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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark one)
X Annual report pursuant to Section 13 or 15(d) of the
--- Securities Exchange Act of 1934
FOR THE FISCAL YEAR ENDED DECEMBER 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) (Zip Code)
Registrant's telephone number, including area code: (617) 547-2500
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12 (g) of the Act:
Common Stock, $.01 par value
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days:
Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. _____
As of March 26, 1997 there were 6,242,286 shares of the Registrant's
Common Stock outstanding. As of that date, the aggregate market value of the
voting stock held by non-affiliates of the registrant was $21,208,152 based on
the last reported sale price of the registrant's common stock on the Nasdaq
National Market as of the close of business on March 26, 1997.
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DOCUMENTS INCORPORATED BY REFERENCE
Part of Form 10-K
Document into which incorporated.
-------- ------------------------
Portions of the Registrant's Items 10, 11, 12 and 13 of Part III
Proxy Statement for the 1997
Annual Meeting of Stockholders.
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<TABLE>
GENSYM CORPORATION
Form 10-K INDEX
<CAPTION>
Page No.
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PART I
<S> <C> <C>
Item 1. Business 4-13
Item 2. Properties 14
Item 3. Legal Proceedings 14
Item 4. Submission of Matters to a Vote of Security Holders 14-15
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 16
Item 6. Selected Financial Data 17
Item 7. Management Discussion and Analysis of Financial Condition and
Results of Operations 18-28
Item 8. Financial Statements and Supplementary Data 29-41
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 41
PART III
Item 10. Directors and Executive Officers of the Registrant 41
Item 11. Executive Compensation 41
Item 12. Security Ownership of Certain Beneficial Owners and Management 41
Item 13. Certain Relationships and Related Transactions 41
PART IV
Item 14. Exhibits, Financial Statements and Reports on Form 8-K 42
Signatures 43
</TABLE>
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PART I.
ITEM 1. BUSINESS
Gensym Corporation ("Gensym" or the "Company") is a leading supplier of software
products and services for developing and deploying intelligent systems for
decision support and control. Applications built with the Company's products can
be used to monitor complex operations, analyze data, detect problems and
opportunities, provide advice, make decisions, and take action in real time.
These products are also used off-line in the design, planning, and scheduling of
operations. The Company's core product, G2, and G2-based products, are sold to
customers for a broad array of applications in a wide range of industries,
including manufacturing, telecommunications, aerospace, transportation, and
financial services.
The Company's early success in delivering intelligent systems to visionary
customers has put the Company in a position to provide application-specific
solutions to the much larger mainstream market. In January 1997, the Company
established three strategic business units, Manufacturing, Communications, and
Advanced Systems, to manage the domain-specific expertise, products, and
services required to serve mainstream customers. In conjunction with this, the
Company has also adopted a solutions-oriented approach in its sales, marketing,
product development and service organizations.
INDUSTRY BACKGROUND
Commercial organizations today face mounting pressures in the global
competitive environment. These pressures are driving organizations to increase
efficiency through improved productivity and better utilization of resources,
improve the quality of products and services, and respond more quickly to
customer needs. Organizations must also be more flexible in their operations and
bring new products and services to market faster. These challenges are present
in a broad range of industries, including manufacturing, telecommunications,
aerospace, transportation, financial services, and many others.
As organizations have become larger and more complex, effective management
of operations has become an increasingly difficult task. The data-rich
environment resulting from the growing capabilities of computer systems and
networks and the broad availability of measurements and historical data from
local and remote sources have compounded the difficulty of this task. Data must
be analyzed and decisions and actions must be effected in a timely manner, often
in real time. Failure to optimize resources or manage operations effectively can
adversely affect quality, increase cost, or delay a product's time to market,
with a resulting deterioration of competitive position in the marketplace.
In an attempt to respond to these challenges, organizations have
implemented low level computer monitoring and process management systems, which
have limited functionality. For example, in manufacturing, computerized
monitoring systems are capable of maintaining steady surveillance of variables
and allowing operators to display trend graphs of measured values. However,
operators are typically required to monitor basic measurement information, apply
expertise to hundreds or thousands of constantly changing measurements, diagnose
unexpected behavior, make decisions, and take corrective action.
These challenges are also present in the telecommunications industry.
Efficient utilization of network resources and optimum levels of quality service
for customers require constant monitoring of network conditions, rapid diagnosis
of network faults, and implementation of recovery actions. Increasingly complex
networks challenge the ability of computer monitoring systems and their
operators to cope with the changing availability of resources and the vast
amounts of network status and alarm information.
In an effort to add intelligence to low level computer monitoring and
process management systems, a number of software products have been developed
which offer "point solutions" designed for specific purposes. Such point
solutions may satisfy part of the need for effective decision support and
control, but they are generally inflexible and only address specific needs. In
addition, the integration of various point solution packages from different
vendors into a complete decision support and control system can be difficult to
implement and maintain. When point solutions are unavailable or inadequate,
custom development using general purpose programming tools is a common and often
costly approach. The resulting programs typically have limited scalability and
are hard to update and maintain as requirements change.
The Company believes that comprehensive intelligent systems are required
for organizations to meet their competitive challenges most effectively. These
systems must analyze, interpret, and act on large amounts of data by applying
"knowledge" that represents the expertise and experience of the best operational
personnel combined with analytical models constructed by engineers and business
professionals.
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THE GENSYM SOLUTION
Gensym software products allow organizations to develop and deploy
intelligent systems for decision support and control. Gensym's products include
G2, the Company's core product, and a growing number of products based on G2. G2
is an object-oriented development and deployment environment used to build
intelligent applications. G2 allows organizations to apply knowledge to data in
order to reach conclusions, provide advice, and take actions, often in real
time. G2 can follow numerous lines of reasoning based on this knowledge and
analyze large amounts of data and trends concurrently. G2 maintains an
understanding of the behavior of processes over time and the currency of
information, both of which are important for real-time decision support and
control.
