<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 THREE MONTHS ENDED MARCH 31, 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 No X
--- ---
As of May 9, 1996 there were 6,026,448 shares of the Registrant's Common
Stock outstanding.
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GENSYM CORPORATION
Form 10-Q INDEX
PART I. FINANCIAL INFORMATION
Page No.
-------
Item 1. Condensed Consolidated Financial Statements:
Condensed Consolidated Balance Sheets
March 31, 1996 and December 31, 1995 3
Condensed Consolidated Statements of Operations
Three months ended March 31, 1996 and 1995 4
Condensed Consolidated Statements of Cash Flows
Three months ended March 31, 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 16
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 17
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GENSYM CORPORATION AND SUBSIDIARIES
<TABLE>
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<CAPTION>
MARCH 31, DECEMBER 31,
1996 1995
--------- ------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $13,857,053 $ 2,126,259
Marketable securities 4,184,413 2,965,942
Accounts receivable, net 8,614,987 8,263,549
Prepaid expenses 1,065,418 1,114,952
Deferred income taxes 906,673 941,544
----------- -----------
Total current assets 28,628,544 15,412,246
----------- -----------
Property and Equipment, net 2,139,991 2,166,445
Other Assets 172,781 267,804
----------- -----------
$30,941,316 $17,846,495
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 1,214,907 $ 1,027,110
Accrued expenses 3,981,565 3,789,297
Deferred revenue 4,856,136 4,419,511
----------- -----------
Total current liabilities 10,052,608 9,235,918
----------- -----------
Stockholders' Equity:
Series A convertible preferred stock -- 30,000
Series B convertible preferred stock -- 35,346
Common stock 60,264 40,010
Capital in excess of par value 17,278,360 5,233,955
Retained earnings 3,640,636 3,307,419
Cumulative translation adjustment (90,552) (36,153)
----------- -----------
Total stockholders' equity 20,888,708 8,610,577
----------- -----------
$30,941,316 $17,846,495
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
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GENSYM CORPORATION AND SUBSIDIARIES
<TABLE>
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
1996 1995
----------- -----------
<S> <C> <C>
REVENUES:
Product $ 4,723,180 $ 3,248,627
Service 3,717,766 2,456,254
----------- -----------
Total revenues 8,440,946 5,704,881
----------- -----------
COST OF REVENUES:
Product 120,979 81,638
Service 1,525,354 913,377
----------- -----------
Total cost of revenues 1,646,333 995,015
----------- -----------
Gross profit 6,794,613 4,709,866
----------- -----------
OPERATING EXPENSES:
Sales and marketing 4,213,765 3,051,583
Research and development 1,396,653 1,281,584
General and administrative 732,100 590,626
----------- -----------
6,342,518 4,923,793
----------- -----------
Operating income (loss) 452,095 (213,927)
OTHER INCOME, NET 63,122 72,939
----------- -----------
Income (loss) before provision for (benefit from)
income taxes 515,217 (140,988)
PROVISION FOR (BENEFIT FROM) INCOME TAXES 182,000 (95,346)
----------- -----------
Net income (loss) $ 333,217 $ (45,642)
=========== ===========
Net income (loss) per share $ 0.06 $ (0.01)
=========== ===========
Weighted average common and common equivalent
shares outstanding 5,731,152 4,690,027
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
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GENSYM CORPORATION AND SUBSIDIARIES
<TABLE>
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
1996 1995
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 333,217 $ (45,642)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation 279,672 212,783
Deferred taxes 34,871 374,202
Changes in assets and liabilities:
Accounts receivable (361,479) 60,139
Prepaid expenses 24,541 (123,178)
Accounts payable 192,696 188,538
Accrued expenses 208,135 (450,354)
Deferred revenue 437,055 (173,825)
----------- -----------
Net cash provided by operating activities 1,148,708 42,663
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable securities (1,218,471) (2,561,505)
Purchases of property and equipment (253,218) (542,267)
Increase (decrease) in other assets 92,561 (24,034)
----------- -----------
Net cash used in investing activities (1,379,128) (3,127,806)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options 21,000 1,920
Proceeds from initial public offering - net 11,978,313 --
----------- -----------
Net cash provided by financing activities 11,999,313 1,920
----------- -----------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (38,099) 69,935
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 11,730,794 (3,013,288)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 2,126,259 6,281,671
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $13,857,053 $ 3,268,383
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
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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 March 31, 1996 and the results of its
operations and its cash flows for the three month periods ended March 31, 1996
and 1995. 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 March 31, 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 quarter ended March 31, 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 quarter ended March 31, 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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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
several G2-based application products as well as several 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 first 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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RESULTS OF OPERATIONS
<TABLE>
The following table sets forth, as a percentage of total revenues,
consolidated statement of income data for the periods indicated:
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
1996 1995
------ ------
<S> <C> <C>
Revenues:
Product 56.0% 57.0%
Service 44.0 43.0
------ ------
Total revenues 100.0 100.0
------ ------
Cost of revenues:
Product 1.4 1.4
Service 18.1 16.0
------ ------
Total cost of revenues 19.5 17.4
------ ------
Gross margin 80.5 82.5
------ ------
Operating expenses:
Sales and marketing 49.9 53.5
Research and development 16.5 22.5
General and administrative 8.7 10.3
------ ------
Total operating expenses 75.1 86.4
------ ------
Operating income (loss) 5.4 (3.8)
Other income, net 0.7 1.3
------ ------
Income (loss) before provision for (benefit from) 6.1 (2.5)
income taxes
Provision for (benefit from) income taxes 2.2 (1.7)
------ ------
Net income (loss) 3.9% (0.8)%
====== ======
Gross margin:
Product revenues 97.4% 97.5%
Service revenues 59.0 62.8
</TABLE>
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<PAGE> 9
THREE MONTHS ENDED MARCH 31, 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
the G2 family of software products. Service revenues consist of fees for
maintenance contracts, consulting services, and training courses related to the
Company's products.
