<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 21, 1997
REGISTRATION NO. 333-27941
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
SYNON CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
------------------------
<TABLE>
<S> <C> <C>
DELAWARE 7372 77-680236754
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
SYNON CORPORATION
1100 LARKSPUR LANDING CIRCLE
LARKSPUR, CA 94939
(415) 461-5000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
RICHARD H. GOLDBERG
PRESIDENT AND CHIEF EXECUTIVE OFFICER
SYNON CORPORATION
1100 LARKSPUR LANDING CIRCLE
LARKSPUR, CA 94939
(415) 461-5000
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
------------------------
COPIES TO:
<TABLE>
<S> <C>
MARK A. BERTELSEN, ESQ. ROBERT P. DAVIS, ESQ.
JAMES N. STRAWBRIDGE, ESQ. CLEARY, GOTTLIEB, STEEN & HAMILTON
DON S. WILLIAMS, ESQ. ONE LIBERTY PLAZA
WILSON SONSINI GOODRICH & ROSATI NEW YORK, NY 10006
PROFESSIONAL CORPORATION (212) 225-2000
650 PAGE MILL ROAD
PALO ALTO, CA 94304
(415) 493-9300
</TABLE>
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration Statement.
------------------------
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 of
1933, 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, please 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 delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
------------------------
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, AS AMENDED, 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
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION
1997
PROSPECTUS
SHARES
SYNON CORPORATION LOGO
COMMON STOCK
($.001 PAR VALUE)
Of the shares of Common Stock, $.001 par value ("Common Stock"), offered
hereby (the "Shares"), are being offered by Synon Corporation and
shares are being offered by the Selling Stockholders. The Company will not
receive any of the proceeds from the sale of shares by the Selling Stockholders.
See "Principal and Selling Stockholders."
Prior to this offering (the "Offering"), there has been no public market for the
Common Stock. It is currently estimated that the initial public offering price
per share will be between $ and $ per share. See "Underwriting" for a
discussion of factors to be considered in determining the initial public
offering price. Application has been made to have the Common Stock approved for
quotation on the Nasdaq National Market under the symbol "SYNO."
SEE "RISK FACTORS" BEGINNING ON PAGE 5 FOR A DISCUSSION OF CERTAIN FACTORS THAT
SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE SHARES.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PROCEEDS
PROCEEDS TO
PRICE TO UNDERWRITING TO SELLING
PUBLIC DISCOUNT COMPANY(1) STOCKHOLDERS
<S> <C> <C> <C> <C>
Per Share............................ $ $ $ $
Total(2)............................. $ $ $ $
</TABLE>
- --------------------------------------------------------------------------------
(1) Before deducting expenses payable by the Company, estimated at $ ,
which includes expenses of the Selling Stockholders that will be reimbursed
by the Company.
(2) Certain Selling Stockholders have granted the Underwriters an option,
exercisable within 30 days from the date hereof, to purchase up to
additional shares of Common Stock on the same terms set forth above, solely
to cover over-allotments, if any. If such option is exercised in full, the
total price to public will be $ , the total Underwriting discount
will be $ and the proceeds to Selling Stockholders will be $ .
See "Underwriting."
The shares of Common Stock are offered subject to receipt and acceptance by the
Underwriters, subject to prior sale and to the Underwriters' right to reject any
order in whole or in part and to withdraw, cancel or modify the offer without
notice. It is expected that delivery of the Shares will be made at the office of
Salomon Brothers Inc, Seven World Trade Center, New York, New York, or through
the facilities of The Depository Trust Company, on or about , 1997.
SALOMON BROTHERS INC VOLPE BROWN WHELAN & COMPANY
THE DATE OF THIS PROSPECTUS IS , 1997
<PAGE> 3
[ARTWORK]
------------------------
This Prospectus contains certain statements of a forward-looking nature
relating to future events or the future financial performance of the Company.
Prospective investors are cautioned that such statements are only predictions
and that actual events or results may differ materially. In evaluating such
statements, prospective investors should specifically consider the various
factors identified in this Prospectus, including the matters set forth under the
caption "Risk Factors."
Synon and Obsydian are registered United States trademarks of the Company.
This Prospectus also contains additional trademarks and tradenames of Synon and
of other companies.
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING PURCHASES OF THE COMMON STOCK TO STABILIZE ITS MARKET PRICE, PURCHASES
OF THE COMMON STOCK TO COVER SOME OR ALL OF A SHORT POSITION IN THE COMMON STOCK
MAINTAINED BY THE UNDERWRITERS AND THE IMPOSITION OF PENALTY BIDS. FOR A
DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS (AND SELLING GROUP
MEMBERS) MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON
THE NASDAQ NATIONAL MARKET IN ACCORDANCE WITH RULE 103 OF REGULATION M. SEE
"UNDERWRITING."
2
<PAGE> 4
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information, and the Company's Consolidated Financial Statements and Notes
thereto, appearing elsewhere in this Prospectus.
THE COMPANY
Synon Corporation ("Synon" or the "Company") is a leading provider of
enterprise software application development tools and related professional
services designed to enable organizations to rapidly design and deploy
mission-critical software applications. Over the last 14 years the Company has
established the leading market position for International Business Machines
Corporation ("IBM") AS/400 software development tools, having sold approximately
6,000 licenses to customers located in approximately 80 countries. In late 1994,
the Company introduced Obsydian, a multi-platform software application
development tool designed to expand the Company's presence in the AS/400 market.
In order to capitalize on the growth of the Microsoft Corporation ("Microsoft")
Enterprise Windows NT computing environment, in March 1997, the Company released
the Obsydian for Windows NT Back Office Generator (the "Windows NT generator").
Obsydian is an integrated business-oriented software development tool that
provides customers with the ability to rapidly develop, deploy and enhance
sophisticated software applications across multiple computing platforms.
Obsydian's technology employs a practical model-based approach to software
design that uses large reusable business objects ("patterns") to reduce
application development lead times. The Obsydian product line includes multiple
code generators that allow developers to deploy applications across different
computing environments, including AS/400, Windows NT and UNIX. The Company is
currently developing a generator with Java capability.
The Company currently sells application development tools primarily in two
distinct markets: the IBM AS/400 market and the emerging Windows NT market.
According to June 1997 research estimates of International Data Corporation,
there were approximately 63,450 new AS/400 systems and 15,650 AS/400 model
upgrades sold in 1996 worldwide, representing an aggregate growth of
approximately 12.8% over 1995, bringing the installed base to approximately
372,000 systems at December 31, 1996. Company management estimates that
approximately half of the new AS/400 systems sold in 1996 include language
compilers which the Company considers potential customer sites. Dataquest has
estimated that the Windows NT-based application server computer systems market
will grow at a compound annual growth rate of 42% per year through 2000 and is
expected to reach approximately five million systems by 1999. The Company
believes that both of these markets represent significant opportunities for its
software development products and services. To date, the Company has derived
substantially all of its revenue from application development tools and services
for the AS/400 market, but believes that an increasing percentage of its revenue
will come from tools and services for the Windows NT market.
The Company intends to leverage its expertise and reputation in AS/400
software development tools to establish Obsydian as the leading multi-platform
application development tool for diverse computing environments. The Company's
major strategies are to: (i) capitalize on its significant customer base and
established market position; (ii) repeat its success in the AS/400 market in the
emerging Windows NT market; (iii) capitalize on its established development and
marketing relationships with IBM and Microsoft; (iv) build upon the Company's
existing technological leadership; (v) facilitate customers' adoption and use of
Synon's technology through a range of professional services; and (vi) leverage
its existing worldwide presence.
The Company sells its products and services through its direct sales forces
in North America, the United Kingdom, France, Italy and Australia and through a
network of distributors in Europe, Asia and Latin America.
The Company was organized under the laws of the United Kingdom in 1983 and
reorganized in Delaware in 1990. Unless the context otherwise requires,
references in this Prospectus to "Synon" or the "Company," relate to Synon
Corporation, a Delaware corporation, its predecessor Synon Limited, organized
under the laws of the United Kingdom, and its wholly-owned subsidiaries. The
Company's principal executive offices are located at 1100 Larkspur Landing
Circle, Larkspur, California 94939 and its telephone number at that address is
(415) 461-5000.
3
<PAGE> 5
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Company..................... shares
Common Stock offered by certain Selling Stockholders.... shares
-----------------
Total Common Stock offered.............................. shares
Common Stock to be outstanding after the Offering....... shares(1)
Use of proceeds......................................... For working capital and other general
corporate purposes. See "Use of
Proceeds."
Proposed Nasdaq National Market symbol.................. SYNO
</TABLE>
- ---------------
(1) Based on shares outstanding as of March 31, 1997. Excludes an aggregate of
1,366,730 shares of Common Stock issuable upon exercise of options
outstanding at March 31, 1997 under the Company's 1990 Stock Option Plan at
a weighted average exercise price of $3.16 per share. See
"Management -- Stock Plans," "Description of Capital Stock" and Note 11 of
Notes to Consolidated Financial Statements. Also excludes (i) 6,000 shares
issuable upon exercise of options granted after March 31, 1997 under the
1990 Stock Option Plan and (ii) an aggregate of shares reserved as
of , 1997 for future issuance under the 1990 Stock Option Plan,
Executive Share Option Scheme, 1997 Incentive Stock Plan, 1997 Director
Option Plan and 1997 Employee Stock Purchase Plan. See Note 11 to
Consolidated Financial Statements.
SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
------------------------------------------------ -----------------
1992 1993 1994 1995 1996 1996 1997
-------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenues.............................. $ 51,345 $60,902 $65,380 $70,782 $76,131 $17,016 $18,472
Operating income (loss)..................... (10,987) 1,867 1,801 869 1,728 (718) 303
Net income (loss)........................... (10,682) 1,151 1,314 714 1,139 (559) 61
Net income (loss) per share................. $ (3.00) $ 0.15 $ 0.17 $ 0.09 $ 0.14 $ (0.15) $ 0.01
Weighted average shares outstanding......... 3,563 7,608 7,772 7,862 7,878 3,626 8,226
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1997
------------------------------------
PRO FORMA AS
DECEMBER 31, 1996 ACTUAL PRO FORMA ADJUSTED(1)
----------------- ------- --------- --------------
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............................. $ 1,080 $ 2,473 $ 2,473
Working capital (deficit)............................. (1,263) (1,504) $(1,504)
Total assets.......................................... 36,909 35,063 $35,063
Capital lease obligations, net of current portion..... 352 283 283
Stockholders' equity.................................. 4,526 4,748 9,748
</TABLE>
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(1) Adjusted to give effect to the estimated net proceeds of this Offering based
on an assumed initial public offering price of $ per share and the
application of the estimated net proceeds therefrom. See "Use of Proceeds."
------------------------
Unless otherwise indicated, all information in this Prospectus (i) assumes
that the Underwriters have not exercised the over-allotment option, (ii) has
been adjusted to give effect to a one-for-two reverse stock split of the
Company's Common Stock currently expected to be effected in July 1997, and (iii)
reflects the issuance of shares of Common Stock upon the conversion of
all of the outstanding shares of the Company's Preferred Stock upon the closing
of the Offering. See "Description of Capital Stock," "Underwriting," and Notes 2
and 17 of Notes to Consolidated Financial Statements.
Certain technical terms used throughout this Prospectus are defined in the
Glossary appearing immediately prior to the Company's Consolidated Financial
Statements at the end of this Prospectus.
4
<PAGE> 6
RISK FACTORS
In addition to the other information contained in this Prospectus, the
following factors should be carefully considered in evaluating the Company and
its business before purchasing the Common Stock offered hereby. All statements,
trend analyses and other information contained in this Prospectus relative to
markets for the Company's products and trends in revenue, gross margin and
anticipated expense levels, as well as other statements including such words as
"anticipate," "believe," "plan," "estimate," "expect," and "intend" and other
similar expressions constitute forward-looking statements. These forward-looking
statements are subject to business and economic risks, and the Company's actual
results of operations may differ materially from those contained in the
forward-looking statements as a result of certain factors, including those set
forth under "Risk Factors" and elsewhere in this Prospectus.
BRIEF HISTORY OF PROFITABILITY; ACCUMULATED DEFICIT
The Company has been profitable on an annual basis since 1993. However, the
Company incurred annual losses of $8.5 million, $6.3 million and $10.7 million
in 1990, 1991 and 1992, respectively, and as of March 31, 1997 on a pro forma
basis had an accumulated deficit of approximately $33.0 million, of which
approximately $20.9 million resulted from operating losses. As a result of these
losses, the Company has experienced constraints in the availability of working
capital and has reported working capital deficits at December 31, 1992, 1993,
1994, 1995 and 1996 and at March 31, 1997. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources." Moreover, even in the profitable years, the Company has
experienced frequent quarterly operating losses, and in each of the last four
years substantially all of the operating income has been based on profits
achieved in the fourth quarter. There can be no assurance that the Company will
be profitable in any future period, and recent operating results are not
necessarily indicative of future financial performance.
FLUCTUATIONS IN QUARTERLY RESULTS; SEASONALITY
The Company's quarterly revenue and operating results have fluctuated
significantly in the past due to seasonal trends, cost overruns associated with
certain fixed price services projects, sales staff turnover and timing of new
product deliveries. The Company's quarterly revenue and operating results are
likely to vary significantly in the future as a result of these and a number of
other factors including the demand for the Company's software; the size, timing
and contractual terms of significant orders; the timing and significance of
software product enhancements and new software product announcements by the
Company or its competitors; the productivity of the Company's sales channels;
changes in pricing policies by the Company or its competitors; changes in the
Company's or its competitors' business strategies; budgeting cycles of its
potential customers; changes in the mix of software products and services the
Company sells; changes in the mix of revenue attributable to domestic and
international sales; software defects and other product quality problems; the
ability of the Company to recruit and retain qualified personnel; investments to
develop sales distribution channels; changes in the level of operating expenses;
and general domestic and international economic and political trends.
The Company's license revenue has experienced and is expected to continue
to experience a high degree of seasonality, in part due to customer buying
patterns. In recent years, the Company has generally had stronger sales of its
software products during the quarter ending in December and weaker sales in the
following quarter. In addition, sales of the Company's software products tend to
be flat in the third quarter compared to the second quarter, due to reduced
sales activity in the summer months, especially in Europe. Moreover, the Company
has experienced frequent quarterly operating and net losses, and in each of the
last four years substantially all of its operating income has been based on
profits achieved in the fourth quarter. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
In addition, the timing of revenue recognition can diverge from
expectations as a result of a variety of factors, including the timing of
contract execution and delivery, and customer acceptance, if applicable.
5
<PAGE> 7
When an undeliverable product affects the usability of other products in a
customer order, recognition of that customer order's revenue may be delayed
until all products constituting part of that customer order can be delivered.
Specifically, quarterly results in 1995 were affected as revenue recognition of
Obsydian sales which included the AS/400 Non-Programmable Terminal ("NPT")
generator was delayed until the generator was delivered in December 1995. These
and other factors affecting the timing of revenue recognition can contribute to
fluctuations in quarterly results.
Software revenue is also difficult to forecast because the market for
high-end client/server software products is rapidly evolving, especially for the
emerging Windows NT market, and because the Company's sales cycle, from initial
contact to purchase and implementation, varies substantially from customer to
customer. In the event of any downturn in potential customers' businesses or the
economy in general, or a lack of market acceptance of the Windows NT computing
platform in general or the Company's Obsydian products (including Obsydian for
Windows NT) in particular, planned purchases of the Company's products may be
deferred or canceled, which could have a material adverse effect on the
Company's business, operating results and financial condition. In addition, the
Company's North American sales operation historically has not achieved levels of
productivity realized elsewhere in the business. The Company has recently
implemented a change in the structure and leadership of the North American sales
operation, but there can be no assurance that the operation's performance will
improve. See "-- Continued Importance of Synon/2E; Dependence on Obsydian;
Dependence on Market for High-End Client/Server Applications," "-- Limited
Customer Use of Obsydian for Windows NT; Market Acceptance of Windows NT
Platform" and "-- Sales and Marketing Productivity."
The Company typically ships product orders shortly after receipt, and
consequently, order backlog at the beginning of any quarter has in the past
represented an inconsequential portion of that quarter's revenue. As a result,
to achieve its quarterly revenue objectives, the Company is dependent upon
obtaining orders in any given quarter for shipment in that quarter. Furthermore,
the Company has often recognized a substantial portion of its revenue in the
last month, or even weeks or days, of a quarter and therefore quarterly revenue
is difficult to predict with any significant degree of accuracy. The Company's
expense levels are based, in significant part, on the Company's expectations as
to future revenue and are, therefore, relatively fixed in the short term. If
revenue levels fall below expectations, net income would likely be
disproportionately adversely affected because a proportionately smaller amount
of the Company's expenses varies with its revenue. There can be no assurance
that the Company will be able to achieve or maintain profitability on a
quarterly or annual basis in the future. Due to all of the foregoing factors, it
is likely that in some future quarter the Company's operating results will be
below the expectations of public market analysts and investors. In such event,
the price of the Company's Common Stock would likely be materially adversely
affected.
CONTINUED IMPORTANCE OF SYNON/2E; DEPENDENCE ON OBSYDIAN; DEPENDENCE ON MARKET
FOR HIGH-END CLIENT/SERVER APPLICATION DEVELOPMENT TOOLS
In the last three years, revenue attributable to the Synon/2E product
family has declined as a percentage of the Company's total revenue, but
continues to be important to the Company. The Company derived approximately 87%,
60% and 45% of its license revenue in 1994, 1995 and 1996, respectively, from
the Company's Synon/2E product family and approximately 100%, 95% and 88% of its
maintenance revenue in 1994, 1995, and 1996, respectively, from the Company's
Synon/2E product family. Moreover, the license revenue attributable to the
Synon/2E product family has declined significantly in absolute dollars in each
of the last three years. Although the Company continues to invest in
enhancements to its Synon/2E product family and plans to continue product
updates and introduction of new releases for such products, the Company expects
further declines in Synon/2Eproduct family license revenue and declines in
Synon/2E product family maintenance and professional services revenue, both in
absolute dollars and as a percentage of total revenue, as customers migrate away
from the Synon/2E product. In the event that the decline in revenue from the
Synon/2E product family is not more than offset by growth in revenue
attributable to the Obsydian product family, the Company's results of operations
will be materially adversely affected.
6
<PAGE> 8
Beginning in 1995, a substantial portion of the Company's license revenue
has been attributable to sales of the Obsydian product family, which accounted
for approximately 13%, 40% and 55% of the Company's license revenue in 1994,
1995 and 1996, respectively. The Company expects the Obsydian product family to
account for an increasingly significant portion of the Company's license revenue
for the foreseeable future. However, total license revenue declined in each of
1994, 1995 and 1996 as the growth in Obsydian product family license revenue was
more than offset by declines in Synon/2E product family license revenue. Growing
Obsydian product family revenue will be required not only to counteract the
effect of declining Synon/2E product family revenue, but also to generate in
large part any future Company revenue growth. As a result, factors adversely
affecting the pricing of or demand for the Obsydian product family, such as
competition or technological change, would have a material adverse effect on the
Company's business, operating results and financial condition. Moreover, the
Company's future financial performance will depend, in significant part, on the
successful development, introduction and customer acceptance of new and enhanced
versions of the Company's Obsydian product and other software products that keep
pace with continuing changes in software application development technology,
evolving industry standards and changing customer preferences. In particular,
customer acceptance of the recently released Obsydian for the Enterprise Windows
NT computing platform, which the Company expects will account for an
increasingly significant portion of Obsydian revenue in the future, is important
to the Company's future success. There can be no assurance that the Company will
continue to be successful in marketing, or that customers will accept, the
Obsydian product family or any new or enhanced software products, including
Obsydian for the Windows NT computing platform. See "--Limited Customer Use of
Obsydian for Windows NT, Market Acceptance of Windows NT Platform."
Although the Company has recently experienced growth in sales of Obsydian,
continued growth is in part dependent on ongoing demand for high-end
client/server applications, and there can be no assurance that such market will
continue to grow. The market for software used in the development, deployment
and management of high-end client/server applications is relatively new and is
characterized by ongoing technological developments, frequent new product
announcements and introductions, evolving industry standards and changing
customer requirements. The Company's future financial performance will depend in
large part on continued growth in the number of organizations adopting high-end
client/server applications and computing environments and the number of
applications developed for use in those environments. If the high-end
client/server market fails to grow or grows more slowly than the Company
currently anticipates, the Company's business, operating results and financial
condition would be materially and adversely affected. Moreover, there can be no
assurance that the Company's customers will expand usage of the Company's
software on an enterprise-wide basis or implement new software products
introduced by the Company. The failure of the Company's software to perform
according to customer expectations or otherwise to be deployed on an
enterprise-wide basis would have a material adverse effect on the ability of the
Company to increase revenue from new as well as existing customers. See
"Business -- Industry Background," "-- Strategy," "-- Technology and Products"
and "-- Competition."
LIMITED CUSTOMER USE AND MARKET ACCEPTANCE OF OBSYDIAN FOR WINDOWS NT; MARKET
ACCEPTANCE OF WINDOWS NT PLATFORM
The Company expects to generate a substantial portion of its future revenue
from sales of Obsydian for the Windows NT computing platform. Consequently,
customer acceptance of such product is important to the Company. See
"--Continued Importance of Synon/2E; Dependence on Obsydian; Dependence on
Market for High-End Client Server Applications." The Company first shipped
Obsydian for the Windows NT computing platform in March 1997. To date, only a
limited number of the Company's customers have completed the development of
software applications for the Windows NT computing platform using Obsydian. As
with all complex software products, a substantial investment of time and
resources is required for users to become educated and fluid with the Obsydian
product family, and to date only a relatively small group of users is qualified
to use such products or manage the Windows NT operating environment more
generally. If any of the Company's customers are not able to successfully
develop and deploy applications for the Windows NT computing platform using
Obsydian, the Company's
7
<PAGE> 9
reputation could be damaged and future sales of Obsydian for the Windows NT
computing platform could suffer. In addition, even if customers are successful
developing and deploying applications for the Windows NT computing platform
using Obsydian, limited market acceptance of the Windows NT platform would
adversely affect sales of Obsydian for the Windows NT computing platform. There
can be no assurance that existing customers will be successful developing or
deploying applications for the Windows NT computing platform using Obsydian,
that the Obsydian for Windows NT product will achieve significant market
acceptance or that the Windows NT platform will become widely adopted. The
failure of any of these to occur would have a material adverse effect on the
Company's business, financial condition and results of operations.
COMPETITION
The software development market is highly fragmented and serviced by many
firms. The market for advanced software used in the development, deployment and
management of high-end client/server application software systems is intensely
competitive and characterized by rapidly changing technology, evolving industry
standards, frequent new product introductions and rapidly changing customer
requirements. The Company's development tools are targeted primarily at
developers of large business applications running on the AS/400 and the Windows
NT operating platform. In the market for high-end client/server application
development software tools, the Company expects to compete primarily with Forte
Software, Inc. and Texas Instruments Incorporated with respect to users of the
Windows NT operating platform, and currently competes primarily with Progress
Software Corporation and several small software companies with respect to users
of the AS/400. In the market for less complex client/server application
development software tools, the Company competes primarily with Powersoft
Corporation, IBM's Visual Age product line and Microsoft's Visual Basic with
respect to users of the Windows NT operating platform and with IBM's Visual Age
product line with respect to users of the AS/400.
Software that can be developed and deployed using the Company's Obsydian
environment can also be implemented using a combination of first generation
application development tools and more powerful server programming techniques
such as stored procedures in relational databases, C or C++ programming, and
networking and database middleware to connect the various components.
Consequently, the Company experiences competition from potential customers'
decisions to pursue this approach as opposed to utilizing an application
environment such as Obsydian. Similarly, the Company's products compete against
the alternative of conventional software development in the AS/400's native RPG
language. As a result, the Company must continuously educate existing and
prospective customers as to the advantages of the Company's products. There can
be no assurance that these customers or potential customers will perceive
sufficient value in the Company's products to justify purchasing them.
The Company also competes indirectly with database vendors such as Oracle
Corporation ("Oracle"), Informix Corporation ("Informix") and others that offer
their own development tools for use with their databases. The Company will in
the future face additional direct or indirect competition from IBM or Microsoft
as such companies continue to develop their own application development tools
for the AS/400, Windows NT or other computing platforms or enter into strategic
relationships with any of the Company's competitors. In addition, since the
software industry has relatively low barriers to entry, the Company may in the
future face additional competition from start-up or other companies in the
software application development tool industry.
Most of the Company's current competitors have, and future competitors may
have, significantly greater financial, technical, marketing and other resources
than the Company. The Company's competitors may be able to respond more quickly
to new or emerging technologies and changes in customer requirements or devote
greater resources to the development, promotion and sale of their products than
the Company. Also, most current and potential competitors have greater name
recognition and more extensive customer bases that could be leveraged, thereby
gaining market share to the Company's detriment. The Company expects to face
additional competition as other established and emerging companies enter the
application development tools market and new products and technologies are
8
<PAGE> 10
introduced. Increased competition could result in price reductions, reduced
purchases of licenses, professional services and maintenance, lower gross
margins or loss of market share, any of which would materially adversely affect
the Company's business, operating results and financial condition.
In addition, current and potential competitors have established or may
establish cooperative relationships among themselves or with third parties or
make strategic acquisitions to increase the ability of their products to address
the needs of the Company's prospective customers. Accordingly, it is possible
that new competitors or alliances among current and new competitors may emerge
and rapidly acquire significant market share. There can be no assurance that the
Company will be able to compete successfully against current and future
competitors or that competitive pressures faced by the Company will not
materially adversely affect its business, operating results and financial
condition. Further, there can be no assurance that products or technologies
developed by others will not render the Company's products non-competitive or
obsolete. In addition, regardless of the Company's success in the marketplace, a
negative perception of the Company generated by industry analysts or the public
more generally could detract from the Company's competitiveness. The Company's
market is still evolving and there can be no assurance that the Company will be
able to compete successfully against current and future competitors, and the
failure to do so successfully will have a material adverse effect upon the
Company's business, operating results and financial condition. See
"Business -- Competition."
SALES AND MARKETING PRODUCTIVITY
An important element of the Company's strategy is to increase the
productivity and effectiveness of its sales and marketing organizations. In
particular, the Company intends to improve the productivity of its North
American sales operation, which has not achieved levels of productivity realized
elsewhere in the business. See "-- Fluctuations in Quarterly Results;
Seasonality." The Company believes that its ability to improve sales and
marketing productivity, as well as its future success more generally, will
depend in large part upon its ability to identify, attract, train and retain
highly skilled sales, marketing and management personnel. Competition for such
personnel in the computer software industry is intense. There can be no
assurance the Company will be successful in identifying, attracting, training
and retaining such personnel, or retaining existing key personnel, each of whom
presently has an at-will employment relationship with the Company. The failure
to do any of the foregoing could have a material adverse effect on the Company's
business, operating results or financial condition.
DEPENDENCE ON RELATIONSHIPS WITH IBM AND MICROSOFT
The Company's development, marketing and distribution activities are in
part dependent on the Company's relationships with IBM's AS/400 division and
Microsoft. Although certain aspects of the Company's relationships with each of
IBM's AS/400 division and Microsoft are contractual in nature, many important
aspects of each relationship depend on the continued cooperation of IBM and
Microsoft, respectively, and there can be no assurance that the Company will be
able to work successfully with either IBM or Microsoft for an extended period of
time. Specific risks to each relationship include the fact that the Company and
IBM and Microsoft also compete in the area of development tools for one or all
of the AS/400, Windows NT and other computing platforms, as well as the risks of
divergence in strategy between Synon and either company, a change in focus by
either company or establishment of strategic relationships between either
company and a competitor or competitors of Synon, any of which events would
materially adversely impact Synon's ability to develop, market, sell or support
its products. See "-- Competition."
POTENTIAL FINANCIAL EXPOSURE FROM FIXED-PRICE CONTRACTS
The Company has in the past entered into agreements with customers
involving application development projects, including multi-million dollar
projects, in which the Company has committed to achieve a specific result for a
fixed price. The Company's operating margins for 1995 and 1996 were negatively
impacted by cost overruns, and in certain cases losses, incurred in completing
certain fixed-price projects. See "Management's Discussion and Analysis of
Financial Condition and Results of
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<PAGE> 11
Operations." The Company has implemented new practices intended to enable it to
more effectively evaluate its ability to achieve the result required by a
fixed-price contract before entering into any such contract in the future.
However, there can be no assurance that the cost of fulfilling the Company's
obligations under any such contract will not exceed the Company's estimate of
such costs or the fixed price payable to the Company under such contract, in
which event the Company's operating results would likely be materially adversely
affected.
RISKS ASSOCIATED WITH DISTRIBUTION CHANNELS
To date, the Company has sold its products primarily through its direct
sales force and distributors. Revenue from distributors accounted for
approximately 26%, 21% and 30% of the Company's software license revenue for
1994, 1995 and 1996, respectively. In addition, the Company relies on its
foreign distributors to provide first level customer support. The success of the
Company is therefore dependent in significant part upon the performance of its
distributors, which is primarily outside the Company's control. The Company's
ability to achieve significant revenue growth in the future will depend in large
part on its success in maintaining and establishing additional relationships
with distributors worldwide. The loss of any of the Company's major
distributors, or their promotion of competitive products, or the failure of
these distributors to take the actions necessary to support Obsydian, especially
Obsydian for the Windows NT computing platform, or the failure of the Company to
attract new distributors, could have a material adverse effect on the Company's
business, operating results and financial condition. See "Business -- Strategy"
and "-- Sales and Marketing."
LENGTHY SALES CYCLE
The evaluation of, and purchase decision with respect to, the Company's
software products generally involves a significant commitment of management
attention and resources by prospective customers. Accordingly, the Company's
sales process is often subject to delays associated with the long approval
process that generally accompanies significant initiatives or capital
expenditures. For these and other reasons, the sales cycle associated with the
license of the Company's products is often lengthy (typically three to nine
months) and subject to a number of significant delays over which the Company has
little or no control. It is likely that the Company will continue to experience
a lengthy sales cycle in the future, which could contribute to variability in
quarterly operating results. See "-- Potential Fluctuations in Quarterly
Results; Seasonality" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS
Revenue from foreign operations accounted for approximately 47%, 48% and
46% of the Company's total revenue in 1994, 1995 and 1996, respectively.
Although the Company has had international operations for a number of years,
there can be no assurance that the Company will be able to successfully market,
sell and deliver its products in international markets in the future. In
addition, the Company believes that in order to increase sales opportunities and
profitability, as well as to meet growing market needs, it may be required to
expand its international operations, including hiring additional personnel and
recruiting additional distributors. To the extent that the Company is unable to
do so in a timely manner, the Company's growth, if any, in international sales
may be limited, and the Company's business, operating results and financial
condition could be materially adversely affected.
The Company's international operations (including export sales) are exposed
to risks from fluctuations in foreign currency exchange rates with respect to a
number of currencies, including fluctuations among and between the United States
dollar, British pound, German deutschemark, Japanese yen, French franc and
Italian lira. The Company's sales outside the U.S. are made primarily through
its foreign subsidiaries and are denominated in the local currencies of the
countries in which such subsidiaries are based. The Company's direct export
sales are limited and generally are priced in U.S. Dollars. The Company's
foreign subsidiaries are obligated to pay the Company royalties based upon sales
in their respective geographic regions, which typically are denominated in the
local currency of the foreign
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<PAGE> 12
subsidiary. Foreign currency transaction gains and loses arising from the change
in foreign exchange rates between the dates of booking and collecting the
intercompany receivable are credited to or charged against earnings in the
period incurred. As a result, fluctuations in the value of the currencies in
which the Company conducts its business have caused and will continue to cause
currency transaction gains and losses with their associated impact on results of
operations and liquidity. In 1996, the Company incurred $167,000 in foreign
currency transaction losses, compared to a $227,000 gain in 1995. The Company
incurred a $225,000 foreign currency transaction loss in the first quarter of
1997. The Company does not currently engage in foreign currency management
activities or hedging transactions. Additional risks inherent in the Company's
international business activities generally include the impact of possible
recessionary environments in economies outside the United States, unexpected
changes in government policies and regulatory requirements, tariffs, export
controls and other trade barriers, costs of localizing products for foreign
markets, lack of acceptance of localized products in foreign countries, longer
accounts receivable payment cycles, difficulties and costs of staffing and
managing international operations, potentially adverse tax consequences,
restrictions on the repatriation of earnings, the burdens of complying with a
wide variety of foreign laws and transportation delays. While a majority of the
Company's revenue from international operations is derived from European
operations, various countries in which the Company operates, particularly those
in Asia, Africa and Latin America, are subject to political and economic
instability which may adversely impact the Company's results of operations in
those areas. There can be no assurance that the Company or its distributors will
be able to sustain or increase international revenue from licenses or from
maintenance or professional services, or that the foregoing factors will not
have a material adverse effect on the Company's results associated with its
international operations, and, consequently, on the Company's overall business,
operating results and financial condition. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Overview" and
"Business -- Sales and Marketing."
DEPENDENCE ON PROPRIETARY RIGHTS AND TECHNOLOGY; RISKS OF INFRINGEMENT
The Company's success is heavily dependent upon proprietary technology. The
Company also believes that factors such as the technological and creative skills
of its personnel, new product developments, frequent product enhancements, name
recognition and reliable product maintenance are essential to establishing and
maintaining a technology leadership position. The Company relies primarily on a
combination of copyright and trademark laws, trade secrets, confidentiality
procedures and contractual provisions to protect its proprietary rights. The
Company seeks to protect its software, documentation and other written materials
under trade secret and copyright laws, which afford only limited protection. The
Company currently has no patents or patent applications pending. Despite
precautions taken by the Company, it may be possible for unauthorized third
parties to copy aspects of its products or future products or to obtain and use
information that the Company regards as proprietary. In particular, for the
Synon Model Applications ("SMA") financial product and class libraries, the
Company provides its licensees with access to its data model and other
proprietary information underlying its licensed applications. There can be no
assurance that the Company's means of protecting its proprietary rights now or
in the future will be adequate or that the Company's competitors will not
independently develop similar or superior technology. Litigation may be
necessary in the future to enforce the Company's intellectual property rights,
to protect the Company's trade secrets or to determine the validity and scope of
the proprietary rights of others. Such litigation could result in substantial
costs and diversion of resources and could have a material adverse effect on the
Company's business, operating results and financial condition.
The Company, Dysys Limited, a United Kingdom company ("Dysys"), and Simon
Williams and Melinda Horton, founders and major stockholders of the Company, are
parties to an agreement dated September 15, 1992 (the "Dysys Agreement") in
connection with which the Company acquired certain intellectual property which
was included in the Company's Obsydian product. In connection with the Dysys
Agreement, the Company currently incurs a liability to pay Mr. Williams and Ms.
Horton a 1.0% and 0.5% royalty, respectively, on Obsydian license and
maintenance revenue for all transactions entered into through June 30, 1999.
Pursuant to the Dysys Agreement, Mr. Williams and Ms. Horton also retain certain
11
<PAGE> 13
rights with respect to the intellectual property, including the non-exclusive
right to use and exploit it under certain circumstances, including the Company's
failure to pay required royalty amounts required in connection with the Dysys
Agreement. See "Certain Transactions -- Dysys Agreement."
Policing unauthorized use of the Company's software is difficult, and,
while the Company does not believe software piracy is a significant problem to
the Company at present, there can be no assurance that it will not become a
problem in the future. In addition, the laws of some foreign countries do not
protect the Company's proprietary rights to the same extent as do the laws of
the United States. The Company is not aware that any of its software product
offerings infringe the proprietary rights of third parties, but there can be no
assurance that third parties will not claim infringement by the Company with
respect to current or future products. The Company expects that software
developers will increasingly be subject to infringement claims as the number of
products and competitors in the Company's industry segment grows and the
functionality of products in different industry segments overlaps. Any such
claims, with or without merit, could be time-consuming, result in costly
litigation, cause product shipment delays or require the Company to enter into
royalty or licensing agreements. Such royalty or licensing agreements, if
required, may not be available on terms acceptable to the Company or at all,
which could have a material adverse effect on the Company's business, operating
results and financial condition. Any such delays or reductions in product
shipments could materially and adversely affect the Company's business,
operating results and financial condition. See "Business -- Intellectual
Property and Other Proprietary Rights."
