<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark one)
/ X / Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
FOR THE THREE MONTHS ENDED JUNE 30, 1996
OR
/ / Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
COMMISSION FILE NUMBER: 0-27696
GENSYM CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 04-2932756
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
125 CAMBRIDGEPARK DRIVE
CAMBRIDGE, MA 02140
(Address of principal executive offices)
TELEPHONE NUMBER (617) 547-2500
(Registrant's telephone number, including area code)
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
___ ___
As of August 9, 1996 there were 6,111,748 shares of the Registrant's
Common Stock outstanding.
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GENSYM CORPORATION
Form 10-Q INDEX
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Financial Statements:
Condensed Consolidated Balance Sheets
June 30, 1996 and December 31, 1995 3
Condensed Consolidated Statements of Operations
Three and Six Months Ended June 30, 1996 and 1995 4
Condensed Consolidated Statements of Cash Flows
Six Months Ended June 30, 1996 and 1995 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of 7-14
Financial Condition and Results of Operations
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 2. Changes in Securities 15
Item 3. Defaults Upon Senior Securities 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 15
Signatures 16
</TABLE>
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
GENSYM CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1996 1995
------------ ------------
ASSETS
Current Assets:
<S> <C> <C>
Cash and cash equivalents $ 13,835,530 $ 2,126,259
Marketable securities 4,379,981 2,965,942
Accounts receivable, net 9,004,022 8,263,549
Prepaid expenses 1,504,029 1,114,952
Deferred income taxes 938,714 941,544
------------ ------------
Total current assets 29,662,276 15,412,246
------------ ------------
Property and Equipment, net 2,036,591 2,166,445
Other Assets 207,950 267,804
------------ ------------
$ 31,906,817 $ 17,846,495
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 820,030 $ 1,027,110
Accrued expenses 4,582,174 3,789,297
Deferred revenue 4,740,720 4,419,511
------------ ------------
Total current liabilities 10,142,924 9,235,918
------------ ------------
Stockholders' Equity:
Series A convertible preferred stock -- 30,000
Series B convertible preferred stock -- 35,346
Common stock 60,915 40,010
Capital in excess of par value 17,484,962 5,233,955
Retained earnings 4,344,119 3,307,419
Cumulative translation adjustment (126,103) (36,153)
------------ ------------
Total stockholders' equity 21,763,893 8,610,577
------------ ------------
$ 31,906,817 $ 17,846,495
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
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GENSYM CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1996 1995 1996 1995
------------ ------------ ------------ ------------
REVENUES:
<S> <C> <C> <C> <C>
Product $ 5,648,836 $ 3,657,351 $ 10,372,016 $ 6,905,978
Service 3,852,395 2,480,369 7,570,161 4,936,623
------------ ------------ ------------ ------------
Total revenues 9,501,231 6,137,720 17,942,177 11,842,601
------------ ------------ ------------ ------------
COST OF REVENUES:
Product 137,720 105,274 258,699 186,912
Service 1,672,962 1,100,048 3,198,316 2,013,425
------------ ------------ ------------ ------------
Total cost of revenues 1,810,682 1,205,322 3,457,015 2,200,337
------------ ------------ ------------ ------------
Gross profit 7,690,549 4,932,398 14,485,162 9,642,264
------------ ------------ ------------ ------------
OPERATING EXPENSES:
Sales and marketing 4,343,910 3,536,157 8,557,675 6,587,740
Research and development 1,461,754 1,377,919 2,858,407 2,659,503
General and administrative 920,505 585,963 1,652,605 1,176,589
------------ ------------ ------------ ------------
6,726,169 5,500,039 13,068,687 10,423,832
------------ ------------ ------------ ------------
Operating income (loss) 964,380 (567,641) 1,416,475 (781,568)
OTHER INCOME, NET 153,103 76,113 216,225 149,052
------------ ------------ ------------ ------------
Income (loss) before provision for
(benefit from) income taxes 1,117,483 (491,528) 1,632,700 (632,516)
PROVISION FOR (BENEFIT FROM) INCOME TAXES 414,000 (332,406) 596,000 (427,752)
------------ ------------ ------------ ------------
Net income (loss) $ 703,483 $ (159,122) $ 1,036,700 $ (204,764)
============ ============ ============ ============
Net income (loss) per share $ 0.11 $ (0.03) $ 0.17 $ (0.04)
============ ============ ============ ============
Weighted average common and common
equivalent shares outstanding 6,495,745 4,690,690 6,117,288 4,690,253
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
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GENSYM CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
1996 1995
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net income (loss) $ 1,036,700 $ (204,764)
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operating activities:
Depreciation 539,599 442,317
Deferred taxes 2,830 (198,375)
Changes in assets and liabilities:
Accounts receivable (756,835) (1,084,993)
Prepaid expenses (438,643) (337,133)
Accounts payable (198,663) (50,445)
Accrued expenses 823,000 (598,846)
Deferred revenue 322,012 525,133
------------ ------------
Net cash provided by (used in) operating activities 1,330,000 (1,507,106)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable securities (1,414,039) (3,059,044)
Purchases of property and equipment (409,745) (910,686)
Increase in other assets 51,019 14,462
------------ ------------
Net cash used in investing activities (1,772,765) (3,955,268)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options 254,175 17,880
Proceeds from initial public offering - net 11,952,391 --
------------ ------------
Net cash provided by financing activities 12,206,566 17,880
------------ ------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (54,530) 49,440
------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 11,709,271 (5,395,054)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 2,126,259 6,281,671
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 13,835,530 $ 886,617
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE> 6
GENSYM CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Operations
Gensym Corporation (the "Company") is a leading supplier of software products
and services for developing and deploying intelligent solutions in a broad range
of industrial, scientific, commercial, and government application areas.
