**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM10-Q**

 

| **ý**                                                                                                                                                                                                                                                                                                                                                                    | **QUARTERLY REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|----------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                                                                                                                                                                                          |                                                                                         |
| **For the quarterly period ended March 31, 2003**                                                                                                                                                                                                                                                                                                                        |
|                                                                                                                                                                                                                                                                                                                                                                          |                                                                                         |
| **OR**                                                                                                                                                                                                                                                                                                                                                                        |
|                                                                                                                                                                                                                                                                                                                                                                          |                                                                                         |
| **o**                                                                                                                                                                                                                                                                                                                                                                         | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITES EXCHANGE ACT OF 1934** |
|                                                                                                                                                                                                                                                                                                                                                                          |                                                                                         |
| **For the transition period from                               to                            ** |
|                                                                                                                                                                                                                                                                                                                                                                          |                                                                                         |
| **Commission File No. 000-30207**                                                                                                                                                                                                                                                                                                                                        |

 

**SEEBEYONDTECHNOLOGY CORPORATION**

(Exactname of Registrant as Specified in Its Charter)

 

| **Delaware**                                                                                                                                  |   | **95-4249153**                            |
|-----------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------------------------|
| (State  or Other Jurisdiction ofIncorporation or Organization)                                                                                |   | (I.R.S.  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) |

 

Indicateby check mark whether the registrant: (1) has filed all reports requiredto be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports) and (2) has been subject tosuch filing requirements for the past 90 days. Yes ý No o

 

Indicate by check mark whether the registrantis an accelerated filer (as defined in Rule 12b-2 under theAct). Yes ý  No o

 

Thenumber of shares outstanding of the registrant’s Common Stock, $0.0001 parvalue, as of May 13, 2003 was 82,710,275.

 

 

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**SeeBeyond Technology Corporation and Subsidiaries**

**INDEX**

 
|                                  | **Page**                                                                                                              |
|---------------------------------------|-----------------------------------------------------------------------------------------------------------------------|
| **Part I—Financial Information** | 3                                                                                                                     |
| Item 1.                               | Financial Statements:                                                                                                 | 3 |
|                                  | Condensed  Consolidated Balance Sheets as of March 31, 2003 (unaudited) and  December 31, 2002              | 3 |
|                                  | Condensed  Consolidated Statements of Operations (unaudited) for the three months ended  March 31, 2003 and 2002 | 4 |
|                                  | Condensed  Consolidated Statements of Cash Flows (unaudited) for the three months ended  March 31, 2003 and 2002 | 5 |
|                                  | Notes  to Condensed Consolidated Financial Statements (unaudited)                                                     | 6 |
| Item 2.                               | Management’s Discussion and Analysis of  Financial Condition and Results of Operations                           | 11 |
| Item 3.                               | Quantitative and Qualitative Disclosure About  Market Risk                                                            | 21 |
| Item 4.                               | Controls and Procedures                                                                                               | 21 |
| **Part II—Other Information**    | 22                                                                                                                    |
| Item  1.                              | Legal  Proceedings                                                                                                    | 22 |
| Item  2.                              | Changes  in Securities and Use of Proceeds                                                                            | 22 |
| Item  4.                              | Submission  of Matters to a Vote of Security Holders                                                                  | 22 |
| Item  6.                              | Exhibits  and Reports on Form 8-K                                                                                     | 22 |
| **Signature**                         | 24                                                                                                                    |

 

2

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**PART I****—FINANCIAL INFORMATION**

 

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

 

**SeeBeyond Technology Corporation and Subsidiaries**

**CondensedConsolidated Balance Sheets**

 
| **In thousands, except share and  per share data**                                                                                                                                                                                        |   | **March 31,  2003** | ** ** | **December  31,  2002** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------|------------|-------------------------|------------|
|                                                                                                                                                                                                                                      |   | **(unaudited)**     |       |                    | ** ** |
| Assets:                                                                                                                                                                                                                                   |   |                |       |                    |       |
| Current assets:                                                                                                                                                                                                                           |   |                |       |                    |       |
| Cash and cash equivalents                                                                                                                                                                                                                 |   | $                   | 86,614     |                    | $          | 94,114 |   |
| Accounts receivable, net of allowances of $2,581  and $2,539 at March 31, 2003 and December 31, 2002, respectively                                                                                                                        |   | 33,787              |       | 33,550                  |       |
| Prepaid expenses and other current assets                                                                                                                                                                                                 |   | 3,137               |       | 4,180                   |       |
| Total current assets                                                                                                                                                                                                                      |   | 123,538             |       | 131,844                 |       |
| Property and equipment, net                                                                                                                                                                                                               |   | 21,424              |       | 22,429                  |       |
| Goodwill                                                                                                                                                                                                                                  |   | 1,391               |       | 1,391                   |       |
| Other assets                                                                                                                                                                                                                              |   | 2,083               |       | 1,379                   |       |
| Total assets                                                                                                                                                                                                                              |   | $                   | 148,436    |                    | $          | 157,043 |   |
| Liabilities and stockholders’ equity:                                                                                                                                                                                                |   |                |       |                    |       |
| Current liabilities:                                                                                                                                                                                                                      |   |                |       |                    |       |
| Accounts payable                                                                                                                                                                                                                          |   | $                   | 9,514      |                    | $          | 11,343 |   |
| Accrued compensation and related expenses                                                                                                                                                                                                 |   | 11,012              |       | 11,818                  |       |
| Accrued expenses                                                                                                                                                                                                                          |   | 7,695               |       | 8,891                   |       |
| Deferred revenues                                                                                                                                                                                                                         |   | 30,026              |       | 28,141                  |       |
| Equipment line and advance payable - current  portion                                                                                                                                                                                     |   | 2,988               |       | 2,988                   |       |
| Capital lease payable - current portion                                                                                                                                                                                                   |   | 239                 |       | 214                     |       |
| Total current liabilities                                                                                                                                                                                                                 |   | 61,474              |       | 63,395                  |       |
| Equipment line and advance payable                                                                                                                                                                                                        |   | 2,473               |       | 3,260                   |       |
| Capital lease line payable                                                                                                                                                                                                                |   | 711                 |       | 750                     |       |
| Total liabilities                                                                                                                                                                                                                         |   | 64,658              |       | 67,405                  |       |
| Stockholders’ equity:                                                                                                                                                                                                                |   |                |       |                    |       |
| Preferred stock, $.0001 par value - 10,000,000  shares authorized; no shares issued and outstanding as of March 31, 2003 and  December 31, 2002                                                                                           |   | —              |       | —                  |       |
| Common stock, $.0001 par value - 200,000,000  shares authorized; 83,893,839 shares issued and 82,693,839 shares outstanding  as of March 31, 2003 and 83,738,243 shares issued and 82,538,243 shares  outstanding as of December 31, 2002 |   | 8                   |       | 8                       |       |
| Additional paid-in capital                                                                                                                                                                                                                |   | 219,559             |       | 219,246                 |       |
| Treasury stock                                                                                                                                                                                                                            |   | (2,760              | )          | (2,760                  | )          |
| Deferred stock compensation                                                                                                                                                                                                               |   | (201                | )          | (317                    | )          |
| Accumulated other comprehensive loss                                                                                                                                                                                                      |   | (263                | )          | (99                     | )          |
| Accumulated deficit                                                                                                                                                                                                                       |   | (132,565            | )          | (126,440                | )          |
| Total stockholders’ equity                                                                                                                                                                                                           |   | 83,778              |       | 89,638                  |       |
| Total liabilities and stockholders’ equity                                                                                                                                                                                           |   | $                   | 148,436    |                    | $          | 157,043 |   |

 

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

 

3

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**SeeBeyond Technology Corporation and Subsidiaries**

