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SECURITIES AND EXCHANGE COMMISSION

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, 2002

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.

Registrant’s telephone number, including area code:  (770) 325-2000

Securities registered pursuant to Section 12(b) of the Act:  None

Securities registered pursuant to Section 12(g) of the Act:

      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 o

      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.     o

      The aggregate market value of the voting stock held by non-affiliates of the Registrant (based upon the closing sale price on The Nasdaq SmallCap Market) on September 16, 2002 was approximately $3.4 million. As of September 16, 2002, there were 2,946,797 shares of common stock, $.01 par value, outstanding.

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SYNQUEST, INC.

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NOTE REGARDING FORWARD-LOOKING STATEMENTS

      The information in this report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Statements that are not historical in nature, including statements about beliefs and expectations, are forward-looking statements. Such statements are based upon current expectations that involve risks and uncertainties. For example, words such as “may,” “will,” “should,” “estimates,” “predicts,” “potential,” “continue,” “strategy,” “believes,” “anticipates,” “plans,” “expects,” “intends,” 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:

	•	discussions of the effects of our proposed business combination and the related private placement, as described herein;
	•	financial condition;
	•	results of operations;
	•	business plans, including growth plans;
	•	our technology;
	•	business strategies, operating efficiencies or synergies, competitive positions, growth opportunities for existing services and products;
	•	plans and objectives of management;
	•	the market for our securities;
	•	our Nasdaq SmallCap Market listing status;
	•	buying patterns of potential and existing customers;
	•	use of third-party lead sources; and
	•	the financial and regulatory environment in which we operate.

      You should not place undue reliance on these forward-looking statements which speak only as of the date of such statements. These statements are based on current expectations. We undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of future events, new information or otherwise. All forward-looking statements are subject to risks and uncertainties that could cause actual events to differ materially from those projected. Factors that might cause or contribute to such a discrepancy include, but are not limited to,

	•	the extent of our ability to integrate the operations of Viewlocity with ours;
	•	the effects of vigorous competition with larger and better-established companies in the markets in which we operate;
	•	the impact of technological change on our business, and new entrants and alternative technologies in our respective markets and businesses;
	•	the effect of the proposed business combination and private placement described herein on our Nasdaq SmallCap Market listing status;
	•	the factors discussed under “Risk Factors” in this report; and
	•	other risks referenced from time to time in our filings with the Securities and Exchange Commission (the “SEC”).

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PART I

Item 1.     BUSINESS

Overview

      We are a software company that specializes in providing supply chain planning solutions that enable companies with complex supply chains to improve their profit and customer service. A complex supply chain consists of a large combination of products/parts, plants, warehouses, transport modes and suppliers that are needed to meet diverse customer requirements. For example, the automotive and major home appliance industries typically have complex supply chains. We believe that our approach to supply chain planning is unique because our solutions address supply chain planning problems as business process problems that are optimally solved only when all the relevant financial and operational implications of the problems are adequately considered across the business process. Other products simply define supply chain problems as operational flow problems, or as financial problems for specific functions within a company, such as inventory or transportation. Our software is designed to optimize the financial and operational performance of the supply chain by using mathematically based technology that maximizes profit while meeting customer demand and respecting supply chain restrictions. Unlike other products, our solutions define supply chain problems as financial problems and derive the operational flow as a result of the best financial solution for the entire business process. To produce the best results across strategic, tactical and operational supply chain planning problems, our solutions use our unique financial optimization technology to:

	•	model the total business process which consists of the operational constraints (such as manufacturing capacity, shipping calendars and dock door restrictions) and the financial drivers (such as purchase price, material handling costs, inventory carrying costs and revenue) and
	•	evaluate all the relevant operational and financial trade-offs across the supply chain and determine which combination of activities represents the greatest profit or lowest total cost while meeting customer requirements.

      Our software solutions have broad applicability, but we have initially targeted manufacturing companies in the following industries: automotive original equipment manufacturers (“OEM”) including their tier-one suppliers, the industrial and consumer durables markets and the third party logistics providers (“3PL”) that serve those markets. We believe companies in these markets face considerable competitive pressure to dramatically improve bottom-line performance and they have already optimized the performance of individual functions within their enterprise. Furthermore, they must make these improvements while simultaneously meeting increasingly stringent customer delivery requirements. These companies need solutions that are capable of delivering significant financial benefits by planning across their complex supply chain network for maximum profit. Our software solutions, which are capable of being implemented quickly, address both complex supply chain planning and profit maximization. These same companies are beginning to leverage the Internet to improve the effectiveness of their complex supply chain network. Our solutions are capable of helping these companies seamlessly collaborate with their trading partners to further improve profit and customer service.

      Our solutions readily interface with a broad range of our customers’ existing enterprise applications, as well as the web-based platforms of their trading partners. As of June 30, 2002, we had implemented our solutions for over 100 customers. Our clients include Whirlpool Corporation, Honda Express Co., Penske Logistics LLC, ABB Vetco Gray, Inc., Nissan North America, Goodrich Corporation, Ford Motor Company, HON Industries, Inc., Alcoa, Inc., STMicroelectronics N.V., The Simmons Manufacturing Co., LLC and Titleist and Footjoy Worldwide.

      On August 30, 2002, we entered into a merger agreement with Viewlocity, Inc. (“Viewlocity”), pursuant to which Viewlocity will be merged with and into us. As consideration for the merger, we will

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      In addition, we entered into an amended and restated stock purchase agreement dated as of September 20, 2002, with our majority shareholder, Warburg, Pincus Investors, L.P. (“Warburg”), certain stockholders of Viewlocity and several new investors, who are referred to collectively as the “purchasers.” Pursuant to the stock purchase agreement, we will issue up to 13.2 million shares of our newly created series A preferred stock (the “series A preferred stock”) to the purchasers in a private placement at a price of $2.50 per share, for total consideration between $27.5 million and $33.0 million consisting of cash or the conversion of outstanding loans by the purchasers to us or Viewlocity. Purchasers have subscribed for 11 million shares of series A preferred stock, for total consideration of up to $27.5 million, under the stock purchase agreement. Up to an additional 1 million shares of series A preferred stock, for total consideration of $2.5 million, may be issued under the stock purchase agreement to existing purchasers or other persons if agreed by us and a majority-in-interest of the purchasers. If purchasers extend additional bridge loans prior to closing, up to an additional 1.2 million shares of series A preferred stock could be issued under the stock purchase agreement upon conversion of up to $3 million of such additional loans. The terms of the series A preferred stock to be issued by us in the private placement are described in Item 7 of this report. The proceeds of the private placement will be used for debt repayment, working capital and general corporate purposes.

      Completion of the merger and the private placement are subject to satisfaction of customary closing conditions. We currently anticipate that the transactions will be completed by December 31, 2002.

      Warburg and Timothy Harvey, our president, have executed voting agreements pursuant to which they have agreed, subject to the terms and conditions of the voting agreements, to vote all of their shares of our common stock in favor of the merger, the private placement and any other matter necessary to effect the merger and the private placement. The shares subject to the voting agreements represent in the aggregate slightly more than 50% of the outstanding voting power of our common stock and are sufficient to approve the merger and the private placement.

      We believe the following trends are driving the supply chain planning market forward:

      Continued pressure to reduce costs. Buyers are continually demanding lower prices, which means that companies face constant pressure to reduce costs. In the past, companies with complex supply chains attempted to reduce costs by focusing on one aspect of the supply chain such as manufacturing or transportation. However, these companies now realize that to reduce costs further, they must consider cost reduction from a cross-functional perspective, evaluating the financial trade-offs of the entire supply chain. This type of analysis is complex because there are many potential trade-offs that must be simultaneously evaluated to determine which combination of trade-offs will provide the greatest overall cost reductions. In addition, we believe manufacturers will continue to outsource key components of their products, which will cause their supply chains to become even more complex. Most companies now recognize that they benefit the most from supply chain planning solutions that are capable of simultaneously evaluating the financial trade-offs across the supply chain to determine the lowest overall cost.