2. Basis of Presentation
The unaudited condensed consolidated financial statements included herein have
been prepared by the Company pursuant to the rules and regulations of the
Securities and Exchange Commission (the "SEC"). Certain information and footnote
disclosures, normally included in financial statements prepared in accordance
with generally accepted accounting principles, have been condensed or omitted
pursuant to such SEC rules and regulations; nevertheless, the management of the
Company believes that the disclosures herein are adequate to make the
information presented not misleading. In the opinion of management, the
condensed consolidated financial statements reflect all adjustments (of a normal
and recurring nature) which are necessary to present fairly the consolidated
financial position of the Company as of June 30, 1996 and the results of its
operations for the three and six month periods ended June 30, 1996 and 1995 and
its cash flows for the six months then ended. These condensed consolidated
financial statements and notes thereto should be read in conjunction with the
consolidated financial statements and notes thereto included in the Company's
prospectus dated February 16, 1996. The results of operations for the interim
period are not necessarily indicative of the results of operations for the full
year.
3. Significant Accounting Policies
The Company applies Statement of Financial Accounting Standards (SFAS) No, 115,
Accounting for Certain Investments in Debt and Equity Securities. Accordingly,
the Company's marketable securities are classified as available-for-sale and are
recorded at fair value which approximates amortized cost at June 30, 1996.
4. Stockholders' Equity and Per Share Data
In February 1996, the Company completed an initial public offering of 2,300,000
shares of Common Stock, of which 1,366,788 were sold by the Company and 933,212
were sold by selling stockholders. The net proceeds received by the Company were
approximately $12 million after deducting underwriting discounts and expenses of
the offering. The Company did not receive any proceeds from the sale of shares
by the selling stockholders.
For the three and six months ended June 30, 1996, net income per common and
common equivalent share was computed using the weighted average number of common
and common equivalent shares outstanding during the period in accordance with
the treasury stock method. For the three and six months ended June 30, 1995, net
loss per common and common equivalent share was computed using the weighted
average common and common equivalent shares, assuming that all series of
Convertible Preferred Stock had been converted to Common Stock as of the
original issuance dates and that Common Stock options granted in the one-year
period preceding the Company's initial public offering had been outstanding for
the period, in accordance with the treasury stock method.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
The Company was incorporated in 1986 to provide software products for
developing and deploying intelligent systems for decision support and control.
The Company released the first version of G2, its core product, in May 1988, and
has been profitable each year since 1989. Since 1988, the Company has introduced
enhanced versions of G2 and expanded its product line to include G2-based
application products as well as G2 connectivity products. In addition, the
Company derives significant service revenues from maintenance contracts,
consulting services, and training courses related to its software products.
The Company markets and sells products through its 27 direct sales offices
in the United States, Europe, Africa, and Asia, as well as through selected
distributors in other countries, including Japan. In 1994, the Company made a
strategic decision to aggressively expand its direct sales force and consulting
services organization, leading to a significant increase in both product and
service revenues in 1995 that continued through the second quarter of 1996.
This Quarterly Report on Form 10-Q contains forward-looking statements. For
this purpose, any statements contained herein that are not statements of
historical fact may be deemed to be forward-looking statements. Without limiting
the foregoing, the words "believes," "anticipates," "plans," "expects" and
similar expressions are intended to identify forward-looking statements. There
are a number of important factors that could cause the Company's actual results
to differ materially from those indicated by such forward-looking statements.
These factors include, without limitation, those set forth below under the
caption "Certain Factors That May Affect Future Results."
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<PAGE> 8
RESULTS OF OPERATIONS
The following table sets forth, as a percentage of total revenues,
consolidated statement of income data for the periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1996 1995 1996 1995
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues:
Product 59.5% 59.6% 57.8% 58.3%
Service 40.5 40.4 42.2 41.7
---------- ---------- ---------- ----------
Total revenues 100.0 100.0 100.0 100.0
---------- ---------- ---------- ----------
Cost of revenues:
Product 1.4 1.7 1.5 1.6
Service 17.6 17.9 17.8 17.0
---------- ---------- ---------- ----------
Total cost of revenues 19.0 19.6 19.3 18.6
---------- ---------- ---------- ----------
Gross margin 81.0 80.4 80.7 81.4
---------- ---------- ---------- ----------
Operating expenses:
Sales and marketing 45.7 57.6 47.7 55.6
Research and development 15.4 22.5 15.9 22.5
General and administrative 9.7 9.5 9.2 9.9
---------- ---------- ---------- ----------
Total operating expenses 70.8 89.6 72.8 88.0
---------- ---------- ---------- ----------
Operating income (loss) 10.2 (9.2) 7.9 (6.6)
Other income, net 1.6 1.2 1.2 1.3
---------- ---------- ---------- ----------
Income (loss) before provision for (benefit from)
income taxes 11.8 (8.0) 9.1 (5.3)
Provision for (benefit from) income taxes 4.4 (5.4) 3.3 (3.6)
---------- ---------- ---------- ----------
Net income (loss) 7.4% (2.6)% 5.8% (1.7)%
========== ========== ========== ==========
Gross margin:
Product revenues 97.6% 97.1% 97.5% 97.3%
Service revenues 56.6 55.6 57.8 59.2
</TABLE>
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THREE AND SIX MONTHS ENDED JUNE 30, 1996 AND 1995
Revenues
The Company's revenues are derived from two sources: product licenses and
services. Product revenues include revenues from sales of licenses for use of
G2 and associated software products. Service revenues consist of fees for
maintenance contracts, consulting services, and training courses related to the
Company's products.