**CondensedConsolidated Statements of Operations**

**(Unaudited)**

 
|                                                                                                                                                |   | **Three  Months Ended  March 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------------|------------|
| **In thousands, except per share  data**                                                                                                            |   | **2003**                           | ** ** | **2002** | ** ** |
| Revenues:                                                                                                                                           |   |                               |       |   |   |
| License                                                                                                                                             |   | $                                  | 12,990     |   | $ | 21,069 |   |
| Services                                                                                                                                            |   | 11,232                             |       | 10,745 |   |
| Maintenance                                                                                                                                         |   | 11,600                             |       | 9,068 |   |
| Total revenues                                                                                                                                      |   | 35,822                             |       | 40,882 |   |
| Cost of revenues:                                                                                                                                   |   |                               |       |   |   |
| License                                                                                                                                             |   | 545                                |       | 1,059 |   |
| Services and maintenance (exclusive of stock-based  compensation of $16 and $42 for the three months ended March 31, 2003 and  2002, respectively.) |   | 11,548                             |       | 9,967 |   |
| Total cost of revenues                                                                                                                              |   | 12,093                             |       | 11,026 |   |
| Gross profit                                                                                                                                        |   | 23,729                             |       | 29,856 |   |
| Operating expenses:                                                                                                                                 |   |                               |       |   |   |
| Research and development (exclusive of stock-based  compensation $18 and $47 for the three months ended March 31, 2003 and 2002,  respectively.)    |   | 10,627                             |       | 7,655 |   |
| Sales and marketing (exclusive of stock-based  compensation of $59 and $156 for the three months ended March 31, 2003 and  2002, respectively.)     |   | 14,481                             |       | 14,500 |   |
| General and administrative (exclusive of  stock-based compensation $8 and $20 for the three months ended March 31, 2003  and 2002, respectively.)   |   | 4,626                              |       | 4,210 |   |
| Amortization of sales and marketing warrants                                                                                                        |   | 111                                |       | 441 |   |
| Amortization of stock-based compensation                                                                                                            |   | 101                                |       | 265 |   |
| Total operating expenses                                                                                                                            |   | 29,946                             |       | 27,071 |   |
| (Loss) income from operations                                                                                                                       |   | (6,217                             | )          | 2,785 |   |
| Other income:                                                                                                                                       |   |                               |       |   |   |
| Interest, net                                                                                                                                       |   | 170                                |       | 193 |   |
| (Loss) income before income tax provision                                                                                                           |   | (6,047                             | )          | 2,978 |   |
| Provision for income tax                                                                                                                            |   | 78                                 |       | 83 |   |
| Net (loss) income                                                                                                                                   |   | $                                  | (6,125     | ) | $ | 2,895 |   |
|                                                                                                                                                |   |                               |       |   |   |
| Basic net (loss) earnings per share                                                                                                                 |   | $                                  | (0.07      | ) | $ | 0.04 |   |
| Diluted net (loss) earnings per share                                                                                                               |   | $                                  | (0.07      | ) | $ | 0.03 |   |
| Number of shares used in calculating:                                                                                                               |   |                               |       |   |   |
| - basic net (loss) earnings per share                                                                                                               |   | 82,616                             |       | 78,678 |   |
| - diluted net (loss) earnings per share                                                                                                             |   | 82,616                             |       | 82,873 |   |

 

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

 

4

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**SeeBeyond Technology Corporation and Subsidiaries**

**CondensedConsolidated Statements of Cash Flows**

**(Unaudited)**

 
|                                                                                  |   | **Three  Months Ended  March 31,** | ** ** |
|---------------------------------------------------------------------------------------|--------|------------------------------------|------------|
| **In thousands**                                                                      |   | **2003**                           |       | **2002** | ** ** |
| Cash flows from operating activities:                                                 |   |                               |       |   |   |
| Net (loss) income                                                                     |   | $                                  | (6,125     | ) | $ | 2,895 |   |
| Adjustments to reconcile net (loss) income to net  cash used in operating activities: |   |                               |       |   |   |
| Gain on disposal of fixed assets                                                      |   | (30                                | )          | — |   |
| Depreciation and amortization                                                         |   | 1,435                              |       | 1,398 |   |
| Provision for doubtful accounts receivable                                            |   | 84                                 |       | 48 |   |
| Amortization of sales and marketing warrants                                          |   | 111                                |       | 441 |   |
| Amortization of stock-based compensation                                              |   | 101                                |       | 265 |   |
| Changes in assets and liabilities:                                                    |   |                               |       |   |   |
| Accounts receivable                                                                   |   | (320                               | )          | (8,911 | ) |
| Prepaid expenses and other current assets                                             |   | 1,043                              |       | (133 | ) |
| Accounts payable                                                                      |   | (1,829                             | )          | (1,836 | ) |
| Accrued compensation and related expenses                                             |   | (2,002                             | )          | (13 | ) |
| Deferred revenue                                                                      |   | 1,885                              |       | 3,850 |   |
| Net cash used in operating activities:                                                |   | (5,647                             | )          | (1,996 | ) |
| Cash flows from investing activities:                                                 |   |                               |       |   |   |
| Purchases of property and equipment                                                   |   | (400                               | )          | (2,205 | ) |
| Related party receivable                                                              |   | —                             |       | 366 |   |
| Other                                                                                 |   | (704                               | )          | (585 | ) |
| Net cash used in investing activities                                                 |   | (1,104                             | )          | (2,424 | ) |
| Cash flows from financing activities:                                                 |   |                               |       |   |   |
| Net (repayments) borrowings on bank lines of credit                                   |   | (787                               | )          | (163 | ) |
| Proceeds from issuance of common stock pursuant to  secondary public offering, net    |   | —                             |       | 58,880 |   |
| Proceeds from issuance of common stock pursuant to  employee stock option plan        |   | 216                                |       | 3,328 |   |
| Repayments of capital lease obligation                                                |   | (14                                | )          | — |   |
| Net cash (used in) provided by financing activities                                   |   | (585                               | )          | 62,045 |   |
| Effect of exchange rate changes on cash                                               |   | (164                               | )          | (86 | ) |
| Net (decrease) increase in cash and cash  equivalents                                 |   | (7,500                             | )          | 57,539 |   |
| Cash and cash equivalents at beginning of the  period                                 |   | 94,114                             |       | 47,039 |   |
| Cash and cash equivalents at end of the period                                        |   | $                                  | 86,614     |   | $ | 104,578 |   |

 

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

 

5

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**SeeBeyond Technology Corporation and Subsidiaries**

**Notes toCondensed Consolidated Financial Statements**

**(Unaudited)**

 

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

 

The accompanying unauditedcondensed consolidated financial statements have been prepared by SeeBeyondTechnology Corporation (the “Company” or “SeeBeyond”) in accordance with therules and regulations of the Securities and Exchange Commission. Certaininformation and footnote disclosures normally included in consolidatedfinancial statements prepared in accordance with generally accepted accountingprinciples have been condensed or omitted in accordance with such rules andregulations. In the opinion of management, the accompanying unaudited condensedconsolidated financial statements reflect all adjustments, consisting only ofnormal recurring adjustments, necessary to present fairly the financialposition of the Company, and its results of operations and cash flows. Thesecondensed consolidated financial statements should be read in conjunction withthe annual audited consolidated financial statements and notes as of and forthe year ended December 31, 2002 included in the Company’s Form 10-Kfiled with the Securities and Exchange Commission on March 28, 2003.

 

The results of operationsfor the three months ended March 31, 2003 are not necessarily indicative of theresults that may be expected for the year ending December 31, 2003 or anyother interim period, and the Company makes no representations related thereto.

 

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

 

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

 

**Note 2.    *Revenue Recognition***

 

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

 

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

 

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

 

*Services Revenues:*   Revenuesfrom services are comprised of consulting and implementation services and, to alimited extent, training. Services are generally sold on a time-and-materialsor fixed fee basis and include a range of services including installation 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 are not essential to the functionality (i.e. do not involvesignificant production, modification or customization of the software orbuilding complex interfaces) of any other element of the transaction and aredescribed in the contract such that the total price of the arrangement would beexpected to vary as the result of the inclusion or exclusion of the services.Revenues for services are recognized as the services are performed. Trainingservices are sold either on a per student basis or per class and are recognizedas classes are attended.

 

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

 

Revenues on sales made byalliance partners are generally recognized upon shipment of the software to theend user, if all other revenue recognition criteria noted above are met. Underlimited arrangements with certain distributors, when all the revenuerecognition criteria have

 

6

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been met upon delivery ofthe product to the distributor, revenues are recognized at that time. TheCompany does not offer a right of return on its products.

 

**Note 3.    *Recently Issued Accounting Pronouncements***

 

In December 2002, theFASB issued SFAS No. 148, “Accounting for Stock Based Compensation—Transitionand Disclosure—an Amendment to FAS 123.” SFAS 148 provides twoadditional transition methods for entities that adopt the fair value method ofaccounting for stock-based compensation. The statement requires disclosure ofcomparable information for all companies regardless of whether, when, or how anentity adopts the preferable, fair value based method of accounting. Thesedisclosures are now required for interim periods in addition to annualdisclosure.  The Company adopted theadditional disclosure provision of SFAS No. 148 in the fourth quarter of2002.  As permitted, the Company has notadopted the fair value method and continues to account for options under APBNo. 25.