RAPID TECHNOLOGICAL CHANGE; PRODUCT DEVELOPMENT RISKS
The market for the Company's products is subject to rapid technological
change, changing customer needs and evolving industry standards that may render
existing products and services obsolete. As a result, the Company's position in
its existing markets or other markets that it may enter could be eroded rapidly
by product advances. The Company's vulnerability to rapid technological change
and changing customer needs is heightened by the focus of its product
development efforts on the Obsydian product line and Obsydian for the Windows NT
computing platform.
The Company's product development efforts are expected to require, from
time to time, substantial investments by the Company, but there can be no
assurance that the Company will have sufficient resources to make the necessary
investments. In addition, the Company has in the past experienced development
delays, and there can be no assurance that the Company will not experience such
delays in the future, which could delay or prevent the successful development,
introduction or marketing of new or enhanced products such as the Java
generator. Such products, even if developed successfully on a timely basis, may
not meet the requirements of the marketplace or achieve market acceptance. If
the Company is unable, for technological or other reasons, to develop and
introduce new and enhanced products in a timely manner, the Company's business,
results of operations and financial condition could be materially adversely
affected.
Software products as complex as those offered by the Company may contain
errors that may be detected at any point in the products' life cycles. There can
be no assurance that, despite testing by the Company and by current and
potential customers, errors will not be found, resulting in loss of, or delay
in, market acceptance and sales, diversion of development resources, injury to
the Company's reputation, or increased service and warranty costs, any of which
could have a material adverse effect on the Company's business, results of
operations and financial condition. See "Business -- Technology and Products"
and "-- Product Development."
DEPENDENCE ON KEY PERSONNEL; NEW SYSTEMS AS PUBLIC COMPANY
Synon's success depends on the continued contributions of certain senior
corporate managers and key employees, each of whom has an at-will employment
relationship with the Company. The Company presently maintains "key person"
insurance for its own benefit on certain such personnel in connection with
potential liabilities to IBM, which liabilities will terminate effective upon
the Offering. The Company
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<PAGE> 14
does not expect to renew such insurance upon expiration and does not otherwise
maintain "key person" insurance. The loss of services of any of such personnel
could have a material adverse effect on the Company. The Company also depends on
its continued ability to attract and retain other highly skilled and qualified
personnel, and there can be no assurance that the Company will be successful in
attracting and retaining such personnel. See "Management -- Executive Officers,
Directors and Key Employees -- Severance and Change in Control Arrangements."
Moreover, in order to compete effectively and manage its obligations as a
public company, the Company must continue to implement and improve information
systems, procedures and controls and expand, train and manage its work force.
FINANCIAL EXPOSURE FROM EXCESS FACILITIES
As a result of the restructuring of its European operations, the Company
currently has excess facilities under long term leases in the United Kingdom.
While these facilities are currently sublet, there can be no assurance that the
Company will not incur liabilities in connection with these excess facilities in
the future, which could have a material adverse effect on the Company's
business, operating results and financial condition. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" and Note 12 of Notes to
Consolidated Financial Statements.
PRODUCT LIABILITY
The Company's license agreements with its customers typically contain
provisions designed to limit the Company's exposure to potential product
liability claims. It is possible, however, that the limitation of liability
provisions contained in the Company's license agreements may not be effective
under existing or future laws of certain jurisdictions. Although the Company has
not experienced any material product liability claims to date, the sale and
support of products by the Company may entail the risk of such claims, and there
can be no assurance that the Company will not be subject to such claims in the
future. A successful product liability claim brought against the Company could
have a material adverse effect on the Company's business, operating results and
financial condition.
EFFECT OF CERTAIN CHARTER PROVISIONS; LIMITATION OF LIABILITY OF DIRECTORS;
ANTITAKEOVER EFFECTS OF DELAWARE LAW
Effective upon the closing of this Offering, the Company will be authorized
to issue up to 5,000,000 shares of undesignated Preferred Stock. The Board of
Directors has the authority to issue the Preferred Stock in one or more series
and to fix the price, rights, preferences, privileges and restrictions thereof,
including dividend rights, dividend rates, conversion rights, voting rights,
terms of redemption, liquidation preferences and the number of shares
constituting a series or the designation of such series, without any further
vote or action by the Company's stockholders. The issuance of any such Preferred
Stock, while providing desirable flexibility in connection with possible
acquisitions and other corporate purposes, could have the effect of delaying,
deferring or preventing a change in control of the Company without further
action by the stockholders and may adversely affect the market price of the
Common Stock and the voting and other rights of the holders of Common Stock. The
issuance of Preferred Stock with voting and conversion rights may adversely
affect the voting power of the holders of Common Stock, and may under certain
circumstances involve the loss of voting control to others. The Company has no
current plans to issue any shares of Preferred Stock.
Certain provisions of the Company's Amended and Restated Certificate of
Incorporation and Bylaws eliminate the right of stockholders to act by written
consent without a meeting and specify certain procedures for nominating
directors and submitting proposals for consideration at stockholder meetings.
Such provisions are intended to enhance the likelihood of continuity and
stability in the composition of the Board of Directors and in the policies
formulated by the Board of Directors and to discourage certain types of
transactions which may involve an actual or threatened change of control of the
Company. Such
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<PAGE> 15
provisions are designed to reduce the vulnerability of the Company to an
unsolicited acquisition proposal and, accordingly, could discourage potential
acquisition proposals and could delay or prevent a change in control of the
Company. Such provisions are also intended to discourage certain tactics that
may be used in proxy fights but could also have the effect of discouraging
others from making offers for the Company's shares and, consequently, may
inhibit fluctuations in the market price of the Company's Common Stock that
could result from actual or rumored takeover attempts. These provisions may also
have the effect of reducing or preventing changes in the management of the
Company.
The Company is subject to Section 203 of the Delaware General Corporation
Law (the "Antitakeover Law"), which regulates corporate acquisitions. The
Antitakeover Law prevents certain Delaware corporations, including those having
securities listed for trading on the Nasdaq National Market, from engaging,
under certain circumstances, in a "business combination" with any "interested
stockholder" for three years following the date that such stockholder became an
interested stockholder. For purposes of the Antitakeover Law, a "business
combination" includes, among other things, a merger or consolidation involving
the Company and the interested stockholder, as well as the sale of more than ten
percent (10%) of the Company's assets. In general, the Antitakeover Law defines
an "interested stockholder" as any entity or person beneficially owning 15% or
more of the outstanding voting stock of the Company and any entity or person
affiliated with or controlling or controlled by such entity or person. A
Delaware corporation may "opt out" of the Antitakeover Law with an express
provision in its original certificate of incorporation or an express provision
in its certificate of incorporation or bylaws resulting from amendments approved
by the holders of at least a majority of the Company's outstanding voting
shares. The Company has not "opted out" of the provisions of the Antitakeover
Law. See "Description of Capital Stock."
BENEFITS OF THE OFFERING TO CURRENT STOCKHOLDERS
The completion of the Offering made by this Prospectus will benefit the
Selling Stockholders through the sale of shares at a large gain. Sales
by directors and officers will account for of such shares. In
addition, this Offering will benefit all current stockholders of the Company,
including its directors and executive officers, indirectly by, among other
things, creating a public market for the Company's Common Stock, thereby
increasing liquidity and potentially increasing the market value of such
stockholders' investment in the Company. The Company's directors and executive
officers and their affiliates beneficially own, prior to this Offering, an
aggregate of shares of Common Stock. Assuming a public offering price
of $ per share, such shares beneficially owned (including shares
subject to options) will have an aggregate market value of approximately
$ million. See "Dilution."
SHARES ELIGIBLE FOR FUTURE SALE
Sales of a substantial number of shares of Common Stock in the public
market following this Offering could adversely affect the market price for the
Company's Common Stock. See "Description of Capital Stock" and "Shares Eligible
for Future Sale."
IMMEDIATE DILUTION
The Offering price is substantially higher than the book value per share of
the Company's Common Stock. Investors purchasing Common Stock in this Offering
will, therefore, incur immediate dilution of $ in the pro forma net
tangible book value per share of Common Stock (based upon the Offering price of
$ per share and after deducting estimated underwriting discounts and
commissions and Offering expenses payable by the Company) from the Offering
price and will incur additional dilution upon the exercise of outstanding stock
options. See "Dilution."
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<PAGE> 16
CONTROL BY PRINCIPAL STOCKHOLDERS, OFFICERS AND DIRECTORS
Upon completion of this Offering, the Company's executive officers,
directors and principal stockholders and their affiliates will beneficially own
approximately % of the outstanding shares of Common Stock ( % if the
Underwriters' over-allotment option is exercised in full). As a result, these
stockholders, if acting in concert, will be able to control most matters
requiring stockholder approval, including the election of directors, and the
approval of mergers, consolidations and sales of all or substantially all of the
assets of the Company. This may prevent or discourage tender offers for the
Company's Common Stock unless the terms are approved by such stockholders. See
"Principal and Selling Stockholders."
NO PRIOR MARKET; POSSIBLE VOLATILITY OF STOCK PRICE
Prior to this Offering there has been no public market for the Common Stock
of the Company. The Offering price will be determined by negotiations among the
Company, the Selling Stockholders and the representatives of the Underwriters.
See "Underwriting" for a discussion of the factors to be considered in
determining the Offering price. There can be no assurance that an active public
market will develop or be sustained after this Offering or that the market price
of the Common Stock will not decline below the Offering price. The market price
of the Company's Common Stock is likely to be highly volatile and may be
significantly affected by future announcements concerning the Company or its
competitors, quarterly or annual variations in results of operations,
announcements of technological innovations, the introduction of new products or
changes in pricing policies by the Company or its competitors, proprietary
rights or other litigation, changes in earnings estimates by analysts, the
Company's failure to meet analysts' estimates or other factors. In addition,
stock prices for many technology companies fluctuate widely for reasons which
may be unrelated to results of operations. These fluctuations, as well as
general economic, market and political conditions such as recessions or military
conflicts, may materially and adversely affect the market price of the Company's
Common Stock.
DISCRETION AS TO USE OF PROCEEDS
The primary purposes of this Offering are to create a public market for the
Company's Common Stock, to facilitate future access to public markets and to
obtain additional working capital. As of the date of this Prospectus, the
Company has no specific plans to use the net proceeds from this Offering other
than for working capital and general corporate purposes. Accordingly, the
Company's management will retain broad discretion as to the allocation of the
net proceeds from this Offering. Pending any such uses, the Company plans to
invest the net proceeds in investment grade, interest-bearing securities. See
"Use of Proceeds."
ABSENCE OF DIVIDENDS
The Company has not in the past declared or paid dividends on its Common
Stock, and does not anticipate paying cash dividends on its Common Stock in the
foreseeable future. In addition, the Company's bank line of credit agreement
contains a restrictive covenant that prohibits the Company from paying cash
dividends without the prior written consent of the lender.
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<PAGE> 17
USE OF PROCEEDS
The net proceeds to the Company from the sale of the shares of
Common Stock offered by the Company hereby are estimated to be approximately
$ (approximately $ if the Underwriters' over-allotment option
is exercised in full), assuming an Offering price of $ per share and
after deducting the estimated underwriting discounts and estimated Offering
expenses.
The primary purposes of this Offering are to create a public market for the
Company's Common Stock, to facilitate future access to public markets and to
obtain additional working capital. The Company expects to use the net proceeds
of this Offering for working capital and other general corporate purposes. A
portion of the net proceeds may also be used for the acquisition of businesses,
products and technologies that are complementary to those of the Company,
although the Company has no current plans, agreements or commitments and is not
currently engaged in any negotiations with respect to any such transactions.
Pending such uses, the net proceeds of this Offering will be invested in
investment grade, interest-bearing securities.
The Company will not receive any proceeds from the sale of the shares of
Common Stock offered by the Selling Stockholders hereby.
DIVIDEND POLICY
The Company has never declared or paid cash dividends on its Common Stock.
The Company currently expects to retain future earnings, if any, for use in the
operation and expansion of its business and does not anticipate paying any cash
dividends in the foreseeable future. In addition, the Company's bank line of
credit agreement contains a restrictive covenant that prohibits the Company from
paying dividends without the prior written consent of the lender.
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<PAGE> 18
CAPITALIZATION
The following table sets forth (i) the actual capitalization of the Company
derived from its financial statements as of March 31, 1997, (ii) pro forma
capitalization of the Company, giving effect to (a) the amendment and
restatement of the Company's Certificate of Incorporation to provide for
authorized capital stock of 50,000,000 shares of Common Stock and 5,000,000
shares of undesignated Preferred Stock, (b) the conversion of all outstanding
shares of Preferred Stock into shares of Common Stock immediately
prior to the closing of the Offering, and (c) except as otherwise indicated, a
one-for-two reverse stock split of the Company's Common Stock effected in July
1997, and (iii) the pro forma as adjusted capitalization of the Company to
reflect the sale by the Company of shares of Common Stock pursuant to
the Offering at an assumed Offering price of $ per share and the
receipt by the Company of the estimated net proceeds therefrom, after deducting
estimated underwriting discounts and estimated Offering expenses. The
capitalization information set forth in the table below is qualified by the more
detailed Consolidated Financial Statements and Notes thereto included elsewhere
in this Prospectus and should be read in conjunction with such Consolidated
Financial Statements and Notes.
<TABLE>
<CAPTION>
MARCH 31, 1997
----------------------------------
PRO
FORMA
PRO AS
ACTUAL FORMA ADJUSTED
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Capital lease obligations, net of current portion.................. $ 283 $ 283 $ 283
Series E mandatorily redeemable preferred stock, $.001 par value;
1,666,667 shares authorized, 1,666,667 shares issued and
outstanding(1)................................................... 5,000 -- --
Stockholders' equity:
Convertible preferred stock, $.001 par value; 7,306,019 shares
authorized, 6,306,019 shares issued and outstanding, actual;
5,000,000 shares authorized, no shares issued and outstanding,
pro forma and pro forma as adjusted(1)........................ 7 -- --
Common Stock, $.001 par value; 25,000,000 shares authorized,
3,466,291 shares issued and 3,453,419 shares outstanding,
actual; 50,000,000 shares authorized, shares issued
and shares outstanding, pro forma; 50,000,000 shares
authorized, shares issued and shares
outstanding, pro forma as adjusted(2)(3)...................... 3 8
Treasury Stock................................................... (47) (47) (47)
Additional paid-in capital(3).................................... 25,907 43,030
Deferred Compensation............................................ (208) (208) (208)
Accumulated deficit(4)........................................... (20,907) (33,028) (33,028)
Cumulative foreign currency translation adjustment............... (7) (7) (7)
-------- -------- --------
Total stockholders' equity.................................... 4,748 9,748
-------- -------- --------
Total capitalization.......................................... $ 10,031 $ 10,031 $
======== ======== ========
</TABLE>
- ---------------
(1) Preferred stock numbers do not give effect to a one-for-two reverse stock
split approved by the Board of Directors on May , 1997 and effected in July
1997.
(2) Excludes an aggregate of 1,366,730 shares of Common Stock issuable upon
exercise of options outstanding at March 31, 1997 under the Company's 1990
Stock Option Plan and Executive Share Option Scheme at a weighted exercise
price of $3.16 per share. Also excludes (i) 6,000 shares issuable upon
exercise of options granted after March 31, 1997 under the 1990 Stock Option
Plan and (ii) an aggregate of shares reserved as
of for future issuance under the 1990 Stock Option Plan,
Executive Share Option Scheme, 1997 Incentive Stock Plan, 1997 Director
Option Plan and 1997 Employee Stock Purchase Plan. See "Management -- Stock
Plans" and Note 11 of Notes to Consolidated Financial Statements.
(3) Pro forma common stock outstanding and pro forma additional paid-in capital
do not reflect the eventual reclassification from paid-in capital to par
value relating to shares issuable as additional conversion consideration to
holders of Series D Preferred Stock. See "Certain Transactions -- Preferred
Stock Sales" and Consolidated Statements of Stockholders' Equity.
(4) Pro forma accumulated deficit reflects accretion of $12,121,000 related to
the issuance of conversion premium shares at an assumed value of
$ per share as a result of the conversion of the Series D Preferred Stock.
See Note 2 of Notes to Consolidated Financial Statements.
17
<PAGE> 19
DILUTION
The pro forma net tangible book value of the Company as of March 31, 1997
was $ million or $ per share of Common Stock. Pro forma net
tangible book value per share represents the Company's total tangible assets
less total liabilities, divided by the number of outstanding shares of the
Company's Common Stock on a pro forma basis after giving effect to the
conversion of all outstanding shares of Preferred Stock into shares of
Common Stock upon the closing of the Offering. After giving effect to the sale
by the Company of shares of Common Stock offered hereby at an assumed
Offering price of $ per share and the receipt by the Company of the
estimated net proceeds therefrom, after deducting the estimated underwriting
discounts and commissions and Offering expenses payable by the Company, the
Company's pro forma net tangible book value at March 31, 1997 would have been
$ or $ per share of Common Stock. This represents an immediate
increase in pro forma net tangible book value of $ per share to
existing stockholders and an immediate dilution in pro forma net tangible book
value of $ per share to new investors. The following table illustrates
this per share dilution:
<TABLE>
<S> <C> <C>
Assumed Offering price per share........................................ $
Pro forma net tangible book value per share before the Offering....... $
Increase in pro forma net tangible book value per share attributable
to new investors...................................................
-------
Pro forma net tangible book value per share after the Offering..........
-------
Dilution per share to new public investors.............................. $
=======
</TABLE>
The following table summarizes, on a pro forma basis as of March 31, 1997,
the number of shares of Common Stock purchased from the Company, the total
consideration paid and the average price per share paid by the existing
stockholders and by new investors purchasing shares in this Offering (at an
assumed Offering price of $ per share and before deducting underwriting
discounts and commissions and estimated Offering expenses payable by the
Company).
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
------------------- -------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
-------- ------- -------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders(1)............. % $ % $
New investors(1).....................
------- ----- -------- -----
Total...................... 100.0% $ 100.0%
======= ===== ======== =====
</TABLE>
- ---------------
(1) Sales by certain Selling Stockholders in this Offering will reduce the
number of shares of Common Stock held by existing stockholders to
or approximately % ( shares, or approximately %, if the
Underwriters' over-allotment option is exercised in full) and will increase
the number of shares held by new investors to or approximately
% ( shares, or approximately %, if the Underwriters
over-allotment option is exercised in full) of the total number of shares of
Common Stock outstanding after this Offering. See "Principal and Selling
Stockholders."
Excludes an aggregate of 1,366,730 shares of Common Stock issuable on
exercise of options outstanding at March 31, 1997 under the Company's 1990 Stock
Option Plan and Executive Share Option Scheme at a weighted average price of
$3.16 per share. Also excludes (i) 6,000 shares issuable upon exercise of
options granted after March 31, 1997 under the 1990 Stock Option Plan and (ii)
an aggregate of shares reserved as of , 1997 for
future issuance under the 1990 Stock Option Plan, Executive Share Option Scheme,
1997 Stock Option Plan, 1997 Director Option Plan and 1997 Employee Stock
Purchase Plan. To the extent that any shares are issued upon exercise of
options, warrants or rights that are presently outstanding or granted in the
future, or reserved for future issuance under the Company's stock plans, there
will be further dilution to new investors. See "Management -- Stock Plans,"
"Description of Capital Stock" and Note 11 of Notes to Consolidated Financial
Statements.
18
<PAGE> 20
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data presented below for and as of the
end of each of the years in the five-year period ended December 31, 1996, are
derived from the consolidated financial statements of Synon Corporation and its
subsidiaries, which financial statements have been audited by Arthur Andersen
LLP, independent public accountants. The consolidated balance sheets as of
December 31, 1995 and 1996, and the consolidated statements of operations for
each of the years in the three-year period ended December 31, 1996, and the
report thereon, are included elsewhere in this Prospectus. The statements of
operations data for the years ended December 31, 1992, December 31, 1993 and the
balance sheet data at December 31, 1992, December 31, 1993 and December 31, 1994
are derived from audited financial statements not included herein. The
statements of operations data for the three-month periods ended March 31, 1996
and 1997 and the balance sheet data at March 31, 1997 are derived from unaudited
consolidated financial statements. In the opinion of management, the unaudited
consolidated financial statements have been prepared on the same basis as the
audited consolidated financial statements and contain all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of the Company's results of operations for such periods and
financial condition at such dates. The results of operations for the three
months ended March 31, 1997 are not necessarily indicative of the results to be
expected for the full year or future periods. The selected consolidated
financial data set forth below is qualified in its entirety by, and should be
read in conjunction with, the Consolidated Financial Statements and Notes
thereto and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
-------------------------------------------------------- ---------------------
1992 1993 1994 1995 1996 1996 1997
-------- -------- -------- -------- -------- -------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenues:
License................................... $ 20,639 $ 23,735 $ 23,313 $ 21,989 $ 21,801 $ 3,471 $ 4,476
Maintenance............................... 14,000 15,798 18,848 21,053 21,321 5,384 5,352
Services.................................. 16,706 21,369 23,219 27,740 33,009 8,161 8,644
-------- ------- ------- ------- ------- ------- -------
Total revenues............................ 51,345 60,902 65,380 70,782 76,131 17,016 18,472
Costs of revenues:
License................................... 3,625 4,897 4,366 4,093 3,133 688 774
Maintenance............................... 2,627 3,241 4,251 5,188 5,984 1,481 1,530
Services.................................. 11,127 13,706 17,351 21,635 26,885 6,774 6,634
-------- ------- ------- ------- ------- ------- -------
Total cost of revenues.................... 17,379 21,844 25,968 30,916 36,002 8,943 8,938
Gross profit................................ 33,966 39,058 39,412 39,866 40,129 8,073 9,534
Operating expenses:
Sales and marketing....................... 22,391 25,155 25,741 25,919 25,034 5,391 5,614
Research and development.................. 3,693 4,528 4,104 4,942 5,922 1,569 1,485
General and administrative................ 8,042 7,383 7,641 8,011 7,320 1,800 2,101
Amortization of goodwill (1).............. 8,779 125 125 125 125 31 31
Restructuring reserve (2)................. 2,048 -- -- -- -- -- --
-------- ------- ------- ------- ------- ------- -------
Total operating expenses.................. 44,953 37,191 37,611 38,997 38,401 8,791 9,231
Operating income (loss)..................... (10,987) 1,867 1,801 869 1,728 (718) 303
Interest income (expense), net.............. (800) (466) (282) (185) (47) (9) 4
Other income (expense), net................. 540 144 232 267 (162) (18) (225)
-------- ------- ------- ------- ------- ------- -------
Income (loss) before income taxes........... (11,247) 1,545 1,751 951 1,519 (745) 82
Provision (benefit) for income taxes........ (565) 394 437 237 380 (186) 21
-------- ------- ------- ------- ------- ------- -------
Net income (loss)........................... $(10,682) $ 1,151 $ 1,314 $ 714 $ 1,139 $ (559) $ 61
======== ======= ======= ======= ======= ======= =======
Net income (loss) per share................. $ (3.00) $ 0.15 $ 0.17 $ 0.09 $ 0.14 $ (0.15) $ 0.01
======== ======= ======= ======= ======= ======= =======
Weighted average shares outstanding......... 3,563 7,608 7,772 7,862 7,878 3,626 8,226
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1997
DECEMBER 31, --------------------------
-------------------------------------------------------- PRO PRO FORMA
1992 1993 1994 1995 1996 FORMA AS ADJUSTED(3)
-------- -------- -------- -------- -------- -------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.............. $ 2,775 $ 3,929 $ 3,419 $ 2,458 $ 1,080 $ 2,473
Working capital (deficit).............. (1,951) (1,667) (2,402) (1,695) (1,263) (1,504)
Total assets........................... 30,970 33,220 35,307 35,867 36,909 35,063
Notes payable and capital lease
obligations, net of current
portion.............................. 3,010 1,792 1,168 396 352 283
Accumulated deficit(4)................. (25,285) (24,135) (22,820) (22,107) (20,968) (33,028)
Stockholders' equity................... 122 1,371 2,557 3,141 4,526 9,748
</TABLE>
- ---------------
(1) 1992 amount includes a write-down of approximately $6.8 million of goodwill
relating to the acquisitions of an Australian subsidiary and certain North
American subsidiaries.
(2) Represents additional accruals for excess facilities costs in the United
Kingdom resulting from the restructuring of European operations.
(3) Adjusted to give effect to estimated net proceeds of this Offering based on
an assumed initial public offering price of $ per share and the
application of the estimated net proceeds therefrom. See "Use of Proceeds."
(4) Pro forma accumulated deficit reflects accretion of $12,121,000 related to
the issuance of conversion premium shares at an assumed value of
$ per share as a result of the conversion of the Series D Preferred Stock.
See Note 2 of Notes to Consolidated Financial Statements.
19
<PAGE> 21
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following Management's Discussion and Analysis of Financial Condition
and Results of Operations contains forward-looking statements relating to future
events or the future financial performance of the Company. All statements, trend
analyses and other information contained herein relative to markets for the
Company's products and trends in revenue, gross margin and anticipated expense
levels, as well as other statements including such words as "anticipate,"
"believe," "plan," "estimate," "expect," and "intend" and other similar
expressions constitute forward-looking statements. These forward-looking
statements are subject to business and economic risks, and the Company's actual
results of operations may differ materially from those contained in the
forward-looking statements as a result of certain factors, including those set
forth under "Risk Factors" and elsewhere in this Prospectus.
OVERVIEW
History
Building on its years of experience selling application development tools
for the IBM System 3X environment, the Company in 1988 introduced its first
integrated application development toolset, Synon/2E, in concert with IBM's
introduction of the AS/400 computer system. Aided by its marketing and
development relationships with IBM, the Company captured a leading position in
the AS/400 application development tools market and grew rapidly and profitably
in 1988 and 1989.
Due to a variety of factors, including increased competition, slowed growth
in the AS/400 market, the relocation of corporate and certain development
functions to the U.S. in 1990, reserves for excess facilities costs in the U.K.
in 1990 through 1992, and the write down of the value of an acquired distributor
business in 1992, the Company sustained net losses of $8.5 million, $6.3 million
and $10.7 million in 1990, 1991 and 1992, respectively. These net losses
generated substantial accumulated deficits of which $20.9 million remained as of
March 31, 1997. During this time, the Company raised approximately $15 million
of additional capital from existing venture capital investors and from IBM to
fund its operations. Additionally, the Company grew its professional services
business, primarily in North America, to provide necessary technology transfer
and customer implementation support for its products. The business returned to
modest profitability in 1993 on the strength of increased license revenue, third
party product offerings, services business expansion, growing maintenance
revenue from the Company's existing customer base and cost controls.
Recognizing the need to enhance its product line, the Company in 1992 began
developing its next generation, multi-platform product, Obsydian, which it
introduced in late 1994. Anticipating an emerging opportunity in the Windows NT
market, in January 1996 the Company entered into a sponsored development
agreement with Microsoft to accelerate the development of Obsydian's Windows NT
generator and enhance the marketing and promotion of the product. See
"Business -- Third Party Relationships." The Windows NT generator was released
in March 1997.
Revenue
Prior to the introduction of Obsydian in late 1994, all of the Company's
license revenue was generated from the Synon/2E product family. License revenue
from the Obsydian product family has grown rapidly in each of the three years
since the introduction of Obsydian, both in absolute dollars and as a percentage
of total revenue, while license revenue from the Synon/2E product family has
decreased, both in absolute dollars and as a percentage of total revenue. The
Company expects that license revenue from the Obsydian product family will
continue to account for an increasing percentage of total license revenue.
Moreover, notwithstanding an increase in license revenue from the Synon/2E
product family in the first quarter of 1997 as compared to the first quarter in
1996, the Company expects that such revenue will continue to decline both in
absolute dollars and as a percentage of total license revenue. In the event that
the decline in revenue from the Synon/2E product family is not more than offset
by growth in revenue attributable to the Obsydian product family, the Company's
results of operations will be
20
<PAGE> 22
materially adversely affected. See "Risk Factors -- Continued Importance of
Synon/2E; Dependence on Obsydian; Dependence on Market for High-End
Client/Server Application Development Tools."
Maintenance revenue, which has reflected the cumulative effect of increases
or decreases in license revenue over time, has not varied significantly in
absolute dollars or as a percentage of total revenue over the last nine
quarters. Through 1996, over 90% of total maintenance revenue was related to
licenses of the Synon/2E product family. The Company expects that maintenance
revenue related to the Synon/2E product family will begin to decline in future
periods, both in absolute dollars and as a percentage of total maintenance
revenue, as existing users of the Synon/2E product family migrate to the
Obsydian product family or otherwise cease to use the Synon/2E products, and
expects maintenance revenue related to the Obsydian product family to increase
as a percentage of total maintenance revenue.
Services revenue is comprised principally of professional services, which
constituted a significant portion of the Company's total revenue in each of
1994, 1995 and 1996. The Company views professional services, which consist of
application development, education, and consulting, as important to customers'
successful implementation of the Company's software products. The Company has
developed an extensive professional services practice in North America in order
to address the market opportunity there and derives a substantial majority of
its total services revenue from service projects in North America. Services
revenue in the remainder of the world is a smaller portion of total services
revenue because much of the services are provided by the Company's distributors.
The Company has historically derived a significant portion of its total
revenue from international operations. International revenue, which is defined
by the Company as revenue generated outside of North America, constituted 47%,
48%, 46% and 44% of total revenue, net of intercompany royalties, in 1994, 1995,
1996 and the first quarter of 1997, respectively. The Company's operating
subsidiaries pay royalties to the parent company for rights to technology
developed by the parent company in North America. See Note 10 of Notes to
Consolidated Financial Statements. The Company expects international revenue to
continue to account for a significant portion of total revenue for the
foreseeable future. The Company has not historically managed its foreign
currency exchange risks by entering into foreign currency management programs or
hedging transactions. As a result, the Company is exposed to currency exchange
fluctuation risks, as well as certain other financial risks associated with
international operations. Such risks with respect to international operations
(including export sales) include fluctuations among and between the United
States dollar, British pound sterling, German deutschemark, Japanese yen, French
franc and Italian lira. The Company's sales outside the U.S. are made primarily
through its foreign subsidiaries and are denominated in the local currencies of
the countries in which such subsidiaries are based. The Company's direct export
sales are limited and generally are priced in U.S. Dollars. The Company's
foreign subsidiaries are obligated to pay the Company royalties based upon sales
in their respective geographic regions, which typically are denominated in the
local currency of the foreign subsidiary. Foreign currency transaction gains and
losses arising from the change in foreign exchange rates between the dates of
booking and collecting the intercompany receivable are credited to or charged
against earnings in the period incurred. As a result, fluctuations in the value
of the currencies in which the Company conducts its business have caused and
will continue to cause currency transaction gains and losses with their
associated impact on results of operations and liquidity. In 1996, the Company
incurred $167,000 in foreign currency transaction losses, compared to a $227,000
gain in 1995. The Company incurred a $225,000 foreign currency transaction loss
in the first quarter of 1997.
Additional risks inherent in the Company's international business
activities generally include the impact of possible recessionary environments in
economies outside the United States, unexpected changes in government policies
and regulatory requirements, tariffs, export controls and other trade barriers,
costs of localizing products for foreign markets, lack of acceptance of
localized products in foreign countries, longer accounts receivable payment
cycles, difficulties and costs of staffing and managing international
operations, potentially adverse tax consequences, restrictions on the
repatriation of earnings, the burdens of complying with a wide variety of
foreign laws and transportation delays. In addition, various countries in which
the Company operates, particularly those in Asia, Africa and Latin America, are
subject to political and economic instability which may adversely impact the
Company's
21
<PAGE> 23
results of operations in those areas. There can be no assurance that the Company
or its distributors will be able to sustain or increase international revenue
from licenses or from maintenance or professional services, or that the
foregoing factors will not have a material adverse effect on the Company's
results associated with its international operations, and, consequently, on the
Company's overall business, operating results and financial condition. See
"Business -- Sales and Marketing" and "Risk Factors -- Risks Associated with
International Operations."
Channel Mix
The Company markets its software primarily through its direct sales force
in North America, the United Kingdom, France, Italy and Australia, and through
distributors in the remainder of Europe, Latin America and Asia. Most of the
Company's foreign distributors (other than those in Japan) have the principal
relationship with the customers and perform first-level customer support and
maintenance services. License revenue from the Company's distributors accounted
for approximately 26%, 21%, 30% and 23% of the Company's total license revenue
in 1994, 1995, 1996 and the first quarter of 1997, respectively. The Company's
ability to achieve significant revenue growth in the future will depend in part
on its success in maintaining existing relationships with its distributors and
in developing new relationships with distributors, independent software vendors
and systems integrators. See "Risk Factors -- Risks Associated with Distribution
Channels."
Revenue Recognition
The Company recognizes software license revenue when the end user customer
executes a non-cancelable license agreement either with the Company or one of
its distributors and the product has been shipped to the customer, provided that
no significant contractual obligations remain and collection of the related
receivable is considered probable by management. Maintenance revenue from
customer maintenance, support and upgrade service agreements is recognized
ratably over the maintenance period, which is typically twelve months. The
Company provides most of its services under time and materials arrangements and
recognizes revenue for these engagements as services are performed. In addition,
the Company has in the past undertaken several fixed-price application
development projects. Approximately 19%, 15%, 12% and 15% of the Company's
services revenue in 1994, 1995, 1996 and the quarter ended March 31, 1997,
respectively, was generated from fixed-price contracts. The Company recognizes
revenue for these projects on a percentage of completion basis. Such revenue
recognition requires the ongoing estimation of percentage of completion on a
project. Company management relies on its services account managers and services
executives to make monthly estimates for these projects and applies periodic
project reviews by separate Quality Assurance staff. In an effort to ensure that
its estimates are conservative, the Company excludes and defers a portion of the
project revenue from its percentage completion revenue calculations until the
project is complete or key milestones have been accomplished. To the extent the
Company's estimates of project completion prove to be inaccurate, the Company's
operating results in future periods will be affected by adjustments as the
estimates are revised. In addition, management is required to make estimates and
assumptions in connection with determining the technological feasibility of
software under development, related research and development cost capitalization
and product life amortization periods for capitalized software costs. See Note 1
of Notes to Consolidated Financial Statements.
22
<PAGE> 24
RESULTS OF OPERATIONS
The following table sets forth the consolidated statement of operations
data of the Company expressed (except where otherwise indicated) as a percentage
of total revenue for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER QUARTER ENDED
31, MARCH 31,
---------------------- -------------
1994 1995 1996 1996 1997
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Revenues:
License............................................... 36% 31% 29% 20% 24%
Maintenance........................................... 29 30 28 32 29
Services.............................................. 35 39 43 48 47
--- --- --- --- ---
Total revenues................................ 100 100 100 100 100
Cost of revenues:
License(1)............................................ 19 19 14 20 17
Maintenance(2)........................................ 23 25 28 28 29
Services(3)........................................... 75 78 81 83 77
--- --- --- --- ---
Total cost of revenues........................ 40 44 47 53 48
Gross profit.......................................... 60 56 53 47 52
Operating expenses:
Sales and marketing................................ 39 37 33 32 31
Research and development........................... 6 7 8 9 8
General and administrative......................... 12 11 10 10 11
Amortization of goodwill........................... 0 0 0 0 0
--- --- --- --- ---
Total operating expenses...................... 57 55 51 51 50
Operating income (loss)................................. 3 1 2 (4) 2
Interest income (expense), net.......................... 0 0 0 0 0
Other income (expense), net............................. 0 0 0 0 (1)
--- --- --- --- ---
Income (loss) before income taxes....................... 3 1 2 (4) 1
Provision (benefit) for income taxes.................... 1 0 1 (1) 0
--- --- --- --- ---
Net income (loss)....................................... 2 % 1 % 1 % (3)% 1 %
=== === === === ===
</TABLE>
- ---------------
(1) Shown as a percentage of license revenue.
(2) Shown as a percentage of maintenance revenue.
(3) Shown as a percentage of services revenue.
Quarters Ended March 31, 1996 and 1997
License Revenue. License revenue consists of fees from the licensing of the
Company's products. License revenue increased 29% from $3.5 million in the first
quarter of 1996 to $4.5 million in the first quarter of 1997 and comprised 20%
and 24%, respectively, of total revenue in those quarters. The increase
reflected continued growth in Obsydian product family sales and strong sales of
Synon/2E - related products, especially in North America. License revenue from
the Obsydian product family increased from $1.7 million in the first quarter of
1996 to $2.1 million in the same quarter of 1997 and comprised 49% and 47%,
respectively, of total license revenue in these quarters. License revenue from
the Synon/2E product family increased from $1.8 million in the first quarter of
1996 to $2.4 million in the same quarter of 1997 and comprised 51% and 53%,
respectively, of total license revenue in these quarters.