Total revenues were $9.5 million for the quarter ended June 30, 1996 as
compared to $6.1 million for the same period in 1995, an increase of $3.4
million or 54.8%. For the six month period ended June 30, 1996, total revenues
increased to $17.9 million from $11.8 million for the same period in 1995, an
increase of $6.1 million or 51.5%. The increase in total revenues was
attributable to increased sales of both software product licenses and related
services. International revenues accounted for 44.0% and 49.4% of total revenue
in the second quarter of 1996 and 1995, respectively and 45.5% and 50.4% of
total revenues in the first six months of 1996 and 1995 respectively.
Product. Product revenues increased to $5.6 million in the second quarter
of 1996 from $3.7 million in the same period in 1995, an increase of 54.5%. For
the six month period ended June 30, 1996 product revenues increased to $10.4
million from $6.9 million for the same period in 1995, an increase of 50.2%. The
increase in product revenues reflected earlier expansion of the Company's direct
sales force and marketing partnerships, as well as greater acceptance of G2 and
G2-based products in both existing and new market segments.
Service. Service revenues increased to $3.9 million in the second quarter
of 1996 from $2.5 million in the same period in 1995, an increase of 55.3%. For
the first six months of 1996, service revenues increased to $7.6 million from
$4.9 million for the same period in 1995, an increase of 53.3%. The increase in
service revenues was primarily due to increased application consulting.
Consulting revenues increased to $1.3 million in the second quarter of 1996 from
$795,000 in the same period in 1995, an increase of 68.9%. Consulting revenues
increased to $2.7 million in the first six months of 1996 from $1.5 million in
the first six months of 1995, an increase of 87.8%. The Company continues to
expand its application consulting organization to meet the growing demand from
customers and partners for solution-level applications and implementation
support and to aggressively enter into new market segments such as
telecommunications. The remaining increase in service revenues was attributable
to increased maintenance fees due to an increased customer base, increased
maintenance renewals, and increased product training courses.
Cost of Revenues
Cost of Product. Cost of product revenues consists primarily of the cost of
product media and duplication, manuals, packaging materials, and the direct
labor involved in producing and distributing the Company's software. These costs
increased to $138,000 in the second quarter of 1996 from $105,000 in the second
quarter in 1995, an increase of 30.8%. In the six month period ended June 30,
1996, cost of product revenues increased to $259,000 from $187,000 in the same
period in 1995, an increase of 38.4%. Cost of product revenues increased due to
increased costs of product media and duplication, manuals, packaging materials
and direct labor associated with increased product shipments. Gross margin on
product revenues remained relatively constant at 97.6% and 97.1% for the second
quarter of 1996 and 1995, respectively. For the first six months of 1996 and
1995, gross margin on product revenues also remained fairly constant at 97.5%
and 97.3%, respectively.
Cost of Service. Cost of service revenues consists primarily of consulting
labor costs and product support costs. These costs increased to $1.7 million for
the quarter ended June 30, 1996 from $1.1 million for the quarter ended June 30,
1995, an increase of 52.1%. For the six month period ended June 30, 1996, these
costs increased to $3.2 million from $2.0 million for the comparable period in
1995, an increase of 58.8%. The increase in cost of service revenue was due
primarily to an increase in the number of consulting projects which resulted in
an increase in consulting payroll costs. Gross margin on service remained
relatively constant at 56.6% in the second quarter of 1996 and 55.6% in the
second quarter of 1995. Gross margin on service revenues decreased to 57.8% in
the first six months of 1996 from 59.2% in the same period in 1995, largely due
to a greater percentage of lower margin consulting revenues versus higher margin
product support and training revenues.
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Operating Expenses
Sales and Marketing. Sales and marketing expenses consist primarily of
costs associated with personnel involved in the sales and marketing process,
sales commissions, seminars, sales facilities expense, trade shows, advertising,
and promotional materials. In the second quarter of 1996, these expenses
increased 22.8% to $4.3 million (45.7% of revenues) from $3.5 million (57.6% of
revenues) for the comparable quarter of 1995. For the six month period ended
June 30, 1996, these expenses were $8.6 million (47.7% of revenues) and $6.6
million (55.6% of revenues) for the comparable period in 1995, an increase of
29.9%. The increase in absolute dollars was primarily a result of the continued
investment in the Company's global sales and marketing capabilities, including
the addition of sales and sales-related personnel in new and existing offices.
While the Company plans to continue to increase its sales and marketing expenses
over the coming years, the Company expects these expenses to continue to
decline as a percentage of total revenues over time, should revenue growth
continue.
Research and Development. Research and development expenses consist
primarily of costs of personnel, equipment and facilities. These expenses
increased 6.1% to $1.5 million (15.4% of revenues) in the second quarter of
1996 from $1.4 million (22.5% of revenues) for the comparable period in 1995.
On a year-to-date basis, research and development expenses increased 7.5% to
$2.9 million (15.9% of revenues) for the six months ended June 30, 1996 from
$2.7 million (22.5% of revenues) for the comparable period in 1995. The
increase in absolute dollars was primarily due to an increase in engineering
personnel devoted to significant new product features and enhancements in the
G2 product family and the development of new products. The decrease as a
percentage of revenues is primarily due to increased revenues. While the
Company plans to increase research and development expenses over the coming
years, the Company expects that these expenses will fluctuate as a percentage
of total revenues.
