

 

 

| ** **                                                                                    | ** ** | **Three Months Ended  March 31,** | ** ** |
|-----------------------------------------------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                                                                    | ** ** | **2005**                          | ** ** | **2004** | ** ** |
| Net loss                                                                                      |       | $                                 | (2,581     | ) | $ | (5,783 | ) |
| Weighted average outstanding shares of common stock used to compute  basic net loss per share |       | 85,358                            |       | 84,053 |   |
| Dilutive effect of employee stock options                                                     |       | —                            |       | — |   |
| Common stock and common stock equivalents                                                     |       | 85,358                            |       | 84,053 |   |
| Basic and diluted net loss per share                                                          |       | $                                 | (0.03      | ) | $ | (0.07 | ) |

 

Options topurchase approximately 19,472,000 shares of common stock at March 31, 2005,and options to purchase approximately 18,716,000 shares of common stock at March 31,2004 were not included in the calculations of diluted net loss per sharebecause their effect would be antidilutive. Common stock warrants to purchase625,000 shares were not included in the calculations of diluted net loss pershare because their effect would be antidilutive for the three months March 31,2005 and March 31, 2004.

 

**Note 5.           *Stock-BasedCompensation***

 

As permitted under SFAS No. 123 “Accounting forStock-based Compensation” and SFAS No. 148, “Accounting for Stock-basedCompensation — Transition and Disclosure — and amendment to FAS 123”,  the Company continues to apply the provisionsof APB No. 25, “Accounting for Stock Issued to Employees,” for itsrecording of stock-based compensation arrangements. Accordingly, the Companyaccounts for its stock-based compensation using the intrinsic value method,which requires recognition of expense when the option exercise price is less thanthe fair value of the stock at the date of grant. The Company provides therequired pro forma net income (loss) and pro forma earnings (loss) per sharedisclosures for employee stock option grants made in 1995 and future years asif the fair value based method defined in SFAS No. 123 had been applied.Under the fair value method stock options are valued and expensed based on thefair value of the options determined under an option-pricing model.

 

The following table sets forth pro forma net loss andpro forma loss per share (in thousands, except per share amounts):

 

 

| ** **                                                                           | ** ** | **Three Months Ended  March 31,** | ** ** |
|--------------------------------------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                                                           | ** ** | **2005**                          | ** ** | **2004** | ** ** |
| Net loss, as reported                                                                |       | $                                 | (2,581     | ) | $ | (5,783 | ) |
| Stock-based employee compensation costs, included in net loss, as  reported          |       | 1                                 |       | 97 |   |
| Stock-based employee compensation costs if fair value based method  had been applied |       | (1,896                            | )          | (3,218 | ) |
| Pro forma net loss                                                                   |       | $                                 | (4,476     | ) | $ | (8,904 | ) |
| Loss per share:                                                                      |       |                              |       |   |   |
| Basic and diluted - as reported                                                      |       | $                                 | (0.03      | ) | $ | (0.07 | ) |
| Basic and diluted - pro forma                                                        |       | $                                 | (0.05      | ) | $ | (0.11 | ) |

 

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

 

**Bank Lines of Credit**

 

In November 2000, the Company established a$15.0 million line of credit facility (the “Line”) with a lendinginstitution that bears interest at an annual rate of either prime plus 0.5% orthe London InterBank Offered Rate (“LIBOR”) rate plus 2.50% (payable

 

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monthly).  The expiration date of the Line hasbeen extended through May 31, 2005.  Asof March 31, 2005, $10.4 million was available under the Line andthere were no borrowings outstanding. The Company may use up to$5.0 million of the Line to issue letters of credit. As of March 31,2005, approximately $386,000 was available for the issuance of letters ofcredit. The Line is secured by intellectual property rights, accountsreceivable and certain other assets and is subject to certain borrowing baserestrictions. The Line requires maintenance of certain financial covenantspertaining to key financial ratios and the Company is in compliance with thosecovenants as of March 31, 2005.

 

**Note 7.           *Legal Proceedings***

 

The Company is party to routine claims and suitsbrought against it in the ordinary course of business including disputesarising over the ownership of intellectual property rights and collectionmatters. In the opinion of management, the outcome of such routine claims willnot have a material adverse effect on the Company’s business, financialcondition or results of operation..

 

**Note 8.           *Comprehensive Loss***

 

SFAS No. 130 “Reporting Comprehensive Income,”establishes standards for reporting comprehensive loss and its components infinancial statements. Comprehensive loss, as defined, refers to revenues,expenses, gains and losses that are not included in net loss but rather arerecorded directly in stockholders’ equity.

 

Total comprehensive loss was as follows (inthousands):

 

 

| ** **                     | ** ** | **Three Months Ended  March 31,** | ** ** |
|--------------------------------|------------|-----------------------------------|------------|
| ** **                     | ** ** | **2005**                          | ** ** | **2004** | ** ** |
| Net loss                       |       | $                                 | (2,581     | ) | $ | (5,783 | ) |
| Other comprehensive loss:      |       |                              |       |   |   |
| Foreign translation adjustment |       | (365                              | )          | 500 |   |
| Comprehensive loss             |       | $                                 | (2,946     | ) | $ | (5,283 | ) |

 

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

 

**Treasury Stock**

 

During the three monthsended March 31, 2005, the Company did not purchase any shares of its commonstock.  As of March 31, 2005, the Companyheld 2,628,952 shares of its common stock in treasury.

 

**Note 10.         *Recent AccountingPronouncements***

 

InDecember 2004, the Financial Accounting Standards Board issued Statements ofFinancial Accounting Standards Statement No. 123 (revised 2004), “Share-BasedPayment” (“SFAS 123R”).  This Statementis a revision of SFAS No. 123, “Accountingfor Stock-Based Compensation” and supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees”.  SFAS 123(R) requires a company to measure the grant-date fair value of equityawards given to employees in exchange for services and recognize that cost overthe period that such services are performed. SFAS 123R is effective beginning January 1, 2006.

 

TheCompany is currently evaluating the two methods of adoption allowed by SFAS123R: the modified-prospective transition method and the modified-retrospectivetransition method.  Adoption of SFAS 123Ris expected to materially increase stock compensation expense and decrease netincome; however, the impact cannot be determined at this time.  In addition, SFAS 123R requires the excesstax benefits related to stock compensation be reported as a cash inflow fromfinancing activities rather than as a reduction of taxes paid in cash fromoperating activities.

 

**Note 11.         *Subsequent Event***

 

In April 2005, the Company’sboard of directors authorized the repurchase of up to an additional $10.0million of its common stock in the open market from time to time until April2007, depending upon market conditions and other factors.

 

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**Item2 .   Management’s Discussion and Analysisof Financial Condition and Results of Operations**

 

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

 

**General Overview**

 

In October 2003, weannounced the general availability of our new suite of products, the SeeBeyondIntegrated Composite Application Network version 5.0 (“ICAN 5”).   ICAN 5 offers the integration industry’sfirst fully integrated platform for the development and deployment of compositeapplications.  ICAN 5 helps organizationsto rapidly assemble and deploy enterprise-scale end-user composite applicationsbuilt on existing systems and infrastructure.

