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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ________ TO ________
COMMISSION FILE NUMBER 000-30963
SYNQUEST, INC.
(Exact name of registrant as specified in governing instrument)
GEORGIA 14-1683872
(State of organization) (IRS Employer Identification No.)
3500 PARKWAY LANE, SUITE 555, NORCROSS, GEORGIA 30092
(Address of Principal Executive Offices -- Zip Code)
Registrant's telephone number, including area code: (770) 325-2000
Securities registered pursuant to Section 12(b) of the Act:
COMMON STOCK, $.01 PER SHARE THE NASDAQ STOCK MARKET
Title of each class Name of each exchange on which registered
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of
the Registrant (based upon the closing sale price on The Nasdaq Stock Market) on
September 22, 2000 was approximately $82.6 million. As of September 22, 2000,
there were 28,541,407 shares of common stock, $.01 par value, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement in connection with its Annual
Meeting of Shareholders to be held November 16, 2000 are incorporated by
reference in Part III.
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SYNQUEST, INC.
TABLE OF CONTENTS
ITEM NO. PAGE NO.
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PART I
ITEM 1. BUSINESS.................................................... 1
Overview.................................................... 1
Market Opportunity.......................................... 1
Limitations of Existing Supply Chain Management Solutions... 2
The SynQuest Solution....................................... 3
Our Strategy................................................ 3
Core Functionality of Our Solutions......................... 5
Our SynQuest One2One Solutions.............................. 7
Professional Services....................................... 9
Customers................................................... 9
Case Studies................................................ 10
Sales and Marketing......................................... 11
Strategic Relationships..................................... 12
Competition................................................. 13
Research and Development.................................... 13
Intellectual Property....................................... 14
Employees................................................... 14
ITEM 2. PROPERTIES.................................................. 14
ITEM 3. LEGAL PROCEEDINGS........................................... 15
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS......... 15
ITEM X. EXECUTIVE OFFICERS OF THE REGISTRANT........................ 16
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS......................................... 18
General..................................................... 18
Recent Sales of Unregistered Securities..................... 18
Use of Proceeds............................................. 19
ITEM 6. SELECTED FINANCIAL DATA..................................... 20
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................... 22
Overview.................................................... 22
Recent Developments......................................... 24
Results of Operations....................................... 24
Fiscal Year Ended June 30, 2000 Compared to Fiscal Year
Ended June 30, 1999......................................... 25
Fiscal Year Ended June 30, 1999 Compared to Fiscal Year
Ended June 30, 1998......................................... 26
Quarterly Results of Operations............................. 27
Liquidity and Capital Resources............................. 29
Recent Accounting Pronouncements............................ 31
Year 2000 Computer Issues................................... 31
Forward-Looking Statements.................................. 31
ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET
RISK........................................................ 38
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................. 39
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.................................... 39
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.......... 40
ITEM 11. EXECUTIVE COMPENSATION...................................... 40
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.................................................. 40
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............. 40
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES, AND REPORTS ON
FORM 8-K.................................................... 41
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PART I
ITEM 1. BUSINESS
OVERVIEW
We provide advanced e-business solutions designed to optimize the financial
and operational performance of the supply chain. Our SynQuest One2One suite of
software solutions enables our customers to fulfill each order they receive in
the most profitable manner and to enhance competitiveness through improved
customer service. Our solutions consider the relevant variables that affect the
performance of the entire supply chain, including materials supply,
manufacturing, distribution, transportation and trading partners. We help our
customers improve their business performance, increase market share and enhance
customer service by:
- providing real-time management of every customer order to help achieve
fast and reliable fulfillment; and
- selecting the financially optimal, or profit maximizing, means of order
fulfillment within the supply chain constraints and customer
requirements.
Our scalable solutions are designed for business-to-business e-commerce. We
target traditional bricks and mortar companies with annual revenues between $100
million and $2 billion, web-based companies and market exchanges. We believe
these companies face complex supply chain management challenges, but their
limited resources and expertise require them to select solutions that are easy
to use and quick to deploy. Our turnkey suite of products can be quickly
implemented to deliver bottom-line savings and incremental revenue opportunities
for customers. Our solutions readily interface with a broad range of our
customers' existing enterprise applications, as well as the platforms of their
web-based trading partners. As of June 30, 2000, we had implemented our
solutions for over 100 customers. Our customers include The B.F. Goodrich
Company, Ford Motor Company, Herman Miller, Inc.'s SQA Division, Nordstrom.com,
Pioneer Electronic Corp., Reynolds Metals Company, STMicroelectronics N.V., and
Titleist and Footjoy Worldwide.
MARKET OPPORTUNITY
OUR ADDRESSABLE MARKET
The supply chain management software and services market is projected to
grow at a 40% compounded annual rate from $3.8 billion in 1999 to $20.3 billion
by 2004, according to AMR Research, Inc., an independent market research
company. In addition, we expect that as business-to-business e-commerce
develops, supply chain management solutions will gain share in e-commerce
application budgets. This will further increase the size of the potential market
for supply chain management solutions. The e-commerce applications market is
estimated to grow from $1.7 billion in 1999 to $16.0 billion by 2004, at a
compounded annual rate of 56%, according to AMR Research.
TRENDS DRIVING THE IMPORTANCE OF SUPPLY CHAIN MANAGEMENT IN THE E-BUSINESS
SOLUTIONS MARKET
Competitive pressure driven by the Internet. The Internet has allowed new
competitors to emerge and existing competitors to compete in new ways. Today's
increasingly competitive business environment and shareholder expectations have
forced many companies to become more efficient while improving their flexibility
and responsiveness to changing market conditions. In addition to facing higher
product standards for quality, variety and price, businesses also recognize the
need to shorten lead times, adjust production for frequent changes in customer
requirements and quote more accurate and reliable delivery dates. Many companies
seek to achieve growth through new distribution channels and superior customer
service, rather than through product innovation. In response to these market
forces, many companies are implementing supply chain management software
solutions to improve the efficiency of their business processes.
Growth of direct materials transactions through e-commerce. The volume of
nonfinancial goods and services sold through business-to-business e-commerce is
expected to reach $7.3 trillion worldwide in 2004,
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according to the GartnerGroup, a technology consulting and research firm. We
believe that approximately 80% of this e-commerce will consist of direct
materials, which are mission-critical materials, parts or components that are an
element of an enterprise's finished product. Buyers of direct materials
generally seek to exchange information with sellers across the life cycle of
their relationship. For example, buyers may need to assess a supplier's ability
to support potential business scenarios, such as the ability to meet volumes and
delivery dates, before committing to purchase a product. These customers seek to
make sourcing decisions that result in the lowest total delivered cost, which
involves many factors other than price, and to easily ascertain the current
status of each other. A typical manufacturing, distribution or retail company
executes thousands of direct materials buy and sell transactions annually, many
of which require coordinated execution. The supply chain management solutions
used today by the majority of companies do not readily support high volume
direct materials e-commerce.
The need for mass customization. As customers increasingly demand goods
tailored to their requirements, businesses seek to grow revenue by producing
unique goods on a large scale. However, manufacturers often cannot
cost-effectively maintain large inventory levels to meet anticipated demand. In
addition, customers are demanding that mass customized products be delivered
reliably and in less time, especially as the Internet raises expectations of
delivery speed. To achieve fast, reliable and profitable mass customization,
manufacturers will need to implement supply chain management solutions that can
address each order and manage it profitably in real-time.
The growth of market exchanges. Market exchanges, which are on-line
intermediaries that connect fragmented buyers and sellers, represent a new and
rapidly growing class of customers for supply chain management solutions. As of
April 2000, there were over 600 market exchanges, which are expected to grow to
10,000 by 2003, according to NetMarketMakers.com, a market research firm.
According to the GartnerGroup, 37% of the expected $7.3 trillion of
business-to-business e-commerce transactions, or $2.7 trillion, will occur
through market exchanges in 2004. As market exchanges move further into high
volume direct materials transactions, they will face increasing supply chain
coordination and customer satisfaction issues.
Globalization. Several factors are increasing the globalization of
markets, including the continued reduction in trade barriers, the Internet's
ability to make market information available worldwide, increasing
specialization and continued pressure to reduce costs and quickly penetrate new
markets to sell existing products. Globalization will lead to companies
interacting with more trading partners and a higher degree of outsourcing,
resulting in larger and more varied supply chains. This shift will place more
emphasis on the importance of supply chain management solutions that provide
visibility and control.
LIMITATIONS OF EXISTING SUPPLY CHAIN MANAGEMENT SOLUTIONS
We believe that existing supply chain management solutions do not fully
address the business imperatives arising from the foregoing trends. We believe
the primary limitations of existing solutions include the following:
- Limited financial optimization capability. Most supply chain management
solutions have limited capability to consider the financial impacts of
supply chain decisions. Typically, these solutions consider financial
impacts at an aggregate level, not on an order-by order basis, and
therefore do not select a financially optimal result.
- Lack of real-time management capability. Most supply chain management
solutions address planning and execution as two separate activities. This
limits effective decision-making over the supply chain and does not
account for real-time events which impact the plan and, therefore,
optimal execution.
- Difficulty of deployment. The adoption of most supply chain management
solutions has been limited due to the complexity of its implementation
process. Successful implementation of these solutions often requires
programming by operations research experts, which few companies have in-
house.
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THE SYNQUEST SOLUTION
Our software solutions are designed to address the limitations of current
supply chain management solutions and provide a comprehensive platform for our
customers to address the trends shaping their businesses. The key elements of
our solutions are as follows:
Financial optimization. Each product in our SynQuest One2One suite of
solutions is designed to achieve a single goal: financial optimization. Our
solutions carry this financial optimization principle from developing a
supply chain management strategy down to the individual order level and
allow our customers to determine the profit margin contribution of each
potential order before they accept it. This focus typically allows our
customers to recover their investment in our products quickly.
Real-time management. Our solutions are designed to create the plan,
coordinate the execution and continuously control each order to facilitate
fast and reliable fulfillment. After analyzing all relevant variables and
selecting the financially optimal means of fulfillment, our software
creates time-stamped operational plans that are disseminated for execution
throughout the supply chain. As execution occurs, our software analyzes the
events of the supply chain in real-time, publishes the impact of the events
on order delivery, and re-plans as necessary to keep the orders on
schedule. Our solutions analyze real-time changes in fulfillment
constraints to redetermine the optimal means of fulfillment.
Turnkey solutions. We offer turnkey solutions that are easy to
deploy, interface readily with most existing enterprise systems and
e-commerce platforms, and require little or no custom programming to
implement. After easily linking to our customers' systems, our solutions
use existing customer supply chain data to generate financially optimal
fulfillment plans. In addition, the turnkey nature of our solutions is a
competitive advantage because we can demonstrate, with little advance
preparation and set-up, a prospective customer's ability to realize
significant bottom-line savings with our solutions.
Comprehensive, high-volume, high-performance solutions. Our solutions
are comprehensive and operate robustly in a variety of environments. Our
solutions cover the entire array of supply chain issues that arise from
both short, vertical supply chains contained largely within a single
enterprise to distributed, complex supply chains crossing numerous
enterprises. As a result, our products are well suited for the most
traditional industrial companies as well as newer web-based businesses and
market exchanges. Our products are built to address the performance
requirements of large, complex supply chains and business-to-business
e-commerce, and to operate in mission-critical situations. We combine
advanced computing technologies, such as mixed integer programming and
genetic algorithms, with multiple modeling techniques designed to maximize
profitability and responsiveness.
OUR STRATEGY
Our objective is to become the leading provider of advanced e-business
solutions that optimize supply chain performance. We seek to enable our
customers to successfully transform their businesses to maximize profitability
and competitiveness. Our strategy to achieve this goal includes the following
key elements:
Increase our brand awareness. We focus on three types of customers:
bricks and mortar companies, web-based companies and market exchanges. We
plan to boost awareness of our company and our solutions through new
marketing campaigns and additional strategic partnerships. Marketing
campaigns may include advertising or public relations programs designed to
reach our target audiences effectively. We will cultivate strategic
partnerships with complementary business-to-business e-commerce companies,
such as software solutions providers and systems integrators, to stimulate
sales lead generation and offer more comprehensive solutions.
Expand and deepen market coverage. We plan to expand our market
coverage by increasing our direct sales force and building strategic
alliances. We intend to increase our coverage of existing markets and to
penetrate new geographic areas throughout Europe, Asia and the Pacific Rim.
In
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certain markets, we plan to partner with resellers to expand our presence
and support indirect sales efforts. We will also continue to market our
software products aggressively to businesses that have already licensed one
or more of our products. We believe that, as a result of the return on
investment that we deliver to our customers, customers will encourage the
use of our products throughout their enterprises and supply chains.
Broaden and enhance our suite of products. We intend to leverage our
expertise in supply chain management to build additional functionality into
our products, increase their competitiveness and broaden their
applicability for existing and new markets. We also plan to continue to
build new solutions that address emerging trends in supply chain management
and business-to-business e-commerce.
Target additional vertical markets. We plan to further penetrate our
current target industries and leverage our existing products' capabilities
into new vertical markets. We intend to support these new verticals by
hiring industry experts and expanding our products to address the specific
challenges presented by each new market. We also expect that successful
implementations in our existing vertical industries will present
significant opportunities to license our products to our customers' trading
partners in other vertical markets.
Pursue strategic acquisition opportunities. We may pursue strategic
acquisitions of complementary businesses, technologies, or products that
will accelerate any of the elements of our strategy. We currently have no
understandings, arrangements or agreements with respect to any potential
acquisitions.
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CORE FUNCTIONALITY OF OUR SOLUTIONS
All of our solutions share a core functionality, the two key features of
which are financial optimization and real-time management.
FINANCIAL OPTIMIZATION
Our products' financial optimization capability provides our customers with
the ability to maximize profitability of each individual order or minimize costs
while meeting order fulfillment constraints. Our customers view their supply
chains as beginning with their customers and ending with suppliers. Those supply
chains have many elements, including manufacturing plants, warehouses, suppliers
and modes of transportation. Each supply chain element has certain capabilities,
limitations and costs. When an order is placed, our solutions dynamically search
through the supply chain to determine what combination of warehouses, plants,
suppliers and transportation methods meets the delivery requirements of the
order, taking into account the capabilities and limitations of each supply chain
element and the impact of existing orders on those elements. That dynamic search
includes assessing alternative paths through the supply chain to find the single
path that meets the delivery requirements with the lowest combined warehousing,
manufacturing, transportation and supplier costs. The diagram below illustrates
financial optimization.
FINANCIAL OPTIMIZATION OF AN ORDER
The order sourcing route is dynamically chosen based upon the capacity,
lead time and cost of all of the supply chain's resources.
(Chart)
Result: The order is sourced for the required or best possible delivery date
and the lowest total delivered cost.
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REAL-TIME MANAGEMENT
Real-time management means planning, execution and control. The real-time
management capability of our solutions allows our customers to create the plan,
coordinate the execution and continuously control an order to facilitate its
fulfillment with the highest reliability in the shortest possible time. After an
order is dynamically sourced, all required actions, timing and
interrelationships are established and tracked throughout the supply chain. As
events in the supply chain occur, they are compared in real-time to the planned
events to detect any deviations from the sourcing plan. As deviations are
detected, our solutions project the impact of a deviation on the delivery of the
order. For instance, if a supplier were expected to deliver 100 input materials
on a particular date but actually delivered only 50, our solutions would project
the impact on the order and automatically determine its new delivery date. Our
solutions can quickly replan orders and select alternate paths or sequences
through the supply chain in order to maintain the delivery schedule if possible.
By constantly tracking the order through its life cycle, real-time management
also improves the speed of an order by minimizing order idle time. The diagram
below illustrates real-time management.
REAL-TIME MANAGEMENT OF AN ORDER
Our solutions track execution of the order, analyze performance deviations
for their impact on the delivery date, and re-plan, if necessary, to place the
impacted order back on schedule.
(Chart)
Result: Orders are reliably delivered within the shortest possible time.
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OUR SYNQUEST ONE2ONE SOLUTIONS
PRODUCT PRIMARY BENEFIT FEATURES/FUNCTIONALITY
SUPPLY CHAIN DESIGN Designed to assemble supply - Determines the supply chain
ENGINE chains to optimize delivery network and product flow
performance and - Optimizes on-time delivery
profitability and demand fulfillment
profitability
- Considers trade-offs between
capital investment and
operational costs
INBOUND PLANNING ENGINE Designed to determine how - Considers supplier,
to move inbound materials transportation and customer
through the supply chain to constraints and costs
result in the lowest total - Creates a transportation plan
delivered cost that minimizes the
combination of
transportation, inventory and
customer handling costs
- Synchronizes inbound
logistics with production or
outbound distribution
requirements
TACTICAL PLANNING ENGINE Designed to produce a plan - Models costs, capacities and
that maximizes margin lead times throughout the
contribution across the supply chain
supply chain - Determines what combination
of products should be sold to
maximize margin contribution
- Selects suppliers and
allocates supply chain's
resources to support the
sales plan
OPEN DEMAND ENGINE Designed to generate an - Manages multiple demand
accurate, unified customer streams, including
demand forecast for sales, collaboration with web-
marketing, manufacturing, enabled trading partners
distribution, finance and - Maintains unconstrained and
trading partners profit-constrained sales
forecasts
- Monitors sales activities
against forecasts and tracks
forecasting accuracy
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PRODUCT PRIMARY BENEFIT FEATURES/FUNCTIONALITY
DYNAMIC SOURCING ENGINE Designed to manage multiple - Models supply chain wide
orders across the supply costs, inventories,
chain capacities and lead times
- Dynamically selects the most
cost-efficient path across
the supply chain for each
customer order
- Tracks the progress of an
order through the supply
chain
- Allows trading partners to
allocate capacity, inventory,
set pricing, receive
commitments and respond with
actual performance over the
Internet
ORDER PROMISING ENGINE Designed to determine the - Considers the availability of
fastest and lowest total materials, manufacturing,
cost way to deliver an distribution, transportation
order capacity, costs and lead
times and finished goods
inventories
- Allows customers via the web
to determine delivery dates
for orders
- Allows manufacturers to
understand the potential
margin of that order before
making commitments
VIRTUAL PRODUCTION Designed to provide - Creates and publishes to-
ENGINE real-time management of the-second production
production orders schedules that optimize order
fulfillment based on cost,
on-time shipment and total
order cycle time
- Monitors and projects the
impact of production events
as they occur on order
shipment
- Re-plans instantly to put
order shipment times back on
track
CUSTOMER SERVICE ENGINE Designed to provide - Accesses and translates up-
real-time visibility to to-the-second supply chain
customer order status information into customer
across the supply chain information
- Creates personalized views of
the supply chain information
for individual customers
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PROFESSIONAL SERVICES
IMPLEMENTATION METHODOLOGY
We use an implementation methodology that we call the SynQuest Optimal
Performance Path. Our methodology consists of an end-to-end framework that
enables our customers to identify, maximize and take advantage of significant
opportunities for business improvement through supply chain management. We begin
the Optimal Performance Path program at the first meeting with each prospective
customer, and we continue it until our customers have achieved their desired
business results. We believe the continuity of our approach helps our customers
achieve measurable benefits quickly.
The initial phase of the Optimal Performance Path process centers around a
Value Opportunity Assessment, which is a formal analysis of the potential
improvements in each prospective customer's supply chain. Our industry
consultants conduct a site visit with the prospect, evaluate current conditions
and produce a report that outlines a value proposition specific to each
prospect's business goals. The value proposition specifically identifies
achievable financial and operations improvements, including how our software
will address the business issues, how to proceed with the actual implementation
and how to measure the delivered performance improvements. By using this
approach, we are able to ensure that we understand and agree upon our prospect's
opportunities for improvement as well as the solutions that are necessary to
produce the anticipated results. After we finalize the sale, the opportunities
identified in the Value Opportunity Assessment become the benchmark goals for
implementation, the second phase of the Optimal Performance Path process.
The implementation phase is designed to rapidly achieve the agreed upon
business objectives. We use two teams, an implementation team and a performance
team, working together to achieve the business objectives. The implementation
team installs and integrates the software to support the new business processes.
The performance team consists of senior management of the customer, our partners
and ourselves and addresses business issues that arise to keep the
implementation progressing as quickly as possible. This two team process
continues until we have achieved the business goals that were identified during
the Value Opportunity Assessment. Because of our implementation process, we are
able to install the software and produce results in as little as 90 days.
MAINTENANCE AND OTHER SERVICES
Maintenance. We provide full maintenance and support of our solutions to
our customers who choose to purchase an annual maintenance agreement. As long as
a maintenance agreement is in effect, our customers will receive all software
fixes and release enhancements as agreed upon in the contract documents and
license agreements. The maintenance program also includes up to 24-hour customer
service support to answer technical questions, assist in solving technical
issues, report product discrepancies, or request enhancements. Standard customer
service support is available during normal business hours. An extended customer
service support option is available which includes seven-day, 24-hour customer
service.