General and Administrative. General and administrative expenses consist
primarily of personnel costs for finance, administration, operations, and
general management, as well as legal and accounting expenses. These expenses
increased 57.1% to $921,000 (9.7% of revenues) in the second quarter of 1996
from $586,000 (9.5% of revenue) in the second quarter of 1995. For the first six
months of 1996, general and administrative expenses increased 40.5% to $1.7
million (9.2% of revenues) compared to $1.2 million (9.9% of revenues) for the
comparable period in 1995. This increase in absolute dollars was primarily due
to an increase in the number of personnel in the Company's finance,
administrative, and information systems departments. The Company expects that
these expenses will decline slightly as a percentage of total revenue over time,
should revenue growth continue.
Other Income
Other income consists primarily of interest income and foreign exchange
transaction gains and losses. In the second quarter of 1996, other income
increased 101.2% to $153,000 from $76,000 for the comparable period in 1995.
Other income increased 45.1% to $216,000 in the first six months of 1996 from
$149,000 for the comparable period in 1995. This increase was primarily due an
increase in interest income due to higher cash and marketable securities
balances available for investment, due to the proceeds of the Company's initial
public offering in February 1996. During the second quarter of 1996, interest
income increased 153.7% to $166,000 from $66,000 in the same period in 1995. For
the first six months of 1996, interest income increased 88.6% to $247,000 from
$131,000 in the comparable period in 1995.
Income Taxes
The Company's effective tax rate for the second quarter of 1996 and 1995
was 37.0% and 67.6%, respectively. The effective tax rate for the first six
months of 1996 was 36.5% as compared to 67.6% for the comparable period in 1995.
The effective tax rate for the second quarter of 1996 approximates the expected
effective tax rate for the year ending December 31, 1996. The effective tax rate
for the three and six months ended December 31, 1995 was higher than the
statutory rate principally due to the effect of taxes on foreign income and to
foreign withholding taxes.
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LIQUIDITY AND CAPITAL RESOURCES
The Company currently finances its operations (including capital
expenditures) primarily through cash flow from operations, its current cash and
marketable securities balances, and operating leases. In addition, the Company
has $3.8 million of equipment financed under long-term operating leases. The
Company's lease commitments consist primarily of operating leases for the
Company's facilities and computers. The Company generated cash from operations
of $1.3 million in the first six months of 1996 and used $1.5 million in the
first six months of 1995. Cash generated from operations in the first six months
of 1996 was primarily due to net income and increases in accrued expenses and
deferred revenue, partially offset by an increase in accounts receivable and
prepaid expenses and a decrease in accounts payable.
At June 30, 1996, the Company had cash, cash equivalents, and marketable
securities of $18.2 million. The Company regularly invests excess funds in
short-term, highly rated money market funds, government securities, and
commercial paper. Included in these balances are the proceeds from the Company's
initial public offering of Common Stock in February 1996. A total of 2,300,000
shares of Common Stock were sold in the offering, of which 1,366,788 were sold
by the Company and 933,212 were sold by the selling stockholders. The net
proceeds received by the Company were approximately $12 million after deducting
underwriting discounts and expenses of the offering. The Company did not receive
any proceeds from the sale of shares by the selling stockholders.
At June 30, 1996, the Company had available a bank line of credit allowing
for borrowings up to $1.0 million providing for interest at prime plus 1%. This
line of credit will expire on May 31, 1997. The bank line of credit requires the
Company to maintain certain financial covenants. The Company was in compliance
with all covenants contained in the bank line of credit at June 30, 1996 and
during the first six months of 1996. There were no borrowings under the bank
line of credit for the period ended June 30, 1996.
Investing activities utilized $1.8 million and $4.0 million during the
first six months of 1996 and 1995, respectively. The principal uses in 1996 were
to fund the purchase of $1.4 million of marketable securities and $410,000 of
property and equipment. The principal uses during the first six months in 1995
were to fund the purchase of $3.1 million of marketable securities and $911,000
of property and equipment. The Company expects that its requirements for
computers, office facilities, and office equipment will grow as staffing
requirements dictate and that such equipment and facilities will be available
when needed.
The Company believes that the currently available funds and cash generated
from operations will be sufficient to meet the Company's business requirements
at least through June 30, 1997. While the Company from time to time evaluates
potential acquisitions, the Company has no present plans, agreements or
commitments with respect to any acquisition. To date, inflation has not had a
material impact on the Company's revenues or income.
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
The following important factors, among others, could cause actual results to
differ materially from those indicated by forward-looking statements made in
this Quarterly Report on Form 10-Q and presented elsewhere by management from
time to time.
Emerging Market for Intelligent Systems. Substantially all of the Company's
revenues are derived from the licensing and support of software products that
enable organizations to implement intelligent systems for decision support and
control applications. Although many organizations have begun to deploy, or have
announced plans to deploy, intelligent systems, these systems are different from
the basic monitoring and control systems that are traditionally employed by
these organizations. There can be no assurance that these organizations will be
able to introduce intelligent systems successfully or that such systems will
gain widespread acceptance. In addition, the timing of the implementation of
intelligent systems by organizations may be affected by economic factors,
government regulations, and other factors. Delays in the introduction of
intelligent systems or the failure of these systems to gain widespread market
acceptance would materially and adversely affect the Company's business, results
of operations or financial condition.