      Increased customer service level requirements. Companies are requiring their suppliers to increase the speed and reliability of delivery of orders. They have realized that slow and unreliable delivery of orders now means that not only will they lose orders, but eventually, customers as well. Building inventory in advance of demand or expediting orders are not feasible solutions to the problem because of the high costs associated with both solutions. In order to improve the speed and reliability of order delivery, manufacturers need supply chain planning solutions that can effectively allocate and coordinate the myriad of resources across the complex supply chain network to deliver orders on time and at the lowest possible cost.

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      Increased demand for mass customization. Customers are increasingly demanding goods tailored to their requirements, and companies are seeking to capitalize on this trend by producing unique goods on a large scale. Mass customization inherently increases the complexity of products and processes across the supply chain. Many companies cannot cost-effectively maintain excess inventory levels to meet anticipated demand because of the number of different products. To achieve profitable mass customization, these companies need to implement supply chain planning solutions that are capable of coordinating these processes efficiently and effectively in order to manufacture a wider array of products while producing each order for the lowest total delivered cost.

      Increased collaboration. Companies have realized that delivering value to their customers and leveraging their trading partners over the Internet can only be done effectively through effective integration of the supply chain. Collaborative planning, as opposed to execution, is the core value delivered by Internet-based supply chain integration. The essence of this realization is that the majority of cost savings result from optimizing the allocation and utilization of the supply chain resources, not automating transactions. Companies have also realized that both the internal and external aspects of the supply chain must be taken into account in order to deliver competitive capabilities such as on-time delivery, order reliability and order flexibility. As a result, companies are looking for supply chain planning solutions that are capable of simultaneously coordinating their trading partners as well as their internal operations.

      Increased globalization. The globalization of markets is increasing at an astounding rate. Factors contributing to this increase include the continued reduction in trade barriers, the Internet’s ability to make market information available worldwide virtually instantaneously, increased product specialization, continued market pressure to reduce costs, and the need for quick penetration of new markets to sell existing products. We believe globalization will cause companies to interact with more trading partners and embrace a higher degree of outsourcing, resulting in larger and more complex supply chains. This shift will place more emphasis on the importance of supply chain planning solutions that provide coordination, visibility and control.

      Our objective is to become the leading provider of supply chain planning solutions for companies with complex supply chains. Our solutions focus on improving planning processes versus improving execution processes, because we believe that improved planning can lead to the greatest benefits in the shortest amount of time. We intend to continue to focus on solving high-value supply chain planning problems for companies and their related logistics service providers in the automotive, industrial and consumer durables markets, by using financially-focused technology to enable our clients to maximize profitability. Once we achieve a leadership position in these markets, we plan to extend our supply chain planning capabilities to new target industries.

      Our strategy includes the following key elements:

      Address specific business problems. We focus on solving specific, high-value business problems for companies with complex supply chains. These business problems manifest themselves in the form of low margins, weakening sales, high inventory levels, excessive expediting charges or poor on-time delivery. We believe these problems are indicative of larger, more complex business issues that cut across the organizations within the supply chain. These larger, more complex business issues include cost structures that are too high, inventory that is in the wrong place at the wrong time, or poor overall supply chain order coordination. We will continue to provide supply chain planning solutions that determine the most effective way to address these larger, more complex problems. We believe our solutions to these problems are the most effective and efficient method of providing our clients with significant and rapid return on investment (“ROI”) in our solutions.

      Initially target specific markets. We intend initially to become recognized as the domain expert in supply chain planning solutions for companies with complex supply chains, including markets such as automotive OEMs and their tier-one suppliers, manufacturers in industrial and consumer durables markets, and third-party supply chain providers that offer outsourced logistics services to these types of companies.

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      Focus on next generation supply chain planning technology. We intend to leverage our expertise in supply chain planning by solving problems that have not been addressed and by addressing existing problems in completely new ways. We intend to continue to focus on problems within complex supply chains and place an emphasis on the facets of these problems that will help our customers maximize profit. We intend to build additional functionality into our current solutions that will continue to differentiate us from other supply chain planning vendors. We believe this additional functionality will broaden the applicability of solutions to our customers and may enable us to penetrate new industries. As always, we intend to continue to build new solutions that address emerging trends in supply chain planning.

      Expand our brand awareness. We plan to continue to increase the awareness of our company and our solutions in the industries we have targeted through focused marketing campaigns and additional strategic partnerships. Marketing campaigns may include advertising or public relations programs designed to reach our target audiences effectively. We intend to cultivate additional strategic partnerships with complementary supply chain management companies, such as software solutions providers and systems integrators, to stimulate sales lead generation and offer more comprehensive solutions.

      Pursue strategic acquisition opportunities. We may pursue strategic acquisitions of complementary businesses, technologies, or products that will help accelerate the elements of our strategy. Consistent with this aspect of our strategy, we have entered into definitive agreements to effect the Viewlocity merger and the private placement as described above.

      We believe that existing supply chain planning solutions do not fully address the business challenges arising from the foregoing trends. We believe the primary limitations of existing solutions include the following:

      Limited complex supply chain network modeling capability. Most supply chain solutions do not accurately model the complex supply chain network because they must simplify the problem or model only part of the overall supply chain process. Simplifying the problem inherently produces sub-optimal results that do not maximize financial returns. This approach does not consider the myriad of operations, income and expense structures inherent in a complex supply chain network. Other solutions attempt to break up a complex supply chain network into less complex pieces, such as isolating transportation costs and activities. Supply chain planning solutions that model only one piece at a time cannot produce the lowest overall cost or greatest profit because they do not evaluate the financial trade-offs of the many elements across the complex supply chain network.

      Limited financial optimization capability. Most supply chain planning solutions are capable of only focusing on managing the activities of the supply chain network to meet customer requirements. The financial performance of the complex supply chain network is computed only after the activities of the supply chain network have been determined or only focuses on a limited set of cost drivers. These solutions are not capable of simultaneously considering all revenues, costs and operational constraints. Therefore, they are not capable of maximizing profit while simultaneously meeting customer requirements.

      Difficulty of deployment. In the past, the adoption of most supply chain planning solutions by companies with complex supply chains has been limited due to the complexity of the supply chain

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      Limited scalability. Most supply chain planning solutions currently available were not designed to rapidly process the massive volume of data and associated permutations generated by a complex supply chain network. To circumvent this problem, these solutions attempt to simplify the supply chain model or break up the complex model into several simple models that operate independently of one another. These approaches produce answers that do not simultaneously consider the multiple trade-offs that comprise a complex supply chain network. Therefore, they inherently produce suboptimal results that are not capable of maximizing financial returns or eliminating infeasible answers from consideration.

      Our current complement of supply chain planning solutions provides a robust platform for our customers to take full advantage of the opportunities for financial and operational improvement that exist in the complex supply chain network by solving a number of strategic, tactical and operational planning problems. The key characteristics that differentiate our solutions from other supply chain solutions include the following:

      Designed for the complex supply chain. Our solutions consider all of the relevant variables that exist in a complex supply chain, including the operational and financial drivers related to manufacturing, transportation, distribution, suppliers and customers. Our solutions not only consider the cross-functional business processes of a company’s supply chain, but also the relevant details that exist within each individual entity within the network. They are capable of accommodating the multiple cost structures that are inherent within the complex supply chain network. Therefore, they are not only able to generate an operationally feasible answer, but also actual plans to achieve the greatest possible financial return.