 

In July 2002, the FASBissued SFAS No. 146, “Accounting for Costs Associated with Exit orDisposal Activities.” SFAS No. 146 requires a liability for costsassociated with an exit or disposal activity be recognized and measuredinitially at fair value only when the liability is incurred rather than thedate of commitment to an exit or disposal plan. SFAS No. 146 is effectivefor exit or disposal activities that are initiated after December 31,2002.

 

In November 2001, theFinancial Accounting Standards Board (“FASB”) issued an announcement on thetopic of “Income Statement Characterization of Reimbursements Received forOut-of-Pocket Expenses Incurred,” which was subsequently incorporated inEmerging Issues Task Force (“EITF”) No. 01-14. EITF No. 01-14requires companies to characterize reimbursements received for out-of-pocketexpenses as revenues in the statement of operations. Historically, the Companyhas netted reimbursements received for out-of-pocket expenses against therelated expenses in the accompanying condensed consolidated statements ofoperations. Reimbursable out-of-pocket expenses reclassified as servicerevenues were approximately $990,000 and $520,000 for the three months endedMarch 31, 2003 and 2002, respectively.

 

In October 2001, theFinancial Accounting Standards Board issued SFAS No. 144, “Accounting forImpairment or Disposal of Long-Lived Assets.” SFAS No. 144 supersedes SFASNo. 121, “Accounting for the Impairment of Long-Lived Assets and forLong-Lived Assets to be Disposed Of”, and addresses financial accounting andreporting for the impairment or disposal of long-lived assets. The Companyadopted SFAS No. 144 on January 1, 2002 and the adoption did not havea material impact on our results of operations, financial position or cashflows.

 

In June 2001, theFinancial Accounting Standards Board issued SFAS No. 141, “BusinessCombinations” and SFAS No. 142, “Goodwill and Other Intangible Assets.”SFAS No. 141 requires all business combination initiated afterJune 30, 2001 to be accounted for using the purchase method. Under SFASNo. 142 goodwill and intangible assets with indefinite lives are no longeramortized but reviewed annually, or more frequently if impairment indicatorsarise, for impairment. The amortization provisions of SFAS No. 142 applyto goodwill and intangible assets acquired after June 30, 2001. TheCompany adopted SFAS No. 142 effective January 1, 2002 with respectto goodwill and intangible assets acquired prior to July 1, 2001.

 

**Note 4.    *Operations by Reportable Segments andGeographic Area***

 

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

 

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

 

|                    |   | **Three  Months Ended  March 31,** | ** ** |
|-------------------------|--------|------------------------------------|------------|
|                    |   | **2003**                           |       | **2002** | ** ** |
| Revenues:               |   |                               |       |   |   |
| North America           |   | $                                  | 22,683     |   | $ | 28,204 |   |
| Europe                  |   | 9,653                              |       | 9,211 |   |
| Pacific Rim             |   | 3,486                              |       | 3,467 |   |
| Total revenues          |   | $                                  | 35,822     |   | $ | 40,882 |   |
|                    |   |                               |       |   |   |
|                    |   | **March 31,  2003**                |       | **December  31,  2002** | ** ** |
| Long-lived assets:      |   |                               |       |   |   |
| North America           |   | $                                  | 21,774     |   | $ | 22,143 |   |
| Europe                  |   | 1,883                              |       | 2,047 |   |
| Pacific Rim             |   | 1,241                              |       | 1,009 |   |
| Total long-lived assets |   | $                                  | 24,898     |   | $ | 25,199 |   |

 

7

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No single customer accountedfor more than 10% of the Company’s net revenues during the three months endedMarch 31, 2003 and 2002.

 

**Note 5.    *Computation of Net (Loss) Income Per Share***

 

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

 

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

 

 
|                                                                                                   |   | **Three  Months Ended  March 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------|--------|------------------------------------|------------|
|                                                                                                   |   | **2003**                           |       | **2002** | ** ** |
| Net (loss) income                                                                                      |   | $                                  | (6,125     | ) | $ | 2,895 |   |
| Weighted average outstanding shares of common  stock used to compute basic net (loss) income per share |   | 82,616                             |       | 78,678 |   |
| Dilutive effect of:                                                                                    |   |                               |       |   |   |
| Stock warrants                                                                                         |   | —                             |       | 577 |   |
| Employee stock options                                                                                 |   | —                             |       | 3,618 |   |
| Common stock and common stock equivalents                                                              |   | 82,616                             |       | 82,873 |   |
| Net (loss) income per share:                                                                           |   |                               |       |   |   |
| Basic                                                                                                  |   | $                                  | (0.07      | ) | $ | 0.04 |   |
| Diluted                                                                                                |   | $                                  | (0.07      | ) | $ | 0.03 |   |

 

Options to purchaseapproximately 11,855,000 and 4,516,000 shares of common stock were not includedin the calculations of diluted net (loss) income per share for the three monthsended March 31, 2003 and 2002, respectively, because their effect would beantidilutive. Common stock warrants to purchase 650,000 shares were notincluded in the calculations of diluted net loss per share for the three monthsended March 31, 2003, because their effect would be antidilutive.

 

**Note 6.    *Stock-Based Compensation***

 

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

 

The following table sets forthpro forma net income (loss) and pro forma earnings (loss) per share (inthousands, except per share amounts):

 

 
|                                                                                 |   | **Three  Months Ended  March 31,** | ** ** |
|--------------------------------------------------------------------------------------|--------|------------------------------------|------------|
|                                                                                 |   | **2003**                           |       | **2002** | ** ** |
| Net (loss) income, as reported                                                       |   | $                                  | (6,125     | ) | $ | 2,895 |   |
| Stock-based employee compensation costs, included  in net (loss) income, as reported |   | 101                                |       | 265 |   |
| Stock-based employee compensation costs if fair  value based method had been applied |   | (3,355                             | )          | (3,438 | ) |
| Pro forma net loss                                                                   |   | (9,379                             | )          | (278 | ) |
| (Loss) earnings per share:                                                           |   |                               |       |   |   |
| Basic - as reported                                                                  |   | $                                  | (0.07      | ) | $ | 0.04 |   |
| Basic - pro forma                                                                    |   | $                                  | (0.11      | ) | $ | 0.00 |   |
| Diluted - as reported                                                                |   | $                                  | (0.07      | ) | $ | 0.03 |   |
| Diluted - pro forma                                                                  |   | $                                  | (0.11      | ) | $ | 0.00 |   |

 

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**Note 7.    *Commitments, Contingencies and Debt***

 

**Bank Lineof Credit and Lease Line Payable**

 

In November 2000, theCompany established a $15.0 million line of credit facility (the “Line”)with a lending institution that bears interest at an annual rate of eitherprime plus 0.5% or the London InterBank Offered Rate (“LIBOR”) rate plus 2.50%(payable monthly) and was to expire May 31, 2002. In October 2001,the Company amended the Line to extend the expiration date through May 31,2003.  The Company is currently in theprocess of extending the expiration date of the existing Line and anticipatesit to be extended through May 31, 2004. As of March 31, 2003, $7.1 million was available under theLine and there were no borrowings outstanding. The Company may use up to $5.0 millionof the Line to issue letters of credit. As of March 31, 2003,approximately $385,000 was available for the issuance of letters of credit. TheLine is secured by intellectual property rights, accounts receivable andcertain other assets and is subject to certain borrowing base restrictions. TheLine requires maintenance of certain financial covenants pertaining to keyfinancial ratios.

 

In October 2001, theCompany’s $3.0 million equipment line (the “Equipment Line”) with the samelending institution providing the Line was amended, reducing the maximum amountavailable for borrowing under the Equipment Line to $2.0 million. TheEquipment Line bears interest at an annual rate of prime plus 0.75%, or theLIBOR rate plus 2.75% (payable monthly) and expires on November 30, 2004.The rate at March 31, 2003 was 5.0%. The Company could draw against theEquipment Line through November 30, 2001. Interest is payable monthly andprincipal is payable in 36 monthly installments commencing inDecember 2001. As of March 31, 2003, there was $1.1 millionoutstanding under the Equipment Line. The Equipment Line is secured by certainassets of the Company.

 

In December 2002, theCompany’s credit facility was amended to include an equipment advance (the“Equipment Advance”) in the amount of $5.0 million from the same lendinginstitution. Interest on the Equipment Advance is payable monthly and principalis payable in 24 equal monthly installments, beginning January 31, 2003.The Equipment Advance bears interest at an annual rate of prime plus 0.75% orthe LIBOR rate plus 3.0%. The rate at March 31, 2003 was 5.0%. As ofMarch 31, 2003 the balance outstanding under this Equipment Advance was$4.4 million.

 

Future principal payments onthe Equipment Line and the Equipment Advance will aggregate approximately$2.4 million for the remainder of 2003 and $3.1 million in 2004,based on the total outstanding balance of approximately $5.5 million.