Variability of Quarterly Operating Results. The Company has
experienced, and may experience in the future, significant quarter-to-quarter
fluctuations in its operating results. Although the Company has been profitable
for each of the past seven fiscal years, the Company has on occasion recorded
quarterly losses and there can be no assurance that revenue growth or
profitable operations can be sustained on a quarterly or annual basis in the
future. The Company's sales cycle typically ranges from six to twelve months,
and the cost
11
<PAGE> 12
of acquiring the Company's software, building and deploying applications, and
training users represents a significant expenditure for customers. The Company's
relatively long sales cycle and high license fees, together with fixed
short-term expenses, can cause significant variations in operating results from
quarter to quarter, based on a relatively small variation in the timing of
major orders. Factors such as the timing of new product introductions and
upgrades, the timing of significant orders, the mix of products sold, and the
mix of domestic versus international revenues could contribute to this
quarterly variability. For example, the Company has experienced in the past,
and may experience in the future, delays in customer maintenance renewals due
to unforeseen delays in product releases. In addition, the Company's expense
levels are based in part on expectations of future revenue levels. A shortfall
in expected revenues could therefore result in a disproportionate decrease in
the Company's net income. The Company's financial performance has generally
been somewhat weaker in the first quarter than in the other fiscal quarters due
to customer purchasing patterns.
Economic Factors. Because capital expenditures are often viewed as
discretionary by organizations, sales of the Company's products for capital
budget projects are subject to general economic conditions. Such capital
expenditures are also susceptible to industry-specific economic downturns.
Certain industries have experienced weakened demand in the past, which has
adversely affected the Company's revenues, gross margin, and operating results
during such periods. There can be no assurance that future recessionary
conditions in the markets for the Company's products will not adversely affect
the Company's business, results of operations, or financial condition.
Product Concentration. The Company's only current product offerings are G2,
an object-oriented development and deployment environment for building
intelligent systems, and software products which operate in conjunction with G2.
Accordingly, the Company's business and financial results are substantially
dependent upon the continued customer acceptance and deployment of G2 and
related products. The timing of major G2 releases may affect the timing of
purchases of the Company's products. The Company has introduced several G2-based
products for building applications and is developing others. The Company
believes that market acceptance of these products will be important to the
Company's future growth. There can be no assurance that such products will
achieve market acceptance or that new products will be successfully developed.
In addition, the Company relies on many of its marketing partners to develop
G2-based products for specialized markets. Accordingly, the Company's business
and financial results are also linked to the continued successful development by
its marketing partners and market acceptance of such G2-based products. Any
decline in the demand for G2 and related products, whether as a result of
competitive products, price competition, the lack of success of the Company's
marketing partners, technological change or other factors could have a material
adverse effect on the Company's business, results of operations, or financial
condition.
New Products and Rapid Technological Change. The market for the Company's
products is relatively new and is characterized by rapid technological change,
evolving industry standards, changes in end-user requirements and frequent new
product introductions and enhancements. The Company's future success will depend
in part upon its ability to enhance its existing products, to introduce new
products and features to meet changing customer requirements and emerging
industry standards, and to manage transitions from one product release to the
next. The Company has from time to time experienced delays in introducing new
products and product enhancements. There can be no assurance that the Company
will not experience difficulties that could delay or prevent the successful
development, introduction and marketing of new products and product
enhancements. Also there can be no assurance that the Company will successfully
complete the development of new or enhanced products, that the Company will
successfully manage the transition to future versions of G2, or that the
Company's future products will achieve market acceptance. In addition, the
introduction of products embodying new technologies and the emergence of new
industry standards could render the Company's existing products and products
currently under development obsolete and unmarketable. From time to time, the
Company or others may announce new products, capabilities, or technologies that
have the potential to replace or shorten the life cycle of the Company's
existing product offerings. There can be no assurance that announcements of
currently planned or other new product offerings will not cause customers to
defer purchasing existing Company products.
Reliance Upon Indirect Distribution Channels. The Company sells its
products in part through value-added resellers, systems integrators, and
distributors, none of which is under the control of the Company. Sales of the
Company's products by value-added resellers and systems integrators represented
29%, 26%, and 34% of the Company's product revenues in 1994, 1995 and the first
six months of 1996, respectively. The Company expects that sales by third-party
resellers will account for an increased percentage of its revenues in the
future. Sales of the Company's products by distributors, primarily the
Company's Japanese distributor, accounted for 19%, 14%, and 17% of the
Company's product revenues in 1994, 1995, and the first six months
12
<PAGE> 13
of 1996, respectively. The loss of one or more major third-party distributors or
resellers of the Company's products, or a significant decline in their sales, or
difficulty on the part of such third-party developers or resellers in developing
successful G2-based products and applications, could have a material adverse
effect on the Company's business, results of operations, or financial condition.
There can be no assurance that the Company will be able to attract or retain
additional qualified third-party resellers or that third-party resellers will be
able to effectively sell the Company's products. In addition, the Company relies
on third-party resellers to provide post-sales service and support to their
customers, and any deficiencies in such service and support could adversely
affect the Company's business, results of operations, or financial condition.
Risks Associated With International Operations. The Company's international
revenues represented 44%, 44%, and 46% of total revenues in 1994, 1995, and the
first six months of 1996. Revenues are categorized by the Company according to
product shipment destination and therefore do not necessarily reflect the
ultimate site of installation. The Company expects that international revenues
will account for an increasing percentage of its revenues in the future. The
international portion of the Company's business is subject to a number of
inherent risks, including difficulties in building and managing international
operations, difficulties in localizing products and translating documentation
into international languages, fluctuations in the value of international
currencies, fluctuating import/export duties and quotas, and unexpected
regulatory, economic, or political changes in international markets. There can
be no assurance that these factors will not adversely affect the Company's
business, results of operations or financial condition.
