<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 29, 2000
REGISTRATION NO. 333-30710
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
SYNCHRONICITY SOFTWARE, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 7372 04-3294799
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
201 FOREST STREET
MARLBORO, MA 01752
(508) 485-4122
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
DENNIS R. HARMON
CHIEF EXECUTIVE OFFICER
SYNCHRONICITY SOFTWARE, INC.
201 FOREST STREET
MARLBORO, MA 01752
(508) 485-4122
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE
NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE)
------------------------
COPIES TO:
<TABLE>
<S> <C>
LINDA DE RENZO, ESQ. MARTIN CARMICHAEL III, P.C.
TESTA, HURWITZ & THIBEAULT, LLP GOODWIN, PROCTER & HOAR LLP
125 HIGH STREET EXCHANGE PLACE
BOSTON, MASSACHUSETTS 02110 BOSTON, MASSACHUSETTS 02109
TELEPHONE: (617) 248-7000 TELEPHONE: (617) 570-1000
TELECOPY: (617) 248-7100 TELECOPY: (617) 523-1231
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date hereof.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act,
check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [ ]
------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF SECURITIES AMOUNT TO AGGREGATE OFFERING AGGREGATE OFFERING AMOUNT OF
TO BE REGISTERED BE REGISTERED(1) PRICE PER SHARE PRICE(2) REGISTRATION FEE(3)
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $0.01 par value per share.... 4,025,000 $14.00 $56,350,000 $1,215
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes 525,000 shares of common stock which may be purchased by the
underwriters to cover over-allotments, if any.
(2) Estimated solely for the purpose of calculating the amount of the
registration fee in accordance with Rule 457(a) under the Securities Act of
1933, as amended.
(3) A registration fee of $13,662 was paid at the time of the initial filing of
this registration statement based on an estimate of the aggregate offering
price.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
WE WILL AMEND AND COMPLETE THE INFORMATION IN THIS PROSPECTUS. ALTHOUGH WE
ARE PERMITTED BY US FEDERAL SECURITIES LAW TO OFFER THESE SECURITIES USING
THIS PROSPECTUS, WE MAY NOT SELL THEM OR ACCEPT YOUR OFFER TO BUY THEM
UNTIL THE DOCUMENTATION FILED WITH THE SEC RELATING TO THESE SECURITIES
HAS BEEN DECLARED EFFECTIVE BY THE SEC. THIS PROSPECTUS IS NOT AN OFFER TO
SELL THESE SECURITIES OR OUR SOLICITATION OF YOUR OFFER TO BUY THESE
SECURITIES IN ANY JURISDICTION WHERE THAT WOULD NOT BE PERMITTED OR LEGAL.
SUBJECT TO COMPLETION, DATED MARCH , 2000
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PROSPECTUS
, 2000
[SYNCHRONICITY LOGO]
3,500,000 SHARES OF COMMON STOCK
- --------------------------------------------------------------------------------
SYNCHRONICITY SOFTWARE, INC.:
-- We provide internet-based software products that enable business-to-
business collaboration among participants developing complex electronic
products.
-- Synchronicity Software, Inc.
201 Forest Street
Marlboro, Massachusetts 01752
(508) 485-4122
PROPOSED SYMBOL AND MARKET:
-- SNCY/Nasdaq National Market
THE OFFERING:
-- We are offering 3,500,000 shares of our common stock.
-- The underwriters have an option to purchase up to 525,000 additional shares
from Synchronicity to cover over-allotments.
-- This is the initial public offering of our common stock.
-- We plan to use the proceeds from this offering for working capital and
other general corporate purposes.
-- Closing: , 2000
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------
PER SHARE TOTAL
- ------------------------------------------------------------------------------------
<S> <C> <C>
Public offering price: $ $
Underwriting fees:
Proceeds to Synchronicity:
- ------------------------------------------------------------------------------------
</TABLE>
THIS INVESTMENT INVOLVES RISK. SEE "RISK FACTORS" BEGINNING ON PAGE 5.
- --------------------------------------------------------------------------------
Neither the SEC nor any state securities commission has determined whether this
prospectus is truthful or complete. Nor have they made, nor will they make, any
determination as to whether anyone should buy these securities. Any
representation to the contrary is a criminal offense.
- --------------------------------------------------------------------------------
DONALDSON, LUFKIN & JENRETTE
ROBERTSON STEPHENS
DAIN RAUSCHER WESSELS
DLJDIRECT INC.
<PAGE> 3
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Prospectus Summary................ 1
Risk Factors...................... 5
Special Note Regarding Forward-
Looking Statements; Market
Data............................ 18
Use of Proceeds................... 19
Dividend Policy................... 19
Corporate Information............. 19
Capitalization.................... 20
Dilution.......................... 21
Selected Financial Data........... 22
Management's Discussion and
Analysis of Financial Condition
and Results of Operations....... 23
</TABLE>
<TABLE>
<CAPTION>
PAGE
<S> <C>
Business.......................... 33
Management........................ 48
Certain Relationships and Related
Transactions.................... 58
Principal Stockholders............ 59
Description of Capital Stock...... 61
Shares Eligible for Future Sale... 64
Underwriting...................... 67
Legal Matters..................... 69
Experts........................... 69
Where You Can Find More
Information..................... 70
Index to Financial Statements..... F-1
</TABLE>
<PAGE> 4
[GRAPHIC DESCRIPTION OF ARTWORK FOR INSIDE FRONT COVER OF PROSPECTUS]
BUILDING VIRTUAL PROJECT TEAMS FOR GLOBAL ELECTRONIC PRODUCT DEVELOPMENT
Synchronicity's solutions make it possible for electronic product
development and semiconductor companies to form Internet-based virtual project
teams that allow them to more efficiently collaborate with their suppliers,
business partners and customers in the development of complex electronic
products.
Integration of development supply chains with Synchronicity solutions
provides companies with shorter time to market, lower development costs and
preservation of existing technology investments.
Portion of globe featuring North America and Europe which depicts a product
development supply chain and places the members of the supply chain (Electronic
Product Development Team, Remote team members, Integrated circuit manufacturing,
consultants, software design team, IP care supplier and end-user products) in
multiple geographic locations across the map and demonstrates through arrows how
the members of the supply chain interact with each other using Synchronicity's
products.
[Synchronicity Logo]
Internet-based solutions enabling B2B collaboration for electronic product
development supply chains.
<PAGE> 5
PROSPECTUS SUMMARY
You should read the following summary together with the more detailed
information in this prospectus, including risk factors, regarding our company
and the common stock being sold in this offering.
THE COMPANY
We provide internet-based software products that enable
business-to-business collaboration among participants in electronic product
development supply chains. Electronic product development supply chains are
comprised of many participants involved in the development of an electronic
product including members of a company's internal design team, external
suppliers of development expertise, business partners, consultants and customers
of the company. Our products are currently used by firms engaged in the
development of semiconductors and other electronic products. We believe that our
products enable companies to develop feature-rich, complex electronic products
at lower cost and in less time. Since October 1997, when we shipped our first
product, we have licensed our products to approximately 50 companies worldwide,
including eight of the ten largest semiconductor companies.
The growth of the new digital economy has been fueled in large part by the
rapid development of new complex semiconductors, microelectronics and other
electronic products, which are essential to an increasing number of end-user
products ranging from computers and mobile phones to personal digital assistants
and pagers. According to the Semiconductor Industry Association, the
semiconductor market alone was $140.8 billion in 1999.
Competition among suppliers of electronic products has become more intense
and has expanded globally. In order to compete successfully, suppliers of
electronic products must develop complex, high quality, feature-rich products at
a lower cost and more quickly than their competitors. The competitive
environment and the increasing complexity of electronic products have compelled
companies to shift from traditional in-house product development processes to
the outsourcing of specialized design tasks. As a result, development teams are
quickly evolving into product development supply chains, often including many
engineers from different departments in a company as well as outside sources of
specialized design expertise. In addition, as the electronic development process
has become more design-specialized and reliant on outsourcing, companies have
increasingly utilized intellectual property (IP) cores, design elements that are
frequently reused within electronic product designs. The practice of design
reuse allows companies to focus on their primary design expertise and to shorten
product development cycles.
The outsourcing of design tasks and the implementation of design reuse
practices enable companies to get to market quickly with reliable,
cost-effective products. However, these trends have created growing challenges
for electronic product development teams and their supply chains, including
promoting and managing supply chain collaboration, managing complex design
iterations and coordinating the reuse of intellectual property.
We have designed our products to address these new challenges confronting
participants in the electronic product development process. Our products enable
these participants to collaborate as a single virtual project team, manage
complex design iterations and share reusable intellectual property. When using
our products, a virtual project team can function within a secure, internet-
based environment regardless of the corporate affiliation or geographic location
of its members. We have designed our products to handle the large volumes of
simultaneous and interactive changes which occur to design information during
the development process. Our products also enable and
1
<PAGE> 6
encourage design reuse and the use of IP cores provided by third-parties. This
allows companies to focus on their areas of expertise while decreasing their
development costs and time-to-market. In addition, our products are designed to
integrate with and complement existing design tools and preserve our customers'
existing investments in technology.
We intend to be the leading provider of solutions that enable company-wide
and business-to-business collaboration within complex product development supply
chains. Key elements of our growth strategy include enhancing the functionality
of supply chain collaboration, leveraging our installed customer base and
increasing the proliferation of our products through network effects. We also
aim to expand our strategic relationships, pursue additional market
opportunities and extend our global presence. While our software is currently
used in the development of electronic products, we believe that it may be
equally useful in the development of other complex products.
2
<PAGE> 7
THE OFFERING
Common stock offered.......... 3,500,000 shares
Common stock to be outstanding
after the offering.......... 14,581,147 shares
Use of proceeds............... We intend to use the net proceeds for working
capital and other general corporate purposes.
These uses may include product development
and expansion of our operations and sales and
marketing capabilities. See "Use of
Proceeds."
Proposed Nasdaq National
Market symbol............... SNCY
The number of shares of common stock to be outstanding after the offering
is based on the number of shares outstanding on March 27, 2000. This number does
not include:
- 1,328,750 shares of common stock issuable upon the exercise of stock
options outstanding on March 27, 2000 with a weighted average exercise
price of $1.07 per share;
- 150,000 shares of common stock issuable upon the exercise of a warrant
outstanding on March 27, 2000 with an exercise price of $4.30 per share;
or
- an aggregate of 748,745 shares reserved as of March 27, 2000 for future
stock option grants and purchases under our equity compensation plans.
Except as otherwise noted, all information in this prospectus:
- reflects the automatic conversion of all of our outstanding shares of
convertible preferred stock into an aggregate of 7,021,002 shares of
common stock upon completion of the offering;
- reflects the effectiveness upon completion of the offering of our second
amended and restated certificate of incorporation, which sets the
authorized number of shares of common stock at 90,000,000 and sets the
authorized number of shares of preferred stock at 5,000,000; and
- assumes no exercise of the underwriters' over-allotment option.
3
<PAGE> 8
SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Set forth below are summary statements of operations data for the years
ended December 31, 1997, 1998 and 1999 and summary balance sheet data as of
December 31, 1999:
-- on an actual basis;
-- with respect to the statement of operations data, unaudited pro forma
basic and diluted net loss per share have been calculated assuming the
conversion of all outstanding shares of our convertible preferred
stock into shares of common stock, as if the shares had converted
immediately upon issuance; and
-- with respect to the balance sheet data, on a pro forma as adjusted
basis to give effect to the conversion of our convertible preferred
stock upon the consummation of this offering, our sale of 3,500,000
shares of common stock in this offering at an assumed initial public
offering price of $13.00 per share, after deducting the estimated
underwriting discounts and commissions and offering expenses payable
by us, and the receipt of the net proceeds from this offering.
This information should be read in conjunction with the financial
statements and notes thereto appearing elsewhere in this prospectus. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1997 1998 1999
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues............................................ $ 660 $ 1,809 $ 7,447
Gross profit........................................ 568 1,496 6,405
Loss from operations................................ (2,850) (4,073) (4,774)
Net loss............................................ (2,780) (3,948) (4,639)
Basic and diluted net loss per share................ $ (0.86) $ (1.21) $ (1.39)
Basic and diluted weighted average common shares
outstanding...................................... 3,247 3,284 3,372
Pro forma basic and diluted net loss per share...... $ (0.45)
Pro forma basic and diluted weighted average common
shares outstanding............................... 10,393
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1999
-----------------------
PRO FORMA
ACTUAL AS ADJUSTED
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................. $ 3,652 $44,717
Working capital........................................... 1,937 43,002
Total assets.............................................. 8,758 49,823
Redeemable convertible preferred stock.................... 12,483 --
Stockholders' equity (deficiency)......................... (9,631) 43,917
</TABLE>
4
<PAGE> 9
RISK FACTORS
You should carefully consider the following risks before making an
investment decision. Our business, operating results and financial condition
could be adversely affected by any of the following risks. The risks described
below are not the only ones that we face. Additional risks and uncertainties
including those that are not yet identified or that we currently think are
immaterial may also adversely affect our business, results of operations and
financial condition. The trading price of our common stock could decline due to
any of these risks, and you could lose all or part of your investment. You
should also refer to the other information set forth in this prospectus,
including our financial statements and the related notes.
RISKS RELATED TO OUR OPERATIONS
OUR LIMITED OPERATING HISTORY MAKES IT DIFFICULT TO EVALUATE OUR BUSINESS AND
PROSPECTS.
We are still in the early stages of our development, therefore evaluating
our business operations and our prospects is difficult. We incorporated in 1996
and shipped our first product in October 1997. The revenues and income potential
of our business and markets are unproven. We will encounter risks and challenges
frequently encountered by early-stage companies in new and rapidly evolving
markets. These challenges include the following:
- we need to increase sales to achieve profitability, requiring us to sell
additional software licenses to our existing customers, expand our
customer base and expand our international operations;
- we need to expand our sales and marketing, customer support and
professional services organizations;
- we need to successfully introduce and promote new products and to enhance
our existing products;
- we need to maintain strategic relationships and build new ones; and
- we need to effectively manage our anticipated growth, which could lead to
management distractions and increased operating expenses, and will
require us to attract and retain key personnel.
Our business strategy may not be successful and we may not be able to
successfully address these risks. In addition, because of our limited operating
history, we have limited insight into trends that may emerge and affect our
business.
WE EXPECT TO INCUR LOSSES IN THE FUTURE.
We incurred net losses of approximately $2.8 million in 1997, $3.9 million
in 1998, and $4.6 million in 1999. As of December 31, 1999, we had an
accumulated deficit of approximately $12.5 million. Moreover, we expect to
continue to incur significant sales and marketing, research and development and
general and administrative expenses. We expect to incur losses for the
foreseeable future and cannot be certain if or when we will achieve
profitability. Even if we do achieve profitability, we may not be able to
sustain or increase profitability on a quarterly or annual basis in the future.
See "Selected Financial Data," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and our financial statements and
related notes for more detailed information about our operating results.
5
<PAGE> 10
OUR OPERATING RESULTS MAY FLUCTUATE ON A QUARTERLY BASIS AND FAIL TO MEET THE
EXPECTATIONS OF ANALYSTS OR INVESTORS, WHICH MAY NEGATIVELY IMPACT OUR STOCK
PRICE.
Our quarterly operating results have varied significantly in the past and
are likely to vary significantly in the future. This makes it difficult for us
to predict our future operating results. Fluctuations in our quarterly results
may be caused by a number of factors, including the following:
- fluctuations in demand for electronic product development software;
- size and timing of sales of our products;
- entry of new competitors into our market, or the announcement of new
products or product enhancements by competitors;
- our ability to successfully retain and expand our direct sales force and
our international sales organization;
- unexpected delays in developing or introducing new and enhanced products;
- unexpected declines in purchases by our existing customers;
- variability in the mix of our software licenses and services revenues;
- our ability to establish and maintain relationships with our third-party
partners; and
- general economic conditions.
Our software license revenues in any quarter can be difficult to forecast
because they depend on orders delivered in that quarter. Moreover, we typically
recognize a majority of our quarterly revenues in the last month of each
quarter. This disproportionate amount of revenues earned in the last month of
each quarter is driven by customer buying patterns. A high percentage of our
operating expenses are essentially fixed in the short term and we may be unable
to adjust spending to compensate for unexpected shortfalls in our revenues.
In addition, we expect our operating expenses to increase as we take the
following steps:
- expand our engineering and sales and marketing operations;
- broaden our customer support capabilities;
- develop new distribution channels and strategic alliances;
- fund increased levels of research and development; and
- build our operational infrastructure.
As a result, if we experience delays in recognizing revenue, or if our revenues
do not grow faster than our expenses, we could experience significant variations
in operating results from quarter to quarter. If, in response to market
pressures or other demands, we introduce new pricing structures for our existing
products, we could experience customer dissatisfaction and loss of sales. In
addition, if we introduce products that are sold in a manner different from how
we currently sell our products, we could recognize revenue differently than
under our current accounting policies. Depending on the manner in which we sell
existing or future products, this could have the effect of extending the length
of time over which we recognize revenues. Furthermore, our quarterly revenues
could be significantly affected by any future amendment or interpretation of
applicable accounting standards.
Due to these and other factors, we believe that period-to-period
comparisons of our results of operations may not be meaningful and should not be
relied upon as indicators of our future
6
<PAGE> 11
performance. It is possible that in some future periods our results of
operations may be below the expectations of public market analysts and
investors. If this occurs, the price of our common stock may decline. See
"Selected Financial Data," "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and our financial statements and related
notes for more detailed information about our operating results.
A SIGNIFICANT PORTION OF OUR REVENUES HAS BEEN DERIVED FROM A RELATIVELY SMALL
NUMBER OF CUSTOMERS. IF WE LOSE A MAJOR CUSTOMER OUR REVENUES COULD
SIGNIFICANTLY DECLINE.
We have derived a significant portion of our revenues from a relatively
small number of customers. Five customers individually accounted for 37.9%,
18.9%, 13.6%, 12.9 % and 11.4% of our total revenues in 1997. We had three
customers that individually accounted for 20.6%, 14.6% and 13.9% of our total
revenues in 1998 and one customer that accounted for 11.8% of our total revenues
in 1999. Although we believe that our customer concentration will decrease as we
continue to build our customer base, we expect that certain customers may
continue to account for a significant portion of revenues in the near term. As a
result, the loss of any one major customer or our inability to secure additional
customers in a given period could have an adverse effect on our business and
results of operations.
THE MARKET FOR OUR PRODUCTS IS EMERGING AND CUSTOMERS MAY NOT ACCEPT OUR
PRODUCTS.
The market for our products is emerging. We cannot be certain that this
market will continue to develop and grow or that companies will elect to use our
products rather than attempt to develop applications internally or through other
sources. In addition, the use of the internet, as well as corporate intranets,
has not yet been widely adopted for sharing product or design information or
collaborating on development projects. Companies that have already invested
substantial resources in other methods of collaborating during the development
process may be reluctant to adopt a new approach that would replace, limit, or
compete with their existing systems or methods. We intend to continue to pursue
intensive marketing and sales efforts to educate prospective customers about the
uses and benefits of our products. These efforts may not be successful.
Therefore, demand for and market acceptance of our products is subject to a high
level of uncertainty.
COMPETITION AMONG PROVIDERS OF SOFTWARE THAT IS COMPARABLE TO OURS MAY
INCREASE. THIS COULD CAUSE US TO REDUCE PRICES AND RESULT IN REDUCED REVENUES
OR LOSS OF MARKET SHARE.
The market for products that enable company-wide and business-to-business
collaboration within electronic product development supply chains through the
internet is new, rapidly changing and increasingly competitive. We expect that
competition in this market will emerge and intensify, and that new competitors
may emerge to address the electronic product development market specifically.
This could result in price reductions, reduced revenues and loss of market
share. We believe that our primary current source of competition is in-house
development efforts by potential customers. In the future, we may face potential
competition from providers of configuration management software and product data
management software.
Some of our potential competitors may have a number of significant
advantages over us, including:
- longer operating histories;
- significantly greater financial, technical and marketing resources;
- significantly greater name recognition and more extensive customer bases;
and
7
<PAGE> 12
- established cooperative relationships among themselves or with third
parties.
These potential competitors may also be able to devote greater resources to
the development, promotion and sale of their products, than we can. Some of our
potential competitors have greater name recognition and more extensive customer
bases that could be leveraged to gain market share to our detriment.
Accordingly, we may not be able to maintain or increase our revenues if
competition increases and we are unable to respond effectively. See
"Business -- Competition" for further discussion of the competitive market in
which we operate.
IF WE DO NOT EXPAND THE NUMBER OF LICENSES AND ADD ENHANCED VERSIONS AND
UPDATES TO PRODUCTS USED BY OUR EXISTING CUSTOMERS, WE MAY NOT ACHIEVE GROWTH
IN OUR REVENUES.
The size of a customer's initial order is typically relatively small and
may include a limited number of user licenses. We have found that in later
orders, customers often purchase additional user licenses or new products which
significantly contribute to our revenues. In order to increase our revenues, we
depend on existing customers purchasing licenses for additional users as well as
sales of new licenses to new customers. Therefore, it is important that our
customers are satisfied with their initial product deployments and that they
believe that expanded use of our products will provide them with additional
benefits. Customers may choose not to purchase any new products or expand the
use of our products. If we do not increase sales to existing customers, we may
not be able to achieve revenue growth.
WE MAY EXPERIENCE DIFFICULTIES IN INTRODUCING NEW PRODUCTS AND UPDATES WHICH
COULD RESULT IN NEGATIVE PUBLICITY, LOSS OF SALES, DELAY IN MARKET ACCEPTANCE
OR CUSTOMER DISSATISFACTION.
Our future financial performance depends on our successful and timely
development, introduction and market acceptance of new and enhanced products. We
find it difficult to predict the life cycles of our products because the market
for our products is new and emerging and is characterized by rapid technological
change, changing customer needs and evolving industry standards. The
introduction of products or computer systems employing new technologies and
emerging industry standards could render our existing products obsolete and
unmarketable. The introduction of enhancements to our products may also cause
customers to defer orders for our existing products. We may experience
difficulties that could delay or prevent the successful development,
introduction or marketing of new or enhanced products in the future. In
addition, those products may not meet the requirements of the marketplace or
achieve market acceptance. We expect to introduce new products through internal
development or by acquisition and by developing enhancements to our existing
products. New products or updates may not be released according to schedule
which could result in negative publicity, loss of sales, delay in market
acceptance of our products, or customer claims against us.
DEPLOYMENT OF OUR PRODUCTS MAY BE COMPLEX, DIFFICULT, COSTLY OR
TIME-CONSUMING, CAUSING OUR CUSTOMERS TO BE DISSATISFIED.
Successful deployment of our products on our customers' existing computer
network configurations and hardware may be difficult, costly or time-consuming.
Because we are one of the first companies to offer products designed for
managing the development of electronic products, some customers may face these
deployment issues for the first time in the context of collaborating both
internally and externally with electronic product development supply chain
partners. Customers could become dissatisfied with our products if deployments
prove to be difficult, costly or time-consuming.
8
<PAGE> 13
WE MAY EXPERIENCE CUSTOMER DISSATISFACTION AND LOST SALES IF OUR PRODUCTS DO
NOT SCALE TO ACCOMMODATE SUBSTANTIAL INCREASES IN THE NUMBER OF CONCURRENT
USERS.
Our strategy requires that our software be highly scalable. While we have
performed product testing on the scalability of our products, the limits of
scalability have not been tested in the context of a customer deployment. If our
customers cannot successfully implement large-scale deployments, we may
experience customer dissatisfaction and find it more difficult to obtain new
customers or to sell additional products to our existing customers.
DEFECTS IN OUR SOFTWARE PRODUCTS COULD DIMINISH DEMAND FOR OUR PRODUCTS.
Our software products are complex and may contain errors that may be
detected at any point in the life of the product. We have in the past discovered
software errors in certain of our products, and as a result, have experienced
delays in shipment of products during the period required to correct these
errors. We cannot assure you that, despite testing by us, our partners and our
customers, errors will not be found in new products or releases after shipment.
Discovery of any errors may result in:
- loss of revenue;
- delay in market acceptance and sales;
- diversion of development resources;
- injury to our reputation; and
- increased service demands.
In addition, our products are generally used in systems with other vendors'
products, and as a result, our products must function successfully with these
existing systems. System errors, whether caused by our products or those of
another vendor, could adversely affect the market acceptance of our products,
and any necessary revisions could cause us to incur significant expenses.
IF WE BECOME SUBJECT TO PRODUCT LIABILITY LITIGATION, IT COULD BE TIME
CONSUMING AND COSTLY TO DEFEND.
Since our products are used for mission-critical applications in the
electronic product development supply chain, errors, defects or other
performance problems could result in financial or other damages to our
customers. For example, our products are designed to communicate information
relating to changes in product specifications during the development process. If
a developer or other participant receives inaccurate or erroneous data, a
customer could claim that it incurred damages based on its reliance on that
data. Although our license agreements generally contain provisions designed to
limit our exposure to product liability litigation, existing or future laws or
unfavorable judicial decisions could negate such limitation of liability
provisions. Product liability litigation, even if unsuccessful, would be
time-consuming and costly to defend and could harm our business and reputation.
OUR PRODUCTS MIGHT NOT BE COMPATIBLE WITH ALL MAJOR PLATFORMS, WHICH COULD
INHIBIT SALES.
We must continually modify and enhance our products to keep pace with
changes in computer hardware and software technology, as well as emerging
technical standards in the software industry. For example, we have designed our
products to be compatible with specific databases and servers such as
Microsoft's Internet Information Server. Any future changes to these platforms
could
9
<PAGE> 14
require us to modify our products, and could cause us to delay releasing a
product until the updated version of that platform has been released.
Furthermore, third parties may develop tools to integrate our products with
other design tools used by our customers. We would then rely on these third
parties to update such tools to reflect changes to our products as well as to
the targeted platform in order to maintain the functionality provided by our
products. As a result, uncertainties related to the timing and nature of new
product announcements, introductions or modifications by vendors of operating
systems and browsers and other internet-related applications could hurt our
business, as customers may not be certain how our products will operate with
their existing systems. Furthermore, some of our products do not run on certain
types of computers. If another platform becomes more widely used, we could be
required to convert our product to that platform. If we do not succeed in making
our products compatible with other platforms, potential customers may not choose
our products.
OUR LENGTHY AND VARIABLE SALES CYCLE MAKES IT DIFFICULT FOR US TO PREDICT WHEN
OR IF SALES WILL BE MADE.
Our products have an unpredictable sales cycle that contributes to the
uncertainty of our future operating results. Our customers often view the
purchase of our products as a significant and strategic decision. As a result,
customers often take time to evaluate our products, resulting in a sales cycle
that has historically ranged from approximately four to seven months. The sale
of our products may be subject to delays due to the lengthy internal budgeting,
approval and evaluation processes of our customers. We may expend significant
sales and marketing expenses during this evaluation period before the customer
places an order with us. Larger customers may purchase our products as part of
multiple simultaneous purchasing decisions, which may result in additional
unplanned administrative processing and other delays in our sales cycle. As a
result, we have only a limited ability to forecast the timing and size of sales
of our products. If sales forecasted for a specific customer for a particular
quarter are not realized, we may experience an unplanned shortfall in revenues.
THE SUCCESS OF OUR BUSINESS DEPENDS ON OUR KEY SENIOR MANAGEMENT, WHOSE
KNOWLEDGE OF OUR BUSINESS AND EXPERTISE WOULD BE DIFFICULT TO REPLACE.
Our success depends largely on the continued contributions of our key
senior management. We have key-man life insurance on certain of our executive
officers. None of our officers, including our founders, has employment
agreements. If one or more members of our senior management were to terminate
their employment, this could result in delays to product development, loss of
sales, and diversion of management resources.
BECAUSE OF COMPETITION FOR ADDITIONAL QUALIFIED PERSONNEL, WE MAY NOT BE ABLE
TO RECRUIT OR RETAIN NECESSARY PERSONNEL, WHICH COULD IMPACT DEVELOPMENT OR
SALES OF OUR PRODUCTS.
Our success depends on our ability to attract and retain qualified,
experienced employees. We currently face a shortage of engineering personnel and
substantial competition for experienced engineering, sales and marketing
personnel in our industry. If we are unable to retain our existing engineering
personnel, or attract and retain additional engineering personnel, our growth
could be limited due to our lack of capacity to develop our products, possible
deterioration in service levels or decreased customer satisfaction.
We currently sell our products primarily through our direct sales force. It
takes time for our new sales personnel to become productive, particularly our
senior sales and services personnel who
10
<PAGE> 15
can take up to six months to become fully productive. If we are unable to hire
or retain qualified sales personnel, or if newly hired personnel fail to develop
necessary skills or productivity it will be difficult for us to sell our
products and we may experience a shortfall in revenues.
IF WE ARE UNABLE TO CONTINUE TO EXPAND OUR INTERNATIONAL OPERATIONS, WE MAY
NOT ACHIEVE ANTICIPATED REVENUE GROWTH.
We believe that expansion of our international operations will be necessary
for our future success. Therefore, we believe that we will need to continue to
commit significant resources to expand our international operations. If we are
unable to successfully enter into and expand our presence in international
markets on a timely basis, we may not be able to achieve anticipated revenue
growth. This expansion may be more difficult or take longer than we anticipate,
and we may not be able to successfully market, sell, deliver and support our
products internationally.
In connection with our international expansion, we are subject to a number
of risks associated with international business activities. These risks include:
- difficulty in providing customer support for our software in multiple
time zones;
- greater difficulty in collecting accounts receivable from customers
located abroad;
- political and economic instability;
- difficulties in enforcing agreements through foreign legal systems; and
- unexpected changes in regulatory requirements.
To date, our revenues have been denominated in United States dollars. If we
recognize revenues denominated in foreign currencies, we may incur greater risks
in currency fluctuations. In the future, our European revenues could be
denominated in the Euro, the currency of the European Union. The Euro is an
untested currency and may be subject to economic risks that are not currently
contemplated. We currently do not engage in foreign exchange hedging activities,
and therefore our international expenses are currently subject to the risks of
foreign currency fluctuations.
IN ORDER TO MANAGE OUR GROWTH AND EXPANSION, WE WILL NEED TO IMPROVE AND
IMPLEMENT NEW SYSTEMS, PROCEDURES AND CONTROLS.
We have recently experienced a period of rapid growth and expansion that
has placed a significant strain on our management information systems and our
administrative, operational and financial resources. If we are unable to manage
our growth and expansion in an efficient or timely manner, our business may be
harmed. In addition, we have recently hired a significant number of employees
and plan to further increase our total headcount. We also plan to expand the
geographic scope of our operations. This expansion has resulted and will
continue to result in substantial demands on our management resources. To
accommodate continued anticipated growth and expansion, we will be required to:
- improve existing and implement new operational and financial systems,
procedures and controls;
- recruit, reward and retain qualified personnel; and
- enter into relationships with strategic partners.
These measures may place additional burdens on our management and our internal
resources.
11
<PAGE> 16
WE DEPEND ON TECHNOLOGY LICENSED FROM THIRD PARTIES AND THE LOSS OF, OR
INABILITY TO MAINTAIN, THESE TECHNOLOGY LICENSES COULD RESULT IN INCREASED
COST OR DELAYS IN SALES OF OUR PRODUCTS.
We license technology on a non-exclusive basis from several businesses for
use with our products, including licenses from RSA Data Security, Inc. for
security and encryption technology software, DuraSoft GmbH for revision control
and Bristol Technology, Inc. for platform portability. We expect to continue to
license technology from third parties in the future. Some of the software we
license from third parties would be difficult to replace. This software may not
continue to be available on commercially reasonable terms, if at all. The loss
of, or inability to maintain, any of these technology licenses could result in
delays in the licensing of our products until equivalent technology, if
available, is identified, licensed and integrated. In addition, the effective
deployment of our products depends upon the successful operation of products
licensed from third parties in conjunction with our products. Any undetected
errors in these licensed products may prevent the implementation or impair the
functionality of our products, delay new product introductions or injure our
reputation. The use of additional third-party software could require us to enter
into license agreements, which could result in royalty payments.
IF WE ARE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY WE MAY LOSE A VALUABLE
ASSET OR INCUR COSTLY LITIGATION TO PROTECT OUR RIGHTS.
Our success and ability to compete depend upon our intellectual property,
including our brands and the technology underlying our products. We rely on
trademark, trade secret and copyright laws to protect our intellectual property.
Despite our efforts to protect our intellectual property, a third party could
copy or otherwise obtain our software or other proprietary information without
authorization. Our means of protecting our proprietary rights may not be
adequate and our competitors may independently develop similar technology, or
duplicate our products or our other intellectual property. In addition, the laws
of some foreign countries do not protect our proprietary rights to as great an
extent as do the laws of the United States, and we expect that it will become
more difficult to monitor the use of our products if we increase our
international presence. We may have to resort to litigation to enforce our
intellectual property rights, to protect our trade secrets or know-how or to
determine their scope, validity or enforceability. Enforcing or defending our
proprietary technology is expensive, could cause the diversion of our resources,
and may not prove successful. Our protective measures may prove inadequate to
protect our proprietary rights, and any failure to enforce or protect our rights
could cause us to lose a valuable asset.
WE MAY BE SUBJECT TO INTELLECTUAL PROPERTY INFRINGEMENT CLAIMS THAT, WITH OR
WITHOUT MERIT, COULD BE COSTLY TO DEFEND OR SETTLE.
We may be subject to claims of infringement of other parties' proprietary
rights, or claims that our own intellectual property rights are invalid. There
has been a substantial amount of litigation in the software and internet
industries regarding intellectual property rights. We expect that software
product developers and providers of electronic commerce solutions will
increasingly be subject to infringement claims as the number of products and
competitors in our industry segment grows and the functionality of products in
industry segments overlaps. It is possible that third parties may claim that we
or our current or potential future products infringe their intellectual
property. Any infringement claims made against us, with or without merit, could
be time-consuming, result in costly litigation, or cause product shipment delays
or negative publicity. In addition, if our products were found to infringe a
third party's proprietary rights, we could be required to enter into royalty or
licensing agreements in order to continue to be able to sell our products.
Royalty or licensing agreements, if required, may not be available on terms
acceptable to us or at all.
12
<PAGE> 17
YEAR 2000 COMPLIANCE COSTS AND RISKS ARE DIFFICULT TO ASSESS AND COULD RESULT
IN DELAY OR LOSS OF REVENUE, DIVERSION OF DEVELOPMENT RESOURCES, DAMAGE TO OUR
REPUTATION OR INCREASED SERVICE, WARRANTY OR LITIGATION COSTS.
The latest versions of our products are year 2000 tested and to the best of
our knowledge are free from any year 2000 problems. However, there may be latent
undiscovered defects that affect the operation of our products during the year
2000. Should such defects exist they may have a detrimental effect on the
operation of our products. Earlier versions of our products may not be year 2000
compliant, and we do not intend to make them year 2000 compliant. While we have
checked with third parties from whom we license software that they have taken
year 2000 readiness measures and we have not experienced any failures to date,
our assurances are only as good as their statements and any year 2000 defects in
our licensed software that have escaped detection, in both their and our
testing, may have adverse effects on the operation of our products.
