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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

Commission File Number 000-30963

SYNQUEST, INC.
(Exact Name of Registrant as Specified in Its Charter)

3500 Parkway Lane, Suite 555, Norcross, Georgia 30092
(Address of Principal Executive Offices— Zip Code)

Registrant’s Telephone Number, Including Area Code: (770) 325-2000

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

     Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [  ] No [X]

     Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date.

     2,946,797 shares of common stock were outstanding as of November 1, 2002.

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SYNQUEST, INC.

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SYNQUEST, INC.

CONSOLIDATED BALANCE SHEETS

See accompanying notes.

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SYNQUEST, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

See accompanying notes.

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SYNQUEST, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

See accompanying notes.

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SYNQUEST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

1. BASIS OF PRESENTATION

     Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to Article 10 of Regulation S-X promulgated by the Securities and Exchange Commission. The accompanying unaudited financial statements reflect, in the opinion of management, all adjustments necessary to achieve a fair statement of financial position and results for the interim periods presented. All such adjustments are of a normal recurring nature. It is suggested that these financial statements be read in conjunction with the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2002.

2. RECLASSIFICATION

     Certain amounts reported in the fiscal 2002 financial statements have been reclassified to conform to the current financial statement presentation. All common share and per share data for all periods prior to the effective date of the reverse stock split has been restated to reflect the one-for-ten reverse split of the Company’s common stock. (See Note 3 for additional information).

3. PROPOSED MERGER AND PRIVATE PLACEMENT

     On August 30, 2002, the Company entered into a definitive merger agreement with Viewlocity, Inc. Under the agreement, Viewlocity will merge with and into the Company, with the Company remaining as the surviving legal entity. Also, the Company will issue up to 13.2 million shares of series A convertible preferred stock in a private placement at a price of $2.50 per share for total consideration between $27.5 million and $33.0 million consisting of cash investments by existing shareholders of the Company and stockholders of Viewlocity, as well as new investors or the conversion of outstanding loans by the purchasers to the Company and Viewlocity. As consideration for the merger, the Company will issue a total of 2,946,867 shares of its common stock to Viewlocity’s series F preferred stockholders. The new funding will be used for debt repayment, working capital and general corporate purposes. For accounting purposes, the merger will be treated as a reverse acquisition, with Viewlocity being the accounting acquirer.

     The proposed transactions are subject to certain closing conditions as well as approval by the shareholders of the Company and the stockholders of Viewlocity. These transactions are expected to close promptly after our annual shareholders meeting on November 15, 2002; however, there can be no assurances that these transactions will close at that time, or that they will ultimately close according to the terms outlined herein.

     During the quarter ended September 30, 2002, the Company incurred approximately $721,000 in costs related to the proposed merger that have been expensed as merger and restructuring costs. Expenses of approximately $552,000 related to the proposed private placement of our series A preferred stock have been deferred and will reduce offering proceeds upon completion of the issuance of the series A preferred stock. At September 30, 2002, approximately $1,099,000 of the total costs incurred related to both the proposed merger and private placement remained in accrued liabilities.

4. REVERSE STOCK SPLIT

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

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5. BASIC AND DILUTED NET LOSS PER SHARE

     Basic net loss per common share is computed based on the weighted average number of common shares outstanding during each period. Diluted net loss per common share is computed based on the weighted average number of common shares outstanding during each period, plus potentially dilutive common shares outstanding during the period, in accordance with SFAS No. 128, “Earnings Per Share.” All common share and per share data for the three months ended September 30, 2001 and 2002, has been adjusted to reflect the one-for-ten reverse split of the Company’s common stock approved on July 29, 2002.

     All outstanding stock options and warrants have been excluded from the calculation of the diluted net loss per common share because these securities are anti-dilutive for all periods presented. The total number of shares related to the options and warrants excluded from the calculations of diluted net loss per common share was 512,626 and 485,170 for the three months ended September 30, 2001 and 2002, respectively.