Potential for Undetected Errors. Complex software products such as those offered
by the Company may contain undetected errors or failures commonly referred to as
"bugs." There can be no assurance that, despite significant testing by the
Company and by current and potential customers, errors will not be found in new
products after commencement of commercial shipments. Although the Company has
not experienced material adverse effects resulting from any such errors or
defects to date, there can be no assurance that errors or defects will not be
discovered in the future, causing delays in product introduction and shipments
or requiring design modifications that could adversely affect the Company's
business, results of operations, or financial condition.
Competition. Although the Company believes that there are no other
commercially available products that offer the full range of high-level
capabilities embodied in the Company's products, a number of companies offer
point solution products that perform certain of the functions of G2. Moreover,
new competitors could enter the intelligent systems market, and existing
competitors could expand the capabilities of their products to equal or exceed
those of the Company's products. In addition, there are commercially available
software development tools that software applications developers or potential
customers could use to build software having functionality similar to the
Company's products.
The Company's software is integrated into industry-specific solutions by
value-added resellers. A number of software companies offer products that
compete in specific application areas addressed by these value-added resellers,
such as cement kiln control and refinery scheduling, and could be successful in
supplying alternative solutions to products based on the Company's software.
The Company's products can also be used to perform lower-level functions
such as monitoring, supervisory control, cell control, and other similar
functions that do not utilize all of G2's capabilities. For these functions, G2
competes with products offered by a number of other companies. The Company
believes that its products compete favorably in these functional areas where
breadth of applicability, flexibility, maintainability, scalability, and ease of
use are important considerations. However, certain of the competitors in this
category have greater financial and other resources than the Company and might
introduce new or improved products to compete with G2, possibly at lower prices.
The Company believes that continued investment in research and development
and sales and marketing will be required to maintain its competitive advantages.
There can be no assurance that competitors will not develop products or provide
services that are superior to the Company's products or services or achieve
greater market acceptance. Competitive pressures faced by the Company could
force the Company to reduce its prices, which could result in reduced
profitability. There can be no assurance that the Company will be able to
compete successfully against current and future sources of competition or that
competition will not have a material adverse effect on the Company's business,
results of operations or financial condition.
Dependence Upon Proprietary Technology. The Company's success is heavily
dependent upon its proprietary technology. The Company relies upon a combination
of trade secret, contract, copyright, patent, and trademark law to protect its
proprietary rights in its products and technology. The Company enters into
13
<PAGE> 14
confidentiality and/or license agreements with its employees, third-party
resellers, and end-users and limits access to and distribution of its software,
documentation, and other proprietary information. In addition, the Company has
placed technical inhibitors in its software that prevent such software from
running on unauthorized computers. However, effective patent, copyright, and
trade secret protection may not be available in every country in which the
Company's products are distributed. There can be no assurance that the steps
taken by the Company to protect its proprietary technology will be adequate to
prevent misappropriation of its technology by third parties, or that third
parties will not be able to independently develop similar technology. In
addition, there can be no assurance that third parties will not assert
infringement claims in the future or that such claims will not be successful.
Management of Growth. The Company's business has grown significantly over
the past several years. This growth has resulted in an increase in
responsibilities placed upon the Company's management and has placed added
pressures on the Company's operating and financial systems. For example, the
Company's expansion of its international operations introduced significant
legal, tax and accounting complexities, as well as the challenges associated
with managing geographically dispersed operations. To manage its growth
effectively, the Company will be required to implement additional management and
financial systems and controls, and to expand, train, and manage its employee
base. There can be no assurance that the management and systems currently in
place will be adequate if the Company continues to grow, or that the Company
will be able to implement additional systems successfully and in a timely manner
as required. Although the Company is not currently involved in negotiations for
any strategic transactions such as acquisitions or equity investments, the
Company may undertake such transactions in the future. Any such transaction
would place additional strains upon the Company's management resources. In
addition, the Company's management team does not have prior experience in
operating and managing a public company. There can be no assurance that the
Company will be effective in managing its future growth or that any failure to
manage growth will not have a material adverse effect on the Company's business,
results of operations, or financial condition.
Dependence on Key Personnel. The Company's success depends in large part
upon certain key employees, the loss of any of whom could have a material
adverse effect on the Company. The Company's key employees are not bound by
employment agreements that require them to remain with the Company. The
Company's success will depend in significant part upon its ability to attract
and retain highly-skilled management, technical, sales and marketing personnel.
Competition for such personnel in the software industry is intense, and there
can be no assurance that the Company will be successful in attracting and
retaining such personnel. The loss of certain key employees or the Company's
inability to attract and retain other qualified employees could have a material
adverse effect on the Company's business, results of operations, or financial
condition.
14
<PAGE> 15
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS OF FORM 8-K
(a) Exhibit Index
Exhibit 10.1 - Amendment to Business Loan Agreement dated May 31,
1996 between Gensym Corporation and State Street Bank and Trust
Company
Exhibit 11 - Computation of Net Income Per Share
Exhibit 27 - Financial Data Schedule
(b) No reports on Form 8-K were filed by Gensym during the quarter
ended June 30, 1996
15
<PAGE> 16
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GENSYM CORPORATION
(Registrant)
/s/ Lowell B. Hawkinson
-------------------------
Dated: August 13, 1996 Lowell B. Hawkinson
Chief Executive Officer
(Principal Executive Officer)
/s/ Stephen Gregorio
-------------------------
Dated: August 13, 1996 Stephen Gregorio
Vice President Finance and Administration,
Chief Financial Officer
(Principal Financial and Accounting Officer)
16
<PAGE> 1
AMENDMENT TO BUSINESS LOAN AGREEMENT
------------------------------------
This Amendment (this "Amendment") dated as of May 31, 1996 is among
Gensym Corporation, a Delaware corporation, each of Gensym's subsidiaries named
below (collectively, the "Borrower") and State Street Bank and Trust Company
(the "Bank").