23
<PAGE> 25
Maintenance Revenue. Maintenance revenue consists of fees received under
maintenance, support and upgrade agreements, which typically have a term of
twelve months. Maintenance agreements for the Synon/2E product family are
typically priced at a percentage of the list price of the license annually.
Maintenance agreements for the Obsydian product family consist of separate
customer support and upgrade agreements. See "Technology and Products."
Maintenance revenue in the first quarter of 1997 declined 1% from the first
quarter of 1996, continuing the trend of maintenance revenue remaining
essentially flat compared to the prior year, and comprised 32% and 29%,
respectively, of total revenue in those quarters.
Services Revenue. Services revenue consists of fees for education,
consulting and application development services designed to assist effective
customer use of Synon's technology. Services revenue increased 6% from $8.2
million in the first quarter of 1996 to $8.6 million in the first quarter of
1997 and comprised 48% and 47%, respectively, of total revenue in those
quarters. Services revenue in the first quarter of 1996 was negatively affected
by two fixed-price projects. The Company recognized reduced revenue per hour on
these contracts in accordance with the percentage of completion revenue
recognition method. See "--Overview--Revenue Recognition" above.
Cost of License Revenue. Cost of license revenue includes costs directly
associated with software products sold, including tangible product costs of
media and documentation, royalties associated with the sale of Obsydian and
third party products and amortization of capitalized software development costs.
Product economic lives used for amortization of capitalized development costs
have been consistently estimated at 60 months, based on the Company's history of
product life as measured by continuing material sales of product. As a primary
product nears the end of its economic life, the capitalized cost of major
enhancements typically is amortized over the remaining life of the primary
product. In addition to Obsydian royalty expense, the Company incurs the cost of
royalties payable to certain third party software companies from which the
Company has licensed software products complementary to Synon/2E for resale to
its customers. Royalty rates vary from 25% to 50% of the license fee and
typically are payable to the third party when payment is received from the
customer. Revenue from third party licensed products relating to Synon/2E has
decreased substantially since the introduction of Obsydian and is expected to
continue to decrease until additional products complementary to the Obsydian
product are selected and offered for sale. Cost of license revenue, excluding
amortization of capitalized software development costs, increased 118% from
$144,000 in the first quarter of 1996 to $314,000 in the first quarter of 1997
and increased from 4% to 7%, respectively, of license revenue in those quarters.
The absolute dollar increase was primarily due to a $75,000 increase in tangible
product costs related primarily to license volume increases in the first quarter
of 1997. Amortization of software development costs, which is included in
reported cost of revenue, totaled $544,000 and $460,000 in the first quarter of
1996 and 1997, respectively, reflecting a change in mix of remaining capitalized
assets and their related useful lives. The Company expects cost of license
revenue to increase in future periods due in part to increased royalties
associated with Obsydian and third party technology incorporated into the
Company's products and to increased tangible product cost.
Cost of Maintenance Revenue. Cost of maintenance revenue consists primarily
of compensation and other costs for customer support personnel, facilities and
equipment costs, third party royalties related to maintenance revenue and the
tangible costs of media, documentation and shipping relating to product updates
and new releases provided to customers. Cost of maintenance revenue, after
rounding, increased 3% from $1.5 million in the first quarter of 1996 to $1.5
million in the first quarter of 1997 and increased from 28% to 29%,
respectively, of maintenance revenue in those quarters. The increases were
attributable primarily to staffing increases in 1996 necessary to support the
increase in number of Obsydian customers. This growth was partially offset by a
reduction in tangible product costs in the first quarter of 1997 because the
Company shipped fewer copies of new releases of the Obsydian product to existing
customers in that quarter than in the same quarter of 1996. The Company expects
that cost of maintenance revenue will increase in future periods due in part to
increases in personnel required to support a larger number of customers.
24
<PAGE> 26
Cost of Services Revenue. Cost of services revenue consists primarily of
compensation and other costs for personnel providing education, consulting and
application development services to Synon's customers, as well as facilities and
equipment costs and travel costs relating to services engagements. Cost of
services revenue decreased 2% from $6.8 million in the first quarter of 1996 to
$6.6 million in the first quarter of 1997 and decreased from 83% to 77%,
respectively, of services revenue in those quarters. The decreases were
primarily due to higher costs incurred in the first quarter of 1996 in
connection with two fixed priced service projects and to higher overall staff
utilization in the first quarter of 1997. The Company has made a significant
investment in the internal training of its services personnel in order to
provide quality education, consulting and application development services to
its customers for the Obsydian product. The Company expects cost of services
revenue to increase in future periods.
Sales and Marketing. Sales and marketing expenses consist primarily of
compensation for sales and marketing personnel and costs of travel,
entertainment, facilities and equipment, marketing materials, advertising, trade
shows and other marketing programs. Sales and marketing expenses increased 4%
from $5.4 million in the first quarter of 1996 to $5.6 million in the first
quarter of 1997 and decreased from 32% to 30%, respectively, of total revenue in
those quarters. The dollar increase was due primarily to staffing increases and
associated costs incurred during the second half of 1996 and to fewer staff
vacancies in the first quarter of 1997 than in the first quarter of 1996. The
Company expects increased sales and marketing costs in 1997 as a result of costs
associated with the introduction and promotion of the Obsydian Windows NT
generator and the development of alternative sales channels.
Research and Development. Research and development expenses consist
primarily of compensation and other personnel related expenses and costs for
computers, software, facilities and other equipment associated with the
development of new products and the enhancement of existing products. The
Company capitalizes the cost of research and development after technological
feasibility has been established according to the requirements of Financial
Accounting Standards ("FAS") No. 86. The determination of technological
feasibility for a product or major product enhancement is generally made
following completion of a program design, according to established policies and
practices which have been consistently applied since the adoption of FAS No. 86.
Research and development expenses, before capitalization of software development
costs, remained essentially flat at $2.2 million in the first quarter of 1996
and the first quarter of 1997 and decreased from 13% to 12%, respectively, of
total revenue in those quarters. Capitalized software development costs
increased by approximately $54,000 in the first quarter of 1997 compared to the
first quarter of 1996 due primarily to the costs associated with developing and
deploying the Windows NT generator and a major release of the Obsydian product.
Research and development costs, including capitalization of software development
costs, remained relatively flat from quarter to quarter. The Company expects
research and development expenses to increase in future periods.
General and Administrative. General and administrative expenses consist
primarily of personnel costs for finance, human resources, internal systems and
general management functions as well as related facility and equipment costs,
professional fees and bad debt expenses. General and administrative costs
increased 17% from $1.8 million in the first quarter of 1996 to $2.1 million in
the first quarter of 1997 and increased from 10% to 11%, respectively, of total
revenue in these quarters. These increases were due primarily to increases in
information systems staff and increased costs associated with internal system
development. The Company expects that general and administrative costs will
continue to increase as the Company invests in internal systems and incurs costs
associated with operating as a public company.
Interest Income (Expense), Net. Interest income (expense) includes interest
expense from capital lease obligations and an IBM development loan offset by
interest earned on cash balances. The Company reported net interest expense of
$9,000 during the first quarter of 1996 compared with net interest income of
$4,000 in the first quarter of 1997. The change was due primarily to the
repayment in full of the remaining balance of the IBM development loan in
December 1996 and a reduction of capital lease obligations in 1996.
25
<PAGE> 27
Other Income (Expense), Net. Other income (expense) consists primarily of
foreign currency gains and losses. Other expense increased from $18,000 in the
first quarter of 1996 to $225,000 in the first quarter of 1997 and was comprised
almost entirely of foreign currency losses.
Income Taxes. The Company's estimated effective income tax rate of 25% for
1997 applied to the first quarter remained essentially unchanged from the 1996
rate due to continued utilization of tax benefit carryovers. The Company has
significant net operating loss, foreign tax credit and other credit carryovers.
These net operating loss carryforwards and credit carryforwards are available
only to offset future taxable income of the subsidiary which generated such
losses or tax credits. Special restrictions under applicable tax laws may limit
the utilization of these net operating loss carryfowards and credit
carryforwards. Such limitations may be triggered by various factors, including
completion of this Offering. The Company expects its effective income tax rate
to increase as it utilizes its tax benefit carryovers, or is limited in its
ability to utilize such carryovers. See Note 9 of Notes to Consolidated
Financial Statements.
Years Ended December 31, 1994, 1995 and 1996
License Revenue. License revenue decreased 6% from $23.3 million in 1994 to
$22.0 million in 1995 and decreased 1% to $21.8 million in 1996. License revenue
represented 36%, 31% and 29% of total revenue in 1994, 1995 and 1996,
respectively. The decreases in absolute dollars and as a percentage of total
revenue in both 1995 and 1996 reflects a decline in the number of Synon/2E
product family licenses, which was only partially offset in both years by growth
in the number of licenses of the new Obsydian product family following its
introduction late in 1994. License revenue from the Obsydian product family has
grown rapidly, from $3.1 million in 1994 to $8.9 million in 1995 and to $12.0
million in 1996 and comprised 13%, 40% and 55%, respectively, of total license
revenue in those years. License revenue from the Synon/2E product family has
declined since the introduction of the Obsydian product, from $20.2 million in
1994 to $13.1 million in 1995 and to $9.8 million in 1996 and comprised 87%, 60%
and 45%, respectively, of total license revenue in those years. The decline in
Synon/2E product family sales reflects reduced demand for the Synon/2E product
family and a change in sales focus by direct sales channels from Synon/2E to
Obsydian. The decline in Synon/2E product family sales was expected after the
introduction of the Obsydian product and the change in sales focus by the
Company's direct sales channel.
Initially, the Company sold Obsydian licenses primarily to existing
Synon/2E customers, primarily through its direct sales channels. These existing
Synon/2E customers accounted for 91% and 72% of Obsydian license revenue in 1994
and 1995, respectively. In 1996 the Company derived an increasing percentage of
its Obsydian license revenue from new customers, which the Company believes was
due to Obsydian's improved functionality and a greater number of customer
references for Obsydian. These new customers accounted for 9%, 28% and 40% of
Obsydian product family license revenue in 1994, 1995 and 1996, respectively. In
late 1995 and in 1996, Obsydian sales were increasingly generated by
international distributors, especially those in Europe and Latin America, as
they focused sales resources on Obsydian.
Maintenance Revenue. Maintenance revenue increased 12% from $18.8 million
in 1994 to $21.1 million in 1995 and increased 1% to $21.3 million in 1996.
Maintenance revenue represented 29%, 30% and 28% of total revenues in 1994, 1995
and 1996, respectively. Maintenance revenue increased in absolute dollars in
1995 and 1996 due to the provision of maintenance, customer support and upgrades
to a larger installed customer base in each of those years, but the rate of
growth decreased from 1995 to 1996. Synon/2E maintenance revenue declined on an
annual basis from 1995 to 1996 by approximately 7%, reflecting lower Synon/2E
license sales and typical attrition of Synon/2E maintenance customers. The
Synon/2E maintenance revenue decline from 1995 to 1996 was offset by a 152%
increase in Obsydian maintenance revenue. Although there was no Obsydian
maintenance revenue in 1994 because the product was introduced late in that
year, Obsydian maintenance revenue comprised 5% and 12% of total maintenance
revenue in 1995 and 1996, respectively.
26
<PAGE> 28
Services Revenue. Services revenue increased 19% from $23.2 million in 1994
to $27.7 million in 1995 and increased 19% to $33.0 million in 1996. Services
revenue represented 35%, 39% and 43% of total revenues in 1994, 1995 and 1996,
respectively. Synon/2E projects accounted for the majority of services revenue
in each of 1994, 1995 and 1996, reflecting continued strong use of the Synon/2E
technology in the market and the mix of the Company's project work. Services
revenue in each year was derived primarily from projects in North America, where
the Company generated approximately 71%, 71% and 73% of its total services
revenue in 1994, 1995 and 1996, respectively.
The Company's services revenue, as well as the related gross margins, for
1995 and 1996 was negatively impacted by reduced revenue per hour recognized in
connection with the completion of certain fixed-price projects in those years.
The Company has implemented new practices intended to enable the Company to more
effectively evaluate its ability to achieve the result required by a fixed-price
engagement at the agreed-upon price. For example, before it accepts any large
fixed-price engagement, the Company now undertakes a design phase engagement for
each project to more accurately define that project's scope and risks. As of
December 31, 1996, the Company had completed all significant fixed price
engagements undertaken prior to the implementation of these policies. The
Company continues to accept work under fixed-price contracts and faces risks
inherent to such contracts. See "Risk Factors -- Potential Financial Exposure
from Fixed-Price Contracts."
Cost of License Revenue. Cost of license revenue, excluding amortization of
capitalized software development costs, decreased 32% from $2.3 million in 1994
to $1.6 million in 1995 and further decreased 27% to $1.1 million in 1996. Cost
of license revenue, excluding amortization of capitalized software development
costs, was 10%, 7% and 3% of license revenue in 1994, 1995 and 1996,
respectively. In each year, the largest contributing factor to the decrease was
a decline in third party royalty costs, which decreased from $1.7 million in
1994 to $745,000 in 1995 and to $322,000 in 1996, due to the reduction in sales
of third party products related to Synon/2E. The decreases in third party
royalty costs were partially offset by increased royalties of $257,000 and
$319,000 in 1995 and 1996, respectively, relating to increased sales of
Obsydian. The royalties due in connection with Obsydian license sales will be
approximately 1.7% of such sales in 1997 and are payable only with respect to
license agreements entered into through June 30, 1999. See "Certain
Transactions." Amortization of capitalized software development costs, which is
included in reported cost of license revenue, totaled $2.1 million, $2.5 million
and $2.0 million in 1994, 1995 and 1996, respectively. The amortized amount of
capitalized software development costs decreased in 1996 because most of such
costs related to the Synon/2E product family had been fully amortized by the end
of 1995 and the capitalized costs of Obsydian and the Windows NT generator were
early in their amortization lives.
Cost of Maintenance Revenue. Cost of maintenance revenue increased 22% from
$4.3 million in 1994 to $5.2 million in 1995 and increased 15% to $6.0 million
in 1996 and represented 23%, 25% and 28%, respectively, of maintenance revenue
in those years. The increases in each year were primarily due to increases in
the number of customer support personnel necessary to maintain and support the
Obsydian product family.
Cost of Services Revenue. Cost of services revenue increased 25% from $17.4
million in 1994 to $21.6 million in 1995 and increased 24% to $26.9 million in
1996 and represented 75%, 78% and 81%, respectively, of services revenue in
those years. The increases in each year were principally the result of higher
internal Obsydian training costs for consultants and excess labor costs on
certain fixed-price projects, particularly in the first quarter of 1996. The
projects caused lower gross margins on services revenue until their completion
in 1996. See "-- Services Revenue" and "-- Overview -- Revenue Recognition."
Sales and Marketing. Sales and marketing expenses increased 1% from $25.7
million in 1994 to $25.9 million in 1995 but decreased by 3% to $25.0 million in
1996. Sales and marketing expenses were 39%, 37% and 33% of total revenue in
1994, 1995 and 1996, respectively. The decrease in sales and marketing expenses
in 1996 was due primarily to a reduction in the sales force in North America,
Asia and Japan in 1996, and the conversion of Germany, Holland and South Africa
from direct sales territories to
27
<PAGE> 29
territories served by distributors. The decrease in 1996 was partially offset by
approximately $659,000 of severance and other costs associated with the closing
of direct sales operations in those territories.
Research and Development. Research and development expenses, before
capitalization of software development costs, increased 6% from $6.7 million in
1994 to $7.2 million in 1995 and increased 20% to $8.6 million in 1996. Research
and development expenses, before capitalization of software development costs,
represented 10%, 10% and 11% of total revenue in 1994, 1995 and 1996,
respectively. The Company capitalized $2.6 million, $2.2 million and $2.6
million of software development costs in 1994, 1995 and 1996, respectively. The
decrease in capitalized software costs from 1994 to 1995 was due to higher
capitalized costs in 1994 associated with the completion and first release of
the Obsydian product. The increase in capitalized software costs from 1995 to
1996 was due to significant enhancements made to the Obsydian product and the
completion of development of the first release of the Windows NT generator in
1996. See "-- Cost of License Revenue."
General and Administrative. General and administrative expenses increased
5% from $7.6 million in 1994 to $8.0 million in 1995 and decreased 9% to $7.3
million in 1996. General and administrative expenses were 12%, 11% and 10% of
total revenue in 1994, 1995 and 1996, respectively. The increase in 1995
reflected higher bad debt expense during the year. Other than the increased bad
debt expense in 1995, general and administrative expenses in both absolute
dollars and as a percentage of total revenue decreased during 1995 and 1996 due
primarily to staff reductions.
Interest Income (Expense), Net. Net interest expense decreased 34% from
$282,000 in 1994 to $185,000 in 1995 and further decreased 75% to $47,000 in
1996. The decreases in each year were the result of reductions in the Company's
capital lease and loan obligations.
Other Income (Expense), Net. Net other income was $232,000 in 1994 and
$267,000 in 1995 due primarily to foreign exchange gains of $216,000 in 1994 and
$227,000 in 1995. Net other expense of $162,000 in 1996 was due primarily to a
$167,000 foreign exchange loss in that year.
Income Taxes. The Company's effective income tax rate was 25% for each of
1994, 1995 and 1996, due primarily to utilization of net operating loss
carryforwards and foreign tax credits. The Company has significant net operating
loss, foreign tax credit and other credit carryovers. These net operating loss
carryforwards and credit carryforwards are available only to offset future
taxable income of the subsidiary which generated such losses or tax credits.
Special restrictions under applicable tax laws may limit the utilization of
these net operating loss carryforwards and credit carryforwards. Such
limitations may be triggered by various factors, including completion of this
Offering. See Note 9 of Notes to Consolidated Financial Statements. The Company
expects its effective income tax rate to increase as it utilizes its tax benefit
carryovers, or is limited in its ability to utilize such carryovers.
28
<PAGE> 30
QUARTERLY RESULTS
The following table sets forth consolidated statements of operations data
for each of the nine quarters in the period ended March 31, 1997, and the
percentage of the Company's total revenue represented by each item of the
respective quarter. This information has been derived from unaudited
consolidated financial statements that, in the opinion of management, reflect
all adjustments (consisting only of normal recurring accruals) necessary to
fairly present this information when read in conjunction with the Consolidated
Financial Statements and Notes thereto appearing elsewhere in this Prospectus.
The results of operations for any quarter are not necessarily indicative of the
results for a full year or results to be expected for any future period.
<TABLE>
<CAPTION>
QUARTER ENDED
---------------------------------------------------------------------------------------------------
JUNE JUNE
MARCH 31, 30, SEPT. 30, DEC. 31, MARCH 31, 30, SEPT. 30, DEC. 31, MARCH 31,
1995 1995 1995 1995 1996 1996 1996 1996 1997
--------- ------- --------- -------- --------- ------- --------- -------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
License................... $ 4,303 $ 4,562 $ 4,631 $ 8,493 $ 3,471 $ 5,097 $ 5,187 $ 8,046 $ 4,476
Maintenance............... 5,160 5,278 5,266 5,349 5,384 5,117 5,340 5,480 5,352
Services.................. 6,964 6,912 6,772 7,092 8,161 8,380 7,519 8,949 8,644
------- ------- ------- ------- ------- ------- ------- ------- -------
Total revenues.......... 16,427 16,752 16,669 20,934 17,016 18,594 18,046 22,475 18,472
Cost of revenues:
License................... 1,038 984 931 1,140 688 843 766 836 774
Maintenance............... 1,375 1,273 1,233 1,307 1,481 1,473 1,515 1,515 1,530
Services.................. 5,428 5,326 5,083 5,798 6,774 6,988 6,487 6,636 6,634
------- ------- ------- ------- ------- ------- ------- ------- -------
Total cost of
revenues.............. 7,841 7,583 7,247 8,245 8,943 9,304 8,768 8,987 8,938
Gross profit................ 8,586 9,169 9,422 12,689 8,073 9,290 9,278 13,488 9,534
Operating expenses:
Sales and marketing....... 6,558 6,844 6,045 6,472 5,391 5,952 5,873 7,818 5,614
Research and
development............. 1,273 1,268 1,211 1,190 1,569 1,356 1,396 1,601 1,485
General and
administrative.......... 1,955 1,942 1,960 2,154 1,800 1,943 1,724 1,853 2,101
Amortization of
goodwill................ 31 32 32 30 31 31 32 31 31
------- ------- ------- ------- ------- ------- ------- ------- -------
Total operating
expense............... 9,817 10,086 9,248 9,846 8,791 9,282 9,025 11,303 9,231
Operating income (loss)..... (1,231) (917) 174 2,843 (718) 8 253 2,185 303
Interest income (expense),
net....................... (59) (47) (36) (43) (9) (8) (10) (20) 4
Other income (expense),
net....................... 344 77 (26) (128) (18) (113) (31) -- (225)
------- ------- ------- ------- ------- ------- ------- ------- -------
Income (loss) before income
taxes..................... (946) (887) 112 2,672 (745) (113) 212 2,165 82
Provision (benefit) for
income taxes.............. (237) (222) 28 668 (186) (28) 53 541 21
------- ------- ------- ------- ------- ------- ------- ------- -------
Net income (loss)........... $ (709) $ (665) $ 84 $ 2,004 $ (559) $ (85) $ 159 $ 1,624 $ 61
======= ======= ======= ======= ======= ======= ======= ======= =======
Net income (loss) per common
share..................... $ (0.20) $ (0.18) $ 0.01 $ 0.26 $ (0.15) $ (0.02) $ 0.02 $ 0.20 $ 0.01
======= ======= ======= ======= ======= ======= ======= ======= =======
Weighted average shares
outstanding............... 3,636 3,637 7,844 7,842 3,626 3,651 7,865 7,939 8,226
</TABLE>
<TABLE>
<CAPTION>
AS A PERCENTAGE OF TOTAL REVENUE, UNLESS OTHERWISE INDICATED
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
License................... 26% 27% 28% 41% 20% 27% 28% 36% 24%
Maintenance............... 32 32 31 25 32 28 30 24 29
Services.................. 42 41 41 34 48 45 42 40 47
--- --- --- --- --- --- --- --- ---
Total revenues.......... 100 100 100 100 100 100 100 100 100
Cost of revenues:
License(1)................ 24 22 20 13 20 17 15 10 17
Maintenance(2)............ 27 24 23 24 28 29 28 28 29
Services(3)............... 78 77 75 82 83 83 86 74 77
--- --- --- --- --- --- --- --- ---
Total cost of
revenues.............. 48 45 43 39 53 50 49 40 48
Gross profit................ 52 55 57 61 47 50 51 60 52
Operating expenses:
Sales and marketing....... 40 40 37 31 32 33 33 35 31
Research and
development............. 8 8 7 6 9 7 8 7 8
General and
administrative.......... 12 12 12 10 10 10 9 8 11
Amortization of
goodwill................ 0 0 0 0 0 0 0 0 0
--- --- --- --- --- --- --- --- ---
Total operating
expense............... 60 60 56 47 51 50 50 50 50
Operating income(loss)...... (7) (5) 1 14 (4) 0 1 10 2
Interest income (expense),
net....................... 0 0 0 0 0 0 0 0 0
Other income (expense),
net....................... 2 0 0 (1) 0 (1) 0 0 (1)
--- --- --- --- --- --- --- --- ---
Income(loss) before income
taxes..................... (5) (5) 1 13 (4) (1) 1 10 1
Provision(benefit) for
income taxes.............. (1) (1) 0 3 (1) 0 0 2 0
--- --- --- --- --- --- --- --- ---
Net income(loss) (4)% (4)% 1% 10% (3)% (1)% 1% 8% 1%
=== === === === === === === === ===
</TABLE>
- ---------------
(1) Shown as a percentage of license revenue.
(2) Shown as a percentage of maintenance revenue.
(3) Shown as a percentage of services revenue.
29
<PAGE> 31
VARIABILITY OF QUARTERLY RESULTS
The Company's business has experienced and is expected to continue to
experience significant seasonality, in part due to customer buying patterns and
lower demand in the summer months, particularly in Europe. In recent years, the
Company has generally had stronger sales of its software products in the quarter
ending in December and weaker sales in the following quarter. License revenue in
the fourth quarter of 1994, 1995 and 1996 represented 36%, 39% and 37%,
respectively, of full year license revenue. The fourth quarter revenue pattern
reflects the Company's end of year sales quotas and sales incentives, customer
purchasing and capital budgeting patterns and general software industry trends.
The Company expects this quarterly pattern to continue in the future. Due
primarily to information technology ("IT") department purchasing patterns and
certain sales staff turnover between quota years, the Company's first quarter
license revenue has typically been weaker than in other quarters. In addition,
license revenue in the third quarter has historically been relatively flat
compared to the second quarter as a result of generally reduced economic
activity in the summer months, particularly in Europe. The Company believes that
these trends are likely to continue.
The Company recorded higher than normal license revenue in the fourth
quarter of 1995 due to the recognition of approximately $587,000 of Obsydian
license revenue attributable to products sold in prior quarters, which license
revenue was deferred and not recognized until the related AS/400 NPT generator
was delivered in December 1995. In addition, many customers delayed making
purchases of the Obsydian product until the AS/400 NPT generator was available,
contributing to an increased level of revenue in the fourth quarter 1995.
The Company's primary annual user group conference was held in the third
quarter of 1994, the first quarter of 1995, and the second quarter of 1996. Fees
collected from those user group conferences contributed $614,000, $426,000 and
$428,000, respectively, to service revenues in those quarters. The Company's
user group conferences in general approximately break even, and accordingly the
expenses associated with these conferences increased cost of services revenue by
an amount similar to related revenue in each of these quarters. The Company's
European operations hold a user conference in the fourth quarter of each year,
having a similar but smaller effect on services revenue and cost of services
revenue.
Sales and marketing expenses decreased in the first three quarters of 1996
compared to each quarter of 1995, due primarily to sales staff reductions and
reduced costs associated with marketing programs. In 1996, additional expense
reductions were realized in the third quarter because the savings from the
conversion of the Germany, Holland and South Africa direct sales territories to
distributor territories were no longer offset by severance and other closure
costs as they had been in the first two quarters of 1996. The increase in sales
and marketing expenses in the fourth quarter of each year reflects typical
increased compensation associated with higher license revenue.
The Company typically ships product orders shortly after receipt, and
consequently, order backlog at the beginning of any quarter has in the past
represented an inconsequential portion of that quarter's revenue. As a result,
to achieve its quarterly revenue objectives, the Company is dependent upon
obtaining orders in any given quarter for shipment in that quarter. Furthermore,
the Company has often recognized a substantial portion of its revenue in the
last month, or even weeks or days, of a quarter and therefore quarterly revenue
is difficult to predict with any significant degree of accuracy. The Company's
expense levels are based, in significant part, on the Company's expectations as
to future revenue and are therefore relatively fixed in the short term. If
revenue levels fall below expectations, net income is likely to be
disproportionately adversely affected because a proportionately smaller amount
of the Company's expenses varies with its revenue. There can be no assurance
that the Company will be able to achieve or maintain profitability on a
quarterly or annual basis in the future. Due to all of the foregoing factors, it
is likely that in some future quarter the Company's operating results will be
below the expectations of public market analysts and investors. In such event,
the price of the Company's Common Stock would likely be materially adversely
affected. See "Risk Factors -- No Prior Market; Possible Volatility of Stock
Price."
30
<PAGE> 32
LIQUIDITY AND CAPITAL RESOURCES
The Company has funded its operations since 1991 primarily by cash
generated from operations and through private sales of preferred equity
securities. For the three months ended March 31, 1997, approximately $2.7
million of cash was provided by operations due to the collection in cash of
significant fourth quarter 1996 license revenue. During 1994, 1995 and 1996,
approximately $4.8 million, $3.6 million and $3.5 million, respectively, of cash
was generated by operations, primarily as a result of net income and
depreciation and amortization, somewhat offset by growth in accounts receivable.
Cash generated by operations was further reduced by approximately $2.6 million,
$2.2 million and $2.6 million in 1994, 1995 and 1996, respectively, for research
and development costs incurred by the Company which were capitalized according
to FAS No. 86.
The Company used cash for the acquisition of property and equipment, of
approximately $2.0 million, $1.0 million, $1.8 million and $609,000 in 1994,
1995, 1996 and the first quarter of 1997, respectively. These investing
activities were partially offset in 1994 by cash received from the repayment of
certain loans made to former officers of the Company.
During 1994, 1995 and 1996 and the quarter ended March 31, 1997, the
Company did not incur any additional debt. The Company used cash generated by
operations to repay IBM approximately $325,000, $500,000, and $675,000 of its
development loan during 1994, 1995 and 1996, respectively, and to pay down
capital lease obligations by approximately $1.3 million, $877,000 and $517,000,
in 1994, 1995 and 1996, respectively. The IBM loan was paid in full by December
31, 1996.
As of March 31, 1997, the Company had approximately $2.5 million of cash
and cash equivalents and a working capital deficit of $1.5 million. The net
losses sustained by the Company in 1990, 1991 and 1992, and the fact that the
Company has not engaged in significant financing activities and has experienced
only limited profitability since that time, have prevented the Company from
significantly increasing its cash and cash equivalents, or reducing its current
liabilities. As a result, the Company had a working capital deficit in each of
the last three years. The Company had available a working capital line of credit
agreement with Silicon Valley Bank (the "Bank") that expired on July 14, 1997,
secured by substantially all of the Company's assets. The Company has obtained a
one month extension on such line of credit. The line of credit bears interest at
1.25% above the Bank's prime rate (8.5% as of April 30, 1997) and drawings are
available up to 70% of eligible receivables. Under the line of credit, the Bank
is committed to lend up to a maximum of $4.0 million, of which $3.6 million was
available as of March 31, 1997 based on eligible receivables. The Company's line
of credit contains certain affirmative and restrictive covenants that are
typical of commercial lending arrangements. From time to time the Company has
not been in compliance with such covenants, although to date the Company has
obtained waivers from the Bank with respect to such noncompliance. There can be
no assurance that the Company will comply with these restrictions and covenants
in the future or be able to obtain waivers from the Bank in the event of
noncompliance. There were no borrowings under the line of credit at December 31,
1996 or March 31, 1997.
The Company has approximately 34,406 square feet in excess facilities in
the United Kingdom under long term lease agreements which expire December 1999
through December 2014. These facilities are currently subleased to third parties
at rates which are in some cases below that which the Company is obligated to
pay and for periods less than the lease term for which the Company is obligated.
The maximum undiscounted obligation for this excess space, net of sublease
income as of December 31, 1996, assuming all break clauses in existing leases
are exercised and the Company is unable to sublet the facilities, is
approximately $16.6 million. The Company has accrued approximately $500,000 for
such excess space as of December 31, 1996, in part due to improvement in the
United Kingdom rental market and recent successes in subletting space. However,
there can be no assurance that such rental market will not be negatively
impacted in the future. See Note 12 of Notes to Consolidated Financial
Statements.
The Company has had limited cash on hand to purchase equipment and internal
systems and expects to use certain proceeds from the Offering to invest in these
areas. See "Use of Proceeds."
31
<PAGE> 33
The Company believes that the net proceeds from this Offering, together
with available funds, its existing line of credit and the cash flows expected to
be generated by operations, will be sufficient to meet its anticipated cash
needs for working capital and capital expenditures for at least the next twelve
months. Thereafter, if cash generated by operations is insufficient to satisfy
the Company's liquidity requirements, the Company may, subject to adequate
market conditions, attempt to sell additional equity or debt securities or
obtain additional credit facilities. Any sale of additional securities may
result in additional dilution to the Company's stockholders.
32
<PAGE> 34
BUSINESS
The following Business section contains forward-looking statements relating
to future events or the future financial performance of the Company, which
involve risks and uncertainties. The Company's actual results could differ
materially from those anticipated in these forward-looking statements as a
result of certain factors, including those set forth under "Risk Factors" and
elsewhere in this Prospectus.
THE COMPANY
Synon is a leading provider of enterprise software application development
tools and professional services. The Company's products and services are
designed to enable its customers to develop business information software
applications through a practical model-based approach to software design.
Synon's integrated business-oriented technology provides customers the ability
to rapidly develop, deploy and enhance advanced software applications across
multiple computing platforms.
Since it was founded in 1983, Synon has sold approximately 6,000 licenses
of its products to customers located in approximately 80 countries. Synon has
established development and marketing relationships with IBM's AS/400 division
for the AS/400 market and with Microsoft for the Enterprise Windows NT market.
Synon markets its products and services primarily through the Company's direct
sales force in North America, the United Kingdom, France, Italy and Australia
and through a network of distributors in Europe, Asia and Latin America.
INDUSTRY BACKGROUND
Many organizations are responding to today's increasingly competitive
business environment by attempting to improve the efficiency and effectiveness
of IT processes, which has resulted in increased demand for new business
software applications. Despite large budgets and high level management focus in
many cases, IT departments often experience difficulty rapidly deploying
business critical applications, which can lead to IT backlogs. Traditional
software development and deployment methods have at times been inadequate in
meeting complex business needs in a timely manner. Third party software can
provide immediate solutions to certain business problems, but often lacks the
flexibility to meet many of the increasing complexities of today's business and
computing environments. Conversely, conventional in-house application
development can provide customized solutions, but generally requires long
development lead times and may be more prone to error.
In addition, organizations seek to retain value in their software
investments by selecting software solutions that are readily adaptable to
business changes or technological advances and are portable to different
computing environments. Common examples include software changes required to
support a new product line or newly-acquired business, or enhancements of
existing systems such as those required to address the year 2000 century date
conversion problem. Traditional software solutions often fall short of
addressing the post-deployment need to enhance and maintain existing
applications.
Software development tools have been designed to address the problems with
traditional software development and deployment solutions. However, certain
development tools which have allowed organizations to rapidly develop software
solutions have fallen short of addressing the complex needs of dynamic
businesses. Tools that have accelerated the development of specific departmental
applications have often lacked the power to scale to large computing
environments. Tools designed to build applications that are scalable and operate
over a wide range of environments generate applications that may not be capable
of fully utilizing the native strengths and attributes of different computing
environments. Object Oriented development technologies promise productivity
gains through the use and reuse of application building blocks, but to date
reusable objects have often lacked the size and scope necessary to provide
substantial improvements in software development.
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THE SYNON SOLUTION
Synon's software development products and services are designed to enable
customers to rapidly develop high-end, scalable business applications that may
be readily customized and easily maintained. Building upon a decade of
application development tools experience, the Company in late 1994 created its
Obsydian product family for the design of business critical client/server
applications for multiple computing environments. The Company believes that the
Obsydian product family offers a highly effective combination of development
speed, flexibility and quality due to the following key features:
- Model-based Development: By using an application "design model" to create
and maintain software applications, the Company's techniques enable
software developers and end-users to more effectively define and capture,
in an application design model, all relevant business processes,
structures and forms at the fundamental business rule-level. Changes made
from time to time to the application design model in response to business
process changes will automatically ripple through the entire model to
each relevant component.
- Large-Scale Reusable Business Objects: The Company has drawn upon its
application development experience to develop libraries of large-scale
business objects which reflect common "patterns" found in commercial
applications. These large, reusable business objects enable customers to
take advantage of the efficiency of object-oriented software design
without sacrificing the ability to adjust the software to a customer's
specific needs.
- Automated Code Generation: After the application design model is
completed, the Company's products can automatically generate computer
code for a variety of network environments, computing platforms and
national languages. Synon generators produce quality code that addresses
deployment complexity and minimizes traditional testing requirements,
leaving the developer free to focus on the business aspects of the
application.
The combination of these technologies enables organizations to make
significant modifications to applications in rapid response to technological
advances and changes in their business environment without incurring the time
and expense required to rewrite the application. The Company's reusable business
objects are easily modified as a customer's business needs change. As a result,
the Company believes its products protect the investment in, and extend the
value of, the customers' developed applications.
The Company complements the technological advantages of its software with
service offerings, including technology transfer, methodology and product
implementation, which are intended to enhance the customer's success and reduce
the customer's risk in building high-end, scalable business applications.