Additionally, the year 2000 problem may affect us by causing disruptions in the
business operations of, or delay technology purchases by, companies with which
we do business causing a decrease in our revenues. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Year 2000
Readiness."
FUTURE ACQUISITIONS MAY BE DIFFICULT TO INTEGRATE, DISRUPT OUR BUSINESS,
DILUTE STOCKHOLDER VALUE OR DIVERT MANAGEMENT ATTENTION.
As part of our business strategy, we may seek to acquire or invest in
businesses, products or technologies that we believe could complement or expand
our business, augment our market coverage, enhance our technical capabilities or
otherwise offer growth opportunities. Acquisitions could create risks for us,
including:
- difficulties in assimilation of acquired personnel, operations,
technologies or products;
- unanticipated costs associated with acquisitions;
- diversion of management's attention from other business concerns;
- adverse effects on our existing business relationships with suppliers and
customers; and
- use of substantial portions of our available cash, including the proceeds
of this offering, to consummate the acquisitions.
In addition, if we consummate acquisitions through an exchange of our
securities, you could suffer significant dilution. Any future acquisitions, even
if successfully completed, may not generate any additional revenue or provide
any benefit to our business.
RISKS TO OUR BUSINESS AND PROSPECTS RELATED TO THE INTERNET
IF USE OF THE INTERNET DOES NOT CONTINUE TO DEVELOP AND RELIABLY SUPPORT THE
DEMANDS PLACED ON IT BY EBUSINESSES, WE MAY EXPERIENCE LOSS OF SALES.
Our success depends upon continued growth in the use of the internet as a
medium of communication and commerce. Although the internet is experiencing
rapid growth in the number of users, this growth is a recent phenomenon and may
not continue. Furthermore, despite this growth in usage, the use of the internet
for commerce is relatively new. As a result, a sufficiently broad base of
companies may not adopt or continue to use the internet as a medium of
exchanging electronic product design information. Our business would be
seriously harmed if:
- use of the internet by electronic product development supply chain
members does not continue to increase or increases more slowly than
expected;
13
<PAGE> 18
- the infrastructure for the internet does not effectively support
enterprises;
- the internet does not create a viable commercial marketplace, which would
inhibit the development of eBusiness and could reduce the demand for our
products; or
- concerns over the secure transmission of confidential information over
public networks inhibit the growth of the internet as a means of
collaborating among enterprises.
CAPACITY CONSTRAINTS MAY RESTRICT THE USE OF THE INTERNET AS A COMMERCIAL
MARKETPLACE, RESULTING IN DECREASED DEMAND FOR OUR PRODUCTS.
The internet infrastructure may not be able to support the demands placed
on it by increased usage or the limited capacity of networks to transmit large
amounts of data. Other risks associated with commercial use of the internet
could slow its growth, including:
- outages and other delays resulting from the inadequate reliability of the
network infrastructure;
- slow development of enabling technologies and complementary products; and
- limited availability of cost-effective, high-speed access.
Delays in the development or adoption of new equipment standards or
protocols required to handle increased levels of internet activity, or increased
governmental regulation, could cause the internet to lose its viability as a
means of communication between manufacturers and their supply chain partners,
resulting in decreased demand for our products.
INCREASING GOVERNMENTAL REGULATION OF THE INTERNET COULD LIMIT THE MARKET FOR
OUR PRODUCTS.
As internet commerce continues to evolve, we expect that federal, state and
foreign governments will adopt laws and regulations covering issues such as user
privacy, taxation of goods and services provided over the internet and pricing,
content and quality of products and services. It is possible that legislation
could expose companies involved in eBusiness to liability, taxation or other
increased costs, any of which could limit the growth of eBusiness generally.
Legislation could dampen the growth in internet usage and decrease its
acceptance as a communications and commercial medium. If enacted, these laws and
regulations could limit the market for our products.
RISKS RELATED TO THIS OFFERING
IF THE PUBLIC PERCEPTION OF THE VALUE OF OUR COMMON STOCK IS LOWER THAN THE
INITIAL PUBLIC OFFERING PRICE, THE PRICE OF OUR COMMON STOCK AFTER THIS
OFFERING MAY BE LOWER THAN THE PRICE YOU PAY.
Prior to this offering, there has been no public market for our common
stock. We, together with the underwriters, will determine the initial public
offering price, and this price may not be the price at which the common stock
will trade after this offering. The price of our common stock that will prevail
in the market after this offering may be higher or lower than the price you pay.
After this offering, an active trading market in our stock might not develop or
continue. We cannot assure you of the extent to which investor interest in our
company will lead to the development of an active trading market or how liquid
that market may become.
14
<PAGE> 19
BECAUSE OF THE NATURE OF OUR BUSINESS, THE MARKET PRICE OF OUR COMMON STOCK IS
PARTICULARLY SUBJECT TO VOLATILITY AND COULD DROP UNEXPECTEDLY.
The stock market in general has recently experienced extreme price and
volume fluctuations. In addition, the market prices of securities of technology
companies, software development firms and developers of electronic products,
including semiconductor companies, have been extremely volatile, and have
experienced fluctuations that have often been unrelated or disproportionate to
the operating performance of such companies. These broad market fluctuations
could adversely affect the market price of our common stock. The market price of
the common stock may fluctuate substantially due to a variety of factors,
including:
-- any actual or anticipated fluctuations in our financial condition and
operating results;
-- public announcements concerning us or our competitors, or the internet
industry;
-- the introduction or market acceptance of new service offerings by us
or our competitors;
-- changes in industry research analysts' earnings estimates;
-- changes in accounting principles;
-- sales of our common stock by existing stockholders; and
-- the loss of any of our key personnel.
WE COULD BECOME SUBJECT TO CLASS ACTION LITIGATION DUE TO STOCK PRICE
VOLATILITY; IF SUCH LITIGATION OCCURS, IT WILL DISTRACT OUR MANAGEMENT AND
COULD RESULT IN SUBSTANTIAL COSTS AND LARGE JUDGMENTS AGAINST US.
In the past, securities class action litigation has often been brought
against companies following periods of volatility in the market prices of their
securities. We may be the target of similar litigation in the future. Securities
litigation could result in substantial costs and divert our management's
attention and resources, which could cause serious harm to our business,
operating results and financial condition.
OUR EXECUTIVE OFFICERS, DIRECTORS AND MAJOR STOCKHOLDERS WILL RETAIN
SIGNIFICANT CONTROL OVER US AFTER THIS OFFERING, WHICH MAY LEAD TO CONFLICTS
WITH OTHER STOCKHOLDERS OVER CORPORATE GOVERNANCE MATTERS.
After this offering, executive officers, directors and holders of 5% or
more of our outstanding common stock will, in the aggregate, own approximately
58.9% of our outstanding common stock. These stockholders would be able to
significantly influence all matters requiring approval by our stockholders,
including the election of directors and the approval of significant corporate
transactions. This concentration of ownership may also delay, deter or prevent a
change in our control and may make some transactions more difficult or
impossible to complete without the support of these stockholders.
OUR MANAGEMENT WILL RETAIN BROAD DISCRETION IN THE USE OF PROCEEDS FROM THIS
OFFERING AND MAY NOT OBTAIN A SIGNIFICANT RETURN ON THE USE OF THESE PROCEEDS.
We currently have no specific plans for a significant portion of our net
proceeds from this offering. Consequently, our management has complete
discretion as to how to spend the proceeds from this offering. They may spend
these proceeds in ways with which our stockholders may not
15
<PAGE> 20
agree. Management's allocation of the proceeds of this offering may not benefit
our business and the investment of the proceeds may not yield a favorable
return.
SUBSTANTIAL FUTURE SALES OF OUR COMMON STOCK COULD CAUSE OUR STOCK PRICE TO
DECLINE.
Sales of a substantial number of shares of our common stock after this
offering could cause the market price of our common stock to decline by
potentially introducing a large number of sellers of our common stock into a
market in which our common stock price is already volatile. In addition, the
sale of these shares could impair our ability to raise capital through the sale
of additional equity securities. Based on shares outstanding as of March 27,
2000, we will have 14,581,147 shares of our common stock outstanding upon
completion of the offering, or 15,106,147 shares if the underwriters'
over-allotment is exercised in full. Our directors, executive officers and all
stockholders have executed lock-up agreements that limit their ability to sell
shares of our common stock. All stockholders have agreed not to sell or
otherwise dispose of any shares of our common stock for a period of 180 days
after the date of this prospectus without the prior written approval of
Donaldson, Lufkin & Jenrette. When these lock-up agreements expire, these shares
and the shares of the common stock underlying any options held by these
individuals will become eligible for sale, in some cases subject only to the
volume, manner of sale and notice requirements of Rule 144 of the Securities Act
of 1933. See "Shares Eligible for Future Sale" for further discussion of the
shares that will be freely tradeable after the date of this prospectus.
CERTAIN PROVISIONS OF OUR GOVERNING DOCUMENTS AND OF DELAWARE LAW COULD INHIBIT
OUR ABILITY TO SELL OUR BUSINESS, EVEN IF DOING SO WOULD BE FAVORED BY
STOCKHOLDERS SUCH AS YOU.
Certain provisions of our certificate of incorporation and bylaws, as well
as Section 203 of the Delaware General Corporation Law, may discourage, delay or
prevent a change in control of our company that you as a stockholder may
consider favorable. These provisions include:
-- authorizing the issuance of "blank check" preferred stock that could
be issued by our board of directors to increase the number of
outstanding shares and thwart a hostile takeover attempt;
-- providing for a classified board of directors with staggered,
three-year terms;
-- prohibiting cumulative voting in the election of directors, which will
allow a majority of stockholders to control the election of all
directors;
-- requiring super-majority voting to effect certain amendments to our
certificate of incorporation and bylaws;
-- limitations on who may call special meetings of stockholders;
-- prohibiting stockholder action by written consent, which requires all
actions to be taken at a meeting of the stockholders; and
-- establishing advance notice requirements for nominations of candidates
for election to the board of directors or for proposing matters that
can be acted upon by stockholders at stockholder meetings.
In addition, Section 203 of the Delaware General Corporation Law may
discourage, delay or prevent a change in control of our company. See
"Description of Capital Stock -- Delaware Law and Certain Charter and By-law
Provisions and Anti-Takeover Effects."
16
<PAGE> 21
YOU WILL EXPERIENCE IMMEDIATE AND SUBSTANTIAL DILUTION IN THE BOOK VALUE OF
YOUR INVESTMENT.
If you purchase shares of our common stock in this offering, you will
experience immediate and substantial dilution, in that the price you pay will be
substantially greater than the net tangible book value per share of the shares
you acquire. This dilution is due in large part to the fact that our earlier
investors paid substantially less than the public offering price when they
purchased their shares of common stock. You will experience additional dilution
upon the exercise of outstanding stock options to purchase common stock.
17
<PAGE> 22
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS; MARKET DATA
Some of the statements under "Summary," "Risk Factors," "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
"Business," and elsewhere in this prospectus constitute forward-looking
statements. These statements relate to future events or other future financial
performance, and are identified by terminology such as "may," "will," "should,"
"expects," "scheduled," "plans," "intends," "anticipates," "believes,"
"estimates," "aims," "potential," or "continue" or the negative of such terms or
other comparable terminology. These statements are only predictions. Actual
events or results may differ materially. In evaluating these statements, you
should specifically consider various factors, including the risks outlined under
"Risk Factors." These factors may cause our actual results to differ materially
from any forward-looking statement.
This prospectus contains market data related to our business, the internet
and the electronic product development industry. This market data includes
projections that are based on a number of assumptions. If these assumptions turn
out to be incorrect, actual results may differ from the projections based on
these assumptions. As a result, our markets may not grow at the rates projected
by these data, or at all. The failure of these markets to grow at these
projected rates may have a material adverse effect on our business, results of
operations and financial condition, and the market price of our common stock.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot assure you that our future results, levels
of activity, performance, or goals will be achieved. We undertake no obligation
to update any of the forward-looking statements after the date of this
prospectus to conform such statements to reflect the occurrence of unanticipated
events.
18
<PAGE> 23
USE OF PROCEEDS
The net proceeds we will receive from the sale of 3,500,000 shares of
common stock offered by us are estimated to be $41.1 million ($47.4 million if
the underwriters' over-allotment option is exercised in full) after deducting
the estimated underwriting discounts and commissions and offering expenses
payable by us and assuming an initial public offering price of $13.00.
We expect to use the net proceeds from this offering for working capital
and other general corporate purposes. These uses may include product development
and expansion of our operations and sales and marketing capabilities. Currently,
we have no specific understanding with respect to any development or expansions.
Management will have discretion over the use and investment of the net proceeds.
Pending such uses, we will invest the net proceeds from this offering in short-
term, investment grade, interest-bearing securities.
The principal purposes of this offering are:
-- to increase our equity capital;
-- to create a public market for our common stock;
-- to facilitate future access by us to public equity markets;
-- to provide increased visibility and credibility in our marketplace;
and
-- to enhance our ability to use our common stock as a means of
attracting and retaining key employees.
A portion of the net proceeds may also be used for the acquisition of
complementary businesses or technologies. We are not currently a party to any
contracts, commitments or agreements with respect to any such acquisitions.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our common stock. We
currently intend to retain any earnings to fund the development and expansion of
our business and do not anticipate paying cash dividends in the foreseeable
future. Payment of any future dividends will be at the discretion of our board
of directors after taking into account various factors, including our financial
condition, operating results, current and anticipated cash needs and plans for
expansion. In addition, under our current line of credit we may not declare or
pay any dividends without written consent from our bank.
CORPORATE INFORMATION
We were initially incorporated in Massachusetts in 1996 under the name
Synchronicity, Inc. We reincorporated in Delaware in May 1999 and changed our
name to Synchronicity, Inc. of Massachusetts. On February 16, 2000, our Board of
Directors, and on March 6, 2000 our stockholders, approved an amendment to our
certificate of incorporation and we changed our name to Synchronicity Software,
Inc. on March 6, 2000. Our executive offices are located at 201 Forest Street,
Marlboro, MA 01752, and our telephone number is (508) 485-4122. Our website is
www.synchronicity.com. Information contained on our website does not constitute
part of this prospectus.
Synchronicity(TM), DesignSync(R), DesignSync(R)DFII, ProjectSync(R),
IPGear(TM), CatalogSync(TM) and the Synchronicity logo are our trademarks. All
other trademarks or tradenames referred to in this prospectus are the property
of their respective owners.
19
<PAGE> 24
CAPITALIZATION
The following table describes our capitalization as of December 31, 1999 on
an actual basis and on a pro forma as adjusted basis to give effect to the
conversion of our convertible preferred stock upon the consummation of this
offering, the sale of our shares of common stock in this offering and our
receipt of the estimated net proceeds, after deducting the estimated
underwriting discounts and commissions and the estimated offering expenses that
we expect to pay in connection with this offering.
You should read this table along with "Management's Discussion and Analysis
of Financial Condition and Results of Operations," our financial statements and
related notes and the other financial information in this prospectus.
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1999
----------------------------
PRO FORMA
ACTUAL AS ADJUSTED
<S> <C> <C>
Cash and cash equivalents................................... $ 3,652,124 $ 44,717,124
============ ============
Redeemable convertible preferred stock:
Series B convertible preferred stock...................... 2,211,765 --
Series C convertible preferred stock...................... 3,069,115 --
Series D convertible preferred stock...................... 7,201,788 --
------------
Total redeemable convertible preferred stock.............. 12,482,668 --
Stockholders' equity (deficiency):
Preferred stock $0.01 par value; 5,000,000 shares
authorized pro forma as adjusted; no shares issued and
outstanding............................................ -- --
Series A convertible preferred stock, $0.01 par value;
200,000 shares authorized, issued and outstanding
actual; no shares authorized, issued and outstanding
pro forma as adjusted.................................. 2,000 --
Common stock, $0.01 par value; 13,088,942 shares
authorized, 3,786,018 shares issued and outstanding
actual; 90,000,000 shares authorized, shares
issued and outstanding pro forma as adjusted........... 37,860 143,070
Additional paid-in capital................................ 7,436,361 60,880,819
Deferred compensation..................................... (4,600,815) (4,600,815)
Accumulated deficit....................................... (12,506,271) (12,506,271)
------------ ------------
Total stockholders' equity (deficiency)................... (9,630,865) 43,916,803
------------ ------------
Total capitalization........................................ $ 2,851,803 $ 43,916,803
============ ============
</TABLE>
The table above excludes:
- 1,520,377 shares of common stock issuable upon the exercise of stock
options outstanding on December 31, 1999 with a weighted average exercise
price of $0.58 per share and additional shares of common stock reserved
for issuance under our equity plans;
- 150,000 shares of common stock issuable upon exercise of a warrant
outstanding on December 31, 1999 with an exercise price of $4.30 per
share.
20
<PAGE> 25
DILUTION
Our net tangible book value per share immediately after this offering will
be substantially less than the initial public offering price because the initial
public offering price will be substantially higher than the current net tangible
book value per share. Our pro forma net tangible book value as of December 31,
1999 was approximately $2.9 million, or approximately $0.26 per share. Pro forma
net tangible book value per share represents assets less total liabilities,
divided by the number of shares of common stock outstanding.
After giving effect to the sale by us of 3,500,000 shares of common stock
in this offering at an assumed initial public offering price of $13.00 per
share, and deducting the estimated underwriting discounts and commissions and
offering expenses that we expect to pay, the pro forma net tangible book value
as of December 31, 1999 would have been $43.9 million, or $3.07 per share. This
represents an immediate increase in pro forma net tangible book value of $2.81
per share to existing stockholders and an immediate dilution of $9.93 per share
to investors purchasing common stock in this offering. The following table
illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price....................... $13.00
Pro forma net tangible book value per share as of
December 31, 1999.................................... 0.26
Increase per share attributable to this offering....... 2.81
------
Pro forma net tangible book value per share after this
offering.................................................. 3.07
------
Dilution per share to new investors......................... $ 9.93
======
</TABLE>
The following table summarizes, on a pro forma basis, as of December 31,
1999, the difference between the number of shares of common stock purchased from
us, the total consideration paid to us, and the average price per share paid by
existing stockholders and by new investors.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
-------------------- --------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
<S> <C> <C> <C> <C> <C>
Existing stockholders........ 10,807,020 75.5% $13,476,466 22.9% $ 1.25
New investors................ 3,500,000 24.5 45,500,000 77.1 13.00
---------- ----- ----------- ----- ------
Total............. 14,307,020 100.0% $58,976,466 100.0% $ 4.12
========== ===== =========== ===== ======
</TABLE>
The discussion and the tables above assume no exercise of stock options or
warrants outstanding on December 31, 1999 and no issuance of shares granted or
reserved for future issuance under our equity plans. As of December 31, 1999,
there were options outstanding to purchase 1,520,377 shares of common stock at a
weighted average exercise price of $0.58 per share and a warrant outstanding to
purchase 150,000 shares of common stock at an exercise price of $4.30 per share.
To the extent that any of these options or warrant are exercised, there will be
further dilution to new investors.
21
<PAGE> 26
SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following selected financial data should be read in conjunction with
our financial statements including the accompanying notes and with "Management's
Discussion and Analysis of Financial Condition and Results of Operations". The
data as of December 31, 1999 and 1998 and for each of the three years in the
period ended December 31, 1999 have been derived from our financial statements
and accompanying notes contained in this prospectus. The Statement of Operations
Data for the year ended December 31, 1996 and the Balance Sheet Data at December
31, 1997 and 1996 have been derived from our audited financial statements which
are not contained in this prospectus.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1996 1997 1998 1999
<S> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Software licenses..................................... $ -- $ 410 $ 1,043 $ 5,224
Services.............................................. -- 250 766 2,223
------- ------- ------- -------
Total revenues................................... -- 660 1,809 7,447
Cost of revenues:
Software licenses..................................... -- 28 107 193
Services.............................................. -- 64 206 849
------- ------- ------- -------
Total cost of revenues........................... -- 92 313 1,042
------- ------- ------- -------
Gross profit.............................................. -- 568 1,496 6,405
Operating expenses:
Sales and marketing................................... 315 1,400 2,172 4,642
Research and development.............................. 390 1,581 2,618 3,696
General and administrative............................ 361 436 730 1,124
Stock-based compensation.............................. -- 1 49 624
Warrant expense....................................... -- -- -- 1,093
------- ------- ------- -------
Total operating expenses......................... 1,066 3,418 5,569 11,179
------- ------- ------- -------
Loss from operations...................................... (1,066) (2,850) (4,073) (4,774)
Interest income........................................... 43 135 125 195
Other expense............................................. -- -- -- (23)
------- ------- ------- -------
Loss before provision for income taxes.................... (1,023) (2,715) (3,948) (4,602)
Provision for income taxes................................ -- 65 -- 37
------- ------- ------- -------
Net loss.................................................. $(1,023) $(2,780) $(3,948) $(4,639)
======= ======= ======= =======
</TABLE>
<TABLE>
<S> <C> <C> <C> <C>
Basic and diluted net loss per share...................... $(0.32) $(0.86) $(1.21) $(1.39)
Basic and diluted weighted average common shares
outstanding............................................. 3,226 3,247 3,284 3,372
Pro forma basic and diluted net loss per share(1)......... $ (0.45)
Pro forma basic and diluted weighted average common shares
outstanding(1).......................................... 10,393
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
----------------------------------------
1996 1997 1998 1999
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................. $ 2,159 $ 2,232 $ 6,313 $ 3,652
Working capital........................................... 2,009 1,970 5,192 1,937
Total assets.............................................. 2,312 3,657 8,792 8,758
Redeemable convertible preferred stock.................... 2,168 5,241 12,445 12,483
Stockholders' equity (deficiency)......................... (17) (2,822) (6,742) (9,631)
</TABLE>
- ---------------
(1) See Note 1 to our financial statements.
22
<PAGE> 27
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis together with our
financial statements, related notes and other financial information appearing
elsewhere in this prospectus. In addition to historical information, the
following discussion and other parts of this prospectus contain forward-looking
information that involves risks and uncertainties. Our actual results could
differ materially from those anticipated by such forward-looking information due
to competitive factors and other factors discussed under "Risk Factors" and
elsewhere in this prospectus.
OVERVIEW
We provide internet-based software that enables collaboration among team
members developing complex products regardless of location or company
affiliation. Our software is currently used primarily by firms engaged in the
development of semiconductors and other electronic products. Our products enable
our customers to track and manage communications, collaboration and design
information across geographically dispersed locations with a high level of
security. Our software further improves productivity by facilitating the reuse
of existing design elements. We were founded in January 1996 and in October 1997
we began licensing our first products and delivering related services.
Our revenues were $0.7 million, $1.8 million and $7.4 million in 1997, 1998
and 1999, respectively, and consisted of software license revenues and services
revenues. Software license revenues are derived from the license of our products
to our customers and the license of our products through our distributors.
Services revenues are attributable to consulting, training, maintenance and
other support services related to our products.
Software license revenues are recognized when products are delivered to
customers, pervasive evidence of an arrangement exists, the fee is fixed or
determinable and collection is probable. When license agreements contain
multiple elements and vendor-specific objective evidence exists for all
undelivered elements of such agreements, revenue is allocated to the undelivered
elements based on such vendor-specific objective evidence and the remainder is
allocated to the delivered elements. When license agreements include maintenance
and unspecified updates to be delivered to customers on an if-and-when-available
basis and vendor-specific objective evidence does not exist, revenue is
recognized ratably over the term of the arrangement. Revenues from arrangements
that have payment terms extending beyond twelve months are recognized as the
payments become due. Software license revenues from sales to our distributors
are generally recognized at the time a distributor reports to us that they have
licensed our software and all revenue recognition criteria have been satisfied.
Services revenues for consulting and training are recognized as the
services are provided, and revenues from maintenance are recognized ratably over
the term of the maintenance period.
We license our products to customers in the United States, Canada, Europe
and Japan. Revenues from customers outside of the United States represented
0.0%, 25.2% and 36.8% of total revenues in fiscal 1997, 1998 and 1999. All of
our sales are denominated in U.S. dollars. We intend to increase our
international distribution by developing stronger relationships with
international distributors and by selectively expanding and establishing foreign
sales offices. We expect international revenues to continue to increase as a
percentage of our total revenues in the future.
23
<PAGE> 28
We market and sell our products primarily through our direct sales force in
the United States and Europe, and through distributors in Japan and Europe. We
intend to continue to expand our domestic and international direct sales force
by expanding into additional geographic locations.
Our cost of software license revenues consists of personnel costs and
royalties due to third parties for the licensing of technology embedded in our
software relating to security, revision control and portability across
platforms. Our cost of services revenues includes salaries and related expenses
for the consulting, training and support services organizations and an
allocation of our overhead expenses.
Although our total revenues have increased annually, we have incurred
significant costs to develop our products and to recruit and train personnel for
our research and development, sales and marketing and general and administrative
organizations. As a result, we have incurred significant losses since inception.
As of December 31, 1999, we had an accumulated deficit of $12.5 million. Our
loss from operations was $2.9 million, $4.1 million and $4.8 million in 1997,
1998 and 1999. We intend to continue to incur significant sales and marketing,
research and development and general and administrative expenses. We expect to
continue to incur operating losses for the foreseeable future. In order to
achieve profitability, we will need to increase our revenues significantly.
Therefore, we cannot assure you that we will ever attain or maintain
profitability. Our expansion will also place significant demands on our
management and operational resources. To manage our rapid growth and increased
demands, we must improve existing, and implement new, operational and financial
systems, procedures and controls. We must also hire, train, manage, retain and
motivate qualified personnel. We expect future expansion to continue to
challenge our ability to hire, train, manage, retain and motivate our employees.
In view of the rapidly changing nature of our market and our limited
operating history, we believe that period-to-period comparisons of our revenues
and other operating results are not necessarily meaningful and should not be
relied upon as indications of future performance. Our historical revenue growth
rates are not necessarily sustainable or indicative of our future growth.
24
<PAGE> 29
RESULTS OF OPERATIONS
The following table sets forth selected financial data for the periods
indicated, expressed as a percentage of total revenues:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1997 1998 1999
<S> <C> <C> <C>
Revenues:
Software licenses................................... 62.1% 57.7% 70.1%
Services............................................ 37.9 42.3 29.9
------ ------ -----
Total revenues................................ 100.0 100.0 100.0
Cost of revenues:
Software licenses................................... 4.3 5.9 2.6
Services............................................ 9.6 11.4 11.4
------ ------ -----
Total cost of revenues........................ 13.9 17.3 14.0
------ ------ -----
Gross profit............................................. 86.1 82.7 86.0
Operating expenses:
Sales and marketing................................. 212.0 120.1 62.3
Research and development............................ 239.6 144.7 49.6
General and administrative.......................... 66.1 40.4 15.1
Stock-based compensation............................ 0.2 2.7 8.4
Warrant expense..................................... -- -- 14.7
------ ------ -----
Total operating expenses...................... 517.9 307.9 150.1
------ ------ -----
Loss from operations..................................... (431.8) (225.2) (64.1)
Interest income.......................................... 20.4 6.9 2.6
Other expense............................................ -- -- (0.3)
------ ------ -----
Loss before provision for income taxes................... (411.4) (218.3) (61.8)
Provision for income taxes............................... 9.8 -- 0.5
------ ------ -----
Net loss................................................. (421.2)% (218.3)% (62.3)%
====== ====== =====
</TABLE>
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
REVENUES
Total Revenues. Total revenues were $0.7 million, $1.8 million and $7.4
million in 1997, 1998 and 1999, representing an increase of $1.1 million, or
174.0%, from 1997 to 1998 and $5.6 million, or 311.8%, from 1998 to 1999. Five
customers individually accounted for 37.9%, 18.9%, 13.6%, 12.9% and 11.4% of our
total revenues in 1997. We had three customers that individually accounted for
20.6%, 14.6% and 13.9% of our total revenues in 1998 and one customer that
accounted for 11.8% of our total revenues in 1999.
Software Licenses. Software license revenues were $0.4 million, $1.0
million and $5.2 million in 1997, 1998 and 1999, representing an increase of
$0.6 million, or 154.3%, from 1997 to 1998 and $4.2 million, or 401.0%, from
1998 to 1999. The increase in software license revenues from
25
<PAGE> 30
1997 to 1998 and 1998 to 1999 was due to increased market acceptance of our
products, including new versions of our products. Software license revenues as a
percentage of total revenues were 62.1%, 57.7% and 70.1% in 1997, 1998 and 1999.
Services. Services revenues were $0.3 million, $0.8 million and $2.2
million in 1997, 1998 and 1999, representing an increase of $0.5 million, or
206.3% from 1997 to 1998 and $1.4 million, or 190.3% from 1998 to 1999. The
increase in services revenues in 1998 and 1999 reflects the increased demand for
our post contract support, training and consulting offerings. Services revenues
as a percentage of total revenues were 37.9%, 42.3% and 29.9% in 1997, 1998 and
1999. The decrease in services revenues as a percentage of total revenues was
due to the proportionally greater increase in the volume of software license
revenues in 1999.
COST OF REVENUES
Software Licenses. Cost of software licenses was $28,000, $107,000 and
$194,000 in 1997, 1998 and 1999, representing an increase of $79,000, or 278.7%,
from 1997 to 1998 and $87,000, or 81.4% from 1998 to 1999. Cost of software
licenses as a percentage of software license revenues in 1997, 1998 and 1999 was
6.9%, 10.2% and 3.7% in the respective periods. The dollar increase in 1998 and
1999 was due to the increase in volume of license sales including an increased
volume of sales to large customers. Cost of software licenses as a percentage of
software license revenues decreased in 1999 as the per seat cost of third party
royalties decreased in proportion to the increase in volume of licenses. We
believe the cost of licenses may vary significantly in the future, depending on
the mix of internally developed and third-party products.
Services. Cost of services was $63,000, $206,000 and $849,000 in 1997, 1998
and 1999, representing an increase of $143,000, or 224.6% from 1997 to 1998 and
$643,000, or 312.0% from 1998 to 1999. Cost of services as a percentage of
services revenues in 1997, 1998 and 1999 was 25.4%, 26.9% and 38.2% of services
revenues in the respective periods. The increase was primarily due to the cost
of hiring additional services personnel and related costs to accommodate the
increase for our services offerings. The cost of services as a percentage of
services revenues may vary between periods due to the mix of services provided
and the resources used to provide these services.
OPERATING EXPENSES
Sales and Marketing. Sales and marketing expenses include specific expenses
related to public relations and advertising, trade shows, marketing materials,
customer meetings and expenditures specific to the sales group, such as
commissions. Sales and marketing expenses were $1.4 million, $2.2 million and
$4.6 million in 1997, 1998 and 1999, representing an increase of $0.8 million,
or 55.2%, from 1997 to 1998 and $2.4 million, or 113.7% from 1998 to 1999. Sales
and marketing expenses as a percentage of revenues in 1997, 1998 and 1999 was
212.0%, 120.1% and 62.3% in the respective periods. The dollar increase reflects
significant personnel-related expenses such as salaries, benefits and
commissions, recruiting fees, travel expenses and related costs of hiring sales
management, sales representatives, sales engineers and marketing personnel. The
number of employees in our sales and marketing departments increased from nine
in 1997 to 17 in 1998 and 28 in 1999. The decline in sales and marketing
expenses as a percentage of total revenues was primarily due to the growth in
total revenues. We anticipate that our sales and marketing expenses will
continue to increase in absolute dollars for the foreseeable future as we expand
our domestic and international sales forces.
26
<PAGE> 31
Research and Development. Research and development expenses consist
primarily of personnel and related expenses associated with the development of
new products, the enhancement of existing products and quality assurance and
testing costs incurred prior to commercial production. Research and development
expenses were $1.6 million, $2.6 million and $3.7 million in 1997, 1998 and
1999, representing an increase of $1.0 million, or 65.6%, from 1997 to 1998 and
$1.1 million, or 41.2%, from 1998 to 1999. Research and development expenses as
a percentage of revenues in 1997, 1998 and 1999 were 239.6%, 144.8% and 49.6% in
the respective periods. The dollar increases for each of the periods were due to
the increase in the number of software developers, quality assurance personnel
and outside contractors whom we hired to support our product development,
documentation and testing activities related to the development and release of
the latest versions of our products. Personnel in research and development
increased from 13 in 1997 to 22 in 1998 and 29 in 1999. The decline in research
and development expenses as a percentage of total revenues was primarily due to
the growth in total revenues. We anticipate that our research and development
expenses will continue to increase in absolute dollars for the foreseeable
future as we expand our research and development staff.
General and Administrative. General and administrative expenses consist
primarily of salaries and other related costs for finance and human resources
employees, as well as accounting, legal, other professional fees and allowance
for doubtful accounts. General and administrative expenses were $0.4 million,
$0.7 million and $1.1 million in 1997, 1998 and 1999, representing an increase
of $0.3 million, or 67.3%, from 1997 to 1998 and $0.4 million, or 54.0% from
1998 to 1999. General and administrative expenses as a percentage of revenues in
1997, 1998 and 1999 were 66.1%, 40.4% and 15.1% in the respective periods. The
dollar increase was primarily due to our hiring of additional finance, executive
and administrative personnel to support the growth of our business during that
period. We anticipate that our general and administrative expenses will continue
to increase in absolute dollars for the foreseeable future as we expand our
operations and incur the ongoing costs associated with being a public company.
Stock-Based Compensation. Stock-based compensation expense was $1,000,
$48,000 and $624,000 in 1997, 1998 and 1999. For grants to employees, these
non-cash expenses represent the difference between the exercise price and the
estimated fair value of the Company's common stock on the date the related stock
options are granted. For grants to nonemployees, these non-cash expenses
represent the value of a particular grant as determined by the Black-Scholes
valuation model. All stock-based compensation is expensed over the vesting
period. Unearned compensation on the unvested options is deferred and included
as a component of stockholders' equity. The deferred stock-based compensation
totaled $4.6 million at December 31, 1999, and will result in additional charges
to operations through 2003.
Warrant Expense. We granted to Intel Corporation a warrant to purchase
150,000 shares of our common stock at a price of $4.30 per share which vested in
1999 when Intel entered into a license agreement and issued to us a purchase
order for $2,500,000. Warrant expense was $1.1 million in 1999 and represents
the estimated fair value calculated using the Black-Scholes valuation model at
the date the warrant became vested. There was no warrant expense in 1998 or
1997.
Interest Income. Interest income was $135,000, $125,000 and $195,000 in
fiscal 1997, 1998 and 1999. The decrease in 1998 was primarily due to lower
average interest rates and the increase in 1999 was due to higher average cash
balances from the sale of the Series D preferred stock in September 1998 and to
higher average interest rates.