Reference is made to the Business Loan Agreement dated as of June 20,
1991 by and between the Borrower and the Bank (as amended, the "Agreement").
The Borrower has requested that the Bank extend the Borrower's Line of Credit,
and the Bank is willing to agree to the extension provided that this Amendment
is executed.
In consideration of the mutual undertakings contained in this
Amendment, and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties agree as follows:
1. Definitions. All terms used herein and not otherwise defined
shall have the meanings set forth in the Agreement.
2. Amendments to the Agreement.
(a) Section 1.2 of the Agreement is hereby amended by deleting the
first sentence therefrom and substituting the following therefor: "The
$1,000,000 Time Note will bear interest at the Prime Rate plus one percent
(1.0%) per year; the Line of Credit will expire on May 31, 1997; there will be
no prepayment penalty.".
(b) Section 3.1 of the Agreement is hereby deleted in its entirety
and the remaining Agreement renumbered as necessary after giving effect to such
deletion and the amendments set forth below.
(c) Section 3.2 of the Agreement is hereby deleted and the
following is substituted therefor, to read as follows:
3.2 Net Worth.
Borrower's Consolidated Tangible Net Worth, determined in
accordance with GAAP, shall be greater than Eighteen Million
Dollars ($18,000,000) as of the end of each quarterly period and
each fiscal year end.
(d) Section 3.4 of the Agreement is hereby deleted in its entirety
and the following is substituted therefor, to read as follows:
3.4 Losses.
Commencing during the Borrower's 1996 fiscal year, Borrower
shall not suffer net losses in more than two consecutive
quarterly periods or at any fiscal year end.
<PAGE> 2
3. Conditions. The effectiveness of this Amendment is subject to the
following conditions:
(a) Receipt by the Bank of this Amendment duly executed by the Borrower;
and
(b) Receipt by the Bank of an Amendment to Promissory Note in the form
delivered by the Bank, duly completed and executed by the Borrower.
4. Representations and Warranties; No Default. The Borrower hereby
represents and warrants that the representations and warranties contained in
Section 2 of the Agreement are true and accurate in all material respects on and
as of the effective date of this Amendment, and no Event of Default and no event
which would constitute, with the lapse of time or the giving of notice, or both,
an Event of Default has occurred and is continuing.
5. Miscellaneous. Except to the extent specifically amended by the
Amendment, the provisions of the Agreement shall remain unmodified, and the
Agreement and all other agreements, documents and certificates relating thereto
are each confirmed as being in full force and effect. This Amendment, the
Agreement and the other agreements, documents and certificates referred to
herein or therein constitute the entire understanding of the parties with
respect to the subject matter hereof and thereof and supersede all prior and
current understandings and agreements, whether written or oral. The invalidity
or unenforceability of any provision hereof shall not affect the validity or
enforceability of any other term or provision hereof. The headings in this
Amendment are for convenience of reference only and shall not alter, limit or
otherwise affect the meaning hereof. This Amendment may be executed in any
number of counterparts, which together shall constitute one instrument, and
shall bind and inure to the benefit of the parties and their respective
successors and assigns. The Borrower shall pay the Bank on demand for all
reasonable expenses incurred or paid by the Bank in connection with this
Amendment. This Amendment shall be construed in accordance with the laws (other
than the conflict of laws rules) of The Commonwealth of Massachusetts.
2
<PAGE> 3
IN WITNESS WHEREOF, the parties have caused this Amendment to be
executed as an instrument under seal by their duly authorized officers
effective as of the day and year first above written.
ATTEST: Gensym Corporation
By: /s/ Lowell B. Hawkinson
- ------------------------------- -------------------------------
Title: Chairman and Chief
Executive Officer
By: /s/ Robert L. Moore
-------------------------------
Title: President
By: /s/ Stephen Gregorio
-------------------------------
Title: Vice President Finance and
Administration and Chief
Financial Officer
Gensym International Corporation
Company
By: /s/ Lowell B. Hawkinson
-------------------------------
Title: Treasurer and Secretary
By: /s/ Robert L. Moore
-------------------------------
Title: President
GENSYM B.V.
By: /s/ Lowell B. Hawkinson
-------------------------------
Title: Managing Director
By: /s/ Robert L. Moore
-------------------------------
Title: Managing Director
GENSYM GMBH
By: /s/ Lowell B. Hawkinson
-------------------------------
Title: Managing Director
By: /s/ Robert L. Moore
-------------------------------
Title: Managing Director
3
<PAGE> 4
GENSYM F.S.C. (V.I.) LIMITED
By: /s/ Lowell B. Hawkinson
-----------------------------------
Title: Treasurer and Secretary
By: /s/ Robert L. Moore
-----------------------------------
Title: President
State Street Bank and Trust Company
By: /s/ Deborah M. Aiken
-----------------------------------
Title: Vice President
4
<PAGE> 5
AMENDMENT TO PROMISSORY NOTE
This Amendment (this "Amendment") is made as of May 31, 1996 by and
among Gensym Corporation, Gensym International Corporation, GENSYM B.V.,
GENSYM GMBH, GENSYM F.S.C. (V.I.) LIMITED (collectively, the "Borrower") and
State Street Bank and Trust Company, a Massachusetts trust company (the "Bank").