Products based on G2 augment G2's broad capabilities with additional
functionality specific to such problems as fault diagnosis, dynamic scheduling,
process design, process simulation, and network management. Such products are
offered both by Gensym and Gensym's marketing partners.
G2 and G2-based products offer the following advantages:
Knowledge as a Corporate Resource. Knowledge, once represented in G2, can
be readily understood and reused, allowing organizations to capture operational
knowledge and experience and transform it into a growing and evolving resource.
This knowledge can be organized, stored, and incorporated within G2
applications. The combined expertise of many persons in an organization,
accumulated over time, can provide a long-term corporate resource for
replicating and extending intelligent decision support and control applications.
Functionality. G2 includes many features that facilitate intelligent
decision support and control. G2's reasoning engines can deal with large numbers
of tasks concurrently in real time, thereby providing timely attention and
response to multiple simultaneous problems. G2 can apply intelligent analysis to
measurements to detect abnormal behavior before alarm limits are reached.
Priorities can be assigned so that execution of critical tasks will not be
delayed by less critical tasks and so that knowledge appropriate to an analysis
can be accessed and used quickly. The Company believes that G2 extends object
technology beyond that generally available in other products. Objects in G2 can
correspond to physical objects in the real world, such as pieces of fixed
equipment, production materials, or transportation vehicles. Because G2 can
model real world objects, their physical locations and interconnections, their
dynamic behavior, and causal and logical relationships among them, G2 can trace
the root cause of a problem or anticipate the consequences of an abnormal
condition.
Ease of Development and Maintainability. G2 provides a development
environment that allows more productive development of intelligent system
applications than conventional programming. Development in G2 is facilitated by
the use of natural language rules and procedures, which are intuitive and
require less specialized training to write than functions and methods in
conventional programming languages such as C, C++, and Java. A single rule or
procedure can apply to multiple measurements or situations, reducing the size of
an application and the time needed to build it. An application can be
constructed and tested incrementally, assisted by G2's built-in simulator,
allowing operational experts to modify and validate the application before it is
deployed. Developers and users have the ability to search, test, and modify
knowledge in an application using G2's knowledge management facilities. Using
Gensym's Telewindows product, individuals at multiple geographic locations can
concurrently develop an application. G2's development features can provide
productivity advantages for existing and follow-on applications and can reduce
the cost and time to deployment for new applications.
Ease of Deployment and Support. G2 provides for a seamless transition from
development to deployment. The customer can select the computer platform on
which to deploy G2 from a broad range of workstations and personal computers.
Apart from external interfaces, G2 applications are portable and can run on a
variety of computer platforms without modification or recompilation. Multiple
users can have concurrent, shared access to any G2 application via Telewindows
or via standard Intranet browsers and Gensym's G2 Weblink product. G2 also
allows interactive support of an application while it is running, avoiding
system down-time. Using Telewindows, this interactive support can be done
remotely over a network, reducing maintenance expense. Gensym offers a set of
modules that allow G2 to interface concurrently to multiple sources of real-time
data from production systems and databases, so that G2 can integrate information
from many sources. These interface modules allow G2 to accept and respond to
high-priority event information with immediate actions, while G2 continues to
perform routine monitoring and control activities.
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STRATEGY
Gensym's objectives are to increase the market for intelligent systems and
extend its leadership in this market. To achieve these objectives, the Company
employs the following strategies:
- Extend Technological Leadership and Enhance Ease of Use. The Company
plans to build upon its technology base by adding new features and
functionalities to its existing products and expanding its product
line, particularly in the direction of industry standards and
solutions to common mission-critical problems in its major markets.
The Company believes that its leadership is primarily a result of its
extensive set of advanced software technologies. The Company plans to
continue to develop features to enhance the ease of use of its
products, such as object libraries, interfaces to other software
systems, and links to networks such as the Internet.
- Focus on Key Accounts. Gensym intends to continue to expand the
market for intelligent systems by selling and delivering solutions
directly and with partners to large organizations with complex
operations and the potential for extensive application proliferation.
The Company works in close cooperation with end-users and partners
around the world in order to expand the features and capabilities of
its products. After proving the effectiveness of its solutions in
initial applications, Gensym both promotes proliferation of additional
applications at additional sites within that organization and
publicizes those successes as references for new customers.
- Expand Relationships with Marketing Partners. To encourage faster
growth of the market for intelligent systems, the Company seeks to
continue to form strategic relationships with systems integrators and
value-added resellers that have experience in various targeted
application markets and can build and install solutions using G2 and
G2-based products.
- Strengthen Worldwide Presence. The Company strives to have sales and
support presence in geographic regions in which the Company believes
there is demand for its products and services. Gensym has a total of
26 direct sales offices in North America, Europe, Africa, and Asia. In
addition, the Company has established local distribution channels in
Japan, South Africa and other international markets and has customer
support service centers in North America and Europe. Gensym plans to
increase the worldwide technical support capabilities of its
international offices.
- Broaden Product Line to Increase Market Penetration. Gensym intends
to expand the markets for its products through the introduction of
additional products which add functionality and knowledge applicable
to manufacturers, communication service providers, financial service
providers, and utilities. The Company plans to expand its relationship
with its strategic partners to help accomplish this goal.
PRODUCTS
Gensym sells G2 and a growing number of products used with or based on G2.
G2
G2 is a comprehensive development and deployment environment for
intelligent decision support and control applications. G2 applies knowledge that
represents the experience of the best operations personnel, combined with the
analytical models constructed by engineers and business professionals and models
derived from past performance, to real-time or model data, in order to reach
conclusions, provide advice, and take real or simulated actions in a timely
fashion. G2 can follow multiple lines of reasoning based on this knowledge and
consider multiple problems concurrently. G2 maintains an understanding of the
behavior of processes over time and the currency of information, both of which
are important for real-time decision support and control. G2 incorporates a
broad array of integrated technologies that allow application developers to
implement object-oriented applications without the need for conventional
computer programming.