 

Wederive revenues primarily from three sources: licenses, services andmaintenance.  We sell our products andservices on a global basis through our direct sales force, and throughalliances with leading systems integrators, and in other instances, throughvalue-added resellers and technology vendors. Our products are typicallylicensed directly to customers for a perpetual term, with pricing based on thenumber of systems or applications the customer is integrating or connectingwith our products.  We record licenserevenues when a license agreement has been signed by both parties, the fee isfixed or determinable, collection of the fee is probable, delivery of ourproducts has occurred and no other significant obligations remain.  Payments for licenses, services andmaintenance received in advance of revenue recognition are recorded as deferredrevenue.

 

Total revenue for the threemonths ended March 31, 2005 was $37.3 million as compared to $34.4 million inthe same period of the prior year, an 8% increase from the same period in theprior year.  License revenue for thethree months ended March 31, 2005 was $13.7 million, a 26% increase over thesame period of the prior year.  For the threemonths ended March 31, 2005, license revenues represented 37% of totalrevenue with services revenues representing 26% and maintenance revenues representing37%.

 

International revenuesrepresented 42% of total revenues for the three months ended March 31, 2005,with Europe revenues representing 30% and Asia Pacific revenues representing 12%.

 

Forthe three months ended March  31, 2005, we closed customer licensetransactions in key verticals such as, healthcare, manufacturing, financialservices and energy and utilities.  Thefollowing customers represent new and repeat business during the quarter:  Blue Cross Blue Shield of Massachusetts,Department of Human Services — Victoria Australia, Dun and Bradstreet, EDS,Lombardier Italy, Menlo Logistics, Pfizer, Phoenix Wealth Management, RobertWood Johnson HealthCare Corp., Sydney Water Corp., University of Chicago andBaylor University.

 

Weremain focused on controlling costs, growing license revenue, achieving ouroperating margin goals and ensuring our customers success with ICAN 5.

 

**Critical Accounting Policies**

 

The discussion and analysis of our financial conditionand results of operations are based upon our consolidated financial statements,which have been prepared in accordance with U.S. generally accepted accountingprinciples.  The preparation of thesefinancial statements requires us to make estimates and judgments that affectthe reported amounts of assets and liabilities, revenues and expenses, andrelated 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 accounting policies are described inNote 1 to the annual consolidated financial statements as of and for theyear ended December 31, 2004 in Item 8: Financial Statements andSupplementary Data of our annual report on Form 10-K for the year ended December 31,2004. We believe our most critical accounting policies include the following:

 

•              revenue recognition,

 

•              estimating allowance for doubtfulaccounts, and

 

•              accounting for income taxes.

 

*Revenue recognition.* We recognize revenue when anagreement has been signed by both parties or other persuasive evidence of anarrangement exists, the software has beenshipped or electronically delivered, the fees are fixed or determinable,collection of the resulting receivable is probable, and no other significantobligations remain. For multiple element arrangements where

 

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vendor specific objective evidence of fair valueexists for all undelivered elements, we account for the delivered elements inaccordance with the “residual method” prescribed by Statement of Position 98-9.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 is fixed and determinableand collection is probable at the time of the transaction. In assessing whetherthe fee is fixed and determinable, we analyze the payment terms of thetransaction and other factors, including the nature and class of customer, ourhistorical experience of collecting under our payment terms without granting aconcession, the possibility of the product becoming technologically obsoletebefore the payments become due and the likelihood of the customer asking for arefund. We do not offer a right of return on our products.

 

If we determine the fee is not fixed or determinable,we defer 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 becomes probable, which is generally upon thereceipt of cash.

 

Maintenance revenues consist primarily of fees forproviding unspecified software upgrades on a when-and-if-available basis andtechnical support over a specified term, which is typically twelve months.Maintenance revenues are typically paid in advance and are recognized on astraight-line basis over the specified term.

 

Revenues on sales made by alliance partners aregenerally recognized upon shipment of the software to the end user, if allother revenue recognition criteria noted above are met. Under limited arrangementswith certain distributors when all the revenue recognition criteria have beenmet upon delivery of the product to the distributor, revenues are recognized atthat time.  The Company does not offer aright of return on its products.

 

The fair value of services such as consulting ortraining is based upon separate sales of these services. Consulting andtraining services are generally sold on a time-and-materials or fixed fee basisand are generally recognized as the services are performed. Consulting servicesprimarily consist of implementation services related to the installation of ourproducts and generally do not involve significant production, modification orcustomization to or development of the software.

 

Significant management judgments and estimates must bemade when applying our revenue recognition policy.  In the event the application of our revenuerecognition policy is incorrect material differences in the amount and timingof revenue could result.

 

*Allowance for doubtful accounts.* We maintain allowances for doubtfulaccounts based on our analyses of the likelihood that our customers will notpay us all the amounts due us.  Incircumstances where there is knowledge of a specific customer’s inability tomeet its financial obligations, a specific reserve is recorded against amountsdue to reduce the net recognized receivable to the amount that is reasonablybelieved to be collected. For all our customers we perform analyses, whichinclude a review of their credit profiles, the terms and conditions of thecontracts with our customers, and the current economic trends and paymenthistory. We reassess these allowances each accounting period. If actual paymentexperience with our customers is different than our estimates, adjustments tothese allowances may be necessary resulting in additional charges to ourstatement of operations.

 

*Accounting for income taxes.* We record a valuationallowance to reduce our deferred tax assets by the estimated amount of taxbenefits which are not expected to be realized. Tax benefits will not be realized if we do not generate sufficienttaxable income in the future to utilize those deferred tax assets.  Our accounting for deferred taxes underStatement of Financial Accounting Standards No. 109, *Accounting for Income Taxes*(“Statement 109”), involves theevaluation of a number of factors concerning the ability to realize ourdeferred tax assets. In concluding that a valuation allowance was required onthe remaining net deferred tax assets, we primarily considered such factors asour history of operating losses and expected future income or losses and thenature of our deferred tax assets in specific jurisdictions.  In the event that we determine we are able torealize our deferred tax assets in the future in excess of their net recordedamount, an adjustment to the valuation allowance would increase income in theperiod such a determination was made.

 

Significant management judgment is requiredfor purposes of assessing our ability to realize any future benefit from ournet deferred tax assets.  In the eventactual results differ from these estimates or we adjust these estimates infuture periods, our operating results and financial position could bematerially affected.

 

In addition, Federal and state income taxeshave not been provided for accumulated undistributed earnings of our foreignsubsidiaries.  We intend to permanentlyreinvest such earnings in those foreign subsidiaries.  The amount of earnings designated as indefinitelyreinvested offshore is based upon the Company’s expectations of the future cashneeds of its entities.  Income taxconsiderations are also a factor in determining the amount of foreign earningsto be repatriated.  In the event actualcash needs of the Company’s U.S. entity exceeds its current expectations or theactual cash needs of its foreign entities are less than expected, the Companymay need to repatriate foreign earnings which have been designated asindefinitely reinvested offshore.  Thiswould result in additional income tax expense being recorded.