MARKET OPPORTUNITY
The Company currently sells application development tools primarily in two
distinct markets: the IBM AS/400 market and the Windows NT market. According to
June 1997 research estimates of International Data Corporation, there were
approximately 63,450 new AS/400 systems and 15,650 AS/400 model upgrades sold in
1996 worldwide, representing an aggregate growth of approximately 12.8% over
1995, bringing the installed base to approximately 372,000 systems at December
31, 1996. Company management estimates that approximately half of the new AS/400
systems sold in 1996 include language compilers which the Company considers
potential customer sites. Dataquest estimates in its report dated September 2,
1996 that the Windows NT-based application server computer systems market will
grow at a compound annual growth rate of 42% per year through 2000 and is
expected to reach approximately five million systems by 1999. The Company
believes that both of these markets represent significant opportunities for its
software development products and services. To date, the Company has derived
substantially all of its revenue from application development tools and services
for the AS/400 market but believes that an increasing percentage of its sales
will come from tools and services for the Windows NT market.
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STRATEGY
The Company's objectives are to establish Synon as the leader in high-end
application development tools and to establish Obsydian as the leading
development framework for assembly and management of Synon- and third-party
developed large-scale business objects. Major strategies of the Company include:
Capitalize on Large Customer Base and Established Market Position
Synon has sold more than 6,000 licenses for its AS/400 development product,
Synon/2E, and has a large installed base of customers. Approximately 64% of
these sites are active with Synon/2E and are supported under current maintenance
agreements. When the Company introduced its next generation multi-platform
product, Obsydian, in late 1994, it first offered the AS/400 client/server
environmental generator to access the market of its large installed customer
base and to gain customer feedback and experience with the new technology.
Approximately 21% of Synon/2E customers have purchased the Obsydian product
since its introduction in late 1994. Synon intends to continue to enhance the
Synon/2E product line, while continuing to actively market Obsydian to its
Synon/2E customers.
As the market leader in application development tools for the AS/400
market, the Company has been successful in acquiring approximately 300 Obsydian
customers that are new to the Company. The Company believes that there are
significant growth opportunities in the AS/400 market and plans to continue to
leverage its reputation, market position and relationship with IBM's AS/400
division to increase its penetration and market share. See "--Third Party
Relationships." Additionally, the Company intends to build, acquire or license
for resale software tools that are complementary to the Obsydian product family
such as report writers and testing tools, that will be designed to provide
increased functionality to its customers.
Repeat AS/400 Success in the Emerging Windows NT Market
The Company is targeting the growing market opportunity for application
development solutions in the emerging Windows NT operating environment. Synon
has developed an Obsydian Enterprise NT environmental generator which provides
the same application development value in the NT environment as in the AS/400
environment. The generator, which became generally available in March 1997,
automatically generates applications which are compliant with Microsoft's NT
Back Office application standards. Existing Synon customers who have already
developed applications using the Obsydian product can automatically regenerate
those applications to operate natively on platforms supported by Windows NT.
Synon plans to aggressively market the product to existing customers, especially
ISVs desiring rapid access to the Windows NT marketplace with existing
Obsydian-based products, and to large companies adopting the Windows NT
operating environment. The Company believes that its experience and success in
the AS/400 market and its relationship with Microsoft make it well positioned to
become a leading provider of application development solutions in this rapidly
expanding market. See "-- Third Party Relationships."
Capitalize on IBM and Microsoft Relationships
Synon has established development, marketing and distribution relationships
with IBM's AS/400 division and Microsoft. The Company has had a long-standing
relationship with IBM's AS/400 division and currently participates in several of
IBM's AS/400 division marketing programs worldwide and maintains close ties with
its AS/400 product development organizations. Additionally, CGI Informatik GmbH,
an IBM subsidiary, acts as the primary distributor of the Company's products in
Germany. In 1996, IBM's AS/400 division sponsored a joint development lab to
encourage the building of large Obsydian-enabled business objects by IBM, Synon
and their customers in order to accelerate the availability of a wider range of
reusable business objects. In January 1997, IBM and Synon jointly announced the
availability of the first products developed in this lab, business objects that
enable integration with Lotus Domino applications. See "Risk Factors--Dependence
on Relationships with IBM and Microsoft," "--Third Party Relationships" and
"Certain Transactions--Agreements with IBM."
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Synon has established a strong working relationship with Microsoft that
Synon believes is important to its future success in the Windows NT market. A
number of agreements with Microsoft have served as the basis for this
relationship. In 1996, Microsoft and the Company entered into an agreement to
facilitate the development of the Windows NT generator. Microsoft and Synon are
also currently parties to a Co-Sponsorship Agreement pursuant to which, in
exchange for payment of a fee, Synon was a Co-Sponsor of Microsoft Tech Ed 1997,
with certain joint advertising exposure opportunities and related benefits.
Synon also co-sponsored Microsoft's annual Professional Developers' Conference
in November 1996. In addition, Synon and Microsoft are parties to a Memorandum
of Understanding pursuant to which Synon has agreed, among other things, to
train and certify product specialists on Windows NT and SQL Server, to train
representatives and channel partners on BackOffice product marketing and to
provide Microsoft's ChannelBase mailing information for joint selling
opportunities. Synon also participates in certain Microsoft promotional programs
and jointly prepares related marketing and promotional materials. Synon intends
to continue to work with Microsoft in the future on these and related projects.
See "Risk Factors--Dependence on Relationships with IBM and Microsoft" and
"--Third Party Relationships."
Build Upon Technological Leadership
The Company has developed a number of advanced technologies designed to
create enterprise-scale business critical client/server applications. As an
industry leader in model-based application development tools, the Company has
continued to extend its technology leadership in object-oriented patterns and
high performance, optimized application generators. The Company plans to extend
Obsydian and its repository to become a development vehicle for combining and
delivering large-scale business objects from multiple vendors into fully
functioning applications. The Company plans to leverage these technologies to
make it easier and faster to create large-scale applications that are flexible
and easy to customize. The Company intends to commit substantial resources to
maintain and extend its technological leadership.
Facilitate Technology Adoption and Use
The Company's enterprise application development software tools are
sophisticated, high-end products. As with all complex software products,
substantial investment of time and resources is required for users to become
educated and fluid with these products. Synon's in-house professional services
organization assists customers in technology transfer and application
development and deployment. The Company encourages independent consulting firms
to promote the growth of its Obsydian product. The Company has recently
developed the Flyte series of consulting services offerings which it markets to
its customers. Synon plans to continue to offer a range of professional services
to facilitate the successful implementation of applications developed using
Synon products.
Reusable business objects are central to the development power of Obsydian.
The Company plans to continue building libraries of reusable business objects
for resale and provide a channel for the resale of objects developed by third
parties. The Company intends to focus its efforts, in concert with those of
certain of its customers, on the development of a range of vertical industry
object libraries. The Company believes that a market is emerging for the
development and sale of libraries of reusable business objects which may provide
additional advantages to Synon customers.
Leverage Worldwide Presence
Synon has an established direct sales force and a network of distributors
in major markets of the world. Each sales channel has customer support and
professional service capabilities, which the Company believes represents a
competitive advantage in marketing its products and provides a platform for
expansion as market opportunities arise.
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TECHNOLOGY AND PRODUCTS
Synon's development products are designed to produce large, scalable,
business applications. They incorporate the knowledge gained from over a decade
of application development tools experience. The keys to successful development
of large applications are the speed with which they can be developed, and the
ease of customization after they are complete. Synon's technology represents a
highly productive combination of speed and flexibility.
OBSYDIAN TECHNOLOGIES
Integrated Repository. All Obsydian development facilities, such as the
Diagram Model Editor and the Class Libraries, are directly linked to a central
integrated repository. Changes made while using any tool component, at any point
in the development cycle instantly update all related elements of the model and
are clearly visible from any other facility or point of view.
The repository tracks all design information in three deployment dimensions
with a full audit trail: version, platform, and national language. As new design
information is added to an application, it is stored separately from the
existing design. This means it is possible to view and create the application as
it exists in different releases of the software, as it appears in different
national languages, or as implemented on to different platforms. Software
vendors can create versions of their application that vary according to
customization done for specific customers or countries, and retain knowledge at
the lowest level of detail on how the customizations differ from their base
product.
The Obsydian repository is a distributed repository. Accordingly, objects
in one repository can inherit traits from objects in a different repository.
This enables Synon to build and maintain class libraries of objects which can be
sold and distributed for use and extension by others.
The greatest advantage of a repository based system is the preservation of
the application design in the face of continual technological change. An
existing design can be deployed on new platforms as generators become available.
For example, a software vendor that has created an application with a Windows
client and AS/400 server instantly gains access to the Windows NT server market
with the availability of the Company's Windows NT generator. Windows NT Back
Office programming is complex. It demands knowledge of Windows NT processes, the
Registries, security architecture, integration with Microsoft System Management
Services and Microsoft Mail, and database optimization for SQL Server. The task
of learning a new platform and porting an application could take months or
years. However, because the Synon generator shields the developer from needing
to understand the new technology, the task can be accomplished in days of
generator availability.
Patterns. Reusable business objects ("patterns") reflect common business
structures and behaviors which are found in many commercial applications. Synon
technology resolves the inherent conflict between the desire to use large
reusable development objects for efficiency and the difficulty of modifying them
to address a specific customer's needs. Abstract or generic pattern definitions
are merged with the application context or specific characteristics of the
business to create the final application. Patterns describing the
interrelationships of many software components -- such as screens, events,
reports, methods, tables, views, messages and even help text -- can be described
in detail and may represent over one hundred programs of quality pretested code.
The size of patterns which can be created with Synon technology extends all the
way to fully functioning vertical applications. If a pattern achieves only 90%
of the desired behavior, the developer can "replace" the undesired 10% with
alternative behavior.
As an example, a common pattern may be used to create apparently unrelated
application business objects such as a purchase order, an insurance policy, or a
utility bill. Because each of these objects is composed of detail line items and
headers (structure) and share standard processing logic (behavior), a common
pattern (abstraction) can be defined. The abstract definitions can be extensive:
database tables and views describing the header/footer relationship, totaling
algorithms, printing routines, screens
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for viewing the objects and screens for managing transactions. Even the simplest
pattern results in the creation of dozens of executable objects.
[Picture of utility bill, insurance policy and purchase order]
Synon's pattern technology merges the specific characteristics of objects
such as orders, policies or utility bills into the generic pattern. The result
is the complete creation of a subsystem at a fraction of the effort to build
these application business objects by traditional methods. Further, if either
the pattern or the specific added elements change, the application is
automatically re-implemented to behave with the new rules.
Synon's pattern technology can incorporate components from the growing
third party component market. Components today are often graphic controls such
as "sliders" and "fuel gauges". Some are sophisticated controls with which
business data can be viewed in a variety of charts and graphs. These components
can be inserted into patterns created with Synon technology, allowing Obsydian
users broader access to third party generated patterns.
In addition to the patterns provided with Obsydian, developers using Synon
technology can build their own reusable patterns. These patterns range from
patterns for automatically integrating third-party technologies, such as the
pattern for the Lotus Domino groupware application, to general purpose or
specific vertical industry patterns.
Environmental Generators. When a design is complete, program generators
take relevant information from the repository and automatically create the
application's programs. The Company's products currently support the following
platforms: C++ applications on Windows, Windows NT and UNIX platforms, and RPG
on the AS/400. The programs are generated in the native language of the platform
on which the application will be executing to exploit the unique advantages and
features of each platform. This provides applications optimized for each
environment. The Company is currently developing a Java generator to add greater
flexibility in deployment options.
[Picture of repository, generator and 3GL application.]
The separation of design from implementation provides many advantages.
First, a single design can be generated to execute in different environments.
Simply regenerating will create the same application on AS/400, Windows NT or
UNIX. This saves the time and complexity of having to port a completed
application from one environment to another.
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Another benefit of the environmental generators is that they can shield the
developer from the technical intricacies of each target platform, leaving the
developer free to focus on the business view of the application. For example,
the techniques required to successfully build a client/server application are
complex. Communications programming, record buffering for optimization,
character type translation and code page translation all need to be considered.
Each of these considerations can vary by platform. However, the Synon generators
automatically generate code that deals with deployment complexity.
Application Partitioning. The flexibility of deployment extends to network
topology as well as platform. The screen handling code can run on the client
machine, database operations on the database server and business processing on
any number of other servers. Synon generators allow a single application to be
partitioned and deployed to any number of different platforms. The partitioning
of logic between clients and servers can occur at design time, at deployment
time, or dynamically at runtime. Runtime deployment means that an application
can load-balance by redirecting program calls from one server to another as the
traffic on the network changes. It also means that applications designed to run
in a client/server mode can also run detached from the network. For example, an
application can run entirely on a laptop, but when connected to the network
cease to invoke programs on the laptop and instead call programs on a server.
OBSYDIAN PRODUCT FAMILY
Obsydian Design Module: Workgroup development environment for the design of
large scale enterprise applications through modeling of the data and
business processes of the enterprise and the application of reusable
business objects to create an application design model.
Environmental Generators: Code generators which convert the application
design model into structured, pre-tested native program code to run the
application on a variety of popular platforms and environments including:
- AS/400 client server (RPG for server, C++ for Windows clients)
- AS/400 NPT (RPG)
- HP Unix client server with Windows client (C++)
- Windows "Fat Client" using ODBC database support (C++)
- Windows NT Server with Windows Client (C++)
National Language Support: Translates developed applications into 20
languages and local numeric, financial and data formats.
Business Object Class Libraries: Reusable design objects used in the
Obsydian design environment to create a Design Model:
- Base Class Library -- robust set of business design objects
- Framework Class Library -- security, batch processing and calendar
functions
- Lotus Domino enabling Class Library
- AS/400 FAX enabling Class Library
Obsydian Import Facilities: Migration facilities to aid customers in the
migration of existing applications into Obsydian including DB2/400 Data
Migration, Synon/2E Data Migration, Synon/2E Function Migration (currently
in beta test with several customers).
The Company's Obsydian family products are priced on a per seat basis.
Single license list price for the design module including one generator is
approximately $10,000. Additional environmental generators are approximately
$5,000 per seat. A $3,000 premium is charged per seat for the Windows NT
generator, whether purchased with Obsydian or as a stand alone generator. Base
class libraries of business objects are included with the design module, with
the prices of additional class libraries
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currently ranging from $2,000 to $4,000. Volume discounts are applied to these
list prices and are approximately 30% for a ten seat purchase. Annual customer
support and upgrade fees are priced separately at approximately $6,000 per site
and 10% of the per seat product list price, respectively.
SYNON/2E TECHNOLOGIES
Synon/2E is a robust development environment for creating AS/400 server
centric applications. Many of the technology features provided in Obsydian have
their roots in Synon/2E. Synon/2E applications are stored in a fully integrated
repository. As a result, Synon/2E customers can with relatively limited effort
solve year 2000 problems in their existing applications that were developed
using Synon/2E. Because the repository knows where all dates are used, changing
a date definition in a single location and regenerating the application will
automatically update all dates (including those used in screens, reports,
program logic, etc.) to recognize the century. Through impact analysis, the
customer can easily verify all the logic relating to the changed date fields. A
problem that could take months or years to solve becomes simply a deployment
exercise.
The Synon/2E generators create RPG or COBOL programs for optimal
performance on the AS/400. As new AS/400 technologies emerge, Synon/2E customers
will be able to reimplement their existing applications. For example, a new
generator will create Internet applications through Java, so legacy "dumb
terminal" AS/400 applications can be regenerated to become accessible as GUI
applications through the Internet.
The precursor to Obsydian's pattern technology are the program templates
available in Synon/2E. These templates are program skeletons that reflect
well-tested programming practices for creating AS/400 screen, report, and batch
programs. By allowing developers to place their business logic into the
templates, Synon produces consistent, high quality programs much faster than
would be possible through traditional methods.
SYNON/2E PRODUCT FAMILY
Synon/2E Development Environment: Using data modeling techniques to express
relationships and business rules, along with high-level action diagrams to
describe process logic for complex interactive, batch, and reporting
processes, Synon/2E speeds implementation of the design model with
COBOL/RPG code generation for the AS/400.
Synon/PE: Analyzes design models to maximize performance.
Synon/RPM: An adaptation of the rapid application development methodology.
Synon Model Applications (SMA) -- Financial: An integrated financial
accounting system designed by Synon using Synon/2E.
Third Party Products: Graphical modeling facility, change management and
report writing.
Each Synon/2E family product is priced per customer central processing unit
("CPU") on which such product operates, with higher prices for CPU's with
relatively greater computing capacity. Synon/2E prices range from approximately
$48,000 to $104,000 depending on the CPU, with additional generators ranging
from $12,000 to $26,000 depending on the CPU. The SMA Financial application is
priced from approximately $50,000 to $360,000. Maintenance agreements for the
Synon/2E product family are typically priced at 15% of the list price of the
license annually.
PROFESSIONAL SERVICES AND CUSTOMER SUPPORT
Synon provides a broad range of customized and packaged professional
services to assist customers in the successful implementation of their
application development software. These offerings include not only the
traditional product education, mentoring and application design, but also
application construction, testing and conversion services. At a higher level,
Synon consultants also provide project management, requirements definition and
quality assurance support.
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In addition to the Company's team of over 180 full time engineers, leading
industry consulting companies such as Whitman-Hart, Inc., Ernst & Young LLP and
Cap Gemini UK PLC also offer a broad spectrum of services to support customers
in their deployment and use of Synon's products and technologies. Synon has
created special offerings to expand the skills and capabilities of third party
service providers and seeks to create a large network of professionals trained
in Synon technology.
Recently the Company has developed a new set of services offerings under
the Flyte series family name. These offerings are designed to decrease the
customer's risk of technology adoption and facilitate cost effective
implementations.
Major offerings in the Flyte series include:
Co-Pilot: Process management methods and techniques to implement best
practices. Licensed from MCI/SHL Systemhouse, Co-Pilot gives Synon's
customers access to state of the art tools integrated with advanced
Enterprise Windows NT extensions from Microsoft and Synon.
RADAR: Project quality assurance processes. Jointly developed with Tandem
Computers, Microsoft and Synon, RADAR allows early detection of project
risks and helps prevent problems throughout the project life cycle.
Pre-Flyte: Technology assessment of customer development and deployment
environment which minimizes implementation errors that may get introduced
early in the technology adoption cycle.
Practice Flyte, First Flyte, Full Flyte: A wide range of technology
transfer, mentoring and pilot project services designed to enable customer
success with the Company's advanced technologies. These offerings are
designed to be comprehensive and flexible to match the specific needs of an
individual customer.
Synon's customer support services are an essential complement to the
Company's professional services offerings in ensuring customer success with
Synon technology. The Company offers customer support services for Synon/2E
family products under annual maintenance agreements and for the Obsydian family
products under annual support and upgrade agreements. The maintenance and
support agreements provide customers with access to technical support services
through the telephone, the Internet, e-mail and facsimile. Support staff members
typically have several years of experience in application development, software
engineering or software testing. The Company develops new releases of its
software products including periodic enhancements which it provides to its
customers according to the terms of the maintenance and upgrade agreements.
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CUSTOMER CASE STUDIES
The following customer case studies illustrate the selection, use and
implementation of Synon software products by certain of the Company's largest
customers. Not every customer achieves the same level of implementation success.
================================================================================
AMWAY CORPORATION ("AMWAY")
Large multinational manufacturer of home care, personal care and fitness
products
<TABLE>
<S> <C>
REQUIREMENT.......... Amway needed to build and deploy major new inventory, order and
distributor management and customer remittance applications to be
used in approximately 40 countries to support its worldwide growth
strategy while concurrently standardizing the processes and
systems among its affiliates.
SYNON'S SOLUTION..... Using Synon/2E, Amway headquarters IT staff developed core sets of
application models which were distributed to local country IT
staffs for customization and implementation.
BENEFITS............. The core models were designed to be easily modified by local IT
staffs to accommodate country variances and ongoing needs. In
addition, the staff in each country is able to use the
headquarters' model, incorporate headquarters' updates and
automatically create the same application in the local national
language. Utilizing the Synon/2E product, Amway's IT function
achieved significant development productivity and gained both on-
going corporate standardization and responsive local
customization.
</TABLE>
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DATALINK CHORUS SOFTWARE, LTD. ("CHORUS")
A U.K. company that offers a suite of financial accounting and business
management applications, historically for IBM mid-range computers.
<TABLE>
<S> <C>
REQUIREMENT.......... Already established in the AS/400 market, Chorus wanted to provide
business application products that could be utilized across other
computing platforms, including the Microsoft Windows NT platform.
SYNON'S SOLUTION..... Chorus is utilizing Obsydian to build high performance scalable
business applications with multi-platform capability.
BENEFITS............. Using Obsydian NT BackOffice generator, Chorus rapidly qualified
for and received from Microsoft the "Designed for Microsoft
BackOffice" logo. The AS/400 client/server application represented
5 person-years of development and was regenerated to a BackOffice
compliant NT application in 2 days.
</TABLE>
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================================================================================
POLICY MANAGEMENT SYSTEMS CORPORATION ("PMSC")
One of the largest providers of software and services for the insurance
industry.
<TABLE>
<S> <C>
REQUIREMENT.......... Create a new release of its client/server, multi-platform
application for midsize companies.
SYNON'S SOLUTION..... PMSC used Obsydian technology to build its POINT Open application,
a Property and Casualty Insurance solution. The POINT system
consists of fully integrated components which include Policy
Administration, Rating, Claims, Billing and Collection, Payables,
and Reinsurance.
BENEFITS............. With Obsydian, PMSC has realized benefits through Object Oriented
software design and reusability. Rating and Policy Processing, the
first business function of POINT Open developed with Obsydian, is
a comprehensive 4 million plus lines of code component. The effort
to develop the second component, Claims, took advantage of many of
the pre-built classes. Although the Claims component was 16% the
size of the Rating and Policy Processing, it took only 8.5% of the
effort.
</TABLE>
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CUSTOMERS
As of December 31, 1996, the Company had licensed its Synon/2E family of
products to approximately 5,800 customer sites and Obsydian to approximately
3,200 development users. The Company's target Obsydian customers include large
organizations that utilize large comprehensive enterprise critical information
systems which are deployed over a range of heterogeneous operating environments
and across international boundaries. The Company's target Synon/2E customers
include medium to large organizations that use enterprise critical information
systems running on the IBM AS/400 midrange computer system. The Company also
targets as customers Independent Software Vendors ("ISVs") which develop large
commercial application software for resale across a range of operating
environments and/or international boundaries. No single customer accounted for
10% or more of the Company's revenue for the year ended December 31, 1996 or for
the three months ended March 31, 1997.
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The Company believes that the following list of some of the Company's
largest customers is representative of its customers as of December 31, 1996.
<TABLE>
<S> <C>
MANUFACTURING INDUSTRIES
Barnes & Noble Distribution Playtex Europe (France)
Bridgestone Corp. Samsung Electronics, Panama, S.A. (Panama)
Burben-Ubbens Papier (Netherlands) Samsung Electronics Ltd. (United Kingdom)
Cargill, Inc. Solarglass (United Kingdom)
The Goodyear Tire & Rubber Co. Yacimientos Petroliferos Fiscales, S.F.
Kraft Foods, Inc. (Argentina)
ELECTRONICS, COMPUTERS AND COMPUTER SERVICES
AdWare Systems, Inc. Ernst & Young LLP
American Software USA, Inc. Nova Systems (Italy)
Cantoc Business Systems Inc. Pacific Systems International PLC (United
Cincinnati Bell Information Systems, Inc. Kingdom)
DAC Data Aktieselskab (Denmark) Policy Management Systems Corporation
ELECTROLUX AB (UK, Ireland, Sweden) UNILOG Multisystems (France)
SERVICES, DISTRIBUTION AND COMMUNICATIONS
Amway Corporation Forward Trust Group Ltd. (United Kingdom)
Anglia Components Ltd. (United Kingdom) Hydro Texaco AS (Norway)
Cellway NV (Netherlands) MCI Communications Corp.
Christian Salvesen Distribution (United New Century Communications Inc.
Kingdom) Nissan Italia SpA (Italy)
Electronic Data Systems Corporation
Enterprise Rent-A-Car
FINANCIAL SERVICES
American Express Co. La Suisse Assurance (Switzerland)
ANZ Banking Group (Australia) North American Mortgage Company
Australia and New Zealand Banking Group San Paolo Fondi SpA (Italy)
Limited The Toronto-Dominion Bank
Banco General S.A. (Panama) Vererband der Vereine Creditreform e.v.
Diners Club International (Germany)
Hermes Kreditversicherungs AG (Germany) Zurich Re-Insurance (United Kingdom)
GOVERNMENTS, AGENCIES AND SOCIAL SERVICES
ACG Informatique (France) New Mexico State Personnel Office
Board of Pensions, Evangelical Lutheran North Lincolnshire Council (United Kingdom)
Church NV Databank Kramers van Koophande en
in America Fabrieken (Netherlands)
Michigan Supreme Court
State of Missouri -- Dept. of Mental Health
</TABLE>
THIRD PARTY RELATIONSHIPS
IBM Corporation
Synon has had a long-standing relationship with IBM which solidified with
the introduction of the AS/400 in 1988. The Company currently participates in
several of IBM's AS/400 division marketing programs worldwide and maintains
close ties with its AS/400 division product development organizations.
Additionally, CGI Informatik GmbH, a subsidiary of IBM, acts as a primary
distributor of the Company's products in Germany.
The Company and IBM's AS/400 division have engaged in several joint
development or sponsored development projects in the past aimed at accelerating
availability of Synon products compatible with IBM's AS/400 division offerings.
In 1996, IBM's AS/400 division sponsored a joint development lab to encourage
the building of large Obsydian-enabled business objects by IBM, Synon and their
customers in order to accelerate the availability of a wider range of reusable
business objects. Currently, IBM's AS/400 division and Synon are jointly
participating in the development of large business object class libraries
44
<PAGE> 46
which can be assembled and deployed through Obsydian. The first libraries
produced by the joint work are the Lotus Notes Class Library and the AS/400 FAX
Class Library. See "--Technology and Products." Both companies are encouraging
third parties to participate in the development lab to build industry vertical
and other reusable class libraries.
In 1992, IBM purchased 1,666,667 (pre-conversion) shares of the Company's
Series E Preferred Stock for $5 million. The Series E Preferred Stock will be
converted to 833,333 shares of Common Stock upon closing of the Offering. See
"Certain Transactions -- Preferred Stock Sales," "Principal and Selling
Stockholders" and Note 2 of Notes to Consolidated Financial Statements.
Microsoft Corporation
Synon has established a strong working relationship with Microsoft that
Synon believes is important to its future success in the Windows NT market. A
number of agreements with Microsoft have served as the basis for this
relationship. In 1996, Microsoft and the Company entered into an agreement to
facilitate the development of the Windows NT generator. Microsoft and Synon are
also currently parties to a Co-Sponsorship Agreement pursuant to which, in
exchange for payment of a fee, Synon was a Co-Sponsor of Microsoft Tech Ed 1997,
with certain joint advertising exposure opportunities and related benefits.
Synon also co-sponsored Microsoft's annual Professional Developers' Conference
in November 1996. In addition, Synon and Microsoft are parties to a Memorandum
of Understanding pursuant to which Synon has agreed, among other things, to
train and certify product specialists on Windows NT and SQL Server, to train
representatives and channel partners on BackOffice product marketing and to
provide Microsoft's ChannelBase mailing information for joint selling
opportunities. Synon also participates in certain Microsoft promotional programs
and jointly prepares related marketing and promotional materials. Synon intends
to continue to work with Microsoft in the future on these and related projects.
See "Risk Factors-- Dependence on Relationships with IBM and Microsoft."
SALES AND MARKETING
The Company markets and sells its products and services through its direct
sales force in the U.S., Canada, United Kingdom, France, Italy and Australia and
through a network of distributors in the rest of Europe, Asia and Latin America.
The Company distributes its products in Asia and Italy through joint venture
arrangements pursuant to which Synon owns 51% of the distributor located in
Japan, 65% of the distributor located in Italy and 75% of the distributor
located in Hong Kong. In addition, CGI Informatik GmbH, a subsidiary of IBM, is
the Company's primary distributor in Germany. Through both the direct sales and
distributor channels, the Company employs an integrated solution approach to
selling which combines its product offerings with professional services. In
addition, the Company is developing its indirect channels to complement direct
sales in its major markets.
Synon's marketing functions provide a comprehensive range of programs and
activities intended to broaden the worldwide market appeal for its products and
services and to support the direct sales channels employed by the Company. Each
of the Company's distributors provides a range of marketing programs to support
their selling efforts which often utilize marketing materials prepared by the
Company. Marketing activities include participation in major trade shows and
industry forums, public relations campaigns, advertising, product seminars,
telemarketing, newsletters, direct mailings, and preparation of a variety of
sales collateral materials. The Company also participates with IBM and Microsoft
in joint marketing programs and intends to seek continued opportunities to work
with both companies. See "--Third Party Relationships."
The Company has entered into agreements with ISVs to help promote and sell
the Company's products. The agreements fall into three general categories, OEM,
Reseller and Cooperative Marketing. The Company has one OEM agreement with the
Marcam Corporation under which Marcam sells a customized version of the
SMA/Financials product to its end user customers and has rights to sell Synon/2E
to those same customers. The Company has entered into reseller agreements with
Policy Management Corporation and American Software USA, Inc. under which the
companies have the right to
45
<PAGE> 47
sell special versions of the Company's products to customize, enhance or
maintain the software products which were developed by these resellers using
Synon products. Additionally, the Company has entered into cooperative marketing
agreements with many of its ISV customers under which the companies are paid a
finder's fee for their assistance in providing sales leads and helping in
product sales process.
PRODUCT DEVELOPMENT
The Company is currently focusing development efforts on various
enhancements to Obsydian, including a 32 bit tool, ActiveX capabilities,
external class definition capabilities, open repository capabilities and change
management capabilities. Pursuant to an agreement with IBM's AS/400 division,
the Company is also developing a Java language code generator. See "Certain
Transactions."
Synon has made substantial investments in new technologies and product
development. The Company believes that its future success will depend in large
part on its ability to enhance existing products, introduce new technologies and
develop new products which meet the needs of a rapidly changing application
development marketplace. As of March 31, 1997, the Company's research and
development staff consisted of 85 employees located principally at its
headquarters in Larkspur, California with a smaller development team in London,
England. Synon's research and development expenses (after capitalization of
software development costs) were approximately $4.1 million, $4.9 million, and
$5.9 million for 1994, 1995 and 1996, respectively.
The Company's product development organization is responsible for product
architecture, core technology and functionality, product testing, user interface
development and expansion of the ability of Obsydian to operate with leading
hardware platforms, operating systems, relational database management systems
and networking and communication protocols. This organization is also
responsible for new product development. Central to the Company's development
approach is concurrent engineering by small product teams. Each group is focused
on development of independent software components within a disciplined set of
protocols so that, when assembled, the components interact and communicate
properly. This approach enables the Company to manage the overall development
process in incremental elements and to track performance, identify problem areas
and add additional resources where necessary. The Company also maintains
detailed release planning procedures to ensure integration, testing and version
control among different groups developing a single release.
The market for the Company's products is subject to rapid technological
change, changing customer needs, frequent new product introductions and evolving
industry standards that may render existing products and services obsolete. As a
result, the Company's position in its existing markets or other markets that it
may enter could be eroded rapidly by product advances. Synon's vulnerability to
rapid technological change and changing customer needs is heightened by the
focus of its product development efforts on the Obsydian product line and
Obsydian for the Windows NT computing platform. See "Risk Factors--Rapid
Technological Change; Product Development Risks."
COMPETITION
The software development market is highly fragmented and serviced by many
firms. The market for advanced software used in the development, deployment and
management of high-end client/server application software systems is intensely
competitive and characterized by rapidly changing technology, evolving industry
standards, frequent new product introductions and rapidly changing customer
requirements. The Company's development tools are targeted primarily at
developers of large business applications running on the Windows NT operating
platform and the AS/400. In the market for high-end client/server application
development software tools, the Company expects to compete primarily with Forte
Software, Inc. and Texas Instruments Incorporated with respect to users of the
Windows NT operating platform, and currently competes primarily with Progress
Software Corporation and several small software companies with respect to users
of the AS/400. In the market for less complex client/server application
development software tools, the Company competes primarily with Powersoft
Corporation, IBM's Visual Age product line and Microsoft's Visual Basic with
respect to users of the
46
<PAGE> 48
Windows NT operating platform and with IBM's Visual Age product line with
respect to users of the AS/400.
Software that can be developed and deployed using the Company's Obsydian
environment can also be implemented using a combination of first generation
application development tools and more powerful server programming techniques
such as stored procedures in relational databases, C or C++ programming, and
networking and database middleware to connect the various components.
Consequently, the Company experiences competition from potential customers'
decisions to pursue this approach as opposed to utilizing an application
environment such as Obsydian. Similarly, the Company's products compete against
the alternative of conventional software development in the AS/400's native RPG
language. As a result, the Company must continuously educate existing and
prospective customers as to the advantages of the Company's products. There can
be no assurance that these customers or potential customers will perceive
sufficient value in the Company's products to justify purchasing them.
The Company also competes with database vendors such as Oracle, Informix
and others that offer their own development tools for use with their databases.
The Company may in the future face additional direct or indirect competition
from IBM or Microsoft in the event that such companies continue to develop their
own application development tools for the AS/400, Windows NT or other computing
platforms or enter into strategic relationships with any of the Company's
competitors. In addition, since the software industry has relatively low
barriers to entry, the Company may in the future face additional competition
from start-up companies or others in the software application development tool
industry.
Most of the Company's current competitors have, and future competitors may
have, significantly greater financial, technical, marketing and other resources
than the Company. The Company's competitors may be able to respond more quickly
to new or emerging technologies and changes in customer requirements or devote
greater resources to the development, promotion and sale of their products than
the Company. Also, most current and potential competitors have greater name
recognition and more extensive customer bases that could be leveraged, thereby
gaining market share to the Company's detriment. The Company expects to face
additional competition as other established and emerging companies enter the
application development tools market and new products and technologies are
introduced. Increased competition could result in price reductions, reduced
purchases of licenses, professional services and maintenance, lower gross
margins or loss of market share, any of which would materially adversely affect
the Company's business, operating results and financial condition.
In addition, current and potential competitors have established or may
establish cooperative relationships among themselves or with third parties or
make strategic acquisitions to increase the ability of their products to address
the needs of the Company's prospective customers. Accordingly, it is possible
that new competitors or alliances among current and new competitors may emerge
and rapidly acquire significant market share. There can be no assurance that the
Company will be able to compete successfully against current and future
competitors or that competitive pressures faced by the Company will not
materially adversely affect its business, operating results and financial
condition. Further, there can be no assurance that products or technologies
developed by others will not render the Company's products noncompetitive or
obsolete. In addition, regardless of the Company's success in the marketplace, a
negative perception of the Company generated by industry analysts or the public
more generally could detract from the Company's competitiveness. See "Risk
Factors -- Competition."
The principal competitive factors affecting the market for the Obsydian and
Synon/2E product families are ease of application development, functionality and
features, product architecture, product performance, reliability and
scaleability, product quality, price and customer support. The Company believes
it presently competes favorably with respect to each of these factors. However,
the Company's market is still evolving and there can be no assurance that the
Company will be able to compete successfully against current and future
competitors and the failure to do so successfully will have a material adverse
effect upon the Company's business, operating results and financial condition.
47
<PAGE> 49
INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS
The Company's success is heavily dependent upon proprietary technology. The
Company also believes that factors such as the technological and creative skills
of its personnel, new product developments, frequent product enhancements, name
recognition and reliable product maintenance are essential to establishing and
maintaining a technology leadership position. The Company relies primarily on a
combination of copyright and trademark laws, trade secrets, confidentiality
procedures and contractual provisions to protect its proprietary rights. The
Company seeks to protect its software, documentation and other written materials
under trade secret and copyright laws, which afford only limited protection. The
Company presently has no patents or patent applications pending. Despite
precautions taken by the Company, it may be possible for unauthorized third
parties to copy aspects of its products or future products or to obtain and use
information that the Company regards as proprietary. In particular, for the SMA
financial product and class libraries, the Company provides its licensees with
access to its data model and other proprietary information underlying its
licensed applications. There can be no assurance that the Company's means of
protecting its proprietary rights now or in the future will be adequate or that
the Company's competitors will not independently develop similar or superior
technology. Litigation may be necessary in the future to enforce the Company's
intellectual property rights, to protect the Company's trade secrets or to
determine the validity and scope of the proprietary rights of others. Such
litigation could result in substantial costs and diversion of resources and
could have a material adverse effect on the Company's business, operating
results and financial condition.