Other Expense. Other expense was $23,000 in 1999 representing foreign
currency transaction losses.
27
<PAGE> 32
Income Taxes. Income taxes were $65,000 and $37,000 in fiscal 1997 and 1999
and represent foreign tax withholdings which we paid during the year. We had no
income tax provision in 1998.
As of December 31, 1999, we had net operating loss carryforwards for
federal and state income tax reporting purposes of approximately $10.1 million
that expire in various amounts beginning in 2011 and 2001, respectively. In
addition, we had federal and state tax credits related to research and
development activities of $371,000 and $146,000 which expire beginning in 2011.
The U.S. tax laws contain provisions that limit the use in any future period of
net operating loss and credit carryforwards upon the occurrence of certain
events, including a significant change in ownership interests. We had deferred
tax assets, including our net operating loss carryforwards and tax credits, of
approximately $5.2 million as of December 31, 1999. Due to our limited operating
history, we fully reserved the net deferred tax assets at December 31, 1999.
28
<PAGE> 33
QUARTERLY RESULTS OF OPERATIONS
The following tables set forth our unaudited statement of operations data
for each of the five quarters in the period ended December 31, 1999, as well as
that data expressed as a percentage of our total revenues for the quarters
presented. You should read this information in conjunction with our financial
statements and related notes appearing elsewhere in this prospectus. We have
prepared this unaudited information on a basis consistent with our audited
financial statements, and, in the opinion of our management, it reflects all
normal recurring adjustments that we consider necessary for a fair presentation
of our operating results for the quarters presented. You should not draw any
conclusions about our future results from the operating results for any quarter.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------------------------
DEC 31, MARCH 31, JUNE 30, SEPT 30, DEC 31,
1998 1999 1999 1999 1999
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Revenues:
Software licenses................................... $ 324 $ 416 $ 990 $1,463 $ 2,355
Services............................................ 182 470 518 572 663
------- ------- ------ ------ -------
Total revenues................................. 506 886 1,508 2,035 3,018
Cost of revenues:
Software licenses................................... 57 22 38 67 66
Services............................................ 47 134 153 213 349
------- ------- ------ ------ -------
Total cost of revenues......................... 104 156 191 280 415
------- ------- ------ ------ -------
Gross profit............................................ 402 730 1,317 1,755 2,603
Operating expenses:
Sales and marketing................................. 667 886 1,020 1,107 1,629
Research and development............................ 722 804 841 960 1,091
General and administrative.......................... 227 232 260 305 327
Stock-based compensation............................ 49 89 60 187 288
Warrant expense..................................... -- -- -- -- 1,093
------- ------- ------ ------ -------
Total operating expenses....................... 1,665 2,011 2,181 2,559 4,428
------- ------- ------ ------ -------
Loss from operations.................................... (1,263) (1,281) (864) (804) (1,825)
Interest income......................................... 72 59 50 44 42
Other expense........................................... -- (3) (5) (4) (11)
------- ------- ------ ------ -------
Loss before provision for income taxes.................. (1,191) (1,225) (819) (764) (1,794)
Provision for income taxes.............................. -- -- -- -- 37
------- ------- ------ ------ -------
Net loss................................................ $(1,191) $(1,225) $ (819) $ (764) $(1,831)
======= ======= ====== ====== =======
</TABLE>
29
<PAGE> 34
<TABLE>
<CAPTION>
AS A PERCENTAGE OF TOTAL REVENUES
---------------------------------------------------
DEC 31, MARCH 31, JUNE 30, SEPT 30, DEC 31,
1998 1999 1999 1999 1999
<S> <C> <C> <C> <C> <C>
Revenues:
Software licenses.................................. 64.0% 47.0% 65.6% 71.9% 78.0%
Services........................................... 36.0 53.0 34.4 28.1 22.0
------- ------- ------ ------ ------
Total revenues................................ 100.0 100.0 100.0 100.0 100.0
Cost of revenues:
Software licenses.................................. 11.3 2.5 2.5 3.3 2.2
Services........................................... 9.3 15.1 10.2 10.5 11.6
------- ------- ------ ------ ------
Total cost of revenues........................ 20.6 17.6 12.7 13.8 13.8
------- ------- ------ ------ ------
Gross profit........................................... 79.4 82.4 87.3 86.2 86.2
Operating expenses:
Sales and marketing................................ 131.7 100.1 67.6 54.3 54.1
Research and development........................... 142.7 90.7 55.8 47.2 36.1
General and administrative......................... 44.9 26.2 17.2 15.0 10.8
Stock-based compensation........................... 9.7 10.0 4.0 9.2 9.5
Warrant expense.................................... -- -- -- -- 36.2
------- ------- ------ ------ ------
Total operating expenses...................... 329.0 227.0 144.6 125.7 146.7
------- ------- ------ ------ ------
Loss from operations................................... (249.6) (144.6) (57.3) (39.5) (60.5)
Interest income........................................ 14.2 6.6 3.3 2.2 1.5
Other expense.......................................... -- (0.3) (0.3) (0.2) (0.4)
------- ------- ------ ------ ------
Loss before provision for income taxes................. (235.4) (138.3) (54.3) (37.5) (59.4)
Provision for income taxes............................. -- -- -- -- 1.3
------- ------- ------ ------ ------
Net loss............................................... (235.4)% (138.3)% (54.3)% (37.5)% (60.7)%
======= ======= ====== ====== ======
</TABLE>
Our total revenues increased in each of the five quarterly periods ended
December 31, 1999. The increase in revenues during these periods reflects an
increased market acceptance of our products as well as the introduction of new
products. Generally, we expect to experience a seasonal decrease from the fourth
quarter of one year to the first quarter of the subsequent year primarily due to
the budgeting cycle and buying patterns of our major customers. Cost of revenues
varied in each of the five quarterly periods ended December 31, 1999 as a result
of the changes in the mix of software license revenues and services rendered.
The relatively lower costs of software license revenues in 1999 as compared to
1998 was the result of a significant reduction in royalties that we paid for
licensing embedded technology. Additionally, the comparatively higher costs of
software license revenues during the fourth quarter of 1998 were the result of a
large strategic order to a significant customer at favorable pricing. Operating
expenses increased in each of the five quarterly periods ended December 31, 1999
as a result of our hiring additional personnel in all functional areas of the
company over those periods.
Our quarterly operating results have fluctuated significantly in the past
and will continue to fluctuate in the future as a result of a number of factors,
many of which are outside our control. As a result of our limited operating
history, we cannot forecast operating expenses based on historical results.
Accordingly, we base our anticipated level of expenses in part on future revenue
projections. Most of our expenses are fixed in the short term and we may not be
able to quickly reduce spending if revenues are lower than we have projected.
Our ability to forecast our quarterly revenues accurately is limited given our
short operating history, the length of our sales cycle and other uncertainties
in our business. If revenues in a particular quarter do not meet projections,
our net losses in a given quarter would be greater than expected. As a result,
investors should not rely on the results of one quarter as indicative of future
performance.
30
<PAGE> 35
LIQUIDITY AND CAPITAL RESOURCES
Since inception, we have primarily funded our operations through equity
financings. Our cash and cash equivalents at December 31, 1999 were $3.7
million. To a lesser extent, we have financed our operations through lending
arrangements.
At December 31, 1999, we had a line of credit, which allowed borrowings up
to $2.0 million through February 2000. Borrowings under the line may be used for
working capital ($1.5 million) and equipment purchases ($0.5 million). Interest
on the borrowings was charged at the bank's prime rate (8.5% at December 31,
1999) plus 0.5% and borrowings were collateralized by substantially all of our
tangible assets. We had no outstanding borrowings at December 31, 1998 or 1999.
The agreement required compliance with certain financial ratios and, among other
things, the maintenance of minimum levels of working capital and tangible net
worth. At December 31, 1999, we were not in compliance with certain financial
ratios and, as such, we obtained a waiver of the non-compliance from the bank.
In February 2000, we renegotiated the line of credit to include borrowings
up to $3.0 million through February 2001 as well as less restrictive financial
covenants. Under this new line of credit we would have been in compliance with
the financial covenants at December 31, 1999. Borrowings under the new line may
be used for working capital ($2.5 million) and equipment purchases ($0.5
million). The other terms of the new line of credit are similar to the former
line of credit. As of February 16, 2000, we had no borrowings outstanding under
the new line of credit.
Cash used in operating activities was $2.5 million, $2.8 million and $2.3
million in fiscal 1997, 1998 and 1999. Cash used in 1997 and 1998 was primarily
due to the increases in our operating losses. Our decrease in the use of cash
from 1998 to 1999 was due to lower operating losses when adjusted for the
stock-based compensation and warrant expense, both of which did not require
cash.
Cash used in investing activities was $434,000, $261,000 and $457,000 in
fiscal 1997, 1998 and 1999. Cash used in investing activities was primarily for
purchases of property and equipment in each period. Purchases of property and
equipment, including equipment purchased under capital leases, were $433,000,
$253,000 and $453,000 in 1997, 1998 and 1999. These expenditures were primarily
for computer hardware and software and furniture and fixtures. We expect that
capital expenditures will continue to increase to the extent we continue to
increase our headcount or expand our operations.
Cash provided by financing activities was $3.0 million, $7.2 million and
$70,000 in fiscal 1997, 1998 and 1999. Cash flows from financing activities in
1997 and 1998 were primarily attributable to the sales of our equity securities.
Cash provided by financing activities in 1999 resulted from net proceeds on the
exercise of common stock options.
We also have noncancelable operating leases for office space of
approximately $1.7 million at December 31, 1999, which are payable through 2004.
We intend to continue to incur significant sales and marketing, research
and development and general and administrative expenses including the hiring of
additional employees in the future. We expect to continue to incur operating
losses for the foreseeable future. In addition, we may utilize cash resources to
fund acquisitions or investments in complementary businesses, technologies or
product lines. We believe that our current cash and cash equivalents, together
with cash generated from operations and the net proceeds from this offering will
be sufficient to meet our foreseeable working capital and capital expenditure
requirements for at least the next 12 months. However,
31
<PAGE> 36
there can be no assurance that we will not require additional financings during
this time frame or that such additional financing, if needed, will be available
on terms acceptable to us, if at all.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the FASB issued Statement of Financial Accounting Standard,
or SFAS, No. 133, "Accounting for Derivative Instruments and Hedging
Activities". This statement establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts and for hedging activities. SFAS No. 133 will be effective for
our year ending December 31, 2001. We have not determined the effects, if any,
that SFAS No. 133 will have on our financial statements.
QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
We develop our products in the United States and market them in North
America, Europe and Japan. As a result, our financial results could be affected
by factors such as changes in foreign currency exchange rates or weak economic
conditions in foreign markets. Because all of our revenues are currently
denominated in U.S. dollars, a strengthening of the dollar could make our
products less competitive in foreign markets. In addition, we are exposed to the
impact of foreign currency fluctuations when we pay for European operating
expenses. We pay for these expenses using the local currency, primarily British
pounds or Euro dollars. During 1999 we did not engage in foreign currency
hedging activities. Our interest income is sensitive to changes in the general
level of U.S. interest rates, particularly since the majority of our investments
are in short-term instruments. Due to the short-term nature of our investments,
we believe that there is no material risk exposure.
YEAR 2000 READINESS
Computer systems and software must accept four digit entries to distinguish
21st century dates from 20th century dates. As a result, many software and
computer systems that accepted only two-digit entries needed to be upgraded in
order to accept dates beginning January 1, 2000. Based on a Year 2000 readiness
review that we have conducted, we believe the versions of our products that we
currently ship are Year 2000 compliant, when configured and used in accordance
with the related documentation, so long as the underlying operating system of
the host machine and any other software used with or in the host machine or with
our products are also Year 2000 compliant. We believe that some versions of our
products prior to DesignSync 2.1.2, DesignSync/DFII 1.3, ProjectSync 2.0.2 and
CatalogSync 1.01 may not be Year 2000 compliant. We have notified our customers
of this fact and encouraged users of these versions to upgrade to the latest
version. To date, all of our customers have maintenance agreements with us and
have the right to receive the latest version of our products without additional
charge.
To date, we have not experienced any date related problems with any
third-party software. In addition, we do not believe we will incur material
costs in the future because of date related problems.
32
<PAGE> 37
BUSINESS
The following description of our business should be read in conjunction
with the information included elsewhere in this prospectus. This description
contains forward-looking statements that involve risks and uncertainties. Our
actual results could differ significantly from the results discussed in the
forward-looking statements as a result of the factors set forth in "Risk
Factors" and elsewhere in this prospectus.
OVERVIEW
We provide internet-based software that enables collaboration among team
members developing complex products regardless of location or company
affiliation. Our products are currently used by firms engaged in the development
of semiconductors and other electronic products. Companies developing these
products face increasing design complexity, a shortage of engineers and other
technical personnel and competitive pressures to bring products to market more
quickly. As a result, collaboration within companies and among other
participants in the electronic product development process is critical. Our
products enable our customers to track and manage communications, collaboration
and design information across geographically dispersed locations within a secure
internet-based environment. Our software further improves productivity by
facilitating the reuse of existing design elements. Although our software is
currently used in the development of electronic products, we believe that it may
be equally useful in the development of other complex products.
Since shipping our first product in 1997, we have licensed our products to
approximately 50 customers totaling approximately 7,500 end-user licenses. Our
customers include market leaders from the semiconductor, computer, computer
peripheral, consumer electronic, networking and telecommunications industries,
including Intel Corporation, Texas Instruments Incorporated, Philips
Semiconductors B.V., Lucent Technologies, Inc., Nortel Networks Corporation,
PMC-Sierra, Inc., Cypress Semiconductor Corporation and ARM Ltd.
INDUSTRY BACKGROUND
The growth of the new digital economy has been fueled in large part by the
rapid development of new, complex semiconductors, microelectronics and other
electronic products which are essential to an increasing number of products
ranging from computers and mobile phones to personal digital assistants and
pagers. According to the Semiconductor Industry Association, the semiconductor
market alone was $140.8 billion in 1999. Competition among suppliers of
electronic products has become more intense and has expanded globally. In order
to compete successfully, suppliers of electronic products must develop complex,
high quality, feature-rich products at a lower cost and more quickly than their
competitors. These challenges, combined with the increasing complexity of new
electronic product designs, have strained traditional product development
processes. As a result of these market dynamics, vendors of electronic products
must shorten product development cycles so that their products enter the market
more efficiently and quickly, thereby providing the vendors with first-mover
advantages.
The competitive environment and the increasing complexity of electronic
products have compelled companies to shift from traditional product development
processes to the outsourcing of specialized design tasks. In the past, product
development processes have been conducted primarily by in-house teams working
together at the same site. The increasing complexity of electronic products has
led to an expansion and diversification of the participants in the product
development process as specialized skills and information are needed to develop
the products. In addition, companies face a chronic shortage of the highly
skilled engineers and other technical experts
33
<PAGE> 38
required to develop complex electronic products. Given this constraint on
resources, it is essential that companies efficiently utilize available
personnel and reuse existing designs whenever possible. Additionally, as
companies grow, both internally and through acquisitions, and as they seek
additional sources of expertise around the world, the participants in the design
process become more dispersed, both geographically and organizationally.
Development teams are thus evolving into electronic product development supply
chains. Electronic product development supply chains are comprised of many
participants involved in the development of an electronic product including
members of a company's internal design team, external suppliers of development
expertise, business partners, consultants and customers of the company. This has
resulted in virtual teams dispersed across corporate and geographic boundaries
and connected by computers and telecommunications networks. In addition, as the
electronic product development process has become more specialized and reliant
on outsourcing, companies have increasingly utilized intellectual property (IP)
cores, design elements that are frequently reused within electronic product
designs. The practice of design reuse allows companies to focus on their primary
design expertise and shorten product development cycles.
While the outsourcing of design tasks and the implementation of design
reuse practices enable companies to get to market quickly with feature-rich,
reliable, cost-effective products, virtual product development teams and their
supply chains face growing challenges in:
Promoting and Managing Supply Chain Collaboration. The ability to
proactively manage real-time collaboration among the participants in the product
development process is a critical success factor for companies developing
electronic products. A virtual product development team consists of participants
performing specialized tasks and can include internal electronic and software
design teams, external design contractors and consultants, providers of external
IP cores and design tool suppliers. In order to effectively utilize the
resources within the supply chain, all members must have the ability to
collaborate freely. However, companies must also be able to control access to
complex design development and project information so that confidential and
proprietary data is protected and design integrity is maintained. For example, a
company may grant all experienced designers within the enterprise full access to
the design information, but restrict the access of less experienced designers
and third party contractors to only the design information which they require.
Such capabilities become even more crucial to the management of a design project
when a development team is geographically dispersed or crosses corporate
boundaries.
Managing Complex Design Iterations. To improve product development and
communication among product development team members, companies must be able to
manage and track the iterative design process. For example, the typical
development process can require the collaboration of 100 developers using as
many as 75 different design tools. The design process is highly iterative,
consisting of many interactive steps in which members of a development team
analyze, change and eventually transform a set of specifications into a
manufacturable design. The process creates a dynamic loop in which members of
the team make thousands of simultaneous changes to the design information every
day. Each change must be tracked, managed and immediately communicated to other
development team members. For example, when making a design change, an engineer
will perform a series of steps to determine whether the change has created the
desired effect. Often this analysis can span several days or even weeks, and if
other members of the development team do not know exactly which version of the
design files should be analyzed, they may perform tests on an obsolete version
of the design. This can lead to costly delays in getting the product to market.
Coordinating the Reuse of Intellectual Property. A feature-rich complex
product can be brought to market more rapidly by reusing internally or
externally supplied IP cores because less
34
<PAGE> 39
time is required to design and develop the product. As a result, companies must
be able to access internal catalogs of IP cores and collaborate effectively with
suppliers of IP cores to improve their productivity and shorten product
development cycles. Additionally, companies that incorporate reusable design
information in their products can dedicate limited resources to value added
tasks. Companies are also seeking to implement company-wide design reuse
initiatives to increase the amount of reusable design data they develop
internally.
To date, companies engaged in the development of complex electronic
products have attempted to enable supply chain collaboration using e-mail, web
pages and internally developed ad hoc collaboration systems to manage design
data and perform tracking functions. Some companies have also attempted to
retrofit software configuration management and product data management software
applications for this process. These methods have produced only partially
effective results and are often costly to develop and maintain. In addition,
these solutions are often proprietary and company-specific, thereby limiting
business-to-business collaboration with external product development partners.
Consequently, a company employing these solutions cannot fully realize the
benefits associated with an outsourced supply chain. Moreover, none of these
technologies is designed to manage the complex design information typical of the
electronic product development process. Finally, these solutions are not capable
of integrating with the multiple design tools used in the design process.
Neither the development of a proprietary solution nor the retrofitting of
technologies designed for other purposes fully capitalizes on the real-time
collaboration capabilities of the internet or the investment companies have made
in their existing technologies.
THE SYNCHRONICITY SOLUTION
We provide internet-based software products that enable participants in
electronic product development supply chains to collaborate as a single virtual
project team, manage complex design iterations and share reusable intellectual
property. Our products manage the interaction among supply chain members and
their design information in a highly dynamic environment where supply chain
members must be notified of design modifications in real-time. Our products also
enable and encourage the use of third-party and internally developed IP cores,
allowing companies to focus on their areas of expertise while decreasing their
development costs and time-to-market. In addition, our products employ an open,
standards-based architecture that is designed to integrate with and complement
existing design tools and preserve our customers' investments in technology. We
believe that our solution enables companies to develop increasingly complex
products at lower cost and in less time.
Our internet-based solutions provide companies involved in complex product
development with the capability to:
Effectively Promote and Manage Supply Chain Collaboration. Our products
create an environment in which all members of an electronic product development
supply chain may collaborate as a single virtual project team. When using our
products, a virtual project team can function within a secure, internet-based
environment regardless of the corporate affiliation or geographic location of
its members. In addition, our products permit companies to maintain privacy and
security with respect to internal communications and intellectual property while
providing external members of the supply chain with the access to design
information they require in order to collaborate effectively. Our products have
also been designed to be highly scalable and flexible to manage the varying user
demands and sizes of complex product development supply chains.
Proactively Manage Complex Design Iterations. We design our products to
handle large volumes of simultaneous and interactive changes which are made to
design information during the
35
<PAGE> 40
development process. Our products track, coordinate and manage all changes and
immediately notify those supply chain members who need to know about the
changes. Our products allow a member of the supply chain to freely interact with
the design information while automatically coordinating design changes with the
numerous other members of the team. All of these capabilities speed the design
process and minimize the opportunity for design related errors that
significantly increase expenses and delay product introductions. We believe that
the use of our products results in lower costs and decreased time-to-market for
our customers.
Efficiently Coordinate the Reuse of Intellectual Property. Our products
enable companies to get to market quickly by promoting the implementation of
design reuse practices. Our solutions have specific capabilities that permit
companies to identify, catalog, publish and manage reusable portions of design
information from internal or external sources. A designer can simply browse a
catalog of reusable designs or IP cores, select and compare them, and then
download the selected IP core for use in a design. Third-party suppliers also
use our products to distribute IP cores, thereby effectively becoming members of
the electronic product development supply chain. Our products allow companies to
focus on their areas of expertise by utilizing third-party technology and
expertise, thereby improving the efficiency of the product development process.
OUR STRATEGY
We intend to be the leading provider of solutions that enable company-wide
and business-to-business collaboration within complex product development supply
chains. Key elements of our strategy include:
Enhancing the Functionality of Supply Chain Collaboration. We intend to
lead technological innovation for improved internet-based electronic product
development supply chain collaboration, offering our customers software products
designed to enhance critical supply chain processes. We plan to extend the
functionality of our products to create and deliver new value-added applications
that enhance company-wide and business-to-business collaboration. We plan to
develop additional software products to address new opportunities that result
from new business processes that are being created for internet-based
collaboration and interaction among supply chain members. For example, we intend
to develop an additional product to allow IP core suppliers to improve delivery
and support of their products. In addition, we expect to develop our products to
more tightly integrate with and complement third-party design automation
software applications.
Leveraging our Installed Customer Base. We believe that we have assembled a
customer base that is representative of the leaders within the electronics
industry and that their use of our products validates our technological
leadership. Approximately 50 companies worldwide, including eight of the ten
largest semiconductor companies, have purchased our products. Many of our
existing customers initially use our products in specific divisions or for
specific development projects. In many cases, this has led to repeat orders from
and purchases of complementary products by these customers. We believe we can
penetrate more deeply into existing customer sites by expanding deployments into
company-wide implementations as well as cross-selling existing and additional
products.
Capitalizing on Network Effects to Expand Our Customer Base. As our
customers deploy our software across their electronic product development supply
chains, non-customer participants benefit from our solution first hand, creating
a network effect. We have experienced incremental sales resulting from our
customers' recommending the use of our products to external product development
partners and anticipate that certain enterprises may require adoption of our
products by
36
<PAGE> 41
their external development partners. In addition, we believe that this network
effect will increase the proliferation of our products as an industry standard
and strengthen our brand recognition.
Developing and Expanding Strategic and Other Industry Relationships. We
plan to continue to develop strategic technology and marketing relationships
with industry participants including third-party IP core providers, consultants,
contractors and design automation software companies. Our existing relationships
with Cadence Design Systems, Inc. and Synopsys, Inc., have allowed us to tightly
couple our products with the two most widely installed electronic design
automation solutions. We believe these relationships validate the use of our
technology within the electronic product development industry, help us create
brand recognition and increase sales of our products. In order to foster
additional industry relationships, we intend to offer a strategic marketing
program, Synchronicity Direct-Connect, through which new partners will gain
access to our products for the purpose of developing more tightly integrated
solutions between our software products and their product development tools or
services.
Pursuing Additional Market Opportunities. We intend to continue to pursue
the ample opportunities provided by the high growth electronic product
development markets and also address new market opportunities in the future. To
date, we have focused on several segments of the electronic product development
industry. We believe that this industry presents the most difficult challenges
in distributed development and design information management due to the specific
complexities of the electronic product development process, the large volumes of
design information and the large number of participants involved in the process.
Although we intend to continue our focus on the electronic product industry for
the foreseeable future, we believe that the experience we have gained in
developing our supply chain collaboration solution has applications in markets
developing other complex products.
Expanding Our Global Presence. We intend to continue to expand our global
presence to both enhance our competitive position worldwide and increase our
ability to better serve and support our customers. Our products are sold
worldwide and revenues outside of the United States represented 36.8% of total
revenues in 1999. We believe there is significant opportunity to expand sales of
our software products internationally. We intend to increase our international
distribution by developing stronger relationships with international
distributors and by selectively expanding and establishing foreign sales
offices.
PRODUCTS
Our internet-based products provide a comprehensive company-wide and
business-to-business solution to the problem of managing collaboration among
electronic product development supply chain members. Our software has also been
designed to be highly scalable and flexible to manage the varying user demands
and sizes of product development supply chains. In addition, our products employ
an open, standards-based architecture that is designed to integrate with and
complement existing design tools and preserve our customers' existing
investments in technology. The foundation of our products is the SyncServer,
which creates a secure project collaboration portal and performs the following
functions:
-- serves as a project hub by storing design files and project
information;
-- enables the creation of access control rules and enforces these rules;
-- notifies supply chain members when changes are made to design
information; and
-- keeps track of the status of design changes.
37
<PAGE> 42
Members of a virtual project team collaborate and communicate using the
following products:
DESIGNSYNC. DesignSync manages the design information within electronic
product development supply chains. DesignSync allows users to:
-- access and retrieve design files from SyncServer;
-- review the history of design changes;
-- share changes with other supply chain members; and
-- receive real-time notices that changes are being made by other team
members.
DesignSync is easy to deploy because it provides support for various
methods of design collaboration commonly used in the design process and may also
complement or be embedded within other design tools. As an example, we created a
specialized version of DesignSync to work with Cadence Design Systems Inc.'s
Design Framework II family of integrated circuit design software so that
developers can access DesignSync directly from within Cadence's operating
environment.
PROJECTSYNC. ProjectSync enables and improves the communication among
members of the electronic product development supply chain. ProjectSync allows
users to:
-- track the lifecycle of design changes;
-- publish and manage design specifications;
-- establish continuous communication with other team members; and
-- create an audit trail of all project team communications.
Project leaders use ProjectSync to track the status of their design projects and
to gain visibility into project statistics, such as the rate at which defects
are found and fixed. While we license ProjectSync as a stand-alone product, our
ProjectSync and DesignSync products are typically used together to create a
comprehensive design and project management solution.
CATALOGSYNC. CatalogSync supports the implementation of design reuse and
enables access to third party design information and IP cores. Using standard
web browsers, members of a product development team can use CatalogSync to:
-- search for IP cores;
-- compare IP cores; and
-- download and incorporate IP cores into new designs.
CatalogSync can be employed both within the boundaries of an enterprise as well
as by third-party providers who make their IP cores available over the internet
to other businesses.
IPGEAR. IPGear is a bundled software solution configured to support the
needs of enterprises that seek to establish collaboration and design reuse
initiatives within and between companies. IPGear consists of CatalogSync,
DesignSync and ProjectSync and is used to implement centralized design reuse
portals for the preparation, storage, distribution and support of reusable IP
cores. The comprehensive solution provided by IPGear can significantly reduce
the amount of time companies spend establishing collaboration initiatives and
centralized, web-accessible design reuse libraries
We are currently developing enhancements to our existing products as well
as new products that will complement our CatalogSync product and add to our
IPGear internet-based design reuse applications.
38
<PAGE> 43
CUSTOMERS
To date, we have licensed our products to approximately 50 customers,
predominantly within the semiconductor, IP cores and tools and services market
segments. In 1999, Cadence Design Systems, Inc. accounted for approximately
11.8% of our revenues.
The following is a representative list of customers, each of which has
purchased approximately $50,000 or more of our products:
SEMICONDUCTORS
Conexant Systems, Inc.
Cypress Semiconductor Corporation
Dallas Semiconductor, Inc.
Fujitsu Microelectronics, Inc.
Hitachi Semiconductor Inc.
Intel Corporation
LSI Logic Corporation
PMC-Sierra, Inc.
ST Microelectronics N.V.
Texas Instruments Incorporated
VTC Inc.
Xilinx, Incorporated
IP CORES
ARM Ltd.
MIPS Technologies, Inc.
Pivotal Technologies, Corp.
OTHER ELECTRONIC PRODUCTS
Globespan Semiconductors, Inc.
Lucent Technologies Inc.
Motorola Incorporated
NEC Electronics, Inc
Nortel Networks Corporation
Philips Semiconductors B.V.
Qualcomm, Inc.
TOOLS/SERVICES
ASIC International, Inc.
Cadence Design Systems, Inc.
Synopsys, Inc.
The Virtual Component Exchange
The following case studies illustrate how some companies are using our
products:
INTEL CORPORATION
Intel, the world's largest chipmaker, designs, develops, manufactures and
markets computer components and related products.
39
Business Challenge. Intel's design organization contains thousands of
developers in numerous large sites distributed around the world, and many of
their product development projects require the collaboration of hundreds of
engineers from multiple sites. One of Intel's challenges is to maximize the
productivity and efficiency of their design teams as well as to encourage the
reuse of design information wherever possible. As a result of the need for
increased collaboration, Intel wanted to create an internet-based collaboration
system that enabled real-time management of the entire design process flow as
well as the tracking of communication across multiple design sites.
Solution. Intel licensed our DesignSync and ProjectSync solutions to
address its multi-site design and communications challenges. Our solutions have
enabled Intel to develop secure, seamless, internet-based access to all relevant
development information regardless of the location of product development team
members. Intel also licensed our IPGear product to build an internet-based
solution for corporate-wide access to, and management of, reusable design
information and intellectual property. Through the use of our solutions, Intel
expects to experience improvements in the productivity of its collaborative
design teams and accelerate the integration of its resources across its
distributed development organization.
40
<PAGE> 44
CYPRESS SEMICONDUCTOR CORPORATION
Cypress Semiconductor Corporation designs, develops, manufactures and
markets high-performance digital and mixed-signal integrated circuits for a
range of markets, including computers, data communications, telecommunications
and instrumentation systems.
Business Challenge. Cypress' complex product development processes
necessitate team collaboration across multiple locations and the reuse of
existing, value-added design information. Cypress required a solution to
implement an internet-based project management environment that would enhance
development team collaboration among its numerous engineers and improve the
consistency of management processes employed throughout the product design
process. In addition, Cypress wanted to develop an internet-based environment to
manage, catalog and communicate reusable design information to the entire design
organization.
Solution. Cypress licensed our DesignSync and ProjectSync products to
solve its multi-site design and project management challenges. Our solutions
have enabled Cypress to establish secure, real-time, internet-based access to
complex design information regardless of a team member's geographic location. In
connection with using DesignSync and ProjectSync, Cypress licensed our IPGear
product to implement an internet-based internal catalog to publish reusable
design information. Cypress' use of our products has resulted in increased
collaboration and productivity and Cypress expects to further increase
productivity and reduce product development cycles with the implementation of a
design reuse catalog.
PMC-SIERRA, INC.
PMC-Sierra designs, develops and markets high-performance semiconductor
networking components for use in high speed transmission and networking systems
and by customers including Cisco and Intel.
Business Challenge. After acquiring numerous companies specializing in
innovative networking systems architectures, PMC-Sierra faced the challenge of
quickly integrating inconsistent design and project management practices across
geographic locations and corporate information systems. In addition, PMC-Sierra
required real-time access to the design expertise and reusable design
information within its acquired companies. PMC-Sierra required a solution that
would enable its existing product development teams to interact with acquired
companies to enhance collaboration and share reusable design information.
Solution. PMC-Sierra licensed our DesignSync and ProjectSync products to
address their company-wide, multi-site design and project management challenges.
Our products have enabled PMC-Sierra to establish an interactive communication
solution that has provided distributed development team members from numerous
enterprises with the ability to freely collaborate on product development
projects. In addition, PMC-Sierra licensed our IPGear product to implement an
internet-based catalog of reusable design information and intellectual property
contained within its acquired companies. As a result of using our solutions,
PMC-Sierra quickly integrated its existing and acquired companies' development
teams and design information to accelerate the transfer of human and
intellectual property resources across its enterprise.
CONEXANT SYSTEMS, INC./ARM LTD.
Conexant Systems is the world's largest independent company focused
exclusively on providing semiconductor products for communications electronics.
Conexant's products facilitate communications worldwide through wireline, voice
and data communications networks, cordless and
40
<PAGE> 45
cellular wireless telephony systems and emerging cable and wireless broadband
communications networks.
ARM is a leading intellectual property provider of low-cost,
power-efficient micro-processors, peripherals, and system-on-chip designs.
Conexant licenses some of ARM's most complex intellectual property for use
in its leading-edge designs as well as to add features to its products and
reduce its time-to-market.
Business Challenge. Conexant and ARM jointly decided that a new
internet-based collaboration system was needed to maximize the benefits that
Conexant receives from using ARM's design information as well as to enhance
ARM's revenue stream. Together, Conexant and ARM determined that a collaborative
system should be able to transfer ARM's intellectual property to Conexant,
validate the deliverable intellectual property and quickly incorporate such
intellectual property into Conexant's designs.
Solution. Both Conexant and ARM licensed our DesignSync, ProjectSync and
IPGear products to firmly establish real-time interaction and create a seamless
mechanism for the delivery, support and update of design information and
intellectual property. Our solutions have enabled ARM and Conexant to develop a
"virtual project team" in which both companies' team members interact as active
participants in the design of Conexant products. Conexant and ARM expect that
their business-to-business collaboration will improve the productivity of
Conexant's engineers and accelerate the resolution of support requests and
design changes between the companies, resulting in increased productivity and
reduced time-to-market for Conexant's products.
THE VIRTUAL COMPONENT EXCHANGE (VCX)
VCX, based in Scotland, is the first commercial endeavor to organize an
internet-based marketplace for the buying and selling of semiconductor
intellectual property.
Business Challenge. VCX's challenge was to bring together intellectual
property suppliers and customers to accelerate the exchange of semiconductor
intellectual property. VCX required an easy to use internet-based solution to
create a catalog that publishes available intellectual property and to enable
VCX to control access to intellectual property in a secure environment.
Solution. VCX licensed our IPGear product as a foundation for its
internet-based intellectual property catalog. We continue to provide consulting
services to VCX as it configures IPGear's capabilities in order to directly and
simply implement its evolving intellectual property exchange. VCX expects that
exchange members will have controlled access to intellectual property based upon
agreements that customers execute with the intellectual property suppliers. VCX
anticipates that its internet-based intellectual property exchange will be used
as a standard means to identify and incorporate third party intellectual
property into products developed by virtual project teams, thereby decreasing
users' time-to-market and design costs.
PARTNERSHIPS AND STRATEGIC RELATIONSHIPS
Creating and supporting long-term relationships with strategically
important partners is a key component of our strategy. These relationships
provide us with name recognition, industry acceptance, and access to third-party
tools and technological expertise. These relationships may contribute
beneficially to our product development efforts as well as to our sales and
marketing campaigns. To date, we have established strategic relationships with
Cadence Design Systems, Inc. and Synopsys, Inc.