      Financial optimization technology. Our solutions are designed to maximize profit or minimize total costs while simultaneously optimizing a company’s supply chain requirements. We call this process “financial optimization.” Financial optimization enables our solutions to extend beyond simply balancing supply and demand. Financial optimization allows a company to maximize profit or minimize total cost while it balances supply and demand. Our financial optimization technology enables our solutions to directly model the revenues or costs of cross-functional business processes within a complex supply chain instead of only modeling the physical activities. Our solutions simultaneously evaluate the possible combinations of supply chain activities and financial drivers across the business process to determine which unique combination represents the greatest profit or lowest cost while simultaneously meeting customer requirements.

      Fast deployment. Implementation of our software solutions is straightforward and may produce significant results quickly. This is because our solutions are configured via business data. Our solutions require no custom programming for configuration and easily accept changes in business processes. Our solutions interface with most existing enterprise systems and web-based platforms. By interfacing to our clients’ systems, our solutions are capable of using real-time supply chain data to quickly generate financially optimal plans. With little advance preparation and set-up, we are capable of demonstrating a prospective client’s ability to realize significant bottom-line savings using our solutions.

      Comprehensive, high-volume, high-performance solutions. Our solutions are capable of solving complex supply chain problems including handling the large data structures inherent in a complex supply chain. The architecture of our solutions allows our customers to model their business processes in a single view, while producing operationally feasible plans in a timely manner. As a result our products are well suited for large industrial companies, such as automotive OEMs, companies that want to include trading partners in the planning process and companies that must react quickly to changes in their supply chain.

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      All of our solutions use financial optimization technology as part of their core functionality. This underlying financially-focused architecture enables our products to model the cross functional business problems inherent in companies with complex supply chains and deliver solutions that maximize profit or minimize costs while simultaneously optimize customer service. Key aspects of our financial optimization technology are as follows:

      Model all Relevant Operational and Financial Variables of the Business Process. Unlike other supply chain planning vendors whose solutions address cross-functional business process problems by breaking them into pieces such as inventory, transportation or manufacturing problems, our solutions address the total business process problem, which includes the operational capabilities and financial drivers. Our solutions not only take into account the overall facilities and transport modes but also the activities within the facilities, such as manufacturing equipment or storage capacities. Our solutions consider all of the relevant revenues and expenses across the business process including start-up costs, inventory carrying costs, material handling costs, transportation costs and investment costs, to maximize profit or minimize total cost. This unique approach is necessary to produce answers that optimize the operational and financial performance of the entire business process. We believe that we have the only supply chain planning solutions that model simultaneously both the operational and financial variables that are relevant to companies with complex supply chains in our target industries.

      Maximize Profits and Optimize Customer Service. As opposed to supply chain planning solutions that simply balance supply and demand to meet customer requirements, our solutions are designed to explicitly maximize profit or minimize total cost while meeting customer requirements. Our financial optimization technology simultaneously evaluates cost and customer service trade-offs that results in a plan that generates the greatest profit or lowest cost and also meets customer requirements. For example, to determine the lowest total delivered cost, our solutions balance inventory-carrying costs, material handling costs and transportation costs. At the same time, our solutions consider a company’s unique supply chain constraints and, therefore, are capable of also producing operationally feasible solutions.

      Using our financial optimization technology, our solutions solve specific high value strategic, tactical and operational business problems for companies with complex supply chains. Typical categories of business problems include:

      Business Strategy Planning. Companies must continually make strategic business decisions concerning customers, return on invested capital, acquisition, divestitures and the use of strategic trading partners. The timeframe to evaluate and make such decisions continues to decrease and companies look to quickly reposition their business model to maximize overall financial performance despite constantly changing market conditions. To get the best financial returns, these types of decisions require comprehensive analysis of the business and must include for example, revenue models, service level agreements, operating costs and capabilities and working capital. Our solution has the ability to model these complex financial and operational scenarios and produce profit maximized plans based upon strategies that include facility rationalization, supplier sourcing, new product introduction, customer profitability and promotions targeting.

      Profit Margin Planning. The majority of the world’s largest manufacturers make products on a to-stock basis, which means that they must make and store them ahead of actual orders. For these manufacturers, failure to correctly allocate resources in advance of demand can result in a large miss in profit as the right products are not available for sales or inventory is excessive. Traditional supply chain planning solutions focus on only a part of the sales and operations planning problem by either focusing on improving demand accuracy or correctly time phasing replenishment of inventory. Our solution takes a holistic view of sales and operations planning including revenues, volumes, operating costs and capabilities to determine what combination of anticipated demand produces the greatest revenue and lowest fulfillment costs, resulting in the greatest profit. With our solution, make-to-stock manufacturers can determine which

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      Inbound Logistics Planning. Significantly reducing inbound logistics costs while supporting material flow requirement into plants that are employing “lean or flow” manufacturing concepts is a challenge because of the comprehensiveness of the problem. Inventory constraints in the plants, increased delivery frequency requirements, transportation delivery and returnable container strategies are interrelated and impact each other. The traditional way to address this problem has been to break the process into pieces and, for example, focus on transportation planning for a limited number of high cost materials, eliminate operational variances that cause unnecessary costs, or conduct additional rate negotiations with transportation providers. Our solutions address the inbound logistics problem in a holistic manner and organize the inbound flow of all material for the lowest total delivered cost. We accomplish this task by assessing the entire inbound supply chain — from a supplier’s dock door through cross docks and returnable containers to the plant’s demand requirements and inventory constraints. At the same time, we simultaneously consider the transportation, material handling and inventory carrying costs to determine the integrated transportation, material handling and inventory plan that yields the lowest total delivered cost into the manufacturing plant or plants.

      Complex Order Planning. Companies that manufacture products across multiple facilities often struggle with long order lead times, unreliable delivery and high expediting costs. The causes of these problems may range from (i) promising orders without knowing if the supply chain has the capacity to deliver the order by the requested date, (ii) poor synchronization of the order across the network or (iii) the inability to address on-going changes and problems as they occur. When an order is placed, our solutions dynamically search through the complex supply chain network to determine what combination of warehouses, plants, suppliers and transportation methods meets the delivery requirements of the order for the lowest total delivered costs or greatest profit. As activities in the supply chain occur, they are compared in real-time to the planned events to detect any deviations from the sourcing plan, including trading partners connected via the web. As deviations are detected, our solutions are capable of determining the impact of the deviation on the delivery of specific orders. Our solutions are capable of quickly re-planning orders and selecting alternate paths or sequences through the supply chain in order to maintain the delivery schedule and, if possible, original margins.

      Manufacturing Planning. For many make-to-order companies, supply chain performance hinges on the ability of manufacturing plants to produce customer orders quickly, reliably and for the lowest cost. Competitive advantage in many industries has shifted from pure product innovation to speed and reliability, increasing the pressure on manufacturers to dramatically improve the speed and reliability of their manufacturing operations. Our solutions determine how to manufacture orders as fast and reliably as possible at the lowest production costs. Our solutions create a manufacturing plan that includes all aspects of manufacturing such as design and tooling requirements, not just equipment and material, and determines the sequence of production that meets the required order shipment date for the lowest total production costs. This sequence of production is electronically dispatched in real time to the workforce and automated equipment to synchronize the manufacturing process. As activities occur within the plant, our solutions compare them to the planned events to detect the impact of the deviations on order shipment dates. Our solutions are capable of quickly re-planning orders and selecting alternate paths or sequences through the plant in order to maintain the delivery schedule and, if possible, minimize cost variances.

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      The following chart includes each of our products, the categories of typical business problems that each product addresses, and the unique way that we solve each business problem:

Customers

      Our customers are primarily in the automotive, industrial and consumer durables markets. Our solutions address high-value planning problems that these companies face within their complex supply chains. We believe by using our financially focused planning technology to solve specific, high-value supply chain problems for our specific markets, we can increase our value proposition to our customers.