The Company, Dysys, and Simon Williams and Melinda Horton, founders and
major stockholders of the Company, are parties to the Dysys Agreement in
connection with which the Company acquired certain intellectual property which
was included in the Company's Obsydian product. In connection with the Dysys
Agreement, the Company currently incurs a liability to pay Mr. Williams and Ms.
Horton a 1% and 0.5% royalty, respectively, on Obsydian license and maintenance
revenue on transactions entered into through June 30, 1999. Pursuant to the
Dysys Agreement, Mr. Williams and Ms. Horton also retain certain rights with
respect to the intellectual property, including the non-exclusive right to use
and exploit it under certain circumstances, including the Company's failure to
pay required royalty amounts in connection with the Dysys Agreement and of
certain other occurrences. See "Certain Transactions -- Dysys Agreement."
Policing unauthorized use of the Company's software is difficult, and,
while the Company does not believe software piracy is a significant problem to
the Company at present, there can be no assurance that it will not become a
problem in the future. In addition, the laws of some foreign countries do not
protect the Company's proprietary rights to the same extent as do the laws of
the United States. The Company is not aware that any of its software product
offerings infringe the proprietary rights of third parties, but there can be no
assurance that third parties will not claim infringement by the Company with
respect to current or future products. The Company expects that software
developers will increasingly be subject to infringement claims as the number of
products and competitors in the Company's industry segment grows and the
functionality of products in different industry segments overlaps. Any such
claims, with or without merit, could be time-consuming, result in costly
litigation, cause product shipment delays or require the Company to enter into
royalty or licensing agreements. Such royalty or licensing agreements, if
required, may not be available on terms acceptable to the Company or at all,
which could have a material adverse effect on the Company's business, operating
results and financial condition. Any such delays or reductions in product
shipments could materially and adversely affect the Company's business,
operating results and financial condition. See "Risk Factors -- Dependence on
Proprietary Rights and Technology; Risk of Infringement."
EMPLOYEES
As of March 31, 1997, the Company had a total of 488 employees, including
85 in product development, 48 in customer support, 104 in sales and marketing,
181 in professional services, and 70 in finance and administration. Of these
employees 324 were located in the United States and Canada, 132 located in
Europe and 30 in Australia and Japan. None of the Company's employees is
represented by a
48
<PAGE> 50
collective bargaining agreement and the Company has never experienced a work
stoppage. The Company considers its relations with its employees to be good.
The Company believes its future success depends in large part on its
ability to attract and retain qualified employees, especially highly skilled
product developers, customer support professionals and professional services
consultants and capable direct sales and pre-sales support representatives.
There can be no assurance that the Company will be successful in retaining,
recruiting or training key personnel. Failure to attract and retain key
personnel could have a material adverse effect on the Company's business,
operating results and financial condition.
FACILITIES
Synon's headquarters are located in Larkspur, California in a 42,675 square
foot facility under leases which expire December 1999 through May 2001. The
Larkspur facility houses the primary product development, customer support,
marketing, finance and administration and executive management of the Company.
The Company also occupies 19,789 square feet of facilities in London under
various lease agreements expiring January 1998 to December 2014. Additionally,
the Company leases space for sales and support facilities in a variety of
international and domestic locations including White Plains, New York and the
metropolitan areas of Chicago, Dallas, Atlanta, Los Angeles, Seattle, Toronto,
Paris, Milan, Sydney, Melbourne, and Tokyo. The Company believes that its
existing facilities and offices will be adequate at least through the end of the
year and that sufficient additional space will be available as needed
thereafter.
The Company has approximately 34,000 square feet in excess facilities in
the United Kingdom under long term lease agreements expiring December 1999
through December 2014. These facilities are currently subleased to third parties
at rates which are in some cases below that which the Company is obligated to
pay and for periods less than the lease term for which the Company is obligated.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" and Note 12 of Notes to the
Consolidated Financial Statements.
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<PAGE> 51
MANAGEMENT
EXECUTIVE OFFICERS, DIRECTORS AND KEY EMPLOYEES
The following table sets forth certain information concerning the
directors, executive officers and certain other key employees of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------- --- ---------------------------------------------
<S> <C> <C>
Richard H. Goldberg 52 President, Chief Executive Officer and
Chairman of the Board
Paul K. Wilde 46 Vice President, Finance and Administration,
Chief Financial Officer and Secretary
William R. Yeack 39 Vice President, Professional Services and
Product Marketing
Keith E. Jaeger 40 Vice President, Development
Nick S. Discombe 34 President, Synon Europe Limited
William O. Grabe 59 Director
David C. Hodgson 40 Director
John F. Rockart 65 Director
William M. Stuek 52 Director
</TABLE>
- ---------------
(1) Member of Compensation Committee.
(2) Member of Audit Committee.
Richard H. Goldberg has served as President and Chief Executive Officer of
the Company since October 1992 and as Chairman of the Board since May 1997. From
June 1967 to July 1992, Mr. Goldberg served as Assistant General Manager of
Software Marketing for IBM. Mr. Goldberg holds an M.S. from Carnegie Mellon
University and a B.S. from Rensselaer Polytechnic Institute.
Paul K. Wilde has served as Vice President, Finance and Administration,
Chief Financial Officer and Secretary since joining the Company in April 1991.
From October 1988 until April 1991, Mr. Wilde served as Chief Financial Officer
of Viasoft, Inc. From October 1984 until October 1988, Mr. Wilde was Chief
Financial Officer and Vice President, International Operations of Candle
Corporation. Prior to October 1984, Mr. Wilde served as Chief Financial Officer
for Informatics General Corporation. Mr. Wilde holds a B.S. from Brigham Young
University.
William R. Yeack has served as Vice President, Professional Services and
Product Marketing since January 1996. Prior to joining the Company, Mr. Yeack
served as President of Tandem Computers' Tandem Services Company from November
1993 to December 1995. From June 1991 to November 1993, Mr. Yeack served as Vice
President of Sales and Marketing for Mozart Systems. Mr. Yeack holds an M.B.A.
and a B.S. from Ohio State University.
Keith E. Jaeger has served as the Company's Vice President, Development
since January 1, 1997. From July 1994 through December 1996, he was
Director -- Product Development and from June 1990 through June 1994, he was
Manager, Development with the Company. Mr. Jaeger holds an M.A. from the
National College of Education and a B.A. from Ripon College.
Nick S. Discombe has served as President, European Operations since January
1997. From August 1994 though December 1996, he was Managing Director -- U.K.
and Northern Europe; from January 1993 through July 1994, he was U.K. Sales
Director, and from January 1991 through December 1992, Mr. Discombe was an
Account Executive with the Company. Mr. Discombe holds a B.A. in Economics from
Portsmouth University.
William O. Grabe has served as a director of the Company since March 1992
and served as Chairman of the Board from September 1992 until May 1997. Mr.
Grabe is a managing member of General Atlantic Partners, LLC ("GAP LLC") and has
been affiliated with GAP LLC or its predecessor since April 1992. From 1984
until March 1992, Mr. Grabe was Vice President, US Marketing and
50
<PAGE> 52
Services, of IBM. Mr. Grabe is also a director of Baan Company N.V., Compuware
Corporation, Marcam Corporation, Centura Software Corporation and Gartner Group.
Mr. Grabe holds an M.B.A. from the University of California, Los Angeles and a
B.S. from New York University.
David C. Hodgson has served as a director of the Company since April 1993.
Mr. Hodgson is a managing member of GAP LLC and has been affiliated with GAP LLC
or its predecessor since 1982. Before joining GAP LLC, Mr. Hodgson was President
of New England Software. Mr. Hodgson is also a director of Baan Company N. V.
and Walker Interactive Systems, Inc. Mr. Hodgson holds an M.B.A. from the
Stanford Graduate School of Business and an A.B. from Dartmouth College.
John F. Rockart has served as a Director of the Company since April 1993.
Mr. Rockart is Director of the Center for Information Systems Research and a
Senior Lecturer at the Massachusetts Institute of Technology's Sloan School. Mr.
Rockart is also a Director of Keane, Inc. and Comshare Inc. Mr. Rockart holds a
Ph.D. from the Massachusetts Institute of Technology, an M.B.A. from Harvard
University and an A.B. from Princeton University.
William M. Stuek has served as a Director of the Company since January
1996, and was previously a Director of the Company from October 1993 to June of
1994. Since September of 1996, Mr. Stuek has served as the General Manager of
North American Operations for IBM. From January 1996 to September 1996, Mr.
Stuek served as General Manager of North American Product Marketing for IBM, and
from September 1993 to January 1996 as Director General of IBM Europe, Middle
East & Africa. Mr. Stuek holds a B.A. from Colgate University. Mr. Stuek serves
on the Company's Board of Directors, but does so in his personal capacity at the
request of GAP II, a Company stockholder, and is not serving at the request of
IBM and does not represent IBM in this capacity.
DIRECTOR COMPENSATION
The Company reimburses each member of the Company's Board of Directors for
out-of-pocket expenses incurred in connection with attending Board meetings. In
addition, John F. Rockart receives an annual consulting fee in the amount of
$15,000 for his services as a member of the Board of Directors. Other than Mr.
Rockart, no member of the Company's Board of Directors currently receives any
cash compensation for services as a director.
On April 28, 1993, the Company granted director John F. Rockart an option
to purchase 10,000 shares of Common Stock at an exercise price of $2.86 per
share under the Company's 1990 Stock Option Plan. Twenty percent of the shares
subject to Mr. Rockart's option vest after one year, with the remaining shares
vesting in equal monthly installments over the next four years. On January 30,
1995, the Company granted director William M. Stuek an option to purchase 12,500
shares of Common Stock at an exercise price of $3.60 per share under the 1990
Stock Option Plan. Fifty percent of the shares subject to Mr. Stuek's option
vest after one year, with the remaining shares vesting in equal monthly
installments over the next year. On April 24, 1992, the Company granted director
William O. Grabe options to purchase a total of 180,000 shares of Common Stock
at a per share exercise price of $2.86 under the 1990 Stock Option Plan. Twenty
percent of the shares subject to Mr. Grabe's options vest after one year, with
the remaining shares vesting in equal monthly installments over the next four
years. See "Certain Transactions -- Agreements with Officers and Directors."
The Company's 1997 Director Option Plan (the "Director Plan") provides that
options will be granted to non-employee directors ("Outside Directors") pursuant
to an automatic nondiscretionary grant mechanism. The Director Plan provides for
an initial grant of options to purchase [10,000] shares of Common Stock to each
Outside Director upon the later of the effective date of the Director Plan or
the date on which such individual first becomes an Outside Director. In
addition, each Outside Director will subsequently be granted an option to
purchase 5,000 shares of Common Stock at the first meeting of the Board of
Directors following the annual meeting of stockholders in each year beginning
with the 1997 Annual Meeting of Stockholders if on such date, such Outside
Director has served on the Board of Directors for at least six months. Each
option under the Director Plan will be granted at the fair market value of the
Common Stock on the date of grant and will become exercisable over four years,
with 25% of
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<PAGE> 53
the shares vesting after one year and the remaining shares vesting in equal
monthly installments thereafter. See "Stock Plans -- 1997 Director Option Plan."
BOARD COMMITTEES
The Board of Directors has a Compensation Committee that makes
recommendations to the Board concerning salaries and incentive compensation for
officers and employees of the Company. The Board of Directors also has an Audit
Committee that reviews the results and scope of the annual audit and other
accounting related services.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
No interlocking relationship exists between any member of the Company's
Compensation Committee and any member of any other company's board of directors
or compensation committee.
EXECUTIVE COMPENSATION
The following table sets forth in summary form information concerning the
compensation received for services rendered to the Company and its subsidiaries
during the year ended December 31, 1996 by the Company's Chief Executive Officer
and the Company's four most highly compensated executive officers (other than
the Chief Executive Officer) whose salary and bonus for such year exceeded
$100,000 (the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
------------
SHARES
ANNUAL COMPENSATION UNDERLYING
-------------------- OPTIONS ALL OTHER
NAME AND PRINCIPAL POSITIONS SALARY($) BONUS($) GRANTED(#) COMPENSATION
- ------------------------------------------ --------- -------- ------------ ------------
<S> <C> <C> <C> <C>
Richard H. Goldberg....................... $ 245,000 $130,000 -- $ --
President, Chief Executive Officer
and Chairman of the Board
William R. Yeack.......................... 200,000 75,000 100,000 --
Vice President, Professional Services
and Product Marketing
Paul K. Wilde............................. 185,000 68,000 -- 11,803(1)
Vice President, Finance and
Administration, Chief Financial
Officer and Secretary
Duncan Moore(2)........................... 174,000 111,500 -- 39,900(3)
President, Synon Europe Limited
Simon Williams(4)......................... 187,500 263,573(5) -- --
Vice President, Development and Chief
Technology Officer
</TABLE>
- ---------------
(1) Represents amounts forgiven under a loan made by the Company to Mr. Wilde
for the purchase of Mr. Wilde's residence. See "Certain
Transactions -- Agreements with Officers and Directors."
(2) Mr. Moore resigned from his position of President of Synon Europe Limited
effective December 31, 1996.
(3) Consists of a $22,500 automobile allowance and $17,400 contributed by the
Company to Mr. Moore's pension fund.
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<PAGE> 54
(4) Mr. Williams resigned from his position of Vice President, Development and
Chief Technology Officer of the Company effective December 31, 1996 and
resigned as a director of the Company in May 1997.
(5) Represents a commission of two percent of all license and maintenance
revenue with respect to the Obsydian product in 1996. See "Certain
Transactions -- Dysys Agreement."
OPTION GRANTS IN FISCAL 1996
The following table sets forth certain information relating to stock
options awarded to each of the Named Executive Officers during the year ended
December 31, 1996. All such options were awarded under the Company's 1990 Stock
Option Plan. No stock appreciation rights were granted to any of the Named
Executive Officers during 1996. See "-- Stock Plans -- 1990 Stock Option Plan."
<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE
INDIVIDUAL GRANTS VALUE AT ASSUMED
--------------------------------------------------------- ANNUAL RATES OF
NUMBER OF PERCENT OF STOCK
SECURITIES TOTAL OPTIONS PRICE APPRECIATION
UNDERLYING GRANTED TO EXERCISE FOR OPTION TERM(5)
OPTIONS EMPLOYEES IN PRICE PER EXPIRATION -------------------
NAME GRANTED FISCAL 1996(1) SHARE($)(2)(3) DATE(4) 5%($) 10%($)
- ---------------------- ---------- -------------- -------------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Richard H. Goldberg... -- -- -- -- -- --
William R. Yeack...... 100,000 27% $ 3.60 01/24/06 $226,402 $573,747
Paul K. Wilde......... -- -- -- -- -- --
Duncan Moore.......... -- -- -- -- -- --
Simon Williams........ -- -- -- -- -- --
</TABLE>
- ---------------
(1) Based on an aggregate 371,250 shares subject to options granted to employees
of the Company and its subsidiaries during 1996.
(2) Options were granted at an exercise price equal to the fair market value of
the Company's Common Stock on the date of grant, as determined by the Board
of Directors.
(3) Exercise price may be paid in cash, by check, or at the discretion of the
Board, by promissory note or such other consideration and method of payment
permitted by applicable law.
(4) The term of each option granted under the 1990 Stock Option Plan is
generally ten years from the date of grant. Options may terminate prior to
their expiration dates, however, if the optionee's continuous status as an
employee is terminated or upon the optionee's death or disability. Options
granted under the 1990 Stock Option Plan generally must be exercised within
ninety (90) days of the termination of the optionee's status as an employee,
or within twelve (12) months after such optionee's death or disability.
(5) Potential realizable value is based on the assumption that the Common Stock
of the Company appreciates at the annual rate shown (compounded annually)
from the date of grant until the expiration of the ten year option term.
These numbers are calculated based on the regulations promulgated by the
Securities and Exchange Commission and do not reflect the Company's estimate
of future stock price growth.
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<PAGE> 55
AGGREGATE OPTION EXERCISES
IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
No Named Executive Officer exercised any stock option during fiscal year
1996. The following table sets forth certain information regarding stock options
held as of December 31, 1996 by the Named Executive Officers.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS AT
DECEMBER 31, 1996(#) DECEMBER 31, 1996($)(1)
----------------------------- -----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ----------------------------------------- ------------ -------------- ------------ --------------
<S> <C> <C> <C> <C>
Richard H. Goldberg...................... 208,333 41,667
William R. Yeack......................... -- 100,000 --
Paul K. Wilde............................ 110,000 -- --
Duncan Moore............................. 110,000 -- --
Simon Williams(2)........................ -- -- -- --
</TABLE>
- ---------------
(1) Based upon an initial public offering price of $ per share minus
the exercise price.
(2) Mr. Williams resigned from his position of Vice President, Development and
Chief Technology Officer of the Company effective December 31, 1996 and
resigned as a director of the Company in May 1997.
STOCK PLANS
1990 Stock Option Plan. The Company's 1990 Stock Option Plan (the "1990
Plan") provides for the grant of incentive stock options within the meaning of
Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), and
the nonstatutory stock options to employees of the Company. As of March 31,
1997, options to purchase an aggregate of 1,347,930 shares of Common Stock were
outstanding under the 1990 Plan, with a weighted average exercise price of
$3.16. Subsequent to March 31, 1997, the Board of Directors granted options to
purchase 6,000 shares of Common Stock under the 1990 Plan. The Board of
Directors has determined that no further options will be granted under the 1990
Plan after this Offering. The 1990 Plan provides that in the event of a merger
of the Company with or into another corporation, each outstanding option will be
assumed or substituted for by the successor corporation. In the event the
successor corporation refuses to assume or substitute for the option, the
optionee shall have the right to exercise all shares subject to the option,
including shares as to which it would not otherwise be exercisable.
Executive Share Option Scheme. The Company's Executive Share Option Scheme
(the "Executive Scheme") provides for the grant of nonstatutory stock options to
full-time employees and directors of the Company or any of its subsidiaries. As
of March 31, 1997, options to purchase an aggregate of 18,800 shares of Common
Stock were outstanding under the Executive Scheme with a weighted average
exercise price of $3.34. Since March 31, 1997, the Board of Directors has not
granted any further options to purchase shares of Common Stock under the
Executive Scheme. The Board of Directors has determined that no further options
will be granted under the Executive Scheme after this Offering.
1997 Incentive Stock Option Plan. The Company's 1997 Incentive Stock Option
Plan (the "1997 Plan") provides for the grant to employees of incentive stock
options within the meaning of Section 422 of the Code, and for the grant to
employees, directors and consultants of nonstatutory stock options and stock
purchase rights. The 1997 Plan was adopted by the Board of Directors in May 1997
and approved by the Company's stockholders in 1997. The 1997 Plan
replaces the 1990 Plan and the Executive Scheme. However, options previously
issued under the 1990 Plan and the Executive Scheme shall continue to be
exercisable according to their terms. Unless terminated sooner, the 1997 Plan
will terminate automatically in May 2007. A total of 1,500,000 shares of Common
Stock, plus annual increases equal to the lowest of (i) 400,000 shares of Common
Stock, (ii) 3% of the outstanding shares
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<PAGE> 56
of Common Stock or (iii) a lesser amount determined by the Board of Directors
has been reserved for issuance under the 1997 Plan.
The 1997 Plan may be administered by the Board of Directors or by a
committee of the Board (the "Committee"), which Committee shall, in the case of
options intended to qualify as "performance-based compensation" within the
meaning of Section 162(m) of the Internal Revenue Code of 1986, as amended (the
"Code"), consist of two or more "outside directors" within the meaning of
Section 162(m) of the Code. The Committee has the power to determine the terms
of options granted, including the exercise price, number of shares subject to
the option, the exercisability thereof, and the form of consideration payable
upon such exercise. In addition, the Committee has the authority to amend,
suspend or terminate the 1997 Plan, provided that no such action may affect any
share of Common Stock previously issued and sold or any option previously
granted under the 1997 Plan.
Options and stock purchase rights granted under the 1997 Plan are not
generally transferable by the optionee, and each option and stock purchase right
is generally exercisable during the lifetime of the optionee only by such
optionee. Options granted under the 1997 Plan must generally be exercised within
three months following termination of an optionee's status as an employee,
director or consultant of the Company, within twelve months after an optionee's
termination by disability, and within twelve months after an optionee's
termination by death, but in no event later than the expiration of the option.
In the case of stock purchase rights, unless the administrator determines
otherwise, a restricted stock purchase agreement shall grant the Company a
repurchase option exercisable upon the voluntary or involuntary termination of
the purchaser's employment with the Company for any reason (including death or
disability). The purchase price for shares repurchased pursuant to a restricted
stock purchase agreement shall be the original price paid by the purchaser and
may be paid by cancellation of any indebtedness of the purchaser to the Company.
The repurchase option shall lapse at a rate determined by the administrator. The
exercise price of all incentive stock options granted under the 1997 Plan must
be at least equal to the fair market value of the shares on the date of grant.
The exercise price of nonstatutory stock options granted under the 1997 Plan is
determined by the Committee, but with respect to nonstatutory stock options
intended to qualify as "performance-based compensation" within the meaning of
Section 162(m) of the Code, the exercise price must be at least equal to the
fair market value of the Common Stock on the date of grant. With respect to any
employee who owns stock possessing more than ten percent of the voting power of
all classes of the Company's outstanding capital stock, the exercise price of
any incentive stock option granted to such person must equal at least 110% of
the fair market value of the Common Stock on the date of grant and the term of
such incentive stock option must not exceed five years. The term of all other
options granted under the 1997 Plan may not exceed ten years.
The 1997 Plan provides that in the event of a merger of the Company with or
into another corporation, or a sale of substantially all of the Company's
assets, each outstanding option and stock purchase right will be assumed or
substituted for by the successor corporation. In the event the successor
corporation refuses to assume or substitute for the option or stock purchase
right, the optionee shall have the right to exercise all of the optioned stock,
including shares as to which it would not otherwise be exercisable.
1997 Employee Stock Purchase Plan. The Company's 1997 Employee Stock
Purchase Plan (the "Purchase Plan") was adopted by the Board of Directors in May
1997 and approved by the stockholders in , 1997. A total of 400,000
shares of Common Stock, plus annual increases equal to the lowest of (i) 150,000
shares, (ii) 1% of the outstanding shares or (iii) a lesser amount determined by
the Board of Directors has been reserved for issuance under the Purchase Plan.
The Purchase Plan, which is intended to qualify under Section 423 of the Code,
is administered by the Board of Directors or by a committee appointed by the
Board. Employees (including officers and employee directors of the Company but
excluding 5% or greater stockholders or persons whose right to purchase Common
Stock accrues at a rate greater than $25,000 worth of Common Stock per year) are
eligible to participate if they are customarily employed for at least 20 hours
per week and for more than five months in any calendar year. The Purchase Plan
permits eligible employees to purchase Common Stock through payroll
55
<PAGE> 57
deductions, which may not exceed 10% of an employee's compensation. The Purchase
Plan will be implemented by consecutive overlapping twelve (12) month offering
periods. The initial offering period under the Purchase Plan will begin on the
effective date of this Offering and subsequent offering periods will begin on
the first trading day on or after May 1 and November 1 of each year. Each
participant will be granted an option on the first day of the offering period,
and shares of Common Stock will be automatically purchased on the last date of
each purchase period within the offering period. If the fair market value of the
Common Stock on any purchase date (other than the final purchase date of the
offering period) is lower than such fair market value on the start date of that
offering period, then all participants in that offering period will be
automatically withdrawn from such offering period and re-enrolled in the
immediately following offering period. The purchase price of the Common Stock
under the Purchase Plan will be equal to 85% of the lesser of the fair market
value per share of Common Stock on the start date of the offering period or on
the purchase date. Employees may end their participation in an offering period
at any time, and participation ends automatically on termination of employment
with the Company. In the event of a proposed dissolution or liquidation of the
Company, the offering periods then in progress will be shortened by setting a
new exercise date that is before the dissolution or liquidation, and will
terminate immediately prior to the consummation of the proposed action, unless
otherwise provided by the Board. In the event of a proposed sale of all or
substantially all of the Company's assets or the merger of the Company with or
into another corporation, each outstanding option will be assumed or substituted
for by the successor corporation. In the event the successor corporation refuses
to assume or substitute for the options, the offering periods then in progress
will be shortened by setting a new exercise date that is before the sale or
merger and the offering periods then in progress will end on the new exercise
date. Each participant will be notified at least ten business days prior to the
new exercise date, and unless such participant ends his or her participation,
the option will be exercised automatically on the new exercise date. The
Purchase Plan will terminate in May 2007, unless sooner terminated by the Board
of Directors.
1997 Director Option Plan. The Company's 1997 Director Option Plan (the
"Director Plan") was adopted by the Board of Directors in May 1997 and approved
by the Company's stockholders in 1997. A total of 175,000 shares of
Common Stock, plus annual increases equal to the lesser of (i) the optioned
stock underlying options granted in the immediately preceding year, or (ii) a
lesser amount determined by the Board of Directors has been reserved for
issuance under the Director Plan. The option grants under the Director Plan are
automatic and non-discretionary, and the exercise price of the options is 100%
of the fair market value of the Common Stock on the grant date. The Director
Plan provides for an initial grant of options to purchase shares of
Common Stock to each new non-employee director of the Company (an "Outside
Director") upon the later of the effective date of the Director Plan or the date
which such individual first becomes an Outside Director. In addition, each
Outside Director will automatically be granted subsequent options to purchase
5,000 shares of Common Stock at the first meeting of the Board of Directors
following the annual meeting of stockholders in each year beginning with the
1997 Annual Meeting of Stockholders if on such date, such Outside Director has
served on the Board of Directors for at least six months. The term of each such
option is ten years. Each option granted to an Outside Director vests as to 25%
of the optioned stock on the first anniversary of the date of grant and as to
1/48th of the optioned stock each month thereafter. In the event of the sale of
all or substantially all the Company's assets or the merger of the Company with
or into another corporation, all outstanding options under the Director Plan may
either be assumed or an equivalent option may be substituted by the surviving
entity. Following such assumption or substitution, if the director is terminated
other than upon a voluntary resignation, such option will vest and become
exercisable in full. If no assumption or substitution occurs, each such option
will vest and become exercisable in full. The Director Plan will terminate in
May 2007 unless sooner terminated by the Board of Directors.
401(K) PLAN
The Company participates in a tax-qualified employee savings and retirement
plan (the "401(k) Plan") which covers all of the Company's full-time employees
who are at least 21 years of age. Pursuant to the 401(k) Plan, employees may
elect to reduce their current compensation by up to the lower of 15%
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<PAGE> 58
or the statutorily prescribed annual limit and have the amount of such reduction
contributed to the 401(k) Plan. The 401(k) Plan permits additional discretionary
matching contributions by the Company on behalf of all participants in the
401(k) Plan in such a percentage amount as may be determined annually by the
Board of Directors. To date, the Company has made no such matching
contributions. The 401(k) Plan is intended to qualify under Section 401 of the
Code, so that contributions by employees or by the Company to the 401(k) Plan,
and income earned on plan contributions, are not taxable to employees until
withdrawn from the 401(k) Plan, and so that contributions by the Company, if
any, will be deductible by the Company when made. The trustee under the 401(k)
Plan, at the direction of each participant, invests the assets of the 401(k)
Plan in any of a number of investment options.
SEVERANCE AND CHANGE IN CONTROL ARRANGEMENTS
The Company and Richard H. Goldberg are parties to an agreement dated
September 17, 1992 and amended on December 7, 1992. Pursuant to the agreement,
Mr. Goldberg is entitled to an annual salary of $225,000 (reviewed annually), an
annual performance-based bonus and a nonstatutory stock option to purchase
250,000 shares of Common Stock with vesting over a period of five years (subject
to acceleration upon certain events). Under the agreement, in the event Mr.
Goldberg is involuntarily or constructively terminated without cause, he will be
entitled to receive a severance payment equal to his full year's salary plus the
targeted annual bonus. Upon a change in control of the Company, 50% of the
unvested portion of Mr. Goldberg's option will vest automatically. If Mr.
Goldberg is involuntarily or constructively terminated within twelve months of a
change in control, his option will accelerate and become immediately exercisable
as to all shares subject to the option. In addition, 20% of the unvested portion
of Mr. Goldberg's option will vest automatically upon the closing of this
Offering.
The Company and Paul K. Wilde are parties to an agreement dated March 27,
1991, and amended on March 29, 1991, December 10, 1992 and January 14, 1993.
Pursuant to the agreement, Mr. Wilde is entitled to an annual salary of $150,000
(reviewed annually) and an annual performance-based bonus. Under the agreement,
in the event Mr. Wilde is involuntarily or constructively terminated without
cause within six months of a change in control of the Company, Mr. Wilde will be
entitled to receive a severance payment equal to his then current annual salary.
The agreement also provides for a loan of $200,000 from the Company to finance
the purchase of Mr. Wilde's home in California. See "Certain Transactions --
Agreements with Officers and Directors." Mr. Wilde has also been granted an
option to purchase 110,000 shares of Common Stock with vesting over a period of
five years from April 15, 1991, Mr. Wilde's employment start date. Under the
employment agreement, Mr. Wilde's option will accelerate and become immediately
exercisable as to all 110,000 shares subject to the option if Mr. Wilde is
involuntarily or constructively terminated within six months of a change in
control of the Company.
The Company and William R. Yeack are parties to an agreement dated January
2, 1996. Pursuant to the agreement, Mr. Yeack is entitled to an annual salary of
$200,000 (reviewed annually), a performance-based bonus and a nonstatutory stock
option to purchase 100,000 shares of Common Stock with vesting over a period of
four years. Upon the closing of this Offering, up to 25,000 shares subject to
Mr. Yeack's option will automatically vest. Upon his involuntary or constructive
termination without cause, Mr. Yeack will be entitled to a severance payment as
follows: (i) if such termination occurs prior to a change in control of the
Company, the severance payment will be equal to six months' salary; or (ii) if
such termination occurs within one year following a change in control, the
severance payment will be equal to a full year's salary and Mr. Yeack's option
will accelerate to become exercisable for one-half of the total number of the
unvested shares subject to the option.
The Company and Duncan Moore are parties to an agreement dated January 28,
1997 governing Mr. Moore's resignation as an executive officer of the Company.
Mr. Moore resigned as President of Synon Europe Limited, effective December 31,
1996. Pursuant to the agreement and in connection with Mr. Moore's resignation,
Mr. Moore was paid a total of UK L138,000, which amount included a severance
payment of UK L116,000 (equal to one year's base salary), a discretionary bonus
and accrued holiday pay. As additional severance consideration, and in exchange
for Mr. Moore's agreement not to compete with or solicit employees from the
Company, the Company agreed to extend through November 30, 1997
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<PAGE> 59
the exercisability of vested options held by Mr. Moore to acquire 110,000 shares
of the Company's Common Stock.
The Company and Simon Williams, the Company's former Vice President,
Development and Chief Technology Officer, are parties to an agreement dated July
28, 1994 (the "Williams Agreement"), pursuant to which Mr. Williams is entitled
to a base salary of UK L125,000 per year and a commission equal to 2% of all
license and maintenance revenue received by the Company with respect to the
Obsydian product (1% following Mr. Williams' leaving the Company). The Williams
Agreement was entered into in connection with the Company's acquisition of Dysys
Limited. Mr. Williams resigned his positions effective December 31, 1996 and
thus no longer receives a salary from the Company. However, Mr. Williams will
continue to receive a 1% Obsydian commission until June 30, 1999, and after such
time will receive a 1% commission with respect to any Obsydian-related contracts
entered into through June 30, 1999. See "Certain Transactions -- Dysys
Agreement."
The Company's 1990 Plan provides for the accelerated vesting of shares of
Common Stock subject to outstanding options held by Company employees, including
the Named Executive Officers, in connection with certain changes in control of
the Company. See "-- Stock Plans -- 1990 Stock Plan."
LIMITATIONS ON LIABILITY AND INDEMNIFICATION MATTERS
The Company has adopted provisions in its Certificate of Incorporation that
eliminate to the fullest extent permissible under Delaware law the liability of
its directors to the Company for monetary damages. Such limitation of liability
does not affect the availability of equitable remedies such as injunctive relief
or rescission. The Company's Bylaws provide that the Company shall indemnify its
directors and officers, and may indemnify its other employees and agents, to the
fullest extent permitted by Delaware law, including in circumstances in which
indemnification is otherwise discretionary under Delaware law. The Company has
entered into indemnification agreements with its officers and directors
containing provisions which may require the Company, among other things, to
indemnify the officers and directors against certain liabilities that may arise
by reason of their status or service as directors or officers (other than
liabilities arising from willful misconduct of a culpable nature), and to
advance their expenses incurred as a result of any proceeding against them as to
which they could be indemnified.
There is no currently pending litigation or proceeding involving a
director, officer, employee or other agent of the Company in which
indemnification would be required or permitted. The Company is not aware of any
threatened litigation or proceeding which may result in a claim for such
indemnification.
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<PAGE> 60
CERTAIN TRANSACTIONS
AGREEMENTS WITH OFFICERS AND DIRECTORS
Synon has employment agreements with certain of its Named Executive
Officers. See "Management -- Employment, Severance and Change in Control
Arrangements."
On March 27, 1991, Synon entered into an agreement with Paul K. Wilde, the
Company's Vice President, Finance and Administration, Chief Financial Officer
and Secretary, whereby Synon agreed to lend $200,000 to Mr. Wilde for the
purchase of a new principal residence pursuant to a five-year recourse
promissory note that bears interest at 8% per annum. The note, which was
executed in September 1992 and amended on January 14, 1992, was secured by a
junior security interest in the residence. Synon agreed to forgive the amount of
principal due on the note over the course of five years beginning on April 15,
1991 (Mr. Wilde's employment start date) at the rate of 1/60th of the principal
balance per month. Synon agreed to forgive the amount of interest due on the
note in the form of annual bonus payments equal to the amount of interest due.
The final remaining principal balance was forgiven on April 15, 1996.
Pursuant to an offer letter from the Company dated April 14, 1993, John F.
Rockart, a director of the Company, is entitled to receive consulting fees at an
annual rate of $15,000, payable monthly, in exchange for his services as a
member of the Board of Directors. In addition, the Company granted Mr. Rockart
an option to purchase 10,000 shares of its Common Stock at an exercise price of
$2.86 per share. See "Management -- Director Compensation."
DYSYS AGREEMENT
Pursuant to the Dysys Agreement, the Company purchased from Simon Williams
and Melinda Horton, founders and major stockholders of the Company, all of the
issued share capital of Dysys for UK L147,542, of which UK L73,771 was paid to
Mr. Williams. In addition, the Company repaid UK L95,871 in loans made by Mr.
Williams and Ms. Horton to Dysys. Of this amount, UK L58,951 was repaid to Mr.
Williams. In connection with this transaction, Dysys became a wholly-owned
subsidiary of the Company (Dysys subsequently changed its name to Synon Research
Limited) and the Company acquired certain intellectual property which was
included in the Company's Obsydian product. The Company also entered into
employment agreements with each of Mr. Williams and Ms. Horton, pursuant to
which the Company currently incurs a liability to pay Mr. Williams and Ms.
Horton a 1.0% and 0.5% commission, respectively, on Obsydian license and
maintenance revenue for all transactions entered into by the Company during the
five year period from July 1, 1994 through June 30, 1999. The commissions due to
Mr. Williams and Ms. Horton originally were 2.0% and 1.0%, respectively.
However, their employment agreements each provided that, upon voluntary
termination of their employment, the commissions would be reduced by half. Mr.
Williams and Ms. Horton resigned their positions with the Company in December
1996. Commissions earned by Mr. Williams under his employment agreement during
1994, 1995 and 1996 were $66,000, $205,000 and $301,000, respectively. Under the
Dysys Agreement, Mr. Williams and Ms. Horton also retain certain rights with
respect to the intellectual property, including the right to obtain a
non-exclusive, non-terminable license to exploit the technology and all
improvements, enhancements, modifications and new versions thereof in the event
of certain defaults by the Company, including failure to pay commissions
required in connection with the Dysys Agreement.