Strategic Consulting. Our consultants are available to work on select
strategic supply chain projects. We can help our customers develop custom supply
chain network plans to achieve their business goals. We apply these resources as
necessary to solve a wide range of complex supply chain problems.
CUSTOMERS
We target three types of customers: bricks and mortar companies, web-based
companies and market exchanges.
- Bricks and mortar companies typically attempt to differentiate themselves
from their competitors through responsiveness and reliability while
achieving a competitive cost advantage. Targeted bricks and mortar
companies have complex products or supply chain processes, such as
multiple suppliers, plants and warehouses, complex orders, significant
inventory carrying costs and alternative transportation modes. They are
also producing or distributing mass customized products.
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- Web-based companies have a strong web presence and accept orders over the
Internet but rely heavily on the supply chain assets of other companies.
Targeted web-based companies have complex order requirements and seek to
fulfill orders as profitably as possible. They must have intimate
knowledge of the capabilities and current status of the supply chain
assets of their trading partners to profitably service their customers.
- Market exchanges are typically businesses that have a web presence and
offer direct materials procurement services to buyers and sellers using
their exchange. Targeted market exchanges offer services for coordination
of complex orders, sourcing of materials for lowest total delivered costs
and/or have sellers that seek to sell excess capacity.
As of June 30, 2000, we had over 100 customers, operating in vertical
markets such as automotive and aerospace, electronics and electrical,
fabrication and assembly, printing and packaging, industrial and general
business industries. The following chart highlights representative customers in
these industries:
AUTOMOTIVE/AEROSPACE ELECTRONICS/ELECTRICAL FABRICATION/ASSEMBLY
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The B.F. Goodrich Company Pioneer Electronic Corp. Eaton Corporation
Ford Motor Company Ryobi North America, Inc. Herman Miller, Inc.'s SQA
Reynolds Metals Company STMicroelectronics N.V. Division
Sagem SA State Industries, Inc. Ingersoll-Rand Company
Tenneco Automotive Inc. Irwin Seating Company
Sauder Woodworking Co., Inc.
PRINTING/PACKAGING INDUSTRIAL GENERAL BUSINESS
------------------------------- ----------------------------- -----------------------------
CCL Custom Manufacturing, Inc. Commonwealth Industries, Inc. AmBev
Chesapeake Corporation Pfaudler, Inc. Cara Operations Limited
Crane Plastics Company Wolverine Tube, Inc. Kellogg Company
Graphic Packaging Corporation Nordstrom.com
Titleist and Footjoy Worldwide Sara Lee Corporation
United Parcel Service, Inc.
We have historically derived a significant portion of our revenues from
relatively few customers. In fiscal 2000, Ford Motor Company accounted for 21%
of our total revenues. In fiscal 1999, Moore Corporation, Limited accounted for
20% of our total revenues and, in fiscal 1998, Moore Corporation, Limited
accounted for 17% of our total revenues.
CASE STUDIES
The following case studies illustrate the benefits that our solutions have
provided to sample customers.
HERMAN MILLER'S SQA DIVISION
Company Background. Herman Miller's SQA Division manufactures and
distributes custom office furniture. The typical delivery time in the custom
office furniture industry is four to eight weeks, with little on-time
reliability. Herman Miller's SQA Division had already achieved delivery times of
as little as two weeks using streamlined methods and the deployment of a
PC-based order configuration system.
Issue. Herman Miller's SQA Division receives an average of 300 customer
orders daily, which results in more than 3,000 work orders for production.
Manufacturing companies typically perform work sequentially, with a product
moving from department to department until it is completed. This method of
manufacturing wastes time as products are moved from station to station with
idle time at each station. Herman Miller realized that to reduce lead times
significantly, it needed to coordinate assembly and reduce product idle time.
SynQuest Solution. To accomplish these tasks, Herman Miller's SQA Division
selected our Virtual Production Engine in 1996 to enable it to keep pace with
growing demand for its products and to create a
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paperless, real-time environment for improved manufacturing flexibility. Herman
Miller's SQA Division implemented our software at its Holland, Michigan facility
within 28 weeks. A second implementation was deployed in Rocklin, California
eight weeks later. In 1999, Herman Miller's SQA Division used the Internet to
integrate its suppliers with Virtual Production Engine to speed delivery of
materials to its production facilities.
Results. During the first 18-month period of live use, Herman Miller's SQA
Division gained the following performance improvements:
- On-time shipment reliability increased from 87% to over 99%;
- Average order cycle time dropped from 16 days to five days;
- Herman Miller's SQA Division ranked first in the furniture industry for
quick and complete delivery, delivery when promised and service,
according to an independent survey referenced by Supply Chain Management
Review, an industry publication;
- Annual inventory turns increased by approximately 250% to over 50; and
- Herman Miller's SQA Division reduced its direct materials lead-time to
four hours prior to use in production.
CHESAPEAKE DISPLAY AND PACKAGING COMPANY
Company Background. Chesapeake Display and Packaging Company, or CD&P, is
a provider of global merchandising services and a wholly owned subsidiary of
Chesapeake Corporation, a specialty packaging and merchandising service
provider. The company converts paperboard and other materials into displays,
produces packaging products and offers merchandising services such as
fulfillment. Since 1990, CD&P has experienced double-digit growth annually while
adding services and facilities. The company's network of sales, design,
manufacturing, custom packaging and fulfillment facilities is strategically
positioned across the United States, Canada and Western Europe to ensure
responsiveness and efficiency.
Issue. CD&P's retail customers began to dictate not only what the company
should deliver, but when and how it should make these deliveries. CD&P began the
search for a supply chain software vendor to help reduce inventory, accommodate
last-minute customer changes and maintain its competitive advantage.
SynQuest Solution. To accomplish these tasks, CD&P purchased our Virtual
Production Engine, Tactical Planning Engine and Dynamic Sourcing Engine in early
1998 for three manufacturing facilities, two sub-assembly facilities and six
fulfillment facilities.
Results. Using our software, CD&P has reduced cycle times, inventory and
work-in process, and is linking to its suppliers via the Internet. For example,
the company builds ahead of time some of the displays and individualizes them
after the customer's order is received. It does this at multiple sites in
multiple states and regions. Its previous system could not provide inventory
status on work-in-process, making inventory difficult to manage. Prior to
implementing our solution, the company's inventory covered one million square
feet. By reducing work-in-process and finished goods inventory, the company has
been able to close four warehouses, resulting in a substantial reduction of
overhead.
Additional improvements include:
- CD&P cut manufacturing cycle time by up to 50% and
- CD&P improved scheduling of work centers and reduced overrun quantities
by up to 50%.
SALES AND MARKETING
As of June 30, 2000, our sales and marketing organization consisted of 71
individuals, of whom 57 were based in North America and 14 were based in Europe.
Our 26 direct sales representatives are supported by a team of 18 pre-sales
consultants for business, product and technical expertise throughout
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the sales cycle. The majority of our direct sales force is organized by
geographical areas. Consistent with our strategy to focus on vertical markets,
we intend to continue to assign some of our sales representatives to specific
industries. Our North American sales offices are located in Atlanta and Chicago.
Our European sales and marketing office is headquartered in London, with an
additional sales office in Paris.
We will continue our initiatives to sell and support our software through
resellers and distributors for specified product types and in multiple
geographic regions. We have established distributor relationships in Latin
America and Eastern Europe.
Our marketing efforts focus on two categories of lead generation programs:
programs that are jointly planned, funded and executed with our strategic
partners; and programs that are designed and implemented by our in-house
marketing team. An advertising agency and a public relations firm assist our
internal team.
Both types of lead generation programs are used to target audiences
throughout North America and Europe. Specific tactics used in these marketing
initiatives include public relations, advertising, trade shows, alliance
programs, seminars, direct mail and telemarketing. In addition, an internal and
external website, product collateral, case studies, white papers and
presentations are available to support the marketing programs.
STRATEGIC RELATIONSHIPS
We are building and maintaining significant working relationships with
complementary vendors. We believe this will contribute considerably to our
success through lead generation and improving our implementation capabilities.
We are an IBM Business Partner, working with multiple organizations within
IBM. We have marketing relationships with the Global Midmarket Business unit and
the AS/400 Server Group, through jointly funded lead generation and awareness
programs. The IBM Manufacturing Industry Solutions Unit develops, installs and
supports a SynQuest/J.D. Edwards World integration product. IBM Global Services
has built an implementation and consulting practice for our products with more
than ten trained and deployed IBM consultants. We are also in the process of
developing additional relationships with other IBM organizations.
We have entered into formal strategic partnership agreements with leading
systems integrators and consulting companies including Deloitte & Touche
Management Solutions and BORN Information Services. These companies complement
our expertise in integrating and implementing SynQuest One2One e-business
solutions. We expect that these companies may become implementation partners in
the future.
We have been a business partner of J.D. Edwards for over three years and,
as of September 1999, we were named its preferred advanced planning and
scheduling partner for discrete manufacturing. We have also created a joint
offering with IBM and J.D. Edwards for the industrial fabrication and assembly
market called Supply Chain Advantage. With J.D. Edwards, we have developed
standard integration for its OneWorld solution and our SynQuest One2One
solutions.
We have relationships with several enterprise resource planning vendors and
are a certified SAP Complementary Software Partner and a member of the Oracle
Partner Program. Our solution has been certified for integration compliance with
SAP R/3, an enterprise resource planning system. Participation in the Oracle
Partner Program entitles us to benefits that reach beyond basic development
capabilities and product support. In addition to the technical aspect of our
relationship, we have access to a large number of Oracle resources such as
discounted education, training and sales and marketing tools. We are an
authorized reseller of Oracle Application Specific Database products, which
further enhances our ability to sell a complete solution to our customers.
As we increasingly work with web-based companies and market exchanges, we
seek to partner with companies that can strengthen our market position. We have
joint marketing relationships with InterWorld, a web-based sell side solution,
BEA Systems, an Internet infrastructure provider, Arborex, a
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packaging materials market exchange, and WebPLAN, a high-tech electronics supply
chain solution vendor.
COMPETITION
The e-business supply chain management solutions market is relatively new
and growing rapidly. We generally differentiate ourselves from our competitors
through our explicit ability to optimize financial performance, our real-time
management and ease of deployment.
We compete primarily with supply chain management solutions vendors,
including i2 and Manugistics, both of which are significantly larger than us. i2
provides customers with software solutions for supply chain management, customer
management and product life cycle management. i2 competes across a broad range
of vertical markets. Manugistics offers a wide range of supply chain management
products targeted towards consumer products companies.
A large number of traditional software vendors, including Demantra,
Descartes and Manhattan Associates, provide specialized applications that
generally fall into the broad category of supply chain management. This includes
vendors of full function demand forecasting, transportation planning and
management, warehouse management and other logistics related applications.
Others provide finite capacity scheduling, geared either to process or discrete
manufacturers. Some of these solutions, such as warehouse management, are
complementary and we have plans to expand our partnerships in those areas. We
believe that most customers prefer to have a broader set of applications that
can solve an entire business process.
A number of web-based solution vendors, including Commerce One and Ariba,
have entered the supply chain management market. We believe that these vendors
fall into three categories: competitors, potential partners and prospects.
Web-based competitors face the same issue as enterprise resource planning
vendors, acquiring domain expertise. We believe that many of the emerging
web-based supply chain management solutions represent strong opportunities for
partnerships that can provide more value to our customers and prospects. These
same vendors are also potential users of our solutions to expand their
capabilities. Further, some companies have relied on in-house development to
satisfy their needs for supply chain management solutions. Typically, these
companies have focused on developing specialized supply chain solutions, not a
broad suite of capabilities. We believe that the number of companies pursuing
in-house development of supply chain management solutions will become
insignificant as companies seek to deploy a broad range of supply chain
capabilities and do not have the required domain expertise.
In addition most of the major enterprise resource planning vendors offer,
or have announced plans to offer, advanced planning and supply chain
functionality into their solutions. SAP, PeopleSoft, Baan, Oracle and J.D.
Edwards rely on supply chain management software to enhance their product
offerings. Their supply chain planning products are designed for integration
with their transaction applications and not for the heterogeneous application
environments of our prospective customers. These companies have very large
installed customer bases and they have substantially greater financial,
technical and marketing resources than we do.
RESEARCH AND DEVELOPMENT
As of June 30, 2000, we employed 78 individuals in our research and
development groups located in Clifton Park, New York and Arlington, Virginia
including a core group of operations research specialists focused on new and
better technologies for solving supply chain problems. In addition, we use
outside programming resources to supplement our base staff from time to time. We
spent $10.0 million on research and development expenses in fiscal 2000, $10.2
million in fiscal 1999 and $9.4 million in fiscal 1998.
Through a combination of investments in internal development, outsourcing
and alliances, we have significantly expanded the scope of our products over the
past 18 months. Due to the evolving nature of the market, we intend to continue
to maintain a high level of investment in new product development and
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enhancements, either internally or through external sources. Periodically, we
undertake advanced development projects, which may be partially or wholly funded
by customers that wish to deploy technology that sets them apart from their
competition. These projects have led to breakthroughs that emerge as new
standard products for the broader market, such as the Inbound Planning Engine,
which we developed in conjunction with Ford Motor Company.
We adhere to industry standard methods whenever possible. Our products are
built to support standards such as J2EE and Microsoft COM. We use industry
standard languages such as Java, Microsoft Visual C++ and Visual Basic. We rely
on component and object oriented engineering methodologies to develop our
products.
We are an innovative technology provider in several areas within the supply
chain management market, including product architecture and communications. We
use a multi-tier, component based architecture for scalability and ease of
deployment. Our architecture separates data, business logic and
presentation/communication services to make distribution of the systems across
multiple entities easier. All communications with the business logic is
conducted through applications programming interfaces. These interfaces allow us
to offer our customers the ability to use one solution to interact through
browsers and Microsoft Windows-based interfaces, as well as connect to legacy
applications and web-based business-to-business e-commerce solutions. Along with
the industry standards, we use proprietary technology where necessary to provide
added value. For example, we have developed our own code generation technology
that allows us to rapidly build a large number of application programming
interfaces simultaneously supporting XML and C-based communications.
Our products operate on IBM RS/6000 AIX, IBM AS/400, HP-UX, Sun Solaris
and/or Microsoft NT servers and browsers or networked PC clients with Microsoft
Windows 95(R) and NT(R), although not every product is yet available for all
platforms. The Oracle Corporation and the IBM Corporation provide relational
database support.
INTELLECTUAL PROPERTY
Our success and ability to compete are dependent upon continuous
improvements of our existing product portfolio and the continued development of
new solutions. To protect our technology, we rely primarily on copyright, trade
secret and trademark laws. In the ordinary course of business, we enter into
confidentiality or license agreements with our employees, consultants and
corporate partners that control access to and distribution of our software,
documentation and other proprietary information. In addition, we license our
products to end users in object code, machine-readable format and our license
agreements generally allow the use of our products solely by the customer for
internal purposes without the right to sublicense or transfer the products.
EMPLOYEES
As of June 30, 2000, we had 209 full-time employees, of whom 78 were
engaged in research and development, 71 in sales and marketing, 44 in service
and support and 16 in finance, administration and operations. None of our
employees are represented by a labor union. As of June 30, 2000, we had 184
employees located in North America and 25 employees located in Europe. We
believe that our employee relations are satisfactory.
ITEM 2. PROPERTIES
We lease 18,452 square feet of office space for our executive offices in
Norcross, Georgia under a lease that expires in January 2006. We also lease
office space in Clifton Park, New York; Chicago, Illinois; York, Pennsylvania;
Arlington, Virginia; Paris, France; London, England; and Gorinchem, Netherlands.
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ITEM 3. LEGAL PROCEEDINGS
We currently are not a party to any litigation that we believe could have a
material adverse effect on us or our business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On December 21, 1999, we held an annual meeting of the shareholders to
elect Joseph Trino, Paul Bender, Henry Kressel, Joseph Landy and Alfred Grunwald
as directors until the annual meeting in 2000 and to increase the number of
shares of common stock authorized for issuance under the 1997 option plan to
3,800,000 shares. Our holders of common stock voted as one class with the
holders of our Series B preferred stock, Series D preferred stock, Series F
preferred stock and Series G preferred stock. The voting results were as
follows:
FOR WITHHELD ABSTAIN
--- -------- -------
Joseph Trino............................................. 6,972,466 8,052 --
Paul Bender.............................................. 6,972,466 8,052 --
Henry Kressel............................................ 6,972,466 8,052 --
Joseph Landy............................................. 6,972,466 8,052 --
Alfred Grunwald.......................................... 6,972,466 8,052 --
FOR AGAINST ABSTAIN
--- ------- -------
Amendment to Stock Option Plan........................... 6,750,514 82,994 157,010
On May 17, 2000, we held a special meeting of the shareholders to amend and
restate the Amended and Restated Articles of Incorporation to increase the
number of authorized shares of common stock, to eliminate the authorized shares
of Class A common stock and to make Series C preferred stock convertible into
common stock. Shareholders of Series C preferred stock voted as a separate
class. The holders of all of 2,376,651 shares of Series C preferred stock voted
for the proposal. Holders of common stock, Series B preferred stock, Series D
preferred stock, Series F preferred stock and Series G preferred stock voting as
a group voted 8,344,647 shares for the proposal, 37,562 shares against the
proposal and 3,744 shares abstained from voting.
On June 26, 2000, we held a special meeting of the Series B, D and G
preferred shareholders to authorize and approve the payment of the accrued and
unpaid dividends on our outstanding preferred stock in the form of a newly
created Series H junior convertible preferred stock. Holders of Series B, D and
G preferred stock all voted as separate classes. The holders of all of 540,016
shares Series B preferred stock voted for the proposal. The holders of all of
3,692,618 shares Series D preferred stock voted for the proposal. Holders of
Series G preferred stock voted 3,706,382 shares for the proposal, no shares
against the proposal and 25,057 shares abstained from voting.
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ITEM X. EXECUTIVE OFFICERS OF THE REGISTRANT
Our executive officers are as follows:
NAME AGE POSITION
- ---- --- --------
Joseph Trino........................... 51 Chairman of the Board and Chief
Executive Officer
Timothy Harvey......................... 44 President and Chief Operating Officer
Paul Bender............................ 64 President, Bender Consulting Division
John Bartels........................... 56 Executive Vice President, Finance and
Administration
Christopher Jones...................... 41 Executive Vice President, Corporate
Development and Marketing
Ronald Nall............................ 53 Executive Vice President, Product
Delivery
Mark Simcoe............................ 43 Chief Financial Officer and Treasurer
Fred Brown............................. 47 Senior Vice President, Field Services
Joseph Trino has been our Chairman of the Board since September 2000 and
our Chief Executive Officer since July 1996. He was our President from May 1994
to December 1999. From April 1992 to December 1993, Mr. Trino was President of
Kaseworks, Inc., an Atlanta-based provider of application development tools.
From January 1980 to April 1992, he was employed at Dun & Bradstreet Software
Inc. From December 1988 to April 1992, Mr. Trino was President of Dun &
Bradstreet Software's Manufacturing Systems Business Unit. Mr. Trino received a
B.S. in Finance and Administration from Syracuse University.
Timothy Harvey has been our President since December 1999 and our Chief
Operating Officer since July 1998. From July 1996 to June 1998, he served as our
Executive Vice President, Field Operations. From March 1988 to June 1996, Mr.
Harvey was Vice President of worldwide field operations at Datalogix
International, an enterprise resource planning vendor. From November 1982 to
March 1988, Mr. Harvey held various positions at Management Science America,
Inc., an enterprise applications provider in Atlanta, Georgia, later acquired by
Dun & Bradstreet Software. Mr. Harvey also served for four years as an officer
in the United States Marine Corps. Mr. Harvey received a B.S. in Business
Administration from the University of Florida.
Paul Bender has been President of Bender Consulting, a consulting division
of our company, since June 1997 and a director since March 1998. From 1982 to
June 1997, Dr. Bender was President of Bender Management, which was the
predecessor to Bender Consulting. He is a founding member of the Council of
Logistics Management and the Institute of Management Consultants. Dr. Bender
received a B.A. and an M.S. in Electrical Engineering and a Ph.D. in Mathematics
from the Swiss Institute of Technology.
John Bartels has been our Executive Vice President, Finance and
Administration since November 1997. He is responsible for our worldwide
financial operations, including investor relations and human resources. From
November 1995 to October 1997, Mr. Bartels was Senior Vice President and Chief
Financial Officer of TSW International, Inc., an enterprise asset management
software company that has since been acquired by Indus International, Inc. From
1993 until October 1995, he was Chief Financial Officer of Boral, Inc., a
manufacturer of construction materials. From March 1974 to June 1991, Mr.