 

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**Results of Operations**

 

The following table sets forth our results ofoperations for the three months ended March 31, 2005 and 2004, respectively,expressed as a percentage of total revenues:

 

 

| ** **                                      | ** ** | **Three Months Ended  March 31,** | ** ** |
|-------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                      | ** ** | **2005**                          | ** ** | **2004** | ** ** |
| Revenues:                                       |       |                              |       |   |   |
| License                                         |       | 37                                | %          | 31 | % |
| Services                                        |       | 26                                |       | 31 |   |
| Maintenance                                     |       | 37                                |       | 38 |   |
| Total revenues                                  |       | 100                               |       | 100 |   |
| Cost of revenues:                               |       |                              |       |   |   |
| License                                         |       | 1                                 |       | 1 |   |
| Services and maintenance                        |       | 29                                |       | 30 |   |
| Total cost of revenues                          |       | 30                                |       | 31 |   |
| Gross profit                                    |       | 70                                |       | 69 |   |
| Operating expenses:                             |       |                              |       |   |   |
| Research and development                        |       | 27                                |       | 28 |   |
| Sales and marketing                             |       | 37                                |       | 44 |   |
| General and administrative                      |       | 13                                |       | 13 |   |
| Amortization of sales and marketing warrants    |       | —                            |       | — |   |
| Amortization of stock-based compensation        |       | —                            |       | — |   |
| Total operating expenses                        |       | 77                                |       | 85 |   |
| Loss from operations                            |       | (7                                | )          | (16 | ) |
| Interest income and other income (expense), net |       | —                            |       | — |   |
| Interest expense                                |       | —                            |       | — |   |
| Loss before income tax provision                |       | (7                                | )          | (16 | ) |
| Income tax provision                            |       | —                            |       | — |   |
| Net loss                                        |       | (7                                | )%         | (16 | )% |

 

**Revenues**

 

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

 

| ** **     | ** ** | **Three Months Ended  March 31,** | ** ** |
|----------------|------------|-----------------------------------|------------|
| ** **     | ** ** | **2005**                          | ** ** | **2004** | ** ** | **Change** | ** ** |
| Total revenues |       | $                                 | 37,308     |   | $ | 34,437 |   | $ | 2,871 |   | 8 | % |
|                |            |                                   |            |  |  |  |  |  |  |  |  |  |

 

Total revenues increased for the three months ended March31, 2005 as compared to the same period of the prior year primarily due toincreases in license and maintenance revenues.

 

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

 

| ** **       | ** ** | **Three Months Ended  March 31,** | ** ** |
|------------------|------------|-----------------------------------|------------|
| ** **       | ** ** | **2005**                          | ** ** | **2004** | ** ** | **Change** | ** ** |
| License revenues |       | $                                 | 13,749     |   | $ | 10,880 |   | $ | 2,869 |   | 26 | % |
|                  |            |                                   |            |  |  |  |  |  |  |  |  |  |

 

 

License revenuesincreased for the three months ended March 31, 2005 as compared to the sameperiod in the prior year primarily due to an increase in license revenue in theUnited States  as a result of increasedsales of ICAN 5 and strong contribution from our existing customer base andseveral new customers.

 

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

 

Revenuesfrom services include consulting and implementation services, training andreimbursable out-of-pocket expenses. A majority of our customers usethird-party systems integrators to implement our products. Customers alsotypically purchase additional consulting services from us to support theirimplementation activities.  From time totime, we use third-party systems integrators in a sub-contractor capacity tosupplement our own internal services employees. Our consulting services aregenerally sold on a time and materials or fixed fee basis, and servicesrevenues are recognized as the services are performed. We also offer trainingservices, which are sold on a per student basis and for which revenues arerecognized as the classes are attended.

 

| ** **        | ** ** | **Three Months Ended  March 31,** | ** ** |
|-------------------|------------|-----------------------------------|------------|
| ** **        | ** ** | **2005**                          | ** ** | **2004** | ** ** | **Change** | ** ** |
| Services revenues |       | $                                 | 9,657      |   | $ | 10,510 |   | $ | (853 | ) | (8 | )% |
|                   |            |                                   |            |  |  |  |  |  |  |  |  |  |

 

Services revenues decreased for the three months endedMarch 31, 2005 as compared to the same period of the prior year primarilydue to a decrease in the size, nature and timing of such engagements.

 

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

 

Customerswho license our products normally purchase maintenance contracts. Thesecontracts provide unspecified software upgrades and technical support over afixed term, which is typically 12 months. Maintenance contracts areusually paid in advance, and revenues from these contracts are recognizedratably over the term of the contract.

 

| ** **            | ** ** | **Three Months Ended  March 31,** | ** ** |
|-----------------------|------------|-----------------------------------|------------|
| ** **            | ** ** | **2005**                          | ** ** | **2004** | ** ** | **Change** | ** ** |
| Maintenance  revenues |       | $                                 | 13,902     |   | $ | 13,047 |   | $ | 855 |   | 7 | % |
|                       |            |                                   |            |  |  |  |  |  |  |  |  |  |

 

Maintenance revenues for the three months ended March31, 2005 increased as compared to the same period of the prior year primarilydue to renewals of prior period maintenance contracts associated with theincrease in our cumulative license revenues.

 

**Cost of revenues**(in thousandsexcept percentages):

 

Cost of revenues consistsprimarily of compensation and related overhead costs for personnel andsub-contractors engaged in implementation services, maintenance supportactivities, training and out-of-pocket expenses as well as royalties forthird-party products embedded or bundled with our products. Such costs includesalaries, employee benefits, incentive compensation, bonuses, travel, rent andallocated facilities and professional fees.

 

| ** **              | ** ** | **Three Months Ended  March 31,** | ** ** |
|-------------------------|------------|-----------------------------------|------------|
| ** **              | ** ** | **2005**                          | ** ** | **2004** | ** ** | **Change** | ** ** |
| Total cost of  revenues |       | $                                 | 11,043     |   | $ | 10,456 |   | $ | 587 |   | 6 | % |
|                         |            |                                   |            |  |  |  |  |  |  |  |  |  |

 

Total cost of revenues for the three months ended March 31,2005 increased slightly as compared to the same period of the prior year withno significant year over year changes in any particular cost of revenue lineitem.

 

**Operatingexpenses**

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

Research and developmentexpenses consist primarily of personnel, third party contractors and relatedcosts associated with the development and enhancement of our products.

 

| ** **                         | ** ** | **Three Months Ended  March 31,** | ** ** |
|------------------------------------|------------|-----------------------------------|------------|
| ** **                         | ** ** | **2005**                          | ** ** | **2004** | ** ** | **Change** | ** ** |
| Research and  development expenses |       | $                                 | 10,011     |   | $ | 9,740 |   | $ | 271 |   | 3 | % |
|                                    |            |                                   |            |  |  |  |  |  |  |  |  |  |

 

Research and development expenses increased for the threemonths ended March 31, 2005 as compared to the same period of the prior year aswe transition our product development efforts to new products due to thecompletion of the ICAN 5 product suite and continue to enhance and extend ourproduct suites.  We anticipate researchand development expenses to increase slightly in absolute dollars

 

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for the foreseeable future.

 

***Salesand marketing expenses***(in thousands exceptpercentages):

Sales and marketing expensesconsist primarily of personnel and related costs of our direct sales force andmarketing staff and the cost of expenditures specific to the marketing group,such as public relations and advertising, trade shows and marketing collateralmaterials and expenditures.