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      A representative list of our customers includes:

Strategic Relationships

      We have a number of alliances, including a global strategic alliance partnership with IBM. Our agreement with IBM involves significant technology and marketing support and places us in an elite group of preferred partners that allows us to not only leverage IBM’s extensive network of sales resources assigned in the United States, but also worldwide and industry accounts. We believe that this partnership provides a distinct opportunity to capitalize on IBM’s leadership position in the industry, and also sends a clear message to the market that our solutions have gained favorable recognition among one of the world’s leading technology providers. IBM Global Services has built an implementation and consulting practice for our solutions.

      As we execute our strategy to become specialists in select industries, we are forming additional alliances with companies that can strengthen our market position. To that end, we have initiated strategic relationships with Penske Logistics LLC and TNT Logistics North America. Both companies are known for their logistics domain expertise in the automotive and industrial markets, with customers such as Ford Motor Company, Whirlpool Corporation and BMW Manufacturing Corp. These partnerships will allow us to expand the applicability of our solutions to those companies that highly value our logistics domain capabilities but want our solutions offered as part of an overall service to design and operate their logistics networks.

Competition

      Supply chain planning is a component of the larger supply chain management market. We differentiate ourselves from other supply chain planning vendors by:

	•	Providing solutions designed specifically for companies with complex supply chains;
	•	Solving cross functional business process problems not addressed by our competitors and/or addressing the same problem in a completely different way;
	•	Using financial optimization technology to maximize profit or minimize cost while meeting customer requirements; and
	•	Using a business data-driven product architecture that enables straightforward implementations and may produce significant results quickly.

      We often compete with supply chain management solutions vendors, including i2 and Manugistics, both of which are significantly larger than us. i2 provides customers with end-to-end software solutions for supply chain management, customer management and product life cycle management. i2 competes across a broad range of vertical markets. Manugistics also provides end-to-end solutions that cover a wide range of supply chain management functions. Neither of these companies focuses specifically on solving supply chain planning problems for companies with complex supply chains, nor do they approach such problems from a business process and financial perspective.

      In addition, most of the major enterprise resource planning vendors offer supply chain planning functionality in their solutions. These companies have very large installed customer bases and have

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      In addition, there are other companies, such as third-party supply chain services providers, that offer planning services that may compete with our solutions. We believe these vendors, including our customer Penske Logistics, may also be potential users of our solutions as they look to expand their supply chain planning capabilities.

      We use an implementation methodology called the “Optimal Performance Path.” Our methodology consists of an end-to-end framework that enables our customers to identify and maximize significant opportunities for business improvement through supply chain planning. 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 involves a “Value Opportunity Assessment,” which is a formal analysis of the potential improvements in each prospect’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 operational improvements, including how our solutions will address the business issues, how to proceed with the actual implementation and how to measure the agreed upon 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 desired results. After the sale is finalized, the opportunities identified in the Value Opportunity Assessment become the benchmark goals for implementation, the second phase of the Optimal Performance Path.

      The implementation phase is designed to achieve rapidly the agreed upon business objectives. We use two teams, an implementation team and a performance team, and the teams work 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. The implementation team addresses business issues that may arise in order to keep the implementation on-track. This two-team approach continues until we have achieved the business goals that were agreed upon during the Value Opportunity Assessment. Due to our implementation process, we are capable of rapidly installing our software and producing results quickly.

      Maintenance. We provide 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 receive all software corrections and release enhancements, both major and minor, as well as customer service support. The customer service support answers technical questions, assists in resolving technical issues, reports solution discrepancies, or requests enhancements. Standard customer service support is available during normal business hours. An extended customer service support option is also available which includes seven-day, 24-hour customer service.

      Strategic Consulting. Our consultants are available to work on select strategic supply chain projects. We are capable of helping our customers develop custom supply chain network plans to help achieve their

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      As of August 31, 2002, our sales and marketing organization consisted of 30 individuals, of whom 22 were based in North America and 8 were based in Europe. Our 10 direct sales representatives are supported by a team of 9 pre-sales consultants for business, product and technical expertise throughout the sales cycle. The majority of our direct sales force is organized by vertical as well as geographical area. Consistent with our strategy to focus on vertical markets, our automotive sales team focuses on the original equipment manufacturers and tier-one automotive suppliers. We may continue to assign some of our sales representatives to additional targeted industries. Our North American sales office is located in Norcross, Georgia and our European sales and marketing office is headquartered in London, England.

      While our software license transactions have principally been the result of direct sales to customers, we intend to continue our initiatives to sell and support our solutions through resellers and distributors in multiple geographic regions. We have established distributor relationships in North America, Latin America and Eastern Europe.

      Our marketing efforts focus on two categories of lead generation programs: programs jointly planned, funded and executed with our strategic partners, and programs designed and implemented by our in-house marketing team. A public relations firm assists our internal team.

      Both types of lead generation programs are used to target prospects throughout North America and Europe. Specific tactics used in these marketing initiatives include: direct mail, telemarketing, events, alliance programs, web-casts, seminars, public relations and advertising. In addition, an internal and external website, product collateral, case studies, white papers and presentations are available to support the sales and marketing programs.

      As of August 31, 2002, we employed 45 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 have used and may use in the future outside programming resources to supplement our base staff from time to time. We spent $7.6 million on research and development expenses in fiscal 2002, $9.8 million in fiscal 2001 and $10.0 million in fiscal 2000.

      Through investments in internal development we have significantly expanded the scope of our solutions over the past 24 months. Due to the evolving nature of the market, we intend to continue to maintain a high level of investment in development of new solutions and 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 comply with 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 believe we are an innovative technology provider in several areas within the supply chain planning 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 external interfaces with other applications are conducted through applications programming interfaces

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      Our products operate on a Windows 2000 Server, IBM AIX, HP-UX, or Sun Solaris servers. Not every product is available for all platforms. Users interact with our products via networked PC clients or Browsers. The Oracle Corporation provides relational database support.

      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.

      As of August 31, 2002, we had 125 full-time employees, of whom 45 were engaged in research and development, 30 in sales and marketing, 36 in service and support and 14 in finance, administration and operations. None of our employees are represented by a labor union. As of August 31, 2002, we had 107 employees located in North America and 18 employees located in Europe. We believe that our employee relations are satisfactory.

Item 2.     PROPERTIES

      We lease 24,145 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; York, Pennsylvania; Arlington, Virginia; London, England; and Gorinchem, Netherlands. We believe that our facilities are adequate for our current operations and that additional leased space can be obtained if needed.

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 July 29, 2002, after our fiscal year end, we held a special meeting of the shareholders to vote on the adoption and approval of an amendment to our Third Amended and Restated Articles of Incorporation which provided for a one-for-ten reverse split of our common stock. The voting results were as follows:

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PART II

      On July 29, 2002, following shareholder approval, we effected a one-for-ten reverse split of our common stock. The reverse stock split did not affect the number of authorized shares. No fractional shares of common stock were issued as a result of the reverse stock split. In lieu of receiving fractional shares, shareholders received a cash payment in U.S. dollars equal to such fraction multiplied by the closing price of the common stock as reported on The Nasdaq SmallCap Market on the effective date of the reverse stock split. In addition, each option and warrant to purchase common stock outstanding on the effective date of the reverse stock split was adjusted so that the number of shares of common stock issuable upon their exercise was divided by ten and the exercise price of each option and warrant was multiplied by ten. The number of shares of common stock reserved under our stock option plans and for issuance pursuant to warrants to purchase our common stock were similarly adjusted. If the adjustments to the options and warrants described above resulted in any right to acquire a fractional share of common stock, such fractional share was disregarded and the number of shares of common stock reserved for issuance under the plans and warrants and the number of shares of common stock subject to any such options and warrants became the next lower number of shares of common stock, rounding all fractions downward.