Bartels was employed at Fuqua Industries, Inc., a diversified holding company,
as its Senior Vice President and Chief Financial Officer. He is a certified
public accountant. Mr. Bartels received a B.S. in Accounting and an M.B.A. from
Florida State University.
Christopher Jones has been our Executive Vice President, Corporate
Development and Marketing since January 2000. From September 1998 to January
2000, he was our Senior Vice President, Marketing and Corporate Development.
From May 1994 to September 1998, Mr. Jones was Vice President of enterprise
applications, manufacturing and logistics research for GartnerGroup, Inc., a
provider of
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information technology advisory services. From July 1981 to May 1994, he was
employed by Kraft Foods in a variety of information technology and management
roles. Mr. Jones received a B.S. in Electrical Engineering from Lehigh
University.
Ronald Nall has been our Executive Vice President, Product Delivery since
July 2000. Mr. Nall has more than 20 years experience in the application
software industry working for companies such as Oracle, EDS, Texas Instruments
and Computer Associates. From March 1997 to April 1999, Mr. Nall served as
Senior Vice President, Services and Products for PowerCerv, Inc., an integrated
enterprise response provider. From June 1995 to March 1997, he was employed by
Datalogix International as Senior Vice President, Product Research, Marketing
and Development. Mr. Nall received a B.S. in Management and an M.B.A. from the
University of West Florida.
Mark Simcoe has been our Chief Financial Officer and Treasurer since July
1994. From April 1994 to June 1994, Mr. Simcoe was a consultant to us in the
role of acting chief financial officer. From May 1992 to April 1994, Mr. Simcoe
served as Executive Vice President and Chief Financial Officer of Kaseworks,
Inc. He is a certified public accountant. Mr. Simcoe received a B.S. in
Accounting, an M.B.A. and an M.S. in Tax Accounting from the University of
Florida.
Fred Brown has been our Senior Vice President, Field Services since January
2000. From November 1996 to December 1999, he was our Vice President, Field
Services. From December 1991 to September 1996, Mr. Brown was Vice President,
Pre-Sales at Datalogix. Mr. Brown attended North Carolina State University.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
GENERAL
SynQuest completed its initial public offering on August 14, 2000 at $7.00
per share and, since August 15, 2000, its common stock has traded on the Nasdaq
National Market under the symbol "SYNQ." During fiscal 2000, SynQuest's common
stock was not publicly traded.
On September 22, 2000, the last sale price of the common stock as reported
on the Nasdaq National Market was $8.38 per share, and there were 227 holders of
record of our common stock.
Except for cash dividends payable in lieu of fractional shares of a
preferred stock dividend, we have never declared or paid any cash dividends on
our capital stock. We currently intend to retain all available funds and any
future earnings for use in the operation and expansion of our business and do
not anticipate declaring or paying any cash dividends in the foreseeable future.
RECENT SALES OF UNREGISTERED SECURITIES
From July 1, 1997 through August 31, 2000, we issued the following
securities that were not registered under the Securities Act of 1933, as
amended:
ISSUANCES OF CAPITAL STOCK
In September 1997, we issued 2,500 shares of our common stock to a former
independent consultant in consideration of the execution and delivery of a
Release and Covenant Not to Sue.
In January 1998, we issued 15,000 shares of our common stock to the
shareholders of Manufacturing Execution Systems Associates, Inc. in
consideration of their continued employment with us.
In January 1999, we issued 15,000 shares of our common stock to the
shareholders of Manufacturing Execution Systems Associates, Inc. in
consideration of their continued employment with us.
In March 1999, we issued and sold an aggregate of 5,636,071 shares of our
Series G preferred stock to several accredited and institutional investors for
an aggregate offering price of $35.0 million. Deutsche Bank Alex. Brown
(formerly BT Alex. Brown Incorporated) served as exclusive placement agent for
this offering. As consideration for its services, we paid Deutsche Bank Alex.
Brown $2.2 million.
In May 2000, we issued and sold an aggregate of 112,500 shares of common
stock to Edward Scott, Jr., a member of our board of directors, for an aggregate
purchase price of $900,000.
In May 2000, we issued and sold an aggregate of 12,500 shares of common
stock to Carolina Gutierrez for an aggregate purchase price of $100,000.
In August 2000, we issued the following shares upon completion of our
initial public offering of common stock:
- 14,349,721 shares of common stock issued upon conversion of all of our
outstanding redeemable preferred stock, plus accrued and unpaid
dividends;
- 3,246,280 shares of common stock issued upon conversion of our
outstanding subordinated promissory notes held by E.M. Warburg, Pincus &
Co. in the aggregate principal amount of $15.0 million plus accrued
interest thereon; and
- 3,430,835 shares of common stock issued upon the cashless exercise of
warrants to purchase common stock held by E.M. Warburg, Pincus.
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No underwriters were used in the foregoing transactions. All sales of
securities described above were made in reliance upon the exemption from
registration provided by Section 4(2) of the Securities Act and/or Regulation D
promulgated thereunder for transactions by an issuer not involving a public
offering.
ISSUANCES OF NOTES AND WARRANTS
On July 20, 1997, we issued and sold a $2.5 million subordinated promissory
note and a warrant to purchase an aggregate of 714,286 shares of our common
stock to Warburg, Pincus Investors, L.P. at an exercise price of $3.50 per
share.
In November 1998, we issued and sold a subordinated promissory note to
Warburg, Pincus Investors, L.P. in an aggregate principal amount of $5.0
million. In accordance with its terms, the note was converted into an aggregate
of 805,153 shares of Series G preferred stock upon the closing of the sale of
the Series G preferred stock discussed above.
In May 2000, we issued a warrant to purchase 400,000 shares of common stock
at an exercise price of $8.00 per share in connection with a software license
agreement.
No underwriters were used in the foregoing transactions. All sales of
securities described above were made in reliance upon the exemption from
registration provided by Section 4(2) of the Securities Act and/or Regulation D
promulgated thereunder for transactions by an issuer not involving a public
offering.
GRANTS AND EXERCISES OF STOCK OPTIONS
From July 1, 1997 through August 31, 2000, we have granted stock options to
purchase an aggregate of 4,028,153 shares of common stock with exercise prices
ranging from $2.75 to $8.00 per share, to employees, directors and consultants
pursuant to our 1997 stock option plan. Of the options granted pursuant to our
1987 and 1997 stock option plans, 434,853 have been exercised for an aggregate
consideration of $405,353 as of August 31, 2000. The issuance of common stock
upon exercise of the options was exempt either pursuant to Rule 701, as a
transaction pursuant to a compensatory benefit plan, or pursuant to Section
4(2), as a transaction by an issuer not involving a public offering.
USE OF PROCEEDS
On August 11, 2000, registration statement no. 333-37518 was declared
effective by the Securities and Exchange Commission. We received approximately
$37.4 million of proceeds, net of underwriting discounts and commissions, from
the sale of 5,750,000 shares of common stock under that registration statement.
To date, we have used approximately $10.5 million of these net proceeds to repay
outstanding indebtedness. The remaining proceeds will be used for working
capital and general corporate purposes.
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ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data are qualified by reference to and
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and our consolidated financial
statements and notes thereto included elsewhere in this annual report. The
selected financial data presented below have been derived from our financial
statements which have been audited by Ernst & Young LLP, independent auditors.
The following acquisitions occurred during the periods presented:
- In September 1995, we purchased the intellectual property rights to
Mandis software from Mandis International Limited. Management
considered the intellectual property rights to be in-process
research and development with no alternative future use and expensed
the $2.5 million purchase price in fiscal 1996.
- In February 1996, we purchased Log'In, S.A. We accounted for this
acquisition under the purchase method of accounting. Management
considered $3.1 million of the purchase price attributable to
in-process research and development with no alternative future use
and expensed this amount in fiscal 1996. The results of Log'In's
operations subsequent to the date of acquisition are included in our
operating results.
- In November 1996, we purchased Manufacturing Execution Systems
Associates, Inc., or MESAi, and accounted for this transaction under
the purchase method of accounting. The results of MESAi's operations
are included in our financial statements effective November 1, 1996.
- In June 1997, we purchased Bender Management Consultants Inc. This
acquisition was accounted for under the purchase method of
accounting. Management considered $2.0 million of the purchase price
to be in-process research and development with no alternative future
use and expensed this amount in fiscal 1997. The results of
operations of Bender Management Consultants are included in our
financial statements effective June 1, 1997.
FISCAL YEAR ENDED JUNE 30,
---------------------------------------------------------------------
1996 1997 1998 1999 2000
---------- ----------- ------------ ------------ ------------
(IN THOUSANDS, EXCEPT SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Revenues:
Software license fees...... $ 4,813 $ 4,333 $ 10,392 $ 10,521 $ 13,181
Services................... 1,702 3,887 8,014 12,760 12,034
---------- ----------- ------------ ------------ ------------
Total revenue...... 6,515 8,220 18,406 23,281 25,215
Operating expenses:
Cost of license fees....... -- 11 524 576 497
Cost of services........... 1,194 4,419 6,714 9,308 7,535
Research and development... 5,193 6,320 9,368 10,179 10,002
Purchased in-process
research and
development............. 5,568 2,083 -- -- --
Sales and marketing........ 3,553 6,344 9,485 13,731 14,351
General and
administrative.......... 1,918 3,663 3,984 4,850 5,200
Provision for doubtful
accounts................ 242 1,600 373 753 767
---------- ----------- ------------ ------------ ------------
Total operating
expenses......... 17,668 24,440 30,448 39,397 38,352
---------- ----------- ------------ ------------ ------------
Operating loss............... (11,153) (16,220) (12,042) (16,116) (13,137)
Other income (expense):
Interest expense........... (658) (1,501) (3,539) (3,526) (2,723)
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FISCAL YEAR ENDED JUNE 30,
---------------------------------------------------------------------
1996 1997 1998 1999 2000
---------- ----------- ------------ ------------ ------------
(IN THOUSANDS, EXCEPT SHARE DATA)
Other income (expense)..... 70 (6) 52 82 87
---------- ----------- ------------ ------------ ------------
Total other
expense.......... (588) (1,507) (3,487) (3,444) (2,636)
Loss before income taxes..... (11,741) (17,727) (15,529) (19,560) (15,773)
---------- ----------- ------------ ------------ ------------
Net loss........... (11,741) (17,727) (15,529) (19,560) (15,773)
Accretion of redeemable
preferred stock............ (790) (1,309) (1,833) (2,534) (3,659)
---------- ----------- ------------ ------------ ------------
Net loss attributable to
common stock............... $ (12,531) $ (19,036) $ (17,362) $ (22,094) $ (19,432)
========== =========== ============ ============ ============
Basic and diluted net loss
per common share........... $ (18.77) $ (16.02) $ (13.98) $ (15.21) $ (12.58)
========== =========== ============ ============ ============
Weighted average number of
shares used in computing
basic and diluted net loss
per common share........... 667,492 1,188,204 1,242,381 1,452,363 1,544,265
========== =========== ============ ============ ============
Pro forma basic and diluted
net loss per common share
(unaudited)(1)............. $ (0.88)
============
Weighted average number of
common shares used in
computing pro forma basic
and diluted net loss per
common share (unaudited)... 22,114,460
============
- ---------------
(1) Reflects the August 2000 conversion of the following into shares of common
stock at the initial public offering price of $7.00 per share, less
underwriting discounts and commissions: (1) all outstanding redeemable
preferred stock, plus accrued and unpaid dividends; (2) outstanding
subordinated promissory notes, held by E.M. Warburg, Pincus in the aggregate
principal amount of $15.0 million, plus accrued interest; and (3) the
cashless exercise by E.M. Warburg, Pincus of all of its warrants. Does not
include the 5,750,000 shares of common stock sold in connection with the
initial public offering.
AS OF JUNE 30,
----------------------------------------------------
1996 1997 1998 1999 2000
-------- -------- -------- -------- --------
(IN THOUSANDS)
BALANCE SHEET DATA:
Cash and cash equivalents................... $ 296 $ 700 $ 900 $ 638 $ 457
Working capital (deficit)................... (5,231) (19,560) (35,012) (22,423) (36,686)
Total assets................................ 4,761 6,532 9,844 11,656 8,923
Long-term debt, less current portion........ 369 389 224 266 163
Redeemable preferred stock.................. 15,334 20,706 22,051 57,256 60,916
Shareholders' deficit....................... (19,968) (38,546) (55,411) (77,523) (94,413)
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
We develop, market and support supply chain management software that
enables enterprises to optimize financial and operational performance across
their supply chains. Since early 1999, we have begun to leverage our core
competencies in supply chain management software by developing additional
e-business products, as well as web-enabling our current products for use across
customer supply chains. The addition of e-business products to our SynQuest
One2One suite of solutions enables us to offer products that integrate and
financially optimize a customer's web-enabled supply chain.
Our fiscal year end is June 30. We generate revenues from two principal
sources:
- license fees derived from software products; and
- professional services fees and maintenance and support fees derived from
consulting, implementation, training and maintenance services and other
technical support related to our software products.
Software License Fees. Customers typically pay a one-time fee for a
perpetual license to use our software products. The amount of the fee is based
on the number of licensed sites, users and products. We require a written
software license contract that typically provides for an initial payment upon
execution of the license contract, followed by one or more periodic payments on
dates specified in the contract. Payments are required to be made within one
year of the contract date. Our initial software license arrangements with
customers typically provide for a fee for the first year of maintenance and
support services. We often negotiate contracts for specific implementation and
training services following the initial software license contract.
Our software licenses have principally been the result of direct sales to
customers, and we expect that direct sales will continue to represent our
principal selling method in the future. However, we have used and expect to
continue to use independent resellers of our products in geographic areas where
we do not believe it is cost-effective to establish a direct sales force. We
rely on third parties such as business process improvement consultants,
implementers of software systems and complementary software application
providers to provide us with leads for potential new customers. Prior to
mid-1999, we primarily depended on J.D. Edwards for our leads. During fiscal
2000, we entered into relationships with several new lead sources, substantially
reducing our dependence on any single lead source.
The sales cycle for our products is typically six to nine months, and
software license revenues for a particular period are substantially dependent on
orders received in that period. Furthermore, we have experienced, and expect to
continue to experience, significant variation in the size of individual
licensing transactions.
We recognize software license revenue when a signed contract is obtained,
shipment of the product has occurred, the license fee is fixed and determinable,
collectibility is probable, and remaining obligations under the license
agreement are insignificant. For software licenses which result from resellers
or distributors sublicensing our products to end users, we do not recognize
software license revenue until our products are licensed to the final end user
and all other conditions for revenue recognition outlined in the previous
sentence have been met. Our software arrangements often include multiple
elements, each of which is available for sale and often is sold separately. If a
software arrangement includes multiple elements, such as multiple software
products, specified upgrades, maintenance and support and/or other services, we
allocate the total software arrangement fee among each element of the
arrangement. We use the residual method, as defined in Statement of Position No.
98-9, to allocate revenue to delivered elements once we have established our
objective evidence for the value of all undelivered elements. Our objective
evidence of fair value for undelivered maintenance and support services is based
upon the then current standard renewal rate for these services and is not
discounted. Our objective evidence of fair value for undelivered implementation
and training services is based on our then current standard hourly rates for
such services as they are sold separately and is not discounted. The remaining
portion of the arrangement
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fee is allocated to the licensed software products. As a result, all discounts
negotiated with our customers in multiple element arrangements are reflected as
discounts to the license fee portion of the arrangement and are prorated across
multiple software products, if there are multiple products, based on their list
prices established by authorized management. Our revenue recognition is in
accordance with the American Institute of Certified Public Accountants Statement
of Position No. 97-2, "Software Revenue Recognition," as amended by Statement of
Position Nos. 98-4 and 98-9. Prior to fiscal 1999, we recognized software
license revenue in accordance with Statement of Position No. 91-1, meaning that
we then recognized software license revenue upon shipment, provided we had a
signed contract, that we had no remaining significant obligations to perform and
that collection of payment was probable. Our adoption of the new standards in
fiscal 1999 has not had a material effect on our revenue recognition.
Services Revenue. Our services revenue consists principally of revenue
derived from professional services associated with implementing our products and
educating and training our customers' employees on the use of our products. In
addition and to a lesser extent, our services revenue includes fees for ongoing
maintenance and support, consisting primarily of customer technical support
services and product upgrades and enhancements.
Our implementation and training services are typically delivered on a
time-and-materials basis or occasionally on a fixed-price basis. We recognize
revenue from the services delivered on a time-and-materials basis as the
services are performed. Revenue from fixed-price arrangements are recognized
using a percentage-of-completion method based upon the cost incurred to date as
a percentage of the total expected cost. Out-of-pocket expense incurred by our
personnel performing professional services are reimbursed by the customer.
Implementation and training services are generally completed four to nine months
following execution of the license contract. However, implementations for
customers licensing multiple products for numerous locations may take place over
a longer period of time.
As part of our maintenance and support services, we provide our customers
with product upgrades and enhancements as well as user and technical support
services for an annual fee. Most of our maintenance and support contracts are
invoiced annually in advance, are renewable at the discretion of the customer
and allow for future fee increases. The revenue from our maintenance and support
services is recognized ratably over the term of the maintenance and support
contract, which is generally 12 months. While a 90-day warranty is included in
the initial software license, our maintenance and support contracts typically
are entered into as of the date of the initial software license. Warranty claims
are typically not material and customers are charged for support during the
warranty period.
Cost of License Fees. Our cost of license fees consists primarily of
commissions or finder fees which we pay to third parties for providing us with a
new customer lead and sub-license fees paid by us to third parties for software
owned by a third party which we have licensed along with our products. Also
included is the amortization of software acquired through business acquisition.
We believe that our continued expansion of strategic alliances for sales lead
generation may increase the future cost of license fees over historical levels
both in dollars and as a percentage of total revenue.
Cost of Services. Our cost of services consists primarily of personnel
costs, including third-party consultants, and travel associated with providing
consulting, implementation, training and maintenance and support services
associated with our products.
Research and Development. Our research and development costs consist
primarily of personnel costs, travel, training and office facilities costs. We
maintain a development staff to enhance our products and to develop new
products. In accordance with Statement of Financial Accounting Standards No. 86,
we expense software costs as incurred until technological feasibility of the
software is determined and the recovery of the cost can reasonably be expected,
after which any additional costs are capitalized. To date, we have expensed all
software development costs because development costs incurred subsequent to the
establishment of both technological feasibility and the reasonable expectations
of cost recovery have been minimal.
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Sales and marketing. Our sales and marketing expenses consist primarily of
personnel costs, commissions to employees, travel, promotional events such as
trade shows, seminars and technical conferences and advertising and public
relations programs.
General and Administrative. Our general and administrative expenses
consist primarily of personnel and other costs of our finance and human
resources activities, as well as legal and audit fees, depreciation and other
general corporate expenses.
Backlog. Our product delivery lead times are very short and, consequently,
substantially all of our license fee revenue in each quarter may result from
contracts entered into in that quarter. Accordingly, we generally only maintain
a significant backlog for our professional services and maintenance and support
activities.
RECENT DEVELOPMENTS
On August 11, 2000, a registration statement on Form S-1 for the initial
public offering of our common stock was declared effective by the Securities and
Exchange Commission. We received approximately $37.4 million of proceeds, net of
underwriting discounts and commissions, from the sale of 5,750,000 shares of our
common stock in the initial public offering at a price of $7.00 per share. Upon
completion of the offering, all of the outstanding redeemable preferred stock,
plus accrued and unpaid dividends as of August 13, 2000 converted into
14,349,721 shares of common stock. Our outstanding subordinated promissory notes
held by E.M. Warburg, Pincus & Co., our principal shareholder, in the principal
amount of $15.0 million plus accrued interest as of August 14, 2000 converted
into 3,246,280 shares of common stock. We issued 3,430,835 shares of common
stock upon the cashless exercise of warrants held by E.M. Warburg, Pincus which
E.M. Warburg, Pincus had agreed to exercise upon completion of the offering.
RESULTS OF OPERATIONS
The following table sets forth selected statement of operations data
expressed as a percentage of our total revenue for the respective periods.