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Development Features
G2 allows an application developer to express objects, rules, models
and procedures using structured natural language so that they can be
readily understood and modified. The built-in editor automatically
shows the user the list of permissible words, checks statements as
they are entered, and indicates errors. The G2 development environment
allows a developer to test an application using simulated data and to
view the results graphically. In this way, an application can be
tested under various scenarios before deployment. Rapid incremental
application development can be done interactively, to facilitate
application improvements during prototyping, during development and
even while in deployment. Using G2's ability to support rapid
application development, a developer can show a dynamic, graphically
animated prototype of an application to an end-user at an early stage.
Using G2, an application developer can model a process in terms of
interrelated objects, which may be in graphical or schematic diagram
form. These object-based graphical connections enable G2 to reason
about the interdependent behavior of connected process objects. An
integrated knowledge management facility contained within G2 can
access all available knowledge (the objects, rules, models, and
procedures) in order to facilitate intelligent knowledge queries for
examining and modifying knowledge. G2's high-level representation of
knowledge allows persons in many positions and roles in an
organization to develop applications more quickly and easily, while
aiding maintainability and reusability. Using Gensym's Telewindows
product, developers at multiple geographic locations can work in teams
to concurrently develop applications.
Deployment Features
Applications built on G2 are portable and interoperable across a
number of computer platforms, so solutions can be offered on any of a
wide range of platforms and knowledge migrated to new and more
powerful computers and operating systems. G2 currently runs on
workstations from Digital Equipment Corporation, Hewlett-Packard, IBM,
Sun Microsystems, and others, as well as on personal computers. G2
currently runs under the UNIX, VMS, and Windows NT operating systems.
G2 allows many procedures or rules to be active concurrently. A
procedure or rule can be executing, suspended to allow other
computations to occur, or waiting for a triggering event. G2 enhances
the reliability of on-line applications by its facility to save
"snap-shots" of a process state and "warm boot" to the last saved
state, so that an intelligent real-time system can resume after power
failures or other interruptions. Applications can also be modified
without interrupting the running of the application.
Through its G2 Standard Interface technology, G2 can support
concurrent access to multiple sources of data and high-performance
data exchange. Once an application is deployed, Telewindows and
Gensym's G2 Weblink allows multiple users to share that application
concurrently.
G2 application server licenses are typically perpetual and carry a
North American list price of $48,000. The Company offers volume and
other discounts to encourage large projects and product proliferation.
TELEWINDOWS AND G2 WEBLINK
Telewindows operates in conjunction with G2 and enables concurrent shared
access to G2 from multiple geographic locations. Telewindows gives each member
of a development team full concurrent access to an application as a native
developer, with immediate awareness of and access to objects and other knowledge
created by other team members. Telewindows enables remote system maintenance by
allowing full developer access to on-line deployed applications remotely across
a network. Once an application is deployed, Telewindows allows multiple users to
share that application concurrently.
Multiple end-users on a network can access multiple applications via
Telewindows. Each user is provided with specific capabilities and restrictions
according to the authorized level of access. For example, in typical
manufacturing operations, the process or plant operators may have access to
intelligent diagnostics and other decision support while the maintenance group,
plant management, plant engineers and others may share the knowledge and
real-time analysis appropriate to their respective tasks.
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In addition to Telewindows, Gensym introduced and released in 1996 a new
product, G2 WebLink, that enables users to interact with G2 applications
remotely from browsers like Netscape and Microsoft Explorer. This new product
"web-enables" G2, that is, provides standard user access over Internet or
intranet connections.
Pricing for Telewindows or G2 WebLink capability is based on the number of
users and whether those users are specifically identified or not. Pricing for
an identified user is $6,000, in single user quantities.
DATA INTERFACE MODULES
The Company and many of its marketing partners offer specific interface
modules to allow on-line integration of G2 with external programs, systems, and
databases. The Company offers interfaces to many standard databases such as
those offered by Informix, Oracle, and Sybase. Interfaces to most popular
factory control systems are available either from the Company or, in several
cases, directly from the vendors of these systems. The North American list price
for Data Interface Modules ranges from $4,000 to $10,000, in single unit
quantities.
G2-BASED PRODUCTS
The Company also offers a number of products that are built on G2. The
Company's G2-based products include:
G2 Diagnostic Assistant
G2 Diagnostic Assistant ("GDA") is a graphical tool set that can be used to
create diagnostic and control applications. GDA is based on functional blocks,
which are graphical objects that can be selected from menus and connected to
create an application. The functional blocks include logic and fuzzy logic
blocks, rule blocks, statistical tests, and alarm actions. New blocks can be
created by the user and added to the application to address specific needs. GDA
has built-in facilities for alarm handling and explanations of diagnostic
conclusions, including the capability to quantify the degree of certainty of
such conclusions. GDA was first released in 1993 and, as of December 31, 1996,
there were more than 700 copies deployed in manufacturing and other
applications. The North American list price of GDA is $16,000, in single unit
quantities. GDA is also offered bundled with G2, at a North American list price
of $53,000.
NeurOn-Line
NeurOn-Line is designed to allow non-programmers who have little or no
experience with neural networks to take advantage of this technology,
particularly for on-line, dynamic applications. NeurOn-Line is used to identify
and generate models of the physical behavior of processes and of relationships
among process variables, when given a sufficient set of data. These models can
then be used on-line to compare process behavior with the model's prediction and
to control processes. The development of neural network applications in
NeurOn-Line is done graphically by selecting objects from menus, connecting
them, and entering attribute and control information. NeurOn-Line was first
released in 1994 and, as of December 31, 1996, there were more than 250 copies
deployed in manufacturing and other applications. The North American list price
for NeurOn-Line is $20,000, in single unit quantities. NeurOn-Line is also
offered bundled with G2, at a North American list price of $60,000.