WHEREAS, the Borrower entered into a certain promissory note dated June
20, 1991 for the benefit and payable to the order of the Bank in the original
principal amount of $1,000,000.00 (as amended, the "Note") subject to the
provisions of a Business Loan Agreement dated as of June 20, 1991 between the
Borrower (as defined therein) and the Bank (as amended, the "Agreement"); and
WHEREAS , the Borrower and the Bank desire to extend the Borrower's
Line of Credit;
NOW, THEREFORE, for valuable consideration paid, the receipt and
sufficiency of which is hereby acknowledged, the parties hereby agree as
follows:
1. The Note is hereby amended as follows:
(a) The first paragraph of the Note prior to the parenthetical
is hereby deleted and the following substituted therefor: "On May 31, 1997".
All references in the Note to "Maturity Date" shall be deemed to refer to May
31, 1997.
(b) All references to the Business Loan Agreement contained in
the Note shall refer to the Business Loan Agreement dated as of June 30, 1991
between the Borrower (as defined therein) and the Bank as amended, including by
an Amendment to Business Loan Agreement dated as of the date hereof between the
Borrower (as defined therein) and the Bank, as such Agreement may be further
amended, extended, modified, superseded or replaced from time to time.
2. All of the terms and provisions of the Note, as amended hereby,
are hereby ratified and confirmed and are extended and remain in full force and
effect. All covenant compliance certification hereafter delivered to the Bank
shall reflect the amendments contained herein.
3. This Amendment to the Note is intended to be an allonge and
shall have the same effect as if the provisions hereof amending the Note were
expressly set forth therein.
4. This Amendment may be signed in any number of counterparts with
the same effect as if the signatures hereto and thereto were upon the same
instrument.
<PAGE> 6
IN WITNESS WHEREOF, the parties have set their hands by, effective as
of the day and year first above written, intending that this Amendment be
signed as a sealed instrument and contrued in accordance with the laws (other
thanthe conflict of laws rules) of The Commonwealth of Massachusetts.
ATTEST AS TO ALL: Gensym Corporation
By: /s/ Lowell B. Hawkinson
- ------------------------------ ---------------------------------
Title: Chairman and Chief
Executive Officer
By: /s/ Robert L. Moore
---------------------------------
Title: President
By: /s/ Stephen Gregorio
---------------------------------
Title: Vice President Finance and
Administration and Chief
Financial Officer
Gensym International
Corporation Company
By: /s/ Lowell B. Hawkinson
---------------------------------
Title: Treasurer and Secretary
By: /s/ Robert L. Moore
---------------------------------
Title: President
GENSYM B.V.
By: /s/ Lowell B. Hawkinson
---------------------------------
Title: Managing Director
By: /s/ Robert L. Moore
---------------------------------
Title: Managing Director
2
<PAGE> 7
GENSYM GMBH
By: /s/ Lowell B. Hawkinson
---------------------------------
Title: Managing Director
By: /s/ Robert L. Moore
---------------------------------
Title: Managing Director
GENSYM F.S.C. (V.I.) LIMITED
By: /s/ Lowell B. Hawkinson
---------------------------------
Title: Treasurer and Secretary
By: /s/ Robert L. Moore
---------------------------------
Title: President
ATTEST: State Street Bank and Trust
Company
By: /s/ Deborah M. Aiken
- ----------------------- --------------------------------
Title: Vice President
3
<PAGE> 1
GENSYM CORPORATION
EXHIBIT 11 - STATEMENT REGARDING COMPUTATION OF NET INCOME (LOSS) PER SHARE
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
1996 1995 1996 1995
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Weighted average common shares outstanding
during the period 6,049,675 3,995,367 5,679,633 3,994,930
Assumed conversion of outstanding preferred
stock to common stock -- 653,460 -- 653,460
Effect of common equivalent shares issued
subsequent to February 1, 1995, computed
in accordance with the treasury stock method -- 41,863 -- 41,863
Shares issuable from assumed exercise of options,
computed in accordance with the treasury
stock method 446,070 -- 437,655 --
----------- ----------- ----------- -----------
Weighted average common and common
equivalent shares 6,495,745 4,690,690 6,117,288 4,690,253
=========== =========== =========== ===========
Net income (loss) $ 703,483 $ (159,122) $ 1,036,700 $ (204,764)
=========== =========== =========== ===========
Net income (loss) per share $ 0.11 $ (0.03) $ 0.17 $ (0.04)
=========== =========== =========== ===========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AND STATEMENT OF OPERATIONS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<EXCHANGE-RATE> 1
<CASH> 13,835,530
<SECURITIES> 4,379,981
<RECEIVABLES> 9,522,088
<ALLOWANCES> 518,066
<INVENTORY> 0
<CURRENT-ASSETS> 29,662,276
<PP&E> 7,459,377
<DEPRECIATION> 5,422,786
<TOTAL-ASSETS> 31,906,817
<CURRENT-LIABILITIES> 10,142,924
<BONDS> 0
0
0
<COMMON> 60,915
<OTHER-SE> 21,702,978
<TOTAL-LIABILITY-AND-EQUITY> 31,906,817
<SALES> 17,942,177
<TOTAL-REVENUES> 17,942,177
<CGS> 3,457,015
<TOTAL-COSTS> 3,457,015
<OTHER-EXPENSES> 13,068,687
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,632,700
<INCOME-TAX> 596,000
<INCOME-CONTINUING> 1,036,700
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,036,700
<EPS-PRIMARY> .17
<EPS-DILUTED> .17
</TABLE>