 

| ** **                    | ** ** | **Three Months Ended  March 31,** | ** ** |
|-------------------------------|------------|-----------------------------------|------------|
| ** **                    | ** ** | **2005**                          | ** ** | **2004** | ** ** | **Change** | ** ** |
| Sales and  marketing expenses |       | $                                 | 13,707     |   | $ | 15,004 |   | $ | (1,297 | ) | (9 | )% |
|                               |            |                                   |            |  |  |  |  |  |  |  |  |  |

 

Sales and marketing expenses decreased for the three months endedMarch 31, 2005 as compared to the same period of the prior year primarily dueto a decrease in promotional and public relations activities.  We anticipate sales and marketing expenses toincrease slightly in absolute dollars for the foreseeable future.

 

***General and administrativeexpenses*** (in thousands except percentages):

 

General and administrativeexpenses consist primarily of personnel and related costs for corporate,executive, human resources, legal, IT, finance and accounting functions.

 

| ** **                           | ** ** | **Three Months Ended  March 31,** | ** ** |
|--------------------------------------|------------|-----------------------------------|------------|
| ** **                           | ** ** | **2005**                          | ** ** | **2004** | ** ** | **Change** | ** ** |
| General and  administrative expenses |       | $                                 | 5,161      |   | $ | 4,609 |   | $ | 552 |   | 12 | % |
|                                      |            |                                   |            |  |  |  |  |  |  |  |  |  |

 

General and administrativeexpenses for the threemonths ended March 31, 2005 increased as compared to the same period of theprior year primarily due to consulting and related expenses incurred on complianceand review projects related to the requirements imposed by the Sarbanes-OxleyAct of 2002.  We anticipate general andadministrative expenses to increase slightly in absolute dollars for the foreseeablefuture.

 

***Interestincome and other income (expense), net***(in thousands exceptpercentages):

 

Interest income and otherincome (expense), net consists of interest earned on cash balances, foreigncurrency gains and losses, gains and losses on the disposal of fixed assets andother miscellaneous income and expense items.

 

| ** **                                       | ** ** | **Three Months Ended  March 31,** | ** ** |
|--------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                       | ** ** | **2005**                          | ** ** | **2004** | ** ** | **Change** | ** ** |
| Interest income  and other income (expense), net |       | $                                 | 286        |   | $ | (213 | ) | $ | 499 |   | (234 | )% |
|                                                  |            |                                   |            |  |  |  |  |  |  |  |  |  |

 

Interest income and otherincome (expense), net for the three months ended March 31, 2005 increasedas compared to the same period of the prior year primarily due to decreases inforeign exchange losses in several of our international subsidiaries and anincrease in interest income earned as a result of higher interest rates.

 

***Interestexpense***(inthousands except percentages):

 

| ** **       | ** ** | **Three Months Ended  March 31,** | ** ** |
|------------------|------------|-----------------------------------|------------|
| ** **       | ** ** | **2005**                          | ** ** | **2004** | ** ** | **Change** | ** ** |
| Interest expense |       | $                                 | (29        | )  | $ | (72 | ) | $ | 43 |   | (60 | )% |
|                  |            |                                   |            |  |  |  |  |  |  |  |  |  |

 

Interest expense for thethree months ended March 31, 2005 decreased as compared to the same period ofthe prior year primarily due to the full repayment of the equipment line and equipmentadvance prior to December 31, 2004.

 

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***Income tax provision***(in thousandsexcept percentages):

 

| ** **            | ** ** | **Three Months Ended  March 31,** | ** ** |
|-----------------------|------------|-----------------------------------|------------|
| ** **            | ** ** | **2005**                          | ** ** | **2004** | ** ** | **Change** | ** ** |
| Income tax  provision |       | $                                 | 223        |   | $ | 43 |   | $ | 180 |   | 419 | % |
|                       |            |                                   |            |  |  |  |  |  |  |  |  |  |

 

The income tax provisionconsists primarily of foreign taxes due to income earned in foreign operations andstate franchise taxes.  The estimatedeffective tax rates differ from the U.S. statutory rate primarily due to statetaxes, non-deductible expenses and changes in the valuation allowance.

 

The Company recordsvaluation allowances against its deferred tax assets, when necessary, inaccordance with SFAS No. 109, “Accounting for Income Taxes”.  Realization of deferred tax assets (such asnet operating loss carryforwards and income tax credits) is dependent on futuretaxable earnings and is therefore uncertain. To the extent management believes recovery is unlikely, the Companyestablishes a valuation allowance against its deferred tax asset.  The Company’s tax position as of March 31,2005 has not changed since December 31, 2004.  The Company continues to monitor the need forthe valuation allowance each period.  Inthe event actual results differ from the Company’s estimates, the operatingresults and financial position could be materially affected.

 

Net undistributed earningsof certain foreign subsidiaries are considered to be indefinitely reinvested,and accordingly, no provision for U.S. Federal and state income taxes has beenprovided thereon.  Upon distribution ofthese earnings in the form of dividends, or otherwise, the Company would besubject to U.S. income tax.

 

**Liquidity and capital resources**

 

As of March 31, 2005, we had cash and cashequivalents of $73.6 million, an increase of $0.5 million from $73.1 millionheld as of December 31, 2004.

 

*Operating activities:*

 

| ** **                                           | ** ** | **Three Months Ended  March 31,** | ** ** |
|------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                           | ** ** | **2005**                          | ** ** | **2004** | ** ** | **Change** | ** ** |
| Net cash (used  in) provided by operating activities |       | $                                 | (1,099     | ) | $ | 4,155 |   | $ | (5,254 | ) | (126 | )% |
|                                                      |            |                                   |            |  |  |  |  |  |  |  |  |  |

 

 

Net cash used in operating activities for thethree months ended March 31, 2005 was primarily related to a net loss of $2.6million and decreases in accounts payable, accrued compensation and relatedexpenses, accrued expenses and deferred revenues, partially offset by adecrease in accounts receivable.

 

Net cash provided by operating activities forthe three months ended March 31, 2004 was primarily due to a net loss of $5.8million and decreases in accrued compensation and related expenses and accruedexpenses, partially offset by a decrease in accounts receivable and increasesin accounts payable and deferred revenues.

 

*Investing activities:*

 

| ** **                                           | ** ** | **Three Months Ended  March 31,** | ** ** |
|------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                           | ** ** | **2005**                          | ** ** | **2004** | ** ** | **Change** | ** ** |
| Net cash  provided by (used in) investing activities |       | $                                 | 4          |   | $ | (827 | ) | $ | 831 |   | (100 | )% |
|                                                      |            |                                   |            |  |  |  |  |  |  |  |  |  |

 

The change in investing activities from March 31, 2004to March 31, 2005 is related primarily to a decrease in capitalexpenditures.  We expect capitalexpenditures in the next three months to remain flat compared to the previousthree months.