ReThink
ReThink is a graphical toolkit and process simulator for business process
analysis, re-engineering, and continual decision support. It includes a wide
range of tools for performing what-if analyses and animating the process
models, allowing the user to visualize the process at various levels of detail
and helping the user to recognize, understand and address difficulties. ReThink
allows business managers to quickly and intuitively design and experiment with
alternative business process structures, determining how such alternative
structures could impact cost and cycle time and identifying potential
bottlenecks. ReThink is currently licensed to several large consulting
organizations for use in their business process re-engineering services.
ReThink was first released in 1996 and as of December 31, 1996, there were more
than 120 copies deployed. ReThink is sold in various configurations depending
on use, starting at a North American list price of $20,000 for a one-year,
single-user only license.
PRODUCTS UNDER DEVELOPMENT
The Company is presently developing new G2-based products. The one listed
below is in pre-release testing and is sold with application support services.
Fault Expert
Fault Expert, formerly "Operations Assistant" or "OPA", is a software
toolkit that helps solve network management problems, such as alarm
flooding, traffic congestion, and lost connections. Fault Expert is
used to filter, correlate, and prioritize alarms; recognize patterns
and predict incipient failures; and diagnose problems and recommend
corrective actions to operations personnel. Fault Expert augments
standard network management software such as HP OpenView, DEC
Polycenter and IBM NetView, adding capabilities for higher level
diagnostics and rule-based reasoning. Fault Expert is currently
installed at more than 40 beta sites. Release is currently planned
in stages in 1997.
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CUSTOMERS AND APPLICATIONS
The Company's customers include end-users, value-added resellers, and
systems integrators. Many of the largest industrial corporations in the world
are customers of the Company. Listed below is a sampling of the Company's
customers, each of which has generated at least $100,000 in license revenues
over the last three years:
AEROSPACE METALS/MINING
Lockheed Martin British Steel Plc
NASA Dofasco
McDonnell Douglas Corporation ISCOR
Storm Integration, Inc. Krupp
AUTOMOBILE PHARMACEUTICAL
Siemens AG Biochemie GmbH
Toyota Eli Lilly & Company
Glaxo
CEMENT
ABB Industrie AG
Lafarge PIPELINE TRANSMISSION
El Paso Energy Corp.
CHEMICAL/PETROLEUM Shell UK Limited
Asahi Chemical Texas Eastern Transmission Corporation
AspenTech
Citgo POWER INDUSTRY
Exxon British Nuclear Fuels
Saudi Aramco National Power (United Kingdom)
Yamatake-Honeywell Corporation Ltd.
DISCRETE MANUFACTURING
Gillette Company TELECOMMUNICATIONS
Hitachi AT&T
Seagate Ericsson Hewlett-Packard AG
France Telecom
FINANCIAL MCI Telecommunications
S.W.I.F.T. Motorola
NEC
FOOD AND BEVERAGE Stanford Telecommunications Inc.
Nabisco
TRANSPORTATION
Mass Transit Railway Corporation
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The Company has sold more than 7,000 licenses for its products to over 600
industrial, service and governmental organizations in more than 40 countries
worldwide. The Company's products are used internationally in a broad array of
applications, including the following:
- AMOCO OIL PETROLEUM PRODUCTS
Amoco estimates that it processes over 400,000 barrels of crude oil
every day at its refinery in Texas City, Texas. The crude oil is
separated into five different product streams, including diesel and
kerosene. Knowing the exact composition of each stream is critical,
but the refinery's on-stream analyzers were subject to frequent
and costly time delays. Using Gensym's GDA and NeurOn-Line, Amoco has
been able to make real-time assessments and take control of stream
quality. The refinery now has tighter control of the process, with
closed-loop utilization rates of over 95%, and Amoco estimates that
it has saved over $500,000 per year in recovered product.
- CORPOVEN S.A.
Corpoven's Puerto La Cruz Refinery in Venezuela operates a conversion
plant that transforms light hydrocarbons into high-value petroleum
products, a very complex process which must meet tight tolerances to
comply with environmental requirements. Corpoven implemented a
G2-based system to incorporate the knowledge of its more experienced
refinery operators so that all operators at this plant would have the
benefit of their expertise. The G2-based system can now forecast
potential operating deviations approximately two hours in advance.
- MOTOROLA SATELLITE COMMUNICATIONS
Utilizing a network of 66 low earth orbit satellites linked to ground
stations around the world, the IRIDIUM(R) network is a global personal
communications system designed to handle voice, data, fax, and paging
transmissions. The IRIDIUM satellites will feature moving cells that
can be shared by access providers worldwide. Motorola's Satellite
Communications Group in Chandler, Arizona relies on Gensym's G2(R)
and Fault Expert(TM) software to manage this complex network and
keep it operational.
- FORD MOTOR COMPANY
Ford's Automatic Transmissions New Product Center in Livonia, Michigan
had a cell controller based on a proprietary architecture. Design and
process revisions were cumbersome, and new hardware and software were
difficult to incorporate. Ford wanted a flexible manufacturing system
(FMS) which could manage all the complexities of prototype
manufacturing and was easy to use and easy to integrate with industry
standard equipment. Ford chose G2 to control the movement of all
parts through the FMS. The FMS issues control commands to machine
tools and allows process engineers to create flexible routes for
pallets of raw materials. Shop-floor staff began using the FMS with no
formal training and functional modules are continuously being added,
including part tracking, tool management, and decision support.
- NABISCO BISCUIT COMPANY
The Nabisco Biscuit Company's Atlanta bakery wanted to reduce the
waste that results from products not meeting its strict quality
standards. Simons Engineering, a Gensym Solution Partner, worked with
Nabisco to develop Process Operator Guidelines (POG), a G2-based
application that performs SCADA, statistical process control, and
recipe management functions. While providing proactive process control
advice to line operators, the POG system gives Nabisco real-time
expert analysis, allowing bakery personnel to recognize problems
quickly and respond to them intelligently. Since implementing the new
system, the Atlanta bakery has achieved higher product consistency,
improved product quality, and reduced product loss by two-thirds.