Total revenues for the three months ended March 31, 1996 increased to $8.4
million from $5.7 million in the first quarter of 1995, an increase of $2.7
million or 48.0%. The increase in total revenues was attributable to increased
sales of both software product licenses and related services. International
revenues accounted for 47.2% of total revenues in the first quarter of 1996 and
51.5% in the first quarter of 1995.
Product. Product revenues increased to $4.7 million in the first quarter of
1996 from $3.2 million in the first quarter of 1995, an increase of 45.4%. 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 $3.7 million in the first quarter of
1996 from $2.5 million in the first quarter of 1995, an increase of 51.4%. The
increase in service revenues was primarily due to increased application
consulting. Consulting revenues increased to $1.4 million in the first quarter
of 1996 from $665,000 in the first quarter of 1995, an increase of 110.4%. The
Company continued 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 and
increased maintenance renewals.
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 $121,000 in the first quarter of 1996 from $82,000 in the first
quarter of 1995, an increase of 48.2%. 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 97.4% and 97.5% for the first
quarter of 1996 and 1995, respectively.
Cost of Service. Cost of service revenues consists primarily of consulting
labor costs and product support costs. These costs increased to $1.5 million in
the first quarter of 1996 from $913,000 in the first quarter of 1995, an
increase of 67.0%. The increase in cost of service revenue was due primarily to
an increase in consulting labor costs and an increase in the number of
consulting projects. Gross margin on service revenues decreased to 59.0% in the
first quarter of 1996 from 62.8% in the first quarter of 1995, largely due to a
greater percentage of lower margin consulting revenues versus higher margin
product support revenues.
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. These expenses increased to $4.2 million in the first
quarter of 1996 from $3.1 million in the first quarter of 1995, an increase of
38.1%. As a percentage of total revenues, sales and marketing expenses decreased
to 49.9% in the first quarter of 1996 from 53.5% in the first quarter of 1995.
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.
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<PAGE> 10
Research and Development. Research and development expenses consist
primarily of costs of personnel, equipment and facilities. These expenses
increased to $1.4 million in the first quarter of 1996 from $1.3 million in the
first quarter of 1995, an increase of 9.0%. As a percentage of total revenues,
research and development expenses decreased to 16.5% in the first quarter of
1996 from 22.5% in the first quarter of 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 over time.
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 to $732,000 in the first quarter of 1996 from $591,000 in the first
quarter of 1995, an increase of 24.0%. As a percentage of total revenues,
general and administrative expenses decreased to 8.7% in the first quarter of
1996 from 10.3% in the first quarter of 1995. The decrease as a percentage of
total revenues reflected the Company's revenue growth in 1996. The 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. Other income decreased to $63,000 in the first
quarter of 1996 from $73,000 in the first quarter of 1995, a decrease of 13.5%.
This decrease is primarily due to foreign exchange transaction losses during the
first quarter of 1996. During the first quarter of 1996, interest income
increased to $80,000 from $65,000 in the first quarter of 1995, an increase of
23%. The increase in interest income is due to higher average invested cash
balances due to the proceeds of the Company's initial public offering.
Income Taxes
The Company's effective tax rate for the first quarter of 1996 was 35.3%
which is the expected effective tax rate for the fiscal year. The effective tax
rate for the first quarter of 1995 was 67.6%. The effective tax rate was higher
than the statutory rate in 1995 principally due to the effect of taxes on
foreign income and due to foreign withholding taxes.
LIQUIDITY AND CAPITAL RESOURCES
The Company currently finances its operations (including capital
expenditures) primarily through cash flow from operations and its current cash
and marketable securities balances. In addition, the Company has $2.9 million of
equipment financed under long-term operating leases. The Company's operating
lease commitments consist primarily of operating leases for the Company's
facilities and computers. The Company generated cash from operations of $1.1
million in the first quarter of 1996 and $43,000 in the first quarter
of 1995. Cash generated from operations in the first quarter of 1996 was
primarily due to increases in accounts payable, accrued expenses and deferred
revenue, partially offset by an increase in accounts receivable.
At March 31, 1996, the Company had cash, cash equivalents, and marketable
securities of $18 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.