FISCAL YEAR ENDED JUNE 30,
---------------------------
1998 1999 2000
------- ------ ------
Revenue:
Software license fees..................................... 56.5% 45.2% 52.3%
Services.................................................. 43.5 54.8 47.7
------ ----- -----
Total revenue..................................... 100.0 100.0 100.0
Operating expenses:
Cost of license fees...................................... 2.8 2.5 2.0
Cost of services.......................................... 36.5 40.0 29.9
Research and development.................................. 50.9 43.7 39.7
Sales and marketing....................................... 51.5 59.0 57.0
General and administrative................................ 21.7 20.8 20.6
Provision for doubtful accounts........................... 2.0 3.2 3.0
Total operating expenses.......................... 165.4 169.2 152.2
------ ----- -----
Operating loss.............................................. (65.4) (69.2) (52.2)
Other income (expense):
Interest expense.......................................... (19.3) (15.1) (10.8)
Other income (expense).................................... 0.3 0.3 0.4
------ ----- -----
Total other expense............................... (19.0) (14.8) (10.4)
------ ----- -----
Loss before income taxes.................................... (84.4) (84.0) (62.6)
------ ----- -----
Net loss.......................................... (84.4)% (84.0)% (62.6)%
====== ===== =====
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FISCAL YEAR ENDED JUNE 30, 2000 COMPARED TO FISCAL YEAR ENDED JUNE 30, 1999
Software License Fees Revenue. Revenue from software license fees
increased 25.3% to $13.2 million in fiscal 2000 from $10.5 million in fiscal
1999. The increase was due to increased market acceptance of our software
solutions, as well as the expansion of our sales force. During the fourth
quarter of fiscal 2000, we entered into a $9.4 million agreement with Ford Motor
Company. The agreement provided for the license of five of our standard software
products, maintenance for one year and a warrant to purchase 400,000 shares of
our common stock. We allocated approximately $6.9 million of the total fee to
software licenses, $1.2 million to maintenance and $1.3 million to the fair
value of the warrant. We shipped a portion of the software in June 2000 and
recognized approximately $4.7 million of software license revenue. We expect to
ship the balance of the products in the quarter ending September 30, 2000.
During the first half of fiscal 2000, we believe that our software license
revenue was negatively impacted by the following factors:
- our traditional sources of customer leads did not meet our growth
expectations during the period of transition to other lead-generation
sources; and
- during calendar 1999 potential customers' short-term focus of financial
and manpower resources on Year 2000 issues postponed some potential
customers' licensing decisions.
In order to increase the quantity and quality of customer leads, we have
entered into and continue to pursue relationships with third-party lead sources
such as business process improvement consultants, implementers of software
systems and complementary software application providers. During fiscal 2000,
these efforts resulted in an increase in the quantity and quality of customer
leads. We believe the increases in our partner relationships with third-party
lead sources and the elimination of Year 2000 issues will continue to have a
positive effect on our future revenues.
Services Revenue. Revenue from services decreased 5.7% to $12.0 million in
fiscal 2000 from $12.8 million in fiscal 1999. This decrease was the result of a
decrease in our revenue from implementation and training services due to our
implementation service provider partners performing a portion of the
implementation services for our software customers, partially offset by an
increase in maintenance and support revenue resulting from license contracts
entered into during the past year. Management expects that the continued use of
third-party software implementation providers as lead sources will have the
future effect of reducing our implementation services revenue from customers
referred to us by the implementation service provider.
Total Revenue. Total revenue increased 8.3% to $25.2 million in fiscal
2000 from $23.3 million in fiscal 1999.
Cost of License Fees. Cost of license fees decreased 13.7% to $497,000 in
fiscal 2000 from $576,000 in fiscal 1999. This decrease resulted from a decrease
in sub-license fees paid to third parties as a result of fewer products
sub-licensed to our customers that were owned by third parties.
Cost of Services. Cost of services decreased 19.1% to $7.5 million in
fiscal 2000 from $9.3 million in fiscal 1999. This decrease was due to our
decreased use of higher cost third-party consultants for implementation
services.
Research and Development. Research and development expenses were
relatively consistent at $10.0 million in fiscal 2000 and $10.2 million in
fiscal 1999. Although we have been developing additional e-business products and
web-enabling our existing products over the past year, our research and
development costs have remained stable. We were able to utilize existing
resources and core competencies of our employees without adding additional
personnel costs to develop these new products and enhancements to our existing
products.
Sales and Marketing. Sales and marketing expenses increased 4.5% to $14.4
million in fiscal 2000 from $13.7 million in fiscal 1999. This increase was due
to an increase in compensation and related
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expenses associated with an increase in the number of sales personnel and
presales consultants as we expanded our direct sales force to allow for future
growth.
General and Administrative. General and administrative expenses increased
7.2% to $5.2 million in fiscal 2000 from $4.9 million in fiscal 1999. This
increase was the result of higher costs associated with the increase in our
infrastructure to support our recent and anticipated growth.
Provision for Doubtful Accounts. Our provision for doubtful accounts was
relatively consistent at $767,000 in fiscal 2000 and $753,000 in fiscal 1999.
Operating Loss. As a result of the above factors, our operating loss
decreased 18.5% to $13.1 million in fiscal 2000 from $16.1 million in fiscal
1999.
Other Income (Expense). Other income (expense) decreased 23.5% to $2.6
million in fiscal 2000 from $3.4 million in fiscal 1999. Other income (expense)
consists almost entirely of interest expense. This decrease was due to lower
average borrowings during fiscal 2000 as a result of the use of a portion of the
proceeds from the sale of Series G preferred stock in March 1999 to reduce debt
under our line of credit.
Income Taxes. During fiscal 2000 and 1999, we reported losses for both
financial reporting and income tax purposes. As a result, we made no significant
provision for income taxes in either period. At the end of fiscal 2000, we had
net operating loss carryforwards of approximately $74.1 million and tax credits
of approximately $1.1 million that expire principally in years 2001 through
2015. Total net operating loss carryforwards at June 30, 2000 includes
approximately $13.2 million of net operating losses related to our foreign
operations that may be carried forward indefinitely.
Net Loss. As a result of the above factors, our net loss decreased 19.4%
to $15.8 million in fiscal 2000 compared to $19.6 million in fiscal 1999.
FISCAL YEAR ENDED JUNE 30, 1999 COMPARED TO FISCAL YEAR ENDED JUNE 30, 1998
Software License Fees Revenue. Revenue from software license fees were
$10.5 million in fiscal 1999 and $10.4 million in fiscal 1998. While our
software license fee revenue increased in the first two quarters of fiscal 1999
compared to fiscal 1998, we experienced a decline in license fees in the last
two quarters of fiscal 1999. We believe this decline in license fees revenue in
the last half of fiscal 1999 was due in large part to our traditional sources of
customer leads not increasing during the period of transition to other
lead-generation sources and postponement of some potential customers' licensing
decisions due to Year 2000 issues.
Services Revenue. Revenue from services increased 59.2% to $12.8 million
in fiscal 1999 from $8.0 million in fiscal 1998. This increase was primarily the
result of an increase in revenue from customer implementations and an increase
in support revenue, both resulting from the increase in new licenses during the
fourth quarter of fiscal 1998 and the fist two quarters of fiscal 1999.
Total Revenue. Total revenue increased 26.5% to $23.3 million in fiscal
1999 from $18.4 million in fiscal 1998. The increase was due to the increase in
services revenue described above.
Cost of License Fees. Cost of license fees increased 9.9% to $576,000 in
fiscal 1999 from $524,000 in fiscal 1998. This increase was due to higher
third-party finder fees partially offset by a decrease in sub-license fees paid
to third parties as a result of a reduction in the number of products owned by
third parties that we sub-licensed to our customers.
Cost of Services. Cost of services increased 38.6% to $9.3 million in
fiscal 1999 from $6.7 million in fiscal 1998. The increase resulted from
increased costs associated with the addition of personnel, including the
increased use of higher cost third-party consultants necessary to provide our
implementation services.
Research and Development. Research and development expenses increased 8.7%
to $10.2 million in fiscal 1999 from $9.4 million in fiscal 1998. This increase
resulted from greater costs associated with additional personnel required to
support our product development activities and plans.
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Sales and Marketing. Sales and marketing expenses increased 44.8% to $13.7
million in fiscal 1999 from $9.5 million in fiscal 1998. This increase resulted
from increased costs associated with additional personnel in our sales and
marketing organization, including additional direct sales and marketing
personnel.
General and Administrative. General and administrative expenses increased
21.7% to $4.9 million in fiscal 1999 from $4.0 million in fiscal 1998. This
increase resulted from increased costs associated with the addition of personnel
and other costs related to the increase in business activity over the past year.
Provision for Doubtful Accounts. Our provision for doubtful accounts
increased 101.9% to $753,000 in fiscal 1999 from $373,000 in fiscal 1998. This
increase resulted from an increase in year-end as well as average outstanding
accounts receivable resulting from increased business activity.
Operating Loss. As a result of the above factors, our operating loss
increased 33.8% to $16.1 million in fiscal 1999 compared to $12.0 million in
fiscal 1998.
Other Income (Expense). Other income (expense), which consists primarily
of interest expense, was $3.4 million in fiscal 1999, approximately equal to the
$3.5 million in fiscal 1998. Although interest expense decreased in the fourth
quarter of fiscal 1999 as result of the use of a portion of the proceeds from
the sale of our Series G preferred stock in March 1999 to reduce borrowings
under our line of credit, the decrease was offset by increased borrowings during
the first three quarters of fiscal 1999.
Income Taxes. During fiscal 1999 and fiscal 1998 we reported losses for
both financial reporting and income tax purposes. As a result, we made no
significant provision for income taxes in either year.
Net Loss. As a result of the above factors, our net loss increased 26.0%
to $19.6 million in fiscal 1999 compared to $15.5 million in fiscal 1998.
QUARTERLY RESULTS OF OPERATIONS
The following tables contain quarterly financial information. The unaudited
consolidated quarterly financial statements have been prepared on substantially
the same basis as the audited consolidated financial statements contained in
this annual report. They include all adjustments, consisting only of normal
recurring accruals, that we consider necessary to present fairly this
information when read in conjunction with our consolidated financial statements
and the related notes appearing elsewhere in this annual report.
QUARTER ENDED
------------------------------------------
SEPT. 30, DEC. 31, MAR. 31, JUNE 30,
1999 1999 2000 2000
--------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenue:
Software license fees................................... $ 253 $ 3,563 $ 3,905 $ 5,460
Services................................................ 3,304 2,899 3,226 2,605
------- ------- ------- -------
Total revenue................................... 3,557 6,462 7,131 8,065
Operating expenses:
Cost of license fees.................................... 125 42 248 82
Cost of services........................................ 2,227 1,755 1,887 1,666
Research and development................................ 2,591 2,591 2,507 2,313
Sales and marketing..................................... 3,228 3,480 3,369 4,274
General and administrative.............................. 1,160 1,415 1,218 1,407
Provision for doubtful accounts......................... 325 147 124 171
------- ------- ------- -------
Total operating expenses........................ 9,656 9,430 9,353 9,913
------- ------- ------- -------
Operating loss............................................ (6,099) (2,968) (2,222) (1,848)
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QUARTER ENDED
------------------------------------------
SEPT. 30, DEC. 31, MAR. 31, JUNE 30,
1999 1999 2000 2000
--------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Other income (expense):
Interest expense........................................ (568) (721) (680) (754)
Other income (expense).................................. 29 16 11 31
------- ------- ------- -------
Total other expense............................. (539) (705) (669) (723)
------- ------- ------- -------
Loss before income taxes.................................. (6,638) (3,673) (2,891) (2,571)
------- ------- ------- -------
Net loss........................................ (6,638) (3,673) (2,891) (2,571)
------- ------- ------- -------
Accretion of redeemable convertible preferred stock....... (1,076) (731) (959) (893)
------- ------- ------- -------
Net loss attributable to common stock..................... $(7,714) $(4,404) $(3,850) $(3,464)
======= ======= ======= =======
Basic and diluted net loss per common share............... $ (5.16) $ (2.93) $ (2.38) $ (2.01)
======= ======= ======= =======
Weighted average number of shares used in computing basic
and diluted net loss per common share................... 1,495 1,501 1,621 1,720
======= ======= ======= =======
QUARTER ENDED
------------------------------------------
SEPT. 30, DEC. 31, MAR. 31, JUNE 30,
1998 1998 1999 1999
--------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenue:
Software license fees................................... $ 1,900 $ 4,000 $ 1,093 $ 3,528
Services................................................ 2,708 2,874 3,664 3,514
------- ------- ------- -------
Total revenue................................... 4,608 6,874 4,757 7,042
Operating expenses:
Cost of license fees.................................... 33 397 47 99
Cost of services........................................ 1,910 2,224 2,401 2,773
Research and development................................ 2,469 2,470 2,675 2,565
Sales and marketing..................................... 3,126 3,524 3,598 3,483
General and administrative.............................. 1,144 1,307 1,162 1,237
Provision for doubtful accounts......................... 45 45 186 477
------- ------- ------- -------
Total operating expenses........................ 8,727 9,967 10,069 10,634
Operating loss............................................ (4,119) (3,093) (5,312) (3,592)
Other income (expense):
Interest expense........................................ (980) (1,141) (959) (446)
Other income (expense).................................. 6 14 28 34
------- ------- ------- -------
Total other expense............................. (974) (1,127) (931) (412)
------- ------- ------- -------
Loss before income taxes.................................. (5,093) (4,220) (6,243) (4,004)
------- ------- ------- -------
Net loss........................................ (5,093) (4,220) (6,243) (4,004)
------- ------- ------- -------
Accretion of redeemable convertible preferred stock....... (485) (493) (629) (927)
------- ------- ------- -------
Net loss attributable to common stock..................... $(5,578) $(4,713) $(6,872) $(4,931)
======= ======= ======= =======
Basic and diluted net loss per common share............... $ (3.87) $ (3.26) $ (4.68) $ (3.33)
======= ======= ======= =======
Weighted average number of shares used in computing basic
and diluted net loss per common share................... 1,441 1,447 1,469 1,480
======= ======= ======= =======
Our quarterly operating results have varied in the past and may vary
significantly in the future depending on many factors including:
- the volume of orders;
- competitor activities;
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- changes in strategic relationships;
- customer budget constraints;
- the mix of products sold; and
- general economic conditions.
Historically, we have experienced very large individual license
transactions, which can cause substantial variances in quarterly license fee
revenue. In addition, we typically enter into a significant portion of our new
license contracts in the last two weeks of the quarter. Furthermore, we believe
that the purchase of our products is relatively discretionary and generally
involves a significant commitment of capital. As a result, purchases of our
products may be deferred or canceled in the event of a downturn in any potential
customer's business or in the economy in general or any potential customer's
focus of financial and manpower resources on other areas such as Year 2000
issues.
Historically, we have recognized greater revenue from license fees in the
fourth quarter of each fiscal year than in each of the preceding quarters, and
the first quarter license fees revenue typically has declined from such revenue
in the fourth quarter of the preceding year. We believe that this concentration
of licensing activity is caused primarily by our sales commission policies,
which compensate sales personnel for meeting or exceeding annual performance
quotas. Any change in these policies could result in a change in this pattern of
licensing activity and, therefore, the portion of annual revenue reported in
each quarter of the year. Furthermore, because we generally ship our software
products within a few days after receipt of a contract, we historically have not
had a material backlog of unfilled software orders and license fees revenue in
any quarter is generally substantially dependent on orders received and shipped
in that quarter.
A substantial portion of our operating expense level, particularly
personnel and facilities costs, is based, in part on our expectations as to
future revenue and is relatively fixed in advance of any particular quarter. As
a result of the foregoing factors, we believe that our quarterly revenue,
expenses and operating results likely will vary significantly in the future and
period-to-period comparisons of our operating results may not be meaningful. In
any event, such comparisons should not be relied upon as indicators of future
performance.
Revenue from software license fees increased in the quarter ended June 30,
2000 primarily as a result of our license agreement with Ford Motor Company.
Revenue from software license fees decreased in the quarter ended September 30,
1999 due in part to our potential customer's focus on Year 2000 issues. In
addition, in the quarter ended September 30, 1999, three new license agreements
were delayed due to our potential customers' delay in making a decision to
purchase J.D. Edwards software. As a result of the reduced software license fees
during the first quarter of fiscal 2000 and the increased use of third-party
service providers by our customers, implementation services revenue decreased in
the quarters ended December 31, 1999 and June 30, 2000.
Cost of services increased in the quarter ended June 30, 1999 due to the
use of higher priced third-party consultants to perform a portion of the
services and decreased thereafter as we reduced the number of third-party
consultants as implementation services declined. Sales and marketing expense
increased in the quarter ended June 30, 2000 primarily due to commissions on the
increase in software license revenue in that quarter. Interest expense decreased
in the quarters ended March 31, 1999 and June 30, 1999 as a result of the use of
a portion of the proceeds from the sale of our Series G preferred stock in March
1999 to repay our borrowings under our line of credit. Since that time,
borrowings under our line of credit have caused our interest expense to
increase.
LIQUIDITY AND CAPITAL RESOURCES
Historically, we have primarily financed our operations and our capital
expenditures through funds generated from operations, sales of our preferred
stock and borrowings from Greyrock Business Credit Corporation and E.M. Warburg,
Pincus, our principal shareholder. In August 2000, we completed the initial
public offering of our common stock and received proceeds, net of underwriting
discounts and
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commissions, of approximately $37.4 million. Approximately $10.5 million of the
proceeds have been used to repay the outstanding balance of our line of credit.
We intend to use the remainder of the net proceeds for working capital,
including funding of operating losses and other general corporate purposes. At
September 15, 2000, our cash and short term investments amounted to
approximately $25.1 million.
At June 30, 2000, our primary sources of liquidity consisted of a $20.0
million line of credit with Greyrock, which is secured by substantially all of
our assets and cash totaling approximately $457,000. Our credit facility with
Greyrock bears interest at the highest LIBOR rate in effect each month, plus
5.125% per annum, which was 11.8% as of June 30, 2000, provided that the
interest rate in effect each month is not less than 9% per annum. It provides
for borrowings not to exceed the lesser of $20.0 million or an amount equal to
the sum of the following: (1) 80% of qualifying receivables, as defined, (2) an
additional loan of $5.0 million and (3) a term loan of $5.0 million. Our line of
credit expires on December 31, 2000. At June 30, 2000, approximately $7.6
million was outstanding and $5.6 million was available for additional borrowings
under our line of credit.
Cash used in our operating activities was $5.4 million for the year ended
June 30, 2000 compared to $17.1 million for the year ended June 30, 1999. The
cash used in operating activities for the year ended June 30, 2000 resulted
primarily from our net losses of $15.8 million partially offset by $1.3 million
of depreciation and amortization expense, a $4.9 million increase in deferred
revenue, a $3.2 million decrease in accounts receivable, and a $1.3 million
increase in accrued expenses. The increase in deferred revenue resulted from
certain software license transactions closed during the quarter ended June 30,
2000 for which the revenue was deferred as the products had not been shipped as
of June 30, 2000. The decrease in accounts receivable at June 30, 2000 was due
to an improvement in the payment terms on our software license agreements as
compared to prior years, as well as the timing of cash receipts and new
contracts. The cash used in operating activities for the year ended June 30,
1999 resulted primarily from our $19.6 million net loss partially offset by a
$3.0 million increase in accrued expenses. The reduction in cash used in
operating activities during the year ended June 30, 2000, as compared to the
year ended June 30, 1999, was due to a $4.9 million decrease in accounts
receivable, a $4.4 million increase in deferred revenue and a $3.8 million
reduction in our net loss, partially offset by a net $836,000 reduction in
accounts payable and accrued expenses.
Cash used in our investing activities was approximately $1.2 million in the
year ended June 30, 2000 as compared to $1.3 million in fiscal 1999. The cash
used in investing activities was principally used for purchases of computer
hardware and software for internal use to support our growth during the previous
year as well as for furniture and fixtures.
Cash provided by our financing activities amounted to approximately $6.5
million in the year ended June 30, 2000 as compared to $18.1 million in fiscal
1999. During the year ended June 30, 2000, $4.1 million was provided from net
borrowings under our line of credit, $1.3 million was provided from the issuance
of a warrant to purchase common stock, and $1.1 million was provided from the
sale of common stock to a member of our board of directors and a member of his
household. During fiscal 1999, $32.7 million, net of issuance costs, was
provided in March 1999 from the sale of Series G preferred stock, of which $26.9
million was used to repay borrowings under our line of credit and $5.0 million
was used for the conversion of a note from E.M. Warburg, Pincus into Series G
preferred stock. Net of borrowings, the outstanding balance of our line of
credit during the year ended June 30, 1999 was reduced by $14.3 million.
We believe that our existing cash balance, short term investments and cash
flow from operations will be sufficient to meet our working capital and capital
expenditure requirements for the next twelve months. However, any material
variance of our operating results from our projections or the acquisitions of
complementary businesses, products or technologies could require us to obtain
additional equity or debt financing. Required financing may not be available on
acceptable terms, if at all.
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RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133, as
amended, is effective for quarters beginning after June 15, 2000. We do not
currently utilize derivative financial instruments and, therefore, we do not
expect that the adoption of SFAS No. 133 will have a material impact on our
results of operations or financial position.
In December 1999, the Securities and Exchange Commission Staff released
Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial
Statements," which clarified some provisions of current standards related to
software revenue recognition and must be adopted no later than the fourth
quarter of the fiscal year ending June 30, 2001. The adoption of SAB No. 101 is
not expected to have a material impact on our revenue recognition policies,
results of operations or financial position.