Based on the success in Atlanta, Nabisco has introduced the system to
five other facilities.
- NEUCHATEL POLICE, SWITZERLAND
In Switzerland, the Neuchatel Police use Gensym's G2 at their Traffic
Management Center for an operator decision system to help control
traffic lights, speed and direction signs in a network of tunnels and
highways. G2 accesses 28,000 data points from sensors deployed
throughout a system consisting of 37 kilometers of tunnels and covered
highways with 900 traffic lights and 650 variable message signs. When
an operator receives
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information about an incident along the highway, the operator selects
which segments of the system need to be closed off. G2 then calculates
the control strategy to redirect traffic around the closed-off
segments based on its knowledge of traffic flow and behavior, safety
procedures, geographic constraints, and operating procedures. Upon
confirmation by the operator, G2 executes the control strategy by
sending signals to the traffic lights and variable-message signs along
the highway.
SALES AND MARKETING
In order to reach the broadest possible market, the Company utilizes its
direct sales force and applications engineering personnel and over 200 selected
marketing partners.
The Company markets its products in North America, Europe, Africa, and
parts of Asia through a direct sales organization composed of 36 salespersons
and sales managers and 27 applications engineers as of December 31, 1996. The
Company currently has 14 sales offices in North America and direct sales offices
in Australia, England, France, Germany, Hong Kong, Italy, the Netherlands,
Scotland, South Korea, Sweden, and Tunisia. The Company intends to continue to
expand its direct sales organization. In 1994, 1995, and 1996, the Company
received 44%, 44%, and 42% of its total revenues, respectively, from
international operations. See Note 7 of Notes to Consolidated Financial
Statements for financial information by geographic area.
The direct sales force focuses on selling to major accounts and provides
face-to-face contact with customers. Applications engineers work with the direct
sales force to perform demonstrations at customer sites and to assist customers
in evaluating their technical requirements and implementing G2 application
prototypes. Regular seminars and workshops are hosted at the Company's larger
offices to demonstrate the G2 family of products and related applications. The
Company's local offices offer basic and advanced training courses that teach
prospective and new customers how to build application solutions using the
Company's G2 and G2 based products.
The Company also distributes its products through a network of more than
200 systems integrators and value-added resellers which are selected for their
capability to add substantial value by providing end-users with focused
application solutions built on G2. Third party resellers currently include
organizations such as Asea Brown Boveri, EDS, The Foxboro Company, Honeywell,
IBM, Loral, SEMA Group, Setpoint, Siemens, and Storm Integration. Product
revenues from systems integrators and value-added resellers represented over
29%, 26%, and 28% of the Company's product revenues for 1994, 1995, and 1996,
respectively.
Gensym markets its products in Japan, South Africa and certain other
countries through distributors. These distributors have technical competence in
the application of G2, market the Company's products, provide local training and
support assistance to customers, translate documentation, help localize software
and provide systems integration services. Sales of the Company's products by
distributors, primarily the Company's Japanese distributor, accounted for 19%,
14%, and 14% of the Company's product revenues in 1994, 1995, and 1996,
respectively.
The Company employs 18 marketing personnel to position, promote and market
the Company's products. These individuals are engaged in a variety of
activities, including public relations, direct marketing, trade shows,
advertising, seminars, and promotion of customer applications for publication in
industry magazines and journals. More than 250 case studies of successful G2
applications have been published.
SERVICE AND SUPPORT
Gensym believes that a high level of customer service and support is
critical to customer satisfaction and project and application success. Most
Gensym customers attend one or two weeks of training and then implement their
applications using the development features of Gensym software. The Company
offers a regular schedule of product training in its offices in North America,
Europe, and Asia, and special on-site training courses are offered on a demand
basis around the world. Direct application engineering services are offered to
customers around the world, to support end-users as well as Gensym marketing
partners.
The Company offers product maintenance and update services for an annual
fee, typically equal to 15% of the license fee list price of the underlying
product. Maintenance is mandatory for the first year after purchase and
thereafter is optional. The Company's telephone support staff assists customers
and partners in the installation and use of the Company's products. Telephone
support is provided by the Company in North America and Europe and by local
marketing partners in Japan and other areas of the world where Gensym does not
have a direct presence.
11
<PAGE> 12
Gensym offers a variety of application engineering and consulting services
on a fee-for-service basis. Gensym has specialized consulting resources in the
following five areas: network and systems management; manufacturing process
management; process design, modeling, and simulation; pharmaceutical process
design and control; and water treatment. A key mission of the consulting staff
is to assist partners, as well as end-users, in the successful development and
deployment of intelligent systems applications based on G2. As of December 31,
1996, the Company employed a staff of 43 full-time consultants, which it
supplements, when necessary, with external contractors.
The Company offers several training courses, including two five-day G2
courses for beginning and more advanced users. In addition, the Company provides
courses on interfacing G2 to data sources and on its GDA, NeurOn-Line, and
ReThink products. The courses are given at the Company several times per month
and are also often provided at local offices and at customer sites. Outside
North America, the courses are offered by the Company where resources permit, as
well as under license from the Company by distributors and training contractors.
In 1996, more than 1,200 individuals worldwide completed courses offered by the
Company. The fee for a full week course is approximately $2,300 per student.
Gensym provides continuing support to the Gensym Users Society, an
organization of all G2 users covered by current maintenance contracts. The
Society sponsors an annual worldwide meeting plus additional regional and local
meetings. These meetings are organized as professional technical conferences,
with formal presentations of G2 applications by end-users and partners, company
and product updates by Gensym, product planning forums, panel discussions,
tutorials, workshops, and site visits. The Society publishes its "Inspect"
newsletter several times per year and has a number of special interest groups in
such areas as manufacturing and engineering design.