 

**LegalProceedings**

 

Beginning on July 3, 2002, several purported class actionshareholder complaints were filed in the United States District Court for theCentral District of California against the Company and several of our officersand directors. The actions were subsequently consolidated and a consolidatedamended complaint was filed purportedly brought on behalf of purchasers of commonstock of SeeBeyond Technology Corporation between December 10, 2001 andMay 7, 2002.  The complaint generallyalleges that defendants made false statements about SeeBeyond’s operatingresults and business, while concealing material information. The plaintiffsseek unspecified monetary damages. The Company believes the suit to be withoutmerit and intends to defend against it vigorously.

 

TheCompany is party to claims and suits brought against it in the ordinary courseof business. In the opinion of management, such claims should not have anymaterial adverse effect upon the results of operation, cash flows or thefinancial position of the Company.

 

Beginning on September 5, 2002, several derivative lawsuits werefiled by purported Company shareholders in the Superior Court of California forthe County of Los Angeles.  Thecomplaints name certain of the Company’s present and former officers anddirectors as defendants and name the Company as a nominal defendant. The complaintsgenerally allege that the defendants breached their fiduciary duties to theCompany through the dissemination of allegedly misleading and inaccurateinformation and other allegations.

 

**Note 8.    *Comprehensive (Loss) Income***

 

The Company accounts forcomprehensive (loss) income using SFAS No. 130, “Reporting ComprehensiveIncome”. SFAS No. 130 establishes standards for reporting comprehensiveincome and its components in financial statements. Comprehensive income, asdefined, refers to revenues, expenses, gains and losses that are not includedin net income (loss) but rather are recorded directly in stockholders’ equity.

 

Total comprehensive (loss)income was as follows (in thousands):

 
|                               |   | **Three  Months Ended  March 31,** | ** ** |
|------------------------------------|--------|------------------------------------|------------|
|                               |   | **2003**                           |       | **2002** | ** ** |
| Net (loss) income                  |   | $                                  | (6,125     | ) | $ | 2,895 |   |
| Other comprehensive (loss) income: |   |                               |       |   |   |
| Foreign translation adjustment     |   | (164                               | )          | (86 | ) |
| Comprehensive (loss) income        |   | $                                  | (6,289     | ) | $ | 2,809 |   |

 

9

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**Note 9.    *Stockholders’ Equity***

 

**SecondaryPublic Offering**

 

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

 

**CommonStock Warrants**

 

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

 

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

 

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

 

During the three monthsended December 31, 2002, the Company recorded restructuring and impairmentcharges totaling $6.6 million, consisting of $2.1 million foremployee termination benefits and related costs associated with headcountreductions, $2.7 million related to properties abandoned in connectionwith facilities consolidation and $1.8 million related to the write-downof leasehold improvements, furniture and fixtures and equipment in connectionwith facilities consolidation. During the three months ended March 31, 2003,the Company recorded no additional charges or adjustments related to theDecember 2002 restructuring. The balance of accrued involuntary terminationbenefits remaining at March 31, 2003, was approximately $292,000.  This balance is expected to be paid over thenext three months.  As of March 31,2003, the balance remaining of accrued rent and related expenses related toabandoned properties was approximately $2,157,000.  This balance is expected to be paid over the next eighteenmonths.

 

**Note 11.    *Related Party Transactions***

 

On January 2, 2002, theCompany provided one of its executive officers, who is also a significantstockholder, with a loan of $2.0 million pursuant to a promissory notewith an annual interest rate of 8.5%. This loan was repaid in full on February 28,2002.

 

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

 

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

 

**Overview**

 

We were founded in 1989 andsold our first products and services in 1991 under the name “SoftwareTechnologies Corporation.” From 1991 to 1998 our sales and marketing effortswere primarily focused on customers in the healthcare industry. In 1998, webegan to significantly increase our sales and marketing expenses to targetcustomers in other vertical markets, such as financial services/insurance,manufacturing, retail/e-Commerce/services, telecommunications, energy servicesand government. In November 1999 we launched the fourth generation of ourproduct e*Gate 4.0, which introduced a fully distributed, fault tolerantarchitecture. We are currently shipping an enhanced version of our eBusinessIntegration Suite (“eBI Suite”), version 4.5.3 to our customers and inMarch 2003 we announced our new suite of products, the SeeBeyondIntegrated Composite Application Network (“ICAN”) version 5.0, which we expectto begin shipping in the second quarter 2003, however, the determination ofwhen and if version 5.0 will be made available remains at the sole discretionof the Company. We incurred significant losses in fiscal years 2001, 2002 andin the first quarter of fiscal 2003.  Asof March 31, 2003, we had an accumulated deficit of approximately$132.6 million.

 

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

 

We currently have operationsin sixteen countries outside of the United States. Revenues derived frominternational sales were 37% of total revenues for the three months ended March31, 2003 compared to 31% of total revenues for the three months endedMarch 31, 2002. We believe that international revenues will continue to besignificant in future periods. To date, we have not experienced significantseasonality of revenues. However, we expect that our future results willfluctuate in response to the fiscal or quarterly budget cycles of ourcustomers.

 

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

 

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

 

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

 

Cost of license revenuesincludes the cost of third-party licensed software embedded or bundled with ourproducts. Cost of services and maintenance revenues consists of compensationand related overhead costs for personnel engaged in implementation consultingand services and maintenance and support activities, training and out-of-pocketexpenses. For the three months ended March 31, 2003, our gross margin was 95.8%on our license revenues and 49.4% on our services and maintenance revenues. Weexpect in the future to continue to earn substantially higher gross margins onour license revenues as compared to our services and maintenance revenues. As aresult, our overall gross margin depends significantly on our revenue mix.

 

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

 

To date, all softwareproduct development costs have been expensed as incurred. Also included in ourtotal costs and expenses are restructuring charges, sales and marketingwarrants and stock compensation.

 

In March 2001, weentered into a four-year co-marketing agreement with General Motors Corporation(GMC) and issued GMC a warrant to purchase 625,000 shares of common stock at anexercise price of $11.34 per share. As a result of the December 2001private placement of

 

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2,574,298 shares of ourcommon stock, the exercise price of this warrant was adjusted to $5.83 pershare. The warrant expires in March 2006 and 175,000 shares under thewarrant were exercisable immediately. The remaining 450,000 shares subject tothe warrant are performance based and vest and become exercisable over thethirty-six month period following the issuance of the warrant provided thewarrant holder has achieved various milestones related to providing certainsales and marketing support. The unvested portion of the warrant was valued as ofthe date of issuance and is being amortized as a charge to marketing expenseover the term of the co-marketing agreement. As of December 31, 2002, atotal of 450,000 shares subject to the warrant were vested. We recognizedamortization of approximately $111,000 and $441,000 for the three months endedMarch 31, 2003 and 2002, respectively. The value of the unvested portion of thewarrant will be adjusted in each reporting period based on changes in the fairvalue of the warrants until such date as the warrants are fully vested. Thereis no obligation for this strategic partner to make future product purchasesfrom us.

 

In connection with stockoption grants to our employees, we have recorded deferred stock compensationtotaling $8.5 million through December 31, 2000, of whichapproximately $180,000 remains to be amortized as of March 31, 2003. Thisamount represents the difference between the exercise price and the deemed fairvalue of our common stock on the date the options were granted multiplied bythe number of option shares granted. This amount is included as a component ofstockholders’ equity and is being amortized by charges to operations over thevesting period of the options, consistent with the method described inFinancial Accounting Standards Board Interpretation No. 28. We recognizedamortization of deferred compensation expense of approximately $101,000 and$265,000 for the three months ended March 31, 2003 and 2002, respectively. Theamortization of stock compensation is classified as a separate component ofoperating expenses in our consolidated statement of operations.

 

**CriticalAccounting Policies**

 

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

 

Our significant accountingpolicies are described in Note 1 to the annual consolidated financialstatements as of and for the year ended December 31, 2002 in Item 8:Financial Statements and Supplementary Data. We believe our most criticalaccounting policies include the following:

 

•                  revenue recognition,

 

•                  estimating allowance for doubtful accounts,

 

•                  accounting for income taxes

 

*Revenuerecognition.*   Werecognize revenue when an agreement has been signed by both parties or otherpersuasive evidence of an arrangement exists, the software has been shipped orelectronically delivered, the fees are fixed or determinable, collection of theresulting receivable is probable, and no other significant obligations remain.For multiple element arrangements where vendor specific objective evidence offair value exists for all undelivered elements, we account for the deliveredelements in accordance with the “residual method” prescribed by Statement ofPosition 98-9. Vendor-specific objective evidence of fair value is based on theprice a customer is required to pay when the element is sold separately.