In March 2000, the FASB issued Interpretation No. 44, "Accounting for
Certain Transactions Involving Stock Compensation," an interpretation of APB
Opinion No. 25, which is referred to as "FIN 44". FIN 44 establishes guidance
for the accounting for stock option grants or modifications to existing stock
option awards and is effective for option grants made after June 30, 2000. FIN
44 also establishes guidance for the repricing of stock options and determining
whether a grantee is an employee, for which the guidance was effective after
December 15, 1998 and modifying a fixed option to add a reload feature, for
which the guidance was effective after January 12, 2000. The adoption of certain
of the provisions of FIN 44 prior to June 30, 2000 did not have a material
effect on the financial statements. We do not expect that the adoption of the
remaining provisions will have a material effect on the financial statements.
YEAR 2000 COMPUTER ISSUES
We did not experience any computer or systems problems relating to Year
2000. Upon review of our internal and external systems during 1999, we
determined that we did not have any material exposure to such computer problems
and that the software and systems required to operate our business and the then
current versions of our software products were Year 2000 compliant. As a result,
during calendar 1999 and the first six months of calendar 2000 we did not incur,
and do not expect to incur, any material expenditures relating to Year 2000
remediation of our internal systems or our software products.
FORWARD-LOOKING STATEMENTS
Certain statements made in this annual report, and other written or oral
statements made by us or on our behalf may constitute "forward-looking
statements" within the meaning of the federal securities laws. When used in this
report, the words "believes," "expects," "estimates" and similar expressions are
intended to identify forward-looking statements. Statements regarding future
events and developments and our future performance, as well as our expectations,
beliefs, plans, estimates or projections relating to the future, are
forward-looking statements within the meaning of these laws. Examples of such
statements in this report include descriptions of our plans with respect to
developing e-business products, the use of third-party lead sources and our
continuing growth. All forward-looking statements are subject to certain risks
and uncertainties that could cause actual events to differ materially from those
projected. We believe that these forward-looking statements are reasonable;
however, you should not place undue reliance on such statements. These
statements are based on current expectations and speak only as of the date of
such statements. We undertake no obligation to publicly update or revise any
forward-looking statement, whether as a result of future events, new information
or otherwise.
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The following are some of the factors that could cause our actual results
to differ materially from the expected results described in our forward-looking
statements:
BECAUSE WE HAVE A LIMITED OPERATING HISTORY IN THE E-COMMERCE MARKET, IT IS
DIFFICULT TO EVALUATE OUR BUSINESS AND PROSPECTS.
Although we were founded in May 1986, most of the products in our SynQuest
One2One suite of solutions were introduced in the last 18 months. You should
consider the risks and difficulties we may encounter as an early stage company
in the new and rapidly evolving e-commerce market. The recent introduction of
our products in the e-commerce market may make it difficult for you to evaluate
the success of our business to date and to assess future viability. We cannot be
certain that our business strategy will be successful. These risks apply
particularly to us because the supply chain management business is a rapidly
evolving market characterized by technological advances. The uncertainty of our
future performance increases the risk that the value of an investment in our
common stock will decline.
WE HAVE A HISTORY OF LOSSES AND EXPECT TO EXPERIENCE LOSSES IN THE FUTURE, WHICH
COULD RESULT IN A DECLINE IN THE MARKET PRICE OF OUR COMMON STOCK.
We incurred net losses of $15.8 million for the fiscal year ended June 30,
2000, $19.6 million for the fiscal year ended June 30, 1999, $15.5 million for
the fiscal year ended June 30, 1998 and $17.7 million for the fiscal year ended
June 30, 1997. As of June 30, 2000, we had an accumulated deficit of $101.2
million. We have not been profitable on a quarterly or annual basis, and we
anticipate that we will incur net losses for the foreseeable future. We expect
to continue to incur significant product development, sales and marketing and
administrative expenses. As a result, we will need to generate significant
quarterly revenues to achieve and maintain profitability. Our business strategy
may not be successful, and we may not generate significant revenues or achieve
profitability. Any failure to significantly increase our revenues as we
implement our product and distribution strategies would also harm our ability to
achieve and maintain profitability. If we do achieve profitability in the
future, we may not be able to sustain or increase profitability on a quarterly
or annual basis. Any failure to achieve or maintain profitability could
negatively impact the market price of our common stock.
OUR QUARTERLY RESULTS ARE SUBJECT TO FLUCTUATION, AND WE MAY FAIL TO MEET
SHAREHOLDER EXPECTATIONS, WHICH MAY CAUSE OUR STOCK PRICE TO DECLINE.
Historically, we have derived a substantial portion of our revenues from
large individual license transactions, which can cause substantial variances in
quarterly license fee revenue. In addition, we typically enter into a
significant portion of our new license contracts in the last two weeks of each
quarter, which makes us susceptible to shortfalls in revenues without
significant advance warning if expected orders fail to materialize. We
anticipate similar licensing patterns in the future. Delivery lead times for our
products are very short and, consequently, a significant portion of our license
fee revenue in each quarter results from orders received in that quarter. As a
result, revenues for future quarters are difficult to forecast. Further, we have
generally realized lower revenues in our first and second fiscal quarters than
in our third and fourth fiscal quarters. We believe that these fluctuations are
caused primarily by customer budgeting and purchasing patterns and by our sales
commission policies, which compensate personnel for meeting or exceeding annual
and other performance quotas.
A substantial portion of our operating expense level, particularly
personnel and facilities costs, are based, in part, on our expectations as to
future revenue and are relatively fixed in advance of any particular quarter. As
a result, if revenues are below expectations, our quarterly operating results
and financial condition will be adversely affected. Our quarterly operating
results may fail to meet expectations due to many factors, including:
- the volume of orders;
- competitor activities;
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- changes in strategic relationships;
- customer budget constraints;
- the mix of products sold; and
- general economic conditions.
If any of these or other factors occur, we could fail to meet expectations for
revenue generation and our stock price could be materially adversely affected.
THE BUSINESS-TO-BUSINESS E-COMMERCE AND SUPPLY CHAIN MANAGEMENT SOLUTIONS
INDUSTRIES ARE EXPERIENCING RAPID TECHNOLOGICAL CHANGE AND EVOLVING STANDARDS,
AND IF WE DO NOT EFFECTIVELY RESPOND TO THESE CHANGES, OUR REVENUES MAY FAIL TO
GROW OR MAY DECLINE.
The market for our solutions is characterized by rapidly changing
technology and evolving industry standards. Our success will depend to a
substantial degree upon the continued evolution of the business-to-business
e-commerce market. The development of advanced new technologies and enhancements
is a complex and uncertain process requiring high levels of innovation, as well
as the accurate anticipation of technological and market trends. The
business-to-business e-commerce industry may not develop as anticipated or, if
the industry changes more rapidly than we expect, we may not be able to
identify, develop, market or support new technologies or enhancements that will
gain market acceptance. Consequently, our products may be superseded. Further,
we may be unable to respond effectively to technological changes and emerging
industry standards.
Our future results depend on continued market acceptance of supply chain
management software and services as well as our ability to continue to adapt and
modify this software to meet our customers' changing needs. Adoption of supply
chain management software solutions, particularly by those businesses that
historically have relied on traditional means of commerce and communication,
will require a broad acceptance of new and substantially different methods of
conducting business and exchanging information. These products and services
introduce new tools in managing and communicating across their supply chains
and, as a result, we may have to dedicate intensive marketing and sales efforts
to educate prospective customers on the uses and advantages of our products to
generate demand. Any reduction in demand or increase in competition in the
market for supply chain management software products could have a material
adverse effect on our ability to sell our solutions.
OUR BUSINESS WILL SUFFER IF WE ARE UNABLE TO RAPIDLY ADAPT TO NEW PRICING
MODELS.
Due to customer demand, many technology companies have recently shifted
from a license fee model to a subscription pricing model. Supply chain
management companies generally have not moved towards subscription pricing. If
potential customers begin to require subscription pricing and we are not able to
quickly accommodate them, our revenues could be adversely affected. Further, a
shift to subscription pricing could adversely affect the timing of our
recognition of revenues. The success of a subscription pricing model would
depend on our ability to set subscription fees for our solutions at rates that
will allow us to achieve profitability.
Market exchanges typically charge for their services on a per-transaction
basis. Accordingly, market exchanges may require that we charge them for the use
of our solutions on a per-transaction basis. The success of a per-transaction
pricing model would depend on our ability to set fees for our solutions at rates
that will allow us to achieve profitability. If we are not able to quickly
accommodate the customers who demand a per-transaction pricing model, our
revenues could be adversely affected.
OUR BUSINESS MAY BE HARMED IF PAST DUE ACCOUNTS RECEIVABLE INCREASE.
We recently have experienced an increase in the percentage of past due
accounts receivable. As of June 30, 2000, approximately $1.5 million of our
accounts receivable were 120 days or more past due out of our total accounts
receivable of $6.4 million. Since older accounts receivable have a higher
probability
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of never being collected, we have established a reserve for doubtful or
uncollectible accounts of $1.6 million as of June 30, 2000. However, a reserve
for doubtful accounts is only an estimate of collectibility. If our actual
experience in collecting existing or future accounts receivable is more
difficult than expected, we may be required to record a provision for additional
reserves or increase the rate at which we reserve.
WE ARE SUBJECT TO INTENSE COMPETITION THAT COULD HARM OUR BUSINESS.
The market for business applications software is highly competitive, and a
number of products directly compete with the SynQuest One2One suite of software
solutions. We compete primarily with supply chain planning vendors, including i2
and Manugistics; enterprise resource planning vendors, such as SAP, PeopleSoft,
Baan, Oracle and J.D. Edwards; traditional software vendors and web-based
solutions vendors. Some of our current and potential competitors have greater
name recognition, significantly greater financial, marketing, technical and
other resources, a broader range of products, and a larger established base of
customers than we do. These factors may enable them to adapt more quickly to new
or emerging technologies and changes in customer requirements, or to devote
greater resources to the development, promotion and sale of their products. In
addition, other companies could develop new products or incorporate additional
functionality into their existing products, directly competing with our products
or making them obsolete. Furthermore, cooperative relationships among our
competitors could increase the ability of their products to address the supply
chain management needs of our prospective customers and could enable them to
rapidly acquire significant market share. We may not compete successfully
against existing or new competitors, which may result in loss of market share.
WE MAY BE UNABLE TO CONTINUE TO ATTRACT QUALIFIED PERSONNEL TO SUPPORT THE
EXPANSION OF OUR BUSINESS.
Our growth depends on our ability to continue to attract qualified
personnel. Specifically, we must increase the size and scope of our direct sales
force, both domestically and internationally. In fiscal 2000, we licensed
substantially all of our products through our direct sales organization which,
as of June 30, 2000, consisted of 26 direct sales representatives. Moreover, we
believe that the complexity of our products and the potential for large-scale
deployment by our customers could require a number of highly trained service and
support personnel. As of June 30, 2000, our service and support organizations
included 44 individuals. We will also need to hire additional qualified
financial and accounting personnel to manage our growth. Competition for sales
representatives, service personnel, accounting and financial personnel and other
skilled employees is intense, and we may fail to attract, assimilate or retain
qualified personnel in the future. If we are unable to hire according to our
needs, our business and expansion plans could be seriously harmed.
WE ARE DEPENDENT UPON OUR KEY PERSONNEL, AND THE LOSS OF THESE PERSONNEL COULD
DISRUPT OUR OPERATIONS AND RESULT IN REDUCED REVENUE.
Our success depends on the continued services and performance of our senior
management staff, in particular, Joseph Trino, our Chairman of the Board and
Chief Executive Officer, Timothy Harvey, our President and Chief Operating
Officer, and John Bartels, our Executive Vice President, Finance and
Administration. The loss of the services of one or more of our executive
officers or key employees could seriously impair our ability to operate and
achieve our objectives, which could reduce our revenue. We do not maintain key
person life insurance. We cannot guarantee that we will be able to retain our
key personnel.
WE ARE DEPENDENT UPON OUR RELATIONSHIPS WITH ALLIANCE PARTNERS FOR LEAD
GENERATION.
Our future success is dependent upon establishing and expanding
relationships with alliance partners, including systems integrators, and other
software vendors. New customer leads generated through our relationship with
J.D. Edwards accounted for approximately 24% of our license fees revenue during
fiscal 2000, approximately 23% during fiscal 1999 and approximately 20% during
fiscal 1998. A decrease in the market demand for the products of our partners
could reduce our revenues. We may not be able to market our products effectively
through our established partners. Furthermore, our arrangements with these
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organizations are not exclusive and, in many cases, may be terminated by either
party for any reason without any advance notice or penalties. In addition, our
alliance partners may not continue their involvement with us and our products.
We may not be able to attract additional distribution partners on mutually
agreeable terms. Our likely strategic partners are actual or potential
competitors, which may impair the viability of these relationships. Some
enterprise resource planning system vendors have acquired supply chain
management software companies, products or functionality or have announced plans
to develop new products or incorporate additional functionality into their
current products that would compete with our products.
WE MAY HAVE DIFFICULTY MANAGING OUR INTERNAL GROWTH, WHICH COULD LIMIT OUR
ABILITY TO EFFECTIVELY IMPLEMENT OUR BUSINESS STRATEGIES.
We recently experienced a period of rapid growth in revenues that placed
significant strains upon our management systems and resources. Our ability to
compete effectively and to manage future growth, if any, requires us to continue
to improve our financial and management controls, reporting systems and
procedures on a timely basis. To expand our business, we must increase the total
number of employees and train and manage our employee work force in a timely and
effective manner. If we are unable to hire according to our needs, we may be
unable to compete for new projects or complete existing projects satisfactorily.
THE SALES CYCLES FOR OUR PRODUCTS ARE LENGTHY, WHICH MAKES SALES DIFFICULT TO
PREDICT.
Our sales cycles vary by customer and are generally from six to nine
months. Larger transactions typically have a longer sales cycle than smaller
transactions. Because the licensing of our products generally involves a
significant capital expenditure by the customer, our sales process is subject to
lengthy approval processes and delays. We often devote significant time and
resources to a prospective customer, including costs associated with multiple
site visits, product demonstrations and feasibility studies, without any
assurance that the prospective customer will decide to license our products.
Operating results for a given period would suffer if we fail to close the larger
transactions that we targeted for that period.
IF WE DO NOT SUCCESSFULLY EXPAND OUR PRODUCT LINE, WE COULD LOSE MARKET SHARE.
As enterprises increasingly focus on decision support for supply chain
management challenges, they are requiring greater levels of functionality and
broader product offerings from their application software vendors. Our future
success will depend upon our ability to continue to enhance our current product
line, develop and introduce new products that keep pace with technological
developments, satisfy increasingly sophisticated customer requirements and
achieve market acceptance. We may not successfully develop and market product
enhancements or new products on a timely and cost-effective basis. Any new
products we introduce may not achieve market acceptance. Our failure to
successfully develop and market product enhancements or new products could cause
our market share to fail to grow or to decline.
WE RELY HEAVILY ON LICENSE REVENUES FROM A SINGLE PRODUCT, AND IF THE DEMAND FOR
THAT PRODUCT DECREASES, OUR REVENUES WILL BE REDUCED.
A substantial portion of our license revenues are derived from Virtual
Production Engine and predecessor products. We derived 40% of our license
revenues from licenses of Virtual Production Engine and predecessor products
during fiscal 2000, 66% during fiscal 1999 and 91% during fiscal 1998. We expect
that revenues from this product will continue to account for a significant
portion of our revenues for the foreseeable future. As a result, our future
operating results are dependent upon continued market acceptance of Virtual
Production Engine and enhancements to that product. This product may not achieve
continued market acceptance. A decline in demand for, or market acceptance of,
Virtual Production Engine as a result of competition, technological change or
other factors would adversely affect our success.
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OUR INTERNATIONAL OPERATIONS, WHICH WE PLAN TO EXPAND, ARE SUBJECT TO HEIGHTENED
RISKS THAT COULD HARM OUR BUSINESS.
We currently conduct business in a number of foreign countries, and we plan
to conduct business in additional regions outside of the United States.
Conducting business outside of the United States may require significant
management attention and financial resources and could adversely affect our
operating margins. We may not be able to generate, maintain or increase demand
for our products in new geographic markets. We derived 11% of our license
revenues from outside the United States during fiscal 2000 and 22% of our
license revenues from customers outside the United States during fiscal 1999. We
anticipate that the proportion of our revenues denominated in foreign currencies
will increase. A decrease in the value of foreign currencies relative to the
U.S. dollar could result in losses from foreign currency translations. In
international markets where we set prices in U.S. dollars, currency fluctuations
could make our products and services less price competitive. In addition, our
international sales and operations could be adversely affected by the imposition
of government controls, changes in financial currencies, such as the unified
currency known as the European Monetary Unit, political and economic
instability, difficulties in staffing and managing international operations and
general economic and currency exchange rate conditions in foreign countries.
OUR PRODUCTS MAY HAVE DEFECTS, WHICH MAY NEGATIVELY AFFECT THE LEVEL OF CUSTOMER
SATISFACTION WITH OUR PRODUCTS AND DAMAGE OUR BUSINESS AND REPUTATION.
Our products are complex and might contain undetected software errors or
failures when new versions are released. Despite testing by us and by current
and prospective customers, we may find errors in existing products, new products
or product enhancements after commercial release. Such errors may result in loss
or delay of market acceptance, lawsuits, or damage to our reputation. Contract
provisions in license agreements limiting exposure and our general liability
insurance may be inadequate to protect us from all liabilities.
WE MAY FAIL TO ADEQUATELY PROTECT OUR INTELLECTUAL PROPERTY AND PROPRIETARY
RIGHTS, AND WE COULD FACE CLAIMS OF INTELLECTUAL PROPRIETY INFRINGEMENT.
Our software is proprietary and is protected by trade secret, copyright and
trademark laws, license agreements, confidentiality agreements with employees,
nondisclosure and other contractual requirements imposed on our customers,
consulting partners and others. We cannot guarantee that these protections will
adequately protect our proprietary rights or that our competitors will not
independently develop products that are substantially equivalent or superior to
our products. In addition, the laws of certain countries in which our products
are or may be licensed do not protect our products and intellectual property
rights to the same extent as the laws of the United States. As the number of
products and competitors continues to grow, the functionality of products in
different industry segments is increasingly overlapping. As a result, we
increasingly may be subject to claims of intellectual property infringement.
Although we are not aware that any of our products infringe upon the proprietary
rights of third parties, third parties may make such claims about our current or
future products. Any infringement claims, with or without merit, could be
time-consuming, result in costly litigation or damages, cause product shipment
delays or the loss or deferral of sales, or require us to enter into royalty or
licensing agreements. If we enter into royalty or licensing agreements in
settlement of any litigation or claims, these agreements may not be on terms
acceptable to us. Although we believe that our products, trademarks and other
proprietary rights do not infringe upon the proprietary rights of third parties,
we cannot guarantee that third parties will not assert infringement claims
against us. If they do, we will have to spend time and money to defend against
these claims, which will divert management's attention.
WE MAY MAKE FUTURE ACQUISITIONS, WHICH MAY NOT BE SUCCESSFUL AND WHICH COULD
DIVERT MANAGEMENT'S ATTENTION FROM OUR DAY-TO-DAY OPERATIONS.
Since September 1995, we have acquired four companies, and we continue to
evaluate potential business combinations on an opportunistic basis. Failure to
successfully integrate the operations and
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products of acquired companies into our operations and products could have a
material adverse effect on our business, operating results and financial
condition. In the future, we may pursue additional acquisitions of businesses,
products and technologies, or enter into joint venture arrangements. The
negotiation of potential acquisitions or joint ventures as well as the
integration of an acquired business, product or technology could divert
management's time and resources. Future acquisitions could cause us to issue
dilutive equity securities, incur debt and contingent liabilities, assume
liabilities that were not identified or underestimated and amortize goodwill and
other intangibles, research and development write-offs and other
acquisition-related expenses. Further, we cannot guarantee we will successfully
integrate any acquired business with our operations or that we will receive the
intended benefits of the acquisition. Future acquisitions could damage our
business, operating results and financial condition.
OUR GROWTH IS DEPENDENT ON INCREASED USE OF THE INTERNET FOR
BUSINESS-TO-BUSINESS TRANSACTIONS, AND A MATERIAL CHANGE IN INTERNET USE MAY
ADVERSELY AFFECT OUR BUSINESS MODEL.