 

*Financing activities:*

 

| ** **                                           | ** ** | **Three Months Ended  March 31,** | ** ** |
|------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                           | ** ** | **2005**                          | ** ** | **2004** | ** ** | **Change** | ** ** |
| Net cash  provided by (used in) financing activities |       | $                                 | 1,878      |   | $ | (203 | ) | $ | 2,081 |   | (1,025 | )% |
|                                                      |            |                                   |            |  |  |  |  |  |  |  |  |  |

 

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Net cash provided by financing activities for thethree months ended March 31, 2005 increased as compared to the same period ofthe prior year primarily due to an increase in proceeds from stock optionexercises.

 

In November 2000, the Company established a$15.0 million line of credit facility (the “Line”) with a lendinginstitution that bears interest at an annual rate of either prime plus 0.5% orthe London InterBank Offered Rate (“LIBOR”) rate plus 2.50% (payable

monthly). The Line expires on May 31, 2005 andthe Company intends to renew this credit facility. As of March 31, 2005,$10.4 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 March 31, 2005, approximately $386,000 wasavailable for the issuance of letters of credit. The Line is secured byintellectual property rights, accounts receivable and certain other assets andis subject to certain borrowing base restrictions. The Line requiresmaintenance of certain financial covenants pertaining to key financial ratiosand the Company is in compliance with those covenants as of March 31,2005.

 

We believe that our current cash and cash equivalentsbalance will be sufficient to meet our working capital and capital expenditurerequirements for at least the next twelve months. However, we may need to raiseadditional funds, and we may not be able to obtain additional debt or equityfinancing on favorable terms, if at all. In addition, we may also utilize cashresources to fund acquisitions or investments in complementary businesses,technologies or product lines.

 

**RisksRelated to SeeBeyond**

 

You should carefully consider the risksdescribed below in evaluating the other statements made herein. The risksdescribed below are not the only ones facing our Company. Additional risks notpresently known to us, or we currently deem immaterial, may also impair ourbusiness operations.

 

Our business, financial condition or resultsof operations could be adversely affected by any of these risks. The tradingprice of our common stock could decline due to any of these risks.

 

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

 

We rely significantly upon customers makinglarge information technology purchasing decisions as a source of revenue. Thegeneral slow-down in capital spending by our customers that we experienced inrecent years, if sustained again in future periods, could result in reducedsales or the postponement of sales to our customers. There can be no assurancethe level of spending on information technology in general or on businessintegration software by our customers and potential customers in particular,will increase or remain at current levels in future periods. Lower spending oninformation technology could result in reduced license sales to our customers,reduced overall revenues, diminished margin levels, and could impair ouroperating results in future periods.

 

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

 

We have incurred substantial losses since1998 as we increased funding of the development of our products andtechnologies and expanded our sales and marketing organization. As of March 31,2005, we had an accumulated deficit of approximately $156.2 million. Wemay continue to incur losses in future periods and we may not achieve andsustain profitability on a quarterly basis, or on an 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 operating results have fluctuatedsignificantly in the past and may vary significantly in the future. We believeperiod-to-period comparisons of our historical results of operations are not agood predictor of our future performance.

 

Our revenues and operating results dependupon the volume and timing of customer orders and payments and the date ofproduct delivery. Historically, a substantial portion of our revenues in agiven quarter has been recorded in the final month of that quarter, with aconcentration of these revenues in the last two weeks of the final month. Weexpect this trend to continue and, therefore, any failure or delay in the closingof orders would have a material adverse effect on our quarterly operatingresults. Since our operating expenses are based on anticipated revenues andbecause a high percentage of these expenses are relatively fixed, a delay inthe recognition of revenues from one or more license transactions could causesignificant variations in operating results from quarter to quarter and cause adecline in our stock price. We realize substantially higher gross margins onour license revenues compared to our services and maintenance revenues. Thus,our margins for any particular quarter will be highly dependent on our revenuemix in that quarter. In our international markets, we have experienced someseasonality of revenues, with lower revenues in the summer months. Althoughthis seasonality has not had a material impact on our operating results in thepast, we cannot assure that our operating results will not

 

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fluctuate in the future as a result of theseand other international trends.

 

We record as deferred revenue, payments fromcustomers that do not meet our revenue recognition policy requirements. Sinceonly a small portion of our revenues each quarter is recognized from deferredrevenue, our quarterly results depend primarily upon entering into newcontracts to generate revenues for that quarter. New contracts may not resultin revenues in the quarter in which the contract was signed, and we may not beable to predict accurately when revenues from these contracts will berecognized. If our operating results are below the expectations of securitiesanalysts or investors for these or other reasons, our stock price would likelydecline, perhaps substantially.

 

***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 used by our customersthroughout their organizations to address critical business problems. Customersgenerally consider a wide range of issues before committing to purchase ourproducts, including product benefits, the ability to operate with existing andfuture computer systems, the ability to accommodate increased transactionvolumes and product reliability. Many customers are addressing these issues forthe first time when they consider whether to buy our products and services. Asa result, we or other parties, including systems integrators, must educatepotential customers on the use and benefits of our products and services. Inaddition, the purchase of our products generally involves a significantcommitment of capital and other resources by a customer. This commitment oftenrequires significant technical review, assessment of competitive products andapproval at a number of management levels within a customer’s organization. Oursales cycle may vary based on the industry in which the potential customeroperates and is difficult to predict for any particular license transaction.The length and variability of our sales cycle makes it difficult to predict whetherparticular sales will be concluded in any given quarter. If one or more of ourlicense transactions are not consummated in a given quarter, our results ofoperations for that quarter may be below our expectations and the expectationsof 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 our license revenueshave been, and are expected to continue to be, derived from the license of ourBusiness Integration Suite. Accordingly, our future operating results willdepend on the demand for our Business Integration Suite by future customers,including new and enhanced releases that are subsequently introduced. Ourlatest version of the Business Integration Suite, ICAN 5, was made generallyavailable to customers in October 2003. If our competitors release newproducts that are superior to our Business Integration Suite in functionality,performance or price, or if we fail to enhance our Business Integration Suiteand introduce new products in a timely manner, demand for our products maydecline, and we may have to reduce the pricing of our products. A decline indemand or pricing for our Business Integration Suite as a result of these orother factors would significantly reduce our revenues.

 

In the past, we have experienced delays inthe commencement of commercial releases of our Business Integration Suite. Inthe future, we may fail to introduce or deliver new products on a timely basis.If new releases or products are delayed or do not achieve market acceptance, wecould experience 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 release enhanced versions ofour products, we may not be successful in upgrading our customers who purchasedprevious versions of our Business Integration Suite to the current version. Wealso may not be successful in selling add-on modules for our products to existingcustomers. Any failure to continue to upgrade existing customers’ products orsell new modules, if and when they are introduced, could negatively impactcustomer satisfaction and our revenues.

 

***The loss of any significant customer could harm our business and causeour stock price to decline.***

 

We do not have long-term sales contracts withany of our customers. There can be no assurance that any of our customers willcontinue to purchase our products in the future. As a result, a customer thatgenerates substantial revenue for us in one period may not be a source ofrevenue in subsequent periods.  Because a significant portion of ourrevenues are derived from repeat customer business, the loss of any significantcustomer or the failure of such a customer to license additional products andservices from us, could cause our revenues to decline, harm our business andcause our stock price to decline.