RESEARCH AND DEVELOPMENT
The Company believes that its future success will depend upon its ability
to enhance existing products as well as to develop and introduce new products
that keep pace with technological developments in the marketplace and address
the increasingly sophisticated needs of its customers. The Company intends to
expand existing product offerings and to introduce new applications. While the
Company expects that certain new products will be developed internally, the
Company may, based on timing and cost considerations, acquire or license
technology and/or products from third parties or consultants.
New products and enhancements to existing products are typically developed
in response to discussions at user groups and customer feedback obtained by the
Company's customer support personnel. New product initiatives are also taken to
address targeted markets. Recent areas of focus include conformance to Microsoft
Windows and NT standards (including ActiveX), CORBA compliance, component-based
product architectures, Internet and World Wide Web technologies (standard
browsers and Java), and agent-based intelligent systems.
As of December 31, 1996, Gensym had 58 employees engaged in research and
development, including software and hardware engineering, test and quality
assurance and technical documentation. In 1994, 1995 and 1996, Gensym's
research and development expenditures totalled $4.6 million, $5.3 million, and
$6.0 million, respectively, representing 23.4%, 18.7% and 16.1% of total
revenues, respectively.
COMPETITION
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. While a number of software companies offer products that
perform certain of the functions of G2 for specific applications, the Company
believes that only the Company's products offer, as a single seamlessly
integrated system, the concentration of software technologies required to build
successfully a broad range of intelligent system applications.
Certain companies sell "point solutions" that compete with the Company's
products with respect to certain applications or uses. However, an intelligent
decision support system based on point solutions requires the integration of
various software packages from different vendors which are often difficult to
maintain. Some potential customers opt to build their own intelligent systems.
These systems require that knowledge be programmed, usually at a high cost and
are typically difficult to adapt, reuse, maintain, and scale up.
Several companies offer products with real-time capabilities or expert
system based development environments. However, the Company believes that these
products lack the capabilities of its G2 environment and G2-based products.
12
<PAGE> 13
The principal competitive factors in all of the Company's markets are
functionality, ease of use, price, distribution capabilities, quality,
performance, customer support, and availability of application software
implementation services. The Company believes that its products are superior in
terms of functionality, ease of use, and performance in the high-level
applications that constitute the Company's principal market, and that it
competes favorably on the basis of these factors in both high-level and lower
level markets. In order to maintain its competitive position, the Company must
continue to enhance its existing products and introduce new products that meet
evolving customer requirements. There is no assurance that the market position
or the competitive advantages of the Company will continue.
PROPRIETARY RIGHTS
The Company relies primarily on a combination of patent law, copyright law
and trade secret law to protect its proprietary technology. The Company also has
internal policies and systems to limit access to and keep confidential its trade
secrets. The Company distributes its products under software license agreements
that contain various provisions to protect the Company's ownership of and the
confidentiality of the underlying technology. The Company also requires its
employees and other parties with access to its confidential information to
execute agreements prohibiting the unauthorized use or disclosure of the
Company's technology. In addition, the Company periodically reviews its
proprietary technology for patentability and has one patent covering specific
aspects of G2. The Company has also placed technical inhibitors in its software
that prevent the software from running on unauthorized computers. Despite these
precautions, it may be possible for a third party to misappropriate the
Company's technology or to independently develop similar technology. In
addition, effective patent, copyright and trade secret protection may not be
available in every foreign county in which the Company's products are
distributed.
Certain technology used in the Company's products is licensed from third
parties. The Company believes that, in general, comparable licenses are
available on commercially comparable terms from a number of licensors and does
not believe that any of the Company's products are significantly dependent upon
such licensed technologies.
Despite the Company's efforts to protect its proprietary rights, attempts
may be made to copy or reverse engineer aspects of the Company's products or to
obtain and use information that the Company regards as proprietary. There can be
no assurance that others will not develop products that infringe the Company's
proprietary rights or are similar or superior to those developed by the Company.
Policing the unauthorized use of the Company's products is difficult. Litigation
may be necessary in the future to enforce the Company's intellectual property
rights, to protect the Company's trade secrets or to determine the validity and
scope of the proprietary rights of others. Such litigation could result in
substantial costs and diversion of resources and could have a material adverse
effect on the Company's business, results of operations and financial condition.
Also, there can be no assurance that third parties will not assert infringement
claims against the Company in the future with respect to current or future
products. Any such assertion could require the Company to enter into royalty
arrangements or result in costly litigation, which could have a material adverse
effect on the Company's business, results of operations and financial condition.
Gensym, G2, and NeurOn-Line are registered trademarks of the Company. The
Gensym logo, NeurOn-line, GDA, ReThink, G2 WebLink, and Fault Expert are
trademarks of the Company. The Company has filed applications to register
Gensym, G2, and other marks in certain foreign jurisdictions. In addition, the
Company has an exclusive, worldwide, royalty- free, perpetual license to use
the trademark Telewindows.
BACKLOG
The Company's products are generally shipped immediately upon the receipt
of an order. As a result, the Company has no significant backlog at any given
time.
EMPLOYEES
As of December 31, 1996, the Company had 284 full-time employees, including
110 in sales and marketing, 60 in product development, 45 in consulting
services, 32 in customer support, production and licensing, and educational
services, and 37 in general and administrative functions. None of the Company's
employees is represented by a labor union, and the Company believes that its
employee relations are good.
13
<PAGE> 14
ITEM 2. PROPERTIES
The Company's headquarters and principal operations are located in a leased
facility with 52,000 square feet in Cambridge, Massachusetts. The Company's
lease expires on December 31, 2000 and contains a commitment to increase the
amount of space to 66,000 square feet at different times over the life of the
lease. In addition to rental expenses, the Company must also pay an allocated
portion of operating expenses and taxes each year. The Company also leases
twelve sales offices in the United States, eight in Europe, and one each in
Australia, Canada, Hong Kong, South Korea and Tunisia. The Company's aggregate
rental expense for all facilities during 1996 was $1.9 million. Gensym believes
that its existing facilities are adequate for its current needs, and that
suitable additional space will be available as required.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any litigation that it believes could have a
material adverse effect on the Company or its business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of the Company's security holders during the
fourth quarter of 1996.