We intend to target companies engaged in business-to-business e-commerce as
a potential client base. If use of the Internet for commerce and communication
does not increase as we anticipate, we may not successfully penetrate this
category of potential clients and our business could suffer. Rapid growth in the
use of the Internet is a recent phenomenon. As a result, acceptance and use may
not continue to develop at historical rates, and a sufficiently broad base of
businesses may not adopt or continue to use the Internet as a medium of
commerce. Demand and market acceptance for recently introduced services and
products over the Internet are subject to a high level of uncertainty, and few
proven services and products exist. Our business could be seriously harmed if
potential clients do not need our solutions because:
- use of the Internet and other online services does not continue to
increase or increases more slowly than expected;
- the necessary communication and computer network technology underlying
the Internet and other online services does not effectively support any
expansion that may occur;
- new standards and protocols are not developed or adopted in a timely
manner; or
- for any other reason, such as concerns about security, reliability, cost,
ease of use, accessibility or quality of service, the Internet does not
create a viable commercial marketplace, or inhibits the development of
e-commerce thereby reducing the need for, and desirability of, our
products and services.
WE SUB-LICENSE THIRD-PARTY SOFTWARE INCLUDED WITH THE SALE OF OUR PRODUCTS, AND
SUCH SUB-LICENSES MAY NOT BE AVAILABLE TO US ON COMMERCIALLY REASONABLE TERMS.
Our inability to maintain or obtain third-party licenses may delay or
reduce our product shipments until we can identify, license and integrate
equivalent software. Any loss of these licenses or delay or reduction in product
shipments could harm our business, operating results and financial condition.
FUTURE SALES OF OUR COMMON STOCK MAY CAUSE OUR STOCK PRICE TO DECLINE.
A total of 22,172,419 shares of our common stock are restricted from
immediate resale, but may be sold into the market in the near future. This could
cause the market price of our common stock to drop significantly, even if our
business is performing well. Sales of substantial amounts of our common stock in
the public market, or the perception that these sales may occur, could reduce
the prevailing market price for our common stock. Of our outstanding shares of
common stock, the 5,750,000 shares sold in our initial public offering, together
with 618,321 shares eligible for resale under Rule 144(k), are freely tradeable
without restriction, other than shares purchased by our officers, directors or
other affiliates within the meaning of Rule 144 under the Securities Act of
1933, which are restricted from sale until February 2001 under lock-up
agreements with the underwriters.
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THE MARKET PRICES OF TECHNOLOGY STOCKS HAVE BEEN VOLATILE, AND OUR STOCK PRICE
MAY FLUCTUATE SIGNIFICANTLY OR DECLINE.
Many technology stocks have experienced extreme price and volume
fluctuations. These fluctuations have often been unrelated or disproportionate
to the operating performance of these companies. The trading price of our stock
is likely to be highly volatile and may be significantly affected by factors
including actual or anticipated fluctuations in our operating results, new
products introduced by us or our competitors, conditions and trends in the
software, Internet or e-commerce industries, changes in financial estimates by
public market analysts, general market conditions and other factors. Any
negative change in the public perception of the prospects of software, Internet
or e-commerce companies in general could also depress our stock price regardless
of our business, prospects or operating results. We believe there are relatively
few companies comparable to us that have publicly-traded equity securities. This
may also negatively affect the trading price of our common stock.
PROVISIONS IN OUR ARTICLES OF INCORPORATION AND BYLAWS MAY DISCOURAGE TAKEOVER
ATTEMPTS, EVEN IF A CHANGE OF CONTROL WOULD BENEFIT OUR SHAREHOLDERS.
Provisions of our articles of incorporation and bylaws could delay or
prevent a third party from acquiring us, even if a change in control would be
beneficial to our shareholders. These provisions could make it more difficult
for a third party to acquire us, even if doing so would benefit our
shareholders. Furthermore, our directors and executive officers beneficially
owned approximately 59.4% of our outstanding common stock as of September 15,
2000. As a result, our directors and executive officers will have sufficient
voting power to prevent any third party from acquiring us.
OUR PRINCIPAL SHAREHOLDER AND ITS AFFILIATES WILL CONTINUE TO INFLUENCE MATTERS
AFFECTING US, WHICH COULD CONFLICT WITH YOUR INTERESTS.
E.M. Warburg, Pincus beneficially owned approximately 52.7% of our common
stock as of September 15, 2000. As a result, E.M. Warburg, Pincus can exercise
significant influence over us, including matters submitted to our shareholders
for a vote. Actions taken by E.M. Warburg, Pincus could conflict with the
interests of other shareholders. As a result of E.M. Warburg, Pincus'
significant shareholdings, a potential acquirer could be discouraged from
attempting to obtain control of us, which could have a material adverse effect
on the market price of our common stock.
ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
Our interest expense and interest income is sensitive to changes in the
general level of U.S. interest rates. Since the initial public offering of our
common stock in August 2000 we have repaid our line of credit with Greyrock,
converted our subordinated debt to common stock and invested in U.S. government
or its agencies securities with maturities of less than two years. As a result
we are now exposed to changes in interest rates on these investment securities.
Prior to completion of our initial public offering, we were exposed to changes
in interest rates primarily from our subordinated debt with E.M. Warburg, Pincus
and our line of credit with Greyrock. We do not currently utilize and we have
not in the past utilized derivative financial instruments to manage exposure to
interest rate changes. Based on the weighted average outstanding debt balances,
a one percent increase in the general level of U.S. interest rates would have
produced approximately $285,000 in additional interest expense in the fiscal
year ended June 30, 2000.
We develop products in the United States and market our products in North
America, South America and Europe. As a result our financial results could be
affected by factors such as changes in foreign currency exchange rates or weak
economic conditions in foreign markets. Sales are currently made in both U.S.
dollars and local currencies. A strengthening of the U.S. dollar or weakening of
these local currencies could make our products less competitive in foreign
markets.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our financial statements are listed under Item 14(a) of this annual report
and are filed as part of this report beginning on page F-1. The supplementary
data are included under Item 7 of this annual report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information under the heading "Election of Directors" of the proxy
statement for the Annual Meeting of Shareholders to be held November 16, 2000
(the "Proxy Statement") are incorporated herein by reference. See Item X in Part
I of this annual report for information regarding our executive officers. The
section under the heading "Other Matters" entitled "Section 16(a) Beneficial
Ownership Reporting Compliance" of the Proxy Statement is incorporated herein by
reference.
ITEM 11. EXECUTIVE COMPENSATION
The information under the headings "Board of Directors" and "Director
Compensation" of the Proxy Statement and the information under the heading
titled "Executive Compensation and Other Information", "Option Grants in Last
Fiscal Year", "Aggregated Option Exercises in Last Fiscal Year and Year-End
Option Value Table", "Employment Agreements" and "Compensation Committee
Interlocks and Insider Participation" of the Proxy Statement are incorporated
herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information under the heading "Common Stock Ownership by Management and
Principal Shareholders" of the Proxy Statement is incorporated herein by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information under the heading "Related Party Transactions" of the Proxy
Statement is incorporated herein by reference.
40
43
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES, AND REPORTS ON FORM 8-K
(a) Financial Statements
1. The following financial statements are filed with this report on the
pages indicated:
PAGE
----
SYNQUEST, INC.:
Report of Independent Auditors.............................. F-2
Consolidated Balance Sheets as of June 30, 1999 and 2000.... F-3
Consolidated Statements of Operations for the years ended
June 30, 1998, 1999 and 2000.............................. F-4
Consolidated Statements of Changes in Convertible Preferred
Stock, Common Stock and Other Shareholders' Deficit for
the years ended June 30, 1998, 1999 and 2000.............. F-5
Consolidated Statements of Changes in Convertible Preferred
Stock, Common Stock and Other Shareholders' Deficit for
the years ended June 30, 1998, 1999 and 2000.............. F-6
Consolidated Statements of Cash Flows....................... F-7
Notes to Consolidated Financial Statements.................. F-8
2. Financial Statement Schedules
Financial statement schedules have been omitted as the required information
is inapplicable or the information is presented in the consolidated financial
statements or notes thereto contained in this annual report on Form 10-K.
3. Exhibits
See Item 14(c) below.
(b) Reports on Form 8-K.
None.
(c) Exhibits.
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
3.1 -- Second Amended and Restated Articles of Incorporation of
SynQuest, Inc. (incorporated by reference to Exhibit 3.1 to
SynQuest's Registration Statement on Form S-1 (File No.
33-37518))
3.2 -- Bylaws of SynQuest, Inc. (incorporated by reference to
Exhibit 3.2 to SynQuest's Registration Statement on Form S-1
(File No. 33-37518))
4.1 -- Form of specimen common stock certificate (incorporated by
reference to Exhibit 3.3 to SynQuest's Registration
Statement on Form S-1 (File No. 33-37518))
4.2 -- Stock Purchase Agreement by and between Factory Automation &
Computer Technologies, Inc., Warburg, Pincus Investors, L.P.
and Craig Skevington dated as of May 10, 1994 (incorporated
by reference to Exhibit 4.2 to SynQuest's Registration
Statement on Form S-1 (File No. 33-37518))
4.3 -- Preferred Stock Purchase Agreement by and between SynQuest,
Inc. and Series G Investors dated as of March 3, 1999
(incorporated by reference to Exhibit 4.3 to SynQuest's
Registration Statement on Form S-1 (File No. 33-37518))
10.1 -- Employment Agreement by and between SynQuest, Inc. and
Joseph Trino dated as of November 1, 1997 (incorporated by
reference to Exhibit 10.1 to SynQuest's Registration
Statement on Form S-1 (File No. 33-37518))
41
44
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
10.2 -- Employment Agreement by and between SynQuest, Inc. and
Timothy Harvey dated as of August 15, 1996 (incorporated by
reference to Exhibit 10.2 to SynQuest's Registration
Statement on Form S-1 (File No. 33-37518))
10.3 -- Employment Agreement by and between SynQuest, Inc. and John
Bartels dated as of November 1, 1997 (incorporated by
reference to Exhibit 10.3 to SynQuest's Registration
Statement on Form S-1 (File No. 33-37518))
10.4 -- Employment Agreement by and between SynQuest, Inc. and Paul
Bender dated as of June 16, 1997 (incorporated by reference
to Exhibit 10.4 to SynQuest's Registration Statement on Form
S-1 (File No. 33-37518))
10.5 -- Employment Agreement by and between SynQuest, Inc. and
Christopher Jones dated as of September 1, 1998
(incorporated by reference to Exhibit 10.5 to SynQuest's
Registration Statement on Form S-1 (File No. 33-37518))
10.6 -- Severance Agreement Letter by and between SynQuest, Inc. and
Mark Simcoe dated as of November 1, 1999 (incorporated by
reference to Exhibit 10.6 to SynQuest's Registration
Statement on Form S-1 (File No. 33-37518))
10.7 -- Employment Agreement by and between SynQuest, Inc. and
Ronald Nall dated as of July 5, 2000
10.8 -- 1997 Stock Option Plan dated as of November 9, 1999
(incorporated by reference to Exhibit 10.7 to SynQuest's
Registration Statement on Form S-1 (File No. 33-37518))
10.9 -- Loan and Security Agreement by and between Factory
Automation & Computer Technology, Inc. and Greyrock Business
Credit dated as of July 10, 1996 (incorporated by reference
to Exhibit 10.8 to SynQuest's Registration Statement on Form
S-1 (File No. 33-37518))
10.10 -- Amended Schedule to Loan and Security Agreement by and
between SynQuest. Inc. and Greyrock Business Credit dated as
of June 30, 1997 (incorporated by reference to Exhibit 10.9
to SynQuest's Registration Statement on Form S-1 (File No.
33-37518))
10.11 -- Second Amendment to Loan Documents by and between SynQuest,
Inc. and Greyrock Business Credit dated as of September 24,
1997 (incorporated by reference to Exhibit 10.10 to
SynQuest's Registration Statement on Form S-1 (File No.
33-37518))
10.12 -- Extension Agreement by and between SynQuest, Inc. and
Greyrock Business Credited dated as of May 20, 1998
(incorporated by reference to Exhibit 10.11 to SynQuest's
Registration Statement on Form S-1 (File No. 33-37518))
10.13 -- Amendment Agreement by and between SynQuest, Inc. and
Greyrock Capital dated as of January 13, 1999 (incorporated
by reference to Exhibit 10.12 to SynQuest's Registration
Statement on Form S-1 (File No. 33-37518))
10.14 -- Amendment Agreement by and between SynQuest, Inc. and
Greyrock Capital dated as of December 14, 1999 (incorporated
by reference to Exhibit 10.13 to SynQuest's Registration
Statement on Form S-1 (File No. 33-37518))
10.15 -- Amendment Agreement by and between SynQuest, Inc. and
Greyrock Capital dated as of March 15, 2000 (incorporated by
reference to Exhibit 10.14 to SynQuest's Registration
Statement on Form S-1 (File No. 33-37518))
10.16 -- Amendment Agreement by and between SynQuest, Inc. and
Greyrock Capital dated as of March 29, 2000 (incorporated by
reference to Exhibit 10.15 to SynQuest's Registration
Statement on Form S-1 (File No. 33-37518))
10.17 -- Lease Agreement by and between SynQuest, Inc. and Acquiport
Peachtree Ridge, Inc. dated as of January 12, 2000
(incorporated by reference to Exhibit 10.16 to SynQuest's
Registration Statement on Form S-1 (File No. 33-37518))
42
45
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
21.1 -- List of subsidiaries (incorporated by reference to Exhibit
21.1 to SynQuest's Registration Statement on Form S-1 (File
No. 33-37518))
27.1 -- Financial Data Schedule (for SEC filing purposes only)
43
46
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act
of 1934, as amended, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on September 26, 2000.
SYNQUEST, INC.
By: /s/ JOSEPH TRINO
------------------------------------
Joseph Trino
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1934, this report has
been signed by the following persons on behalf of the registrant and in the
capacities indicated on September 26, 2000.
SIGNATURE TITLE
--------- -----
/s/ JOSEPH TRINO Chairman of the Board and Chief Executive Officer
- --------------------------------------------------- and Director (Principal Executive Officer)
Joseph Trino
/s/ JOHN BARTELS Executive Vice President, Finance and
- --------------------------------------------------- Administration (Principal Financial Officer)
John Bartels
/s/ PAUL BENDER President, Bender Consulting Division and
- --------------------------------------------------- Director
Paul Bender
/s/ HENRY KRESSEL Director
- ---------------------------------------------------
Henry Kressel
/s/ JOSEPH LANDY Director
- ---------------------------------------------------
Joseph Landy
/s/ EDWARD SCOTT, JR. Director
- ---------------------------------------------------
Edward Scott, Jr.
44
47
SYNQUEST, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Report of Independent Auditors.............................. F-2
Consolidated Balance Sheets as of June 30, 1999 and 2000.... F-3
Consolidated Statements of Operations for the years ended
June 30, 1998, 1999 and 2000.............................. F-4
Consolidated Statements of Changes in Convertible Preferred
Stock, Common Stock and Other Shareholders' Deficit for
the years ended June 30, 1998, 1999 and 2000.............. F-5
Consolidated Statements of Cash Flows....................... F-7
Notes to Consolidated Financial Statements.................. F-8
F-1
48
REPORT OF INDEPENDENT AUDITORS
Board of Directors
SynQuest, Inc.
We have audited the accompanying consolidated balance sheets of SynQuest,
Inc. and subsidiaries as of June 30, 1999 and 2000, and the related consolidated
statements of operations, changes in convertible preferred stock, common stock
and other shareholders' deficit, and cash flows, for each of the three years in
the period ended June 30, 2000. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of SynQuest, Inc.
and subsidiaries at June 30, 1999 and 2000, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended June 30, 2000, in conformity with accounting principles generally accepted
in the United States.
/s/ ERNST & YOUNG LLP
Atlanta, Georgia
September 17, 2000
F-2
49
SYNQUEST, INC.
CONSOLIDATED BALANCE SHEETS
JUNE 30,
----------------------------
1999 2000
------------ -------------
ASSETS
CURRENT ASSETS:
Cash...................................................... $ 638,213 $ 456,670
Accounts receivable (net of allowances of $1,238,000 and
$1,600,000 in 1999 and 2000, respectively)............. 8,170,490 4,840,296
Other receivables......................................... 103,327 54,790
Prepaid expenses.......................................... 321,685 218,795
------------ -------------
Total current assets.............................. 9,233,715 5,570,551
Property and equipment:
Leasehold improvements.................................... 158,014 189,710
Furniture and fixtures.................................... 781,934 845,742
Equipment................................................. 3,505,798 4,666,165
------------ -------------
4,445,746 5,701,617
Less accumulated depreciation and amortization............ (2,316,293) (3,418,257)
------------ -------------
Net property and equipment.................................. 2,129,453 2,283,360
Other assets................................................ 164,953 1,068,825
Intangible assets (net of accumulated amortization of
$429,000 and $557,000 in 1999 and 2000, respectively)..... 127,634 --
------------ -------------
Total assets...................................... $ 11,655,755 $ 8,922,736
============ =============
LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES:
Subordinated notes payable and accrued interest payable to
related party.......................................... $ 19,372,745 $ 20,928,315
Borrowings under line of credit agreement................. 3,563,219 7,642,082
Accounts payable.......................................... 889,803 1,265,235
Accrued expenses.......................................... 5,316,385 5,060,896
Deferred revenue.......................................... 2,281,916 7,168,878
Current portion of notes payable and obligations under
capital leases......................................... 232,399 191,845
------------ -------------
Total current liabilities......................... 31,656,467 42,257,251
Notes payable and obligations under capital leases, less
current portion........................................... 265,801 163,359
Preferred Stock, in series, $0.01 par value; redeemable and
convertible:
Authorized shares -- 16,000,000
Issued and outstanding shares -- 12,995,356 at June 30,
1999 and 2000..........................................
Liquidation preference of $64,474,679 at June 30, 2000.... 57,256,365 60,915,824
Shareholders' deficit:
Common Stock, $0.01 par value; 100,000,000 shares
authorized and 1,492,522 and 1,762,704 shares issued
and outstanding at June 30, 1999 and 2000,
respectively........................................... 14,925 17,626
Additional paid-in capital................................ 4,357,452 7,087,426
Accumulated deficit....................................... (81,751,679) (101,184,487)
Equity adjustment from foreign currency translation....... (143,576) (334,263)
------------ -------------
Total shareholders' deficit....................... (77,522,878) (94,413,698)
------------ -------------
Total liabilities and shareholders' deficit....... $ 11,655,755 $ 8,922,736
============ =============
See accompanying notes.
F-3
50
SYNQUEST, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED JUNE 30,
------------------------------------------
1998 1999 2000
------------ ------------ ------------
Revenue:
Software license fees.............................. $ 10,392,229 $ 10,521,571 $ 13,181,075
Services........................................... 8,014,146 12,759,849 12,034,346
------------ ------------ ------------
Total revenue.............................. 18,406,375 23,281,420 25,215,421
Operating expenses:
Cost of license fees............................... 523,682 576,049 496,814
Cost of services................................... 6,713,808 9,308,436 7,535,149
Research and development........................... 9,368,312 10,179,517 10,001,605
Sales and marketing................................ 9,485,157 13,730,177 14,351,477
General and administrative......................... 3,984,128 4,850,263 5,199,916
Provision for doubtful accounts.................... 373,245 753,374 767,745
------------ ------------ ------------
Total operating expenses................... 30,448,332 39,397,816 38,352,706
------------ ------------ ------------
Operating loss....................................... (12,041,957) (16,116,396) (13,137,285)
Other income (expense):
Interest expense................................... (3,539,237) (3,526,242) (2,723,803)
Other income (expense)............................. 51,817 82,528 87,739
------------ ------------ ------------
Total other income (expense)............... (3,487,420) (3,443,714) (2,636,064)
------------ ------------ ------------
Loss before income taxes............................. (15,529,377) (19,560,110) (15,773,349)
Income taxes......................................... -- -- --
------------ ------------ ------------
Net loss............................................. (15,529,377) (19,560,110) (15,773,349)
Accretion of redeemable convertible preferred
stock.............................................. (1,833,158) (2,533,544) (3,659,459)
------------ ------------ ------------
Net loss attributable to common stock................ $(17,362,535) $(22,093,654) $(19,432,808)
============ ============ ============
Basic and diluted net loss per common share.......... $ (13.98) $ (15.21) $ (12.58)
============ ============ ============
Weighted average number of shares used in computing
basic and diluted net loss per common share........ 1,242,381 1,452,363 1,544,265
============ ============ ============
Pro forma basic and diluted net loss per common share
(unaudited)........................................ $ (0.88)
============
Weighted average number of shares used in computing
pro forma basic and diluted net loss per common
share (unaudited).................................. 22,114,460
============
Comprehensive loss:
Net loss........................................... $(15,529,377) $(19,560,110) $(15,773,349)
Other comprehensive loss:
Foreign currency translation adjustments........... (57,716) (104,647) (190,687)
------------ ------------ ------------
Comprehensive loss................................. $(15,587,093) $(19,664,757) $(15,964,036)
============ ============ ============
See accompanying notes.