41
<PAGE> 46
Our relationship with Cadence began in 1998 when we signed a joint
marketing agreement announcing our technology alliance. In 1999, we entered into
three-year original equipment manufacturer and joint development agreements with
Cadence under which we supply to Cadence electronic product development
collaboration and data management technology. This relationship led to the
development of our DesignSync DFII product, a specialized version of DesignSync
designed to work with Cadence's Design Framework II family of integrated circuit
design products, and has validated our position as the leading provider of
electronic product development supply chain software. In addition, we have
benefited from sponsored access to the installed base of the Cadence family of
products into which we sell the DesignSync DFII product.
Synopsys, Inc. licensed our technology in 1998 to create and publish an IP
core catalog for members of its IP Catalyst Program, a Synopsys customer
consortium. Later that year, Synopsys made an equity investment in us. We
believe our relationship with Synopsys has increased our visibility within the
Synopsys installed base of customers.
PRODUCT TECHNOLOGY AND ARCHITECTURE
We designed our products upon open systems standards used within the
software industry for internet applications. Our architecture is designed to be
scalable to accommodate the demands of an expanding product development supply
chain and adaptable to changing customer requirements. The result is a low cost,
low maintenance, high performance application that eliminates the need for
complex customization or in-house development efforts.
Our internet-based architecture utilizes the industry standard Hyper-Text
Transport Protocol (HTTP) to enable communication between application servers
and internet-based applications. Our application servers are based on the Apache
Web Server for UNIX and on the Microsoft Internet Information Server (IIS) for
the Windows NT platform. We selected these platforms for their broad industry
acceptance. We use licensed encryption technology from RSA Data Security to
maintain data and file security while information is transported over the
internet. Users of our products access the application servers through standard
web browsers such as Netscape Communicator and Microsoft Internet Explorer. In
addition, we supply UNIX and Windows-based versions of our applications. Our
application server products are available on Sun Solaris, HP-UX, and Windows NT.
At the core of our architecture is the Synchronicity Object Model which is
based on the Component Object Model standard from Microsoft. The Synchronicity
Object Model provides all of the functions for:
- database management;
- version control;
- change notification;
- event driven triggering of actions;
- access and privilege control;
- encryption;
- compression; and
- dynamic report generation.
42
<PAGE> 47
The Synchronicity Object Model contains specialized technology that allows it to
manage complex data formats. It also contains technology that allows our
applications to support workflows and workspace management models common to
complex product development processes.
We implement our software in the C++ language as well as portions in C,
Java, JavaScript, TCL and HTML. Our software may be ported to the various
operating systems without significant porting effort. We provide online
documentation for all of our products and we support the formats of Windows
Online Help, HTML and PDF. We enable our products for multi-byte localization to
support foreign languages.
We have entered into various alliances to ensure our products are based on
open industry standards and to enable us to take advantage of current and
emerging technologies. We are members of developer partnership programs with
Microsoft Corporation, Hewlett-Packard Company, IBM, Sun Microsystems, Inc.,
Rational Software Corporation, Cadence Design Systems, Inc. and Synopsys, Inc.
We are a member of relevant industry standards organizations. We actively
participate as a member in both the Virtual Socket Interface Alliance (VSIA) and
the Reusable Application-Specific Intellectual Property Developers (RAPID). We
have been active in the Virtual Component Exchange (VCX) as both a member and a
technology supplier for the implementation of VCX's internet-based marketplace
for IP cores.
PRODUCT DEVELOPMENT
We believe that innovation begins with the customer. We obtain extensive
feedback from our customers and field applications engineers. This provides us
with an in-depth understanding of our customers' needs and has led to the
development of technology and products which provide real solutions to complex
problems.
We divide our engineering staff into the following teams:
- software development;
- quality assurance;
- test automation;
- documentation;
- customer support; and
- training.
A cross-functional team with representatives from each of these groups and
marketing and sales provides input into our product planning process. We also
seek out and monitor industry sources for the latest technological advances and
market trends to ensure that our products remain current.
We use our products to facilitate collaboration and communication within
our engineering organization and our company at large and to test our products
before we release them to our customers. We use our products because we need to
collaborate in a secure fashion across multiple sites. We use our products to:
- track and manage source code development;
- manage the development of documentation; and
- analyze customer input/feedback.
43
<PAGE> 48
We have formed a technical advisory committee that includes representatives
from our leading customers and members of our product development team. We
consult with the members of our committee to obtain direct feedback on our
products, input on future product development and to help steer our technology
direction. Currently, this group consists of representatives from Cypress
Semiconductor Corporation, ST Microelectronics N.V., Cisco Systems, Inc.,
Fujitsu Microelectronics, Inc. and ARM Ltd.
We perform regular product releases, balancing the introduction of large
new features or new products, which inherently require more research and
development, with smaller releases containing minor enhancements and defect
fixes. We aim to perform at least one major software release and between three
and five minor releases each year. We are currently developing enhancements to
our existing products as well as several new products that will complement our
CatalogSync product and add to our IPGear suite of internet-based design reuse
applications.
SALES AND MARKETING
Our sales and marketing organizations develop our markets and generate
sales leads. Additionally, they position and promote our image and identify
customer product requirements. We market and sell our products primarily through
our direct sales force located in the United States and Europe and through
distributors in Europe and Japan. Our direct sales force consists of senior
account executives who focus on major opportunities in specific geographic
territories and sales applications engineers who provide pre-sales technical
support. We intend to continue to expand our domestic and international direct
sales force by expanding into additional geographic locations. We are also in
the early stages of complementing our direct sales force, particularly
internationally, with additional distribution channels, including non-exclusive
distributors and consulting partners.
To support our direct sales efforts and to actively promote our brand, we
engage in a variety of marketing activities. These include:
- co-marketing strategies with our existing business partners;
- targeting additional new strategic relationships;
- managing and maintaining our web site content;
- advertising in industry and other publications;
- conducting public relations campaigns; and
- establishing and maintaining relationships with recognized industry
analysts.
We promote our products and services through regional sales promotional seminars
for prospective customers. We also actively participate in electronic product
related trade shows.
We establish marketing alliances with strategic partners such as Cadence to
promote the distribution of our products and to increase our product
interoperability. We also pursue services alliances with consulting distribution
firms to:
- configure our software;
- provide customer support services;
- create customized customer presentations and demonstrations; and
- endorse our products during the evaluation stage of the sales cycle.
44
<PAGE> 49
We believe that our relationships with these service providers may shorten our
sales cycle because these service providers have generated and qualified sales
leads, made initial customer contacts and assessed needs prior to our
introduction.
CONSULTING SERVICES, CUSTOMER SUPPORT AND TRAINING
Consulting. We offer fee-based consulting services to assist in:
- methodology selection and planning;
- initialization and setup; and
- loading of existing design data.
We intend to utilize our specialized expertise to facilitate and accelerate
wide-scale adoption of our products at the enterprise level. This approach
allows us to increase our revenues and provides us with opportunities to deepen
our knowledge of our customers' needs.
Customer Support. We believe that our success depends upon responsive
customer support and periodic product updates on a when-and-if available basis
through our annual maintenance program. Customers generally purchase the first
year of support at the time they initially license a product. We offer customer
support primarily through our internet-based customer problem reporting and
resolution system as well as by e-mail and telephone. Utilizing our web-site,
customers have access to product notices, updates, problem reporting and
tracking and self-help through our extensive online knowledge base. Our field
application force, in some instances, also provides end-user support.
Training. We offer our customers a variety of classes and related
materials on product functionality, system administration, updates and new
releases. We also offer these classes as part of our "Train the Trainer"
program. We have in the past conducted these training classes primarily at
customer sites but are increasingly conducting them at our training centers in
San Jose, California and Marlboro, Massachusetts.
COMPETITION
To date, companies have attempted to solve the problems addressed by our
products primarily by developing proprietary ad hoc solutions and retrofitting
elements of technology from other markets such as the software configuration
management market and the product data management market. These solutions
typically provide only some of the capabilities required to meet the needs of
virtual project teams and are generally not available to external supply chain
partners. Accordingly, we believe our primary current source of competition is
in-house development efforts by customers and potential customers. In the
future, we may face potential competition from providers of configuration
management software, such as Rational Software Corporation, and supply chain
management software, such as Agile Software Corporation.
We expect competition to emerge and intensify, which could result in price
reductions, reduced gross margins and loss of market share, any of which could
seriously harm our business.
We believe that our ability to compete depends on many factors both within
and outside our control, including:
- the performance, functionality, price, reliability and speed of our
solutions;
- the timing and market acceptance of new products or enhancements to our
existing suite of products;
45
<PAGE> 50
- the quality of our customer service; and
- the effectiveness of our sales and marketing efforts.
We believe we currently are in a position to compete favorably with respect
to each of these factors. We believe our market is relatively new and our
software has created a new category of products. Therefore, we may not be able
to maintain our competitive position against potential competition, particularly
competitors that have longer operating histories and significantly greater
financial, technical, marketing and other resources than we do and therefore may
be able to respond more quickly to new or changing opportunities, technologies
and customer requirements. Also, many potential competitors have greater name
recognition and more extensive customer bases that could be leveraged to gain
market share to our detriment. These competitors may be able to undertake more
extensive promotional activities, adopt more aggressive pricing policies, and
offer more attractive terms to purchasers than we can. In addition, potential
competitors have established or may establish cooperative relationships among
themselves or with third parties to enhance their products. Accordingly, it is
possible that new competitors or alliances among potential competitors may
emerge and rapidly acquire significant market share.
PROPRIETARY RIGHTS
Our success and ability to compete depend upon our proprietary technology.
We have no patents. We rely on copyright, trade secret and trademark law to
protect our proprietary information. We also typically enter into agreements
with our employees, consultants and customers to control their access to and
distribution of our software, documentation and other proprietary information.
Nevertheless, a third party could copy or otherwise obtain our software or other
proprietary information without authorization, or could develop software
competitive to ours. Our means of protecting our proprietary rights may not be
adequate and our competitors may independently develop similar technology or
duplicate our products or our other intellectual property. In addition, the laws
of some foreign countries do not protect our proprietary rights to as great an
extent as do the laws of the United States. We expect that it will become more
difficult for us to monitor the use of our products if we increase our
international presence.
In addition, we integrate third-party software into our products from RSA
Data Security, Inc. for security and encryption technology, from Bristol
Technologies, Inc. for platform portability and from DuraSoft GmbH for revision
control. These third-party software components may not continue to be available
on commercially reasonable terms. If we cannot maintain licenses to such
third-party software at an acceptable cost, shipments of our products may be
delayed until equivalent software can be developed or licensed and integrated
into our products.
Certain of our significant customers have negotiated for our source code to
be held in escrow and to be released upon specific events such as our bankruptcy
or our failure to meet support obligations to such customers. The release of our
source code from escrow to such customers could seriously harm our business.
There has been a substantial amount of litigation in the software and
internet industries regarding intellectual property rights. It is possible that,
in the future, third parties may claim that we, or our current or potential
future products, infringe their intellectual property. We expect that software
product developers and providers of electronic commerce solutions will
increasingly be subject to infringement claims as the number of products and
competitors in our industry segment grows and the functionality of products in
industry segments overlaps. Any claims, with or without merit, could be
time-consuming, result in costly litigation, cause product shipment delays or
require us to enter into royalty or licensing agreements. If our products were
found to infringe a third
46
<PAGE> 51
party's proprietary rights we could be required to enter into royalty or
licensing agreements in order to continue to be able to sell our products.
Royalty or licensing agreements, if required, may not be available on terms
acceptable to us or at all. This could seriously harm our business.
EMPLOYEES
As of December 31, 1999, we had a total of 69 employees. Of this total, 29
were in research and development, seven were in consulting, customer support and
training, eight in marketing, 20 in sales and five in finance and
administration. We also retain independent contractors to support activities
such as our consulting services and product development. Our success depends on
our ability to attract and retain qualified, experienced employees. None of our
employees is represented by a collective bargaining unit, and we have never
experienced a work stoppage. We consider our relations with our employees to be
good.
FACILITIES
Our headquarters are currently located in a leased facility in Marlboro,
Massachusetts, consisting of approximately 9,259 square feet under a lease
expiring in 2004 with expansion and renewal options. We also lease offices for
sales and service personnel in San Jose, California, Orlando, Florida and
Seattle, Washington. We believe our current facilities are adequate to meet our
needs for the foreseeable future.
LEGAL PROCEEDINGS
From time to time we have been and expect to continue to be subject to
legal proceedings and claims in the ordinary course of business. We currently
are not a party to any material legal proceeding.
47
<PAGE> 52
MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES
Our directors, executive officers and key employees and their ages as of
March 27, 2000 are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
<S> <C> <C>
Dennis R. Harmon 39 Chairman of the Board, Chief Executive Officer and
President
Eugene C. Connolly 49 Executive Vice President, Chief Operating Officer,
Treasurer and Director
Onofrio Sozio 37 Vice President Product Development
Mitchel Mastellone 36 Vice President Research and Development, Chief
Technical Officer
Steve Robbins 40 Vice President Worldwide Sales
Mark Miller 43 Vice President Marketing & Business Development
Joseph A. Calo 47 Vice President Finance, Chief Financial Officer
Seth Lieber(1) 35 Director
James C. Furnivall(1)(2) 42 Director
Leigh Michl(2) 38 Director
Richard T. Finigan(1)(2) 60 Director
</TABLE>
- ------------------------------
(1) Member of the Compensation Committee
(2) Member of the Audit Committee
Dennis R. Harmon co-founded Synchronicity and has served as our President
and Chief Executive Officer and a member of our board of directors since our
inception in January 1996. From 1994 to 1996, Mr. Harmon served as Manager of
Worldwide Strategic Account Services for Viewlogic Systems Inc., a developer of
engineering design automation software. From 1989 to 1994, Mr. Harmon served as
Manager of Worldwide Corporate Applications for Viewlogic Systems Inc. From 1986
to 1989, Mr. Harmon held various electrical engineering positions at Viewlogic.
Mr. Harmon received a B.S. in Electrical/Mechanical Engineering from the
University of Maine.
Eugene C. Connolly co-founded Synchronicity and has been a member of our
board of directors since our inception in January 1996. Since August 1999, Mr.
Connolly has served as Executive Vice President and Chief Operating Officer.
From 1996 to 1999, Mr. Connolly served as our Vice President of Operations. From
1985 to 1996, Mr. Connolly served as Vice President Human Resources for
Viewlogic Systems Inc. From 1980 to 1985, Mr. Connolly served as Vice President
of Human Resources for Telesis Systems Inc., a design automation software
company. Mr. Connolly received a B.A. in Business Administration from Kentucky
Wesleyan College.
Onofrio Sozio co-founded Synchronicity and has served as our Vice President
of Product Development since our inception in January 1996. From 1995 to 1996,
Mr. Sozio served as a Technology Consultant, Strategic Account Services, for
Viewlogic Systems, Inc. From 1994 to 1995 he served as a Corporation
Applications Consultant for Viewlogic and from 1993 to 1994, as an Applications
Engineer at Viewlogic. From 1986 to 1993, Mr. Sozio served as an electrical
engineer for Digital Equipment Corporation, a developer of computer hardware
products, which was acquired by Compaq Computer Corporation. Mr. Sozio received
a B.S. in Electrical Engineering from Northeastern University.
48
<PAGE> 53
Mitchel Mastellone co-founded Synchronicity and has served as our Vice
President of Research and Development since our inception in January 1996 and as
our Chief Technical Officer since April 1997. From 1990 to 1996, Mr. Mastellone
served as a Technology Consultant, Strategic Account Services, for Viewlogic
Systems, Inc. From 1985 to 1990, Mr. Mastellone served as a Senior Member of
Technical Staff for Harris Semiconductor, a prior division of Harris
Corporation, a communications, semiconductor, office systems and advanced
electronic systems company. Mr. Mastellone received a B.S. in Computer Science
and Business from Rutgers University.
Steve Robbins has served as our Vice President of Worldwide Sales since
June 1996. From 1991 to 1996, Mr. Robbins served as Vice President of Eastern
Area Sales for Viewlogic Systems, Inc. From 1984 to 1991, Mr. Robbins served in
various senior sales management positions with Advanced Micro Devices, Inc., a
semiconductor manufacturer. From 1983 to 1984, Mr. Robbins served as District
Distributor Manager for Harris Semiconductor, a prior division of Harris
Corporation. Mr. Robbins received a B.S. in electrical engineering from
University of Central Florida.
Mark Miller has served as our Vice President of Marketing and Business
Development since October 1996. From 1993 to 1996, Mr. Miller served as Vice
President of Marketing for Escalade Corporation, an engineering design
automation company. From 1987 to 1993, Mr. Miller held sales and marketing
positions and was Director of the IC Technology Center for Mentor Graphics
Corporation, a provider of electronic hardware and software design systems,
electronic design automation and consulting services. From 1983 to 1987, Mr.
Miller was General Manager of Advanced VLSI Tools at Daisy Systems, Inc., an
engineering design automation company. Mr. Miller received a B.S. in electrical
engineering from Rensselaer Polytechnic Institute.
Joseph A. Calo has served as our Vice President of Finance and Chief
Financial Officer since August of 1999. From 1998 to 1999, Mr. Calo served as
Vice President of Finance. From 1989 to 1998, Mr. Calo served as Corporate
Controller and subsequently Vice President of Finance for Viewlogic Systems,
Inc. From 1980 to 1989, Mr. Calo served as International Controller for Prime
Computer, Inc., a minicomputer manufacturer. Mr. Calo received a B.S. in
Business from Western New England College and an M.B.A. from Babson College.
Seth Lieber has served a director of our company since 1996. Mr. Lieber has
served as a Vice President of GeoCapital LLC, an investment advisory firm, since
1991 and has been a Partner with Wheatley Partners, L.P., since 1996. From 1988
to 1991, Mr. Lieber worked for Donaldson, Lufkin & Jenrette, an investment
banking firm, in its investment services group. Mr. Lieber received his B.S. in
Finance from Boston University.
James Furnivall has served as a director of our company since 1997. Mr.
Furnivall has served as a Principal with Canaan Partners, a venture capital
firm, since 1996 and a Partner since 1999. From 1995 to 1996, Mr. Furnivall
served as Managing Director for Comdisco Ventures, the venture capital division
of Comdisco, Inc., a technology management services company, and from 1991 to
1995, Mr. Furnivall served as an Associate Director in the Investment Banking
Group of Bear Stearns & Co., an investment banking firm. Mr. Furnivall received
a B.S. in Chemical Engineering from Princeton University and an M.B.A. from The
Wharton School at the University of Pennsylvania.
Leigh Michl has served as a director of our company since 1998. Since 1999,
Mr. Michl has served as the Managing Director for Ascent Venture Management,
Inc., a venture capital firm. From 1989 to 1999, Mr. Michl served as Vice
President and General Partner with Pioneer Capital Corporation, a venture
capital firm. From 1987 to 1989, Mr. Michl served as Audit and Business Analyst
for the Pioneer Group Inc., a diversified financial services company and from
1984 to
49
<PAGE> 54
1987, Mr. Michl was an internal auditor with General Electric Company, a
conglomerate industrial corporation. Mr. Michl received a B.A. in Economics from
Bates College and an M.S. in Finance from Boston College. Mr. Michl also serves
as a director of SoftLock.com, Inc., a provider of security software and
services.
Richard T. Finigan has served as a director of Synchronicity since April of
1996. Mr. Finigan currently serves as Vice-Chairman of PADS Software, Inc., an
engineering design automation company, and served as its Chief Executive Officer
and Vice-Chairman from 1992 to 1999. From 1984 to 1992, Mr. Finigan served as
Vice President of Finance and Chief Financial Officer for Viewlogic Systems,
Inc. From 1981 to 1985, Mr. Finigan served as Vice President and Chief Financial
Officer for ITECO Corporation, an international training and education company.
From 1976 to 1981, Mr. Finigan served as Vice President-Corporate Controller for
Prime Computer. Mr. Finigan is a C.P.A., graduated from Bentley School of
Accounting & Finance and received a B.A. in Business from Suffolk University and
an M.B.A. from Babson College.
BOARD COMPOSITION
Following this offering, our board of directors will be divided into three
staggered classes, each of whose members will serve for a three-year term. The
board will consist of two class I directors (Messrs. Connolly and Harmon), two
class II directors (Messrs. Furnivall and Lieber) and two class III directors
(Messrs. Finigan and Michl). At each annual meeting of stockholders, a class of
directors will be elected for a three-year term to succeed the directors of the
same class whose terms are then expiring. The terms of the class I directors,
class II directors and class III directors will expire upon the election and
qualification of successor directors at the annual meeting of stockholders to be
held during calendar years 2001, 2002 and 2003, respectively.
Each officer serves at the discretion of the board of directors and holds
office until his or her successor is elected and qualified or until his or her
earlier resignation or removal.
There are no family relationships among any of our directors or executive
officers.
BOARD COMMITTEES
Upon completion of our offering our board of directors' compensation
committee will be composed of Messrs. Finigan, Furnivall and Lieber. The
compensation committee makes recommendations concerning salaries and incentive
compensation of our management. In addition, our compensation committee
administers and grants equity incentives under our stock plans.
The board of directors also has an audit committee which, upon completion
of our offering, will be composed of Messrs. Finigan, Furnivall and Michl. The
audit committee is governed by a charter which requires that each member of the
committee be independent. The charter also identifies the roles and
responsibilities of the committee, which include:
-- oversight of the audit process performed by our independent auditors;
-- review of the scope, and results of, the audit process,
-- oversight of the integrity and accuracy of our financial reporting,
both internal and external; and
-- review of our annual and interim financial statements.
50
<PAGE> 55
DIRECTOR COMPENSATION
We do not currently compensate directors for attending meetings of the
board of directors or committee meetings of the board of directors. Directors
are reimbursed for reasonable expenses incurred in attending board meetings. We
have made grants of stock options to certain directors in the past. In February
1996, Mr. Finigan was granted a non-qualified stock option under the 1996 Stock
Option Plan to purchase 50,000 shares of Common Stock at an exercise price of
$0.05 per share, which has vested and been exercised. In December 1996, Mr.
Lieber was granted a non-qualified stock option under the 1996 Stock Plan to
purchase 31,250 shares of common stock at an exercise price of $0.16 per share,
which has vested and been exercised. In June 1997, Mr. Furnivall was granted a
non-qualified stock option under the 1996 Stock Plan to purchase 28,250 shares
of common stock at an exercise price of $0.18 per share, which has vested and
been exercised. All option grants were made at the discretion of the board of
directors.
In addition, our 2000 Non-Employee Director Stock Option Plan will become
effective upon the completion of this offering. The plan provides for the grant
of stock options to purchase a maximum of 250,000 shares of our common stock.
See "Management -- Equity and Other Incentives -- 2000 Non-Employee Director
Stock Option Plan."
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Upon completion of our offering, the members of our compensation committee
will be Messrs. Finigan, Lieber and Furnivall. No executive officer has served
as a director or member of the compensation committee, or other committee
serving an equivalent function, of any entity whose executive officers served as
a member of the compensation committee of our board of directors. The full board
of directors has in the past made all decisions regarding executive officer
compensation and the granting of stock options.
51
<PAGE> 56
EXECUTIVE COMPENSATION
The following table sets forth information concerning the total
compensation paid or accrued during the fiscal year ended December 31, 1999 to
our chief executive officer and our six other most highly compensated executive
officers whose salary and bonus for such fiscal year equaled or exceeded
$100,000. We refer to all of these officers collectively as our named executive
officers.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION
COMPENSATION AWARDS
-------------------- ------------------
SECURITIES ALL OTHER
NAME AND PRINCIPAL POSITION(S) SALARY BONUS UNDERLYING OPTIONS COMPENSATION
<S> <C> <C> <C> <C>
Dennis R. Harmon......................... $135,000 $ 54,000 15,000 --
Chairman of the Board, President and
Chief Executive Officer
Eugene C. Connolly....................... 127,000 40,800 15,000 --
Executive Vice President and Chief
Operating Officer
Onofrio Sozio............................ 127,000 40,800 15,000 --
Vice President of Product
Development
Mitchel Mastellone....................... 127,000 40,800 15,000 --
Vice President of Research and
Development and Chief Technical
Officer
Steve Robbins............................ 110,000 229,248(1) 20,000 $6,000(2)
Vice President of Worldwide Sales
Mark Miller.............................. 131,000 52,800 20,000 --
Vice President of Marketing and
Business Development
Joseph A. Calo........................... 117,750 64,600 20,000 --
Vice President of Finance and Chief
Financial Officer
</TABLE>
- ------------------------------
(1) $209,248 represents sales commissions.
(2) Consists of an automobile allowance.
52
<PAGE> 57
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth information as to stock options granted to
each of our named executive officers during the year ended December 31, 1999.
The exercise price per share of each option grant was equal to the fair market
value of the common stock on the grant date as determined by the board of
directors at such time. We have never granted any stock appreciation rights.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
INDIVIDUAL GRANTS(3) VALUE AT
--------------------------------------------------------- ASSUMED ANNUAL
NUMBER OF PERCENT OF RATES OF STOCK PRICE
SECURITIES TOTAL OPTIONS APPRECIATION
UNDERLYING GRANTED TO FOR OPTION TERM(2)
OPTIONS EMPLOYEES IN EXERCISE PRICE EXPIRATION ----------------------
NAME GRANTED FISCAL YEAR(1) PER SHARE DATE 5% 10%
<S> <C> <C> <C> <C> <C> <C>
Dennis R. Harmon....... 15,000 2.6% $0.75 9/21/09 $306,384 $494,530
Eugene C. Connolly..... 15,000 2.6 0.75 9/21/09 306,384 494,530
Onofrio Sozio.......... 15,000 2.6 0.75 9/21/09 306,384 494,530
Mitchel Mastellone..... 15,000 2.6 0.75 9/21/09 306,384 494,530
Steve Robbins.......... 20,000 3.4 0.75 9/21/09 408,513 659,373
Mark Miller............ 20,000 3.4 0.75 9/21/09 408,513 659,373
Joseph A. Calo......... 7,000 1.2 0.75 6/14/09 142,979 230,781
13,000 2.2 0.75 7/31/09 265,533 428,592
</TABLE>
- ------------------------------
(1) The percentage of total options granted to employees in the last fiscal year
is based on options to purchase an aggregate of 586,075 shares.
(2) Amounts that may be realized upon exercise of the options immediately before
the expiration of their term, assuming the specified compound rates of
appreciation (5% and 10%) on the assumed initial offering price of $13.00
per share. These numbers are calculated based on rules promulgated by the
Securities and Exchange Commission and do not reflect our estimate of future
stock price growth. Actual gains, if any, on stock option exercises and
common stock holdings are dependent on the timing of exercise and the future
performance of the common stock. There can be no assurance that the rates of
appreciation assumed in this table can be achieved or that the amounts
reflected will be received by the individuals.
(3) The above table does not include option grants which the board of directors
has the intention to grant to each of the above named executive officers in
the amount of 20,000 shares of common stock upon the effective date of this
offering at an exercise price per share equal to the initial public offering
price.
53
<PAGE> 58
FISCAL YEAR-END OPTION VALUES
The following table sets forth information with respect to unexercised
options held as of December 31, 1999 by our chief executive officer and our six
most highly compensated executive officers, other than our chief executive
officer. During 1999 Steve Robbins exercised his options to purchase 150,000
shares of common stock, Mark Miller exercised his options to purchase 69,500
shares of common stock and Joseph A. Calo exercised his options to purchase
28,480 shares of common stock.
<TABLE>
<CAPTION>
NUMBER OF SHARES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT
OPTIONS AT FISCAL YEAR-END FISCAL YEAR-END(1)
-------------------------- -----------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
<S> <C> <C> <C> <C>
Dennis R. Harmon................. 1,200 13,800 $ 14,700 $169,050
Eugene C. Connolly............... 1,200 13,800 14,700 169,050
Onofrio Sozio.................... 1,200 13,800 14,700 169,050
Mitchel Mastellone............... 1,200 13,800 14,700 169,050
Steve Robbins.................... 71,000 59,000 914,508 748,692
Mark Miller...................... 1,600 48,900 19,600 616,740
Joseph A. Calo................... 1,800 59,720 22,848 755,510
</TABLE>
- ------------------------------
(1) Calculated by determining the difference between the exercise price and the
estimated initial public offering price of $13.00 per share.
EQUITY AND OTHER INCENTIVES
1996 STOCK OPTION PLAN
Our board of directors and stockholders adopted the 1996 Stock Option Plan
in January 1996. The aggregate number of shares of common stock which may be
issued under the 1996 Stock Option Plan is 531,350. Under the 1996 Stock Plan,
we were authorized to grant incentive stock options and non-qualified stock
options to employees, consultants, directors and officers. The 1996 Stock Option
Plan provides that the Board of Directors has the authority to select the
participants and determine the terms of the stock options, awards and purchase
rights granted under the 1996 Stock Option Plan. An incentive stock option is
not transferable by the recipient except by will or by the laws of descent and
distribution. Non-qualified stock options and other awards are transferable only
to the extent provided in the agreement relating to such option or award or in
response to a valid domestic relations order. Generally, no incentive stock
options may be exercised more than three months following termination of
employment. However, in the event that termination is due to death or
disability, the stock option is exercisable for a maximum of one year after such
termination. As of December 31, 1999, we had outstanding under the 1996 Stock
Option Plan incentive stock options to purchase 245,000 shares of common stock
and 5,000 non-qualified stock options. We no longer grant stock or options to
purchase stock under this plan.
1996 STOCK PLAN
Our board of directors adopted the 1996 Stock Plan in December 1996. Our
stockholders approved the 1996 Stock Plan in April 1997. The aggregate number of
shares of common stock which may be issued under the 1996 Stock Plan, as
amended, is 1,177,950. Under the 1996 Stock Plan, we were authorized to grant
incentive stock options and non-qualified stock options, as well as awards of
common stock and opportunities to make direct purchases of common stock to
employees, consultants, directors and officers. The 1996 Stock Plan provides
that the Board of
54
<PAGE> 59
Directors or the compensation committee has the authority to select the
participants and determine the terms of the stock options, awards and purchase
rights granted under the 1996 Stock Plan. An incentive stock option is not
transferable by the recipient except by will or by the laws of descent and
distribution. Non-qualified stock options and other awards are transferable only
to the extent provided in the agreement relating to such option or award or in
response to a valid domestic relations order. Generally, no incentive stock
options may be exercised more than three months following termination of
employment. However, in the event that termination is due to death or
disability, the stock option is exercisable for a maximum of 180 days after such
termination. As of December 31, 1999, we had outstanding under the 1996 Stock
Plan incentive stock options to purchase 606,350 shares of common stock and
non-qualified stock options to purchase 183,500 shares of common stock. We no
longer grant stock or options to purchase stock under this plan.
1999 STOCK OPTION AND INCENTIVE PLAN
Our 1999 Stock Option and Incentive Plan was adopted by our board of
directors in April 1999 and approved by our stockholders in May 1999 and was
amended and restated on February 16, 2000. The 1999 plan provides for the grant
of stock-based awards to our employees, officers, directors, consultants or
advisors. Under the 1999 plan, we may grant options that are intended to qualify
as incentive stock options within the meaning of the Internal Revenue Code,
options not intended to qualify as incentive stock options, restricted stock and
other stock-based awards. Incentive stock options may be granted only to our
employees. A total of 1,325,000 shares of common stock have been reserved for
issuance under the 1999 plan. The 1999 plan provides that the number of shares
authorized for issuance will automatically increase by 5% of the issued and
outstanding number of shares of common stock on December 31, 2000, 2001, 2002,
2003 and 2004, provided, however, no more than 5,100,000 shares of common stock
may be cumulatively available for issuance pursuant to incentive stock options.
As of December 31, 1999, we had outstanding under the 1999 Stock Option and
Incentive Plan, incentive stock options to purchase 465,527 shares of common
stock and non-qualified stock options to purchase 15,000 shares of common stock.
The 1999 plan is administered by our board of directors or a committee
appointed by the board of directors. Subject to the provisions of the 1999 plan,
the board of directors (or the committee) has the authority to select the
persons to whom awards are granted and determine the terms of each award,
including the number of shares of common stock subject to the awards. Payment of
the exercise price of an award may be made by check or, if approved by the board
of directors (or the committee), shares of common stock, delivery of a
promissory note, or by any other method approved by the board of directors (or
the committee). Unless otherwise permitted by the board of directors (or the
committee), awards are not assignable or transferable except by will or the laws
of descent and distribution, and during the participant's lifetime, may be
exercised only by the participant.
2000 NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN
The 2000 Non-Employee Director Stock Option Plan was adopted by the board
of directors in February 2000. The director plan will take effect upon
completion of this offering. The director plan provides for the grant of options
to purchase a maximum of 250,000 shares of our common stock to our non-employee
directors.
The director plan will be administered by a committee appointed by the
board of directors. In the event the board of directors does not appoint such a
committee, then the board shall have all power and authority to administer the
director plan. Under the director plan, each director who is
55
<PAGE> 60
not also one of our employees or officers shall be automatically granted on the
later of (i) the date such person is first elected to the board of directors or
(ii) the effective date of this offering, without any further action, an option
to purchase 5,000 shares of common stock. In addition, each non-employee
director who is serving on the board of directors on the last day of February
and the last day of August during the term of the plan shall be automatically
granted an option to purchase 2,500 shares of Common Stock. Provided that the
director continues to serve as a member of the board of directors, one-twelfth
( 1/12) of the shares included in each grant will become exercisable on the last
day of each month over the year after the date of the grant. All options granted
under the director plan will have an exercise price equal to the fair market
value of the common stock on the date of grant. The term of each option will be
for a period of ten years from the date of grant. Options may not be assigned or
transferred except by will or by the laws of descent and distribution and are
exercisable to the extent vested only while the optionee is serving as a
director or within 90 days after the optionee ceases to serve as a director
(except that if a director dies or becomes disabled while he or she is serving
as a director, the option is exercisable until the scheduled expiration date of
the option). No options have been granted to date under the director plan.
2000 EMPLOYEE STOCK PURCHASE PLAN
The 2000 Employee Stock Purchase Plan was adopted by the board of directors
in February 2000. The purchase plan will take effect upon completion of this
offering. The purchase plan provides for the issuance of a maximum of 500,000
shares of common stock. The purchase plan is administered by the board of
directors and the compensation committee. All employees whose customary
employment is for more than 20 hours per week and for more than five months in
any calendar year and who have completed more than 90 days of employment on or
before the first day of any six-month payment period are eligible to participate
in the purchase plan. Outside directors and employees who would own 5% or more
of the total combined voting power or value of our stock immediately after the
grant may not participate in the purchase plan.