PREFERRED STOCK SALES
In September 1991, General Atlantic Partners II, L.P. ("GAP II"), a major
stockholder of the Company, purchased 2,776,120 (pre-conversion) shares of the
Company's Series D Preferred Stock at a purchase price of $3.35 per share as
part of a financing with other investors. In connection with such financing, GAP
II also exchanged previously held shares of the Company's capital stock for an
aggregate of 827,098 (pre-conversion) additional shares of Preferred Stock and
received certain registration rights with respect to the Company's Common Stock
owned by it. The Company's Certificate of Incorporation
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<PAGE> 61
provides that, upon conversion, holders of Series D Preferred Stock are entitled
to receive additional conversion consideration in the amount of $3.35 per share,
payable either in cash or in equity securities of the Company. The Company
currently expects to make the payment of the additional conversion consideration
using the Company's Common Stock. Currently, the Company has 3,618,269 shares of
Series D Preferred Stock issued and outstanding, of which 3,260,060 shares are
held by GAP II. Thus, upon the closing of this Offering and the conversion of
all outstanding shares of Preferred Stock, the holders of Series D Preferred
Stock will receive additional shares of Common Stock worth approximately
$12,121,000, of which amount approximately $10,921,000 will be issuable to GAP
II. Directors Grabe and Hodgson are managing members of General Atlantic
Partners, LLC, the general partner of GAP II. See "Management -- Executive
Officers, Directors and Key Employees" and "Description of Capital Stock
- -- Registration Rights."
On August 28, 1992, IBM purchased 1,666,667 (pre-conversion) shares of the
Company's Series E Preferred Stock at a price of $3.00 per share pursuant to a
stock purchase agreement (the "Stock Purchase Agreement"). As originally
executed, the Stock Purchase Agreement, among other things, granted IBM a right
of first refusal with respect to change in control transactions, a right to
require the Company to repurchase its shares of Series E Preferred Stock in
certain circumstances and the right to nominate an individual to the Company's
Board of Directors (collectively, the "IBM Rights"). IBM has never exercised its
right to nominate a director. Mr. William M. Stuek, General Manager of
Operations for IBM North America, serves on the Company's Board of Directors,
but does so in his personal capacity at the request of GAP II, and is not
serving at the request of IBM and does not represent IBM in this capacity. On
May 28, 1997, the Company and IBM entered into an amendment to the Stock
Purchase Agreement pursuant to which IBM agreed to the automatic termination of
the IBM Rights effective and contingent upon the closing of this Offering.
STOCKHOLDERS AGREEMENT
The Company, IBM, GAP II, Simon Williams, director William O. Grabe, and
several other significant stockholders (collectively, the "Stockholder Parties")
are parties to a Third Amended and Restated Stockholders Agreement (the
"Stockholders Agreement") dated July , 1997, pursuant to which the Stockholder
Parties were granted a right of first refusal to purchase any future voting
securities offered by the Company (excluding shares issued in a firm commitment
underwritten public offering). Certain Stockholder Parties were also granted the
right to elect one or more persons to the Company's Board of Directors. These
stockholder rights will automatically terminate upon the closing of this
Offering. The Stockholders Agreement also entitles the Stockholder Parties to
certain registration rights with respect to the Company's Common Stock owned by
them. See "Description of Capital Stock -- Registration Rights."
AGREEMENTS WITH IBM
The Company and IBM's AS/400 division are parties to an agreement dated
December 20, 1996, pursuant to which the Company agreed to develop and IBM's
AS/400 division agreed to partially fund a Synon/2E and Obsydian
internet/intranet enablement using a Java generator on the IBM AS/400. The
agreement provides for IBM's AS/400 division to pay the Company up to $200,000,
subject to the Company's attainment of certain development milestones. As of
March 31, 1997, the Company had accrued $140,000 under this agreement.
On September 27, 1990, the Company and IBM's AS/400 division entered into a
Development Incentive Agreement (the "Development Agreement") pursuant to which
IBM's AS/400 division loaned the Company $1.5 million to assist in the
development of an application generator tool for the IBM AS/400. The loan
initially was interest-free. However, in connection with IBM's purchase of
shares of the Company's Series E Preferred Stock in August 1992, the Company and
IBM agreed that, beginning January 1, 1994, the loan would accrue interest at 8%
per annum. The Company and IBM also agreed to extend the loan repayment schedule
and to provide for repayment of the loan in twelve increasing
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<PAGE> 62
quarterly installments beginning in March 1994. In December 1996, the Company
made its final loan payment to IBM under the Development Agreement.
The Company and CGI, a subsidiary of IBM, are parties to a distributorship
agreement dated January 8, 1996 pursuant to which CGI is designated as a
non-exclusive distributor in Germany for the Company's products. Under the
agreement, CGI licenses products from the Company, grants sublicenses to such
products to end-user customers and provides maintenance and first-level
technical support to such end-users. CGI has the right to appoint
sub-distributors, subject to the prior written approval of the Company. The
distributorship agreement also provides that CGI shall pay to the Company a
commission on all license and maintenance agreements. The agreement is due to
expire on January 8, 2001, however either party may terminate with 90 days'
written notice upon the third, fourth or fifth anniversary of the date of the
agreement, and the Company may unilaterally terminate earlier for CGI's breach,
failure to meet the sales quota for two consecutive quarters, insolvency,
bankruptcy, change of control or an unauthorized assignment.
The Company and IBM are parties to a Software Vendor Marketing Programs
Agreement dated March 7, 1997. Under this agreement, IBM has the right to market
Obsydian as an application development solution. In exchange, the Company has
agreed to pay IBM a fee based on a percentage of the total license revenue
received by the Company on certain transactions under user agreements entered
into as a result of IBM's marketing efforts.
The Company and IBM's AS/400 division are parties to a sponsored
development agreement dated April 1, 1997 (the "JumpStart Agreement"), pursuant
to which IBM's AS/400 division has agreed to assist the Company in the
development of four business object Class Libraries which can be assembled and
deployed through Obsydian. IBM's AS/400 division has agreed to provide the
necessary equipment, facilities and funding to support the joint project. In
exchange, the Company has agreed to pay IBM a royalty based on a percentage of
the Company's published sales price for each copy of Class Library licensed,
supported or sold for a period of two years after the general availability of
each Class Library. In connection with the JumpStart Agreement, the Company
contracted with CGI Systems Inc., a subsidiary of IBM, to provide two
application consultants to work on the joint development project with IBM in its
JumpStart Lab in Rochester, Minnesota. The estimated total value of this
engagement is $300,000.
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PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information regarding to the
beneficial ownership of the Company's Common Stock as of March 31, 1997 and as
adjusted to reflect the sale of the shares of Common Stock offered hereby
( shares, assuming the full exercise of the Underwriters' over-
allotment option) by (i) each person or entity who is known by the Company to
own beneficially 5% or more of the Company's outstanding Common Stock; (ii) each
director of the Company; (iii) each of the Named Executive Officers; (iv) all
directors and executive officers of the Company as a group; and (v) the other
Selling Stockholders.
<TABLE>
<CAPTION>
NUMBER OF
SHARES
OFFERED MAXIMUM
(EXCLUDING NUMBER OF
SHARES SHARES
OFFERED OFFERED
PURSUANT PURSUANT
TO TO
BENEFICIAL OWNERSHIP UNDERWRITERS' UNDERWRITERS' BENEFICIAL OWNERSHIP
PRIOR TO OFFERING(2) OVER- OVER- AFTER OFFERING(2)
-------------------- ALLOTMENT ALLOTMENT ------------------------
NAME AND ADDRESS(1) NUMBER PERCENT OPTION) OPTION NUMBER PERCENT
- ---------------------- ---------- ------- --------- ---------- -------------- -------
<S> <C> <C> <C> <C> <C> <C>
PRINCIPAL
STOCKHOLDERS:
General Atlantic 3,688,280 49.6
Partners LLC(3).....
3 Pickwick Plaza
Greenwich, CT 06830
Simon Williams........ 995,158 13.4
3 Butlers Wharf Road
West
40 Shad Thames
London SE1 2YA
United Kingdom
International Business 833,333 11.2
Machines
Corporation.........
1133 Westchester
Avenue
White Plains, NY
10604
Nicholas Knowles(4)... 442,875 6.0
45 Thornhill Road
London N1 IJ5
United Kingdom
Simon Haigh(5)........ 390,258 5.2
Asset Cornerstone
Technologies
77 West 200 Street,
Suite 500
Salt Lake City, UT
84101
</TABLE>
62
<PAGE> 64
<TABLE>
<CAPTION>
NUMBER OF
SHARES
OFFERED MAXIMUM
(EXCLUDING NUMBER OF
SHARES SHARES
OFFERED OFFERED
PURSUANT PURSUANT
TO TO
BENEFICIAL OWNERSHIP UNDERWRITERS' UNDERWRITERS' BENEFICIAL OWNERSHIP
PRIOR TO OFFERING(2) OVER- OVER- AFTER OFFERING(2)
-------------------- ALLOTMENT ALLOTMENT ------------------------
NAME AND ADDRESS(1) NUMBER PERCENT OPTION) OPTION NUMBER PERCENT
- ---------------------- ---------- ------- --------- ---------- -------------- -------
<S> <C> <C> <C> <C> <C> <C>
OFFICERS AND
DIRECTORS:
Richard H. 249,167 3.3
Goldberg(6).........
William R. Yeack(7)... 26,667 *
Paul K. Wilde(8)...... 115,000 1.5
Duncan Moore(9)....... 115,000 1.5
William O. 3,898,280 52.4
Grabe(10)...........
David C. Hodgson(11).. 3,688,280 49.6
John F. Rockart(12)... 9,709 *
William M. 25,000 *
Stuek(13)...........
All executive officers 4,375,614 60.4
and directors as a
group (9
persons)(14)........
OTHER SELLING STOCKHOLDERS:
</TABLE>
- ---------------
* Less than 1%.
(1) Unless otherwise indicated, the address for each listed stockholder is c/o
Synon Corporation, 1100 Larkspur Landing Circle, Larkspur, California,
94939. Except as otherwise indicated, and subject to applicable community
property laws, the persons named in the table have sole voting and
investment power with respect to all shares of Common Stock held by them.
(2) Applicable percentage ownership is based on 7,439,745 shares of Common
Stock outstanding as of March 31, 1997 and shares immediately
following the closing of this Offering (assuming the exercise in full of
the Underwriters' over-allotment option), together with applicable options
for such shareholder. Beneficial ownership is determined in accordance with
the rules of the Securities and Exchange Commission and generally includes
voting or investment power with respect to securities, subject to community
property laws, where applicable. Shares of Common Stock subject to options
that are presently exercisable or exercisable within 60 days of March 31,
1997 are deemed to be beneficially owned by the person holding such options
for the purpose of computing the percentage of ownership of such person but
are not treated as outstanding for the purpose of computing the percentage
of any other person. To the extent that any shares are issued upon exercise
of options, warrants or other rights to acquire the Company's capital stock
that are presently outstanding or granted in the future or reserved for
future issuance under the Company's stock plans, there will be further
dilution to new public investors.
(3) Includes 3,522,900 shares of Common Stock owned by General Atlantic
Partners II, L.P. ("GAP II"), 140,135 shares of Common Stock owned by
GAP-Synon Partners, L.P. ("GAP-Synon") and 25,245 shares of Common Stock
owned by GAP Coinvestment Partners, L.P. ("GAPCO"). The general partner of
GAP II is General Atlantic Partners, LLC ("GAP LLC"). The
63
<PAGE> 65
managing members of GAP LLC, including directors Hodgson and Grabe, are
also the general partners of GAPCO. In addition, Stephen P. Reynolds, a
managing member of GAP LLC, is the general partner of GAP-Synon. The
foregoing persons are a group within the meaning of Rule 13d-5 of the
Exchange Act and each of GAP II, GAP-Synon and GAPCO may be deemed to be
the beneficial owner of shares of Common Stock held by the other. In
addition to the 3,688,280 shares beneficially owned by GAP II and its
affiliates prior to the Offering, GAP II and its affiliates will be
entitled to receive upon the closing of the Offering a number of shares of
Common Stock worth approximately $10,921,000 as additional conversion
consideration for the shares of Series D Preferred Stock held by them. See
"Certain Transactions -- Preferred Stock Sales."
(4) Includes 12,500 shares owned by Catherine Alison Jane Knowles as to which
Mr. Knowles disclaims beneficial ownership.
(5) Includes 162,607 shares of Common Stock held of record by Timber Trustees
(CI) Limited, Peter Edmund Milner and Nigel Timothy Bentley, Trustees for
the Simon Haigh Trust.
(6) Includes 20,000 shares of Common Stock owned by the Goldberg Family Trust
UTD 2/21/96, of which Mr. Goldberg is co-trustee and 229,167 shares of
Common Stock issuable upon exercise of outstanding stock options which are
presently exercisable or will become exercisable within 60 days of March
31, 1997.
(7) Includes 26,667 shares of Common Stock issuable upon exercise of
outstanding stock options which are presently exercisable or will become
exercisable within 60 days of March 31, 1997.
(8) Includes 110,000 shares of Common Stock issuable upon exercise of
outstanding stock options which are presently exercisable or will become
exercisable within 60 days of March 31, 1997.
(9) Includes 110,000 shares of Common Stock issuable upon exercise of
outstanding stock options which are presently exercisable or will become
exercisable within 60 days of March 31, 1997.
(10) Includes 180,000 shares of Common Stock issuable upon exercise of
outstanding stock options which are presently exercisable or will become
exercisable within 60 days of March 31, 1997. Also includes 5,000 shares
owned by Mr. Grabe's wife, Joan Grabe, and 2,500 shares each owned by Lisa
Grabe and Laura Grabe, Mr. Grabe's minor children. Mr. Grabe disclaims
beneficial ownership as to the shares held of record by his wife and minor
children. Beneficial ownership totals for Mr. Grabe also include: (i)
3,522,900 shares of Common Stock owned by GAP II, (ii) 140,135 shares of
Common Stock owned by GAP-Synon, (iii) 25,245 shares of Common Stock owned
by GAPCO, and (iv) upon the closing of the Offering, an additional number
of shares of Common Stock worth approximately $10,921,201 issuable to GAP
II and its affiliates as additional conversion consideration for the Shares
of Series D Preferred Stock held by them (see note 3). Mr. Grabe disclaims
beneficial ownership of all shares held of record by GAP II, GAPCO and
GAP-Synon.
(11) Includes the following amounts: (i) 3,522,900 shares of Common Stock owned
by GAP II, (ii) 140,135 shares of Common Stock owned by GAP-Synon, (iii)
25,245 shares of Common Stock owned by GAPCO, and (iv) upon the closing of
the Offering, an additional number of shares of Common Stock worth
approximately $10,921,201 issuable to GAP II and its affiliates as
additional conversion consideration for the Shares of Series D Preferred
Stock held by them (see note 3). Mr. Hodgson disclaims beneficial ownership
of all shares held of record by GAP II, GAPCO and GAP-Synon.
(12) Includes 9,709 shares of Common Stock issuable upon exercise of outstanding
stock options which are presently exercisable or will become exercisable
within 60 days of March 31, 1997.
(13) Includes 12,500 shares of Common Stock issuable upon exercise of
outstanding stock options which are presently exercisable or will become
exercisable within 60 days of March 31, 1997.
(14) Includes 619,835 shares of Common Stock issuable upon exercise of
outstanding stock options which are presently exercisable or will become
exercisable within 60 days of March 31, 1997. Also includes the following
shares as to which beneficial ownership may be attributed to directors
Grabe and Hodgson: (i) 3,522,900 shares of Common Stock owned by GAP II,
(ii) 140,135 shares of Common Stock owned by GAP-Synon, (iii) 25,245 shares
of Common Stock owned by GAPCO, and (iv) upon the closing of the Offering,
an additional number of shares of Common Stock worth approximately
$10,921,000 issuable to GAP II and its affiliates as additional conversion
consideration for the Shares of Series D Preferred Stock held by them (see
note 3). Directors Grabe and Hodgson disclaim beneficial ownership of all
shares held of record by GAP II, GAPCO and GAP-Synon.
64
<PAGE> 66
DESCRIPTION OF CAPITAL STOCK
GENERAL
Upon the closing of this Offering, the Company will be authorized to issue
50,000,000 shares of Common Stock, $0.001 par value, and 5,000,000 shares of
undesignated Preferred Stock, $0.001 par value. Based upon shares outstanding as
of March 31, 1997 and assuming no exercise of the Underwriters' over-allotment
option, the Company estimates that immediately after the closing of this
Offering there will be an aggregate of shares of Common Stock
outstanding, shares of Common Stock will be issuable upon exercise of
outstanding options and no shares of Preferred Stock will be issued and
outstanding.
The following description of the Company's capital stock does not purport
to be complete and is subject to and qualified in its entirety by the Company's
Amended and Restated Certificate of Incorporation and Bylaws, which are included
as exhibits to the Registration Statement of which this Prospectus forms a part,
and by the provisions of applicable Delaware law.
The Amended and Restated Certificate of Incorporation and Bylaws contain
certain provisions that are intended to enhance the likelihood of continuity and
stability in the composition of the Board of Directors and which may have the
effect of delaying, deferring, or preventing a future takeover or change in
control of the Company unless such takeover or change in control is approved by
the Board of Directors.
COMMON STOCK
Holders of Common Stock are entitled to one vote per share on all matters
to be voted upon by the stockholders. Holders of Common Stock do not have
cumulative voting rights, and, therefore, holders of a majority of the shares
voting for the election of directors can elect all of the directors. In such
event, the holders of the remaining shares will not be able to elect any
directors.
Holders of the Common Stock are entitled to receive such dividends as may
be declared from time to time by the Board of Directors out of funds legally
available therefor, subject to the terms of any existing or future agreements
between the Company and its debtholders. The Company has never declared or paid
cash dividends on its capital stock, expects to retain future earnings, if any,
for use in the operation and expansion of its business, and does not anticipate
paying any cash dividends in the foreseeable future. In addition, the Company's
bank line of credit agreement contains a restrictive covenant that limits the
Company's ability to pay cash dividends or make certain stock repurchases
without the prior written consent of the lender. See "Dividend Policy." In the
event of the liquidation, dissolution or winding up of the Company, the holders
of Common Stock are entitled to share ratably in all assets legally available
for distribution after payment of all debts and other liabilities and subject to
the prior rights of any holders of Preferred Stock then outstanding.
PREFERRED STOCK
Effective upon the closing of this Offering, the Company will be authorized
to issue 5,000,000 shares of undesignated Preferred Stock. The Board of
Directors has the authority to issue the Preferred Stock in one or more series
and to fix the price, rights, preferences, privileges and restrictions thereof,
including dividend rights, dividend rates, conversion rights, voting rights,
terms of redemption, redemption prices, liquidation preferences and the number
of shares constituting a series or the designation of such series, without any
further vote or action by the Company's stockholders. The issuance of Preferred
Stock, while providing desirable flexibility in connection with possible
acquisitions and other corporate purposes, could have the effect of delaying,
deferring or preventing a change in control of the Company without further
action by the stockholders and may adversely affect the market price of, and the
voting and other rights of, the holders of Common Stock. The issuance of
Preferred Stock with voting and conversion rights may adversely affect the
voting power of the holders of Common Stock, including the loss of voting
control to others. The Company has no current plans to issue any shares of
Preferred Stock.
65
<PAGE> 67
ANTITAKEOVER EFFECTS OF PROVISIONS OF CERTIFICATE OF INCORPORATION AND BYLAWS
The Company's Amended and Restated Certificate of Incorporation provides
that all stockholder actions must be effected at a duly called annual or special
meeting and may not be effected by written consent. The Company's Bylaws provide
that, except as otherwise required by law, special meetings of the stockholders
can only be called pursuant to a resolution adopted by a majority of the Board
of Directors, by the Chairman of the Board of Directors, by the Chief Executive
Officer of the Company or by stockholders holding shares in the aggregate
entitled to cast not less than 20% of the votes at such meeting. In addition,
the Company's Bylaws establish an advance notice procedure for stockholder
proposals to be brought before an annual meeting of stockholders, including
proposed nominations of persons for election to the Board. Stockholders at an
annual meeting may only consider proposals or nominations specified in the
notice of meeting or brought before the meeting by or at the direction of the
Board of Directors or by a stockholder who was a stockholder of record on the
record date for the meeting, who is entitled to vote at the meeting and who has
delivered timely written notice in proper form to the Company's Secretary of the
stockholder's intention to bring such business before the meeting.
The foregoing provisions of the Company's Amended and Restated Certificate
of Incorporation and Bylaws are intended to enhance the likelihood of continuity
and stability in the composition of the Board of Directors and in the policies
formulated by the Board of Directors and to discourage certain types of
transactions which may involve an actual or threatened change of control of the
Company. Such provisions are designed to reduce the vulnerability of the Company
to an unsolicited acquisition proposal and, accordingly, could discourage
potential acquisition proposals and could delay or prevent a change in control
of the Company. Such provisions are also intended to discourage certain tactics
that may be used in proxy fights but could, however, have the effect of
discouraging others from making offers for the Company's shares and,
consequently, may also inhibit fluctuations in the market price of the Company's
shares that could result from actual or rumored takeover attempts. These
provisions may also have the effect of preventing changes in the management of
the Company. See "Risk Factors -- Effect of Certain Charter Provisions;
Antitakeover Effects of Certificate of Incorporation, Bylaws and Delaware Law."
EFFECT OF DELAWARE ANTITAKEOVER STATUTE
The Company is subject to Section 203 of the Delaware General Corporation
Law (the "Antitakeover Law"), which regulates corporate acquisitions. The
Antitakeover Law prevents certain Delaware corporations, including those whose
securities are listed for trading on the Nasdaq National Market, from engaging,
under certain circumstances in a "business combination" with any "interested
stockholder" for three years following the date that such stockholder became an
interested stockholder. For purposes of the Antitakeover Law, a "business
combination" includes, among other things, a merger or consolidation involving
the Company and the interested shareholder and the sale of more than ten percent
(10%) of the Company's assets. In general, the Antitakeover Law defines an
"interested stockholder" as any entity or person beneficially owning 15% or more
the outstanding voting stock of the Company and any entity or person affiliated
with or controlling or controlled by such entity or person. A Delaware
corporation may "opt out" of the Antitakeover Law with an express provision in
its original certificate of incorporation or an express provision in its
certificate of incorporation or bylaws resulting from amendments approved by the
holders of at least a majority of the Company's outstanding voting shares. The
Company has not "opted out" of the provisions of the Antitakeover Law. See "Risk
Factors -- Effect of Certain Charter Provisions; Antitakeover Effects of
Certificate of Incorporation, Bylaws and Delaware Law."
REGISTRATION RIGHTS
After the closing of this Offering and upon expiration of lock-up
agreements with the Underwriters, the holders of shares of Common
Stock will be entitled to certain rights with respect to the registration of
such shares under the Securities Act. Under the terms of the Stockholders
Agreement, if the Company proposes to register any of its securities under the
Securities Act, either for its own account or for the account of other
securities holders exercising registration rights, such holders are entitled to
notice of such registration and are entitled to include certain of their shares
of Common Stock therein.
66
<PAGE> 68
Holders of registration rights may also require the Company to file a
registration statement under the Securities Act at the Company's expense with
respect to their shares of Common Stock, and the Company is required to use its
best efforts to effect such registration. Further, holders may require the
Company to file registration statements on Form S-3 at the Company's expense
when such form becomes available for use to the Company. All such registration
rights are subject to certain conditions and limitations, including the right of
the underwriters of an offering to limit the number of shares to be included in
such registration.
TRANSFER AGENT
The Transfer Agent and Registrar for the Common Stock is ChaseMellon
Shareholder Services LLC, 50 California Street, 10th Floor, San Francisco,
California 94111, telephone (415)956-9512.
67
<PAGE> 69
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this Offering, there has been no market for the Common Stock and
there is no assurance that a significant public market for the Common Stock will
develop or be sustained after this Offering. Sales of substantial amounts of
Common Stock in the public market could adversely affect the market price of the
Common Stock and could impair the Company's future ability to raise capital
through the sale of its equity securities.
Upon the closing of this Offering, the Company will have outstanding
shares of Common Stock based upon shares outstanding as of March 31,
1997. In addition to the shares of Common Stock offered hereby
( if the Underwriters' over-allotment option is exercised in full), as
of the effective date of the Registration Statement (the "Effective Date"),
there will be shares of Common Stock outstanding (excluding 1,366,730
shares issuable upon the exercise of outstanding options), all of which are
"restricted" shares (the "Restricted Shares") under the Securities Act of 1933,
as amended (the "Securities Act"). Such Restricted Shares may be sold only if
registered under the Securities Act or sold in accordance with an available
exemption from such registration. Approximately of the Restricted
Shares will be freely tradeable without restriction immediately following the
Effective Date pursuant to Rule 144(k) of the Securities Act by persons who are
not "affiliates" of the Company as the term is defined in Rule 144.
Effective April 29, 1997, under Rule 144, a person (or persons whose shares
are aggregated in accordance with the Rule) who has beneficially owned his or
her shares for at least one year, including persons who are affiliates of the
Company, would be entitled to sell, within any three month period a number of
shares of Common Stock that does not exceed the greater of (i) one percent of
the then outstanding number of shares of Common Stock (up to shares of
Common Stock immediately after the consummation of the Offering) or (ii) the
average weekly trading volume of the shares during the four calendar weeks
preceding each such sale. In addition, sales under Rule 144 are also subject to
certain manner of sale provisions and notice requirements and to the
availability of current public information about the Company. After shares are
held for two years, a person who is not an affiliate of the Company is entitled
to sell such shares under Rule 144 without regard to such volume limitations, or
manner of sale, notice or public information requirements under Rule 144. Sales
of shares by affiliates will continue to be subject to such volume limitations,
and manner of sale, notice and public information requirements. Under Rule 701,
shares issued under certain compensatory stock-based plans, such as the 1990
Plan and the Executive Scheme, may be resold under Rule 144 by nonaffiliates
subject only to the manner of sale requirements, and by affiliates without
regard to the two-year holding period requirements, commencing 90 days after the
date of this Offering.
The Company, its officers and directors and certain holders of Common Stock
and options to purchase Common Stock have each agreed with the Underwriters not
to 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, directly or
indirectly, or announce the offering of, or file or cause to be filed, any
registration statements (other than, in the Company's case, a registration
statement on Form S-8) under the Securities Act, with respect to any shares of
Common Stock or any securities convertible into or exercisable or exchangeable
for Common Stock (the "Securities"), except in certain cases as to shares
acquired after the Offering, or enter into any swap or other agreement that
transfers, in whole or in part, the economic consequences of ownership of the
Common Stock for a period of 180 days after the date of the Underwriting
Agreement without the prior written consent of Salomon Brothers Inc. [IBM has
agreed to a similar agreement, except that commencing on the 91st day after the
date of the Underwriting Agreement, IBM may transfer or dispose of any or all of
its Securities in a private transaction with the prior written consent of
Salomon Brothers Inc, which consent shall not be unreasonably withheld, provided
that certain additional conditions are met.] Certain holders of Common Stock and
options to purchase Common Stock also have agreed pursuant to existing
agreements with the Company not to sell or otherwise transfer or dispose of any
Common Stock for a period of 180 days after the effective date of this Offering
without the prior written consent of the Company or Salomon Brothers Inc.
68
<PAGE> 70
Beginning 180 days after the Effective Date, approximately
additional Restricted Shares of Common Stock subject to the lock-up agreements
will become eligible for sale in the public market (unless the Representatives
elect, in their sole discretion, the earlier release of such shares from the
lock-up agreement) pursuant to Rule 144.
After the Offering pursuant to this Prospectus, the holders of
shares of Common Stock, or their transferees, will be entitled to certain rights
with respect to the registration of such shares under the Securities Act. See
"Description of Capital Stock -- Registration Rights." Registration of such
shares under the Securities Act would result in such shares becoming freely
tradeable without restriction under the Securities Act (except for shares
purchased by affiliates under Rule 144) immediately upon the effectiveness of
such registration.
The Company intends to file registration statements on Form S-8 shortly
after this Offering to cover shares of Common Stock which have been reserved for
issuance under the 1990 Plan, Executive Scheme, 1997 Incentive Stock Plan,
Purchase Plan and 1997 Director Option Plan. Shares so registered will be
eligible for sale by non-affiliates in the public market without limitation and
by affiliates subject to the provisions of Rule 144, except for the holding
period limitation. Shares of Common Stock issued upon exercise of options after
the effective date of the Form S-8 will be available for sale in the public
market, subject to Rule 144 limitations and lock-up agreements. Beginning 180
days after the Effective Date, shares issuable upon the exercise of
vested options will be eligible for sale.
Rule 144A under the Securities Act would permit the immediate sale of
Restricted Shares to qualified institutional buyers, subject to compliance with
conditions of the Rule.
69
<PAGE> 71
UNDERWRITING
Upon the terms and subject to the conditions set forth in the Underwriting
Agreement, the Company and the Selling Stockholders have agreed to sell to each
of the Underwriters named below (the "Underwriters"), for whom Salomon Brothers
Inc and Volpe, Brown, Whelan & Company, LLC are acting as representatives (the
"Representatives"), and each of such Underwriters has severally agreed to
purchase from the Company and the Selling Stockholders the respective number of
shares of Common Stock set forth opposite its name below:
<TABLE>
<CAPTION>
NUMBER
UNDERWRITERS OF SHARES
----------------------------------------------------------------- ---------
<S> <C>
Salomon Brothers Inc.............................................
Volpe Brown Whelan & Company, LLC................................
---------
Total..................................................
=========
</TABLE>
In the Underwriting Agreement, the several Underwriters have agreed,
subject to the terms and conditions set forth therein, to purchase all the
Shares offered hereby (other than those subject to the over-allotment option
described below) if any such Shares are purchased. In the event of a default by
an Underwriter, the Underwriting Agreement provides that, in certain
circumstances, the purchase commitments of the non-defaulting Underwriters may
be increased or the Underwriting Agreement may be terminated.
The Representatives have advised the Company and the Selling Stockholders
that the several Underwriters propose initially to offer the Shares to the
public at the price to public set forth on the cover page of this Prospectus and
to certain dealers at such price less a concession not in excess of $
per share. The Underwriters may allow and such dealers may reallow a concession
not in excess of $ per share to other dealers. After the Offering, the
price to public and such concessions may be changed.
Certain Selling Stockholders have granted the Underwriters an option,
exercisable within 30 days of the date of this Prospectus, to purchase up to
additional shares of Common Stock at the same price per share as the
initial shares of Common Stock to be purchased by the Underwriters.
The Underwriters may exercise such option only to cover over-allotments, if any,
incurred in connection with the Offering. To the extent the Underwriters
exercise such option, each Underwriter will have a firm commitment, subject to
certain conditions, to purchase the same proportion of such additional shares of
Common Stock as the number of shares of Common Stock to be purchased and offered
by such Underwriter in the table above bears to the total number of shares of
Common Stock initially offered by the Underwriters hereby.
The Underwriting Agreement provides that the Company and the Selling
Stockholders, jointly and severally, will indemnify the several Underwriters
against certain liabilities, including liabilities under the Securities Act, or
contribute to payments the Underwriters may be required to make in respect
thereof.
In connection with this Offering, certain Underwriters and selling group
members and their respective affiliates may engage in transactions that
stabilize, maintain or otherwise affect the market price of the Common Stock.
Such transactions may include stabilization transactions effected in accordance
with Rule 104 of Regulation M, pursuant to which such persons may bid for or
purchase Common Stock for the purpose of stabilizing its market price. The
Underwriters also may create a short position for the account of the
Underwriters by selling more Common Stock in connection with the Offering than
they are committed to purchase from the Company and the Selling Stockholders,
and in such case may purchase Common Stock in the open market following
completion of the Offering to cover all or a portion of such
70
<PAGE> 72
short position. The Underwriters may also cover all or a portion of such short
position, up to shares of Common Stock, by exercising the
Underwriters' over-allotment option referred to above. In addition, Salomon
Brothers Inc, on behalf of the Underwriters, may impose "penalty bids" under
contractual arrangements with the Underwriters whereby it may reclaim from an
Underwriter (or dealer participating in the Offering) for the account of the
other Underwriters, the selling concession with respect to Common Stock that is
distributed in the Offering but subsequently purchased for the account of the
Underwriters in the open market. Any of the transactions described in this
paragraph may result in the maintenance of the price of the Common Stock at a
level above that which might otherwise prevail in the open market. None of the
transactions described in this paragraph is required, and, if they are
undertaken, they may be discontinued at any time.
The Company, its officers and directors and certain holders of Common Stock
and options to purchase Common Stock have each agreed with the Underwriters not
to 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, directly or
indirectly, or announce the offering of, or file or, cause to be filed, any
registration statement (other than, in the Company's case, a registration
statement on Form S-8) under the Securities Act, with respect to any shares of
Common Stock or any securities convertible into or exercisable or exchangeable
for Common Stock (the "Securities"), except in certain cases as to shares
acquired after the Offering, or enter into any swap or other agreement that
transfers, in whole or in part, the economic consequences of ownership of the
Common Stock for a period of 180 days after date of the Underwriting Agreement
without the prior written consent of Salomon Brothers Inc. [IBM has agreed to a
similar agreement, except that commencing on the 91st day after the date of the
Underwriting Agreement, IBM may transfer or dispose of any or all of its
Securities in a private transaction with the prior written consent of Salomon
Brothers Inc, which consent shall not be unreasonably withheld, provided that
certain additional conditions are met.] Certain holders of Common Stock and
options to purchase Common Stock also have agreed pursuant to existing
agreements with the Company not to sell or otherwise transfer or dispose of any
Common Stock for a period of 180 days after the effective date of this Offering
without the prior written consent of the Company of Salomon Brothers Inc.
The Underwriters do not intend to confirm sales to any accounts over which
they exercise discretionary authority.
Prior to this Offering, there has been no public market for the Common
Stock. Accordingly, the initial public offering price for the Common Stock will
be determined by negotiation among the Company, the Selling Stockholders and the
Representatives. Among the factors to be considered in determining the initial
public offering price are the Company's record of operations, its current
financial condition, its future prospects, the market for its services, the
experience of management, the economic conditions of the Company's industry in
general, the general condition of the equity securities market and the demand
for similar securities of companies considered comparable to the Company and
other relevant factors. There can be no assurance, however, that the prices at
which the Common Stock will sell in the public market after this Offering will
not be lower than the price at which the Shares are sold by the Underwriters.
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company by Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo
Alto, California. Cleary, Gottlieb, Steen & Hamilton, New York, New York, is
acting as counsel for the Underwriters in connection with certain legal matters
relating to the shares of Common Stock offered hereby.
71
<PAGE> 73
EXPERTS
The financial statements and schedule included in this prospectus and
elsewhere in the registration statement have been audited by Arthur Andersen
LLP, independent public accountants, as indicated in their report with respect
thereto, and are included herein in reliance upon the authority of said firm as
experts in giving said reports.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-1 (the "Registration
Statement") under the Securities Act with respect to the securities offered
hereby. This Prospectus does not contain all of the information set forth in the
Registration Statement and the exhibits and schedules thereto. For further
information with respect to the Company and the Common Stock, reference is made
to the Registration Statement and the exhibits and schedules filed as a part
thereof. Statements contained in this Prospectus as to the contents of any
contract or any other document referred to are not necessarily complete. In each
instance, reference is made to the copy of such contract or document filed as an
exhibit to the Registration Statement, and each such statement is qualified in
all respects by such reference. The Registration Statement, including exhibits
and schedules thereto, may be inspected without charge at the public reference
facilities maintained by the Commission at 450 Fifth Street, N.W., Washington,
D.C. 20549 and at the regional offices of the Commission located at Seven World
Trade Center, Suite 1300, New York, New York 10048 and Northwestern Atrium
Center, 500 Madison Street, Suite 1400, Chicago, Illinois 60661-2511. Copies of
such materials may be obtained from the Public Reference Section of the
Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates,
and through the National Association of Securities Dealers, Inc. located at 1735
K Street, N.W., Washington, D.C. 20006. The Commission maintains a World Wide
Web site that contains reports, proxy and information statements and other
information regarding registrants that file electronically with the Commission.
The address of the Commission's Web site is http://www.sec.gov.