 

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

 

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

 

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

 

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

 

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production, modification orcustomization to or development of the software.

 

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

 

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

 

*Accountingfor income taxes.*   Werecord a valuation allowance to reduce our deferred tax assets by an estimatedamount of tax benefits we estimate which is not expected to be realized. Taxbenefits will not be realized if we do not generate sufficient taxable incomein the future to apply the deferred tax balance against. As of March 31,2003, a valuation allowance equal to the value of the deferred tax assets wasmaintained. In the event we were to determine that we would be able to realizeour deferred tax assets in the future in excess of its net recorded amount, anadjustment to the deferred tax asset would increase income in the period such adetermination was made.

 

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

 

**Results ofOperations**

 

The following table setsforth our results of operations for the three months ended March 31, 2003 and2002, respectively, expressed as a percentage of total revenues:

 
|                                         |   | **Three  Months Ended  March 31,** | ** ** |
|----------------------------------------------|--------|------------------------------------|------------|
|                                         |   | **2003**                           |       | **2002** | ** ** |
| Revenues:                                    |   |                               |       |   |   |
| License                                      |   | 36                                 | %          | 52 | % |
| Services                                     |   | 31                                 |       | 26 |   |
| Maintenance                                  |   | 33                                 |       | 22 |   |
| Total revenues                               |   | 100                                |       | 100 |   |
| Cost of revenues:                            |   |                               |       |   |   |
| License                                      |   | 2                                  |       | 3 |   |
| Services and maintenance                     |   | 32                                 |       | 24 |   |
| Total cost of revenues                       |   | 34                                 |       | 27 |   |
| Gross profit                                 |   | 66                                 |       | 73 |   |
| Operating expenses:                          |   |                               |       |   |   |
| Research and development                     |   | 30                                 |       | 19 |   |
| Sales and marketing                          |   | 40                                 |       | 35 |   |
| General and administrative                   |   | 13                                 |       | 10 |   |
| Amortization of sales and marketing warrants |   | —                             |       | 1 |   |
| Amortization of stock-based compensation     |   | —                             |       | 1 |   |
| Total operating expenses                     |   | 83                                 |       | 66 |   |
| (Loss) income from operations                |   | (17                                | )          | 7 |   |
| Other income                                 |   | —                             |       | — |   |
| (Loss) income before income tax provision    |   | (17                                | )          | 7 |   |
| Provision for income tax                     |   | —                             |       | — |   |
| Net (loss) income                            |   | (17                                | )%         | 7 | % |

 

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**Results ofoperations for the three months ended March 31, 2003 and 2002:**

 

**Revenues**

 

*Totalrevenues.*   Totalrevenues for the three months ended March 31, 2003 decreased 12% from the sameperiod last year, from $40.9 million to $35.8 million. Total revenuesfor the three months ended March 31, 2003 decreased primarily due to thedecrease in license revenues as a result of delayed purchasing decision makingby our customers due to cost-cutting pressures, reduced capital spendingbudgets and general economic weakness.

 

*Licenserevenues.*   Licenserevenues for the three months ended March 31, 2003, decreased 38% from the sameperiod last year, from $21.1 million to $13.0 million. Licenserevenues for the three months ended March 31, 2003, as a percentage of totalrevenues were 36%, as compared to 52% for the same period in the previous year.The decreases in license revenues were due primarily to delayed purchasingdecision making by our customers due to cost-cutting pressures, reduced capitalspending budgets and general economic weakness.

 

*Servicesrevenues.*   Servicesrevenues for the three months ended March 31, 2003, increased 4% from the sameperiod in the previous year, from $10.8 million to $11.2 million.Services revenues for the three months ended March 31, 2003, as a percentage oftotal revenues were 31% as compared to 26% for the same period in the previousyear. The increase in the absolute dollar amount of services revenues was dueprimarily to continued strong demand for consulting services from customers incertain industry verticals, including healthcare, despite the decrease inlicense revenues for the three months ended March 31, 2003 and December 31,2002, as compared to the three months ended March 31, 2002 and December31, 2001.

 

*Maintenancerevenues.*   Maintenancerevenues for the three months ended March 31, 2003, increased 27% from the sameperiod in the previous year, from $9.1 million to $11.6 million.Maintenance revenues for the three months ended March 31, 2003, as a percentageof total revenues were 33%, as compared to 22% for the same period in theprevious year. The increase in the absolute dollar amount of maintenancerevenues was due primarily to the renewals of prior period maintenance contactsassociated with the increase in our cumulative license revenues.

 

**Cost ofrevenues**

 

*Cost oflicense revenues.*   Costof license revenues for the three months ended March 31, 2003, wasapproximately $545,000, compared to $1,059,000 in the same period in theprevious year. Cost of license revenues consists primarily of the cost ofthird-party licensed software embedded or bundled with our products. Thedecrease was due to a decrease in revenues during the three months ended March31, 2003 from the sale of our products with third-party embedded or bundledsoftware, as compared to the three months ended March 31, 2002.

 

*Cost ofservices and maintenance revenues.*   Cost of services and maintenance revenues for thethree months ended March 31, 2003, increased 15% from the same period in theprevious year, from $10.0 million to $11.5 million. Cost of servicesand maintenance revenues for the three months ended March 31, 2003, as apercentage of total revenues were 32%, as compared to 24% for the same periodin the previous year. The increase in the absolute dollar amount was dueprimarily to the increase in the use of third-party contractors and the relatedcosts associated with increased services revenues. We expect that cost ofservices and maintenances revenues will decrease slightly in absolute dollarsfor the foreseeable future.

 

**Operatingexpenses**

 

*Researchand development expenses.*   Research and development expenses for the threemonths ended March 31, 2003, increased 38% from the same period in the previousyear, from $7.7 million to $10.6 million. Research and developmentexpenses as a percentage of total revenues were 30% for the quarter ended March31, 2003 as compared to 19% for the same period in the prior year. Theincreases in research and development expenses were due primarily to the increasein the number of software developers and quality assurance personnel to supportour product development, documentation and testing activities related to thedevelopment and release of the latest versions of our products. We anticipatethat research and development expenses will continue to increase in absolutedollars for the remainder of 2003 as we continue to invest in additionalheadcount and the development of new products.

 

*Sales andmarketing expenses.*   Salesand marketing expenses for the three months ended March 31, 2003, remained at$14.5 million from the same period in the previous year.  Sales and marketing expenses as a percentageof total revenues were 40% for the quarter ended March 31, 2003 as compared to35% for the same period in the prior year. However, sales and marketingexpenses for the three months ended March 31, 2003, decreased 16% from thethree months ended December 31, 2002, from $17.2 million to $14.5 million.  This decrease was due primarily to lowerheadcount and a seasonal decrease in promotional and public relationsactivities, as well as a decrease in sales commissions that resulted from lowerlicense revenues during the three months ended March 31, 2003.  We anticipate our sales and marketingexpenses will remain flat or decrease slightly in absolute dollars for theforeseeable future.

 

*Generaland administrative expenses.*   General and administrative expenses for the threemonths ended March 31, 2003, increased 10% from the same period in the previousyear, from $4.2 million to $4.6 million. General and administrativeexpenses as a percentage of total revenues were 13% for the quarter ended March31, 2003 as compared to 10% for the same period in the prior year. However,general and administrative expenses for the three months ended March 31, 2003,decreased 6% from the three months ended December 31, 2002, from $4.9 millionto $4.6 million.  This decrease ingeneral and administrative expenses was due primarily lower headcount duringthe quarter ended March 31, 2002. We anticipate general and administrativeexpenses to remain flat or decrease slightly in absolute dollars for theforeseeable 

 

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future.

 

*Restructuringand impairment charges. *During the three months ended December 31,2002, the Company recorded restructuring and impairment charges totaling$6.6 million, consisting of $2.1 million for employee terminationbenefits and related costs associated with headcount reductions,$2.7 million related to properties abandoned in connection with facilitiesconsolidation and $1.8 million related to the write-down of leaseholdimprovements, furniture and fixtures and equipment in connection withfacilities consolidation. During the three months ended March 31, 2003, theCompany recorded no additional charges or adjustments related to the December2002 restructuring. The balance of accrued involuntary termination benefitsremaining at March 31, 2003, was approximately $292,000.  This balance is expected to be paid over thenext three months.  As of March 31,2003, the balance remaining of accrued rent and related expenses related toabandoned properties was approximately $1,993,000.  This balance is expected to be paid over the next eighteenmonths.