To participate in the purchase plan, an employee must authorize us to
deduct an amount not less than one percent nor more than 10 percent of a
participant's total cash compensation from his or her pay during each six-month
payment periods. The first payment period will commence on the effective date of
this offering and end on August 31, 2000. Thereafter, the payment periods will
commence on the first day of September and March and end on the last day of the
following February and August, respectively, each year. In no case shall an
employee be entitled to purchase more than 500 shares in any one payment period.
The exercise price for the option granted in each payment period is 85% of the
lesser of the average market price of the common stock on the first or last
business day of the payment period, in either event rounded up to the nearest
cent. If an employee is not a participant on the last day of the payment period,
such employee is not entitled to exercise his or her option, and the unused
amount of his or her accumulated payroll deductions will be refunded.
Options granted under the purchase plan may not be transferred or assigned.
An employee's rights under the purchase plan terminate upon his or her voluntary
withdrawal from the plan at any time or upon termination or employment. No
options or shares have been granted to date under the purchase plan.
401(K) PLAN
We provide a tax-qualified employee savings and retirement plan, commonly
known as a 401(k) plan, which covers our eligible employees. Under the 401(k)
plan, our employees may elect
56
<PAGE> 61
to reduce their current annual compensation up to the lesser of 12% or the
statutorily prescribed annual limit, which is $10,500 in calendar year 2000, and
have the amount of the reduction contributed to the 401(k) plan. We intend the
401(k) plan to qualify under Sections 401(a) and 401(k) of the Internal Revenue
Code, so that contributions by us or our employees to the 401(k) plan, and
income earned on such contributions, are not taxable to employees until
withdrawn from the 401(k) plan, and so that contributions by us, if any, will be
deductible by us when made. The trustee of the 401(k) plan invests the assets of
the 401(k) plan in the various investment options as directed by the
participants.
LIMITATION OF LIABILITY AND INDEMNIFICATION OF OFFICERS AND DIRECTORS
Our second amended and restated certificate of incorporation provides that
our directors and officers shall be indemnified by us to the fullest extent
permitted by Delaware law, as it now exists or may in the future be amended,
against all expenses and liabilities reasonably incurred in connection with
their service for us or on our behalf. In addition, our second amended and
restated certificate of incorporation provides that our directors will not be
personally liable for monetary damages to us for breaches of their fiduciary
duty as directors, unless they:
- violated their duty of loyalty to us or our stockholders;
- acted in bad faith;
- knowingly or intentionally violated the law;
- authorized illegal dividends or redemptions; or
- derived an improper personal benefit from their action as directors.
We intend to obtain insurance which insures our directors and officers against
certain losses and which insures us against our obligations to indemnify our
directors and officers.
57
<PAGE> 62
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On December 31, 1999, we entered into a license agreement with Intel
Corporation under which Intel licensed our DesignSync DFII product and engaged
in a collaborative project with us for a fee of $2.5 million. Under the License
Agreement, Intel Corporation may purchase licenses for the use of other products
and training and consulting services from us for additional fees. Prior to this
offering Intel Corporation was a 6.6% stockholder of our company.
We believe that the transactions set forth above were made on terms no less
favorable to us than could have been obtained from unaffiliated third parties.
We intend that all future transactions will be approved by a majority of the
board of directors, including a majority of the independent and disinterested
members of the board of directors, and will be on terms no less favorable to us
than those that could be obtained from unaffiliated third parties.
INDEMNIFICATION
We intend to enter into indemnification agreements with each of our
directors and officers. These indemnification agreements will require us to
indemnify our directors and officers to the fullest extent permitted by Delaware
law. See "Management -- Limitation of Liability and Indemnification" for
additional information regarding provisions in our charter documents requiring
us to indemnify our officers and directors.
CONFLICT OF INTEREST POLICY
We believe that all transactions with our directors, officers and principal
stockholders described above were made on terms no less favorable to us than
could have been obtained from unaffiliated third parties. A majority of the
disinterested outside directors on our board of directors approves all
transactions between us and our officers, directors, principal stockholders and
their affiliates. Any similar transactions will continue to be on terms no less
favorable to us than we could have obtained from unaffiliated third parties.
58
<PAGE> 63
PRINCIPAL STOCKHOLDERS
The following table sets forth information known to us regarding the
beneficial ownership of our common stock as of March 27, 2000:
-- each person or entity who is known by us to beneficially own more than
5% of our common stock;
-- each of our directors and executive officers; and
-- all of our directors and executive officers as a group.
Except as indicated below, none of these entities has a relationship with
us or, to our knowledge, any of the underwriters or their respective affiliates.
Unless otherwise indicated, the address of each person or entity named in the
table is c/o Synchronicity Software, Inc., 201 Forest Street, Marlboro, MA
01752, and each person or entity has sole voting power and investment power (or
shares such power with his or her spouse) with respect to all shares of capital
stock listed as owned by such person or entity.
The number and percentage of shares beneficially owned is determined in
accordance with the rules of the Securities and Exchange Commission, and is not
necessarily indicative of beneficial ownership for any other purpose. Under such
rules, beneficial ownership includes any shares as to which a person has sole or
shared voting power or investment power and also any shares of common stock
underlying options or warrants that are exercisable by that person within 60
days of March 27, 2000. However, these shares underlying options or warrants are
not treated as outstanding for the purpose of computing the percentage ownership
of any other person or entity. Unless otherwise indicated in the footnotes, each
person has sole voting and investment power (or shares such powers with his or
her spouse) with respect to the shares shown as beneficially owned. Percentage
of beneficial ownership prior to the offering is based on 11,081,147 shares of
common stock outstanding as of March 27, 2000 and assumes the conversion of all
outstanding shares of our convertible preferred stock into shares of common
stock. Percentage of beneficial ownership after the offering assumes 14,581,147
shares of common stock to be outstanding after completion of this offering and
no exercise of the underwriters' over-allotment option to purchase up to an
aggregate of 525,000 additional shares.
<TABLE>
<CAPTION>
PERCENTAGE OF
OWNERSHIP
---------------------
SHARES PRIOR TO AFTER THE
BENEFICIALLY OWNED OFFERING OFFERING
<S> <C> <C> <C>
5% STOCKHOLDERS:
Wheatley Partners, L.P.(1)(5)....................... 2,120,008 19.1% 14.5%
Canaan Partners and affiliates(2)(5)................ 1,825,942 16.5 12.5
Ascent Venture Partners II, L.P.(3)(5).............. 992,094 9.0 6.8
Intel Corporation(4)(5)............................. 742,885 6.6 5.0
DIRECTORS AND OFFICERS:
Dennis R. Harmon(6)................................. 796,450 7.2 5.5
Eugene C. Connolly(7)............................... 821,450 7.4 5.6
Onofrio Sozio(6).................................... 796,450 7.2 5.5
Mitchel A. Mastellone(6)............................ 796,450 7.2 5.5
Steve Robbins(8).................................... 239,000 2.1 1.6
Mark Miller(9)...................................... 83,100 * *
Joseph A. Calo(10).................................. 64,280 * *
Seth Lieber(1)...................................... 2,120,008 19.1 14.5
James C. Furnivall(2)............................... 1,825,942 16.5 12.5
Leigh Michl(3)...................................... 992,094 9.0 6.8
Richard T. Finigan.................................. 125,000 1.1 *
All executive officers and directors as a group (11
persons)(11)...................................... 8,660,224 77.2 58.9
</TABLE>
59
<PAGE> 64
- ------------------------------
* Less than 1%.
(1) Includes 1,940,481 shares held by Wheatley Partners, L.P., 137,861 shares
held by Wheatley Foreign Partners, L.P., 20,834 shares held by Seth Lieber
and 20,832 shares held by Jonathan Lieber. Both Seth Lieber and Jonathan
Lieber are General Partners of each of Wheatley Partners, L.P. and Wheatley
Foreign Partners, L.P. Seth Lieber may be deemed to share voting and
dispositive power with respect to all shares held by Wheatley Partners,
L.P. and Wheatley Foreign Partners, L.P. Both Seth Lieber and Jonathan
Lieber disclaim beneficial ownership with respect to any of these shares,
except to the extent of any pecuniary interest therein.
(2) Includes 7,255 shares held by Canaan Capital Limited Partnership, 60,540
shares held by Canaan Capital Offshore Limited Partnership, C.V., 1,288,140
shares held by Canaan S.B.I.C., L.P., 441,757 shares held by Canaan Equity,
L.P. and 28,250 shares held by James C. Furnivall. Each of the following
general partners, Canaan Capital Partners L.P., the general partner of
Canaan Capital Limited Partnership and Canaan Capital Offshore Limited
Partnership, C.V., Canaan S.I.B.C. Partners, L.P., the general partner of
Canaan S.B.I.C., L.P., and Canaan Equity Partners LLC, the general partner
of Canaan Equity, L.P., may be deemed to have sole voting and disposition
power with respect to all shares held by each respective entity for which
they are a general partner. Mr. Furnivall is an employee of the management
company servicing each of these Canaan entities. Mr. Furnivall disclaims
beneficial ownership with respect to any of these shares, except to the
extent of any pecuniary interest therein.
(3) Includes 98,814 shares held by Ascent Venture Partners, L.P., 889,328
shares held by Ascent Venture Partners II, L.P., and 3,952 shares held by
Leigh Michl. Mr. Michl is a managing member of Ascent Venture Management,
LLC, which is the general partner of Ascent Venture Partners, L.P. Mr.
Michl is also a managing member of Ascent Venture Management SBIC Corp.,
which is the general partner of Ascent Venture Management II, L.P., which
is the general partner of Ascent Venture Partners II, L.P. Mr. Michl may be
deemed to share voting and dispositive power with respect to all shares
held by Ascent Venture Partners, L.P. and Ascent Venture Partners II, L.P.
Mr. Michl disclaims beneficial ownership with respect to any of these
shares, except to the extent of any pecuniary interest therein.
(4) Includes 150,000 shares underlying a warrant which is exercisable within 60
days of March 27, 2000.
<TABLE>
<C> <S> <C> <C> <C>
(5) Addresses: Wheatley Partners, L.P. -- 80 Cuttermill Road, Suite 311, Great Neck, NY 11021.
Canaan Partners -- 105 Rowayton Avenue, Rowayton, CT 06853.
Ascent Venture Partners II, L.P. -- c/o Ascent Venture Management, Inc., 255 State
Street, 5th Floor, Boston, MA 02109.
Intel Corporation -- 2200 Mission College Blvd., Santa Clara, CA 95052.
</TABLE>
(6) Includes 2,700 shares underlying options which are exercisable within 60
days of March 27, 2000.
(7) Includes 2,700 shares underlying options which are exercisable within 60
days of March 27, 2000, and 25,000 shares held in the name of Mr.
Connolly's spouse.
(8) Includes 99,000 shares underlying options which are exercisable within 60
days of March 27, 2000.
(9) Includes 13,600 shares underlying options which are exercisable within 60
days of March 27, 2000.
(10) Includes 10,800 shares underlying options which are exercisable within 60
days of March 27, 2000.
(11) Includes 134,200 shares underlying options which are exercisable within 60
days of March 27, 2000.
60
<PAGE> 65
DESCRIPTION OF CAPITAL STOCK
GENERAL
After this offering and the filing of our second amended and restated
certificate of incorporation, our authorized capital stock will consist of
90,000,000 shares of common stock, $0.01 par value per share, and 5,000,000
shares of preferred stock, $0.01 par value per share. As of March 27, 2000,
there were outstanding (i) 4,060,145 shares of common stock held by 47
stockholders of record, (ii) 3,694,870 shares of convertible preferred stock
held by 45 stockholders of record and (iii) options to purchase an aggregate of
1,328,750 shares of common stock.
The following summary of certain provisions of our securities and various
provisions of our second amended and restated certificate of incorporation and
our amended and restated by-laws is not intended to be complete and is qualified
by reference to the provisions of applicable law and to our second amended and
restated certificate of incorporation and amended and restated by-laws included
as exhibits to the Registration Statement of which this prospectus is a part.
See "Where You Can Find More Information."
COMMON STOCK
As of March 27, 2000 there were 4,060,145 shares of common stock
outstanding held by approximately 47 stockholders of record. Based upon the
number of shares outstanding as of that date and giving effect to the issuance
of the 3,500,000 shares of common stock offered by us in this offering and the
conversion of the outstanding shares of convertible preferred stock into
7,021,002 shares of common stock, there will be 14,581,147 shares of common
stock outstanding upon the closing of this offering. In addition, as of March
27, 2000, there were outstanding stock options to purchase 1,328,750 shares of
common stock.
Holders of common stock are entitled to one vote for each share held on all
matters submitted to a vote of stockholders and do not have cumulative voting
rights. Directors are elected by a plurality of the votes of the shares present
in person or by proxy at the meeting and entitled to vote in such election.
Holders of common stock are entitled to receive ratably such dividends, if any,
as may be declared by the board of directors out of funds legally available
therefor, after provision has been made for any preferential dividend rights of
outstanding preferred stock. Upon our liquidation, dissolution or winding up,
the holders of common stock are entitled to receive ratably the net assets
available after the payment of all of our debts and other liabilities and after
the satisfaction of the rights of any outstanding preferred stock. Holders of
the common stock have no preemptive, subscription, redemption or conversion
rights, nor are they entitled to the benefit of any sinking fund. The
outstanding shares of common stock are, and the shares offered by us in this
offering will be, when issued and paid for, validly issued, fully paid and
non-assessable. The rights, powers, preferences and privileges of holders of
common stock are subordinate to, and may be adversely affected by, the rights of
the holders of shares of any series of preferred stock which we may designate
and issue in the future.
PREFERRED STOCK
Upon the closing of this offering, all outstanding shares of convertible
preferred stock will automatically convert into an aggregate of 7,021,002 shares
of common stock. Thereafter, the board of directors will generally be
authorized, without further stockholder approval, to issue from time to time up
to an aggregate of 5,000,000 shares of preferred stock, in one or more series.
Each series
61
<PAGE> 66
of preferred stock shall have such number of shares, designations, preferences,
voting powers, qualifications and special or relative rights or privileges as
shall be determined by the board of directors, which may include, among others,
dividend rights, voting rights, redemption and sinking fund provisions,
liquidation preferences, conversion rights and preemptive rights.
Our stockholders have granted the board of directors authority to issue the
preferred stock and to determine the rights and preferences of the preferred
stock in order to eliminate delays associated with a stockholder vote on
specific issuances. The rights of the holders of common stock will be
subordinate to the rights of holders of any preferred stock issued in the
future. The issuance of preferred stock, while providing desirable flexibility
in connection with possible acquisitions and other corporate purposes, could
adversely affect the voting power or other rights of the holders of common
stock, and could make it more difficult for a third party to acquire, or
discourage a third party from attempting to acquire, a majority of our
outstanding voting stock. We have not, to date, issued any shares of such
preferred stock, and we have no present plans to issue any shares of preferred
stock.
DELAWARE LAW AND CERTAIN CHARTER AND BY-LAW PROVISIONS AND ANTI-TAKEOVER EFFECTS
Upon completion of this offering, the provisions of Section 203 of the
General Corporation Law of Delaware will prohibit us from engaging in a
"business combination" with an "interested stockholder" for a period of three
years after the date of the transaction in which the person became an interested
stockholder, unless the business combination is approved in a prescribed manner.
A "business combination" includes certain mergers, asset sales and other
transactions resulting in a financial benefit to the interested stockholder. An
"interested stockholder" is generally defined as a person who, together with
affiliates and associates, owns, or, if currently an affiliate or an associate
of the corporation, within three years did own, 15% or more of the corporation's
voting stock.
Our second amended and restated certificate of incorporation provides for
the division of the board of directors into three classes as nearly equal in
size as possible with staggered three-year terms. In addition, our second
amended and restated certificate of incorporation provides that directors may be
removed with cause only by the affirmative vote of the holders of a majority of
the shares of our capital stock entitled to vote and without cause only by the
affirmative vote of the holders of 75% of the shares of our capital stock
entitled to vote. Under our second amended and restated certificate of
incorporation, any vacancy on the board of directors, unless and until filled by
the stockholders, including a vacancy resulting from an enlargement of the
board, may only be filled by vote of a majority of the directors then in office
even if less than a quorum. The likely effect of the classification of the board
of directors and the limitations on the removal of directors and filling of
vacancies is an increase in the time required for the stockholders to change the
composition of the board of directors. For example, in general, at least two
annual meetings of the stockholders will be necessary for stockholders to effect
a change in a majority of the members of the board of directors.
Our second amended and restated certificate of incorporation also provides
that any action required or permitted to be taken by our stockholders at an
annual meeting or special meeting of stockholders may only be taken if it is
properly brought before the meeting and may not be taken by written action in
lieu of a meeting. Our second amended and restated certificate of incorporation
and our amended and restated by-laws provide that special meetings of the
stockholders may only be called by the board of directors, the chairman of the
board of directors, the chief executive officer or the president. Our amended
and restated by-laws further provide that in order for any matter to be
considered "properly brought" before a meeting, a stockholder must comply with
62
<PAGE> 67
requirements regarding advance notice to us. The foregoing provisions could have
the effect of delaying until the next stockholders meeting actions which are
favored by the holders of a majority of our outstanding voting securities. These
provisions may also discourage another person or entity from making a tender
offer for our common stock, because such person or entity, even if it acquired a
majority of our outstanding voting securities, would only be able to take action
as a stockholder, such as electing new directors or approving a merger, at a
duly called stockholders meeting, and not by written consent.
The General Corporation Law of Delaware provides generally that the
affirmative vote of a majority of the shares entitled to vote on any matter is
required to amend a corporation's certificate of incorporation or by-laws,
unless a corporation's certificate of incorporation or by-laws, as the case may
be, requires a greater percentage. Our second amended and restated certificate
of incorporation requires the affirmative vote of the holders of at least 75% of
the shares of our capital stock that are issued and outstanding and entitled to
vote to amend or repeal any of the foregoing provisions of the amended and
restated certificate of incorporation. Our amended and restated by-laws may
generally be amended or repealed by a majority vote of the board of directors
and may also be amended or repealed by the affirmative vote of the holders of at
least 75% of the shares of our capital stock that are issued and outstanding and
entitled to vote. The 75% stockholder vote would be in addition to any separate
class vote that might in the future be required in accordance with the terms of
any series of preferred stock that might be outstanding at the time any such
amendments are submitted to stockholders.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the common stock is EquiServe Trust
Company.
63
<PAGE> 68
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has not been any public market for our common
stock, and we make no prediction as to the effect, if any, that market sales of
shares of common stock or the availability of shares of common stock for sale
will have on the market price of the common stock prevailing from time to time.
Nevertheless, sales of substantial amounts of common stock in the public market,
or the perception that such sales could occur, could adversely affect the market
price of the common stock and could impair our future ability to raise capital
through the sale of equity securities. See "Risk Factors."
SALES OF RESTRICTED SHARES
Upon the closing of this offering, we will have an aggregate of 14,581,147
shares of common stock outstanding, assuming no exercise of the underwriters'
over-allotment option and no exercise of outstanding options. Of the outstanding
shares, all of the shares sold in this offering will be freely tradable, except
that any shares purchased by "affiliates" (as that term is defined in Rule 144
under the Securities Act), may only be sold in compliance with the limitations
described below. The remaining 11,081,147 shares of common stock will be deemed
"restricted securities" as defined in Rule 144. Restricted securities may be
sold in the public market only if registered or if they qualify for an exemption
from registration under Rule 144, including Rule 144(k), or Rule 701 promulgated
under the Securities Act, which rules are summarized below. Subject to the
lock-up agreements described below and the provisions of Rule 144, including
Rule 144(k), and Rule 701, shares will be available for sale in the public
market as follows:
<TABLE>
<CAPTION>
NUMBER OF SHARES DATE
<C> <S>
1,053,795 Immediately after the date of this prospectus
10,027,352 At various times after 90 days from the date of this
prospectus (Rules 144 and 701)
</TABLE>
In general, under Rule 144, as currently in effect, a person or persons
whose shares are required to be aggregated, including an affiliate of ours, who
has beneficially owned shares for at least one year is entitled to sell, within
any three-month period commencing 90 days after the date of this prospectus, a
number of shares that does not exceed the greater of 1% of the then outstanding
shares of common stock, approximately 14,581,147 shares immediately after this
offering, or the average weekly trading volume in the common stock during the
four calendar weeks preceding the date on which notice of such sale is filed,
subject to restrictions. In addition, a person who is not deemed to have been an
affiliate at any time during the 90 days preceding a sale and who has
beneficially owned the shares proposed to be sold for at least two years would
be entitled to sell such shares under Rule 144(k) without regard to the
requirements described above. To the extent that shares were acquired from an
affiliate of ours, such person's holding period for the purpose of effecting a
sale under Rule 144 commences on the date of transfer from the affiliate.
Our directors, executive officers and all stockholders who hold 11,081,147
shares in the aggregate have agreed that they will not offer, sell or agree to
sell, directly or indirectly, or otherwise dispose of any shares of common stock
without the prior written consent of Donaldson, Lufkin & Jenrette for a period
of 180 days from the date of this prospectus.
OPTIONS
Any of our employees or consultants who purchased his or her shares
pursuant to a written compensatory plan or contract is entitled to rely on the
resale provisions of Rule 701, which permits nonaffiliates to sell their Rule
701 shares without having to comply with the public information, holding period,
volume limitation or notice provisions of Rule 144 and permits
64
<PAGE> 69
affiliates to sell their Rule 701 shares without having to comply with the Rule
144 holding period restrictions, in each case commencing 90 days after the date
of this prospectus. As of March 27, 2000, the holders of options exercisable for
approximately 1,328,750 shares of common stock will be eligible to sell their
shares on the expiration of the 180-day lockup period or subject in some cases
to vesting of such options.
We intend to file one or more registration statements on Form S-8 under the
Securities Act to register all shares of common stock subject to outstanding
stock options and common stock issued or issuable under our stock plans. We
expect to file the registration statement covering shares offered pursuant to
the 1996 Stock Option Plan, 1996 Stock Plan, 1999 Stock Option and Incentive
Plan, the 2000 Non-Employee Director Stock Option Plan and the 2000 Employee
Stock Purchase Plan within 180 days after the date of this prospectus,
permitting the resale of such shares by nonaffiliates in the public market
without restriction under the Securities Act.
LOCK-UP AGREEMENTS
We, our executive officers and directors and all of our stockholders and
option holders have agreed not to sell or otherwise dispose of any shares of
common stock without the consent of Donaldson, Lufkin & Jenrette, during the
180-day period following the date of the prospectus. Donaldson, Lufkin &
Jenrette, in its sole discretion at any time, or from time to time, and without
notice may release for sale in the public market all or any portion of the
shares subject to the lock-up agreements. We may issue, and grant options to
purchase, shares of common stock under the 1999 Stock Option and Incentive Plan,
the 2000 Non-Employee Director Stock Option Plan and the 2000 Employee Stock
Purchase Plan. In addition, we may issue shares of common stock in connection
with any acquisition of another company if the terms of issuance provide that
such common stock shall not be resold prior to the expiration of the 180-day
period referenced in the preceding sentence. Donaldson, Lufkin & Jenrette
currently has no plans to release shares from the lock-up agreements. Donaldson,
Lufkin & Jenrette will consider, among other features, the stockholder's reasons
for requesting the release, the number of shares for which release is being
requested and market conditions at the time of release.
WARRANT
As of March 27, 2000, we had an outstanding warrant exercisable for a total
of 150,000 shares of common stock, which is currently exercisable. These shares
are restricted by the terms of the lock-up agreements.
REGISTRATION RIGHTS
Upon the expiration of the contractual lock-up period with the
underwriters, certain stockholders will be entitled to require us to register
under the Securities Act up to a total of 6,174,502 shares of outstanding common
stock under the terms of an investor rights agreement between us and the rights
holders. The investor rights agreement provides that if we propose to register
in a public offering any of our securities under the Securities Act at any time
or times without obtaining waivers from the stockholders having registration
rights, the non-waiving stockholders will generally be entitled to include
shares of common stock held by them in such registration. However, the managing
underwriter of any offering may exclude for marketing reasons some or all of the
shares from the registration. These stockholders also have the right to require
us,
65
<PAGE> 70
on no more than two occasions, to prepare and file a registration statement
under the Securities Act registering the shares of common stock held by them.
Additionally, these stockholders may require us to file additional registration
statements on Form S-3. We are generally required to bear the expenses of all
such registrations, except underwriting discounts and commissions. These
registration rights terminate at the time that each of these stockholders may
sell all of their shares of our stock under Rule 144 of the Securities Act in
any three month period.
66
<PAGE> 71
UNDERWRITING
Subject to the terms and conditions contained in an underwriting agreement
dated , 2000, the underwriters named below, who are represented by
Donaldson, Lufkin & Jenrette Securities Corporation, FleetBoston Robertson
Stephens Inc., Dain Rauscher Incorporated and DLJdirect Inc., have severally
agreed to purchase from us the number of shares of common stock set forth
opposite their names below:
<TABLE>
<CAPTION>
NUMBER
UNDERWRITERS OF SHARES
<S> <C>
Donaldson Lufkin & Jenrette Securities Corporation..........
FleetBoston Robertson Stephens Inc..........................
Dain Rauscher Incorporated..................................
DLJdirect Inc...............................................
Total............................................ 3,500,000
=========
</TABLE>
The underwriting agreement provides that the obligations of the
underwriters to purchase and accept delivery of the shares of common stock
offered by this prospectus are subject to approval by their counsel of legal
matters concerning the offering and to conditions that must be satisfied by us.
The underwriters are obligated to purchase and accept delivery of all of the
shares of common stock offered by this prospectus, other than those shares
covered by the over-allotment option described below, if any are purchased.
The underwriters initially propose to offer the shares of common stock in
part directly to the public at the initial public offering price set forth on
the cover page of this prospectus and in part to dealers, including the
underwriters, at such price less a concession not in excess of $ per share.
The underwriters may allow, and such dealers may re-allow, to other dealers a
concession not in excess of $ per share. After the initial offering of the
common stock, the public offering price and other selling terms may be changed
by the representatives at any time without notice. The underwriters do not
intend to confirm sales to any accounts over which they exercise discretionary
authority.
An electronic prospectus will be available on the web site maintained by
DLJdirect Inc., an affiliate of Donaldson, Lufkin & Jenrette Securities
Corporation. Other than the prospectus in electronic format, the information on
this web site relating to the offering is not part of this prospectus and has
not been approved or endorsed by us or the underwriters, and should not be
relied on by prospective investors.
The following table shows the underwriting fees to be paid to the
underwriters by us in this offering. These amounts are shown assuming both no
exercise and full exercise of the underwriters' option to purchase additional
shares of our common stock.
<TABLE>
<CAPTION>
FULL
NO EXERCISE EXERCISE
----------- --------
<S> <C> <C>
Per share............................................. $ $
Total................................................. $ $
</TABLE>
We will pay the offering expenses, estimated to be $1.25 million.
We have granted to the underwriters an option, exercisable for 30 days
after the date of this prospectus, to purchase, from time to time, in whole or
in part, up to an aggregate of additional shares of common stock at
the initial public offering price less underwriting discounts
67
<PAGE> 72
and commissions. The underwriters may exercise the option solely to cover
over-allotments, if any, made in connection with the offering. To the extent
that the underwriters exercise the option, each underwriter will become
obligated, subject to conditions contained in the underwriting agreement, to
purchase its pro rata portion of such additional shares based on the
underwriters' percentage underwriting commitment as indicated in the above
table.
We have agreed to indemnify the underwriters against liabilities which may
arise in connection with the offering, including liabilities under the
Securities Act of 1933, or to contribute to payments that the underwriters may
be required to make.
We, our executive officers and directors and all of our stockholders and
option holders are subject to agreements providing that, with certain limited
exceptions, we will not:
-- offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option,
right or warrant to purchase, lend, or otherwise transfer or dispose
of directly or indirectly any shares of common stock or any securities
convertible into or exercisable or exchangeable for common stock; or
-- enter into any swap or other arrangement that transfers to another, in
whole or in part, any of the economic consequences of ownership of the
common stock, whether any such transaction described above is to be
settled by delivery of common stock or other securities, in cash or
otherwise
for a period of 180 days after the date of this prospectus. Donaldson, Lufkin
Jenrette Securities Corporation may release some or all of these shares from
such restrictions prior to the expiration of the 180 day period lock-up period,
although it has no current intention of doing so. See "Shares Eligible For
Future Sale -- Lock-Up Agreements."
In addition, during such 180 day period, we have also agreed not to file
any registration statement with respect to the registration of any shares of
common stock or any securities convertible into or exercisable or exchangeable
for common stock, except for registration statements on Form S-8 registering
shares of common stock pursuant to our existing stock plans, without the prior
written consent of Donaldson, Lufkin & Jenrette Securities Corporation.
Prior to the offering, there has been no established trading market for our
common stock. The initial public offering price of the shares of common stock
offered by this prospectus will be determined by negotiation among us and the
underwriters. The factors to be considered in determining the initial public
offering price include:
-- the history of and the prospects for the markets in which we compete;
-- our past and present operations;
-- our historical results of operations;
-- our prospects for future financial performance;
-- recent market prices of securities of generally comparable companies;
and
-- the general condition of the securities markets at the time of the
offering.
The underwriters have reserved up to shares of our common stock
to be sold in this offering for sale to some of our employees and associates of
our employees and directors, and to other individuals or companies who have
commercial arrangements or personal relationships with us. Through this directed
share program, we intend to ensure that those individuals and companies that
have supported us, or who are in a position to support us in the future, have
the opportunity to
68
<PAGE> 73
purchase our common stock at the same price that we are offering our shares to
the general public. Prospective participants will not receive any investment
materials other than a copy of this prospectus, and will be permitted to
participate in this offering at the initial public offering price presented on
the cover page of this prospectus. No commitment to purchase shares by any
participant in the directed share program will be accepted until after the
registration statement of which this prospectus is part is effective and an
initial public offering price has been established. The number of shares
available for sale to the general public will be reduced by the number of shares
sold through the directed share program. Any shares reserved for the directed
share program which are not so purchased will be offered by the underwriters to
the general public on the same basis as the other shares offered hereby.
Other than in the United States, no action has been taken by us or the
underwriters that would permit a public offering of the shares of common stock
offered in any jurisdiction where action for that purpose is required. The
shares of common stock offered may not be offered or sold, directly or
indirectly, nor may this prospectus or any other offering material or
advertisements in connection with the offer and sale of any such shares of
common stock be distributed or published in any jurisdiction, except under
circumstances that will result in compliance with the applicable rules and
regulations of such jurisdiction. Persons into whose possession this prospectus
comes are advised to inform themselves about and observe any restrictions
relating to the offering and the distribution of this prospectus. This
prospectus does not constitute an offer to sell or a solicitation of an offer to
buy any shares of common stock offered in any jurisdiction in which such an
offer or a solicitation is unlawful.
In connection with the offering, the underwriters may engage in
transactions that stabilize, maintain or otherwise affect the price of the
common stock. Specifically, the underwriters may over-allot the offering,
creating a syndicate short position. The underwriters may bid for and stabilize
the price of the common stock. In addition, the underwriting syndicate may
reclaim selling concessions from syndicate members and selected dealers if they
repurchase previously distributed common stock in syndicate covering
transactions, in stabilizing transactions or otherwise. These activities may
stabilize or maintain the market price of the common stock above independent
market levels. The underwriters are not required to engage in these activities,
and may end any of these activities at any time.
LEGAL MATTERS
The validity of the shares of common stock offered hereby will be passed
upon for us by Testa, Hurwitz & Thibeault, LLP, Boston, Massachusetts. Certain
legal matters in connection with this offering will be passed upon for the
underwriters by Goodwin, Procter & Hoar LLP.
EXPERTS
The financial statements included in this prospectus have been audited by
Deloitte & Touche LLP, independent auditors, as stated in their report appearing
herein (which report expresses an unqualified opinion and includes an
explanatory paragraph referring to a change in accounting), and have been so
included in reliance upon the report of such firm given upon their authority as
experts in accounting and auditing.
69
<PAGE> 74
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form S-1. This prospectus, which constitutes a part of the
registration statement, does not contain all of the information included in the
registration statement. Certain information is omitted and you should refer to
the registration statement and its exhibits. With respect to references made in
this prospectus to any contract, agreement or other document of Synchronicity,
such references are not necessarily complete and you should refer to the
exhibits attached to the registration statement for copies of the actual
contract, agreement or other document. You may review a copy of the registration
statement, including exhibits, at the Securities and Exchange Commission's
public reference room at Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549 or Seven World Trade Center, 13th Floor, New York, New York 10048 or
Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661.
Please call the Commission at 1-800-SEC-0330 for further information on the
operation of the public reference rooms.
We will also file annual, quarterly and current reports, proxy statements
and other information with the Securities and Exchange Commission. You may read
and copy any reports, statements or other information on file at the public
reference rooms. You can also request copies of these documents, for a copying
fee, by writing to the Securities and Exchange Commission.
Our Securities and Exchange Commission filings and the registration
statement can also be reviewed by accessing the Securities and Exchange
Commission's internet site at http://www.sec.gov, which contains reports, proxy
and information statements and other information regarding registrants that file
electronically with the Securities and Exchange Commission.
70
<PAGE> 75
SYNCHRONICITY SOFTWARE, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Independent Auditors' Report................................ F-2
Balance Sheets.............................................. F-3
Statements of Operations.................................... F-4
Statements of Stockholders' Equity (Deficiency)............. F-5
Statements of Cash Flows.................................... F-6
Notes to Financial Statements............................... F-7
</TABLE>
F-1
<PAGE> 76
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Synchronicity Software, Inc.
We have audited the accompanying balance sheets of Synchronicity Software,
Inc. (formerly Synchronicity, Inc. of Massachusetts) (the "Company") as of
December 31, 1998 and 1999, and the related statements of operations,
stockholders' equity (deficiency), and cash flows for each of the three years in
the period ended December 31, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of Synchronicity Software, Inc. at December 31,
1998 and 1999, and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 1999 in conformity with
generally accepted accounting principles.
As discussed in Note 1, in 1998 the Company changed its method of
accounting for revenue.