      Our common stock, $0.01 par value per share, trades on The Nasdaq SmallCap Market under the symbol “SYNQ.” We completed our initial public offering on August 14, 2000, at $70.00 per share, restated to reflect the one-for-ten reverse split of our common stock. From August 15, 2000 through the close of business on June 20, 2002, our common stock traded on the Nasdaq National Market under the symbol “SYNQ.” Prior to our initial public offering, there was no public market for our common stock.

      We received a determination letter from Nasdaq dated February 14, 2002, stating that we failed to meet the minimum $1.00 per share requirement for continued inclusion on The Nasdaq National Market under Marketplace Rule 4450(a)(5). On May 10, 2002, we applied to transfer our listing from The Nasdaq National Market to The Nasdaq SmallCap Market. This transfer was approved and became effective on June 21, 2002. On August 15, 2002, we were notified by Nasdaq that we had not regained compliance with the minimum $1.00 bid price per share requirement and, as a result, we did not comply with the requirement for continued listing of our common stock as a Nasdaq SmallCap Market security. On August 22, 2002, we requested a hearing before Nasdaq’s Listing Qualifications Hearing Panel on the minimum bid price issue and were scheduled to appear before Nasdaq on September 26, 2002. In a letter dated September 17, 2002, Nasdaq informed us that it declared us in compliance with the minimum bid price requirement and cancelled our hearing on that issue. In the September letter, Nasdaq indicated its belief that the merger and the private placement together constitute a “reverse merger” as set forth in Nasdaq Marketplace Rule 4330(f). Nasdaq also stated that we do not comply with the net tangible assets/ shareholders’ equity/ market value requirements under Nasdaq Marketplace Rule 4310(c)(2)(B). A hearing on these matters is scheduled before a Nasdaq Listing Qualifications Hearing Panel on October 17, 2002. If Nasdaq determines that the proposed transactions constitute a “reverse merger” under Nasdaq rules, we will be required to meet the initial listing requirements for inclusion on The Nasdaq SmallCap Market rather than the continued listing requirements in order to remain listed. The initial listing requirements are more stringent than the continued listing requirements. If we are not successful in maintaining our listing on The Nasdaq SmallCap Market, our common stock will be quoted on the Nasdaq-sponsored OTC Bulletin Board Service.

      For the periods indicated, the following table sets forth the high and low per share closing prices for our common stock as reported by The Nasdaq National Market through the close of business on June 20,

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      On September 16, 2002, the last sale price of our common stock as reported on The Nasdaq SmallCap Market was $1.17 per share, there were 256 holders of record of our common stock and 2,946,797 shares issued and outstanding.

      Except for cash dividends payable in lieu of fractional shares of a preferred stock dividend in connection with our initial public offering, we have never declared or paid any cash dividends on our capital stock. We 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.

Item 6.     SELECTED FINANCIAL DATA

      The following selected financial data are derived from the consolidated financial statements of SynQuest, Inc. which have been audited by Ernst & Young LLP, independent auditors. The data should be read in conjunction with our consolidated financial statements, related notes, and other financial information included herein. The period-to-period comparisons of our financial results are not necessarily indicative of future results.

     Reclassification

      Certain amounts reported in the prior year financial statements have been reclassified to conform to the current financial statement presentation. All common share and per share data for all periods prior to the effective date of the reverse stock split has been restated to reflect the one-for-ten reverse split of our common stock effected on July 29, 2002.

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(1)

The computation of pro forma basic and diluted net loss per common share reflects the August 2000 conversion of the following into shares of common stock at the restated initial public offering price of $70.00 per share, less underwriting discounts and commissions: (a) all outstanding redeemable preferred stock, plus accrued and unpaid dividends; (b) outstanding subordinated promissory notes, held by Warburg Pincus LLC (“Warburg Pincus”) in the aggregate principal amount of $15.0 million, plus accrued interest; and (c) the cashless exercise by Warburg Pincus of all of its warrants. The restated 575,000 shares of common stock sold in connection with the initial public offering are included in pro forma basic and diluted net loss per common share subsequent to their date of sale.

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Recent Trends and Developments

     Proposed Merger and Private Placement

      On August 30, 2002, we entered into a merger agreement with Viewlocity, pursuant to which Viewlocity will be merged with and into us. As consideration for the merger, we will issue a total of 2,946,867 shares of our common stock to Viewlocity’s series F preferred stockholders. Holders of other classes and series of Viewlocity capital stock will receive nominal cash consideration in the merger.

      In addition, we entered into an amended and restated stock purchase agreement dated as of September 20, 2002, with our majority shareholder, Warburg, certain stockholders of Viewlocity and several new investors, who are referred to collectively as the “purchasers.” Pursuant to the stock purchase agreement, we will issue up to 13.2 million shares of our newly created series A preferred stock to the purchasers in a private placement at a price of $2.50 per share, for total consideration between $27.5 million and $33.0 million consisting of cash or the conversion of outstanding loans by the purchasers to us or Viewlocity. Purchasers have subscribed for 11 million shares of series A preferred stock for total consideration of up to $27.5 million, under the stock purchase agreement. Up to an additional 1 million shares of series A preferred stock for total consideration of $2.5 million, may be issued under the stock purchase agreement to existing purchasers or other persons if agreed by us and a majority-in-interest of the purchasers. If purchasers extend additional bridge loans prior to closing, up to an additional 1.2 million shares of series A preferred stock could be issued under the stock purchase agreement upon conversion of up to $3 million of such additional loans. The proceeds of the private placement will be used for debt repayment, working capital and general corporate purposes.

      Completion of the merger and the private placement are subject to satisfaction of customary closing conditions. We currently anticipate that the transactions will be completed by December 31, 2002.

      Warburg and Timothy Harvey, our president, have executed voting agreements pursuant to which they have agreed, subject to the terms and conditions of the voting agreements, to vote all of their shares of our common stock in favor of the merger, the private placement and any other matter necessary to effect the merger and the private placement. The shares subject to the voting agreements represent in the aggregate slightly more than 50% of the outstanding voting power of our common stock and are sufficient to approve the merger and the private placement.

      The terms of the series A preferred stock are described below:

	•	The series A preferred stock is convertible into common stock at any time at a ratio of one share of common stock for each share of series A preferred stock converted, subject to adjustments for stock splits and other customary events.
	•	Dividends on the series A preferred stock will accrue at a rate of 7% per year and are cumulative.
	•	We will not declare or pay out any cash dividends during the two-year period following the closing.

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	•	Except as described below, the series A preferred stock has priority over the common stock in any liquidation, dissolution or winding up of us, and in connection with allocation of proceeds in any merger, acquisition, sales of all or substantially all of our assets, or similar major corporate transactions (other than certain qualified public offerings) (collectively referred to as a “liquidation event”). In the event of a liquidation event, holders of the series A preferred stock will be entitled to receive $2.50 per share and an additional amount such that the holders will receive a total return equal to a 15% internal rate of return (including dividends) per year compounded annually. Notwithstanding the series A preferred stock priority, in connection with any such liquidation event, the holders of common stock will be entitled to receive 8% of the proceeds available to our shareholders (pro rata, in accordance with share ownership) until the series A preferred stock liquidation preference is satisfied. After the series A preferred stock liquidation preference is satisfied, the remaining proceeds will be distributed to the holders of the common stock.
	•	Generally, shares of series A preferred stock vote as one class with the common stock on an as-converted to common basis.
	•	The initial conversion rate of series A preferred stock to common stock is one to one, subject to adjustment in certain circumstances. Shares of series A preferred stock are convertible to common stock at any time at the option of the holder. Shares of series A preferred stock will be automatically converted to common stock upon (i) a public offering of common stock meeting certain thresholds, (ii) the vote of two-thirds of the then outstanding shares of series A preferred stock, or (iii) the common stock attaining a $10.00 closing price for 100 of 120 trading days. The series A preferred stock is not redeemable.