72
<PAGE> 74
GLOSSARY
AS/400 -- IBM's midrange server which has an established reputation for low
cost of ownership and high availability of package applications.
Client-server -- A specialized distributed computing architecture,
consisting of client applications and related server applications in which the
client applications request and receive information and computing services from
the server applications.
DB2/400 -- IBM's relational database operating on the AS/400.
Distributed computing -- The process by which data and applications are
distributed to minicomputers, workstations and personal computers within a
network rather than maintained on a centralized mainframe computer.
Graphical user interface (GUI) -- A means of communicating with a computer
by manipulating icons and windows rather than using character-oriented displays.
Java -- A recently introduced programming language from Sun Microsystems
derived from C++ that executes across hardware environments and can be
downloaded automatically to an Internet browser.
Lotus Domino -- The server component of the workflow product commonly known
as Lotus Notes.
Model-based -- An application development methodology which separates the
application's design from its programming implementation to provide better
design linkage with the end-user and greater flexibility in implementation
alternatives.
Object -- A piece of code that encapsulates both data and logic associated
with some function or service, such as formatting the current date.
Object Oriented -- An application development methodology which promotes
reuse of developed application objects through encapsulation and inheritance.
ODBC -- Open Database Communications Protocol -- a standard access protocol
for interfacing to a variety of databases.
Protocol -- A formal description of message formats and the rules two or
more machines must follow in order to exchange such messages.
Repository -- A storage mechanism for holding and managing an application
design.
Reuse -- The reuse of software code principally through the use of objects
and object frameworks.
RPG -- The prevalent 3rd generation programming language used in AS/400
applications.
Windows NT -- The scaleable 32 bit operating system from Microsoft for both
high performance workstations and application servers designed to run large or
small critical applications for an enterprise.
Wintel -- The shorthand description for the operating environment which
uses Intel chips and Microsoft operating systems.
73
<PAGE> 75
SYNON CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Report of Independent Public Accountants.............................................. F-3
Consolidated Balance Sheets -- December 31, 1995 and 1996 and March 31, 1997
(unaudited)......................................................................... F-4
Consolidated Statements of Operations -- Years ended December 31, 1994, 1995 and 1996
and three months ended March 31, 1996 and 1997 (unaudited).......................... F-6
Consolidated Statements of Stockholders' Equity -- Years ended December 31, 1994, 1995
and 1996 and three months ended March 31, 1997 (unaudited).......................... F-7
Consolidated Statements of Cash Flows -- Years ended December 31, 1994, 1995 and 1996
and three months ended March 31, 1996 and 1997 (unaudited).......................... F-8
Notes to Consolidated Financial Statements............................................ F-9
</TABLE>
F-1
<PAGE> 76
(This page intentionally left blank)
F-2
<PAGE> 77
After the transactions discussed in Note 17 to Synon
Corporation's consolidated financial statements are effected,
we expect to be in a position to render the following audit
report.
/s/ Arthur Andersen
LLP
May 15, 1997
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of
Synon Corporation:
We have audited the accompanying consolidated balance sheets of Synon
Corporation (a Delaware corporation) and subsidiaries as of December 31, 1995
and 1996, and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the three years in the period ended December
31, 1996. 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 audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Synon
Corporation and subsidiaries as of December 31, 1995 and 1996, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1996, in conformity with generally accepted accounting
principles.
San Francisco, California,
F-3
<PAGE> 78
SYNON CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- MARCH 31,
1995 1996 1997
------- ------- -----------
(UNAUDITED)
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents............................... $ 2,458 $ 1,080 $ 2,473
Trade accounts receivable, less allowance for doubtful
accounts of $1,706, $1,794, and $1,853,
respectively......................................... 20,198 22,777 18,735
Other receivables....................................... 307 220 612
Prepaid expenses and other current assets............... 2,432 1,345 1,375
------- ------- -------
Total current assets............................ 25,395 25,422 23,195
PROPERTY AND EQUIPMENT, net............................... 3,296 3,493 3,525
GOODWILL, net............................................. 501 376 344
CAPITALIZED SOFTWARE DEVELOPMENT COSTS, net............... 5,574 6,233 6,446
DEFERRED TAXES............................................ 728 1,048 1,149
DEPOSITS AND OTHER ASSETS................................. 373 337 404
------- ------- -------
Total assets.................................... $35,867 $36,909 $35,063
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE> 79
SYNON CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE AMOUNTS)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
DECEMBER 31, PRO FORMA,
------------------- MARCH 31, MARCH 31
1995 1996 1997 1997
-------- -------- -------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C>
CURRENT LIABILITIES:
Trade accounts payable........................................ $ 3,103 $ 2,990 $ 2,723
Accrued expenses related to restructuring European operations,
current portion............................................ 338 154 137
Other accrued expenses........................................ 8,859 9,281 7,908
Notes payable................................................. 675 380 297
Capital lease obligations, current portion.................... 489 396 324
Deferred maintenance and other revenue........................ 13,318 13,102 12,975
Income taxes payable.......................................... 308 382 335
-------- -------- --------
Total current liabilities............................. 27,090 26,685 24,699
CAPITAL LEASE OBLIGATIONS, net of current portion............... 396 352 283
ACCRUED EXPENSES RELATED TO RESTRUCTURING EUROPEAN OPERATIONS,
net of current portion........................................ 240 346 333
-------- -------- --------
Total liabilities..................................... 27,726 27,383 25,315
COMMITMENTS AND CONTINGENCIES
SERIES E MANDATORILY REDEEMABLE PREFERRED STOCK --
par value $0.001 per share
Authorized -- 1,666,667 shares
Issued and outstanding -- 1,666,667 shares
Preference in liquidation -- $5,000........................ 5,000 5,000 5,000 --
-------- -------- --------
STOCKHOLDERS' EQUITY:
Convertible preferred stock:
Series A -- par value $0.001 per share:
Authorized -- 3,687,750 shares
Issued and outstanding -- 2,687,750 shares
Preference in liquidation -- $22,846..................... 3 3 3 --
Series D -- par value $0.001 per share:
Authorized -- 3,618,269 shares
Issued and outstanding -- 3,618,269 shares
Preference in liquidation -- $24,242..................... 4 4 4 --
Undesignated series -- par value $0.001 per share:
Authorized -- 5,000,000 shares pro forma
Issued and outstanding -- no shares
Common stock -- par value $0.001 per share:
Authorized -- 25,000,000 shares (50,000,000 shares pro
forma)
Issued -- 3,434,325, 3,466,091 and 3,466,291 shares at
December 31, 1995 and 1996 and March 31, 1997,
respectively ( shares pro forma)
Outstanding -- 3,421,453, 3,453,219 and 3,453,419 shares
at December 31, 1995 and 1996 and March 31, 1997,
respectively ( shares pro forma)................ 3 3 3 8
Less: Treasury stock at cost -- 12,872 shares................. (47) (47) (47) (47)
Additional paid-in capital.................................... 25,593 25,906 25,907 43,030
Deferred compensation......................................... -- (219) (208) (208)
Accumulated deficit........................................... (22,107) (20,968) (20,907) (33,028)
Cumulative foreign currency translation adjustment............ (308) (156) (7) (7)
-------- -------- -------- --------
Total stockholders' equity............................ 3,141 4,526 4,748 9,748
-------- -------- -------- --------
Total liabilities and stockholders' equity............ $ 35,867 $ 36,909 $ 35,063
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE> 80
SYNON CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
------------------------------------ ------------------------
1994 1995 1996 1996 1997
---------- ---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES:
License..................... $ 23,313 $ 21,989 $ 21,801 $ 3,471 $ 4,476
Maintenance................. 18,848 21,053 21,321 5,384 5,352
Services.................... 23,219 27,740 33,009 8,161 8,644
---------- ---------- ---------- ---------- ----------
65,380 70,782 76,131 17,016 18,472
---------- ---------- ---------- ---------- ----------
COST OF REVENUES:
License..................... 4,366 4,093 3,133 688 774
Maintenance................. 4,251 5,188 5,984 1,481 1,530
Services.................... 17,351 21,635 26,885 6,774 6,634
---------- ---------- ---------- ---------- ----------
25,968 30,916 36,002 8,943 8,938
---------- ---------- ---------- ---------- ----------
Gross Profit............. 39,412 39,866 40,129 8,073 9,534
OPERATING EXPENSES:
Sales and marketing......... 25,741 25,919 25,034 5,391 5,614
Research and development.... 4,104 4,942 5,922 1,569 1,485
General and
administrative........... 7,641 8,011 7,320 1,800 2,101
Amortization of goodwill.... 125 125 125 31 31
---------- ---------- ---------- ---------- ----------
37,611 38,997 38,401 8,791 9,231
---------- ---------- ---------- ---------- ----------
Operating income
(loss)................. 1,801 869 1,728 (718) 303
OTHER INCOME (EXPENSE):
Interest income............. 130 73 78 29 22
Interest expense............ (412) (258) (125) (38) (18)
Other income (expense),
net...................... 232 267 (162) (18) (225)
---------- ---------- ---------- ---------- ----------
(50) 82 (209) (27) (221)
---------- ---------- ---------- ---------- ----------
Income (loss) before
income taxes........... 1,751 951 1,519 (745) 82
PROVISION (BENEFIT) FOR INCOME
TAXES....................... 437 237 380 (186) 21
---------- ---------- ---------- ---------- ----------
Net income (loss)........ $ 1,314 $ 714 $ 1,139 $ (559) $ 61
========== ========== ========== ========== ==========
Net income (loss) per
common and common
equivalent share....... $ 0.17 $ 0.09 $ 0.14 $ (0.15) $ 0.01
========== ========== ========== ========== ==========
Weighted average common
and common equivalent
shares outstanding..... 7,772,348 7,861,819 7,877,888 3,626,223 8,226,233
========== ========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE> 81
SYNON CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
SERIES A AND D
-------------------
CONVERTIBLE FOREIGN
PREFERRED STOCK COMMON STOCK(1) ADDITIONAL TREASURY STOCK CURRENCY
------------------- ------------------- PAID-IN ---------------- DEFERRED ACCUMULATED TRANSLATION
SHARES AMOUNT SHARES AMOUNT CAPITAL(1) SHARES AMOUNT COMPENSATION DEFICIT ADJUSTMENT
---------- ------ ---------- ------ ---------- ------- ------- ------------ ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT
DECEMBER 31,
1993........... 6,306,019 $ 7 3,366,919 $ 3 $ 25,505 $ $ $ (24,135) $ (7)
Exercise of
stock
options for
cash........ 64,697 -- 81
Foreign
currency
translation
adjustment... (210)
Net income.... 1,314
--------- ------ --------- ------ ------- ------- ------ ------- -------- -------
BALANCE AT
DECEMBER 31,
1994.......... 6,306,019 $ 7 3,431,616 3 25,586 (22,821) (217)
Exercise of
stock
options for
cash........ 2,708 -- 7
Foreign
currency
translation
adjustment... (91)
Purchase of
treasury
stock....... (12,872) (47)
Net income.... 714
--------- ------ --------- ------ ------- ------- ------ ------- -------- -------
BALANCE AT
DECEMBER 31,
1995.......... 6,306,019 $ 7 3,434,324 3 25,593 (12,872) (47) (22,107) (308)
Exercise of
stock
options for
cash........ 31,767 -- 93
Foreign
currency
translation
adjustment... 152
Deferred
compensation... 220 (220)
Amortization
of deferred
compensation... 1
Net income.... 1,139
--------- ------ --------- ------ ------- ------- ------ ------- -------- -------
BALANCE AT
DECEMBER 31,
1996.......... 6,306,019 $ 7 3,466,091 3 25,906 (12,872) (47) (219) (20,968) (156)
Exercise of
stock
options for
cash........ 200 -- 1
Foreign
currency
translation
adjustment... 149
Amortization
of deferred
compensation... 11
Net income.... 61
--------- ------ --------- ------ ------- ------- ------ ------- -------- -------
BALANCE AT MARCH
31, 1997
(unaudited)... 6,306,019 $ 7 3,466,291 $ 3 $ 25,907 (12,872) (47) $ (208) $ (20,907) $ (7)
========= ====== ========= ====== ======= ======= ====== ======= ======== =======
Conversion of
preferred
series A to
common
shares...... (2,687,750) (3) 1,343,875 2 1
Conversion of
preferred
series D to
common
shares...... (3,618,269) (4) 1,809,134 2 2
Accretion of
conversion
consideration -- preferred
Series D
shares...... 12,121 (12,121)
Conversion of
preferred
Series E
mandatorily
redeemable
preferred
shares to
common
shares...... 833,334 1 4,999
--------- ------ --------- ------ ------- ------- ------ ------- -------- -------
PRO FORMA
BALANCE AT
MARCH 31, 1997
(unaudited)... $ 8 $ 43,030 (12,872) $ (47) $ (208) $ (33,028) $ (7)
====== ======= ======= ====== ======= ======== =======
</TABLE>
- ---------------
(1) Pro forma common stock outstanding and additional paid-in capital do not
reflect the eventual reclassification from paid-in capital to par value
relating to shares issuable as additional conversion consideration to
holders of Series D Preferred Stock. See Note 2.
The accompanying notes are an integral part of these statements.
F-7
<PAGE> 82
SYNON CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------- -------------------
1994 1995 1996 1996 1997
------- ------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)................................ $ 1,314 $ 714 $ 1,139 $ (559) $ 61
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization................. 4,794 5,038 3,939 1,024 996
Deferred income taxes......................... (187) (322) (319) (141) (101)
(Gain) loss on sale of property and
equipment................................... 50 90 38 (9) (11)
Change in operating assets and liabilities:
Trade accounts receivable..................... (1,498) (2,255) (2,181) 1,851 3,461
Other receivables, prepaid expenses and
current assets.............................. (112) (413) 1,176 171 (459)
Trade accounts payable and accrued expenses... (1,454) 817 (204) (974) (1,357)
Deferred maintenance and other revenue........ 1,909 (313) (146) 367 238
Income taxes receivable and payable........... 11 118 52 (178) (32)
Deposits and other assets..................... (63) 122 28 (159) (67)
------ ------ ------ ------ ------
Net cash provided by operating
activities............................. 4,764 3,596 3,522 1,393 2,716
------ ------ ------ ------ ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment............... (2,043) (1,000) (1,761) (356) (609)
Proceeds from sale of property and equipment..... 79 88 162 33 16
Capitalization of software development costs..... (2,639) (2,219) (2,645) (619) (674)
Loans to officers and stockholder................ (4) -- -- -- --
Repayment of loans to officers and stockholder... 927 52 15 10 --
------ ------ ------ ------ ------
Net cash used for investing activities... (3,680) (3,079) (4,229) (932) (1,267)
------ ------ ------ ------ ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of notes payable.......... -- -- 380 250 --
Principal payments/proceeds on notes payable..... (325) (500) (675) (83)
Principal payments on capital lease
obligations................................... (1,285) (877) (517) (138) (119)
Proceeds from sale of common stock and exercise
of common stock options....................... 81 7 93 5 1
------ ------ ------ ------ ------
Net cash provided by (used for) financing
activities............................. (1,529) (1,370) (719) 117 (201)
------ ------ ------ ------ ------
EFFECT OF EXCHANGE RATE CHANGES ON CASH....... (65) (108) 48 101 132
------ ------ ------ ------ ------
NET INCREASE (DECREASE) IN CASH.................... (510) (961) (1,378) 679 1,393
CASH AT BEGINNING OF PERIOD........................ 3,929 3,419 2,458 2,458 1,080
------ ------ ------ ------ ------
CASH AT END OF PERIOD.............................. $ 3,419 $ 2,458 $ 1,080 $ 3,137 $ 2,473
====== ====== ====== ====== ======
</TABLE>
The accompanying notes are an integral part of these statements.
F-8
<PAGE> 83
SYNON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1997 IS
UNAUDITED.)
1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES:
NATURE OF BUSINESS
Synon Corporation and its subsidiaries (the "Company") is a leading
provider of enterprise software application development tools and professional
services.
The Company operates through wholly owned (except as noted) subsidiaries:
in North America through its U.S. subsidiary, Synon, Inc., and its Canadian
subsidiary, Synon Canada Ltd.; in the United Kingdom through its U.K.
subsidiaries, Synon Europe Ltd. and Synon Research Ltd.; in France through its
French subsidiary, Synon France SARL; in Germany through its German subsidiary,
Synon Germany GmBH; in Italy through its 65 percent-owned Italian joint venture,
Synon Italy SRL; in Japan through its 51 percent-owned Japanese joint venture,
Synon Japan Ltd.; in the Far East (other than Japan) through its 75
percent-owned Hong Kong joint venture, Synon Asia Ltd.; and in Australia through
its Australian subsidiary, Synon Pty Ltd.
CONCENTRATION OF BUSINESS RISKS
The market for the Company's products and services is characterized by
intense competition, rapid technological developments, frequent new product
introductions and evolving industry standards. Accordingly, the Company is
required to continually improve the performance, features and reliability of its
products and develop and maintain strategic relationships with larger companies.
Historically, most of the Company's license revenues have been attributable
to the Synon 2E product family. Beginning in 1995, a significant portion of the
Company's license revenue has been attributable to the Obsydian product family.
The Company expects the Obsydian product family to account for an increasingly
significant portion of the Company's revenues for the foreseeable future.
The Company operates in foreign countries located in Asia, Australia,
Europe, North America and South America and is impacted by the economic and
political stability of nations in these regions.
In addition, as discussed in Note 12, the Company has excess space under
long-term leases. While the space is currently subleased, the Company's ability
to continue to sublease the space under economically satisfactory terms is
subject to the impact of changing market conditions.
CONCENTRATION OF CREDIT RISK
Financial instruments that may potentially subject the Company to
concentrations of credit risk consist principally of cash and cash equivalents
and accounts receivable. Concentration of credit risk related to accounts
receivable is limited due to the varied customers comprising the Company's
customer base and their dispersion across geographies. All cash and cash
equivalents are with financial institutions with strong credit ratings, which
minimizes the risk of loss due to nonpayment. The Company has not experienced
any losses due to credit impairment related to its financial instruments.
SIGNIFICANT ACCOUNTING POLICIES
Unaudited Information -- The accompanying interim balance sheet at March 31
1997, and the statements of operations and cash flows for the three months ended
March 31, 1996 and 1997, together with the related notes, are unaudited but
include all adjustments, consisting of only normal recurring adjustments, which
the Company considers necessary to present fairly, in all material respects, the
financial condition of the Company at March 31, 1997, and the Company's results
of operations and cash flows for the three months ended March 31, 1996 and 1997.
Results for the three months ended March 31, 1997 are not necessarily indicative
of results for the entire fiscal year.
F-9
<PAGE> 84
SYNON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1997 IS
UNAUDITED.)
In conjunction with its proposed initial public offering (Note 17), all of
the Company's outstanding convertible preferred stock will be converted into
shares of common stock. The pro forma effect of these conversions, which is
unaudited, has been reflected in the accompanying pro forma consolidated balance
sheet assuming the conversion had occurred on March 31, 1997.
Principles of Consolidation -- The consolidated financial statements
include the accounts of Synon Corporation and all of its subsidiaries and joint
ventures.
Revenue Recognition -- The Company generates revenues from licensing the
rights to use its software products directly to end users and indirectly through
value-added resellers (VARs). The Company also generates revenues from sales of
post-contract support, consulting and training services performed for customers
who license the Company's products.
The Company recognizes revenues and records estimated warranty reserves
from software license agreements with end users and VARs upon shipment of the
software if there are no significant post-delivery obligations and if collection
is probable. If a software license agreement provides for acceptance criteria
that extend beyond the published specifications of the applicable product, then
revenues are recognized upon the earlier of customer acceptance or the
expiration of the acceptance period.
Customers who purchase post-contract support services under maintenance
agreements have the right to receive unspecified product updates, upgrades and
enhancements. Customers that do not purchase post-contract support must purchase
product updates, upgrades and enhancements under separate agreements that are
subject to the criteria of the Company's revenue recognition policy.
Revenues from post-contract support services are recognized ratably over
the term of the support period. If post-contract support services are included
free or at a discount in a license agreement, such amounts are allocated out of
the license fee at their fair market value based on the value established by
independent sale of such post-contract support services to customers. Consulting
revenues are primarily related to implementation services performed on a time
and materials basis and fixed-price contracts under separate service
arrangements related to the installation of the Company's software products and
software development using the Company's software products. Revenues from
consulting and training services are recognized as services are performed except
for fixed-price contracts. Revenues from fixed-price contracts are recognized on
the percentage-of-completion method, measured by the cost incurred to date,
compared to estimated total costs for each contract. If a transaction includes
both license and service elements, license fee revenue is recognized upon
shipment of the software, provided services do not include significant
customization or modification of the base product and the payment terms for
licenses are not subject to acceptance criteria. In cases where license fee
payments are contingent upon the acceptance of services, revenues from both the
license and the service elements are deferred until the acceptance criteria are
met. In situations where there are undelivered elements that are critical to
functionality of the software product, the entire license fee is deferred.
Deferred revenues include software license fees and services that have been
invoiced to the customer for which the revenue earnings process has not been
completed.
Use of Estimates -- The preparation of the consolidated 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 and disclosure of contingent assets and liabilities at
the dates of the consolidated financial statements and the reported amounts of
revenues and expenses during the reporting periods. Actual results could differ
from those estimates.
Significant estimates made by management include revenue recognition under
fixed-price contracts, excess space reserves (see Note 12), determination of
technological feasibility of software under
F-10
<PAGE> 85
SYNON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1997 IS
UNAUDITED.)
development and related research and development cost capitalization, as well as
product life amortization periods for capitalized software costs.
Supplemental Cash Flow Information -- During the years ended December 31,
1994, 1995 and 1996, and during the three months ended March 31, 1996 and 1997,
the Company paid interest of approximately $412,000, $258,000, $125,000, $38,000
and $18,000, respectively, and income taxes of approximately $533,000, $177,000,
$719,000, $188,000 and $186,000, respectively.
During the years ended December 31, 1994, 1995 and 1996, and during the
three months ended March 31, 1996 and 1997, capital lease obligations of
approximately $676,000, $542,000, $333,000, $47,000 and $0, respectively, were
incurred relating to the acquisition of property and equipment.
Cash -- Cash and cash equivalents are stated at cost, which approximates
market, and consist of short-term, highly liquid investments with original
maturities of less than three months.
Property and Equipment -- Property and equipment are stated at cost and are
depreciated using the straight-line method over estimated useful lives, or
related lease terms, if shorter, as follows:
<TABLE>
<CAPTION>
ESTIMATED
CLASSIFICATION USEFUL LIFE
------------------------------------------------------ --------------
<S> <C>
Computer hardware..................................... 3 to 6 years
Computer software..................................... 3 to 5 years
Leasehold improvements................................ 1 to 8 years
Furniture and fixtures................................ 5 to 11 years
Automobiles........................................... 4 to 5 years
</TABLE>
Capitalized Software Development Costs -- The Company capitalizes software
development costs in accordance with Statement of Financial Accounting Standards
(SFAS) No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased
or Otherwise Marketed." The costs of software development are capitalized from
the date at which the technological feasibility of a product is established.
Capitalization of development costs ceases and amortization begins when a
product is available for general release to customers. Amortization is computed
separately for each product using the straight-line method over an estimated
useful life of up to five years (see Note 4).
Goodwill -- Goodwill relates to the acquisition of Synon Consulting, Inc.
in 1990 and is being amortized on a straight-line basis over its estimated
useful life of 10 years. Periodically, goodwill is evaluated for indications of
impairment in its value. If impairment exists, a write-down to the net
realizable value is recorded. No such write-down occurred during the years ended
December 31, 1994, 1995 or 1996, or in the three months ended March 31, 1997.
Accumulated amortization at December 31, 1995 and 1996 and at March 31, 1997 was
approximately $9,849,000, $9,974,000 and $10,005,000, respectively.
Stock Split -- In July 1997, the Company will effect a 1-for-2 reverse
stock split of its common stock (see Note 17). All common stock and option data
in the accompanying consolidated financial statements for all periods presented
have been retroactively adjusted to reflect the stock split.
Cost of License Revenue -- Cost of license revenue includes royalties on
Obsydian and third-party products (see Note 14), materials costs, and
amortization of capitalized software development costs.
Cost of Maintenance Revenue -- Cost of maintenance revenue consists
primarily of compensation and other costs for customer support personnel,
related facilities and equipment costs, third party royalties related to
maintenance revenue, and materials costs of product updates and new releases
provided to customers.
F-11
<PAGE> 86
SYNON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1997 IS
UNAUDITED.)
Cost of Services Revenue -- Cost of services revenue consists primarily of
compensation and other costs for personnel providing education, consulting and
application development services, related facilities and equipment costs and
travel costs related to services engagements.
Income Taxes -- The Company provides for income taxes under Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes." Under
SFAS 109, deferred income taxes are recorded to reflect the tax consequences on
future years of differences between the tax basis of assets and liabilities and
their financial reporting amounts at each period-end. Income tax benefits have
been recorded for net operating loss carryforwards, tax credit carryforwards and
net deferred tax assets except as disclosed in Note 9. A valuation allowance is
placed on the deferred tax assets to reduce them to their net realizable value.
Foreign Currency Translation -- The financial statements of subsidiaries
outside the United States are generally measured using the local currency as the
functional currency. Assets and liabilities of these subsidiaries are translated
at the rates of exchange at the balance sheet date. The resultant translation
adjustments are included in equity as a cumulative foreign currency translation
adjustment, a separate component of stockholders' equity. Income and expense
items are translated at average monthly rates of exchange. Gains and losses from
foreign currency transactions of these subsidiaries are included in net
earnings. Foreign exchange transaction gains and losses of $216,000, $227,000,
$(167,000), $(18,000) and $(225,000) are included in the consolidated statements
of operations for the years ended December 31, 1994, 1995 and 1996 and for the
three months ended March 31, 1996 and March 31, 1997, respectively.
Net Income (Loss) per Common and Common Equivalent Share -- Net income
(loss) per common and common equivalent share is computed using the weighted
average number of common and common equivalent shares outstanding (using the
treasury stock method). Common equivalent shares from preferred stock and stock
options are excluded from the computation if their effect is antidilutive.
Pursuant to the Securities and Exchange Commission (SEC) Staff Accounting
Bulletins, stock options and warrants issued during the 12-month period prior to
the proposed initial public offering at prices below the assumed public offering
price have been included in the calculation as if they were outstanding for all
periods presented (using the treasury stock method).
Adoption of Accounting Pronouncements -- For the year ended December 31,
1997, the Company will report its Earnings per Share (EPS) based upon the
recently issued Statement of Financial Accounting Standards No. 128 (SFAS No.
128), "Earnings per Share". The pro forma effect of this accounting change on
the quarter ended March 31, 1997 is:
<TABLE>
<S> <C>
Primary EPS as reported.............................. $ .01
Pro forma effect of SFAS No. 128..................... $ .01
Basic EPS pro forma.................................. $ .02
Fully diluted EPS as reported........................ $ .01
Pro forma effect of SFAS No. 128..................... $ .00
Diluted EPS pro forma................................ $ .01
</TABLE>
The Company adopted SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for the Long-Lived Assets to be Disposed of" beginning
January 1, 1996. The Company also adopted SFAS No. 123, "Accounting for
Stock-Based Compensation," beginning January 1, 1996. The adoption of these
pronouncements did not have a material impact on the consolidated financial
statements of the Company taken as a whole.
Reclassifications -- Certain reclassifications have been made to prior
years' consolidated financial statements in order to conform to the current year
presentation.
F-12
<PAGE> 87
SYNON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1997 IS
UNAUDITED.)
2. PREFERENCES AND RESTRICTIONS RELATED TO STOCKHOLDERS' EQUITY:
Preferred stockholders are entitled to dividends only when and if declared
by the Board of Directors.
Preferred stock is subject to certain preferences upon liquidation of the
Company, or upon merger or acquisition of the Company if not exempted by a
two-thirds vote of the Board of Directors.
Each preferred and common share is entitled to one vote, except with
respect to certain corporate events.
Each share of Series A and Series E preferred stock is convertible into
common stock on a share-for-share basis. Each share of Series D preferred stock
is convertible into one share of common stock plus $3.35 in cash (or at the
option of the Company, equity securities of the Company with an agreed-upon or
appraised market value of $3.35 per share). It is management's intention to
satisfy the conversion premium by issuing common stock. The pro forma
consolidated balance sheet as of March 31, 1997 reflects accretion of
$12,121,000 related to the conversion of Series D preferred stock, as well as
issuance of conversion premium shares at an assumed initial public
offering price of per share. The holders of Series D preferred stock may
convert their shares into shares of common stock upon the sale, merger or
liquidation of the Company or upon the consummation of an initial public
offering as described below. Conversion of Series A, D and E preferred stock is
automatic in the event of a public sale of common stock at not less than $10.00
per share and not less than $10 million in gross proceeds.
Certain of the Company's stockholders have the right of first refusal to
purchase any new stock issued by the Company (with certain exceptions, such as
stock issued under the Company's stock option plans). This right will terminate
on the closing of the proposed Offering. (Note 16)
In August 1992, IBM purchased 1,666,667 shares of Series E Preferred stock
at $3.00 per share. Under the stock purchase agreement, IBM has a right of first
refusal with respect to change in control transactions. In addition, under
certain circumstances, including a change in the Company's business, IBM may put
its 1,666,667 shares to the Company at the greater of a price of $3.00 per share
or the then-fair-market value of the shares. Notwithstanding the above, IBM may
require redemption of one-third of its shares on each of August 31, 1997, 1998
and 1999 at the then-fair-market value of the shares. On May 28, 1997, the
Company and IBM entered into an amendment pursuant to which IBM agreed to the
automatic termination of these rights effective and contingent upon the closing
of the Offering.
The Company and certain of the Company's stockholders also have the right
of first refusal to purchase any stock offered for sale by stockholders to any
person who, upon purchase of the shares, would own more than 10 percent of the
voting power of the Company. This right is expected to terminate upon the
closing of the Offering.
Certain of the Company's common stockholders have demand registration
rights and piggyback registration rights.
F-13
<PAGE> 88
SYNON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1997 IS
UNAUDITED.)
3. PROPERTY AND EQUIPMENT:
The components of property and equipment are (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, MARCH
------------------- 31,
1995 1996 1997
------- ------- -------
<S> <C> <C> <C>
Computer hardware and software.............. $ 7,012 $ 8,118 $ 8,295
Leasehold improvements...................... 1,688 1,062 1,162
Furniture and fixtures...................... 2,441 2,809 2,713
Automobiles................................. 1,333 1,302 1,208
------ ------ ------
12,474 13,291 13,378
Less -- Accumulated depreciation and
amortization.............................. (9,178) (9,798) (9,853)
------ ------ ------
$ 3,296 $ 3,493 $ 3,525
====== ====== ======
</TABLE>
4. CAPITALIZED SOFTWARE DEVELOPMENT COSTS:
Capitalized software development expenditures, net of write-offs, were
approximately $2,639,000, $2,219,000 and $2,645,000 for the years ended December
31, 1994, 1995, and 1996, respectively, and $619,000 and $674,000 for the three
months ended March 31, 1996 and March 31, 1997, respectively. Capitalized
software development expenditures represented 39%, 31% and 31% of total research
and development expenditures for the years ended December 31, 1994, 1995 and
1996, respectively, and 28% and 31% of total research and development
expenditures for the three months ended March 31, 1996 and 1997, respectively.
Accumulated amortization was approximately $7,999,000, $10,106,000 and
$10,513,000 at December 31, 1995 and 1996 and at March 31, 1997, respectively.
Amortization expense for the years ended December 31, 1994, 1995 and 1996 and
for the three months ended March 31, 1996 and 1997 was approximately $2,070,000,
$2,527,000, $1,986,000, $544,000 and $460,000, respectively.
5. OTHER ACCRUED EXPENSES:
Other accrued expenses consisted of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER, 31
----------------- MARCH 31,
1995 1996 1997
------ ------ ---------
<S> <C> <C> <C>
Third-party royalties and fees................ $ 822 $ 621 $ 509
Commissions and bonuses....................... 2,277 2,655 1,605
Taxes other than income....................... 1,461 1,284 1,184
Accrued vacation pay.......................... 947 1,000 1,045
Accrued consultants fees...................... 1,286 1,487 1,465
Accrued distributor and finders fees.......... 639 709 459
Other accrued expenses........................ 1,427 1,525 1,641
------ ------ ------
$8,859 $9,281 $ 7,908
====== ====== ======
</TABLE>
6. LINE OF CREDIT:
In 1996, the Company renewed a line of credit agreement (the 1996
Agreement) originally signed in 1994 (the 1994 Agreement) with a bank that
permits the Company to borrow up to $4,000,000 but not to exceed 70 percent of
eligible accounts receivable. Balances outstanding under the line accrue
interest at a rate of 1.25 percent above the bank's prime rate (8.25 percent at
December 31, 1996). The line of credit is secured by substantially all of the
Company's assets, and expires July 14, 1997. The Company is subject to certain
financial and non-financial covenants under the agreement, including the
maintenance
F-14
<PAGE> 89
SYNON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1997 IS
UNAUDITED.)
of quick ratio, additional quick ratio, debt-to-equity ratio and profitability
requirements. As of December 31, 1996 and March 31, 1997, the Company was not in
compliance with certain of these covenants. Waivers were obtained from the bank
for these violations. No borrowings were made under the agreement in 1995 or
1996.
7. NOTES PAYABLE:
The Company entered into a development incentive agreement with IBM, a
related party, in September 1990, whereby IBM agreed to lend the Company up to
$1,500,000 for qualified research and development expenditures. This loan was
interest free and repayable in quarterly installments between March 31, 1992,
and December 31, 1994. In connection with IBM's purchase of the Company's Series
E preferred stock, IBM deferred the payment dates on this note to begin on March
31, 1994. These payment requirements were quarterly, with increasing principal
from $65,000 due on March 31, 1994, to $185,000 due on December 31, 1996.
Interest accrued from January 1, 1994 at 8 percent and was due quarterly. The
remaining unpaid principal balance on the note at December 31, 1995, was
$675,000. The note was paid in full by December 31, 1996.
At December 31, 1996 notes payable in the accompanying consolidated balance
sheet consisted of equipment financing and development funding advances.
8. LEASES:
The Company is obligated under leases for certain facilities and equipment
with remaining terms ranging from 1 to 18 years.
Rental expense (under operating leases) was approximately $3,634,000,
$3,671,000 and $3,676,000 for the years ended December 31, 1994, 1995 and 1996
respectively, and $864,000 and $912,000 for the three months ended March 31,
1996 and 1997, respectively. In connection with these leases, the Company pays
all insurance, maintenance and repairs on the related properties.
At December 31, 1995 and 1996 and at March 31, 1997, total assets under
capital lease obligations were approximately $1,981,000, $2,108,000 and
$2,004,000, respectively. Accumulated amortization of assets under capital lease
obligations was $961,000, $1,214,000 and $1,205,000 as of December 31, 1995 and
1996 and at March 31, 1997, respectively.
F-15
<PAGE> 90
SYNON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1997 IS
UNAUDITED.)
Future minimum payments under leases with initial noncancelable lease terms
in excess of one year at December 31, 1996, are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDING CAPITAL OPERATING
DECEMBER 31 LEASES LEASES
------------------------------------------------ ------- ---------
<S> <C> <C>
1997......................................... $ 454 $ 3,220
1998......................................... 369 2,835
1999......................................... 33 2,321
2000......................................... 0 1,742
2001......................................... 0 1,003
Thereafter................................... 0 4,564
----- -------
Total future minimum lease payments... 856 $15,685
===== =======
Less:
Amounts representing executory costs.......... (2)
Amounts representing interest (at an average
rate of 13 percent)........................ (106)
-----
Present value of future minimum lease
payments................................. 748
Current portion................................. (396)
-----
Long-term portion............................... $ 352
=====
</TABLE>
Excluded from operating lease commitments above are commitments related to
excess space in three offices located in the United Kingdom (see Note 12).