EXECUTIVE OFFICERS OF THE COMPANY
<TABLE>
The executive officers of the Company and their respective ages as of March 26, 1997 are as follows:
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Lowell B. Hawkinson........... 54 Chairman of the Board, Chief Executive Officer,
Treasurer and Secretary
Robert L. Moore............... 54 President and Director
Richard M. Darer(1)........... 43 Vice President, Finance and Administration and Chief Financial Officer
Troy A. Heindel............... 35 Vice President, Support Services and Chief
Information Officer
Kathy L. Kessel............... 45 Vice President, Marketing
Michael Levin(2).............. 57 Vice President, Technology
James T. Pepe................. 52 Vice President, Product Development
Mark H. Whitworth............. 45 Vice President, Advanced Systems Business Unit
Bill H. Wood.................. 58 Vice President, Communications Business Unit
</TABLE>
(1) Will commence employment April 10, 1997.
(2) Mr. Levin has informed the Company that he will be resigning effective
April 15,1997.
Mr. Hawkinson, a founder of the Company, has served as Chairman of the Board,
Chief Executive Officer, Treasurer and Secretary since September 1986. Prior to
founding the Company, Mr. Hawkinson was a Manager of Expert Systems Development
at Lisp Machines Inc., a specialty computer manufacturer, from 1983 to 1986.
From 1973 to 1983, Mr. Hawkinson was Research Associate in the field of
artificial intelligence at the Laboratory for Computer Science at the
Massachusetts Institute of Technology. Mr. Hawkinson is also a director of
GenRad, Inc.
Dr. Moore, a founder of the Company, has served as President and a director
since September 1986. Prior to founding the Company, Dr. Moore founded and was
Vice President of the Process Systems Division of Lisp Machines Inc. from 1983
to 1986. From 1981 to 1983, Dr. Moore was President of Sentrol Systems Inc., a
supplier of process control systems. Dr. Moore received his undergraduate
degrees in Electrical Engineering and Engineering Mathematics from the
University of Michigan, his Ph.D. degree from the Massachusetts Institute of
Technology, with a major in Automatic Control and a minor in Industrial
Management.
Mr. Darer is joining the Company in April 1997 as Vice President of Finance and
Administration and Chief Financial Officer. From May 1996 to March 1997 he
served as Chief Financial Officer and Vice President of Administration at White
Pine Software, Inc., a videoconferencing software products company. Mr. Darer
served as Vice President, Treasurer and Controller of Sequoia Systems, Inc., a
computer systems company, from January 1996 to May 1996, and Corporate
Controller from July 1994 to December 1995. From 1982 to 1994, Mr. Darer held
several positions in financial management at Computervision Corporation, a
CAD/CAM software and services company, the most recent of which was the
Controller of the Computervision Group. Mr. Darer received an M.B.A. from the
Harvard Graduate School of Business Administration, an M.S. from Northeastern
University and a B.S. from the Polytechnic Institute of Brooklyn.
14
<PAGE> 15
Mr. Heindel joined the Company in 1991 as a telecommunications marketing
specialist and was promoted to his current position of Vice President, Support
Services and Chief Information Officer in November 1995. Prior to joining
Gensym, Mr. Heindel worked at NASA's Johnson Space Center as a Space Shuttle
Operations Flight Controller and Project Manager from 1985 to 1991.
Ms. Kessel joined the Company in May 1992 and has served as Vice President,
Marketing since May 1995. From 1992 to 1995 Ms. Kessel served as the Director
of Corporate and Product Marketing. Prior to joining the Company, Ms. Kessel
held various senior market development and engineering positions at Texas
Instruments, Automatix, and from 1988 to 1992 at Concentra Corporation, where
she served most recently as Director of Marketing. Ms. Kessel holds an M.S. in
Management of Technology from the Massachusetts Institute of Technology Sloan
School of Management and a B.S. in Mechanical Engineering from the University
of New Hampshire.
Mr. Levin, a founder of the Company, has served as Vice President, Technology
since 1989. Mr. Levin holds a B.S. degree in mathematics from the Massachusetts
Institute of Technology.
Dr. Pepe joined the Company in June 1994 as Vice President of Product
Development. From 1990 to 1994, Dr. Pepe served with DEC as Group Manager for
transaction processing software development. Dr. Pepe holds SB, SM, and Ph.D.
degrees in mathematics from the Massachusetts Institute of Technology.
Mr. Whitworth joined the Company in July 1992 as its Director of Consulting
Services and has served as Vice President, Advanced Systems Business Unit since
January 1997. From May 1995 to December 1996 Mr. Whitworth served as the Vice
President of Consulting Services. Prior to joining the Company, Mr. Whitworth
was Director of Consulting Services at MainStream Software Company from 1990 to
1992.
Mr. Wood joined the Company in March 1997 as the Vice President, Communications
Business Unit after serving as a consultant to the Company for three months.
From July 1995 through December 1996 Mr. Wood served as the Vice President and
General Manager, North American Operations of Information Systems Management at
Bull Information Systems. Mr. Wood held various senior management positions at
Candle Corporation from 1984 to July 1995, where he most recently served as
Vice President of Worldwide Marketing.
15
<PAGE> 16
PART II.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The common stock of the Company is traded on The NASDAQ Stock Market under the
symbol "GNSM". The common stock was first traded on NASDAQ on February 16, 1996
concurrent with the underwritten initial public offering of shares of the
Company's Common Stock (the "Offering"). Prior to the Offering there was no
established public trading market for the Company's shares.
<TABLE>
The table below sets forth the high and low sales prices of the Company's Common
Stock in 1996 from February 16, 1996, the date of the Offering, through the end
of the first quarter of 1996 and for each full quarterly period thereafter in
1996.