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At March 31, 1996, the Company had available a bank line of credit allowing
for borrowings up to $1.0 million, reduced by an outstanding letter of credit
totaling $139,000 and providing for interest at prime plus 1%. This line of
credit will expire on May 31, 1996. The Company expects that the line of credit
will be renewed on substantially similar terms. The bank line of credit requires
the Company to maintain certain covenants including certain financial ratios.
The Company was in compliance with all covenants contained in the bank line of
credit at March 31, 1996 and during 1995. There were no borrowings under the
bank line of credit for the period ended March 31, 1996.
Investing activities utilized $1.4 million and $3.1 million during the
first quarter of 1996 and 1995, respectively. The principal uses in 1996 were to
fund the purchase of $1.2 million of marketable securities and $253,000 of
property and equipment. The principal uses during the first quarter in 1995 were
to fund the purchase of $2.6 million of marketable securities and $542,000 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 March 31, 1997. While the Company from time to time evaluates
potential acquisitions, the Company has no present 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 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
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<PAGE> 12
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 32% of the Company's product revenues in 1994, 1995 and the first
quarter of 1996, respectively. The Company expects that sales by such
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 20% of the Company's
product revenues in 1994, 1995, and the first quarter 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.
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<PAGE> 13
Risks Associated With International Operations. The Company's international
revenues represented 44%, 44%, and 47% of total revenues in 1994, 1995, and the
first quarter 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
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
13
<PAGE> 14
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
<TABLE>
On January 16, 1996 the Company held a Special Meeting of the Stockholders. The
following matters were adopted by the vote specified below:
<CAPTION>
Proposal Class of Stock For Against Abstain
-------- -------------- --- ------- -------
<S> <C> <C> <C> <C> <C>
1) Approval of Capital Stock 3,383,453.52 0 0
Amendment to Series A Preferred Stock 300,000.00 0 0
Certificate of Series B Preferred Stock 335,822.00
Incorporation
2) Approval of Amended Capital Stock 3,383,453.52
and Restated Certificate Series A Preferred Stock 300,000.00
of Incorporation Series B Preferred Stock 335,822.00
3) Adoption of amendment Capital Stock 3,383,453.52 0 0
to 1994 Stock Option Plan
which, among other things,
increased the number of
shares reserved for issuance
under the plan from 134,800
to 534,850
4) Adoption of 1995 Capital Stock 3,365,415.59 18,037.93 0
Employee Stock Purchase
Plan
5) Adoption of 1995 Capital Stock 3,359,453.52 24,000.00 0
Director Stock Option
Plan
6) Approval of amendment to Series B Preferred Stock 335,822.00 0 0
Voting Agreement by and
among certain holders of
Series B Preferred Stock
</TABLE>
15
<PAGE> 16
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS OF FORM 8-K
(a) Exhibit Index
Exhibit 11 - Computation of Net Income Per Share
Exhibit 27 - Financial Data Schedule
(b) A report on Form 8-K dated February 16, 1996, was filed on February
22, 1996.
16
<PAGE> 17
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: May 15, 1996 Lowell B. Hawkinson
Chief Executive Officer
(Principal Executive Officer)
/s/ Stephen Gregorio
-----------------------
Dated: May 15, 1996 Stephen Gregorio
Vice President Finance,
Chief Financial Officer
(Principal Financial and Accounting Officer)
17
<PAGE> 1
GENSYM CORPORATION
<TABLE>
EXHIBIT 11 - STATEMENT REGARDING COMPUTATION OF NET INCOME (LOSS) PER SHARE
<CAPTION>
Three months ended
March 31,
1996 1995
----------- -----------
<S> <C> <C>
Weighted average common shares outstanding during the period 5,332,731 3,994,704
Assumed conversion of outstanding preferred stock to common stock -- 653,460
Effect of common equivalent shares issued subsequent to February 1, 1995,
computed in accordance with the treasury
stock method -- 41,863
Shares issuable from assumed exercise of options, computed in
accordance with the treasury stock method 398,421 --
----------- -----------
Weighted average common and common equivalent shares 5,731,152 4,690,027
=========== ===========
Net income (loss) $ 333,217 $ (45,642)
=========== ===========
Net income (loss) per share $ 0.06 $ (0.01)
=========== ===========
</TABLE>
18
<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> US DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<EXCHANGE-RATE> 1
<CASH> 13,857,053
<SECURITIES> 4,184,413
<RECEIVABLES> 9,013,360
<ALLOWANCES> 398,373
<INVENTORY> 0
<CURRENT-ASSETS> 28,628,544
<PP&E> 7,302,850
<DEPRECIATION> 5,162,859
<TOTAL-ASSETS> 30,941,316
<CURRENT-LIABILITIES> 10,052,608
<BONDS> 0
<COMMON> 60,264
0
0
<OTHER-SE> 20,828,444
<TOTAL-LIABILITY-AND-EQUITY> 30,941,316
<SALES> 8,440,946
<TOTAL-REVENUES> 8,440,946
<CGS> 1,646,333
<TOTAL-COSTS> 1,646,333
<OTHER-EXPENSES> 6,342,518
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 515,217
<INCOME-TAX> 182,000
<INCOME-CONTINUING> 333,217
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 333,217
<EPS-PRIMARY> .06
<EPS-DILUTED> .06
</TABLE>