 

***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 into agreements with a numberof systems integrators for them to install and deploy our products and perform

 

17

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custom integration of systems andapplications. These systems integrators also engage in joint marketing andsales efforts with us. If these relationships fail, we will have to devotesubstantially more resources to the sales and marketing and implementation andsupport of our products than we would otherwise, and our efforts may not be aseffective as those of the systems integrators. In many cases, these partieshave extensive relationships with our existing and potential customers and influencethe decisions of these customers. We rely upon these firms to recommend ourproducts during the evaluation stage of the purchasing process, as well as forimplementation and customer support services.

 

These systems integrators are notcontractually required to implement our products, and competition for theseresources may preclude us from obtaining sufficient resources to provide thenecessary 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 our competitorshave stronger relationships with some of these systems integrators and, as aresult, these systems integrators might be more likely to recommend competitors’products and services instead of ours. In addition, a number of our competitorshave relationships with a greater number of these systems integrators or havestronger systems integrator relationships based on specific vertical marketsand, therefore, have access to a broader base of customers.

 

Our failure to establish or maintain systemsintegrator relationships would significantly harm our ability to license andsuccessfully implement our software products. In addition, we rely on theindustry expertise and customer contacts of these firms in order to market ourproducts more effectively. Therefore, any failure of these relationships wouldalso harm our ability to increase revenues in key commercial markets. We arecurrently investing, and plan to continue to invest, significant resources todevelop these relationships. Our operating results could be adversely affectedif these efforts do not generate license and service revenues necessary tooffset 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 products is intenselycompetitive, evolving and subject to rapid technological change. We expect theintensity of competition to increase in the future. As a result of increasedcompetition, we may have to reduce the price of our products and services, andwe may experience reduced gross margins and loss of market share, any one ofwhich could significantly reduce our future revenues and operating results. Ourcurrent competitors include vendors offering business application integrationand traditional electronic data interchange, or EDI, software products, as wellas “in house” information technology departments of potential customers thathave developed or may develop systems that provide some or all of the functionalityof our Business Integration Suite. We may also encounter competition from majorenterprise software developers in the future.

 

Many of our existing and potentialcompetitors 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 of products andservices outside the United States accounted for 42% during the three monthsended March 31, 2005.  Revenues from the sale of products and services inthe United Kingdom as a percent of our total revenues were 13% during the threemonths ended March 31, 2005. We believe revenues from sales outside the UnitedStates will continue to account for a material portion of our total revenuesfor the foreseeable future. We are exposed to several risks inherent inconducting business internationally, such as:

 

•      fluctuations in currency exchange rates,which could result in increased expenses;

 

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

 

•      difficulties and costs of staffing andmanaging international operations;

 

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

 

•      reduced protection for intellectualproperty rights in some countries.

 

Any of these factors could adversely affectour international operations and, consequently, our operating results.

 

18

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***New regulations related to equity compensation willadversely affect our operating results and may affect our ability to attractand retain key personnel.***

Since ourinception, we have used stock options as an important component of our employeecompensation packages. We believe that our stock option plan is an essentialtool to link the long-term interests of our stockholders and employees, andserve to motivate management to make decisions that will, in the long run, givethe best returns to stockholders. The Financial Accounting Standards Board(FASB) has implemented changes to United States generally acceptedaccounting principles requiring us to record a charge to earnings for employeestock option grants, as well as other equity-based awards. The changesimplemented by FASB relating to the accounting for equity compensation plansare scheduled to go into effect in the first quarter of 2006.  This accounting pronouncement will negativelyimpact our operating results and could affect our ability to raise capital onacceptable terms.  For an illustrativeexample of the adverse impact this accounting change may have had on our recentoperating results, please see Note 5 — “Stock-Based Compensation” to theconsolidated financial statements included elsewhere in this report.  To the extent that new regulations make itmore difficult or expensive to grant options to employees, we may incurincreased compensation costs, change our equity compensation strategy or findit difficult to attract, retain and motivate employees, each of which couldmaterially and adversely affect our business.

 

***We could sufferlosses and negative publicity if new versions or releases of our productscontain errors or defects.***

 

Our products and their interactions with customers’ softwareapplications and IT systems are complex and, accordingly, there may beundetected errors or failures when our products are introduced or as newversions are released. In the past we have discovered software errors in ournew releases 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 donot operate with the many hardware and software platforms used by our customersand keep pace with technological change, our business may fail.***

 

We currently serve a customer base with a wide variety of constantlychanging hardware, software applications and platforms. If our products fail togain broad market acceptance due to an inability to support a variety of theseplatforms, our operating results may suffer. Our business depends on a numberof factors, including the following:

 

•      ourability to integrate our products with multiple platforms and existing, orlegacy, systems and to modify our products as new versions of softwareapplications are introduced;

 

•      theportability of our products, particularly the number of operating systems anddatabases our products can source or target;

 

•      ourability to anticipate and support new standards, especially Internet standards;

 

•      theintegration of additional software modules under development with our existingproducts; and

 

•      our management of software being developedby third parties for our customers for use with our products.

 

Our industry is characterized by very rapidtechnological change, frequent new product introductions and enhancements,changes in customer demands and evolving industry standards. We have also foundthe technological life cycles of our products are difficult to estimate. Webelieve we must continue to enhance our current products and concurrentlydevelop and introduce new products that anticipate emerging technologystandards and keep pace with competitive and technological developments.Failure to do so will harm our ability to compete. As a result, we are requiredto continue to make substantial product development 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 business integration softwareis rapidly evolving. We earn substantially all of our license revenues fromsales of our Business Integration Suite. We expect to earn substantially all ofour revenues in the foreseeable future from sales of our Business Integration Suiteand related products and services. Our future financial performance will dependon continued growth in the number of organizations demanding software andservices for application integration and business integration solutions andseeking outside vendors to develop, manage and maintain this software for theircritical applications. Many of our potential customers have made significantinvestments in internally developed systems and would incur significant costsin switching to third-party products, which may substantially inhibit thegrowth of the market for business integration software. If this market fails togrow, or grows more slowly than we expect, our revenues will be adverselyaffected.

 

19

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

 

From time to time, we have been subject tolitigation. In addition to the related cost and use of cash, pending or futurelitigation could cause the diversion of management’s attention and resources,and ultimately could have a material adverse impact on our results of operationand financial condition.