F-4
51
SYNQUEST, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN CONVERTIBLE PREFERRED STOCK,
COMMON STOCK AND OTHER SHAREHOLDERS' DEFICIT
YEARS ENDED JUNE 30, 1998, 1999 AND 2000
REDEEMABLE PREFERRED STOCK
-----------------------------------------------------------------------
SERIES B SERIES C SERIES D
-------------------- ---------------------- -----------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
------- ---------- --------- ---------- --------- -----------
Balance at June 30, 1997............................ 540,016 $1,607,673 2,376,651 $7,075,455 3,870,178 $ 9,942,175
Issuance of common stock pursuant to exercise of
stock options................................... -- -- -- -- -- --
Issuance of common stock pursuant to conversion of
preferred stock................................. -- -- -- -- (177,560) (488,290)
Issuance of common stock for services at $2.75 per
share........................................... -- -- -- -- -- --
Accretion of cumulative preferred stock dividends
and stock issuance costs........................ -- 105,440 -- 464,058 -- 743,074
Equity adjustment from foreign currency
translation..................................... -- -- -- -- -- --
Net loss.......................................... -- -- -- -- -- --
------- ---------- --------- ---------- --------- -----------
Balance at June 30, 1998............................ 540,016 1,713,113 2,376,651 7,539,513 3,692,618 10,196,959
Issuance of common stock pursuant to exercise of
stock options................................... -- -- -- -- -- --
Issuance of common stock for services at $3.25 per
share........................................... -- -- -- -- -- --
Issuance of Series G preferred stock at $6.21 per
share less issuance costs of $2,328,010......... -- -- -- -- -- --
Accretion of cumulative preferred stock dividends
and stock issuance costs........................ -- 92,766 -- 408,269 -- 652,226
Equity adjustment from foreign currency
translation..................................... -- -- -- -- -- --
Net loss.......................................... -- -- -- -- -- --
------- ---------- --------- ---------- --------- -----------
Balance at June 30, 1999............................ 540,016 1,805,879 2,376,651 7,947,782 3,692,618 10,849,185
Issuance of common stock pursuant to exercise of
stock options................................... -- -- -- -- -- --
Issuance of common stock pursuant to subscription
agreement....................................... -- -- -- -- -- --
Issuance of warrant to purchase common stock...... -- -- -- -- -- --
Accretion of cumulative preferred stock dividends
and stock issuance costs........................ -- 66,704 -- 293,564 -- 258,226
Equity adjustment from foreign currency
translation..................................... -- -- -- -- -- --
Net loss.......................................... -- -- -- -- -- --
------- ---------- --------- ---------- --------- -----------
Balance at June 30, 2000............................ 540,016 $1,872,583 2,376,651 $8,241,346 3,692,618 $11,107,411
======= ========== ========= ========== ========= ===========
F-5
52
SYNQUEST, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN CONVERTIBLE PREFERRED STOCK,
COMMON STOCK AND OTHER SHAREHOLDERS' DEFICIT
YEARS ENDED JUNE 30, 1998, 1999 AND 2000 (CONTINUED)
SERIES F SERIES G COMMON STOCK ADDITIONAL FOREIGN
-------------------- ----------------------- ------------------- PAID-IN ACCUMULATED CURRENCY
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT TRANSLATION
------- ---------- --------- ----------- --------- ------- ---------- ------------- -----------
750,000 $2,080,668 -- $ -- 1,189,871 $11,899 $3,718,935 $ (42,295,490) $ 18,787
-- -- -- -- 57,026 570 25,505 -- --
-- -- -- -- 177,560 1,776 486,514 -- --
-- -- -- -- 15,000 150 41,100 -- --
-- 520,586 -- -- -- -- -- (1,833,158) --
-- -- -- -- -- -- -- -- (57,716)
-- -- -- -- -- -- -- (15,529,377) --
------- ---------- --------- ----------- --------- ------- ---------- ------------- ---------
750,000 2,601,254 -- -- 1,439,457 14,395 4,272,054 (59,658,025) (38,929)
-- -- -- -- 38,065 380 36,798 -- --
-- -- -- -- 15,000 150 48,600 -- --
-- -- 5,636,071 32,671,990 -- -- -- -- --
-- 650,838 -- 729,437 -- -- -- (2,533,544) --
-- -- -- -- -- -- -- -- (104,647)
-- -- -- -- -- -- -- (19,560,110) --
------- ---------- --------- ----------- --------- ------- ---------- ------------- ---------
750,000 3,252,092 5,636,071 33,401,427 1,492,522 14,925 4,357,452 (81,751,679) (143,576)
-- -- -- -- 145,182 1,451 278,224 -- --
-- -- -- -- 125,000 1,250 1,123,750 -- --
-- -- -- -- -- -- 1,328,000 -- --
-- 804,144 -- 2,236,821 -- -- -- (3,659,459) --
-- -- -- -- -- -- -- -- (190,687)
-- -- -- -- -- -- -- (15,773,349) --
------- ---------- --------- ----------- --------- ------- ---------- ------------- ---------
750,000 $4,056,236 5,636,071 $35,638,248 1,762,704 $17,626 $7,087,426 $(101,184,487) $(334,263)
======= ========== ========= =========== ========= ======= ========== ============= =========
See accompanying notes.
F-6
53
SYNQUEST, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED JUNE 30,
------------------------------------------
1998 1999 2000
------------ ------------ ------------
OPERATING ACTIVITIES
Net loss............................................. $(15,529,377) $(19,560,110) $(15,773,349)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization...................... 798,067 1,103,108 1,270,347
Non-cash stock compensation........................ 41,250 48,750 63,096
Accretion of discount on subordinated notes
payable......................................... 426,338 -- --
Changes in operating assets and liabilities:
Accounts receivable............................. (2,474,083) (1,622,084) 3,236,943
Other assets.................................... 192,190 (117,220) (819,596)
Accounts payable................................ (1,351,844) (423,564) 394,042
Accrued expenses................................ 3,431,473 2,959,597 1,305,885
Deferred revenue................................ (563,084) 527,477 4,907,385
------------ ------------ ------------
Net cash used in operating activities...... (15,029,070) (17,084,046) (5,415,247)
INVESTING ACTIVITIES
Purchases of property and equipment.................. (463,485) (1,326,186) (1,175,999)
------------ ------------ ------------
Net cash used in investing activities...... (463,485) (1,326,186) (1,175,999)
FINANCING ACTIVITIES
Issuance of convertible preferred stock.............. -- 35,000,000 --
Payment of preferred issuance costs.................. -- (2,328,010) --
Principal payments on loans.......................... (17,437) (14,333) --
Net borrowings (repayments) under line of credit..... 13,509,059 (14,264,440) 4,078,863
Net borrowings (repayments) from related party....... 2,500,000 -- (39,178)
Proceeds from issuance of common stock............... 26,075 37,178 1,404,676
Proceeds from issuance of warrant to purchase common
stock.............................................. -- -- 1,328,000
Repayment of obligations under capital leases........ (352,297) (347,911) (250,699)
------------ ------------ ------------
Net cash provided by financing
activities............................... 15,665,400 18,082,484 6,521,662
Effect of exchange rate changes on cash.............. 26,608 66,287 (111,959)
------------ ------------ ------------
Net increase (decrease) in cash...................... 199,453 (261,461) (181,543)
Cash at beginning of period.......................... 700,221 899,674 638,213
------------ ------------ ------------
Cash at end of period................................ $ 899,674 $ 638,213 $ 456,670
============ ============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest........................................... $ 1,169,000 $ 2,006,000 $ 1,162,000
============ ============ ============
Income taxes....................................... $ -- $ -- $ --
============ ============ ============
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND
FINANCING ACTIVITIES
Capital lease obligations incurred to acquire
equipment.......................................... $ 155,000 $ 319,000 $ 142,000
============ ============ ============
See accompanying notes.
F-7
54
SYNQUEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998, 1999 AND 2000
1. DESCRIPTION OF BUSINESS
SynQuest, Inc. (the "Company") is principally involved in developing,
licensing and servicing its software products that enable enterprises to
optimize financial and operational performance across their supply chains. The
Company operates principally in the United States and Europe.
All of the outstanding shares of the Company's Series B, C, and D preferred
stock and 805,153 shares of Series G preferred stock are owned by E. M. Warburg,
Pincus & Co.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Fair Value of Financial Instruments
The Company considers its cash, accounts receivable, accounts payable,
subordinated notes payable, line of credit borrowings and other notes payable
and capital lease obligations to be its only significant financial instruments
and believes that the carrying amounts of these instruments approximate their
fair values based on the short-term nature of these instruments.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its subsidiaries, all of which are wholly-owned. All significant
intercompany accounts and transactions have been eliminated. The Company has
subsidiaries in France, the Netherlands and the United Kingdom.
Foreign Currency Translation
For foreign subsidiaries, the balance sheet accounts are translated at the
year-end exchange rates and income statement items are translated at the average
exchange rates for the period. Resulting translation adjustments are made
directly to a separate component of shareholders' deficit. Foreign currency
gains and losses resulting from transactions are included in net loss. Foreign
currency realized and unrealized gains and losses for the periods presented were
not material.
Revenue Recognition
In October 1997, the American Institute of Certified Public Accountants
issued SOP 97-2, "Software Revenue Recognition." The Company adopted SOP 97-2
for transactions entered into beginning July 1, 1998. Prior year transactions
have been accounted for in accordance with SOP 91-1, the SOP in effect during
those years. The adoption of the SOP 97-2 has not had a significant impact on
the Company's financial statements.
In accordance with SOP 97-2, as amended by SOP 98-9, the Company allocates
the total software arrangement fee among each element of the arrangement where
the arrangement with a customer includes rights to multiple software products,
specified upgrades, post-contract support and/or other services. The arrangement
fee is allocated using the residual method. The arrangement fee is recognized by
deferring the fair value of all undelivered elements, as determined based on
vendor-specific objective evidence of the fair
F-8
55
SYNQUEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
value of the elements when they are sold separately, and recognizing as revenue
the balance of the arrangement fee as attributable to the delivered elements. As
a result, all discounts are allocated to the license fee element of the
arrangement.
The Company recognizes the revenue allocable to software licenses and
specified upgrades upon delivery of the software product or upgrade to the end
user and when a signed and executed contract is obtained unless the fee is not
fixed or determinable or collectibility is not probable. Software licenses sold
by resellers or distributors are recognized upon delivery to the final end user.
The Company considers all arrangements with payment terms extending beyond
twelve months not to be fixed or determinable. If the fee is not fixed or
determinable, revenue is recognized as payments become due from the customer. If
collectibility is not considered probable, revenue is recognized when the fee is
collected.
Post-contract customer support services include telephone support, bug
fixes, and rights to upgrades on a when-and-if-available basis. Revenue
allocable to post-contract support is recognized on a straight-line basis over
the period the support is provided.
Other software services include consulting, implementation, training and
other services related to the software and its usage. Arrangements which include
software services are evaluated to determine whether those services are
essential to the functionality of other elements of the arrangement. When
software services are not considered essential to the functionality of other
elements, the revenue allocable to the software services is recognized as the
services are performed.
When software services are considered essential to the functionality of
other elements, including customization or modification of the software, revenue
from the services and related elements is recognized using contract accounting.
Contract accounting is also used to recognize software services revenue when the
services are performed for a fixed fee. Under contract accounting, the
applicable revenue from these software arrangements is recognized on a
percentage-of-completion method with progress-to-completion measured based upon
labor costs incurred.
Internally Developed Software
Costs related to internally developed software are accounted for in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 86,
"Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise
Marketed." No amounts related to internally developed software were capitalized
at June 30, 1999 or 2000. In March 2000, the Company adopted the Emerging Issues
Task Force (EITF) No. 00-2 "Accounting for Web Site Development Costs." In
accordance with EITF No. 00-2, the planning stage costs of the Company's new web
site were expensed. The development costs, which are composed of amounts
directly involved in developing the new web site, are being capitalized. As of
June 30, 2000, approximately $129,000 of development costs have been
capitalized.
Property and Equipment
Property and equipment is stated at cost less accumulated depreciation.
Depreciation is calculated using the straight-line method over the estimated
useful lives (ranging from 3 to 7 years) of the assets and includes amortization
of assets under capital leases. Depreciation expense for 1998, 1999 and 2000 was
approximately $612,000, $904,000, and $1,144,000, respectively.
Intangible Assets
Intangible assets arose from the acquisitions of businesses and represent
the value of the assembled work forces acquired. These assets are being
amortized using the straight-line method over a period of three years.
Amortization expense amounted to approximately $55,000, $47,000 and $8,000 in
1998, 1999 and 2000, respectively.
F-9
56
SYNQUEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Concentration of Credit Risk and Major Customers
Financial instruments that potentially subject the Company to concentration
of credit risk consist primarily of accounts receivable. Accounts receivable
represent billed and unbilled receivables primarily for license fees and related
services. Accounts receivable include $2,182,000, $1,690,000 and $889,000 of
unbilled accounts receivable at June 30, 1998, 1999 and 2000, respectively.
Unbilled accounts receivable are invoiced on dates specified in the contract,
generally within six months of contract execution. The Company performs periodic
credit evaluations of its customers' financial condition and generally does not
require collateral. Although due dates of receivables vary based on contract
terms, credit losses have been within management's estimates in determining the
level of allowance for doubtful accounts. Provision for doubtful accounts was
approximately $373,000, $753,000, and $768,000 in 1998, 1999 and 2000,
respectively. Write-offs of uncollectible accounts in the years ended June 30,
1998, 1999 and 2000 were $474,000, $477,000, and $540,000, respectively.
In fiscal 2000, one customer accounted for 21% of the Company's total
revenues, in fiscal 1999 one customer accounted for 20% of the Company's total
revenues, and in fiscal 1998 one customer accounted for 17% of the Company's
total revenues.
Stock-Based Compensation
SFAS No. 123, "Accounting for Stock-Based Compensation," provides an
alternative to APB Opinion No. 25, "Accounting for Stock Issued to Employees"
("APB 25"), in accounting for stock-based compensation issued to employees. The
Company adopted the disclosure alternative of the impact of applying SFAS No.
123 and accounts for stock option grants in accordance with APB 25.
Impairment of Long-Lived Assets
The Company accounts for the impairment of its long-lived assets in
accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of," which requires impairment
losses to be recorded on long-lived assets used in operations when indicators of
impairment are present and the undiscounted cash flows estimated to be generated
by those assets are less than the assets' carrying amount. SFAS No. 121 also
addresses the accounting for long-lived assets that are expected to be disposed
of.
Advertising Costs
Advertising costs are charged to expense in the period the costs are
incurred. Advertising expense was approximately $486,000, $741,000, and $183,000
in 1998, 1999 and 2000, respectively.
Basic and Diluted Net Loss per Share
Basic net loss per common share is computed based on the weighted average
number of common shares outstanding during each year. Diluted net loss per
common share is computed based on the weighted average number of common shares
outstanding during each year, plus potentially dilutive common shares
outstanding during the year, in accordance with SFAS No. 128, "Earnings Per
Share."
All convertible preferred shares, outstanding stock options and warrants
have been excluded from the calculation of the diluted net loss per common share
because these securities are anti-dilutive for all periods presented. The total
number of shares related to the outstanding convertible preferred stock, options
and warrants excluded from the calculations of diluted net loss per common share
was 16,220,436, 22,721,333, and 23,532,916 for the years ended June 30, 1998,
1999, and 2000, respectively.
F-10
57
SYNQUEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
As described in more detail in Note 13, in August 2000, the Company
completed an initial public offering of its common stock. In conjunction with
the initial public offering, the following changes in the Company's
capitalization took place: (1) the conversion into common stock of all
outstanding convertible preferred stock, plus accrued and unpaid dividends; (2)
the conversion into common stock of outstanding subordinated promissory notes,
held by E.M. Warburg, Pincus in the aggregate principal amount of $15 million,
plus accrued interest; and (3) the cashless exercise by E.M. Warburg, Pincus of
all of its warrants to purchase common stock. Unaudited pro forma basic and
diluted net loss per common share has been calculated assuming these changes in
the Company's capitalization as of the dates of the instruments original
issuance or accrual.
The following table presents the calculation of unaudited pro forma basic
and diluted net loss per share:
YEAR ENDED JUNE 30, 2000
------------------------
Net loss.................................................... $(15,773,349)
Accretion of convertible preferred stock.................. (3,659,459)
------------
Net loss attributable to common stock....................... $(19,432,808)
------------
Pro forma:
Shares used in computing basic and diluted net loss per
common share........................................... 1,544,265
Effect of assumed conversion of preferred stock and
dividends, subordinated notes payable and interest, and
warrants into common stock............................. 20,570,195
------------
Shares used in computing unaudited pro
forma basic and diluted net loss per common share...... 22,114,460
============
Unaudited pro forma basic and diluted net loss per common
share..................................................... $ (0.88)
============
Reclassification
Certain amounts reported in the 1998 and 1999 financial statements have
been reclassified to conform to the current financial statement presentation.
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133, as
amended, is effective for quarters beginning after June 15, 2000. The Company
does not currently utilize derivative financial instruments and therefore it
does not expect that the adoption of SFAS No. 133 will have a material impact on
its results of operations or financial position.
In December 1999, the Securities and Exchange Commission Staff released
Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial
Statements," which clarified some provisions of current standards related to
software revenue recognition and must be adopted no later than the fourth
quarter of the fiscal year ending June 30, 2001. The adoption of SAB No. 101 is
not expected to have a material impact on the Company's revenue recognition
policies, results of operations or financial position.
In March 2000, the FASB issued Interpretation No. 44, "Accounting for
Certain Transactions Involving Stock Compensation," an interpretation of APB
Opinion No. 25 ("FIN 44"). FIN 44 establishes guidance for the accounting for
stock option grants or modifications to existing stock option
F-11
58
SYNQUEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
awards and is effective for option grants made after June 30, 2000. FIN 44 also
establishes guidance for the re-pricing of stock options and determining whether
a grantee is an employee, for which the guidance was effective after December
15, 1998, and modifying a fixed option to add a reload feature, for which the
guidance was effective after January 12, 2000. The adoption of certain of the
provisions of FIN 44 prior to June 30, 2000 did not have a material effect on
the Company's financial statements. The Company does not expect that the
adoption of the remaining provisions will have a material effect on its
financial statements.
3. SUBORDINATED NOTES PAYABLE TO RELATED PARTY
The Company has entered into eight Subordinated Promissory Note agreements
with E. M. Warburg, Pincus at various dates from May 10, 1995 to July 20, 1997.
The notes accrue interest at prime plus 2% annually, adjusted biannually from
the date of issuance (9.75% and 11.50% at June 30, 1999 and 2000, respectively).
Interest and principal are payable on demand.
In conjunction with entering into the Subordinated Promissory Notes, the
Company issued warrants to purchase common stock to E. M. Warburg, Pincus. The
warrants may be exercised at any time before their expiration dates. Under the
terms of the warrant agreements, the warrant holder is protected from future
dilution of the Company's common stock. The date and amount of each note and the
terms of warrants issued and outstanding related to each note are summarized as
follows:
WARRANTS VALUE
TO PURCHASE EXERCISE EXPIRATION ASSIGNED
AMOUNT OF COMMON PRICE OF DATE OF TO
DATE OF NOTE NOTE STOCK WARRANTS WARRANT WARRANTS
------------ ----------- ----------- -------- ------------------ --------
May 10, 1995............. $ 2,000,000 1,301,696 $1.80 May 9, 2005 $475,680
September 19, 1995....... 2,000,000 681,213 2.94 September 18, 2005 --
November 5, 1996......... 1,500,000 545,455 2.75 November 4, 2006 85,421
December 9, 1996......... 1,000,000 363,636 2.75 December 9, 2006 53,780
February 17, 1997........ 2,500,000 909,091 2.75 February 17, 2007 119,917
April 15, 1997........... 1,500,000 545,455 2.75 April 15, 2007 68,987
May 20, 1997............. 2,000,000 727,273 2.75 May 20, 2007 78,013
July 20, 1997............ 2,500,000 714,286 3.50 July 20, 2007 --
----------- ---------
Outstanding at June 30,
2000................... $15,000,000 5,788,105
=========== =========
The Company allocated a portion of the proceeds from each note to the value
of the warrants issued as disclosed above. The fair value for the warrants above
were estimated at the date of grant using the Black-Scholes model with the
following assumptions: risk-free interest rates of 5.54% to 6.87%, a dividend
yield of 0%, a volatility factor of 1%, and an expected life of 1.5 to 2 years.
The resulting discount on the debt was amortized to interest expense over the
expected life of the debt. The discount on the debt was fully amortized at June
30, 1998. Amortization expense was $426,000 in 1998. The resulting weighted
average effective interest rate on the outstanding Subordinated Promissory Notes
was 15.5%, 11.1%, and 10.4% in 1998, 1999, and 2000, respectively.
See Note 13 for additional information.