/s/ DELOITTE & TOUCHE LLP
Boston, Massachusetts
February 17, 2000
(March 6, 2000 as to Note 10)
F-2
<PAGE> 77
SYNCHRONICITY SOFTWARE, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
PRO FORMA
AS OF DECEMBER 31, DECEMBER 31, 1999
--------------------------- -----------------
1998 1999 (UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and equivalents.................... $ 6,312,910 $ 3,652,124
Accounts receivable, net of allowance of
$44,000 in 1999....................... 1,579,000 3,100,139
Prepaid commissions..................... 278,148 940,735
Prepaid expenses and other current
assets................................ 110,171 149,781
----------- ------------
Total current assets............... 8,280,229 7,842,779
----------- ------------
PROPERTY AND EQUIPMENT, Net.................. 463,741 579,373
OTHER ASSETS (Net of accumulated amortization
of $3,477 and $8,491 in 1998 and 1999,
respectively).............................. 12,256 10,552
PREPAID COMMISSIONS.......................... 35,795 325,296
----------- ------------
Total.............................. $ 8,792,021 $ 8,758,000
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIENCY)
CURRENT LIABILITIES:
Accounts payable........................ $ 294,038 $ 364,580
Accrued payroll and commissions......... 486,052 1,679,812
Deferred revenues....................... 2,307,965 3,861,805
----------- ------------
Total current liabilities.......... 3,088,055 5,906,197
----------- ------------
COMMITMENTS (NOTE 8)
REDEEMABLE CONVERTIBLE PREFERRED STOCK
(aggregate liquidation preference,
$12,594,248)............................... 12,445,473 12,482,668 --
----------- ------------ ------------
STOCKHOLDERS' EQUITY (DEFICIENCY):
Preferred stock, $0.01 par value, 5,000,000
shares authorized pro forma; no shares
issued and outstanding.................. -- -- --
Convertible preferred stock, Series A,
$0.01 par value, 200,000 shares
authorized, issued and outstanding
(liquidation preference $1,000,000)..... 2,000 2,000 --
Common stock, $0.01 par value, 13,088,942
shares authorized (12,605,302 authorized
in 1998); 3,786,018 shares issued and
outstanding (3,299,900 in 1998);
90,000,000 shares authorized pro forma;
10,807,020 issued and outstanding....... 32,999 37,860 108,070
Additional paid-in capital................. 1,383,539 7,436,361 19,850,819
Deferred compensation...................... (330,289) (4,600,815) (4,600,815)
Accumulated deficit........................ (7,829,756) (12,506,271) (12,506,271)
----------- ------------ ------------
Total stockholders' equity
(deficiency)..................... (6,741,507) (9,630,865) $ 2,851,803
----------- ------------ ============
Total.............................. $ 8,792,021 $ 8,758,000
=========== ============
</TABLE>
See notes to financial statements.
F-3
<PAGE> 78
SYNCHRONICITY SOFTWARE, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------
1997 1998 1999
<S> <C> <C> <C>
REVENUES:
Software licenses..................... $ 410,000 $ 1,042,783 $ 5,224,133
Services.............................. 250,000 765,751 2,223,072
----------- ----------- -----------
Total revenues.................. 660,000 1,808,534 7,447,205
----------- ----------- -----------
COST OF REVENUES:
Software licenses..................... 28,200 106,792 193,707
Services.............................. 63,472 206,020 848,771
----------- ----------- -----------
Total cost of revenues.......... 91,672 312,812 1,042,478
----------- ----------- -----------
Gross profit............................... 568,328 1,495,722 6,404,727
----------- ----------- -----------
OPERATING EXPENSES:
Sales and marketing (excluding
stock-based compensation of $26,635
in 1998 and $317,689 in 1999)...... 1,399,364 2,172,136 4,641,774
Research and development (excluding
stock-based compensation of $866 in
1997, $14,044 in 1998 and $224,990
in 1999)........................... 1,581,355 2,618,274 3,695,893
General and administrative (excluding
stock-based compensation of $7,749
in 1998 and $81,332 in 1999)....... 436,349 730,075 1,124,151
Stock-based compensation.............. 866 48,428 624,011
Warrant expense....................... -- -- 1,092,714
----------- ----------- -----------
Total operating expenses........ 3,417,934 5,568,913 11,178,543
----------- ----------- -----------
Loss from operations....................... (2,849,606) (4,073,191) (4,773,816)
Interest income............................ 134,617 124,919 195,369
Other expense.............................. -- -- (23,448)
----------- ----------- -----------
Loss before provision for income taxes..... (2,714,989) (3,948,272) (4,601,895)
Provision for income taxes................. 65,000 -- 37,425
----------- ----------- -----------
Net loss................................... $(2,779,989) $(3,948,272) $(4,639,320)
=========== =========== ===========
Net loss per share:
Basic and diluted..................... $ (0.86) $ (1.21) $ (1.39)
=========== =========== ===========
Weighted-average shares............... 3,247,172 3,283,730 3,372,069
=========== =========== ===========
Pro forma net loss per share (unaudited):
Basic and diluted..................... $ (0.45)
===========
Weighted-average shares............... 10,393,071
===========
</TABLE>
See notes to financial statements.
F-4
<PAGE> 79
SYNCHRONICITY SOFTWARE, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
<TABLE>
CONVERTIBLE
PREFERRED STOCK
SERIES A COMMON STOCK ADDITIONAL
---------------- ------------------- PAID-IN DEFERRED ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION DEFICIT
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1997....... 200,000 $2,000 3,226,350 $32,264 $ 998,308 $ -- $ (1,049,088)
Exercise of common stock
options................. -- -- 25,000 250 1,000 -- --
Stock-based
compensation............ -- -- -- -- 866 -- --
Accretion of preferred
stock issuance costs.... -- -- -- -- -- -- (27,258)
Net loss.................. -- -- -- -- -- -- (2,779,989)
------- ------ --------- ------- ---------- ----------- ------------
Balance, December 31, 1997..... 200,000 2,000 3,251,350 32,514 1,000,174 -- (3,856,335)
Exercise of common stock
options................. -- -- 48,550 485 4,648 -- --
Stock-based
compensation............ -- -- -- -- 378,717 (330,289) --
Accretion of preferred
stock issuance costs.... -- -- -- -- -- -- (25,149)
Net loss.................. -- -- -- -- -- -- (3,948,272)
------- ------ --------- ------- ---------- ----------- ------------
Balance, December 31, 1998..... 200,000 2,000 3,299,900 32,999 1,383,539 (330,289) (7,829,756)
Exercise of common stock
options................. -- -- 486,118 4,861 65,571 -- --
Warrant expense........... -- -- -- -- 1,092,714 -- --
Stock-based
compensation............ -- -- -- -- 4,894,537 (4,270,526) --
Accretion of preferred
stock issuance costs.... -- -- -- -- -- -- (37,195)
Net loss.................. -- -- -- -- -- -- (4,639,320)
------- ------ --------- ------- ---------- ----------- ------------
Balance, December 31, 1999..... 200,000 $2,000 3,786,018 $37,860 $7,436,361 $(4,600,815) $(12,506,271)
======= ====== ========= ======= ========== =========== ============
TOTAL
<S> <C>
Balance, January 1, 1997....... $ (16,516)
Exercise of common stock
options................. 1,250
Stock-based
compensation............ 866
Accretion of preferred
stock issuance costs.... (27,258)
Net loss.................. (2,779,989)
-----------
Balance, December 31, 1997..... (2,821,647)
Exercise of common stock
options................. 5,133
Stock-based
compensation............ 48,428
Accretion of preferred
stock issuance costs.... (25,149)
Net loss.................. (3,948,272)
-----------
Balance, December 31, 1998..... (6,741,507)
Exercise of common stock
options................. 70,432
Warrant expense........... 1,092,714
Stock-based
compensation............ 624,011
Accretion of preferred
stock issuance costs.... (37,195)
Net loss.................. (4,639,320)
-----------
Balance, December 31, 1999..... $(9,630,865)
===========
</TABLE>
See notes to financial statements.
F-5
<PAGE> 80
SYNCHRONICITY SOFTWARE, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1997 1998 1999
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss....................................... $(2,779,989) $(3,948,272) $(4,639,320)
----------- ----------- -----------
Adjustments to reconcile net loss to cash used
for operating activities:
Depreciation and amortization............. 128,754 233,947 342,770
Warrant expense........................... -- -- 1,092,714
Stock-based compensation.................. 866 48,428 624,011
(Decrease) increase in cash from:
Accounts receivable................. (967,500) (611,500) (1,521,139)
Prepaid commissions................. -- (313,943) (952,088)
Prepaid expenses and other current
assets............................ 310 (100,931) (39,610)
Accounts payable.................... 175,265 9,448 70,542
Accrued payroll and commissions..... 52,559 382,678 1,193,760
Deferred revenues................... 850,000 1,457,965 1,553,840
----------- ----------- -----------
Total adjustments................... 240,254 1,106,092 2,364,800
----------- ----------- -----------
Cash used for operating
activities........................ (2,539,735) (2,842,180) (2,274,520)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment............ (433,185) (252,523) (453,388)
Other assets................................... (889) (8,646) (3,310)
----------- ----------- -----------
Cash used for investing
activities........................ (434,074) (261,169) (456,698)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of common stock
options...................................... 1,250 5,133 70,432
Proceeds from issuance of preferred stock, net
of issuance costs............................ 3,045,091 7,179,550 --
----------- ----------- -----------
Cash provided by financing
activities........................ 3,046,341 7,184,683 70,432
----------- ----------- -----------
Increase (decrease) in cash and equivalents.... 72,532 4,081,334 (2,660,786)
Cash and equivalents, beginning of year........ 2,159,044 2,231,576 6,312,910
----------- ----------- -----------
Cash and equivalents, end of year.............. $ 2,231,576 $ 6,312,910 $ 3,652,124
=========== =========== ===========
NONCASH FINANCING ACTIVITY -- Accretion of
preferred stock issuance costs............... $ 27,258 $ 25,149 $ 37,195
=========== =========== ===========
</TABLE>
See notes to financial statements.
F-6
<PAGE> 81
SYNCHRONICITY SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS -- Synchronicity Software, Inc. (formerly
Synchronicity, Inc. of Massachusetts) (the "Company") provides internet-based
software products that enable company-wide and business-to-business
collaboration among participants in electronic product development supply
chains. In May 1999, the Company changed its state of incorporation from
Massachusetts to Delaware.
SEGMENTS -- The Company has a single operating segment, the development and
marketing of internet-based software products. The Company's organizational
structure is not dictated by product lines, geography or customer type.
PRO FORMA BALANCE SHEET INFORMATION (UNAUDITED) -- Upon the closing of the
Company's public offering, all of the outstanding shares of preferred stock as
of December 31, 1999 will automatically convert into 7,021,002 shares of common
stock. The unaudited pro forma presentation of the balance sheet has been
prepared assuming the conversion of all shares of preferred stock into common
stock at December 31, 1999. All references to pro forma information in the notes
to the financial statements are unaudited.
USE OF ESTIMATES -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
CASH AND EQUIVALENTS -- The Company considers all highly liquid investments
with remaining maturities of three months or less when purchased to be cash
equivalents.
PREPAID COMMISSIONS -- Commissions directly related to revenue transactions
are deferred and charged to sales and marketing expense when the related revenue
is recognized.
PROPERTY AND EQUIPMENT -- Property and equipment are stated at cost.
Depreciation and amortization are provided using the straight-line method over
the useful lives (three years) of the related assets. The Company periodically
evaluates the recoverability of its long-lived assets based on expected
undiscounted cash flows and recognizes impairments, if any, based on discounted
cash flows.
OTHER ASSETS -- Other assets consist primarily of capitalized costs
incurred to register trademarks. Such costs are being amortized over five years.
REVENUE RECOGNITION -- Beginning in 1998, the Company recognized revenue
under Statement of Position ("SOP") 97-2, "Software Revenue Recognition," and
SOP 98-9, "Modification of SOP 97-2, Software Revenue Recognition, with Respect
to Certain Transactions." Prior to 1998, revenue was recognized in accordance
with SOP 91-1, "Software Revenue Recognition".
Revenue from licenses of software products is recognized when products are
delivered to customers, pervasive evidence of an arrangement exists, the fee is
fixed or determinable, and collection is probable. When arrangements contain
multiple elements and vendor-specific objective evidence exists for all
undelivered elements, revenue is allocated to the delivered elements using the
F-7
<PAGE> 82
SYNCHRONICITY SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999 -- (CONTINUED)
residual method as prescribed by SOP 98-9. Vendor-specific objective evidence is
based on the renewal rate, if applicable, or the prices charged when the same
element is sold separately or if an element has not yet been sold separately,
the price established by management having the relevant authority. When
arrangements include post-contract support and unspecified updates to be
delivered on a if-and-when-available basis, and where vendor-specific objective
evidence does not exist for the allocation of revenue to the various elements of
the arrangement, revenue is recognized ratably over the term of the arrangement.
Revenue recognized under these arrangements is included in software license
revenues and amounted to approximately $27,000 and $989,000 in 1998 and 1999,
respectively. Revenue from arrangements that have payment terms extending beyond
twelve months is recognized as the payments become due. Software license
revenues from sales to distributors are generally recognized at the time a
distributor reports that the software has been licensed to an end-user and all
revenue recognition criteria have been satisfied. The Company does not permit
end-user customers to return licensed software for refunds.
Revenue from consulting and training is recognized as services are
provided. Revenue from post-contract support is recognized ratably over the term
of the service agreement.
Deferred revenues include amounts billed in advance for consulting,
training, and maintenance for service and support not yet performed which are
recognized as revenue as the services are performed. Deferred revenues also
include amounts billed for sales to distributors in advance of licensing to
end-users, which are recognized as revenue as end-user licenses are reported. In
addition, deferred revenues include multiple-element contract arrangements in
which sufficient vendor-specific objective evidence does not exist, which are
recognized as revenue ratably over the term of the arrangement.
STOCK-BASED COMPENSATION -- The Company accounts for stock-based employee
compensation arrangements in accordance with provisions of Accounting Principles
Board Opinion ("APB") No. 25, "Accounting for Stock Issued to Employees" and
complies with the disclosure provisions of Statement of Financial Accounting
Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation." Under APB
No. 25, compensation cost is recognized on a straight-line basis over the
vesting period based on the difference, if any, on the date of grant between the
fair value of the Company's stock and the exercise price.
The Company accounts for stock issued to nonemployees in accordance with
the provisions of SFAS No. 123 and Emerging Issues Task Force No. 96-18,
"Accounting for Equity Instruments That Are Issued to Other Than Employees for
Acquiring, or in Conjunction with Selling, Goods or Services."
SOFTWARE DEVELOPMENT COSTS -- Software development costs are included in
research and development and are expensed as incurred. After technological
feasibility is established, material software development costs are capitalized.
The capitalized cost is then amortized on a straight-line basis over the
estimated product life or in the ratio of current revenues to total projected
product revenues, whichever is greater. To date, the period between achieving
technological feasibility, which the Company has defined as the establishment of
a working model which typically occurs when the beta testing commences, and the
general availability of such software has been short, and software development
costs qualifying for capitalization have been insignificant. Accordingly, the
Company has not capitalized any software development costs.
F-8
<PAGE> 83
SYNCHRONICITY SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999 -- (CONTINUED)
INCOME TAXES -- Deferred tax assets and liabilities are recorded to measure
the taxes expected to be paid or recovered in future periods due to differences
between the book and tax bases of assets and liabilities and operating loss
carryforwards. The Company records a valuation allowance of 100% for all
deferred tax assets.
CONCENTRATION OF CREDIT RISK -- Financial instruments that potentially
subject the Company to significant concentrations of credit risk consist
principally of cash and equivalents and accounts receivable. Cash and
equivalents are deposited with financial institutions that management believes
are creditworthy.
The Company performs ongoing credit evaluations of its customers' financial
condition and requires no collateral from its customers. The Company maintains
an allowance for doubtful accounts receivable based on the expected
collectibility of accounts receivable.
FAIR VALUE OF FINANCIAL INSTRUMENTS -- The Company's financial instruments,
including cash, cash equivalents, accounts receivable and accounts payable, are
carried at cost, which approximates their fair value because of the short-term
nature of these instruments.
NET LOSS PER SHARE AND PRO FORMA NET LOSS PER SHARE -- Net loss per share
is computed under SFAS No. 128, "Earnings Per Share." Basic net loss per share
is computed using the weighted-average number of shares of common stock
outstanding. Net loss used in the calculation is increased by the accretion of
preferred stock in each year to arrive at the net loss available to common
shareholders. Diluted loss per share does not differ from basic loss per share
since potential common shares from conversion of preferred stock, stock options
and warrants are antidilutive for all periods presented and, therefore, are
excluded from the calculation. During the years ended December 31, 1997, 1998
and 1999, options to purchase 1,116,500, 1,449,500, and 1,520,377 shares of
common stock and preferred stock convertible into 4,157,665, 7,021,002 and
7,021,002 shares of common stock, respectively, were not included in the
computation of diluted earnings per share since their inclusion would be
antidilutive. Additionally, a warrant to purchase 150,000 shares of common stock
granted in 1998 was not included in the computation of diluted earnings per
share for 1998 and 1999 since its inclusion would be antidilutive. Pro forma
basic and diluted net loss per share have been calculated assuming the
conversion of all outstanding shares of preferred stock into common stock, as if
the shares had converted immediately upon their issuance.
COMPREHENSIVE INCOME -- There are no other elements of comprehensive income
(loss) other than net income (loss).
FUTURE ADOPTION OF ACCOUNTING PRONOUNCEMENTS -- In 1998, the Financial
Accounting Standards Board ("FASB") issued SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities." SFAS No. 133 establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities.
The provisions of SFAS No. 133 are effective for periods beginning after June
15, 2000. The Company has not determined the effect, if any, that SFAS No. 133
will have on its financial statements.
F-9
<PAGE> 84
SYNCHRONICITY SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999 -- (CONTINUED)
2. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
ESTIMATED -----------------------
USEFUL LIFE 1998 1999
<S> <C> <C> <C>
Office and computer equipment........................ 3 years $ 585,277 $ 903,277
Computer software.................................... 3 years 220,846 314,005
Furniture and fixtures............................... 3 years 45,533 85,826
--------- ----------
Total property and equipment.................... 851,656 1,303,108
Less accumulated depreciation and amortization....... (387,915) (723,735)
--------- ----------
Property and equipment -- net........................ $ 463,741 $ 579,373
========= ==========
</TABLE>
3. LINE OF CREDIT
At December 31, 1999, the Company had a line of credit, which allowed
borrowings up to $2.0 million through February 2000. Borrowings under the line
may be used for working capital ($1.5 million) and equipment purchases ($0.5
million). Interest on the borrowings was charged at the bank's prime rate (8.5%
at December 31, 1999) plus 0.5% and borrowings were collateralized by
substantially all of our tangible assets. There were no outstanding borrowings
at December 31, 1998 or 1999. The agreement required compliance with certain
financial ratios and, among other things, the maintenance of minimum levels of
working capital and tangible net worth. The agreement also prohibited the
declaration or payment of dividends. At December 31, 1999, the Company was not
in compliance with certain financial ratios; waivers of the non-compliance have
been obtained from the bank.
In February 2000, the line of credit was renegotiated to include borrowings
up to $3.0 million through February 2001 as well as less restrictive financial
covenants. Under this new line of credit, the Company would have been in
compliance with the financial covenants at December 31 1999. Borrowings under
the new line may be used for working capital ($2.5 million) and equipment
purchases ($0.5 million). The other terms of the new line of credit are similar
to the former line of credit, including the restriction on the declaration and
payment of dividends.
The Company has an outstanding letter of credit in the amount of $70,590,
which was provided in lieu of a security deposit to a holder of one of the
Company's office leases. The letter of credit expires on December 31, 2000.
4. REDEEMABLE CONVERTIBLE PREFERRED STOCK
At December 31, 1998 and 1999, the Company had 281,250 authorized, issued
and outstanding shares of Series B Convertible Preferred Stock, $0.01 par value
(the "Series B Preferred Stock"); 350,283 authorized, issued and outstanding
shares of Series C Convertible Preferred Stock, $0.01 par value (the "Series C
Preferred Stock"); and 2,863,337 authorized, issued and outstanding shares of
Series D Convertible Preferred Stock, $0.01 par value (the "Series D Preferred
Stock") (collectively, the "Redeemable Preferred Stock").
F-10
<PAGE> 85
SYNCHRONICITY SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999 -- (CONTINUED)
Redeemable Preferred Stock was comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1998 1999
<S> <C> <C>
Series B Preferred Stock, at redemption value
(liquidation preference, $2,250,000).................. $ 2,199,017 $ 2,211,765
Series C Preferred Stock, at redemption value
(liquidation preference, $3,100,005).................. 3,058,819 3,069,115
Series D Preferred Stock, at redemption value
(liquidation preference, $7,244,243).................. 7,187,637 7,201,788
----------- -----------
Total redeemable convertible preferred
stock...................................... $12,445,473 $12,482,668
=========== ===========
</TABLE>
CONVERSION -- Holders of the Redeemable Preferred Stock have the right and
option to convert all or any portion of the preferred shares into shares of
common stock at any time. Shares of the Redeemable Preferred Stock will be
automatically converted into common stock at the then applicable conversion rate
in the event of a public offering in which the aggregate net proceeds are at
least $20,000,000 and the per share price is at least $5.06. Each Series B and C
share is convertible on a five-for-one basis into common stock, and each share
of Series D is convertible on a one-for-one basis. The conversion rate will be
adjusted for stock splits, combinations, stock dividends and distributions.
REDEMPTIONS AND DIVIDENDS -- The Series B, Series C and Series D Preferred
Stock are subject to redemption, at the option of holders of 66 2/3% of the
combined Series B, C and D Preferred Stock, at any time after September 28,
2003, at redemption prices of $8.00 per share, $8.85 per share and $2.53 per
share, respectively, plus accrued and unpaid dividends. Dividends on the
Redeemable Preferred Stock accrue and are payable when and if declared by the
Company's Board of Directors (the "Board"). No dividends have been declared
through December 31, 1999.
LIQUIDATION PREFERENCE -- In the event of liquidation, dissolution, or
winding up of the Company, holders of the Series B, C and D Preferred Stock are
entitled to receive, in preference to the holders of common stock but pari-passu
to the Series A Preferred Stock, an amount equal to $8.00 per share, $8.85 per
share and $2.53 per share, respectively, plus accrued and unpaid dividends.
VOTING RIGHTS -- The holders of Redeemable Preferred Stock are entitled to
vote, together with holders of the common stock and Series A Preferred Stock, on
all matters. Each share of preferred stock is entitled to vote on an
as-converted basis.
5. STOCKHOLDERS' EQUITY (DEFICIENCY)
1999 STOCK OPTION AND INCENTIVE PLAN -- The Company has a stock option plan
under which options to purchase up to a maximum of 575,000 shares of common
stock may be granted to employees, directors, or consultants. The exercise price
of incentive stock options cannot be less than 100% of the fair market value of
the stock at the date of grant; the exercise price of nonqualified stock options
is determined by the Board. Options vest over periods determined by the Board,
generally four years.
F-11
<PAGE> 86
SYNCHRONICITY SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999 -- (CONTINUED)
The following table sets forth the option activity for the years ended
December 31 under the 1999 Stock Option and Incentive Plan and predecessor
plans:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
---------------------------
WEIGHTED-
NUMBER OF AVERAGE
SHARES EXERCISE PRICE
<S> <C> <C>
Outstanding, January 1, 1997...................... 753,750 $0.11
Granted...................................... 387,750 0.17
Exercised.................................... (25,000) 0.05
---------
Outstanding, December 31, 1997.................... 1,116,500 0.13
Granted...................................... 444,000 0.19
Exercised.................................... (48,550) 0.11
Forfeited.................................... (62,450) 0.17
---------
Outstanding, December 31, 1998.................... 1,449,500 0.15
Granted...................................... 586,075 1.27
Exercised.................................... (486,118) 0.14
Forfeited.................................... (29,080) 0.29
---------
Outstanding, December 31, 1999.................... 1,520,377 0.58
=========
Exercisable, December 31, 1999.................... 564,383 0.22
=========
Exercisable, December 31, 1998.................... 639,771 0.13
=========
Exercisable, December 31, 1997.................... 318,518 0.12
=========
</TABLE>
The estimated weighted-average fair value of option grants made during
1997, 1998 and 1999 was $0.08, $0.90 and $8.01 per option, respectively.
Included in the table above are options to five nonemployees to purchase an
aggregate of 47,000 shares of common stock at a weighted-average exercise price
of $0.16 per share with actual exercise prices ranging from $0.10 to $0.18 per
share. Compensation expense of $866, $48,428, and $46,395 was recognized in
1997, 1998 and 1999 respectively, for these nonemployee options in accordance
with SFAS No. 123 and EITF No. 96-18.
Under APB No. 25, stock-based compensation is based on the difference, if
any, on the date of the grant, between the fair value of the Company's stock and
the exercise price. Stock-based compensation is amortized to expense in
accordance with FASB Interpretation No. 28. In connection with certain stock
option grants during the years ended December 31, 1998 and 1999, the Company
recorded unearned stock-based compensation cost totaling $5,178,431, which is
being recognized over the vesting period.
F-12
<PAGE> 87
SYNCHRONICITY SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999 -- (CONTINUED)
The following table summarizes information about stock options outstanding
at December 31, 1999:
<TABLE>
<CAPTION>
OUTSTANDING EXERCISABLE
------------------------------------------------------ ----------------------------------
WEIGHTED- WEIGHTED-AVERAGE
NUMBER WEIGHTED- AVERAGE NUMBER EXERCISE PRICE
RANGE OF OUTSTANDING AVERAGE REMAINING EXERCISABLE OF CURRENTLY
EXERCISE AT DECEMBER 31, EXERCISE LIFE AT DECEMBER 31, EXERCISABLE
PRICES 1999 PRICE (IN YEARS) 1999 OPTIONS
<S> <C> <C> <C> <C> <C>
$ 0.05 35,000 $0.05 6 30,500 $0.05
0.10 215,000 0.10 7 160,750 0.10
0.16 200,050 0.16 7 146,013 0.16
0.18 464,800 0.18 8 156,990 0.18
0.25 31,000 0.25 9 9,240 0.25
0.75 481,227 0.75 10 58,870 0.75
4.00 93,300 4.00 10 2,020 4.00
--------- -------
0.05 - 4.00 1,520,377 0.58 564,383 0.22
========= =======
</TABLE>
PRO FORMA DISCLOSURES -- SFAS No. 123 requires the disclosure of pro forma
information as if the Company adopted the fair value method for grants or awards
made to employees. For purposes of the pro forma disclosures, the fair value of
options on their grant date was measured using the Black-Scholes option pricing
model with the following weighted-average assumptions: expected life of four
years; risk free interest rate of 6.0%, 5.5% and 6.0% in 1997, 1998 and 1999,
respectively; and no dividends during the expected term. The Company's 1997,
1998 and 1999 calculations assumed a volatility factor of 52%, 68% and 83%,
respectively. Forfeitures are recognized as they occur. If the computed fair
values of the 1997, 1998 and 1999 awards had been amortized to expense over the
vesting period of the awards, pro forma net loss and net loss per share would
have been as follows:
<TABLE>
<CAPTION>
1997 1998 1999
<S> <C> <C> <C>
Net loss as reported............... $(2,779,989) $(3,948,272) $(4,639,320)
Pro forma net loss................. (2,791,544) (3,972,149) (4,732,644)
Net loss per share as reported..... (0.86) (1.21) (1.39)
Pro forma net loss per share....... (0.87) (1.22) (1.41)
</TABLE>
CONVERTIBLE PREFERRED STOCK -- At December 31, 1998 and 1999, the Company
had 200,000 authorized issued and outstanding shares of Series A Preferred
Stock, $0.01 par value.
Conversion -- Holders of the Series A Preferred Stock have the right and
option to convert the preferred shares at any time into shares of common stock.
Each share of Series A Preferred Stock is convertible on a five-for-one basis
into common stock. The conversion rate will be adjusted for stock splits,
combinations, stock dividends and distributions. Series A Preferred Stock
automatically converts into common stock upon the closing of a public offering
of the Company's stock.
F-13
<PAGE> 88
SYNCHRONICITY SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999 -- (CONTINUED)
Dividends -- Dividends accrue and are payable when and if declared by the
Board. No dividends have been declared through December 31, 1999.
Liquidation Preference -- In the event of liquidation or dissolution of the
Company, holders of the Series A Preferred Stock are entitled to receive, in
preference to the holders of common stock, an amount equal to $5.00 per share,
plus accrued and unpaid dividends.
WARRANT -- The Company granted to a customer a warrant to purchase 150,000
shares of common stock at a price of $4.30 per share which vested in December
1999 when the customer entered into a license agreement and issued a purchase
order for $2,500,000. The revenue related to this order will be recognized
ratably over the three year term of the license agreement with the customer
commencing January 1, 2000. The Company valued the warrant at approximately
$1,093,000 using the Black-Scholes model, based on a deemed fair market value of
the Company's common stock of $11.05 per share, an assumed volatility of 83%, a
risk-free interest rate of 6.0%, a weighted-average expected life of 12 months
and a dividend rate of 0.0%.
The warrant is exercisable at any time before the earlier of September 28,
2002, or upon the closing of a public offering of the Company's stock.
6. INCOME TAXES
At December 31, the deferred tax assets and liabilities consisted of the
following:
<TABLE>
<CAPTION>
1998 1999
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards............ $ 2,819,000 $ 4,018,000
Depreciation................................ 31,000 56,000
Start-up costs.............................. 189,000 129,000
Research and development credits............ 286,000 517,000
Warrant expense............................. -- 437,000
Stock-based compensation.................... 19,000 45,000
Other....................................... 17,000 15,000
----------- -----------
3,361,000 5,217,000
Less valuation allowance......................... (3,361,000) (5,217,000)
----------- -----------
$ -- $ --
=========== ===========
</TABLE>
Because of the Company's limited operating history, management has provided
a 100% reserve against the Company's net deferred tax assets. Federal and state
net operating loss carryforwards of approximately $10,050,000 expire beginning
in 2011 and 2001, respectively. Federal and state tax credits related to
research and development activities of approximately $371,000 and $146,000
expire beginning in 2011.
F-14
<PAGE> 89
SYNCHRONICITY SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999 -- (CONTINUED)
A reconciliation between the amount of income tax determined by applying
the applicable U.S. statutory income tax rate to pre-tax loss is as follows:
<TABLE>
<CAPTION>
1997 1998 1999
<S> <C> <C> <C>
Federal Statutory rate................................... (35)% (35)% (35)%
State tax, net of federal impact......................... (6) (6) (6)
Foreign withholding tax.................................. 1 -- 2
Provision for valuation allowance on deferred tax
assets................................................. 41 41 41
--- --- ---
1% --% 2%
=== === ===
</TABLE>
The 1997 and 1999 provisions for taxes relate to taxes withheld by foreign
governments for revenue generated in those foreign countries. Taxes paid were
$65,000 and $37,425 in 1997 and 1999, respectively. No taxes were paid in 1998.
7. GEOGRAPHIC INFORMATION AND MAJOR CUSTOMERS
Revenues by geographic region for the years ended December 31 are as
follows:
<TABLE>
<CAPTION>
1997 1998 1999
<S> <C> <C> <C>
United States.......................... $660,000 $1,352,575 $4,704,805
Canada................................. -- 371,584 934,310
Europe................................. -- 28,125 1,095,356
Japan.................................. -- 56,250 712,734
</TABLE>
Three customers comprised 77% and 58% of accounts receivable at December
31, 1998 and 1999, respectively. The concentration of revenues by major customer
for the years ended December 31 is as follows:
<TABLE>
<CAPTION>
1997 1998 1999
<S> <C> <C> <C>
Customer A..................................... -- -- 12%
Customer B..................................... -- 21% 8%
Customer C..................................... -- 15% 5%
Customer D..................................... 19% 14% 3%
Customer E..................................... 14% 3% 2%
Customer F..................................... 13% 2% 5%
Customer G..................................... 38% -- --
Customer H..................................... 11% -- --
</TABLE>
8. COMMITMENTS
The Company has entered into three multi-year operating lease agreements
for office space, which expire in 2002, 2003 and 2004. One of the leases
contains a renewal option. Rental expense
F-15
<PAGE> 90
SYNCHRONICITY SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999 -- (CONTINUED)
under these agreements was $44,000, $58,500 and $372,927 in 1997, 1998 and 1999,
respectively. The Company is obligated to make the following minimum lease
payments under these agreements:
<TABLE>
<S> <C>
YEAR ENDED DECEMBER 31,
2000................................................ $410,254
2001................................................ 418,783
2002................................................ 397,179
2003................................................ 407,354
2004................................................ 104,164
</TABLE>
9. RETIREMENT PLAN
On January 1, 1998, the Company established a savings and investment plan
for eligible employees. The plan is a defined contribution plan, which allows
for a compensation reduction feature under Section 401(k) of the Internal
Revenue Code. A matching employer contribution may be made to each employee's
account at the Company's discretion. For the years ended December 31, 1998 and
1999, the Company made no contributions to the plan.
10. SUBSEQUENT EVENTS
On March 6, 2000, the Company's shareholders, took the following actions:
- Increased by 750,000 the number of shares available for grant under the
1999 Stock Option and Incentive Plan.
- Changed the name of the Company to Synchronicity Software, Inc.
- Approved amendments to the Company's certificate of incorporation to be
effective upon the closing of a public offering of the Company's stock,
including an increase in authorized shares of the Company's common stock
to 90,000,000 shares and the authorization of 5,000,000 shares of
undesignated preferred stock.
- Approved the adoption of the 2000 Non-Employee Director Stock Option
Plan, to be effective upon the effectiveness of a public offering of the
Company's stock, pursuant to which options to purchase up to 250,000
shares of common stock may be granted to non-employee directors.
- Approved the 2000 Employee Stock Purchase Plan, to be effective upon the
effectiveness of a public offering of the Company's stock, pursuant to
which up to 500,000 shares of the Company's common stock may be sold to
employees.
- Approved a change in the 1999 Stock Option and Incentive Plan to increase
the number of shares available for grant on January 1 of each of the next
five years commencing with January 1, 2001 by an amount equal to 5% of
the Company's common shares outstanding on December 31 of the preceding
fiscal year, provided however, that no more than 5,100,000 shares of
common stock may be cumulatively available for issuance pursuant to
incentive stock options.
F-16
<PAGE> 91
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
, 2000
[SYNCHRONICITY LOGO]
3,500,000 SHARES OF COMMON STOCK
----------------------------
PROSPECTUS
----------------------------
DONALDSON, LUFKIN & JENRETTE
ROBERTSON STEPHENS
DAIN RAUSCHER WESSELS
DLJDIRECT INC.
- --------------------------------------------------------------------------------
We have not authorized any dealer, sales person or other person to give you
written information other than this prospectus or to make representations as to
matters not stated in this prospectus. You must not rely on unauthorized
information. This prospectus is not an offer to sell these securities or our
solicitation of your offer to buy the securities in any jurisdiction where that
would not be permitted or legal. Neither the delivery of this prospectus nor any
sales made hereunder after the date of this prospectus shall create an
implication that the information contained herein or the affairs of
Synchronicity have not changed since the date hereof.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Until , 2000 (25 days after the date of this prospectus), all dealers
that effect transactions in these shares of common stock may be required to
deliver a prospectus. This is in addition to the dealer's obligation to deliver
a prospectus when acting as an underwriter and with respect to its unsold
allotments or subscriptions.
- --------------------------------------------------------------------------------
<PAGE> 92
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the various expenses, all of which will be
borne by the Registrant, in connection with the sale and distribution of the
securities being registered, other than the underwriting discounts and
commissions. All amounts shown are estimates except for the Securities and
Exchange Commission registration fee and the NASD filing fee.