      In addition to customary closing conditions, the obligations of the investor group to close the private placement are conditioned upon (i) certain of our liabilities remaining below a specified level as of September 30, 2002 and (ii) the combined revenue of us and Viewlocity for the three-month period ending September 30, 2002 exceeding specified minimums.

      On July 29, 2002, following shareholder approval, we effected a one-for-ten reverse split of our common stock. No fractional shares of common stock were issued as a result of the reverse stock split. In lieu of receiving fractional shares, shareholders received a cash payment in U.S. dollars equal to such fraction multiplied by the closing price of the common stock as reported on The Nasdaq SmallCap Market on the effective date of the reverse stock split. In addition, each option and warrant to purchase common stock outstanding on the effective date of the reverse stock split was adjusted so that the number of shares of common stock issuable upon their exercise was divided by ten and the exercise price of each option and warrant was multiplied by ten. The number of shares of common stock reserved under our stock option plans and for issuance pursuant to warrants to purchase our common stock were similarly adjusted. If the adjustments to the options and warrants described above resulted in any right to acquire a fractional share of common stock, such fractional share was disregarded and the number of shares of common stock reserved for issuance under the plans and warrants and the number of shares of common stock subject to any such options and warrants became the next lower number of shares of common stock, rounding all fractions downward. All common share and per share data for all periods prior to the effective date of the reverse stock split has been restated to reflect the one-for-ten reverse split of our common stock.

      Effective June 21, 2002, our common stock began trading on The Nasdaq SmallCap Market. We received a determination letter from Nasdaq dated February 14, 2002, stating that we failed to meet the minimum $1.00 per share requirement for continued inclusion on The Nasdaq National Market under Marketplace Rule 4450(a)(5). Accordingly, we applied for a listing transfer to The Nasdaq SmallCap Market. The transfer was approved and became effective on June 21, 2002. On August 15, 2002, we were notified by Nasdaq that we had not regained compliance with the minimum $1.00 bid price per share

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      Our revenue stream continues to be strongly impacted by the continued weak economic environment. In the current economic environment, many companies have severely reduced or postponed their capital spending activities. In addition, when companies are able to pursue the licensing of our products, we continue to experience a slowdown in our sales cycles as a result of these companies’ lengthened approval process for entering into software license transactions. Companies are taking additional time to assess and prioritize purchases, as well as requiring additional approvals for such purchases. We believe that these companies still consider our solutions to be important; however, the reduced spending and delays have had the effect of reducing revenue from software license fees. In addition, we also believe that during the past six months our ability to close software license transactions has been negatively impacted by prospect’s concerns about out limited cash to fund operations. We believe that our future software license fees, as well as our ability to predict future revenues, will be negatively impacted as long as companies continue to constrain their software licensing activities.

      In February 2002, we entered into a credit agreement with Warburg Pincus, the beneficial owner of approximately 51% of our outstanding common stock. The credit agreement allows for periodic borrowings up to a maximum of $3 million. Our borrowing capacity under the credit agreement will be reduced by any amounts which have been borrowed and repaid. The credit agreement expires on December 31, 2002. On September 24, 2002, we borrowed $1.5 million under the credit agreement.

      We believe that our existing cash balance, short term investments and cash flow from operations, coupled with the credit agreement with Warburg Pincus, will be sufficient to fund our operations, including our working capital and capital expenditure requirements, until December 31, 2002. While the merger and the private placement, described above, are expected to close before December 31, 2002, there can be no assurances that these transactions will close before December 31, 2002, or that they will ultimately close according to the terms described above. If the transactions do not close and we are unable to make a profit in the near term, we will be unable to fund our future operations.

Restructuring

      During fiscal 2002, we restructured our business operations to more closely align operating expenses with anticipated revenue. In connection with the restructurings, we reduced our global workforce in total by 160 full-time equivalents. The reduction in workforce was achieved through a combination of attrition and 127 involuntary terminations. These restructurings as well as other cost reduction measures put in

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      We believe that these reductions to our cost structure will not affect our ability to capitalize on future opportunities, but will strengthen our financial position and reduce the revenue required for us to become profitable.

Critical Accounting Policies and Use of Estimates

      Management’s discussion and analysis of financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. We review the accounting policies we use in reporting our financial results on a regular basis. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates and other items that require management’s estimates due to actual outcomes being different from those on which we based our assumptions. We believe the following critical accounting policies affect the most significant areas involving management’s judgments and estimates. In addition, please refer to Note 2 in the Notes to Consolidated Financial Statements included elsewhere in this annual report for further discussion of our accounting policies.

      Revenue Recognition. Our revenue consists of software license fees and services revenue, including fees for ongoing maintenance and support. 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, and SEC Staff Accounting Bulletin (“SAB”) 101, “Revenue Recognition in Financial Statements.” We recognize software license revenue when all of the following conditions have been met: a signed license contract is obtained, shipment of the product has occurred, the license fee is fixed and determinable, and collectibility is probable. 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 is often 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 fair 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 hourly rates for such services as they are sold separately and are not discounted. The remaining portion of the arrangement 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 delivered elements of the arrangement, which have typically been software license fees.

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      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 is recognized using a percentage-of-completion method based upon the cost incurred to date as a percentage of the total expected cost. Recognized revenue is subject to revisions as the contract progresses to completion. Revisions to recognized revenue as a result of changes in the total estimated cost are charged or credited to income in the period in which the facts that give rise to the revision become known. Out-of-pocket expenses incurred by our personnel performing professional services are included in our cost of services. These costs are generally reimbursed by the customer and such reimbursements are included in services revenue. Implementation and training services are generally completed four to twelve 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.

      Post-contract customer support services include telephone support, bug fixes, and rights to upgrades on a when-and-if-available basis. 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.

      Allowance for Doubtful Accounts. We continuously monitor collections and payments from our customers and maintain allowances for doubtful accounts based upon our historical experience of write-offs of uncollectible accounts and any specific customer collection issues that we have identified. While such credit losses have historically been within management’s estimates, there can be no assurance that we will continue to experience the same level of credit losses that we have in the past. If the financial condition of our customers was to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. Changes in our assumptions and estimates could result in significantly different results than those recorded in the financials statements and would have the effect of reducing or increasing our future profits in the period in which the estimate is revised.

      Capitalized Computer Software Costs. In accordance with Statement of Financial Accounting Standards No. 86, we expense software development 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 expectation of cost recovery have been minimal. However, if in the future significant development costs were incurred for a given product subsequent to technological feasibility of the software such costs would be capitalized and reported at the lower of the unamortized cost or net realizable value. Capitalized costs would be amortized based on current and future revenue for each product with an annual minimum equal to the straight-line amortization over the remaining estimated economic life of the product.

      Other Estimates. Our financial statements also include accruals and reserves for other liabilities incurred as a result of our normal ongoing operations. These accruals may require the use of estimates and judgment in regards to the ultimate liability. These estimates are based upon historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Changes in our assumptions and estimates could result in significantly different results than those recorded in the financials statements and would have the effect of reducing or increasing our future profits in the period in which the estimate is revised.

      Income Taxes. We recognize deferred tax assets and liabilities based on the differences between the financial statement carrying amounts and the tax bases of assets and liabilities. We regularly review our deferred tax assets for recoverability and establish a valuation allowance based upon historical losses, projected future taxable income and the expected timing of the reversals of existing temporary differences. As a result of this review, we have established a full valuation allowance against our deferred tax assets.

Overview of Business Operations

      We specialize in providing supply chain planning solutions that enable companies with complex supply chains to simultaneously improve their profits and customer service. Our solutions are designed for

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      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 business units, 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 the first year of maintenance and support services for a fee. We often negotiate contracts for specific implementation and training services following the initial license contract.

      Our software license fees have principally resulted from direct sales to customers. 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. In addition to internally generated leads, 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.