6. CREDIT AGREEMENT

     In February 2002, the Company entered into a credit agreement with Warburg Pincus LLC, the beneficial owner of approximately 51% of the Company’s outstanding common stock at September 30, 2002. The credit agreement allows for periodic borrowings up to a maximum of $3 million. The Company’s borrowing capacity under the credit agreement will be reduced by any amounts which have been borrowed and repaid. Interest on outstanding borrowings accrues at the prime rate plus 2% per annum, adjusted biannually from the date of issuance. Borrowings under the credit agreement will be senior to any other Company debt and substantially all of the Company’s assets have been pledged as collateral under the credit agreement. The credit agreement expires on December 31, 2002. As of September 30, 2002, $1.5 million was outstanding under the credit agreement.

7. SEGMENT AND GEOGRAPHIC INFORMATION

     The Company is organized around geographic areas. The Company’s operations in the Americas and Europe represent its two reportable segments. The Europe segment is comprised primarily of operations in the United Kingdom and the Netherlands. The accounting policies as described in the summary of significant accounting policies included in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2002 are applied consistently across the segments.

     Segment information for the three months ended September 30, 2001 and 2002 is summarized as follows:

     All revenue was generated from external customers by the segment reporting the revenue.

     The elimination within total assets represents the Company’s investment in the Europe segment and funding provided for operations.

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     Export sales from the United States were approximately $63,000 and $58,000 for the three months ended September 30, 2001 and 2002, respectively.

8. RESTRUCTURING

     During the three months ended September 30, 2001, the Company restructured its business operations to more closely align operating expenses with anticipated revenue. In connection with the restructuring, the Company reduced its global workforce by approximately 31%, or 91 full-time employees. The restructuring resulted in a charge of approximately $882,000 in the three months ended September 30, 2001, included in merger and restructuring costs, to cover costs related to the workforce reduction, of which $750,000 related to severance and related benefits, approximately half of which was paid during the quarter ended September 30, 2001 and the majority of the remainder was paid during the following quarter, and $132,000 related to estimated lease termination costs. The Company continued these cost reduction efforts during the remainder of fiscal 2002.

     During the three months ended September 30, 2002, as part of its continuing cost reduction initiatives, the Company reduced its sales and services personnel by 6 full-time employees which resulted in a charge of approximately $296,000, included in merger and restructuring costs, primarily related to severance and related benefits. At September 30, 2002, approximately $41,000 of restructuring charges remained in accrued liabilities primarily related to lease termination costs estimated in prior periods.

Recent Trends and Developments

     Proposed Merger and Private Placement

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

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

     Completion of the merger and the private placement are subject to satisfaction of customary closing conditions. We currently anticipate that the transactions will close promptly after our annual shareholders meeting on November 15, 2002.

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

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     Our Nasdaq SmallCap Market Listing

     We received a letter from Nasdaq dated September 17, 2002, in which Nasdaq indicated its belief that the merger with Viewlocity and the private placement together constitute a “reverse merger” as set forth in Nasdaq Marketplace Rule 4330(f). Nasdaq also stated that we do not comply with the net tangible assets/shareholders’ equity/market value requirements under Nasdaq Marketplace Rule 4310(c) (2) (B). A hearing on these matters was held before a Nasdaq Listing Qualifications Hearing Panel on October 17, 2002. As of the date of this report, the panel has not issued its ruling. If Nasdaq determines that the proposed transactions constitute a “reverse merger” under Nasdaq rules, we will be required to meet the initial listing requirements for inclusion on The Nasdaq SmallCap Market rather than the continued listing requirements in order to remain listed. The initial listing requirements are more stringent than the continued listing requirements. If we are not successful in maintaining our listing on The Nasdaq SmallCap Market, our common stock will be quoted on the Nasdaq-sponsored OTC Bulletin Board Service. There can be no assurances that our appeal will be successful, and even if our appeal is successful there can be no assurances that we will regain compliance with the requirements for initial inclusion or continued inclusion, as applicable, or that our stock will continue to be listed on The Nasdaq SmallCap Market.

     Reverse Stock Split

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

     Liquidity Constraints

     Our revenue stream continues to be strongly impacted by the continued weak economic environment. In the current economic environment, many companies have severely reduced or postponed their capital spending activities. In addition, when companies are able to pursue the licensing of our products, we continue to experience a slowdown in our sales cycles as a result of these companies’ lengthened approval process for entering into s