 

The Company expects to recordadditional restructuring charges related to facilities consolidation andrelated matters of approximately $6.0 million to $7.0 million during the threemonths ending June 30, 2003.

 

*Amortizationof sales and marketing warrants.*   Amortization of warrants for the three months endedMarch 31, 2003, was $111,000, compared to $441,000 for the same period in theprior year. The decrease in amortization of warrants was a result of warrantsissued to strategic alliance partners being fully amortized or cancelled during2002 as well as a decrease in the value of the unvested portion of a warrantissued to a strategic marketing partner. The amortization of warrant expensefor the three months ended March 31, 2003, and the remaining warrant expense tobe recognized going forward, relate to this warrant issued under a four-yearco-marketing agreement with a strategic partner. The value of the unvestedportion of the warrant will be adjusted in each reporting period based onchanges in the fair value of the warrant until such date as the warrant isfully vested and therefore the amount of amortization for such warrant issubject to fluctuation based on the value of our stock.

 

*Amortizationof stock-based compensation.*   Amortization of stock-based compensation for thethree months ended March 31, 2003, was approximately $101,000, compared to$265,000 for the same period in the previous year.

 

**Otherincome**

 

Other income consistsprimarily of interest income (expense). Other income for the three months endedMarch 31, 2003, was approximately $170,000 compared to $193,000 for the sameperiod last year. The decrease was primarily due to a decrease in interestincome as a result of lower interest rates offset slightly by larger averagecash balances during the three months ended March 31, 2003 as compared to thethree months ended March 31, 2002.

 

**Liquidityand capital resources**

 

As of March 31, 2003, we hadcash and cash equivalents of $86.6 million, a decrease of$7.5 million from $94.1 million held as of December 31, 2002.

 

Net cash used in operatingactivities was $5.7 million during the three months ended March 31, 2003,as compared with $2.0 million in the same period in the previous year.This period over period increase in cash used in operating activities reflectsincreases in net loss, accounts receivable and other assets, offset bydecreases in accounts payable, accrued expenses and prepaid expenses and othercurrent assets.

 

During the three monthsended March 31, 2003, our accounts receivable increased approximately $200,000from $33.6 million at December 31, 2002 to $33.8 million atMarch 31, 2003. This increase was primarily due to the timing of revenuerecorded during the three months ended March 31, 2003, as compared to the threemonths ended December 31, 2002. The timing of receivable collections andrevenue recorded within a given quarter will affect our accounts receivablegoing forward.

 

Net cash used in investingactivities was $1.1 million during the three months ended March 31,2003, as compared with $2.4 million in the same period in the previousyear. The decrease primarily was due to decreases in capital expenditures. Weexpect capital expenditures in the next three months to increase slightlycompared to the last three months.

 

Net cash (used in) providedby financing activities was $(585,000) during the three months ended March 31,2003, as compared with $62.0 million in the same period in the previousyear. This decrease was due primarily to the completion of the secondary publicstock offering in February 2002.

 

In November 2000, theCompany established a $15.0 million line of credit facility (the “Line”)with a lending institution that bears interest at an annual rate of eitherprime plus 0.5% or the London InterBank Offered Rate (“LIBOR”) rate plus 2.50%(payable monthly) and was to expire May 31, 2002. In October 2001,the Company amended the Line to extend the expiration date through May 31,2003. The Company is currently in the process of extending the expiration dateof the existing Line and anticipates it to be extended through May 31,2004.  As of March 31, 2003,$7.1 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, 2003, approximately $385,000 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 requires maintenanceof certain financial covenants pertaining to key financial ratios.

 

In October 2001, theCompany’s $3.0 million equipment line (the “Equipment Line”) with the samelending institution providing the Line was amended, reducing the maximum amountavailable for borrowing under the Equipment Line to $2.0 million. TheEquipment Line bears

 

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interest at an annual rateof prime plus 0.75%, or the LIBOR rate plus 2.75% (payable monthly) and expireson November 30, 2004. The rate at March 31, 2003 was 5.0%. TheCompany could draw against the Equipment Line through November 30, 2001.Interest is payable monthly and principal is payable in 36 monthlyinstallments commencing in December 2001. As of March 31, 2003, therewas $1.1 million outstanding under the Equipment Line. The Equipment Lineis secured by certain assets of the Company.

 

In December 2002, theCompany’s credit facility was amended to include an equipment advance (the“Equipment Advance”) in the amount of $5.0 million from the same lendinginstitution. Interest on the Equipment Advance is payable monthly and principalis payable in 24 equal monthly installments, beginning January 31, 2003.The Equipment Advance bears interest at an annual rate of prime plus 0.75% orthe LIBOR rate plus 3.0%. The rate at March 31, 2003 was 5.0%. As ofMarch 31, 2003 the balance outstanding under this Equipment Advance was$4.4 million.

 

Future principal payments onthe Equipment Line and the Equipment Advance will aggregate approximately$2.4 million in 2003 and $3.1 million in 2004, based on the totaloutstanding balance of approximately $5.5 million as of March 31, 2003.

 

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

 

**RisksRelated to SeeBeyond**

 

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

 

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

 

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

 

We rely significantly uponcustomers making large information technology purchasing decisions as a sourceof revenue. During 2001, 2002 and the first quarter of 2003, we experienced ageneral slow-down in the level of capital spending by some of our customers dueto the general economic downturn, which has adversely affected our revenues.This slow-down in capital spending, if sustained in future periods, couldresult in reduced sales or the postponement of sales to our customers. Therecan be no assurance that the level of spending on information technology ingeneral, or on business integration software by our customers and potentialcustomers in particular, will increase or remain at current levels in futureperiods. Lower spending on information technology could result in reducedlicense sales to our customers, reduced overall revenues, diminished marginlevels, and could impair our operating results in future periods.

 

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

 

We have incurred substantiallosses since 1998 as we increased funding of the development of our productsand technologies and expanded our sales and marketing organization. As ofMarch 31, 2003, we had an accumulated deficit of $132.6 million. Wemay continue to incur losses in future periods and we may not achieve ormaintain profitability on a quarterly or annual basis.

 

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

 

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

 

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

 

We record as deferredrevenue payments from customers that do not meet our revenue recognition policyrequirements. Since only a small portion of our revenues each quarter isrecognized from deferred revenue, our quarterly results depend primarily uponentering into new

 

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contracts to generaterevenues for that quarter. New contracts may not result in revenues in thequarter in which the contract was signed, and we may not be able to predictaccurately when revenues from these contracts will be recognized. If ouroperating results are below the expectations of securities analysts orinvestors for these or other reasons, our stock price would likely decline,perhaps substantially.

 

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

 

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

 

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

 

Substantially all of ourlicense revenues have been, and are expected to continue to be, derived fromthe license of our Business Integration Suite. Accordingly, our futureoperating results will depend on the demand for our Business Integration Suiteby future customers, including new and enhanced releases that are subsequentlyintroduced. Our latest version of the Business Integration Suite, called ourSeeBeyond Integrated Composite Application Network (ICAN) Suite version 5.0,was launched in March 2003. If our competitors release new products that aresuperior to our Business Integration Suite in performance or price, or if wefail to enhance our Business Integration Suite and introduce new products in atimely manner, demand for our products may decline, and we may have to reducethe pricing of our products. A decline in demand or pricing for our BusinessIntegration Suite as a result of these or other factors would significantlyreduce our revenues.

 

In the past, we haveexperienced delays in the commencement of commercial releases of our BusinessIntegration Suite. To date, these delays have not had a material impact on ourrevenues. In the future, we may fail to introduce or deliver new products on atimely basis. If new releases or products are delayed or do not achieve marketacceptance, we could experience customer dissatisfaction or a delay or loss ofrevenues. For example, the introduction of new enterprise and businessapplications requires us to introduce new e*Way adapters to support theintegration of these applications. Our failure to introduce these or othermodules in a timely manner could cause our revenues and market share todecline. In addition, customers may delay purchases of our products inanticipation of future releases. If customers defer material orders inanticipation of new releases or new product introductions, our revenues maydecline.

 

Moreover, as we releaseenhanced versions of our products, we may not be successful in upgrading ourcustomers who purchased previous versions of our Business Integration Suite tothe current version. We also may not be successful in selling add-on modulesfor our products to existing customers. Any failure to continue to upgrade existingcustomers’ products or sell new modules, if and when they are introduced, couldnegatively impact customer satisfaction and our revenues.

 

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

 

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

 

These systems integratorsare not contractually 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 ourcompetitors have stronger relationships with some of these systems integratorsand, as a result, these systems integrators might be more likely to recommendcompetitors’ products and services instead of ours. In addition, a number ofour competitors have relationships with a greater number of these systemsintegrators or have stronger systems integrator relationships based on specificvertical markets and, therefore, have access to a broader base of customers.