 

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

 

We depend upon our ability to develop andprotect our proprietary technology and intellectual property rights todistinguish our product from our competitors’ products. The unauthorized use byothers of our proprietary rights could materially harm our business. We rely ona combination of copyright, trademark and trade secret laws, as well asconfidentiality agreements and licensing arrangements, to establish and protectour proprietary rights. We currently have no issued patents. Despite ourefforts to protect our proprietary rights, existing laws afford only limitedprotection. Attempts may be made to copy or reverse engineer aspects of ourproducts or to obtain and use information we regard as proprietary.Accordingly, we cannot be certain we will be able to protect our proprietaryrights against unauthorized third party copying or use. Furthermore, policingthe unauthorized use of our products is difficult, and expensive litigation maybe necessary in the future to enforce our 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 we have infringedtheir current or future intellectual property rights. We expect softwaredevelopers in our market will increasingly be subject to infringement claims asthe number of products in different software industry segments overlap. Anyclaims, with or without merit, could be time-consuming, result in costlylitigation, prevent product shipment or cause delays, or require us to enterinto royalty or licensing agreements, any of which could harm our business.Patent litigation in particular has complex technical issues and inherentuncertainties. In the event an infringement claim against us is successful andwe cannot obtain a license on acceptable terms, license a substitute technologyor redesign our products to avoid infringement, our business would be harmed.Furthermore, former employers of our current and future employees may assertour employees have improperly disclosed to us or are using their confidentialor 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 our current cashresources will be sufficient to meet our working capital and capitalexpenditure needs for at least the next twelve months. After that, we may needto raise additional funds, and we cannot be certain we will be able to obtainadditional debt or equity financing on favorable terms, or at all. If we raiseadditional equity financing, our stockholders may experience significantdilution of their ownership interests and the per share value of our commonstock could decline. If we engage in debt financing, we may be required toaccept terms that restrict our ability to incur additional indebtedness andforce us to maintain specified liquidity or other ratios, any of which couldharm our business. If we need additional capital and cannot raise it onacceptable terms, we may not be able to, among other things:

 

•      develop or enhance our products andservices;

 

•      maintain or expand our sales and marketingorganizations;

 

•      acquire complementary technologies,products or 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 of these things couldresult in lower revenues and could seriously harm our business.

 

***If we fail to attract, retain and integrate qualified personnel, ourability to compete will be harmed.***

 

We depend on the continued service of our keytechnical, sales and senior management personnel, including our founder andChief Executive Officer, James T. Demetriades. Most of these persons are notbound by an employment agreement, and we do not maintain key person lifeinsurance on any of these persons, other than Mr. Demetriades. The loss ofany of our senior management or other key product development or sales andmarketing personnel could adversely affect our future operating results.Additionally, we recently experienced significant turnover in our NorthAmerican sales force, including new staff and management.  Our ability toeffectively train and integrate this new North American sales force could posecontinuing challenges to our business.  If we fail to do so,

 

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our operating results, particularly in theshort term, could be negatively impacted.  In addition, we must attract,retain and motivate highly skilled employees, including sales personnel andsoftware engineers. We face significant competition for individuals with theskills required to develop, market and support our products and services. Wemay not be able to recruit and retain sufficient numbers of these highlyskilled employees. If we fail to do so, our ability to compete will besignificantly 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 our growtheffectively in order to offer our products and services and achieve revenuegrowth and profitability in a rapidly evolving market. Our growth has and willcontinue to place a significant strain on our management systems and resources,and we may not be able to effectively manage our growth in the future.

 

Furthermore, if our relationships withsystems integrators succeed and we are able to penetrate additional commercialmarkets, we may need additional sales and marketing and professional servicesresources to support these customers. The growth of our customer base willrequire us to invest significant resources in the training and development ofour employees and our systems integration partners. If these organizations failto keep pace with the number and demands of the customers that license ourproducts, our ability to market and sell our products and services and ourability to develop new products and services will be harmed. To manage ourbusiness, we must continue to:

 

•      effectively manage our direct sales force;

 

•      effectively manage our professionalservices organization;

 

•      hire and retain qualified softwareengineers;

 

•      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 acquire or invest in othercompanies, we may experience further strain on our resources and face risksinherent in integrating two corporate cultures, product lines, operations andbusinesses.

 

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

 

Some provisions of Delaware law and ourcertificate of incorporation and bylaws could have the effect of delaying orpreventing a third party from acquiring us, even if a change in control wouldbe beneficial to our stockholders. For example, our certificate of incorporationprovides for a classified board of directors whose members serve staggeredthree-year terms and does not provide for cumulative voting in the election ofdirectors. Our board of directors has the authority, without further action byour stockholders, to fix the rights and preferences of and issue shares ofpreferred stock. In addition, our stockholders are unable to act by writtenconsent. These and other provisions could make it more difficult for a thirdparty to acquire us, even if doing so would benefit our stockholders.

 

***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 30% of our outstanding commonstock. Our executive officers and directors beneficially own, in the aggregate,approximately 39% of our outstanding common stock. As a result, thesestockholders will be able to exercise a significant level of control over allmatters requiring stockholder approval, including the election of directors andapproval of significant corporate transactions. This could have the effect ofdelaying 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 potential terroristattacks could have an adverse effect upon an already weakened world economy andcould cause U.S. and foreign businesses to slow spending on products andservices and delay sales cycles. The economic uncertainty resulting from anysuch future attacks and other responses associated with such attacks maycontinue to negatively impact short-term consumer and business confidence.

 

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**Item 3 .           Quantitative and QualitativeDisclosure About Market Risk**

 

We are exposed to a variety of risks, includingchanges in interest rates affecting the return on our investments and foreigncurrency fluctuations. We have established policies and procedures to manageour exposure to fluctuations in interest rates and foreign currency exchangerates.

 

*Interest rate risk.* We maintain our funds in moneymarket and certificate of deposit accounts at financial institutions. Ourexposure to market risk due to fluctuations in interest rates relates primarilyto our interest earnings on our cash deposits. These securities are subject tointerest rate risk in as much as their fair value may fall if market interestrates increase. If market interest rates were to increase immediately anduniformly by 10% from the levels prevailing as of March 31, 2005, the fairvalue of the portfolio would not decline by a material amount. We do not usederivative financial instruments to mitigate risks. However, we do have aninvestment policy that would allow us to invest in short-term and long-terminvestments such as money market instruments and corporate debt securities. Ourpolicy attempts to reduce such risks by typically limiting the maturity date ofsuch securities, placing our investments with high credit quality issuers andlimiting the amount of credit exposure with any one issuer.

 

*Foreign currency exchange rate risk.* Ourexposure to market risk due to fluctuations in foreign currency exchange ratesrelates primarily to the intercompany balances with our subsidiaries located inAustralia, France, Germany, Japan and the United Kingdom. Transaction gains orlosses have not been significant in the past and we do not participate in anyhedging activity on foreign currencies. We would not experience a materialforeign exchange loss based on a hypothetical 10% adverse change in the priceof any of the local currencies of these countries. Consequently, we do notexpect that a reduction in the value of such accounts denominated in foreigncurrencies resulting from a sudden or significant fluctuation in foreignexchange rates would have a direct material impact on our financial position,results of operations or cash flows.

 

**Item 4 .           Controls and Procedures**

 

Our management evaluated, with theparticipation of our chief executive officer and chief financial officer, theeffectiveness of our disclosure controls and procedures (as defined inRule 13a-15(e) under the Securities Exchange Act of 1934 (the “ExchangeAct”)) as of the end of the period covered by this Quarterly Report on Form10-Q.  Based upon this evaluation, our chief executive officer and chieffinancial officer have concluded that our disclosure controls and proceduresare effective to ensure that information we are required to disclose in reportsthat we file or submit under the Exchange Act is recorded, processed, summarizedand reported within the time periods specified in Securities and ExchangeCommission rules and forms. There was no change in our internal control overfinancial reporting (as defined in Rule 13a—15(f) under the Exchange Act)during the period covered by this Quarterly Report on Form 10-Q that hasmaterially affected, or is reasonably likely to materially affect, our internalcontrol over financial reporting.