4. LINE OF CREDIT AGREEMENT
On July 10, 1996, the Company entered into a Loan and Security Agreement
(the "Agreement") with a financing company. The Agreement, as amended to date,
provides the Company with a line of credit not to exceed the lesser of $20
million or an amount equal to the sum of the following: 80% of
F-12
59
SYNQUEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
qualifying receivables, as defined, an additional loan of $5 million, and the
amount outstanding under the term loan in the original principal amount of $5
million. Virtually all assets of the Company have been pledged as collateral
under these loan facilities. Interest accrues at the highest LIBOR rate in
effect each month, plus 5.125% per annum, provided that the interest rate in
effect each month is not less than 9% per annum. The interest rate in effect
under the Agreement was 10.5% at June 30, 1999 and 11.8% at June 30, 2000. The
Agreement expires on December 31, 2000. The Company is subject to certain
covenants under the Agreement. The Company has continued to borrow under the
Agreement even though the Company was in violation of certain of these covenants
(principally covenants pertaining to periodic reporting, pre-approval of new
offices and advances to subsidiaries) at June 30, 2000. These covenant
violations have been waived by the financing company.
See Note 13 for additional information.
5. NOTES PAYABLE AND CAPITAL LEASES
The Company leases various equipment under capital leases with a total cost
of approximately $968,000 and $743,000 and accumulated amortization of
approximately $596,000 and $358,000 at June 30, 1999 and 2000, respectively.
Future minimum payments under these capital leases and future principal
payments due under notes payable are as follows:
NOTES CAPITAL
PAYABLE LEASES
------- --------
Year ending June 30, 2001................................... $12,000 $238,000
2002...................................................... -- 104,000
2003...................................................... -- 45,000
2004...................................................... -- --
------- --------
Total obligations under notes payable and minimum lease
payments under capital leases............................. 12,000 387,000
Less amount representing interest........................... -- 44,000
------- --------
Present value of minimum capital lease payments........... -- 343,000
Less amounts due within one year.......................... 12,000 180,000
------- --------
Long-term obligations under notes payable and capital
leases................................................. $ -- $163,000
======= ========
6. CONVERTIBLE PREFERRED STOCK
The Company is authorized to issue up to 16 million shares of preferred
stock. At June 30, 2000, the Company had established seven series of preferred
stock: Series B, C, D, E, F, G, and H, the terms of which are summarized below.
At June 30, 1999 and 2000, the Company had 540,016 authorized, issued and
outstanding shares of Series B preferred stock. Each share of Series B preferred
stock entitles its holder to receive an annual cash dividend of $0.12 ($0.192
prior to March 1, 1999) per share; to convert it into one share of common stock,
as adjusted in the event of future dilution; to receive $2.40 per share plus
accrued dividends in the event of involuntary or voluntary liquidation; and to
receive $2.40 per share plus accrued dividends, subject to adjustment in the
event of future dilution, upon mandatory redemption by the Company on December
31, 2003. In the event the Company breaches or violates certain warranties,
representations, or covenants as stipulated in the Stock Purchase Agreement
dated May 10, 1994 and the Certificate of Incorporation, holders of Series B
preferred stock are granted certain special voting rights. Such voting rights
may be limited by the terms of the Shareholders Agreement as described in more
detail below.
F-13
60
SYNQUEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At June 30, 1999 and 2000, the Company had 2,376,651 authorized, issued and
outstanding shares of Series C preferred stock. Each share of Series C preferred
stock entitles its holder to receive an annual cash dividend of $0.12 ($0.192
prior to March 1, 1999) per share; to convert it into one share of common stock,
as adjusted in the event of future dilution; to receive $2.40 per share plus
accrued dividends in the event of involuntary or voluntary liquidation; and to
receive $2.40 per share plus accrued dividends, subject to adjustment in the
event of future dilution, upon redemption by the Company on December 31, 2003.
Holders of Series C preferred stock are not entitled to voting rights.
The Company has 4,000,000 authorized shares of Series D preferred stock, of
which 3,692,618 were issued and outstanding at June 30, 1999 and 2000. Each
share of Series D preferred stock entitles its holder to receive an annual cash
dividend of $0.12 ($0.192 prior to March 1, 1999) per share; to convert it into
one share of common stock, as adjusted in the event of future dilution; to
receive $2.28 per share plus accrued dividends in the event of involuntary or
voluntary liquidation; and to receive $2.28 per share plus accrued dividends,
subject to adjustment in the event of future dilution, upon mandatory redemption
by the Company on December 31, 2003. Holders of Series D preferred stock are not
entitled to voting rights.
The Company has 1,000,000 authorized shares of Series E preferred stock.
There were no shares of Series E preferred stock outstanding at June 30, 1999 or
2000.
At June 30, 1999 and 2000, the Company had 750,000 authorized, issued and
outstanding shares of Series F preferred stock, all of which were issued during
1997 in conjunction with the purchase of Bender Management Consultants Inc.
("BMC"). Each share of Series F preferred stock entitles its holder to receive
non-cumulative cash dividends at an annual rate of $0.192 per share before
dividends may be paid to holders of common stock; to convert it into one share
of common stock, as adjusted in the event of future dilution; and to receive
$8.00 per share in the event of involuntary or voluntary liquidation. Shares of
Series F preferred stock have voting rights equivalent to those of common stock
plus the right to designate one member of the board of directors as long as the
shares are held by the seller of BMC. Under the terms of an investor's agreement
with the holder of Series F preferred stock, as amended, the holder may require
the Company to repurchase, at $8.00 per share, up to 40% of the Series F
preferred stock on June 16, 2001, and up to 20% on June 16 of each of the
subsequent three years. These put rights expire upon the closing of an
underwritten public offering of the Company's common stock.
In March 1999, the Company designated 5,636,071 of its authorized preferred
stock as Series G preferred stock and sold the shares in a private offering for
net proceeds of approximately $32.7 million. Each share of Series G preferred
stock entitles its holder to receive an annual cash dividend of $0.3105 per
share; to convert it into one share of common stock, as adjusted in the event of
future dilution; to receive $6.21 per share plus accrued dividends in the event
of involuntary or voluntary liquidation; and to receive $6.21 per share plus
accrued dividends, subject to adjustment in the event of future dilution, upon
redemption, at the option of the Series G preferred stock shareholder, on or
after December 31, 2003. Shares of Series G preferred stock have voting rights
equivalent to those of common stock plus, under certain circumstances, the right
to pre-approve certain actions of the Company as specified in the Certificate of
Designation.
In June 2000, the board of directors resolved to pay the preferred stock
dividends in shares of a newly created Series H junior convertible preferred
stock which was established in August 2000. Payments of dividends on the
Company's Series B, Series C, Series D, Series F and Series G preferred stock
were made in the form of the new Series H preferred stock immediately prior to
the completion of the Company's August 2000 initial public offering. Each share
of Series H preferred stock automatically converted into one share of common
stock upon completion of the Company's initial public offering. There were no
shares of Series H preferred stock authorized, issued or outstanding at June 30,
2000.
F-14
61
SYNQUEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Dividends on outstanding shares of Series B, Series C, Series D and Series
G preferred stock are cumulative and must be paid in the event of liquidation
and before any distribution to holders of common stock. Aggregate cumulative
dividends in arrears on preferred stock were $5,598,379 and $8,055,509 at June
30, 1999 and 2000, respectively. Dividends on the Series F preferred stock are
not cumulative except that if, in any year, accrued dividends from prior years
are paid on Series B, Series C, Series D and Series G preferred stock, then
dividends will be paid on the Series F preferred stock.
The difference between the carrying amount and the amount at which
preferred stock may be redeemed or put to the Company is being accreted through
periodic adjustments to the balance of preferred stock and the accumulated
deficit over the period from issuance to the redemption or put date.
Each share of Series B, Series C, Series D, Series E, Series F and Series G
preferred stock shall automatically be converted into shares of common stock at
the then applicable conversion price at any time upon the closing of an
underwritten public offering of the Company's common stock meeting certain
criteria.
On May 11, 1994, the Company entered into a Shareholder's Agreement with E.
M. Warburg, Pincus and a former employee whereby the parties agreed to certain
matters relating to the operations of the Company and disposition and issuance
of shares of capital stock of the Company. On November 16, 1997, the Company
amended and restated the original Shareholder's Agreement with E. M. Warburg,
Pincus. The Agreement, as amended, includes provisions giving E. M. Warburg,
Pincus certain rights to subscribe for securities. The Agreement also includes a
provision which limits the voting rights of E. M. Warburg, Pincus to the extent
of the number of votes represented by all outstanding shares of the Company's
capital stock not owned directly or indirectly by E. M. Warburg, Pincus (Maximum
Number of Votes). All shares held by E. M. Warburg, Pincus which represent a
number of votes in excess of the Maximum Number of Votes will be deemed to be
nonvoting shares. Nonvoting shares will have no right to vote upon the election
of directors or any other matter submitted to shareholder vote.
See Note 13 for additional information.
7. COMMON STOCK
The Company is authorized to issue up to 100 million shares of common
stock. Holders of common stock are entitled to dividends declared by the board
of directors out of legally available funds. Holders of common stock are
entitled to one vote per share.
On May 1, 2000 the board of directors resolved to eliminate the Class A
common stock.
The Company has reserved a total of 23,532,916 shares of common stock for
future issuance upon conversion of Series B, Series C, Series D, Series F, and
Series G preferred stock and the exercise of warrants and options to purchase
common stock.
On May 17, 2000 the Company issued a warrant to purchase 400,000 shares of
its common stock at an exercise price of $8.00 per share in connection with a
software license agreement for certain of the Company's standard products and
maintenance. Except under circumstances defined in the warrant agreement, the
warrant expires in May 2003. The fair market for this warrant was estimated at
the date of grant using the Black-Scholes model with the following assumptions:
risk free interest rate of 6.81%, a dividend yield of 0%, a volatility factor of
.35404 and an expected life of three years. The software license and maintenance
fees have been reduced by the fair value of the warrant.
See Notes 3, 6, and 8 for additional information with respect to common
stock.
F-15
62
SYNQUEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. STOCK OPTION PLANS
The Company's 1987 and 1997 stock option plans provide for the granting of
either incentive stock options or non-qualified options to purchase shares of
the Company's common stock in order to provide incentives to certain employees
and directors. The Company's 1987 plan has expired and the Company is
authorized, as of June 30, 2000, to issue up to 3,800,000 options to purchase
common stock under its 1997 plan. These plans allow participants to purchase
common stock of the Company at prices set by the board of directors, but in the
case of incentive stock options not less than fair market value at the date the
option is granted. Unless otherwise specified, outstanding options vest
one-third each year. Unexercised options expire ten years after the date of
grant unless otherwise specified by the board of directors.
Stock option activity is shown below:
WEIGHTED
NUMBER AVERAGE
STOCK OPTIONS OF SHARES EXERCISE PRICE
- ------------- --------- --------------
Outstanding at June 30, 1997................................ 1,684,779 $1.79
Granted................................................... 1,491,200 2.75
Exercised................................................. (57,026) 0.46
Lapsed or canceled........................................ (45,907) 2.43
---------
Outstanding at June 30, 1998................................ 3,073,046 2.27
Granted................................................... 1,080,250 3.12
Exercised................................................. (38,064) 0.98
Lapsed or canceled........................................ (177,360) 2.61
---------
Outstanding at June 30, 1999................................ 3,937,872 2.50
Granted................................................... 872,516 5.42
Exercised................................................. (145,182) 1.93
Lapsed or canceled........................................ (315,751) 3.01
---------
Outstanding at June 30, 2000................................ 4,349,455 $3.07
=========
Exercisable at June 30, 1998................................ 1,168,359 $1.75
Exercisable at June 30, 1999................................ 1,832,336 2.05
Exercisable at June 30, 2000................................ 2,512,772 2.32
Available for grant at June 30, 2000........................ 612,618
The following table summarizes the range of exercise prices, weighted
average exercise prices, and weighted average remaining contractual lives for
options outstanding and exercisable as of June 30, 2000:
OUTSTANDING EXERCISABLE
---------------------------------- --------------------
WEIGHTED
WEIGHTED AVERAGE WEIGHTED
NUMBER AVERAGE REMAINING NUMBER AVERAGE
OF EXERCISE CONTRACTUAL OF EXERCISE
EXERCISE PRICES SHARES PRICE LIFE SHARES PRICE
- --------------- --------- -------- ----------- --------- --------
$0.25................ 80,500 $0.25 3 80,500 $0.25
1.80................ 1,043,873 1.80 5 1,043,873 1.80
2.75................ 1,475,133 2.75 7 1,060,382 2.75
3.00................ 726,833 3.00 8 247,167 3.00
3.25................ 131,250 3.25 8 44,000 3.25
3.75................ 549,866 3.75 9 36,850 3.75
8.00................ 342,000 8.00 10 -- 8.00
--------- ---------
4,349,455 $3.07 7 2,512,772 $2.32
========= =========
F-16
63
SYNQUEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company has elected to follow APB 25 and related interpretations in
accounting for its employee stock options. Under APB 25, because the exercise
price of the Company's employee stock options equals or exceeds the estimated
fair value of the underlying stock on the date of grant, generally no
compensation expense is recognized.
Pro forma information regarding net loss is required by SFAS No. 123, which
also requires that the information be determined as if the Company had accounted
for its employee stock options granted subsequent to July 1, 1996 under the fair
value method of that Statement. The fair value for these options was estimated
at the date of grant using the Black-Scholes model with the following weighted
average assumptions for fiscal 1998, 1999 and 2000: risk-free interest rate of
5.7%, 5.0% and 5.2%, respectively, a dividend yield of 0%, volatility factor of
the expected market price of the Company's Common Stock of .01, and an expected
life of the option of 5 years, 4 years and 4 years, respectively. The weighted
average grant-date fair value of options granted in 1998, 1999 and 2000 was
$0.70, $0.58, and $1.21 per share, respectively.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options, which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. Pro forma net
loss for 1998, 1999 and 2000 was $15,900,000, $20,079,000, and $16,362,000,
respectively. Pro forma net loss per common share for 1998, 1999 and 2000 was
$(14.27), $(15.57), and $(12.96), respectively. Because SFAS No. 123 is
applicable only to options granted subsequent to June 30, 1995, its pro forma
effect was not fully reflected until 1998.
See Note 13 for additional information.
9. OPERATING LEASES
The Company rents office space, office equipment, and vehicles under
operating lease agreements. Rent expense for 1998, 1999 and 2000 was
approximately $737,000, $1,460,000 and $1,473,000, respectively. Future minimum
payments under all non-cancelable operating leases at June 30, 2000 are
summarized below:
Year ending June 30,
2001...................................................... $ 998,000
2002...................................................... 645,000
2003...................................................... 600,000
2004...................................................... 591,000
2005...................................................... 573,000
----------
Total future minimum lease payments............... $3,407,000
==========
10. INCOME TAXES
At June 30, 2000, the Company has net operating loss carryforwards of
approximately $74 million and tax credits of approximately $1,129,000 for income
tax purposes that expire principally in years 2001 through 2015. Included in the
total net operating loss carryforwards at June 30, 2000 are approximately $13.2
million of net operating losses related to the Company's foreign operations
which may be carried
F-17
64
SYNQUEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
forward indefinitely. Loss before income taxes attributable to the Company's
foreign operations was $2.3 million in 1998, $3.5 million in 1999 and $3.6
million in 2000.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amount used for income tax purposes. Significant components of
the Company's deferred tax assets and liabilities are as follows:
JUNE 30,
---------------------------
1999 2000
------------ ------------
Deferred tax assets:
Net operating loss carryforwards....................... $ 23,225,000 $ 28,174,000
Allowance for doubtful accounts........................ 444,000 382,000
Accrued liabilities.................................... 1,377,000 2,388,000
Research and development credits....................... 929,000 1,129,000
------------ ------------
Total deferred tax assets...................... 25,975,000 32,073,000
Valuation allowance...................................... (25,975,000) (32,073,000)
Net deferred tax assets........................ -- --
------------ ------------
Net deferred taxes............................. $ -- $ --
============ ============
Based on an assessment of available evidence as of June 30, 1999 and 2000,
management concluded that the deferred income tax assets should be reduced by a
valuation allowance equal to the amount of the net deferred income tax assets.
A reconciliation of the statutory U.S. income tax rate to the effective
income tax rate is as follows:
YEAR ENDED JUNE 30,
---------------------------------------
1998 1999 2000
----------- ----------- -----------
Tax (benefit) at statutory federal rate......... $(5,259,000) $(6,650,000) $(5,362,000)
State taxes net of federal benefit.............. (619,000) (782,000) (631,000)
Research and development credits................ (238,000) (200,000) (200,000)
Meals and entertainment......................... 81,000 68,000 45,000
Other, net...................................... 48,000 63,000 50,000
Change in valuation allowance................... 5,987,000 7,501,000 6,098,000
----------- ----------- -----------
Total income tax expense.............. $ -- $ -- $ --
=========== =========== ===========
11. EMPLOYEE BENEFIT PLAN
The Company has a 401(k) Profit Sharing Plan for the benefit of eligible
employees and their beneficiaries. Essentially all employees are eligible to
participate in the Plan and are fully vested. The Company's contributions to the
Plan are discretionary. No contributions were made to the Plan during 1998, 1999
or 2000.
12. SEGMENT AND GEOGRAPHIC INFORMATION
The Company is organized around geographic areas. The Company's operations
in The Americas and Europe represent the two reportable segments. Europe is
comprised of operations in the United Kingdom, France, Germany and The
Netherlands. The accounting policies as described in the summary of significant
accounting policies are applied consistently across the segments.
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SYNQUEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Segment information for the years ended June 30, 1998, 1999, and 2000 are
summarized as follows:
YEAR ENDED JUNE 30,
------------------------------------------
1998 1999 2000
------------ ------------ ------------
REVENUE
The Americas
Software license fees...................... $ 9,026,723 $ 8,994,040 $ 12,727,971
Services................................... 6,766,732 11,344,645 10,391,722
------------ ------------ ------------
Total The Americas................. 15,793,455 20,338,685 23,119,693
Europe
Software license fees...................... 1,365,506 1,527,531 453,104
Services................................... 1,247,414 1,415,204 1,642,624
------------ ------------ ------------
Total Europe....................... 2,612,920 2,942,735 2,095,728
Total.............................. $ 18,406,375 $ 23,281,420 $ 25,215,421
============ ============ ============
NET LOSS
The Americas................................. $(13,275,436) $(16,010,136) $(12,182,624)
Europe....................................... (2,253,941) (3,549,974) (3,590,725)
------------ ------------ ------------
Total.............................. $(15,529,377) $(19,560,110) $(15,773,349)
============ ============ ============
TOTAL ASSETS
The Americas................................. $ 22,313,871 $ 23,505,826
Europe....................................... 3,081,202 1,596,072
Eliminations............................... (13,739,318) (16,179,162)
------------ ------------
Total.............................. $ 11,655,755 $ 8,922,736
============ ============
All revenue was generated from external customers.
The elimination within total assets represents the Company's investment in
the Europe segment and funding provided for operations.
Export sales from the United States were approximately $1,671,000,
$1,597,000 and $1,546,000 for the years ended June 30, 1998, 1999, and 2000,
respectively.
13. SUBSEQUENT EVENTS
Stock Options
On August 2, 2000, the Company granted options to purchase a total of
434,187 shares of common stock at $7.00 per share.
On September 9, 2000, the board of directors increased, subject to
shareholder approval, the number of shares authorized for issuance under the
Company's stock option plan from 3,800,000 to 5,000,000.
Initial Public Offering
On August 11, 2000, the Company filed a registration statement with the
Securities and Exchange Commission to register shares of its common stock in
connection with an initial public offering ("IPO"). The Company received
approximately $37.4 million of proceeds, net of underwriting discounts and
commissions, from the sale of 5,750,000 shares of common stock in the IPO.
Approximately $10.5 million of the proceeds were used to repay the outstanding
balance under the Company's line of credit. Upon completion of the offering, all
of the outstanding convertible preferred stock was converted to 12,995,356
shares of common stock. Additionally, the board of directors approved the
payment of all accrued and unpaid dividends on the outstanding preferred stock
of the Company in shares of Series H preferred stock
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66
SYNQUEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
that automatically converted to common stock upon completion of the IPO.
Accordingly, the Company issued 1,354,365 shares of Series H preferred stock
which converted into the same number of shares of common stock upon completion
of the IPO. Furthermore, upon completion of the IPO the outstanding Subordinated
Promissory Notes held by E. M. Warburg, Pincus in the aggregate principal amount
of $15 million plus all accrued and unpaid interest on such notes converted into
3,246,280 shares of common stock at the initial public offering price, less
underwriting discounts and commissions. Upon completion of the offering, E. M.
Warburg, Pincus exercised, on a cashless basis, all of its outstanding warrants
based on the initial public offering price, less underwriting discounts and
commission, resulting in the issuance of 3,430,835 shares of common stock.
F-20