 

Our failure to establish ormaintain systems integrator relationships would significantly harm our abilityto license and successfully implement our software products. In addition, werely on the industry expertise and customer contacts of these firms in order tomarket our products more effectively. Therefore, any failure of theserelationships would also harm our ability to increase revenues in keycommercial

 

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markets. We are currentlyinvesting, and plan to continue to invest, significant resources to developthese relationships. Our operating results could be adversely affected if theseefforts do not generate license and service revenues necessary to offset thisinvestment.

 

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

 

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

 

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

 

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

 

Revenues from the sale ofproducts and services outside the United States accounted for 37% of our totalrevenues for the first three months of 2003 and 31% of our total revenues forthe same period in the prior year. Revenues from the sale of products andservices in the United Kingdom as a percent of our total revenues were 15% in2002 and 12% for the same period in the prior year. We believe revenues fromsales outside the United States will continue to account for a material portionof our total revenues for the foreseeable future. We are exposed to severalrisks inherent in conducting 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 intellectual propertyrights in some countries.

 

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

 

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

 

Our products and their interactionswith customers’ software applications and IT systems are complex and,accordingly, there may be undetected errors or failures when our products areintroduced or as new versions are released. In the past we have discoveredsoftware errors in our new releases and new products after their introduction,which have resulted in additional product development expenses. To date, theseadditional expenses have not been material. These errors have resulted inproduct release delays, delayed revenues and customer dissatisfaction. In thefuture we may discover errors, including performance limitations, in newreleases or new products after the commencement of commercial shipments. Sincemany customers are using our products for mission-critical business operations,any of these occurrences could seriously harm our business and generatenegative publicity, which could have a negative impact on future sales.Although we maintain product liability and errors and omissions insurance, wecannot assure you these policies will be sufficient to compensate for lossescaused by any of these occurrences.

 

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

 

We currently serve acustomer base with a wide variety of constantly changing hardware, softwareapplications and networking platforms. If our products fail to gain broadmarket acceptance due to an inability to support a variety of these platforms,our operating results may suffer. Our business depends on a number of factors,including the following:

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

Third parties may claim wehave infringed their current or future intellectual property rights. We expectsoftware developers in our market will increasingly be subject to infringementclaims as the number of products in different software industry segmentsoverlap. Any claims, with or without merit, could be time-consuming, result incostly litigation, prevent product shipment or cause delays, or require us toenter into royalty or licensing agreements, any of which could harm ourbusiness. Patent litigation in particular has complex technical issues andinherent uncertainties. In the event an infringement claim against us issuccessful and we cannot obtain a license on acceptable terms, license asubstitute technology or redesign our products to avoid infringement, ourbusiness would be harmed. Furthermore, former employers of our current andfuture employees may assert our employees have improperly disclosed to us orare using their confidential or proprietary information.

 

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

 

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

 

•                  develop or enhance our products and services;

 

•                  maintain or expand our sales and marketingorganizations;

 

•                  acquire complementary technologies, productsor businesses;

 

•                  expand operations, in the United States orinternationally;

 

•                  hire, train and retain employees; or

 

•                  respond to competitive pressures orunanticipated working capital requirements.

 

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

 

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

 

We depend on the continuedservice of our key technical, sales and senior management personnel, includingour founder and Chief Executive Officer, James T. Demetriades. Most ofthese persons are not bound by an employment agreement, and we do not maintainkey person life insurance on any of these persons, other thanMr. Demetriades. The loss of any of our senior management or other keyproduct development or sales and marketing personnel could adversely affect ourfuture operating results. In addition, we must attract, retain and motivatehighly skilled employees, including sales personnel and software engineers. Weface significant competition for individuals with the skills required todevelop, market and support our products and services. We may not be able torecruit and retain sufficient numbers of these highly skilled employees. If wefail to do so, our ability to compete will be significantly harmed.

 

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

 

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

 

•                  effectively manage our direct sales force;

 

•                  effectively manage our professional servicesorganization;

 

•                  hire and retain qualified software engineers;

 

•                  improve our operational, financial andmanagement controls;

 

•                  improve our reporting systems and procedures;

 

•                  enhance our management and informationcontrol systems; and

 

•                  effectively manage, train and motivate ourworkforce.

 

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

 

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

 

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

 

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

 

Our President and ChiefExecutive Officer, James T. Demetriades beneficially owns approximately 32% ofour outstanding common stock. Our executive officers and directors beneficiallyown, in the aggregate, approximately 42% of our outstanding common stock. As aresult, these stockholders will be able to exercise a significant level ofcontrol over all matters requiring stockholder approval, including the electionof directors and approval of significant corporate transactions. This couldhave the effect of delaying or preventing a change of control of SeeBeyond andwill make some transactions difficult or impossible without the support ofthese stockholders.

 

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

 

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

 

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

 

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

 

*Interestrate risk.*   Wemaintain our funds in money market and certificate of deposit accounts atfinancial institutions. Our exposure to market risk due to fluctuations ininterest rates relates primarily to our interest earnings on our cash deposits.These securities are subject to interest rate risk in as much as their fairvalue may fall if market interest rates increase. If market interest rates wereto increase immediately and uniformly by 10% from the levels prevailing as ofDecember 31, 2002, the fair value of the portfolio would not decline by amaterial amount. We do not use derivative financial instruments to mitigaterisks. However, we do have an investment policy that would allow us to investin short-term and long-term investments such as money market instruments andcorporate debt securities. Our policy attempts to reduce such risks bytypically limiting the maturity date of such securities, placing ourinvestments with high credit quality issuers and limiting the amount of creditexposure with any one issuer.

 

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

 

**Item 4****.    Controlsand Procedures**

 

Based on their evaluation asof a date within 90 days of the filing date of this Report onForm 10-Q, the Company’s chief executive officer and chief financialofficer have concluded that the Company’s disclosure controls and procedures(as defined in Rules 13a-14(c) and 15d-14(c) under the Securities ExchangeAct of 1934 (the “Exchange Act”)) are effective to ensure that informationrequired to be disclosed by the Company in reports that it files or submitsunder the Exchange Act is recorded, processed, summarized and reported withinthe time periods specified in Securities and Exchange Commission rules and forms.There were no significant changes in the Company’s internal controls or inother factors that could significantly affect these controls subsequent to thedate the chief executive officer and chief financial officer completed theirevaluation.

 

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**PART II****—OTHER INFORMATION**

 

**Item 1.    Legal Proceedings**

 

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

 

Information with respect tothis item is incorporated by reference to Note 7 of the Notes to theConsolidated Financial Statements included in this Report on Form 10-Q.

 

**Item 2.    Changes in Securitiesand Use of Proceeds**

 

**(a)**               **Modification of ConstituentInstruments**

 

Notapplicable

 

**(b)**               **Change in Rights**

 

Notapplicable

 

**(c)**               **Changes in Securities**

 

Notapplicable

 

**Item 4.    Submission of Mattersto a Vote of Security Holders**

 

Notapplicable

 

**Item 6.    Exhibits and reports onForm 8-K**

 

(a)               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(a)(c)           |   | 1998 Stock Plan                                                                                                                                                                                      |
| 10.3(a)(c)           |   | 2000 Employee Stock  Purchase Plan and form of agreements there under                                                                                                                                |
| 10.5(a)              |   | Registration Rights  Agreement dated May 8, 1998, as amended                                                                                                                                    |
| 10.6(a)              |   | Lease Agreement dated  June 6, 1997 and First Amendment to the Lease dated August 5, 1998  between the Registrant and Boone/Fetter/Occidental I for premises in  Monrovia, California |
| 10.7(a)              |   | Lease Agreement dated  June 10, 1999 between the Registrant and Franklin Select Realty Trust  for premises in Redwood Shores, California                                                        |
| 10.8(a)              |   | Lease Agreement dated  December 30, 1991 between the Registrant and the Demetriades Family  Trust (dated December 20, 1983 for premises in Arcadia, California)                            |
| 10.9(b)              |   | Lease Agreement between  The Employees Retirement System of The State of Hawaii and the Registrant  dated July 21, 2000 for premises in Monrovia, California                                    |
| 10.10(b)             |   | Lease Agreement between  Grant Regent, LLC and the Registrant dated August 2, 2000 for  premises in New York, New York                                                                     |
| 10.11(e)             |   | Lease Agreement dated  October 9, 2000 between S & F Huntington Millennium LLC  and the Registrant for premises in Monrovia, California                                           |
| 10.12(e)             |   | Loan and Security  Agreement, dated December 4, 2000, between the Registrant and Comerica  Bank—California                                                                                 |
| 10.13(d)             |   | Warrant Purchase Agreement  and Warrant dated March 16, 2001 issued to General Motors Corporation                                                                                               |
| 10.14(f)             |   | Amendment to the Loan and  Security Agreement dated as of June 25, 2001, between the Registrant and  Comerica Bank-California                                                                   |
| 10.15(f)             |   | Second Amendment to the  Loan and Security Agreement dated October 31, 2001, between the  Registrant and Comerica Bank-California                                                               |
| 10.16(f)             |   | Lease Agreement dated as  of February 24, 2001 between MWB Business Eschange Limited and the  Registrant for premises in Berkshire, United Kingdom                                              |
| 10.17(f)             |   | Lease Agreement as of  July 1, 2001 between Trust Company of Australia Limited and the  Registrant for premises in Melbourne, Australia                                                         |