      The sales cycle for our products is typically six to twelve months. 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. Generally we ship our software products within a few days after receipt of a contract therefore we typically do not have 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.

      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, our services revenue includes fees for ongoing maintenance and support, consisting primarily of customer technical support services and product upgrades and enhancements.

      As part of the annual fee for our maintenance and support services, we provide our customers with product upgrades and enhancements as well as user and technical support services. 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. While a warranty, generally three to six months, is included in the license contract, our maintenance and support contracts typically are entered into as of the effective date of the license contract. Warranty claims are typically not material and customers are charged for support during the warranty period.

      Backlog. Our product delivery 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.

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      Cost of License Fees. Our cost of license fees includes finder fees which we pay to third parties for providing us with customer leads and sublicense fees paid by us to third parties for the third parties’ software which we have licensed along with our products. In addition, we are obligated to pay royalties to a third party on software license fees generated from our Inbound Planning Engine product within our suite of software solutions. Future licenses of our Inbound Planning Engine product could have the effect of continuing to increase the 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 our services.

      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.

      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 accounting, legal and human resources activities, as well as depreciation and other general corporate expenses.

      Other Income (Expense). Other income (expense), net, consists of interest income, interest expense, foreign currency exchange transaction gains/losses and other miscellaneous income and expense items.

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.

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      Software License Fees Revenue. Revenue from software license fees decreased 43.0% to $8.9 million in fiscal 2002 from $15.6 million in fiscal 2001. During the last six months of fiscal 2001 and throughout fiscal 2002, many companies severely reduced or postponed their capital spending activities. In addition, when companies were able to pursue the licensing of our products, we experienced a slowdown in our sales cycles as a result of these companies’ lengthening approval processes for entering into software license transactions. Companies are taking additional time to assess and prioritize purchases, as well as obtaining additional approvals for such purchases. We believe that these companies still consider purchases of our software products to be important; however, the reduced spending and delays have had the effect of reducing our revenue from software license fees. We believe that our future software license fees will be negatively impacted as long as companies continue to constrain their software licensing activities in light of the weak economy. In addition, we also believe that during the past six months our ability to close software license transactions has been negatively impacted by prospects’ concerns about our liquidity. As a result of the decline in software license fees during fiscal 2002, revenue from software license fees as a percentage of total revenue decreased to 42.0% in fiscal 2002 from 48.3% in fiscal 2001.

      Services Revenue. Revenue from services decreased 26.3% to $12.3 million in fiscal 2002 from $16.7 million in fiscal 2001. The decrease in revenue from services resulted primarily from the decline in new software license contracts closed during the last six months of fiscal 2001 and throughout fiscal 2002. Despite the decrease in services revenue, as a percentage of total revenue, revenue from services increased to 58.0% in fiscal 2002 from 51.7% in fiscal 2001 as a result of the decrease in revenue from software license fees.

      Total Revenue. Total revenue decreased 34.4% to $21.2 million in fiscal 2002 from $32.3 million in fiscal 2001.

      Cost of License Fees. Cost of license fees increased 29.4% to $638,000 in fiscal 2002 from $493,000 in fiscal 2001. The increase resulted primarily from an approximate $347,000 increase in royalties paid to a third party on software license fees generated from our Inbound Planning Engine product during fiscal 2002. These royalties to the third party were not significant in fiscal 2001. The increase in royalties paid to the third party in fiscal 2002 was partially offset by a decrease in sub-license fees paid by us to third parties for the third parties’ software which we licensed along with our products as well as a decrease in finder fees paid to third parties for providing us with customer leads. As a percentage of software license fees revenue, costs of license fees increased to 7.2% in fiscal 2002 from 3.2% in fiscal 2001 as a result of the decrease in revenue from software license fees coupled with the increase in cost of license fees. Future licenses of our Inbound Planning Engine product could have the effect of continuing to increase the cost of license fees over historical levels both in dollars and as a percentage of total revenue.

      Cost of Services. Cost of services decreased 32.9% to $5.9 million in fiscal 2002 from $8.8 million in fiscal 2001. Despite the decrease in services revenue, the cost of services decreased as a percentage of services revenue to 48.2% in fiscal 2002 from 53.0% in fiscal 2001, which resulted in an increase in services margin to 51.8% in fiscal 2002 from 47.0% in fiscal 2001. The decrease in the dollar amount of cost of services was primarily the result of the decreased cost of personnel and their related costs, such as travel and general office expenses, as a result of the restructurings as well as the decreased use of higher cost third-party consultants for implementation services.

      Research and Development. Research and development expenses decreased 22.7% to $7.6 million in fiscal 2002 from $9.8 million in fiscal 2001. This decrease was primarily due to a decrease in the number of personnel engaged in research and development activities and their related costs, such as compensation, travel and general office expenses, as a result of the restructurings as well as our decreased use of third-party contractors for specific development projects. Despite the decrease in research and development expenses, as a percentage of total revenue these costs increased to 35.8% in fiscal 2002 from 30.4% in fiscal 2001 as a result of the decrease in total revenue.

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      Sales and Marketing. Sales and marketing expenses decreased 37.6% to $12.0 million in fiscal 2002 from $19.2 million in fiscal 2001. As a result of the restructurings, the number of personnel involved in sales and marketing activities and their related costs, such as compensation, travel and general office expenses, decreased which accounted for approximately $5.1 million of this reduction in cost. Sales and marketing expenses also decreased approximately $2.1 million due to reduced advertising and promotional spending as a result of our shift from more expensive brand awareness programs to more focused lead generation marketing activities. Despite the significant decrease in sales and marketing expenses, as a percentage of total revenue these costs decreased slightly to 56.4% in fiscal 2002 compared to 59.3% for fiscal 2001 as a result of the decrease in total revenue.

      General and Administrative. General and administrative expenses decreased 27.9% to $5.4 million in fiscal 2002 from $7.5 million in fiscal 2001. This decrease was primarily due to a $986,000 reduction in personnel costs and general corporate expenses as a result of reduced business activity coupled with the restructurings and a $358,000 reduction in our estimated sales tax liability primarily related to our software license fees. In addition, based upon an analysis of accounts receivable, lower past due balances as well as successful collection of certain accounts, we reduced our allowance for doubtful accounts during fiscal 2002, resulting in a reduction in general and administrative expenses of approximately $341,000 compared to a provision for doubtful accounts included in general and administrative expenses in fiscal 2001 of approximately $398,000. Despite the decrease in total general and administrative expenses, as a percentage of total revenue these costs increased to 25.4% for fiscal 2002 from 23.1% for fiscal 2001 as a result of the decrease in total revenue.

      Restructuring Costs. During fiscal 2002, we restructured our business operations several times to more closely align operating expenses with anticipated revenue. In connection with the restructurings, we reduced our global workforce in total by 160 full-time equivalents. The reduction in workforce was achieved through a combination of attrition and 127 involuntary terminations. The restructurings resulted in a charge of $1,551,624 in fiscal 2002 to cover costs related to the workforce reduction, of which $1,410,900 related to severance and related benefits and $140,724 related to lease termination costs. Because the restructurings were completed at different times during the year, the total operating expenses for fiscal 2002 do not reflect the full effect of the cost savings from these restructurings nor the level of our operating expenses expected in future periods. On an annualized basis, these restructurings as well as other cost reduction measures put in place during the year are expected to reduce total operating expenses by approximately $15.8 million.

      Operating Loss. As a result of the above factors, our operating loss decreased 12.1% to $11.8 million in fiscal 2002 from $13.5 million in fiscal 2001.