 

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**PARTII —OTHER INFORMATION**

 

**Item 1.            Legal Proceedings**

 

The Company is party to routine claims and suitsbrought against it in the ordinary course of business including disputesarising over the ownership of intellectual property rights and collectionmatters. In the opinion of management, the outcome of such routine claims willnot have a material adverse effect on the Company’s business, financialcondition or results of operation.

 

**Item 2.            Changes in Securities and Use ofProceeds**

 
| **(a)** | Not applicable                                                          |
|---------|-------------------------------------------------------------------------|
| **(b)** | Not applicable                                                          |
| **(c)** | Purchases of Equity Securities  by the Issuer and Affiliated Purchasers |

 

None.

 

**Item 3.            Defaults Upon Senior Securities**

 

Notapplicable

 

**Item 4.            Submission of Matters to a Vote ofSecurity Holders**

 

None

 

**Item 5.            Other Information**

 

None

 

**Item 6.            Exhibits**

 
| **Exhibit  No.** | ** ** | **Description**                                                                                                                                                                                                    |
|------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1(f)           |       | Restated Certificate 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(n)(c)       |       | Amended and Restated  1998 Stock Plan                                                                                                                                                                              |
| 10.3(a)(c)       |       | 2000 Employee Stock  Purchase Plan and form of agreements thereunder                                                                                                                                               |
| 10.5(a)          |       | Registration Rights  Agreement dated May 8, 1998, as amended                                                                                                                                                       |
| 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 Exchange 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 |

 

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| 10.20(g)    |   | Third Amendment to the  Loan and Security Agreement dated as of June 30, 2002 between the  Registrant and Comerica Bank-California                                                                                           |
|-------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.22(h)    |   | First Amendment to the  Lease Agreement between Monrovia Technology Campus LLC and the Registrant  dated January 23, 2002                                                                                                    |
| 10.23(h)    |   | Second Amendment to the  Lease Agreement between Foothill Technology Center LLC,  (Boone/Fetter/Occidental I) and the Registrant dated October 25, 2002                                                                      |
| 10.24(h)    |   | Fourth Amendment to the  Loan and Security Agreement dated December 24, 2002 between the  Registrant and Comerica Bank-California                                                                                            |
| 10.25(c)(h) |   | Change of Control  Letter Agreement between Alex Demetriades and the Registrant dated  March 19, 2001                                                                                                                        |
| 10.26(c)(k) |   | Form of Change of  Control Letter Agreement between the Registrant and certain of its executive  officers.                                                                                                                        |
| 10.27(c)(l) |   | Employment Letter  Agreement between the Registrant and H. Carvel Moore dated July 21,  2003.                                                                                                                                |
| 10.28(l)    |   | Fifth Amendment to the  Loan and Security Agreement dated December 24, 2002 between the  Registrant and Comerica Bank-California dated March 26, 2003                                                                   |
| 10.29(l)    |   | Sixth Amendment to the  Loan and Security Agreement dated December 24, 2002 between the  Registrant and Comerica Bank-California dated May 30, 2003                                                                          |
| 10.31(o)    |   | Lease Agreement between  Mr. T. Devendar Reddy and STC Systems Private Limited dated April 22,  2004 for premises in Hyderabad, India                                                                                        |
| 10.32(o)    |   | Equipment Lease  Agreement between Mrs. T. Jhansi Reddy and STC Systems Private Limited dated  April 22, 2004 for equipment at leased premises in Hyderabad, India                                                           |
| 10.33(o)    |   | Seventh Amendment to  the Loan and Security Agreement dated December 24, 2002 between the  Registrant and Comerica Bank-California dated July 29, 2004                                                                  |
| 10.34       |   | Sublease agreement  between the Registrant (Sublessor) and Parsons Energy & Chemicals Group  Inc. (Sublessee) and S&F Huntington Millennium LLC (Master Lessor) dated  March 4, 2005 for premises in Monrovia, California |
| 10.35       |   | First Amendment to the  Lease Agreement between the Registrant and S&F Huntington Millennium LLC  dated March 9, 2005                                                                                                         |
| 14.1(p)     |   | Code of Ethics                                                                                                                                                                                                                    |
| 21.1(p)     |   | List of subsidiaries                                                                                                                                                                                                              |
| 23.1(p)     |   | Consent of Ernst &  Young LLP, Registered Public Accounting Firm                                                                                                                                                              |
| 31.1        |   | Rule 13a-14(a)/  15d-14(a) Certifications of Chief Executive Officer and Chief Financial  Officer                                                                                                                                 |
| 32.1        |   | Section 1350  Certifications of Chief Executive Officer and Chief Financial Officer                                                                                                                                               |
|        |   |                                                                                                                                                                                                                              |
| (a)         |   | Incorporated by reference  to an exhibit in the Registrant’s Registration Statement on Form S-1 File No.  333-330648.                                                                                                        |
| (b)         |   | Incorporated by reference  to an exhibit in the Registrant’s Quarterly Report on Form 10-Q filed with  the Commission on November 14, 2000.                                                                             |
| (c)         |   | Denotes a management  contract or compensatory plan arrangement.                                                                                                                                                                  |
| (d)         |   | Incorporated by reference  to an exhibit in the Registrant’s Quarterly Report on Form 10-Q filed with  the Commission on May 15, 2001.                                                                                       |
| (e)         |   | Incorporated by reference  to an exhibit in the Registrant’s Annual Report on Form 10-K filed with the  Commission on March 30, 2001.                                                                                   |
| (f)         |   | Incorporated by reference  to an exhibit in the Registrant’s Annual Report on Form 10-K filed with the  Commission on February 8, 2002.                                                                                 |
| (g)         |   | Incorporated by reference  to an exhibit in the Registrant’s Quarterly Report on Form 10-Q filed with  the Commission on August 14, 2002.                                                                               |
| (h)         |   | Incorporated by reference  to an exhibit in the Registrant’s Annual Report on Form 10-K filed with  the Commission on March 28, 2003.                                                                              |
| (k)         |   | Incorporated by reference  to an exhibit in the Registrant’s Annual Report on Form 10-K/A filed with the  Commission on May 30, 2003.                                                                                        |
| (l)         |   | Incorporated by reference  to an exhibit in the Registrant’s Quarterly Report on Form 10-Q filed with  the Commission on August 14, 2003.                                                                               |
| (m)         |   | Incorporated by reference  to an exhibit in the Registrant’s Quarterly Report on Form 10-Q filed with  the Commission on November 14, 2003.                                                                             |
| (n)         |   | Incorporated by reference  to an exhibit in the Registrant’s Proxy Statement on Schedule 14A filed  with the Commission on April 29, 2004                                                                          |
| (o)         |   | Incorporated by reference  to an exhibit in the Registrant’s Quarterly Report on Form 10-Q filed with  the Commission on August 9, 2004.                                                                                |
| (p)         |   | Incorporated by reference  to an exhibit in the Registrant’s Annual Report on Form 10-K filed with  the Commission on March 9, 2005.                                                                               |

 

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**Signature**

 

Pursuant to the requirements of Section 13 or15(d) of the Securities Exchange Act of 1934, the Registrant has duly causedthis report to be signed on its behalf by the undersigned thereunto dulyauthorized, on May 6, 2005.

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

 

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