 

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| 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 May 15, 2002 for premises  in Monrovia, California)                                      |
| 10.20(g)    |   | Third Amendment to the  Loan and Security Agreement dated as of June 30, 2002 between the  Registrant and Comerica Bank-California                                                                                                             |
| 10.21(h)    |   | Sublease Agreement between  the Registrant (Sublessor and Fidelity National Information Services  (Sublessee and The Employees Retirement System of the State of Hawaii (Lessor  dated December 17, 2002 for premises in Monrovia, California) |
| 10.22(h)    |   | First Amendment to the  Lease Agreement between Monrovia Technology Campus LLC and the  Registrant dated January 23, 2002                                                                                                                 |
| 10.23(h)    |   | Second Amendment to the  Lease Agreement between Foothill Technology Center LLC,  (Boone/Fetter/Occidental I and the Registrant dated October 25,  2002)                                                                             |
| 10.24(h)    |   | Fourth Amendment to the  Loan and Security Agreement dated December 24, 2002 between the  Registrant and Comerica Bank-California                                                                                                              |
| 10.25(c)(h) |   | Change of Control Letter  Agreement between Alex Demetriades and the Registrant dated March 19,  2001                                                                                                                                          |
| 99.1        |   | Certification of Chief  Executive Officer and Chief Financial Officer pursuant to 18 U.S.C.  Section 1350.                                                                                                                                     |

 

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(a)          Incorporated by reference to an exhibit in the Registrant’sRegistration Statement on Form S-1 File No. 333-330648.

 

(b)         Incorporated by reference to an exhibit in the Registrant’s QuarterlyReport 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 QuarterlyReport on Form 10-Q filed with the Commission on May 15, 2001.

 

(e)          Incorporated by reference to an exhibit in the Registrant’s AnnualReport on Form 10-K filed with the Commission on March 30, 2001.

 

(f)            Incorporated by reference to an exhibit inthe Registrant’s Annual Report on Form 10-K filed with the Commission on February 8,2002.

 

(g)         Incorporated by reference to an exhibit in theRegistrant’s Quarterly Report on Form 10-Q filed with the Commission onAugust 14, 2002.

 

(h)         Incorporated by reference to an exhibit in the Registrant’s AnnualReport on Form 10-K filed with the Commission on March 28, 2003.

 

(b)              Reports on Form 8-K.

 

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

 

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

 

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**Signature**

 

Pursuant to the requirementsof Section 13 or 15(d) of the Securities Exchange Act of 1934, theRegistrant has duly caused this report to be signed on its behalf by theundersigned thereunto duly authorized, on May 14, 2003.

 

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

 

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**CERTIFICATION****OF CHIEF EXECUTIVE OFFICERAS ADOPTED PURSUANT TOSECTION 302 OF THE SARBANES-OXLEY ACT OF 2002**

 

I, James T. Demetriades,certify that:

 

1.               I have reviewed this quarterly report on Form 10-Qof SeeBeyond Technology Corporation.

 

2.               Based on my knowledge, this quarterly reportdoes not contain any untrue statement of material fact or omit to state amaterial fact necessary to make the statements made, in light of thecircumstances under which such statements were made, not misleading withrespect to the period covered by this quarterly report.

 

3.               Based on my knowledge, the financialstatements, and other financial information included in this quarterly report,fairly present in all material respects the financial condition, results ofoperations and cash flows of the registrant as of, and for, the periodspresented in this quarterly report;

 

4.               The registrant’s other certifying officersand I are responsible for establishing and maintaining disclosure controls andprocedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for theregistrant and we have:

 

a.  designed such disclosure controls andprocedures to ensure that material information relating to the registrant,including its consolidated subsidiaries, is made known to us by others withinthose entities, particularly during the period in which this quarterly reportis being prepared;

 

b.  evaluated the effectiveness of theregistrant’s disclosure controls and procedures as of a date within90 days prior to the filing date of this quarterly report (the “EvaluationDate”)

 

c.  presented in this quarterly report ourconclusions about the effectiveness of the disclosure controls and proceduresbased on our evaluation as of the Evaluation Date;

 

5.               The registrant’s other certifying officersand I have disclosed, based on our most recent evaluation, to the registrant’sability to record, process, summarize and report financial data and haveidentified for the registrant’s auditors any material weaknesses in internalcontrols; and

 

a.  all significant deficiencies in the designor operation of internal controls which could adversely affect the registrant’sability to record, process, summarize and report financial data and haveidentified for the registrant’s auditors any material weaknesses in internalcontrols; and

 

b.  any fraud, whether or not material, thatinvolves management or other employees who have a significant role in theregistrant’s internal controls; and

 

6.               The registrant’s other certifying officersand I have indicated in this quarterly report whether or not there weresignificant changes in internal controls or in other factors that couldsignificantly affect internal controls subsequent to the date of our most recentevaluation, including any corrective actions with regard to significantdeficiencies and material weaknesses.

 

Date:    May 14,2003

 

 
| By:    | /s/   JAMES T.  DEMETRIADES |   |
|--------|---------------------------------------|--------|
| Name:  | James T. Demetriades                  |
| Title: | *Chief  Executive Officer*            |

 

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**CERTIFICATION OF CHIEF FINANCIAL OFFICER****AS ADOPTED PURSUANTTOSECTION 302 OF THE SARBANES-OXLEY ACT OF 2002**

 

I, Barry J. Plaga, certifythat:

 

1.               I have reviewed this quarterly report onForm 10-Q of SeeBeyond Technology Corporation.

 

2.               Based on my knowledge, this quarterly reportdoes not contain any untrue statement of material fact or omit to state amaterial fact necessary to make the statements made, in light of thecircumstances under which such statements were made, not misleading withrespect to the period covered by this quarterly report.

 

3.               Based on my knowledge, the financialstatements, and other financial information included in this quarterly report,fairly present in all material respects the financial condition, results ofoperations and cash flows of the registrant as of, and for, the periodspresented in this quarterly report;

 

4.               The registrant’s other certifying officersand I are responsible for establishing and maintaining disclosure controls andprocedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for theregistrant and we have:

 

a.  designed such disclosure controls andprocedures to ensure that material information relating to the registrant,including its consolidated subsidiaries, is made known to us by others withinthose entities, particularly during the period in which this quarterly reportis being prepared;

 

b.  evaluated the effectiveness of theregistrant’s disclosure controls and procedures as of a date within90 days prior to the filing date of this quarterly report (the “EvaluationDate”)

 

c.  presented in this quarterly report ourconclusions about the effectiveness of the disclosure controls and proceduresbased on our evaluation as of the Evaluation Date;

 

5.               The registrant’s other certifying officersand I have disclosed, based on our most recent evaluation, to the registrant’sability to record, process, summarize and report financial data and haveidentified for the registrant’s auditors any material weaknesses in internalcontrols; and

 

a.  all significant deficiencies in the designor operation of internal controls which could adversely affect the registrant’sability to record, process, summarize and report financial data and haveidentified for the registrant’s auditors any material weaknesses in internalcontrols; and

 

b.  any fraud, whether or not material, thatinvolves management or other employees who have a significant role in theregistrant’s internal controls; and

 

6.               The registrant’s other certifying officersand I have indicated in this quarterly report whether or not there weresignificant changes in internal controls or in other factors that couldsignificantly affect internal controls subsequent to the date of our mostrecent evaluation, including any corrective actions with regard to significantdeficiencies and material weaknesses.

 

Date:    May 14,2003

 

 
| By:    | /s/   BARRY J.  PLAGA |   |
|--------|---------------------------------|--------|
| Name:  | Barry J. Plaga                  |
| Title: | *Chief  Financial Officer*      |

 

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