9. INCOME TAXES:
The U.S. and international components of income before taxes are as follows
(in thousands):
<TABLE>
<CAPTION>
1994 1995 1996
------ ---- ------
<S> <C> <C> <C>
U.S.............................................. 1,111 145 461
International.................................... 640 806 1,058
----- --- -----
Income before taxes.................... 1,751 951 1,519
===== === =====
</TABLE>
The provision for income taxes consists of the following (in thousands) :
<TABLE>
<CAPTION>
1994 1995 1996
---- ---- ------
<S> <C> <C> <C>
Domestic:
Current......................................... $264 $415 $ 402
Deferred........................................ (187) (322) (319)
---- ---- ----
Total domestic.......................... 77 93 83
---- ---- ----
International:
Current......................................... 360 501 1,036
Deferred........................................ -- -- --
Benefit of loss carryforwards................... -- (357) (739)
---- ---- ----
Total international..................... 360 144 297
---- ---- ----
Provision for income taxes.............. $437 $237 $ 380
==== ==== ====
</TABLE>
F-16
<PAGE> 91
SYNON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1997 IS
UNAUDITED.)
Deferred tax assets (liabilities) consist of the following as of December
31 (in thousands):
<TABLE>
<CAPTION>
1995 1996
------- -------
<S> <C> <C>
Foreign tax and general business credits............... $ 1,316 $ 1,148
Net operating loss carryforwards....................... 3,028 2,131
Deferred tax assets -- timing differences.............. 1,825 2,022
Deferred tax liabilities -- timing differences......... (1,484) (1,537)
Valuation allowance.................................... (3,957) (2,716)
------- -------
Net deferred tax assets...................... $ 728 $ 1,048
======= =======
</TABLE>
The valuation allowance relates to net operating loss carryforwards and
various tax credit carryforwards, the realization of which is uncertain due to
certain limitations and various expiration dates. The valuation allowance
decreased by $428,000, $596,000 and $1,241,000 in the years ended December 31,
1994, 1995 and 1996, respectively, primarily due to the utilization and
expiration of net operating loss carryforwards.
The difference between the provision for income taxes and income taxes
computed using the U.S. federal income tax rate was as follows:
<TABLE>
<CAPTION>
1994 1995 1996
------------------ ------------------ ------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
------ ------- ------ ------- ------ -------
(IN THOUSANDS EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C> <C> <C>
Tax expected at U.S. statutory tax
rate................................... $595 34% $324 34% $ 517 34%
Foreign losses not benefitable........... 231 13 108 11 564 37
Goodwill amortization.................... 43 2 40 4 40 3
Utilization of net operating loss
carryforwards.......................... (345) (20) (357) (38) (739) (48)
Benefit of foreign tax credit............ (350) (20) (315) (33) (485) (32)
Foreign withholding taxes................ 105 7 208 22 280 18
Difference between foreign and federal
income tax rates....................... 81 5 210 22 140 9
State taxes.............................. 77 4 28 3 51 3
Other.................................... 0 0 (9) 0 12 1
---- --- ---- --- ---- ---
Total tax provision.................. $437 25% $237 25% $ 380 25%
==== === ==== === ==== ===
</TABLE>
The Company has approximately $6,267,000 of tax net operating loss
carryforwards at December 31, 1996 which expire as follows:
<TABLE>
<CAPTION>
COUNTRY EXPIRING THROUGH AMOUNT
- ------------- --------------------------------------- ----------
<S> <C> <C>
Australia Indefinite............................. $2,150,000
Canada 2000................................... 42,000
Germany Indefinite............................. 986,000
Japan 2001................................... 1,016,000
France 2001................................... 1,106,000
Hong Kong Indefinite............................. 967,000
----------
$6,267,000
==========
</TABLE>
At December 31, 1996, the Company had U.S. alternative minimum tax credit
carryforwards, U.S. general business credit carryforwards, and foreign tax
credit carryforwards of approximately $283,000,
F-17
<PAGE> 92
SYNON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1997 IS
UNAUDITED.)
$560,000 and $305,000, respectively. The general business credit begins to
expire in 2004. The foreign tax credits expire in 1997 and 1998.
These net operating loss carryforwards and credit carryforwards are
available only to offset future taxable income of the related subsidiary, if
any. Special limitations exist under the tax law that may restrict the
utilization of these net operating loss carryforwards and credits carryforwards
including completion of the initial public offering discussed in Note 17.
The Company expects its effective tax rate to increase after it utilizes
its tax benefit carryovers.
10. SEGMENT INFORMATION:
The Company operates in one industry segment: developing, marketing and
supporting software application development tools used to develop, deploy and
maintain high-end software applications. The distribution of revenues, operating
income (loss) and identifiable assets by major geographic area for the years
ended December 31, 1994, 1995 and 1996 is as follows (in thousands):
<TABLE>
<CAPTION>
1994 1995 1996
------- ------- -------
<S> <C> <C> <C>
Revenues:
North America.............................. $40,747 $43,917 $48,736
Europe..................................... 23,346 26,770 27,601
Rest of World.............................. 8,090 7,724 7,741
Eliminations............................... (6,803) (7,629) (7,947)
------- ------- -------
Total Revenues..................... $65,380 $70,782 $76,131
Operating Income (Loss):
North America.............................. $ 2,124 $ 1,601 $ 1,831
Europe..................................... (504) (400) (259)
Rest of World.............................. 181 (332) 156
------- ------- -------
Total Operating Income (Loss)...... $ 1,801 $ 869 $ 1,728
Identifiable Assets:
North America.............................. $19,769 $19,425 $20,775
Europe..................................... 12,187 14,017 13,879
Rest of World.............................. 3,351 2,425 2,255
------- ------- -------
Total Identifiable Assets.......... $35,307 $35,867 $36,909
</TABLE>
North America operating profits include certain marketing, product
management and general and administrative expenses which may be attributable to
worldwide operations but which are not reasonably allocable. Revenues and
operating income include intercompany royalties paid by the Company's operating
subsidiaries for rights to technology developed by the parent company in North
America or other subsidiaries. The majority of the Company's research and
development is performed in its North America segment which includes the
Company's corporate functions. Accordingly, approximately $5.7 million, $7.5
million and $8.0 million in net royalties were paid to the North America segment
during 1994, 1995 and 1996, respectively, by the other operating segments.
Capitalized research and development costs net of accumulated amortization are
included in identifiable assets for North America.
11. EMPLOYEE STOCK OPTION PLANS:
OPTION PLANS
1990 Stock Option Plan -- The Company's 1990 Stock Option Plan (the "1990
Plan") provides for the grant of incentive stock options and nonstatutory stock
options to employees of the Company. As of
F-18
<PAGE> 93
SYNON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1997 IS
UNAUDITED.)
December 31, 1996 and March 31, 1997, options to purchase an aggregate of
1,367,993 and 1,347,930 shares of common stock, respectively, were outstanding
under the 1990 Plan. Vesting under the 1990 Plan ranges from twenty-four to
sixty months.
Executive Share Option Scheme -- The Company's Executive Share Option
Scheme provides for the grant of nonstatutory stock options to full-time
employees and directors of the Company or any of its subsidiaries. As of
December 31, 1996 and March 31, 1997, options to purchase an aggregate of 17,300
and 18,800 shares of common stock, respectively, were outstanding under the
Executive Share Option Scheme. Vesting under the Executive Share Option Scheme
occurs over a three year period.
STOCK BASED COMPENSATION
The Company accounts for these plans under APB Opinion No. 25, under which
$220,000 was charged to deferred compensation during the year ended December 31,
1996 because certain options were granted at below the then fair market value of
the common stock. This deferred compensation is being amortized over the vesting
period of the related options. No other compensation cost has been recognized
under APB Opinion No. 25 as options have been granted at an option exercise
price equal to the market value of common stock as determined by the Board of
Directors on the date of grant.
Had compensation cost for the plans been determined consistent with SFAS
No. 123, the Company's net income (loss) would have been changed to the
following pro forma amounts:
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED
DECEMBER 31, MARCH 31,
----------------- -----------------
1995 1996 1996 1997
------ ------- ------ ------
<S> <C> <C> <C> <C>
Net Income (Loss)
As Reported....................... $ 714 $ 1,139 $ (559) $ 61
Pro Forma......................... $ 648 $ 965 $ (596) $ (2)
Earnings (Loss) Per common and
common equivalent share
As Reported....................... $ 0.09 $ 0.14 $(0.15) $ 0.01
Pro Forma......................... $ 0.08 $ 0.12 $(0.16) $(0.00)
</TABLE>
Because the SFAS No. 123 method of accounting has not been applied to
options granted prior to January 1, 1995, the resulting pro forma compensation
cost may not be representative of that to be expected in future years.
F-19
<PAGE> 94
SYNON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1997 IS
UNAUDITED.)
A summary of the status of the Company stock option plans at December 31,
1994, 1995, 1996 and at March 31, 1997 and changes during the periods then ended
is presented in the table and narrative below:
<TABLE>
<CAPTION>
WEIGHTED
WEIGHTED AVERAGE FAIR
AVERAGE EXERCISABLE VALUE OF
OPTION EXERCISE AT END OF OPTIONS
SHARES PRICE PERIOD GRANTED
--------- ------- ----------- ------------
<S> <C> <C> <C> <C>
Outstanding at December 31, 1994............. 1,316,780 $2.88 706,564
Granted.................................... 116,750 3.60 $ 2.06
Exercised.................................. (2,708) 2.86
Canceled................................... (184,645) 2.96
--------- -----
Outstanding at December 31, 1995............. 1,246,177 2.94 925,477
Granted.................................... 421,250 3.60 $ 2.46
Exercised.................................. (31,767) 2.90
Canceled................................... (250,367) 3.32
--------- -----
Outstanding at December 31, 1996............. 1,385,293 3.06 873,100
Granted.................................... 70,500 5.40 $ 3.06
Exercised.................................. (200) 3.60
Canceled................................... (88,863) 3.28
--------- -----
Outstanding at March 31, 1997................ 1,366,730 3.16 910,763
========= =====
</TABLE>
Options outstanding at December 31, 1996 and March 31, 1997 are comprised
of the following:
<TABLE>
<CAPTION>
DECEMBER 31, 1996 MARCH 31, 1997
- ----------------------------------------------------------------- -----------------------------------------------
REMAINING REMAINING
EXERCISE WEIGHTED AVERAGE EXERCISE WEIGHTED AVERAGE
OPTION SHARES PRICE CONTRACTUAL LIFE VESTED SHARES OPTION SHARES PRICE CONTRACTUAL LIFE
- ------------- -------- ---------------- ------------- ------------- -------- ----------------
<S> <C> <C> <C> <C> <C> <C>
51,168 0.90 47 months 51,168 51,168 0.90 44 months
828,488 2.86 73 months 750,969 791,925 2.86 71 months
505,637 3.60 106 months 70,963 453,137 3.60 103 months
70,500 5.40 118 months
--------
1,385,293 873,100 1,366,730
========= ======= ========
<CAPTION>
- -------------
OPTION SHARES VESTED SHARES
- ------------- -------------
<S> <C>
51,168 51,168
828,488 741,124
505,637 118,471
--
1,385,293 910,763
=======
</TABLE>
There are 114,904 options available for grant under the plans at December
31, 1996.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted-average
assumptions used for grants in 1995 and 1996, respectively: risk-free weighted
average interest rates of 6.5 and 6.2 percent; expected dividend yield of zero
percent; expected life of 5 years from the grant date; expected volatility of 58
percent.
12. EXPENSES RELATED TO RESTRUCTURING EUROPEAN OPERATIONS:
In 1990, the Company began reorganizing its activities in Europe in order
to reduce overhead costs. Two offices were closed and certain space in other
offices was vacated, resulting in excess space under lease agreements which
expire December 1999 through December 2014. These facilities are currently
subleased to third parties for periods less than the lease term for which the
Company is obligated. The maximum undiscounted and discounted obligations for
this excess space, net of sublease income as of December 31, 1996, assuming all
contractual sublease break clauses are exercised, are approximately $16.6
million and $7.7 million, respectively, at December 31, 1996. The net maximum
undiscounted and discounted obligations for excess space, assuming that no
sublease break clauses are exercised, are $5.3 million and $2.5 million,
respectively, at December 31, 1996. As of December 31, 1996, the accrual
F-20
<PAGE> 95
SYNON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1997 IS
UNAUDITED.)
for excess space related to the reorganization was approximately $500,000. Given
the improvement in the U.K. rental market and recent successes in subletting
space, management believes that the accrual at December 31, 1996 is sufficient.
However, there can be no assurance that the rental market will not be negatively
impacted in the future.
13. RELATED-PARTY TRANSACTIONS:
The Company and IBM, a related party, have entered into several marketing
agreements. For the years ended December 31, 1994, 1995 and 1996 and the
quarters ended March 31, 1996 and 1997, the Company incurred marketing expenses
under these agreements of $237,000, $188,000, $32,000, $(68,000) and $25,000,
respectively. Fees payable to IBM as of December 31, 1995 and 1996 and the
quarter ended March 31, 1997 were $378,000, $47,000, and $63,000, respectively,
and are included in other accrued expenses in the accompanying consolidated
balance sheets.
In 1993 and 1996, the Company and IBM entered into development agreements.
Under the 1993 agreement, IBM advanced the Company $200,000 toward the
development of a software product. As of December 31, 1996, the Company had
recognized all revenue under this agreement. Under the 1996 agreement, IBM has
agreed to advance the Company up to $200,000 for the joint development of a
software product. As of December 31, 1996, the Company had received $140,000,
all of which is included in deferred revenue in the accompanying consolidated
balance sheet.
The Company has entered into an agreement to pay a stockholder and a
developer of the Obsydian technology a collective commission of 3 percent
through December 31, 1996 and of 1.5 percent after December 31, 1996 on Obsydian
license and maintenance revenue. Royalties earned by these individuals in the
years ended December 31, 1994, 1995 and 1996 and for the three months ended
March 31, 1996 and 1997 were approximately $66,000, $205,000, $301,000, $47,000
and $42,000, respectively. Royalties accrued at December 31, 1995 and 1996 and
March 31, 1997 were $146,000, $184,000, and $114,000, respectively. In addition,
the stockholder and developer have certain other rights with respect to certain
intellectual property.
14. COMMITMENTS AND CONTINGENCIES:
Employment Agreements--
The Company has entered into employment agreements with three key employees
providing for the payment of up to one year's salary and certain bonus amounts
in the event of termination or a change in control of the Company.
Royalty Agreements--
The Company incurs a royalty obligation through June 30, 1999 with respect
to the Obsydian product (see Note 13). In addition, the Company incurs a cost of
royalties payable to certain third party software companies from which the
Company has licensed certain complementary software products for resale. Royalty
rates vary form 25% to 50% of the license fee and are typically payable to the
third party when payment is received from the customer.
15. RETIREMENT PLAN:
The Company participates in an employee savings and retirement 401(k) plan
which covers all full-time employees who are at least 21 years of age. Employees
may elect to contribute up to 15 percent of their compensation (subject to
statutory limitations) to the Plan. The Company, at its discretion, may provide
a matching contribution in an amount as determined by the Board of Directors. To
date the Company has made no matching contributions.
F-21
<PAGE> 96
SYNON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1997 IS
UNAUDITED.)
16. LITIGATION:
The Company is involved in various litigation matters arising during the
normal course of its business. The Company intends to defend these matters, and
it is management's opinion that the ultimate outcome of these matters will not
have a material adverse effect on the Company's operations or financial
position.
17. SUBSEQUENT EVENTS:
PROPOSED OFFERING
In May, 1997, the Board of Directors authorized the Company to file a
registration statement with the Securities and Exchange Commission offering its
common stock to the public. In conjunction with the Registration, the Board of
Directors authorized, subject to stockholder approval in July 1997, a one-for-
two reverse stock split of the Company's common stock.
OPTION AND PURCHASE PLANS
In May, 1997, the Board of Directors authorized, subject to stockholder
approval in July 1997, the 1997 Incentive Stock Option Plan, the 1997 Employee
Stock Purchase Plan and the 1997 Director Stock Option Plan. A total of
1,500,000 shares, 400,000 shares, and 175,000 shares have been reserved for
issuance under these Plans, respectively. Each of these Plans provides for an
annual increase in the number of shares reserved for issuance. Subsequent to
March 31, 1997, options for 6,000 shares of stock were granted under the 1990
Stock Plan.
F-22
<PAGE> 97
======================================================
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY, THE SELLING STOCKHOLDERS OR ANY OF THE UNDERWRITERS.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER
ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY SINCE THE DATES AS OF WHICH THE INFORMATION IS GIVEN IN
THIS PROSPECTUS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OR SOLICITATION BY
ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED
OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO
SO OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH SOLICITATION.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 3
Risk Factors.......................... 5
Use of Proceeds....................... 16
Dividend Policy....................... 16
Capitalization........................ 17
Dilution.............................. 18
Selected Consolidated Financial
Data................................ 19
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 20
Business.............................. 33
Management............................ 50
Certain Transactions.................. 59
Principal and Selling Stockholders.... 62
Description of Capital Stock.......... 65
Shares Eligible for Future Sale....... 68
Underwriting.......................... 70
Legal Matters......................... 71
Experts............................... 72
Additional Information................ 72
Glossary.............................. 73
Index to Financial Statements......... F-1
</TABLE>
------------------------
UNTIL , 1997 (25 DAYS AFTER
THE COMMENCEMENT OF THE OFFERING), ALL DEALERS EFFECTING TRANSACTIONS IN THE
COMMON STOCK, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED
TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO
DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
======================================================
======================================================
SHARES
SYNON
CORPORATION
COMMON STOCK
($.001 PAR VALUE)
LOGO
SALOMON BROTHERS INC
VOLPE BROWN WHELAN &
COMPANY
PROSPECTUS
DATED , 1997
======================================================
<PAGE> 98
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than
underwriting discounts, commissions and certain accountable expenses, payable by
the Company in connection with the sale of Common Stock being registered. All
amounts are estimates except the SEC registration fee and the NASD filing fee.
<TABLE>
<S> <C>
SEC Registration Fee...................................................... $13,940
NASD Filing Fee........................................................... 5,100
Nasdaq National Market Listing Fee........................................ 5,000
Printing Fees and Expenses................................................ *
Legal Fees and Expenses................................................... *
Accounting Fees and Expenses.............................................. *
Blue Sky Fees and Expenses................................................ *
Transfer Agent and Registrar Fees......................................... 10,000
Miscellaneous............................................................. *
------
Total........................................................... $*
======
</TABLE>
- ---------------
* To be filed by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law permits a corporation
to include in its charter documents, and in agreements between the corporation
and its directors and officers, provisions expanding the scope of
indemnification beyond that specifically provided by the current law.
The Registrant's Amended and Restated Certificate of Incorporation provides
for the indemnification of directors to the fullest extent permissible under
Delaware law.
The Registrant's Bylaws provide for the indemnification of officers,
directors and third parties acting on behalf of the Registrant if such person
acted in good faith and in a manner reasonably believed to be in and not opposed
to the best interest of the Registrant, and, with respect to any criminal action
or proceeding, the indemnified party had no reason to believe his conduct was
unlawful.
The Registrant has entered into indemnification agreements with its
directors and executive officers, in addition to indemnification provided for in
the Registrant's Bylaws, and intends to enter into indemnification agreements
with any new directors and executive officers in the future.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Since May 22, 1994, the Registrant has issued and sold 156,338 shares of
its Common Stock to employees for an aggregate amount of $159,648.08 pursuant to
the exercise of options under its 1990 Stock Option Plan and Executive Share
Option Scheme.
The share amounts set forth above take into account the one-for-two reverse
stock split that will be effective prior to the closing of the offering
contemplated by this Registration Statement.
The sales of such securities were deemed to be exempt from registration
under the Securities Act in reliance on Rule 701 promulgated under Section 3(b)
of the Securities Act as transactions pursuant to compensatory benefit plans and
contracts relating to compensation as provided under such Rule 701.
The recipients of securities in each such transaction represented their
intention to acquire the securities for investment only and not with a view to
or for sale in connection with any distribution thereof
II-1
<PAGE> 99
and appropriate legends were affixed to the share certificates issued in such
transactions. All recipients had adequate access, through their relationships
with the Company, to information about the Registrant.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<C> <S>
**1.1 Form of Underwriting Agreement.
*3.1 Amended and Restated Certificate of Incorporation filed with the Secretary
of State of Delaware on July 16, 1991, as amended by a Certificate of
Amendment filed on August 30, 1991 and a Certificate of Amendment filed on
August 28, 1992.
*3.2 Form of Certificate of Amendment of Certificate of Incorporation to be filed
with the Secretary of State of Delaware.
*3.3 Form of Amended and Restated Certificate of Incorporation to be filed after
the closing of this Offering made under this Registration Statement.
*3.4 Amended and Restated Bylaws.
**4.1 Specimen Common Stock Certificate.
**4.2 Third Amended and Restated Stockholders' Agreement dated as of June ,
1994.
*4.3 Stock Purchase Agreement dated as of August 28, 1992 between the Registrant
and International Business Machines Corporation, as amended on May 28, 1997.
**5.1 Opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation, as to
the legality of the securities being registered.
9.1 See Exhibit 4.2.
9.2 See Exhibit 4.3.
*10.1 Form of Indemnification Agreement for directors and officers.
*10.2 1990 Stock Option Plan and form of agreement thereunder.
*10.3 Rules of the Executive Share Option Scheme and forms of offer and acceptance
letters thereunder.
*10.4 1997 Incentive Stock Plan and form of agreement thereunder.
*10.5 1997 Employee Stock Purchase Plan and forms of participation agreement
thereunder.
*10.6 1997 Director Option Plan and form of agreement thereunder.
10.7 See Exhibit 4.2.
10.8 See Exhibit 4.3.
*10.9 Series D Preferred Stock Purchase Agreement dated as of July 16, 1991.
*10.10 Employment Agreement between the Registrant and Richard H. Goldberg dated
September 17, 1992, as amended on December 7, 1992.
*10.11 Termination Agreement between the Registrant and Duncan Moore dated January
28, 1997.
*10.12 Employment Agreement between the Registrant and Paul K. Wilde dated as of
March 27, 1991, as amended on March 29, 1991, December 10, 1992 and January
14, 1993.
*10.13 Employment Agreement between the Registrant and William R. Yeack dated
January 2, 1996.
*10.14 Employment Agreement between the Registrant and Simon Williams dated July
28, 1994.
*10.15 Employment Agreement between the Registrant and Melinda Horton dated July
28, 1994.
*10.16 Offer Letter from the Registrant to John F. Rockart dated April 14, 1993.
</TABLE>
II-2
<PAGE> 100
<TABLE>
<C> <S>
*10.17 Security Agreement between the Registrant and Paul K. Wilde dated as of
September 24, 1992.
*10.18 Full Recourse Promissory Note from Paul K. Wilde to the Registrant dated
September 24, 1992.
*10.19 Employment Agreement between the Registrant and Kevin Kilroy dated May 15,
1997.
*10.20 Agreement Related to the Sale and Purchase of the Entire Issued Share
Capital of Dysys Limited, dated as of September 15, 1992.
*10.21 Development Incentive Agreement dated as of September 27, 1990 between
Synon, Inc. and International Business Machines Corporation.
*+10.22 IBM Developer Agreement and Statement of Work dated as of December 20, 1996
between the Registrant and International Business Machines Corporation.
*+10.23 Software Vendor Marketing Programs Agreement dated as of March 7, 1997
between the Registrant and International Business Machines Corporation.
*+10.24 Non Exclusive International Distributorship Agreement dated January 8, 1996
between Synon Deutschland GmbH and CGI Informatik GmbH.
*+10.25 Agreement dated April 1, 1997 between the Registrant and International
Business Machines Corporation relating to the joint development of class
libraries.
*10.26 Form of Synon/2E Software License Agreement.
*10.27 Form of Obsydian Software License Agreement.
*10.28 Lease Agreements as amended, between Synon, Inc. and Lincoln Property
Company N.C., Inc. for the Registrant's headquarters in Larkspur,
California.
*10.29 Lease Agreements dated October 16, 1989, May 20, 1988, September 15, 1989
for the headquarters of Synon Europe Limited in London, United Kingdom.
*+10.30 CGI Systems Contractor Agreement dated August 30, 1996 between CGI Systems
Inc. and Synon, Inc.
*10.31 Loan and Security Agreement dated as of March 17, 1994, as amended on June
5, 1995 and July 15, 1996, by and among the Registrant, Synon, Inc. and
Silicon Valley Bank.
*10.32 Intellectual Property Security Agreement dated as of March 17, 1994 by and
among the Registrant, Synon, Inc. and Silicon Valley Bank.
*10.33 Notice of Stock Option Grant from the Registrant to Richard H. Goldberg.
*10.34 Notice of Stock Option Grant from the Registrant to Paul K. Wilde.
*10.35 Notice of Stock Option Grant from the Registrant to William R. Yeack.
*10.36 Notices of Stock Option Grant from the Registrant to William O. Grabe.
*10.37 Notice of Stock Option Grant from the Registrant to John F. Rockart.
*10.38 Notice of Stock Option Grant from the Registrant to Duncan Moore.
*10.39 Notice of Stock Option Grant from the Registrant to William R. Stuek.
11.1 Calculation of earnings per share.
*21.1 List of Subsidiaries of the Registrant.
23.1 Consent of Independent Auditors.
*23.2 Consent of Counsel (included in Exhibit 5.1).
**24.1 Power of Attorney.
</TABLE>
- ---------------
* Previously filed.
** To be filed by amendment.
+ Confidential treatment has been requested with respect to certain portions
of this exhibit pursuant to a request for confidential treatment filed with
the Securities and Exchange Commission. Omitted portions have been filed
separately with the Commission.
II-3
<PAGE> 101
(b) Financial Statement Schedules
<TABLE>
<S> <C> <C>
Schedule II -- Valuation and Qualifying Accounts
</TABLE>
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the financial
statements or notes thereto.
ITEM 17. UNDERTAKINGS
The Registrant hereby undertakes to provide 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.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 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 of 1933, and will be governed by the final adjudication of such
issue.
The undersigned Registrant undertakes that: (1) for purposes of determining
any liability under the Securities Act of 1933, the information omitted from the
form of prospectus as filed as part of the registration statement in reliance
upon Rule 430A and contained in the 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, and (2) for the purpose of determining any liability under the
Securities Act of 1933, each posteffective 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-4
<PAGE> 102
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Amendment to Registration Statement on Form S-1
to be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Larkspur, State of California, on the 21st day of July, 1997.
SYNON CORPORATION
By *
------------------------------------
Richard H. Goldberg, President, CEO
and Chairman
Pursuant to the requirements of the Securities Act of 1933, this
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>
* President, Chief Executive July 21, 1997
- ----------------------------------------------- Officer and Chairman of the
Richard H. Goldberg Board
/s/ PAUL K. WILDE Vice President, Chief July 21, 1997
- ----------------------------------------------- Financial and Accounting
Paul K. Wilde Officer and Secretary
* Director July 21, 1997
- -----------------------------------------------
William O. Grabe
* Director July 21, 1997
- -----------------------------------------------
David C. Hodgson
* Director July 21, 1997
- -----------------------------------------------
John F. Rockart
* Director July 21, 1997
- -----------------------------------------------
William M. Stuek
/s/ PAUL K. WILDE
- -----------------------------------------------
By Paul K. Wilde, attorney-in-fact
</TABLE>
II-5
<PAGE> 103
After the transactions discussed in Note 17 to Synon
Corporation's consolidated financial statements are effected,
we expect to be in a position to render the following audit
report.
/s/ Arthur Andersen
LLP
May 15, 1997
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
We have audited in accordance with generally accepted auditing standards,
the consolidated financial statements of Synon corporation (a Delaware
corporation) and subsidiaries included in this registration statement and have
issued our report thereon dated May 15, 1997. Our audit was made for the purpose
of forming an opinion on the basic financial statements taken as a whole.
Schedule II -- Valuation and Qualifying Accounts is presented for the purposes
of complying with the Securities and Exchange Commission rules and is not part
of the basic financial statements. This schedule has been subjected to the
auditing procedures applied in the audit of the basic financial statements and,
in our opinion, fairly states in all material respects the financial data
required to be set forth therein in relation to the basic financial statements
taken as a whole.
San Francisco, California,
S-1
<PAGE> 104
SYNON CORPORATION AND SUBSIDIARIES
SCHEDULE II -- VALUATION & QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
BALANCE AT CHARGES TO
BEGINNING OF COSTS AND DEDUCTIONS/ BALANCE AT
PERIOD EXPENSES OTHER END OF PERIOD
------------ ---------- ----------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Year ended December 31, 1994
Allowance for doubtful accounts....... 1,269 724 (327) 1,666
Year ended December 31, 1995
Allowance for doubtful accounts....... 1,666 1,297 (1,257) 1,706
Year ended December 31, 1996
Allowance for doubtful accounts....... 1,706 877 (789) 1,794
</TABLE>
S-2
<PAGE> 105
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
NUMBERED
EXHIBIT DESCRIPTION PAGE
-------- ---------------------------------------------------------------- ------------
<C> <S> <C>
**1.1 Form of Underwriting Agreement
*3.1 Amended and Restated Certificate of Incorporation filed with the
Secretary of State of Delaware on July 16, 1991, as amended by a
Certificate of Amendment filed on August 30, 1991 and a
Certificate of Amendment filed on August 28, 1992
*3.2 Form of Certificate of Amendment of Certificate of Incorporation
to be filed with the Secretary of State of Delaware
*3.3 Form of Amended and Restated Certificate of Incorporation to be
filed after the closing of this Offering made under this
Registration Statement
*3.4 Amended and Restated Bylaws
**4.1 Specimen Common Stock Certificate
**4.2 Third Amended and Restated Stockholders' Agreement dated as of
June , 1994
*4.3 Stock Purchase Agreement dated as of August 28, 1992 between the
Registrant and International Business Machines Corporation, as
amended on May 28, 1997
**5.1 Opinion of Wilson Sonsini Goodrich & Rosati, Professional
Corporation, as to the legality of the securities being
registered
9.1 See Exhibit 4.2
9.2 See Exhibit 4.3
*10.1 Form of Indemnification Agreement for directors and officers
*10.2 1990 Stock Option Plan and form of agreement thereunder
*10.3 Rules of the Executive Share Option Scheme and forms of offer
and acceptance letters thereunder
*10.4 1997 Incentive Stock Plan and form of agreement thereunder
*10.5 1997 Employee Stock Purchase Plan and forms of participation
agreement thereunder
*10.6 1997 Director Option Plan and form of agreement thereunder
10.7 See Exhibit 4.2
10.8 See Exhibit 4.3
*10.9 Series D Preferred Stock Purchase Agreement dated as of July 16,
1991
*10.10 Employment Agreement between the Registrant and Richard H.
Goldberg dated September 17, 1992, as amended on December 7,
1992
*10.11 Termination Agreement between the Registrant and Duncan Moore
dated January 28, 1997
*10.12 Employment Agreement between the Registrant and Paul K. Wilde
dated as of March 27, 1991, as amended on March 29, 1991,
December 10, 1992 and January 14, 1993
*10.13 Employment Agreement between the Registrant and William R. Yeack
dated January 2, 1996
*10.14 Employment Agreement between the Registrant and Simon Williams
dated July 28, 1994
</TABLE>
<PAGE> 106
<TABLE>
<CAPTION>
SEQUENTIALLY
NUMBERED
EXHIBIT DESCRIPTION PAGE
-------- ---------------------------------------------------------------- ------------
<C> <S> <C>
*10.15 Employment Agreement between the Registrant and Melinda Horton
dated July 28, 1994
*10.16 Offer Letter from the Registrant to John F. Rockart dated April
14, 1993
*10.17 Security Agreement between the Registrant and Paul K. Wilde
dated as of September 24, 1992
*10.18 Full Recourse Promissory Note from Paul K. Wilde to the
Registrant dated September 24, 1992
*10.19 Employment Agreement between the Registrant and Kevin Kilroy
dated May 15, 1997
*10.20 Agreement Related to the Sale and Purchase of the Entire Issued
Share Capital of Dysys Limited, dated as of September 15, 1992
*10.21 Development Incentive Agreement dated as of September 27, 1990
between Synon, Inc. and International Business Machines
Corporation
*+10.22 IBM Developer Agreement and Statement of Work dated as of
December 20, 1996 between the Registrant and International
Business Machines Corporation
*+10.23 Software Vendor Marketing Programs Agreement dated as of March
7, 1997 between the Registrant and International Business
Machines Corporation
*+10.24 Non Exclusive International Distributorship Agreement dated
January 8, 1996 between Synon Deutschland GmbH and CGI
Informatik GmbH
*+10.25 Agreement dated April 1, 1997 between the Registrant and
International Business Machines Corporation relating to the
joint development of class libraries
*10.26 Form of Synon/2E Software License Agreement
*10.27 Form of Obsydian Software License Agreement
*10.28 Lease Agreements as amended, between Synon, Inc. and Lincoln
Property Company N.C., Inc. for the Registrant's headquarters in
Larkspur, California
*10.29 Lease Agreements dated October 16, 1989, May 20, 1988, September
15, 1989 for the headquarters of Synon Europe Limited in London,
United Kingdom
*+10.30 CGI Systems Contractor Agreement dated August 30, 1996 between
CGI Systems Inc. and Synon, Inc.
*10.31 Loan and Security Agreement dated as of March 17, 1994, as
amended on June 5, 1995 and July 15, 1996, by and among the
Registrant, Synon, Inc. and Silicon Valley Bank
*10.32 Intellectual Property Security Agreement dated as of March 17,
1994 by and among the Registrant, Synon, Inc. and Silicon Valley
Bank
*10.33 Notice of Stock Option Grant from the Registrant to Richard H.
Goldberg.
*10.34 Notice of Stock Option Grant from the Registrant to Paul K.
Wilde
*10.35 Notice of Stock Option Grant from the Registrant to William R.
Yeack
*10.36 Notices of Stock Option Grant from the Registrant to William O.
Grabe
*10.37 Notice of Stock Option Grant from the Registrant to John F.
Rockart
*10.38 Notice of Stock Option Grant from the Registrant to Duncan Moore
</TABLE>
<PAGE> 107
<TABLE>
<CAPTION>
SEQUENTIALLY
NUMBERED
EXHIBIT DESCRIPTION PAGE
-------- ---------------------------------------------------------------- ------------
<C> <S> <C>
*10.39 Notice of Stock Option Grant from the Registrant to William R.
Stuek
11.1 Calculation of earnings per share
*21.1 List of Subsidiaries of the Registrant
23.1 Consent of Independent Auditors
*23.2 Consent of Counsel (included in Exhibit 5.1)
*24.1 Power of Attorney
</TABLE>
- ---------------
* Previously filed.
** To be filed by amendment.
+ Confidential treatment has been requested with respect to certain portions
of this exhibit pursuant to a request for confidential treatment filed with
the Securities and Exchange Commission. Omitted portions have been filed
separately with the Commission.
<PAGE> 1
EXHIBIT 11.1
SYNON CORPORATION AND SUBSIDIARIES
STATEMENT REGARDING COMPUTATION OF
NET INCOME (LOSS) PER COMMON AND COMMON EQUIVALENT SHARE
(In thousands, except for share and per share amounts)
<TABLE>
<CAPTION>
Years ended Three months
December 31, ended March 31,
----------------------------------------- ------------------------
1994 1995 1996 1996 1997
--------- --------- --------- --------- --------
(unaudited)
<S> <C> <C> <C> <C> <C>
Net income (loss) $1,314 $714 $1,139 $(559) $61
--------- --------- --------- --------- ---------
Weighted average common
shares outstanding 3,399,533 3,425,024 3,444,116 3,422,403 3,453,317
Weighted average
common equivalent
shares outstanding -
preferred shares 3,986,343 3,986,343 3,986,343 -- 3,986,343
Weighted average
common equivalent
shares outstanding -
common stock options 182,652 246,632 243,609 -- 582,753
Additional weighted average
shares of stock using
estimated initial
public offering price
under the treasury
stock method included
pursuant to Securities
and Exchange Commission
Rules 203,820 203,820 203,820 203,820 203,820
--------- --------- --------- --------- ---------
Weighted average common and common
equivalent shares outstanding 7,772,348 7,861,819 7,877,888 3,626,223 8,226,233
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net income (loss) per common and
common equivalent share $0.17 $0.09 $0.14 $(0.15) $0.01
===== ===== ===== ====== =====
</TABLE>
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
reports (and to all references to our Firm) included in or made a part of this
Amendment to the Registration Statement (No. 333-27941) for Synon Corporation.
/s/ ARTHUR ANDERSON LLP
-----------------------
Arthur Anderson LLP
San Francisco, California
July 18, 1997