<TABLE>
<S> <C>
SEC registration fee........................................ $ 13,662
NASD filing fee............................................. 5,500
Nasdaq National Market listing fee.......................... 90,500
Blue Sky fees and expenses.................................. 5,000
Transfer Agent and Registrar fees........................... 5,500
Accounting fees and expenses................................ 350,000
Legal fees and expenses..................................... 500,000
Printing and mailing expenses............................... 225,000
Miscellaneous............................................... 54,838
----------
Total............................................ $1,250,000
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Delaware General Corporation Law and our charter provide for
indemnification of directors and officers for liabilities and expenses that they
may incur in such capacities. In general, directors and officers are indemnified
with respect to actions taken in good faith in a manner reasonably believed to
be in, or not opposed to, our best interests, and with respect to any criminal
action or proceeding, actions that the indemnitee had no reasonable cause to
believe were unlawful. Reference is made to our corporate charter filed as
Exhibit 3.3 hereto.
The underwriting agreement provides that the underwriters are obligated,
under certain circumstances, to indemnify our directors, officers and
controlling persons against certain liabilities, including liabilities under the
Securities Act. Reference is made to the form of underwriting agreement filed as
Exhibit 1.1 hereto.
The registrant intends to apply for a directors' and officers' liability
insurance policy.
The effect of these provisions would be to permit indemnification by the
Company for, among other liabilities, liabilities arising out of the Securities
Act.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
STOCK SPLITS
On May 1, 1997, the registrant effected a five-for-one stock split of its
common stock in the form of a dividend of four shares of common stock for each
share of common stock outstanding and held of record by a stockholder as of May
1, 1997. In connection with such stock split, the registrant issued to its
stockholders of record as of May 1, 1997 an aggregate of 2,601,080 shares of
common stock. All common share amounts herein reflect the stock split.
II-1
<PAGE> 93
CERTAIN SALES OF SECURITIES
Set forth in chronological order is information regarding shares of common
stock issued and options granted by us since March 27, 1997. Further included is
the consideration, if any, received by us for such shares, warrants and options
and information relating to the section of the Securities Act, or rule of the
Securities and Exchange Commission, under which exemption from registration was
claimed.
The securities issued in the following transactions were either (i) offered
and sold in reliance upon exemptions from Securities Act registration set forth
in Section 4(2) of the Securities Act, or any regulations promulgated
thereunder, relating to sales by an issuer not involving any public offering, or
(ii) in the case of certain options to purchase shares of common stock and
shares of common stock issued upon the exercise of such options, such offers and
sales were made in reliance upon an exemption from registration under rule 701
of the Securities Act as set forth in more detail below. No underwriters were
involved in the following sales of securities.
(a) Issuances of Capital Stock.
On April 28, 1997, we issued and sold to venture capital funds and other
accredited investors 350,283 shares of Series C convertible preferred stock in a
private financing for an aggregate purchase price of $3,100,004.55. We relied
upon the exemption from registration for the sale of these securities provided
in Section 4(2) of the Securities Act, the exemption for transactions involving
no public offering, and Rule 506 of Regulation D promulgated under the
Securities Act because the transaction met the requirements set forth in such
section of the Securities Act and such regulation. We took actions that
evidenced our exercise of reasonable care in executing this transaction in
compliance with the requirements under the Securities Act and such regulation.
Specifically, we followed the applicable information requirements in connection
with this transaction. This transaction involved fewer than 35 purchasers of the
securities and we reasonably believed that each purchaser was an accredited
investor and received representations to such fact from each investor. We filed
a Form D with the Commission on May 12, 1997.
On September 28, 1998, we, issued and sold to venture capital funds and
other accredited investors 2,863,337 shares of Series D convertible preferred
stock in a private financing for an aggregate purchase price of $7,244,242.61.
We relied upon the exemption from registration for the sale of these securities
provided in Section 4(2) of the Securities Act, the exemption for transactions
involving no public offering, and Rule 506 of Regulation D promulgated under the
Securities Act because the transaction met the requirements set forth in such
section of the Securities Act and such regulation. We took actions that
evidenced our exercise of reasonable care in executing this transaction in
compliance with the requirements under the Securities Act and such regulation.
Specifically, we followed the applicable information requirements, limitations
on the manner of offering requirements and limitations on resale requirements in
connection with this transaction. This transaction involved fewer than 35
purchasers of the securities and we reasonably believed that each purchaser was
an accredited investor and received representations to such fact from each
investor. We filed a Form D with the Commission on September 29, 1998.
In connection with such transaction we also issued a warrant to purchase
150,000 shares of common stock to one of the investors, Intel Corporation, which
vested on December 31, 1999. The exercise price of such warrant is $4.30 per
share.
On May 12, 1999, we effected a migratory merger in which our predecessor,
Synchronicity, Inc., a Massachusetts corporation, merged into and with
Synchronicity, Inc. of Massachusetts, a Delaware Corporation. In connection with
such migratory merger, on April 15, 1999, we issued
II-2
<PAGE> 94
and sold 100 shares of common stock to our predecessor for an aggregate purchase
price of $1.00. We cancelled such 100 shares on May 12, 1999. Also in connection
with such migratory merger, we re-issued 3,300,440 shares of common stock;
200,000 shares of Series A convertible preferred stock; 281,250 shares of Series
B convertible preferred stock; 350,283 shares of Series C convertible preferred
stock; and 2,863,337 shares of Series D convertible preferred stock in exchange
for all of the outstanding shares of stock of the registrant's predecessor. The
sole purpose of the migratory merger was to change the state of incorporation to
Delaware and had no other impact on us or our predecessor Massachusetts
corporation. Several of the transactions listed above and below occurred prior
to May 12, 1999 and were completed by our predecessor, the Massachusetts
corporation.
(b) Certain Grants and Exercises of Stock Options.
We made each grant of stock options and issuance of stock upon the exercise
of such options listed below in reliance upon the exemption from registration
under Rule 701 of the Securities Act for, at the time of each grant, the
registrant was not subject to the reporting requirements of Section 13 or 15(d)
of the Exchange Act. In addition, with respect to each offer and sale listed
below, we made each such grant to an employee or consultant who provided bona
fide services to us not in connection with an offer or sale of securities in a
capital raising transaction, each of the grants were made pursuant to a written
compensatory benefit plan, specifically, a stock option plan established by us;
each of the sales of securities underlying options has been counted as a sale on
the date of the option grants; the aggregate sales price of the securities sold
during each of the calendar years 1997, 1998, 1999 and 2000 did not exceed
$1,000,000; and we provided each grantee with a copy of the stock option plan.
On June 11, 1997, we issued to officers and employees options to purchase
an aggregate of 113,250 shares of common stock at an exercise price of $0.18 per
share. As of March 27, 2000, options to purchase 22,800 shares were outstanding,
of which 4,800 were exercisable.
On August 5, 1997, we issued to employees and consultants options to
purchase an aggregate of 62,000 shares of common stock at an exercise price of
$0.18 per share. As of March 27, 2000, options to purchase 29,550 shares were
outstanding, of which were 11,450 exercisable.
On September 24, 1997, we issued to employees options to purchase an
aggregate of 15,000 shares of common stock at an exercise price of $0.18 per
share. As of March 27, 2000, options to purchase 15,000 shares were outstanding,
of which 9,300 were exercisable.
On October 23, 1997, we issued to employees options to purchase an
aggregate of 55,000 shares of common stock at an exercise price of $0.18 per
share. As of March 27, 2000, options to purchase 24,000 shares were outstanding,
of which 4,000 were exercisable.
On December 18, 1997, we issued to employees options to purchase an
aggregate of 40,000 shares of common stock at an exercise price of $0.18 per
share. As of March 27, 2000, options to purchase 28,400 shares were outstanding,
of which 11,040 were exercisable.
On January 26, 1998, we issued to employees options to purchase an
aggregate of 95,000 shares of common stock at an exercise price of $0.18 per
share. As of March 27, 2000, options to purchase 80,400 shares were outstanding,
of which 36,700 were exercisable.
On March 2, 1998, we issued to officers and employees options to purchase
an aggregate of 125,000 shares of common stock at an exercise price of $0.18 per
share. As of March 27, 2000, options to purchase 86,750 shares were outstanding,
of which 28,000 were exercisable.
II-3
<PAGE> 95
On July 23, 1998, we issued to officers, employees and consultants options
to purchase an aggregate of 84,000 shares of common stock at an exercise price
of $0.18 per share. As of March 27, 2000, options to purchase 53,400 shares were
outstanding, of which 9,940 were exercisable.
On September 25, 1998, we issued to employees options to purchase an
aggregate of 84,000 shares of common stock at an exercise price of $0.18 per
share. As of March 27, 2000, options to purchase 59,300 shares were outstanding,
of which 11,600 were exercisable.
On November 4, 1998, we issued to employees options to purchase an
aggregate of 56,000 shares of common stock at an exercise price of $0.25 per
share. As of March 27, 2000, options to purchase 30,100 shares were outstanding,
of which 10,200 were exercisable.
On January 21, 1999, we issued to employees options to purchase an
aggregate of 96,000 shares of common stock at an exercise price of $0.75 per
share. As of March 27, 2000, options to purchase 94,000 shares were outstanding,
of which 28,200 were exercisable.
On June 15, 1999, we issued to our employees options to purchase an
aggregate of 151,775 shares of common stock at an exercise price of $0.75 per
share. As of March 27, 2000, options to purchase 139,863 shares were
outstanding, of which 19,643 were exercisable.
On July 8, 1999, we issued to our employees options to purchase an
aggregate of 39,500 shares of common stock at an exercise price of $0.75 per
share. As of March 27, 2000, options to purchase 33,950 shares were outstanding,
of which 2,830 were exercisable.
On September 22, 1999, we issued to our officers and employees options to
purchase an aggregate of 168,000 shares of common stock at an exercise price of
$0.75 per share. As of March 27, 2000, options to purchase 164,760 shares were
outstanding, of which 21,900 were exercisable.
On October 28, 1999, we issued to our employees options to purchase an
aggregate of 37,500 shares of common stock at an exercise price of $0.75 per
share. As of March 27, 2000, options to purchase 37,500 shares were outstanding,
of which 4,500 were exercisable.
On December 15, 1999, we issued to our employees options to purchase an
aggregate of 93,300 shares of common stock at an exercise price of $4.00 per
share. As of March 27, 2000, options to purchase 93,300 shares were outstanding,
of which 8,374 were exercisable.
On January 25, 2000, we issued to our employees options to purchase an
aggregate of 52,500 shares of common stock at an exercise price of $6.00 per
share. As of March 27, 2000, options to purchase 52,500 shares were outstanding,
of which 3,150 were exercisable.
On February 23, 2000, we issued to our employees options to purchase an
aggregate of 35,000 shares of common stock at an exercise price of $8.00 per
share, as of March 27, 2000 options to purchase 34,940 shares were outstanding,
of which 1,500 were exercisable.
II-4
<PAGE> 96
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(A) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
<C> <S>
1.1* Form of Underwriting Agreement.
3.1 Certificate of Incorporation of the registrant, as amended.
3.2 Form of First Amended and Restated Certificate of
Incorporation of the registrant to be effective upon
effectiveness of the registration statement.
3.3 Form of Second Amended and Restated Certificate of
Incorporation of the registrant, to be effective upon the
closing of the offering to which this registration statement
relates.
3.4 By-Laws of the registrant.
3.5 Form of Amended and Restated By-Laws of the registrant, to
be effective upon the closing of this offering.
4.1* Specimen certificate for shares of common stock.
5.1* Opinion of Testa, Hurwitz & Thibeault, LLP.
10.1 1996 Stock Option Plan.
10.2 1996 Stock Plan.
10.3 Amended and Restated 1999 Stock Option and Incentive Plan.
10.4 2000 Non-Employee Director Stock Option Plan.
10.5 2000 Employee Stock Purchase Plan.
10.6 Second Amended and Restated Registration Rights Agreement by
and among the registrant and certain stockholders of the
registrant, dated as of September 28, 1998.
10.7 Loan and Security Agreement by and between the registrant
and Silicon Valley Bank, dated as of February 20, 1998.
10.8 First Loan Modification Agreement by and between the
registrant and Silicon Valley Bank, dated as of April 15,
1999.
10.9 Second Loan Modification Agreement by and between the
registrant and Silicon Valley Bank, dated as of February 17,
2000.
10.10 Negative Pledge Agreement by and between the registrant and
Silicon Valley Bank, dated as of November 3, 1998.
10.11 Office Lease by and between the registrant and 201 Forest
Street Realty Trust, dated as of April 1, 1997.
10.12 Lease Agreement by and between the registrant and W9/PHC
Real Estate Limited Partnership, dated as of November 18,
1998.
10.13 Lease Agreement by and between the registrant and Koger
Equity, Inc. dated as of November 3, 1998.
10.14# International Software Distribution Agreement by and between
the registrant and ItochuTechno Science Group, dated as of
December 27, 1999.
10.15# License Agreement by and between the registrant and Intel
Corporation, dated as of December 31, 1999.
10.16# Software OEM License Agreement by and between the registrant
and Cadence Design Systems, Inc. dated as of May 7, 1999.
23.1* Consent of Deloitte & Touche LLP.
</TABLE>
II-5
<PAGE> 97
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
<C> <S>
23.2 Consent of Testa, Hurwitz & Thibeault, LLP (included in
Exhibit 5.1).
24.1 Power of Attorney (included on page II-6).
27.1 Financial Data Schedule.
</TABLE>
- ---------------
* Filed herewith.
# Confidential treatment requested as to certain portions, which portions are
omitted and filed separately with the Securities and Exchange Commission.
(B) FINANCIAL STATEMENT SCHEDULES
All other schedules have been omitted because they are not required or
because the required information is given in the Registrant's Financial
Statements or Notes thereto.
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrant pursuant to the provisions described in Item 14 above or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Securities Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes to provide to the underwriters
at the closing specified in the underwriting agreement certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-6
<PAGE> 98
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Amendment No. 1 to the registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in Marlboro,
Massachusetts, on this 29th day of March, 2000.
SYNCHRONICITY SOFTWARE, INC.
By: /s/ EUGENE C. CONNOLLY
------------------------------------
Eugene C. Connolly
Executive Vice-President and Chief
Operating Officer
SIGNATURES
Pursuant to the requirements of the Securities Act, this Amendment No. 1 to
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------- ----- ----
<S> <C> <C>
/s/ President, Chief Executive March 29, 2000
* Officer and Director
- --------------------------------------------------- (principal executive
Dennis R. Harmon officer)
/s/ EUGENE C. CONNOLLY Executive Vice-President, March 29, 2000
- --------------------------------------------------- Chief Operating Officer
Eugene C. Connolly and Director
/s/ Chief Financial Officer and March 29, 2000
* Vice President Finance
- --------------------------------------------------- (principal financial and
Joseph A. Calo accounting officer)
/s/ Director March 29, 2000
*
- ---------------------------------------------------
Seth Lieber
/s/ Director March 29, 2000
*
- ---------------------------------------------------
James C. Furnivall
/s/ Director March 29, 2000
*
- ---------------------------------------------------
Leigh Michl
/s/ Director March 29, 2000
*
- ---------------------------------------------------
Richard T. Finigan
</TABLE>
*By: /s/ EUGENE C. CONNOLLY
-------------------------------
Eugene C. Connolly
Attorney-in-Fact
II-7
<PAGE> 99
EXHIBIT 11
SYNCHRONICITY SOFTWARE, INC.
COMPUTATION OF NET LOSS PER COMMON SHARE
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
BASIC AND DILUTED NET PER COMMON SHARE:
Net loss as reported $(2,780) $(3,948) $(4,639)
Accretion of preferred stock issuance costs (27) (25) (37)
------- ------- -------
Net loss available to common shares as
reported $(2,807) $(3,973) $(4,676)
------- ------- -------
Basic and diluted Weighted average number
of common shares outstanding: 3,247 3,284 3,372
Basic and diluted net loss per common share $ (0.86) $ (1.21) $ (1.39)
Pro forma basic and diluted Weighted average
number of common shares outstanding: 10,393
Pro forma diluted net loss per common share $(0.45)
</TABLE>
<PAGE> 100
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
<C> <S>
1.1* Form of Underwriting Agreement.
3.1 Certificate of Incorporation of the registrant, as amended.
3.2 Form of First Amended and Restated Certificate of
Incorporation of the registrant to be effective upon the
effectiveness of the registration statement.
3.3 Form of Second Amended and Restated Certificate of
Incorporation of the registrant, to be effective upon the
closing of the offering to which this registration statement
relates.
3.4 By-Laws of the registrant.
3.5 Form of Amended and Restated By-Laws of the registrant, to
be effective upon the closing of this offering.
4.1* Specimen certificate for shares of common stock.
5.1* Opinion of Testa, Hurwitz & Thibeault, LLP.
10.1 1996 Stock Option Plan.
10.2 1996 Stock Plan.
10.3 Amended and Restated 1999 Stock Option and Incentive Plan.
10.4 2000 Non-Employee Director Stock Option Plan.
10.5 2000 Employee Stock Purchase Plan.
10.6 Second Amended and Restated Registration Rights Agreement by
and among the registrant and certain stockholders of the
registrant, dated as of September 28, 1998.
10.7 Loan and Security Agreement by and between the registrant
and Silicon Valley Bank, dated as of February 20, 1998.
10.8 First Loan Modification Agreement by and between the
registrant and Silicon Valley Bank, dated as of April 15,
1999.
10.9 Second Loan Modification Agreement by and between the
registrant and Silicon Valley Bank, dated as of February 17,
2000.
10.10 Negative Pledge Agreement by and between the registrant and
Silicon Valley Bank, dated as of November 3, 1998.
10.11 Office Lease by and between the registrant and 201 Forest
Street Realty Trust, dated as of April 1, 1997.
10.12 Lease Agreement by and between the registrant and W9/PHC
Real Estate Limited Partnership, dated as of November 18,
1998.
10.13 Lease Agreement by and between the registrant and Koger
Equity, Inc. dated as of November 3, 1998.
10.14# International Software Distribution Agreement by and between
the registrant and ItochuTechno Science Group, dated as of
December 27, 1999.
10.15# License Agreement by and between the registrant and Intel
Corporation, dated as of December 31, 1999.
10.16# Software OEM License Agreement by and between the registrant
and Cadence Design Systems, Inc. dated as of May 7, 1999.
23.1* Consent of Deloitte & Touche LLP.
23.2 Consent of Testa, Hurwitz & Thibeault, LLP (included in
Exhibit 5.1).
24.1 Power of Attorney (included on page II-6).
27.1 Financial Data Schedule.
</TABLE>
- ---------------
* Filed herewith.
# Confidential treatment requested as to certain portions, which portions are
omitted and filed separately with the Securities and Exchange Commission.
<PAGE> 1
EXHIBIT 1.1
__________ Shares
SYNCHRONICITY SOFTWARE, INC.
Common Stock
UNDERWRITING AGREEMENT
__________, 2000
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
FLEETBOSTON ROBERTSON STEPHENS
DAIN RAUSCHER INCORPORATED
DLJdirect INC.
As representatives of the
several Underwriters
named in Schedule I hereto
c/o Donaldson, Lufkin & Jenrette
Securities Corporation
277 Park Avenue
New York, New York 10172
Dear Sirs:
Synchronicity Software, Inc., a Delaware corporation (the "COMPANY"),
proposes to issue and sell ____________ shares of its Common Stock, par value
$.01 (the "FIRM SHARES") to the several underwriters named in Schedule I hereto
(the "UNDERWRITERS"). The Company also proposes to issue and sell to the several
Underwriters not more than an additional _______ shares of its Common Stock, par
value $.01 per share (the "ADDITIONAL SHARES") if requested by the Underwriters
as provided in Section 2 hereof. The Firm Shares and the Additional Shares are
hereinafter referred to collectively as the "SHARES". The shares of common stock
of the Company to be outstanding after giving effect to the sales contemplated
hereby are hereinafter referred to as the "COMMON STOCK".
SECTION 1. Registration Statement and Prospectus. The Company has
prepared and filed with the Securities and Exchange Commission (the
"COMMISSION") in accordance with the provisions of the Securities Act of 1933,
as amended, and the rules and regulations of the Commission thereunder
<PAGE> 2
(collectively, the "ACT"), a registration statement on Form S-1, including a
prospectus, relating to the Shares. The registration statement, as amended at
the time it became effective, including the information (if any) deemed to be
part of the registration statement at the time of effectiveness pursuant to Rule
430A under the Act, is hereinafter referred to as the "REGISTRATION STATEMENT";
and the prospectus in the form first used to confirm sales of Shares is
hereinafter referred to as the "PROSPECTUS". If the Company has filed or is
required pursuant to the terms hereof to file a registration statement pursuant
to Rule 462(b) under the Act registering additional shares of Common Stock (a
"RULE 462(b) REGISTRATION STATEMENT"), then, unless otherwise specified, any
reference herein to the term "Registration Statement" shall be deemed to include
such Rule 462(b) Registration Statement.
SECTION 2. Agreements to Sell and Purchase and Lock-Up Agreements . On
the basis of the representations and warranties contained in this Agreement, and
subject to its terms and conditions, the Company agrees to issue and sell, and
each Underwriter agrees, severally and not jointly, to purchase from the Company
at a price per Share of $______ (the "PURCHASE PRICE") the number of Firm Shares
set forth opposite the name of such Underwriter in Schedule I hereto.
On the basis of the representations and warranties contained in this
Agreement, and subject to its terms and conditions, the Company agrees to issue
and sell the Additional Shares and the Underwriters shall have the right to
purchase, severally and not jointly, up to _______ Additional Shares from the
Company at the Purchase Price. Additional Shares may be purchased solely for the
purpose of covering over-allotments made in connection with the offering of the
Firm Shares. The Underwriters may exercise their right to purchase Additional
Shares in whole or in part from time to time by giving written notice thereof to
the Company within 30 days after the date of this Agreement. You shall give any
such notice on behalf of the Underwriters and such notice shall specify the
aggregate number of Additional Shares to be purchased pursuant to such exercise
and the date for payment and delivery thereof, which date shall be a business
day (i) no earlier than two business days after such notice has been given (and,
in any event, no earlier than the Closing Date (as hereinafter defined)) and
(ii) no later than ten business days after such notice has been given. If any
Additional Shares are to be purchased, each Underwriter, severally and not
jointly, agrees to purchase from the Company the number of Additional Shares
(subject to such adjustments to eliminate fractional shares as you may
determine) which bears the same proportion to the total number of Additional
Shares to be purchased from the Company as the number of Firm Shares set forth
opposite the name of such Underwriter in Schedule I bears to the total number of
Firm Shares.
The Company hereby agrees not to (i) offer, pledge, sell, contract to
sell, sell any option or contract to purchase, purchase any option or contract
to sell, grant any option, right or warrant to purchase, or otherwise transfer
or dispose of,
2
<PAGE> 3
directly or indirectly, any shares of Common Stock or any securities convertible
into or exercisable or exchangeable for Common Stock or (ii) enter into any swap
or other arrangement that transfers all or a portion of the economic
consequences associated with the ownership of any Common Stock (regardless of
whether any of the transactions described in clause (i) or (ii) is to be settled
by the delivery of Common Stock, or such other securities, in cash or
otherwise), except to the Underwriters pursuant to this Agreement, for a period
of 180 days after the date of the Prospectus without the prior written consent
of Donaldson, Lufkin & Jenrette Securities Corporation. Notwithstanding the
foregoing, during such period (i) the Company may grant stock options and awards
pursuant to the Company's existing stock plans, (ii) the Company may issue
shares of Common Stock upon the exercise of an option or warrant or the
conversion of a security outstanding on the date hereof and (iii) the Company
may issue shares of Common Stock in connection with an acquisition so long as
any individual or entity receiving such Common Stock agrees to execute a lock-up
agreement as described below. The Company also agrees not to file any
registration statement with respect to any shares of Common Stock or any
securities convertible into or exercisable or exchangeable for Common Stock for
a period of 180 days after the date of the Prospectus without the prior written
consent of Donaldson, Lufkin & Jenrette Securities Corporation, provided,
however, that during such period the Company may file one or more registration
statements on Form S-8 registering the shares of Common Stock acquired or to be
acquired pursuant to its existing stock plans. The Company shall, prior to or
concurrently with the execution of this Agreement, deliver an agreement executed
by (i) each of the directors and officers of the Company and (ii) each
stockholder listed on Annex I hereto to the effect that such person will not,
during the period commencing on the date such person signs such agreement and
ending 180 days after the date of the Prospectus, without the prior written
consent of Donaldson, Lufkin & Jenrette Securities Corporation, (A) engage in
any of the transactions described in the first sentence of this paragraph or (B)
make any demand for, or exercise any right with respect to, the registration of
any shares of Common Stock or any securities convertible into or exercisable or
exchangeable for Common Stock.
SECTION 3. Terms of Public Offering. The Company is advised by you that
the Underwriters propose (i) to make a public offering of their respective
portions of the Shares as soon after the execution and delivery of this
Agreement as in your judgment is advisable and (ii) initially to offer the
Shares upon the terms set forth in the Prospectus.
SECTION 4. Delivery and Payment. The Shares shall be represented by
definitive certificates and shall be issued in such authorized denominations and
registered in such names as Donaldson, Lufkin & Jenrette Securities Corporation
shall request no later than two business days prior to the Closing Date or the
applicable Option Closing Date (as defined below), as the case may be. The
Company shall deliver the Shares, with any transfer taxes thereon duly paid by
the
3
<PAGE> 4
respective Sellers, to Donaldson, Lufkin & Jenrette Securities Corporation
through the facilities of The Depository Trust Company ("DTC"), for the
respective accounts of the several Underwriters, against payment to the Company
of the Purchase Price therefore by wire transfer of Federal or other funds
immediately available in New York City. The certificates representing the Shares
shall be made available for inspection not later than 9:30 A.M., New York City
time, on the business day prior to the Closing Date or the applicable Option
Closing Date, as the case may be, at the office of DTC or its designated
custodian (the "DESIGNATED OFFICE"). The time and date of delivery and payment
for the Firm Shares shall be 9:00 A.M., New York City time, on ________, 2000 or
such other time on the same or such other date as Donaldson, Lufkin & Jenrette
Securities Corporation and the Company shall agree in writing. The time and date
of delivery for the Firm Shares are hereinafter referred to as the "CLOSING
DATE". The time and date of delivery and payment for any Additional Shares to be
purchased by the Underwriters shall be 9:00 A.M., New York City time, on the
date specified in the applicable exercise notice given by you pursuant to
Section 2 or such other time on the same or such other date as Donaldson, Lufkin
& Jenrette Securities Corporation and the Company shall agree in writing. The
time and date of delivery for any Additional Shares are hereinafter referred to
as an "OPTION CLOSING DATE".
The documents to be delivered on the Closing Date or any Option Closing
Date on behalf of the parties hereto pursuant to Section 8 of this Agreement
shall be delivered at the offices of Testa, Hurwitz and Thibeault LLP and the
Shares shall be delivered at the Designated Office, all on the Closing Date or
such Option Closing Date, as the case may be.
SECTION 5. Agreements of the Company. The Company agrees with you:
(a) To advise you promptly and, if requested by you, to confirm such
advice in writing, (i) of any request by the Commission for amendments to the
Registration Statement or amendments or supplements to the Prospectus or for
additional information, (ii) of the issuance by the Commission of any stop order
suspending the effectiveness of the Registration Statement or of the suspension
of qualification of the Shares for offering or sale in any jurisdiction, or the
initiation of any proceeding for such purposes, (iii) when any amendment to the
Registration Statement becomes effective, (iv) if the Company is required to
file a Rule 462(b) Registration Statement after the effectiveness of this
Agreement, when the Rule 462(b) Registration Statement has become effective and
(v) of the happening of any event during the period referred to in Section 5(d)
below which makes any statement of a material fact made in the Registration
Statement or the Prospectus untrue or which requires any additions to or changes
in the Registration Statement or the Prospectus in order to make the statements
therein not misleading. If at any time the Commission shall issue any stop order
suspending the effectiveness of the Registration Statement, the Company will use
4
<PAGE> 5
its best efforts to obtain the withdrawal or lifting of such order at the
earliest possible time.
(b) To furnish to you seven (7) signed copies of the Registration
Statement as first filed with the Commission and of each amendment to it,
including all exhibits, and to furnish to you and each Underwriter designated by
you such number of conformed copies of the Registration Statement as so filed
and of each amendment to it, without exhibits, as you may reasonably request.
(c) To prepare the Prospectus, the form and substance of which shall
be satisfactory to you, and to file the Prospectus in such form with the
Commission within the applicable period specified in Rule 424(b) under the Act;
during the period specified in Section 5(d) below, not to file any further
amendment to the Registration Statement and not to make any amendment or
supplement to the Prospectus of which you shall not previously have been advised
or to which you shall reasonably object after being so advised; and, during such
period, to prepare and file with the Commission, promptly upon your reasonable
request, any amendment to the Registration Statement or amendment or supplement
to the Prospectus which may be necessary or advisable in connection with the
distribution of the Shares by you, and to use its best efforts to cause any such
amendment to the Registration Statement to become promptly effective.
(d) Prior to 10:00 A.M., New York City time, on the first business day
after the date of this Agreement and from time to time thereafter for such
period as in the opinion of counsel for the Underwriters a prospectus is
required by law to be delivered in connection with sales by an Underwriter or a
dealer, to furnish in New York City to each Underwriter and any dealer as many
copies of the Prospectus (and of any amendment or supplement to the Prospectus)
as such Underwriter or dealer may reasonably request.
(e) If during the period specified in Section 5(d), any event shall
occur or condition shall exist as a result of which, in the opinion of counsel
for the Underwriters, it becomes necessary to amend or supplement the Prospectus
in order to make the statements therein, in the light of the circumstances when
the Prospectus is delivered to a purchaser, not misleading, or if, in the
opinion of counsel for the Underwriters, it is necessary to amend or supplement
the Prospectus to comply with applicable law, forthwith to prepare and file with
the Commission an appropriate amendment or supplement to the Prospectus so that
the statements in the Prospectus, as so amended or supplemented, will not in the
light of the circumstances when it is so delivered, be misleading, or so that
the Prospectus will comply with applicable law, and to furnish to each
Underwriter and to any dealer as many copies thereof as such Underwriter or
dealer may reasonably request.
(f) Prior to any public offering of the Shares, to cooperate with you
and
5
<PAGE> 6
counsel for the Underwriters in connection with the registration or
qualification of the Shares for offer and sale by the several Underwriters and
by dealers under the state securities or Blue Sky laws of such jurisdictions as
you may request, to continue such registration or qualification in effect so
long as required for distribution of the Shares and to file such consents to
service of process or other documents as may be necessary in order to effect
such registration or qualification; provided, however, that the Company shall
not be required in connection therewith to qualify as a foreign corporation in
any jurisdiction in which it is not now so qualified or to take any action that
would subject it to general consent to service of process or taxation other than
as to matters and transactions relating to the Prospectus, the Registration
Statement, any preliminary prospectus or the offering or sale of the Shares, in
any jurisdiction in which it is not now so subject.
(g) To make generally available to its stockholders as soon as
practicable an earnings statement covering a period of at least twelve months
beginning after the effective date of the Registration Statement that shall
satisfy the provisions of Section 11(a) of the Act and the rules and regulations
thereunder (including Rule 158), and to advise you in writing when such
statement has been so made available.
(h) During the period of three years after the date of this Agreement,
to furnish to you as soon as available copies of all reports or other
communications furnished to the record holders of Common Stock or furnished to
or filed with the Commission or any national securities exchange on which any
class of securities of the Company is listed and such other publicly available
information concerning the Company as you may reasonably request.
(i) Whether or not the transactions contemplated in this Agreement are
consummated or this Agreement is terminated, to pay or cause to be paid all
expenses incident to the performance of its obligations under this Agreement,
including: (i) the fees, disbursements and expenses of the Company's counsel and
the Company's accountants in connection with the registration and delivery of
the Shares under the Act and all other fees and expenses in connection with the
preparation, printing, filing and distribution of the Registration Statement
(including financial statements and exhibits), any preliminary prospectus, the
Prospectus and all amendments and supplements to any of the foregoing, including
the mailing and delivering of copies thereof to the Underwriters and dealers in
the quantities specified herein, (ii) all costs and expenses related to the
transfer and delivery of the Shares to the Underwriters, including any transfer
or other taxes payable thereon, (iii) all costs of printing or producing this
Agreement and any other agreements or documents in connection with the offering,
purchase, sale or delivery of the Shares, (iv) all expenses in connection with
the registration or qualification of the Shares for offer and sale under the
securities or Blue Sky laws of the several states and all costs of printing or
producing any Preliminary
6
<PAGE> 7
and Supplemental Blue Sky Memoranda in connection therewith (including the
filing fees and fees and disbursements of counsel for the Underwriters in
connection with such registration or qualification and memoranda relating
thereto), (v) the filing fees and disbursements of counsel for the Underwriters
in connection with the review and clearance of the offering of the Shares by the
National Association of Securities Dealers, Inc., (vi) all fees and expenses in
connection with the preparation and filing of the registration statement on Form
8-A relating to the Common Stock and all costs and expenses incident to the
listing of the Shares on the Nasdaq National Market, (vii) the cost of printing
certificates representing the Shares, (viii) the costs and charges of any
transfer agent, registrar and/or depositary, and (ix) all other costs and
expenses incident to the performance of the obligations of the Company hereunder
for which provision is not otherwise made in this Section.
(j) To use its reasonable best efforts to list for quotation the
Shares on the Nasdaq National Market and to maintain the listing of the Shares
on the Nasdaq National Market for a period of three years after the date of this
Agreement.
(k) To use its reasonable best efforts to do and perform all things
required or necessary to be done and performed under this Agreement by the
Company prior to the Closing Date or any Option Closing Date, as the case may
be, and to satisfy all conditions precedent to the delivery of the Shares.
(l) If the Registration Statement at the time of the effectiveness of
this Agreement does not cover all of the Shares, to file a Rule 462(b)
Registration Statement with the Commission registering the Shares not so covered
in compliance with Rule 462(b) by 10:00 P.M., New York City time, on the date of
this Agreement and to pay to the Commission the filing fee for such Rule 462(b)
Registration Statement at the time of the filing thereof or to give irrevocable
instructions for the payment of such fee pursuant to Rule 111(b) under the Act.
SECTION 6. Representations and Warranties of the Company. The Company
represents and warrants to each Underwriter that:
(a) The Registration Statement has become effective (other than any
Rule 462(b) Registration Statement to be filed by the Company after the
effectiveness of this Agreement); any Rule 462(b) Registration Statement filed
after the effectiveness of this Agreement will become effective no later than
10:00 P.M., New York City time, on the date of this Agreement; and no stop order
suspending the effectiveness of the Registration Statement is in effect, and no
proceedings for such purpose are pending before or threatened by the Commission.