      Other Income (Expense). Other income (expense) is primarily the net of interest income and interest expense. Other income (expense) was $188,000 of income in fiscal 2002 compared with $647,000 of income in fiscal 2001. Interest expense decreased to ($34,000) in fiscal 2002 from ($417,000) in fiscal 2001 due to lower average borrowings resulting from the use of a portion of the net proceeds from our initial public offering of common stock to repay in full the outstanding indebtedness under our line of credit during the three months ended September 30, 2000. Interest income decreased to $222,000 in fiscal 2002 from $1.1 million in fiscal 2001 primarily as a result of the decreased level of investment in government short-term marketable securities as well as the decline in interest income rates.

      Income Taxes. During fiscal 2002 and 2001, we reported losses for both financial reporting and income tax purposes. As a result, we made no provision for income taxes in either period. At the end of fiscal 2002, we had net operating loss carryforwards of approximately $99.0 million and tax credits of approximately $1.5 million that expire principally in years 2003 through 2017. Total net operating loss carryforwards at June 30, 2002, include approximately $16.7 million of net operating losses related to our foreign operations the majority of which may be carried forward indefinitely.

      Net Loss. As a result of the above factors, our net loss decreased 9.2% to $11.7 million in fiscal 2002 compared to $12.8 million in fiscal 2001.

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      Software License Fees Revenue. Revenue from software license fees increased 18.5% to $15.6 million in fiscal 2001 from $13.2 million in fiscal 2000. The year-over-year increase was comprised of a 207.4% increase in software license fees during the first six months of fiscal 2001 partially offset by a 58.4% decrease in software license fees during the last six months of fiscal 2001 as compared to the same periods in fiscal 2000. As a result of the decline in software license fees during the last six months of fiscal 2001, revenue from software license fees as a percentage of total revenue decreased to 48.3% in fiscal 2001 from 52.3% in fiscal 2000.

      During the first six months of fiscal 2001, our software license fees increased as a result of the continued increase in market awareness of the benefits that may be derived from deploying our software solutions, the introduction of new and enhanced products, the expansion of our sales force as well as increased marketing activities aimed at increasing brand awareness.

      However, during the last six months of fiscal 2001, many companies severely reduced or postponed their capital spending activities. In addition, when companies were able to pursue the licensing of our products, we experienced a slowdown in our sales cycles as a result of these companies’ lengthening approval processes for entering into software license transactions. Companies are taking additional time to assess and prioritize purchases, as well as obtaining additional approvals for such purchases. We believe that these companies still consider these purchases to be important; however, the reduced spending and delays have had the effect of reducing revenue from software license fees. We believe that our future software license fees will be negatively impacted as long as companies continue to constrain their software licensing activities in light of the weak economy.

      Services Revenue. Revenue from services increased 38.8% to $16.7 million in fiscal 2001 from $12.0 million in fiscal 2000. The increase in revenue from services resulted primarily from the growth in new license contracts during the first six months of fiscal 2000. Although revenue from services increased in fiscal 2001 compared with fiscal 2000, the decline in new license fee contracts during the last six months of fiscal 2001 negatively affected services revenue during at least the first half of fiscal 2002. In addition, we believe the use of third-party software implementation providers as lead sources reduced our implementation services revenue from customers referred to us by these implementation service providers during fiscal 2001. As a percentage of total revenue, revenue from services increased to 51.7% in fiscal 2001 from 47.7% in fiscal 2000 as a result of the decrease in revenue from software license fees during the last six months of fiscal 2001.

      Total Revenue. Total revenue increased 28.2% to $32.3 million in fiscal 2001 from $25.2 million in fiscal 2000.

      Cost of License Fees. Cost of license fees were $493,000 in fiscal 2001 which was approximately equal to the $497,000 in fiscal 2000. We are obligated to pay royalties to a third party on software license fees generated from our Inbound Planning Engine product which is included in our cost of license fees. While these royalties were not significant in fiscal 2001, future licenses of our Inbound Planning Engine product will increase the future cost of license fees over historical levels both in dollars and as a percentage of total revenue. As of June 30, 2000, we had fully amortized software acquired through business acquisitions and, as a result, our cost of license fees no longer includes amortization expense associated with these assets. As a percentage of software license fees revenue, costs of license fees decreased slightly to 3.2% in fiscal 2001 from 3.8% in fiscal 2000 primarily as a result of the increase in revenue from software license fees.

      Cost of Services. Cost of services increased 17.4% to $8.8 million in fiscal 2001 from $7.5 million in fiscal 2000. The increase in the dollar amount of cost of services is primarily the result of an increase in the number of employees engaged in implementation, training and customer support services partially offset by the decreased use of higher cost third-party consultants for implementation services. In spite of the increase in cost of services during fiscal 2001, as a percentage of services revenue, the cost of services decreased to 53.0% in fiscal 2001 from 62.6% in fiscal 2000. This decrease in the cost of services resulted

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      Research and Development. Research and development expenses decreased slightly to $9.8 million in fiscal 2001 from $10.0 million in fiscal 2000. This decrease is primarily the result of our decreased use of third-party contractors for specific development projects during fiscal 2001 compared to fiscal 2000. As a percentage of total revenue, research and development expenses decreased to 30.4% in fiscal 2001 from 39.7% in fiscal 2000 as a result of the increase in total revenue.

      Sales and Marketing. Sales and marketing expenses increased 33.5% to $19.2 million in fiscal 2001 from $14.4 million in fiscal 2000. Approximately $2.0 million of this increase was due to an increase in compensation and related 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 as well as the increase in commissions to employees on the additional license fee revenue during the first six months of fiscal 2001. In addition, $1.7 million of this increase was due to cost increases in marketing programs and public relations activities as we expanded our presence in the market and further developed our brand awareness. As a percentage of total revenue, these costs increased to 59.3% for fiscal 2001 from 57.0% for fiscal 2000 as a result of the increase in total sales and marketing expenses, partially offset by the increase in total revenue.

      General and Administrative. General and administrative expenses increased 25.0% to $7.5 million in fiscal 2001 from $6.0 million in fiscal 2000. This increase was the result of higher costs associated with the increase in our infrastructure to support our anticipated growth as well as additional costs related to being a publicly held company, partially offset by a decrease in our provision for doubtful accounts included in general and administrative expenses. This decrease in our provision reflected the lower software license fees during the last six months of fiscal 2001 which resulted in a decline in our accounts receivable balance at June 30, 2001. In addition, the decrease reflected an additional provision in fiscal 2000 as a result of management’s concern over the collectibility of certain amounts from one of our European customers. Despite the increase in total general and administrative expenses, as a percentage of total revenue these costs increased only slightly to 23.1% for fiscal 2001 from 23.6% for fiscal 2000 as a result of the increase in total revenue.

      Operating Loss. As a result of the above factors, our operating loss increased 2.6% to $13.5 million in fiscal 2001 from $13.1 million in fiscal 2000.

      Other Income (Expense). Other income (expense) is primarily the net of interest income and interest expense. Other income (expense) was $647,000 of income in fiscal 2001 compared with ($2.6) million of expense in fiscal 2000. Interest expense decreased to ($417,000) in fiscal 2001 from ($2.7) million in fiscal 2000 due to lower average borrowings resulting from the use of a portion of the net proceeds from our initial public offering of common stock to repay in full the outstanding indebtedness under our line of credit during the three months ended September 30, 2000. Interest income increased to $1.1 million in fiscal 2001 from $88,000 in fiscal 2000 primarily as a result of the interest earned on the investment in government securities of the remaining net proceeds from our initial public offering.

      Income Taxes. During fiscal 2001 and 2000, we reported losses for both financial reporting and income tax purposes. As a result, we made no provision for income taxes in either period.

      Net Loss. As a result of the above factors, our net loss decreased 18.6% to $12.8 million in fiscal 2001 compared to $15.8 million in fiscal 2000.

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      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. All common share and per share data for all periods prior to the effective date of the reverse stock split has been restated to reflect the one-for-ten reverse split of our common stock effective July 29, 2002.

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