(b) (i) The Registration Statement (other than any Rule 462(b)
Registration Statement to be filed by the Company after the effectiveness of
this Agreement),
7
<PAGE> 8
when it became effective, did not contain and, as amended, if applicable, will
not contain any untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements therein
not misleading, (ii) the Registration Statement (other than any Rule 462(b)
Registration Statement to be filed by the Company after the effectiveness of
this Agreement) and the Prospectus comply and, as amended or supplemented, if
applicable, will comply in all material respects with the Act, (iii) if the
Company is required to file a Rule 462(b) Registration Statement after the
effectiveness of this Agreement, such Rule 462(b) Registration Statement and any
amendments thereto, when they become effective (A) will not contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein not misleading and
(B) will comply in all material respects with the Act and (iv) the Prospectus
does not contain and, as amended or supplemented, if applicable, will not
contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading, except that the representations and
warranties set forth in this paragraph do not apply to statements or omissions
in the Registration Statement or the Prospectus based upon information relating
to any Underwriter furnished to the Company in writing by such Underwriter
through you expressly for use therein.
(c) Each preliminary prospectus filed as part of the registration
statement as originally filed or as part of any amendment thereto, or filed
pursuant to Rule 424 under the Act, complied when so filed in all material
respects with the Act, and did not contain an untrue statement of a material
fact or omit to state a material fact required to be stated therein or necessary
to make the statements therein, in the light of the circumstances under which
they were made, not misleading, except that the representations and warranties
set forth in this paragraph do not apply to statements or omissions in any
preliminary prospectus based upon information relating to any Underwriter
furnished to the Company in writing by such Underwriter through you expressly
for use therein.
(d) The Company has been duly incorporated, is validly existing as a
corporation in good standing under the laws of its jurisdiction of incorporation
and has the corporate power and authority to carry on its business as described
in the Prospectus and to own, lease and operate its properties, and each is duly
qualified and is in good standing as a foreign corporation authorized to do
business in each jurisdiction in which the nature of its business or its
ownership or leasing of property requires such qualification, except where the
failure to be so qualified would not have a material adverse effect on the
business, prospects, financial condition or results of operations of the Company
(a "Material Adverse Effect").
(e) There are no outstanding subscriptions, rights, warrants, options,
8
<PAGE> 9
calls, convertible securities, commitments of sale or liens granted or issued by
the Company relating to or entitling any person to purchase or otherwise to
acquire any shares of the capital stock of the Company, except as otherwise
disclosed in the Registration Statement.
(f) All the outstanding shares of capital stock of the Company have
been duly authorized and validly issued and are fully paid, non-assessable and
not subject to any preemptive or similar rights; and the Shares have been duly
authorized and, when issued and delivered to the Underwriters against payment
therefor as provided by this Agreement, will be validly issued, fully paid and
non-assessable, and the issuance of such Shares will not be subject to any
preemptive or similar rights.
(g) Intentionally omitted.
(h) The authorized capital stock of the Company conforms as to legal
matters to the description thereof contained in the Prospectus.
(i) The Company is not in violation of its charter or by-laws or in
default in the performance of any obligation, agreement, covenant or condition
contained in any indenture, loan agreement, mortgage, lease or other agreement
or instrument that is material to the Company, to which the Company is a party
or by which the Company or its property is bound.
(j) The execution, delivery and performance of this Agreement by the
Company, the compliance by the Company with all the provisions hereof and the
consummation of the transactions contemplated hereby will not (i) require any
consent, approval, authorization or other order of, or qualification with, any
court or governmental body or agency (except such as may be required under the
securities or Blue Sky laws of the various states or in connection with the
NASD's review of the underwriting arrangements of the offering and sale of
Shares), (ii) conflict with or constitute a breach of any of the terms or
provisions of, or a default under, the charter or by-laws of the Company or any
indenture, loan agreement, mortgage, lease or other agreement or instrument that
is material to the Company, to which the Company is a party or by which the
Company or its property is bound, (iii) violate or conflict with any applicable
law or any rule, regulation, judgment, order or decree of any court or any
governmental body or agency having jurisdiction over the Company or its property
or (iv) result in the suspension, termination or revocation of any Authorization
(as defined below) of the Company or any other impairment of the rights of the
holder of any such Authorization.
(k) There are no legal or governmental proceedings pending or, to the
Company's knowledge, threatened to which the Company is or is reasonably likely
to be a party or to which any of its property is or could be subject that are
9
<PAGE> 10
required to be described in the Registration Statement or the Prospectus and are
not so described; nor are there any statutes, regulations, contracts or other
documents that are required to be described in the Registration Statement or the
Prospectus or to be filed as exhibits to the Registration Statement that are not
so described or filed as required.
(l) The Company has not violated any foreign, federal, state or local
law or regulation relating to the protection of human health and safety, the
environment or hazardous or toxic substances or wastes, pollutants or
contaminants ("ENVIRONMENTAL LAWS"), any provisions of the Employee Retirement
Income Security Act of 1974, as amended, or any provisions of the Foreign
Corrupt Practices Act, or the rules and regulations promulgated thereunder,
except for such violations which, singly or in the aggregate, would not have a
Material Adverse Effect.
(m) The Company has such permits, licenses, consents, exemptions,
franchises, authorizations and other approvals (each, an "AUTHORIZATION") of,
and has made all filings with and notices to, all governmental or regulatory
authorities and self-regulatory organizations and all courts and other
tribunals, including, without limitation, under any applicable Environmental
Laws, as are necessary to own, lease, license and operate its properties and to
conduct its business, except where the failure to have any such Authorization or
to make any such filing or notice would not, singly or in the aggregate, have a
Material Adverse Effect. Each such Authorization is valid and in full force and
effect and the Company is in compliance with all the terms and conditions
thereof and with the rules and regulations of the authorities and governing
bodies having jurisdiction with respect thereto; and no event has occurred
(including, without limitation, the receipt of any notice from any authority or
governing body) which allows or, after notice or lapse of time or both, would
allow, revocation, suspension or termination of any such Authorization or
results or, after notice or lapse of time or both, would result in any other
impairment of the rights of the holder of any such Authorization; and such
Authorizations contain no restrictions that are burdensome to the Company;
except where such failure to be valid and in full force and effect or to be in
compliance, the occurrence of any such event or the presence of any such
restriction would not, singly or in the aggregate, have a Material Adverse
Effect.
(n) There are no costs or liabilities associated with Environmental
Laws (including, without limitation, any capital or operating expenditures
required for clean-up, closure of properties or compliance with Environmental
Laws or any Authorization, any related constraints on operating activities and
any potential liabilities to third parties) which would, singly or in the
aggregate, have a Material Adverse Effect.
(o) This Agreement has been duly authorized, executed and delivered
10
<PAGE> 11
by the Company.
(p) Deloitte & Touche LLP are independent public accountants with
respect to the Company as required by the Act.
(q) The financial statements included in the Registration Statement
and the Prospectus (and any amendment or supplement thereto), together with
related schedules and notes, present fairly the financial position, results of
operations and changes in financial position of the Company on the basis stated
therein at the respective dates or for the respective periods to which they
apply; such statements and related schedules and notes have been prepared in
accordance with generally accepted accounting principles consistently applied
throughout the periods involved, except as disclosed therein; the supporting
schedules, if any, included in the Registration Statement present fairly in
accordance with generally accepted accounting principles the information
required to be stated therein; and the other financial and statistical
information and data set forth in the Registration Statement and the Prospectus
(and any amendment or supplement thereto) are, in all material respects,
accurately presented and prepared on a basis consistent with such financial
statements and the books and records of the Company.
(r) The Company is not and, after giving effect to the offering and
sale of the Shares and the application of the proceeds thereof as described in
the Prospectus, will not be, an "investment company" as such term is defined in
the Investment Company Act of 1940, as amended.
(s) Except as disclosed in the Prospectus, there are no contracts,
agreements or understandings between the Company and any person granting such
person the right to require the Company to file a registration statement under
the Act with respect to any securities of the Company or to require the Company
to include such securities with the Shares registered pursuant to the
Registration Statement which rights with respect to such inclusion have not been
waived.
(t) Since the respective dates as of which information is given in the
Prospectus other than as set forth in the Prospectus (exclusive of any
amendments or supplements thereto subsequent to the date of this Agreement), (i)
there has not occurred any material adverse change or any development involving
a prospective material adverse change in the condition, financial or otherwise,
or the earnings, business, management or operations of the Company (ii) there
has not been any material adverse change or any development involving a
prospective material adverse change in the capital stock or in the long-term
debt of the Company and (iii) the Company has not incurred any material
liability or obligation, direct or contingent.
(u) Intentionally omitted.
(v) Each certificate signed by any officer of the Company and
11
<PAGE> 12
delivered to the Underwriters or counsel for the Underwriters shall be deemed to
be a representation and warranty by the Company to the Underwriters as to the
matters covered thereby.
(w) The Company has good and marketable title to all property owned by
it which is material to the Company's business, free and clear of all liens,
claims, security interests or other encumbrances except such as are described in
the Registration Statement and the Prospectus or such as do not materially
affect the value of such property and do not interfere with the use made and
proposed to be made of such property by the Company; the property held under
lease by the Company is held by it under valid, subsisting and enforceable
leases with only such exceptions with respect to any particular lease as do not
interfere in any material respect with the conduct of the business of the
Company; except as disclosed in the Registration Statement and Prospectus, the
Company owns or possesses all patents, patent applications, trademarks, service
marks, tradenames, trademark registrations, service mark registrations,
copyrights, licenses, inventions, trade secrets and rights necessary for the
conduct of business of the Company as currently carried on and as described in
the Registration Statement and Prospectus, except where the failure to so own or
possess such right would not have a Material Adverse Effect; except as stated in
the Registration Statement and Prospectus, to the knowledge of the Company, no
name which the Company uses and no other material aspect of the business of the
Company will give rise to any infringement of, or require the payment of license
or similar fees for, any patents, patent applications, trademarks, service
marks, tradenames, trademark registrations, service mark registrations,
copyrights, licenses, inventions, trade secrets or other similar rights of
others material to the business or prospects of the Company, and the Company has
not received any notice alleging any such infringement or fee, except for such
allegations which, if true, would not have a Material Adverse Effect.
(x) The Securities have been conditionally approved for quotation on
the Nasdaq National Market and, on the date the Registration Statement became or
becomes effective, the Company's Registration Statement on Form 8-A or other
applicable form under the Securities and Exchange Act of 1934, as amended (the
"Exchange Act"), became or will become effective.
(y) The Company owns no capital stock or other equity or ownership or
proprietary interest in any corporation, partnership, association, trust or
other entity.
(z) The Company maintains a system of internal accounting controls
sufficient to provide reasonable assurances that (i) transactions are executed
in accordance with management's general or specific authorization; (ii)
transactions are recorded as necessary to permit preparation of financial
statements in conformity with generally accepted accounting principles and to
maintain accountability for assets; (iii) access to assets is permitted only in
accordance with
12
<PAGE> 13
management's general or specific authorization; and (iv) the recorded
accountability for assets is compared with existing assets at reasonable
intervals and appropriate action is taken with respect to any differences.
SECTION 7. Indemnification. (a) The Company agrees to indemnify and hold
harmless each Underwriter, its directors, its officers and each person, if any,
who controls any Underwriter within the meaning of Section 15 of the Act or
Section 20 of the Securities Exchange Act of 1934, as amended (the "EXCHANGE
ACT"), from and against any and all losses, claims, damages, liabilities and
judgments (including, without limitation, any reasonable legal or other expenses
incurred in connection with investigating or defending any matter, including any
action, that could give rise to any such losses, claims, damages, liabilities or
judgments) caused by any untrue statement or alleged untrue statement of a
material fact contained in the Registration Statement (or any amendment
thereto), the Prospectus (or any amendment or supplement thereto) or any
preliminary prospectus, or caused by any omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein not misleading, except insofar as such losses, claims,
damages, liabilities or judgments are caused by any such untrue statement or
omission or alleged untrue statement or omission based upon information relating
to any Underwriter furnished in writing to the Company by such Underwriter
through you expressly for use therein; provided, however, that the foregoing
indemnity agreement with respect to any preliminary prospectus shall not inure
to the benefit of any Underwriter (or any person controlling such Underwriter)
who failed to deliver a Prospectus, as then amended or supplemented, (so long as
the Prospectus and any amendments or supplements thereto was provided by the
Company to the several Underwriters in the requisite quantity and on a timely
basis to permit proper delivery on or prior to the Closing Date) to the person
asserting any losses, claims, damages, liabilities or judgments caused by any
untrue statement or alleged untrue statement of a material fact contained in
such preliminary prospectus, or caused by any omission or alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein not misleading, if such material misstatement or omission
or alleged material misstatement or omission was cured in the Prospectus, as so
amended or supplemented, and such Prospectus was required by law to be delivered
at or prior to the written confirmation of sale to such person.
(b) Each Underwriter agrees, severally and not jointly, to indemnify
and hold harmless the Company, its directors, its officers who sign the
Registration Statement and each person, if any, who controls the Company within
the meaning of Section 15 of the Act or Section 20 of the Exchange Act, to the
same extent as the foregoing indemnity from the Company to such Underwriter but
only with reference to information relating to such Underwriter furnished in
writing to the Company by such Underwriter through you expressly for use in the
Registration Statement (or any amendment thereto), the Prospectus (or any
amendment or
13
<PAGE> 14
supplement thereto) or any preliminary prospectus.
(c) In case any action shall be commenced involving any person in
respect of which indemnity may be sought pursuant to Section 7(a) or 7(b) (the
"indemnified party"), the indemnified party shall promptly notify the person
against whom such indemnity may be sought (the "indemnifying party") in writing
and the indemnifying party shall assume the defense of such action, including
the employment of counsel reasonably satisfactory to the indemnified party and
the payment of all reasonable fees and expenses of such counsel, as incurred
(except that in the case of any action in respect of which indemnity may be
sought pursuant to both Sections 7(a) and 7(b), the Underwriter shall not be
required to assume the defense of such action pursuant to this Section 7(c), but
may employ separate counsel and participate in the defense thereof, but the fees
and expenses of such counsel, except as provided below, shall be at the expense
of such Underwriter). Any indemnified party shall have the right to employ
separate counsel in any such action and participate in the defense thereof, but
the fees and expenses of such counsel shall be at the expense of the indemnified
party unless (i) the employment of such counsel shall have been specifically
authorized in writing by the indemnifying party, (ii) the indemnifying party
shall have failed to assume the defense of such action or employ counsel
reasonably satisfactory to the indemnified party or (iii) the named parties to
any such action (including any impleaded parties) include both the indemnified
party and the indemnifying party, and the indemnified party shall have been
advised by such counsel that there may be one or more legal defenses available
to it which are different from or additional to those available to the
indemnifying party (in which case the indemnifying party shall not have the
right to assume the defense of such action on behalf of the indemnified party).
In any such case, the indemnifying party shall not, in connection with any one
action or separate but substantially similar or related actions in the same
jurisdiction arising out of the same general allegations or circumstances, be
liable for the reasonable fees and expenses of more than one separate firm of
attorneys (in addition to any local counsel) for all indemnified parties and all
such fees and expenses shall be reimbursed as they are incurred. Such firm shall
be designated in writing by Donaldson, Lufkin & Jenrette Securities Corporation,
in the case of parties indemnified pursuant to Section 7(a), and by the Company,
in the case of parties indemnified pursuant to Section 7(b). The indemnifying
party shall indemnify and hold harmless the indemnified party from and against
any and all losses, claims, damages, liabilities and judgments by reason of any
settlement of any action (i) effected with its written consent or (ii) effected
without its written consent if the settlement is entered into more than twenty
business days after the indemnifying party shall have received a written request
from the indemnified party for reimbursement for the reasonable fees and
expenses of counsel (in any case where such fees and expenses are at the expense
of the indemnifying party) and, prior to the date of such settlement, the
indemnifying party shall have failed to comply with such reimbursement request
(or shall have failed to contest in good faith all portions of such fees and
expenses
14
<PAGE> 15
not so reimbursed). No indemnifying party shall, without the prior written
consent of the indemnified party, effect any settlement or compromise of, or
consent to the entry of judgment with respect to, any pending or threatened
action in respect of which the indemnified party is or could have been a party
and indemnity or contribution may be or could have been sought hereunder by the
indemnified party, unless such settlement, compromise or judgment (i) includes
an unconditional release of the indemnified party from all liability on claims
that are or could have been the subject matter of such action and (ii) does not
include a statement as to or an admission of fault, culpability or a failure to
act, by or on behalf of the indemnified party.
(d) To the extent the indemnification provided for in this Section 7
is unavailable to an indemnified party or insufficient in respect of any losses,
claims, damages, liabilities or judgments referred to therein, then each
indemnifying party, in lieu of indemnifying such indemnified party, shall
contribute to the amount paid or payable by such indemnified party as a result
of such losses, claims, damages, liabilities and judgments (i) in such
proportion as is appropriate to reflect the relative benefits received by the
Company on the one hand and the Underwriters on the other hand from the offering
of the Shares or (ii) if the allocation provided by clause 7(d)(i) above is not
permitted by applicable law, in such proportion as is appropriate to reflect not
only the relative benefits referred to in clause 7(d)(i) above but also the
relative fault of the Company on the one hand and the Underwriters on the other
hand in connection with the statements or omissions which resulted in such
losses, claims, damages, liabilities or judgments, as well as any other relevant
equitable considerations. The relative benefits received by the Company on the
one hand and the Underwriters on the other hand shall be deemed to be in the
same proportion as the total net proceeds from the offering (after deducting
underwriting discounts and commissions, but before deducting expenses) received
by the Company, and the total underwriting discounts and commissions received by
the Underwriters, bear to the total price to the public of the Shares, in each
case as set forth in the table on the cover page of the Prospectus. The relative
fault of the Company on the one hand and the Underwriters on the other hand
shall be determined by reference to, among other things, whether the untrue or
alleged untrue statement of a material fact or the omission or alleged omission
to state a material fact relates to information supplied by the Company or the
Underwriters and the parties' relative intent, knowledge, access to information
and opportunity to correct or prevent such statement or omission.
The Company and the Underwriters agree that it would not be just and
equitable if contribution pursuant to this Section 7(d) were determined by pro
rata allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not take account of the
equitable considerations referred to in the immediately preceding paragraph. The
amount paid or payable by an indemnified party as a result of the losses,
claims, damages,
15
<PAGE> 16
liabilities or judgments referred to in the immediately preceding paragraph
shall be deemed to include, subject to the limitations set forth above, any
reasonable legal or other expenses incurred by such indemnified party in
connection with investigating or defending any matter, including any action,
that could have given rise to such losses, claims, damages, liabilities or
judgments. Notwithstanding the provisions of this Section 7, no Underwriter
shall be required to contribute any amount in excess of the amount by which the
total price at which the Shares underwritten by it and distributed to the public
were offered to the public exceeds the amount of any damages which such
Underwriter has otherwise been required to pay by reason of such untrue or
alleged untrue statement or omission or alleged omission. No person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. The Underwriters' obligations to contribute
pursuant to this Section 7(d) are several in proportion to the respective number
of Shares purchased by each of the Underwriters hereunder and not joint.
(e) The remedies provided for in this Section 7 are not exclusive and
shall not limit any rights or remedies which may otherwise be available to any
indemnified party at law or in equity.
SECTION 8. Conditions of Underwriters' Obligations. The several
obligations of the Underwriters to purchase the Firm Shares under this Agreement
are subject to the satisfaction of each of the following conditions:
(a) All the representations and warranties of the Company contained in
this Agreement shall be true and correct on the Closing Date with the same force
and effect as if made on and as of the Closing Date.
(b) If the Company is required to file a Rule 462(b) Registration
Statement after the effectiveness of this Agreement, such Rule 462(b)
Registration Statement shall have become effective by 10:00 P.M., New York City
time, on the date of this Agreement; and no stop order suspending the
effectiveness of the Registration Statement shall have been issued and no
proceedings for that purpose shall have been commenced or shall be pending
before or contemplated by the Commission.
(c) You shall have received on the Closing Date a certificate dated
the Closing Date, signed by Dennis Harmon and Joseph Calo, in their capacities
as the Chief Executive Officer and Chief Financial Officer of the Company,
confirming the matters set forth in Sections 6(t), 8(a) and 8(b) and that the
Company has complied with all of the agreements and satisfied all of the
conditions herein contained and required to be complied with or satisfied by the
Company on or prior to the Closing Date.
16
<PAGE> 17
(d) Since the respective dates as of which information is given in the
Prospectus other than as set forth in the Prospectus (exclusive of any
amendments or supplements thereto subsequent to the date of this Agreement), (i)
there shall not have occurred any change or any development involving a
prospective change in the financial condition or the earnings, business,
management or operations of the Company, (ii) there shall not have been any
change or any development involving a prospective change in the capital stock or
in the long-term debt of the Company and (iii) the Company shall not have
incurred any liability or obligation, direct or contingent, the effect of which,
in any such case described in clause 8(d)(i), 8(d)(ii) or 8(d)(iii), in your
judgment, is material and adverse and, in your judgment, makes it impracticable
to market the Shares on the terms and in the manner contemplated in the
Prospectus.
(e) You shall have received on the Closing Date an opinion in form
satisfactory to you and counsel for the Underwriters, dated the Closing Date,
of Testa, Hurwitz & Thibeault, LLP counsel for the Company.
17
<PAGE> 18
The opinion of Testa, Hurwitz & Thibeault, LLP shall be rendered to you
at the request of the Company and shall so state
18
<PAGE> 19
therein.
(f) You shall have received on the Closing Date an opinion, dated the
Closing Date, of Goodwin, Procter & Hoar LLP, counsel for the Underwriters, in
form and substance reasonably satisfactory to you.
In giving such opinions with respect to certain matters, Testa, Hurwitz
& Thibeault, LLP and Goodwin, Procter & Hoar LLP may state that their opinion
and belief are based upon their participation in the preparation of the
Registration Statement and Prospectus and any amendments or supplements thereto
and review and discussion of the contents thereof, but are without independent
check or verification.
(g) You shall have received, on each of the date hereof and the
Closing Date, a letter dated the date hereof or the Closing Date, as the case
may be, in form and substance satisfactory to you, from Deloitte & Touche LLP,
independent public accountants, containing the information and statements of the
type ordinarily included in accountants' "comfort letters" to Underwriters with
respect to the financial statements and certain financial information contained
in the Registration Statement and the Prospectus.
(h) The Company shall have delivered to you the agreements specified
in Section 2 hereof which agreements shall be in full force and effect on the
Closing Date.
(i) The Shares shall have been duly listed for quotation on the Nasdaq
National Market.
(j) The Company shall not have failed on or prior to the Closing Date
to perform or comply with any of the agreements herein contained and required to
be performed or complied with by the Company on or prior to the Closing Date.
The several obligations of the Underwriters to purchase any Additional
Shares hereunder are subject to the delivery to you on the applicable Option
Closing Date of such documents as you may reasonably request with respect to the
good standing of the Company, the due authorization and issuance of such
Additional Shares and other matters related to the issuance of such Additional
Shares.
SECTION 9. Effectiveness of Agreement and Termination. This Agreement
shall become effective upon the execution and delivery of this Agreement by the
parties hereto.
This Agreement may be terminated at any time on or prior to the Closing
Date by you by written notice to the Company if any of the following has
occurred: (i) any outbreak or escalation of hostilities or other national or
19
<PAGE> 20
international calamity or crisis or change in economic conditions or in the
financial markets of the United States or elsewhere that, in your judgment, is
material and adverse and, in your judgment, makes it impracticable to market the
Shares on the terms and in the manner contemplated in the Prospectus, (ii) the
suspension or material limitation of trading in securities or other instruments
on the New York Stock Exchange, the American Stock Exchange, the Chicago Board
of Options Exchange, the Chicago Mercantile Exchange, the Chicago Board of Trade
or the Nasdaq National Market or limitation on prices for securities or other
instruments on any such exchange or the Nasdaq National Market, (iii) the
suspension of trading of any securities of the Company on any exchange or in the
over-the-counter market, (iv) the enactment, publication, decree or other
promulgation of any federal or state statute, regulation, rule or order of any
court or other governmental authority which in your opinion materially and
adversely affects, or will materially and adversely affect, the business,
prospects, financial condition or results of operations of the Company, (v) the
declaration of a banking moratorium by either federal or New York State
authorities or (vi) the taking of any action by any federal, state or local
government or agency in respect of its monetary or fiscal affairs which in your
opinion has a material adverse effect on the financial markets in the United
States.
If on the Closing Date or on an Option Closing Date, as the case may
be, any one or more of the Underwriters shall fail or refuse to purchase the
Firm Shares or Additional Shares, as the case may be, which it has or they have
agreed to purchase hereunder on such date and the aggregate number of Firm
Shares or Additional Shares, as the case may be, which such defaulting
Underwriter or Underwriters agreed but failed or refused to purchase is not more
than one-tenth of the total number of Firm Shares or Additional Shares, as the
case may be, to be purchased on such date by all Underwriters, each
non-defaulting Underwriter shall be obligated severally, in the proportion which
the number of Firm Shares set forth opposite its name in Schedule I bears to the
total number of Firm Shares which all the non-defaulting Underwriters have
agreed to purchase, or in such other proportion as you may specify, to purchase
the Firm Shares or Additional Shares, as the case may be, which such defaulting
Underwriter or Underwriters agreed but failed or refused to purchase on such
date; provided that in no event shall the number of Firm Shares or Additional
Shares, as the case may be, which any Underwriter has agreed to purchase
pursuant to Section 2 hereof be increased pursuant to this Section 9 by an
amount in excess of one-ninth of such number of Firm Shares or Additional
Shares, as the case may be, without the written consent of such Underwriter. If
on the Closing Date any Underwriter or Underwriters shall fail or refuse to
purchase Firm Shares and the aggregate number of Firm Shares with respect to
which such default occurs is more than one-tenth of the aggregate number of Firm
Shares to be purchased by all Underwriters and arrangements satisfactory to you
and the Company for purchase of such Firm Shares are not made within 48 hours
after such default, this Agreement will terminate without liability on the part
of any non-defaulting Underwriter and the
20
<PAGE> 21
Company. In any such case which does not result in termination of this
Agreement, either you or the Company shall have the right to postpone the
Closing Date, but in no event for longer than seven days, in order that the
required changes, if any, in the Registration Statement and the Prospectus or
any other documents or arrangements may be effected. If, on an Option Closing
Date, any Underwriter or Underwriters shall fail or refuse to purchase
Additional Shares and the aggregate number of Additional Shares with respect to
which such default occurs is more than one-tenth of the aggregate number of
Additional Shares to be purchased on such date, the non-defaulting Underwriters
shall have the option to (i) terminate their obligation hereunder to purchase
such Additional Shares or (ii) purchase not less than the number of Additional
Shares that such non-defaulting Underwriters would have been obligated to
purchase on such date in the absence of such default. Any action taken under
this paragraph shall not relieve any defaulting Underwriter from liability in
respect of any default of any such Underwriter under this Agreement.
SECTION 10. Miscellaneous. Notices given pursuant to any provision of
this Agreement shall be addressed as follows: (i) if to the Company, to
Synchronicity, Inc. of Massachusetts, 201 Forest Street, Marlboro, Massachusetts
01752 and (ii) if to any Underwriter or to you, c/o Donaldson, Lufkin & Jenrette
Securities Corporation, 277 Park Avenue, New York, New York 10172, Attention:
Syndicate Department, or in any case to such other address as the person to be
notified may have requested in writing.
The respective indemnities, contribution agreements, representations,
warranties and other statements of the Company and the several Underwriters set
forth in or made pursuant to this Agreement shall remain operative and in full
force and effect, and will survive delivery of and payment for the Shares,
regardless of (i) any investigation, or statement as to the results thereof,
made by or on behalf of any Underwriter, the officers or directors of any
Underwriter, any person controlling any Underwriter, the Company, the officers
or directors of the Company or any person controlling the Company, (ii)
acceptance of the Shares and payment for them hereunder and (iii) termination of
this Agreement.
If for any reason the Shares are not delivered by or on behalf of the
Company as provided herein (other than as a result of any termination of this
Agreement pursuant to Section 9), the Company agrees to reimburse the several
Underwriters for all reasonable out-of-pocket expenses (including the fees and
disbursements of counsel) incurred by them. Notwithstanding any termination of
this Agreement, the Company shall be liable for all expenses which it has agreed
to pay pursuant to Section 5(i) hereof. The Company also agrees to reimburse the
several Underwriters, their directors and officers and any persons controlling
any of the Underwriters for any and all reasonable fees and expenses (including,
without limitation, the fees and disbursements of counsel) incurred by them in
connection with enforcing their rights hereunder (including, without limitation,
21
<PAGE> 22
pursuant to Section 7 hereof).
Except as otherwise provided, this Agreement has been and is made
solely for the benefit of and shall be binding upon the Company, the
Underwriters, the Underwriters' directors and officers, any controlling persons
referred to herein, the Company's directors and the Company's officers who sign
the Registration Statement and their respective successors and assigns, all as
and to the extent provided in this Agreement, and no other person shall acquire
or have any right under or by virtue of this Agreement. The term "successors and
assigns" shall not include a purchaser of any of the Shares from any of the
several Underwriters merely because of such purchase.
This Agreement shall be governed and construed in accordance with the
laws of the State of New York.
This Agreement may be signed in various counterparts which together
shall constitute one and the same instrument.
22
<PAGE> 23
Please confirm that the foregoing correctly sets forth the agreement
between the Company and the several Underwriters.
Very truly yours,
SYNCHRONICITY SOFTWARE, INC.
By:
-------------------------
Title:
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
FLEETBOSTON ROBERTSON STEPHENS
DAIN RAUSCHER INCORPORATED
DLJdirect Inc.
Acting severally on behalf of
themselves and the several
Underwriters named in
Schedule I hereto
By DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
By
--------------------------
23
<PAGE> 24
SCHEDULE I
----------
Underwriters Number of Firm Shares
to be Purchased
Donaldson, Lufkin & Jenrette Securities
Corporation
FleetBoston Robertson Stephens
Dain Rauscher Incorporated
DLJdirect Inc.
Total
<PAGE> 25
Annex I
[Insert names of stockholders of the Company who will be required to sign lock
ups]
<PAGE> 1
Exhibit 4.1
Synchronicity Software, Inc. transferable on the books of the Corporation in
person or by attorney upon surrender of this Certificate properly endorsed or
assigned. This Certificate and the shares represented hereby are subject to the
laws of the State of Delaware and to the Certificate of Incorporation and the
By-laws of the Corporation as from time to time amended (copies of which are on
file with the Transfer Agent) to all of which the holder by acceptance hereof
assents.
This Certificate is not valid until countersigned and registered by the
Transfer Agent and Registrar.
IN WITNESS WHEREOF, Synchronicity Software, Inc. has caused its facsimile
corporate seal and the facsimile signatures of its duly authorized officers to
be hereunto affixed.
Dated: Chairman of the Board of Directors
Chief Operating Officer
SYNCHRONICITY SOFTWARE, INC.
The following abbreviations, when used in the inscription on the face of
this Certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM- as tenants in common UNIF GIFT MIN ACT......Custodian.......
TEN ENT- as tenants by the entireties (Cust) (Minor)
JT TEN- as joint tenants with right under Uniform Gifts to Minors
of survivorship and not as Act.........................
tenants in common (State)
COM PROP- as community property
Additional abbreviations may also be used though not in the above list.
For value received, ____________________ hereby sell, assign and transfer unto
_____________________________________________________________________________
_____________________________________________________________________________
______________________________________________________________________ Shares
of the capital stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
__________________________________________________________________ Attorney
to transfer the said stock on the books of the within named Corporation with
full power of substitution in the premises.
Dated, ___________________
______________________________________
NOTICE: THE SIGNATURE TO THIS ASSIGNMENT MUST
CORRESPOND WITH THE NAME AS WRITTEN
UPON THE FACE OF THE CERTIFICATE IN
EVERY PARTICULAR, WITHOUT ALTERATION
OR ENLARGEMENT OR ANY CHANGE
WHATEVER.
SIGNATURE(S) GUARANTEED:________________________________________________________
THE SIGNATURE(S) MUST BE GUARANTEED BY AN ELIGIBLE
GUARANTOR INSTITUTION (BANKS, STOCKBROKERS, SAVINGS AND
LOAN ASSOCIATIONS AND CREDIT UNIONS WITH MEMBERSHIP IN
AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM),
PURSUANT TO S.E.C. RULE 17Ad-15.
<PAGE> 1
Exhibit 5.1
March 29, 2000
Synchronicity Software, Inc.
201 Forest Street
Marlboro, MA 01752
RE: Registration Statement on Form S-1
(File No. 333-30710)
Ladies and Gentlemen:
This opinion relates to an aggregate of 4,025,000 shares of Common
Stock, par value $.01 per share (the "Common Stock"), of Synchronicity Software,
Inc. (the "Company"), which are the subject matter of a Registration Statement
on Form S-1 as filed with the Securities and Exchange Commission (the
"Commission") on February 18, 2000, as amended by Amendment No. 1 to Form S-1
Registration Statement as filed with the Commission on March 29, 2000, (the
"Registration Statement").
The 4,025,000 shares of Common Stock covered by the Registration
Statement consist of 3,500,000 shares being sold by the Company and an
additional 525,000 shares subject to an over-allotment option granted by the
Company to the underwriters to be named in the prospectus (the "Prospectus")
incorporated by reference in the Registration Statement. Such shares of Common
Stock, together with any shares of Common Stock registered under a registration
statement related to the offering contemplated by the Registration Statement
that is to be effective upon filing pursuant to Rule 462(b) of the Securities
Act of 1933, as amended (a "462(b) Registration Statement), are collectively
referred to herein as the "Shares."
Based upon such investigation as we have deemed necessary, we are of
the opinion that when the Shares to be sold by the Company pursuant to the
Prospectus have been issued and paid for in accordance with the terms described
in the Prospectus, such shares of Common Stock will have been validly issued and
will be fully paid and nonassessable.
We hereby consent to the filing of this opinion as Exhibit 5.01 to the
Registration Statement or any 462(b) Registration Statement and to the reference
to our firm in the Prospectus under the caption "Legal Matters."
Very truly yours,
TESTA, HURWITZ & THIBEAULT, LLP
<PAGE> 1
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Amendment No. 1 to Registration Statement No.
333-30710 of Synchronicity Software, Inc. (formerly Synchronicity, Inc. of
Massachusetts) of our report dated February 17, 2000 (March 6, 2000 as to Note
10) (which report expresses an unqualified opinion and includes an explanatory
paragraph relating to a change in accounting for revenue in 1998) appearing in
the Prospectus, which is a part of such Registration Statement, and to the
reference to us under the heading "Experts" in such Prospectus.
/s/ Deloitte & Touche LLP
- ------------------------
DELOITTE & TOUCHE LLP
Boston, Massachusetts
March 28, 2000