<CAPTION>
Year ended
December 31, 1996
High Low
------ ------
<S> <C> <C>
First quarter (from February 16, 1996) 19 1/2 10
Second quarter 23 3/4 18 1/4
Third quarter 23 3/4 18 3/4
Fourth quarter 22 3/8 8 5/8
</TABLE>
The Company has never declared or paid cash dividends on its capital stock. The
Company currently intends to retain its earnings for future growth and,
therefore does not anticipate paying any cash dividends in the foreseeable
future. Payment of future dividends, if any, will be at the discretion of the
Company's Board of Directors after taking into account various factors,
including the Company's financial condition, operating results, current and
anticipated cash needs and plans for expansion.
The number of holders of record of the Company's Common Stock at March 26, 1997
was 128. This number does not include shareholders for whom shares are held in
a "nominee" or "street" name.
16
<PAGE> 17
ss
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
The selected consolidated balance sheet data presented below as of December 31, 1996 and 1995, and the selected consolidated
statement of operations data for each of the three years in the period ended December 31, 1996, are derived from the Company's
Consolidated Financial Statements, included elsewhere in this Annual Report which have been audited by Arthur Andersen LLP,
independent public accountants (the "Consolidated Financial Statements") . The selected consolidated balance sheet data presented
below as of December 31, 1994, 1993 and 1992 and the selected consolidated statement of operations data for the years ended
December 31, 1993 and 1992 are derived from the Company's Consolidated Financial Statements, not included in this Annual Report on
Form 10-K, all of which have been audited by Arthur Andersen LLP, independent public accountants. These data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Consolidated
Financial Statements and related Notes included elsewhere in this Annual Report on Form 10-K.
<CAPTION>
Year ended December 31,
-----------------------------------------------------------------------
1996 1995 1994 1993 1992
----------- ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues:
Product $21,358,295 $16,438,400 $11,426,593 $11,280,211 $ 9,712,901
Service 15,877,240 11,702,577 8,164,778 6,470,862 4,124,788
----------- ----------- ----------- ----------- -----------
Total revenues 37,235,535 28,140,977 19,591,371 17,751,073 13,837,689
----------- ----------- ----------- ----------- -----------
Cost of revenues:
Product 578,144 525,452 257,946 223,385 199,477
Service 6,807,071 4,789,202 2,565,091 1,777,692 1,581,049
----------- ----------- ----------- ----------- -----------
Total cost of revenues 7,385,215 5,314,654 2,823,037 2,001,077 1,780,526
----------- ----------- ----------- ----------- -----------
Gross profit 29,850,320 22,826,323 16,768,334 15,749,996 12,057,163
----------- ----------- ----------- ----------- -----------
Operating expenses:
Sales and marketing 17,432,861 14,568,045 9,371,574 7,747,776 6,132,387
Research and development 5,983,741 5,267,461 4,590,220 4,070,243 3,544,646
General and administrative 3,699,254 2,619,103 2,630,943 2,004,783 1,523,600
----------- ----------- ----------- ----------- -----------
Total operating expenses 27,115,856 22,454,609 16,592,737 13,822,802 11,200,633
----------- ----------- ----------- ----------- -----------
Operating income 2,734,464 371,714 175,597 1,927,194 856,530
Other income, net 517,758 236,030 258,077 78,223 144,520
----------- ----------- ----------- ----------- -----------
Income before provision for income taxes 3,252,222 607,744 433,674 2,005,417 1,001,050
Provision for income taxes 1,204,000 411,000 302,000 772,000 210,000
----------- ----------- ----------- ----------- -----------
Net income $ 2,048,222 $ 196,744 $ 131,674 $ 1,233,417 $ 791,050
=========== =========== =========== =========== ===========
Net income per common and common
equivalent share (1) (2) $ 0.33 $ 0.04
=========== ===========
Weighted average common and common
equivalent shares outstanding (1) (2) 6,286,170 4,804,108
=========== ===========
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments $19,589,852 $ 5,092,201 $ 6,772,671 $ 5,805,469 $ 3,923,005
Working capital 20,469,778 6,176,328 6,585,277 6,542,286 5,551,629
Total assets 36,257,621 17,846,495 14,335,231 13,189,483 10,798,355
Long-term obligations, less current portion - - - - 71,667
Total stockholders' equity 24,068,455 8,610,577 8,360,244 8,199,878 6,927,375
<FN>
(1) Computed as described in Note 1(i) of Notes to Consolidated Financial Statements.
(2) Net income per common and common equivalent share and weighted average common and common equivalent shares outstanding have
not been presented for the years ended December 31, 1994, 1993 and 1992 as the information is not considered to be relevant
or meaningful.
</TABLE>
17
<PAGE> 18
ITEM 7. 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 released
enhanced versions of G2, has introduced add-on products that complement G2 in
areas of data connectivity and graphical user interfaces, and has further
expanded its product line to include G2-based application 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 its products through its 26 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 an increase in both product and
service revenues in 1995 and 1996. The Company also sells its products through a
network of value-added resellers and systems integrators who provide consulting
services and integrated solutions to their customers. The Company believes that
there is a trend among end-users in its markets toward purchasing complete
solutions, rather than software tools with which to develop such solutions. This
trend has increased the Company's reliance on such value-added resellers and
systems integrators to provide consulting services and integrated solutions to
end-users, and has lead the Company to increase its own capabilities to deliver
complete solutions directly.
This Annual Report on Form 10-K 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."
18
<PAGE> 19
RESULTS OF OPERATIONS
<TABLE>
The following table sets forth, as a percentage of total revenues,
consolidated statements of operations data for the periods indicated:
<CAPTION>
YEAR ENDED DECEMBER 31,
1996 1995 1994
----- ----- -----
<S> <C> <C> <C>
Revenues:
Product 57.4% 58.4% 58.3%
Service 42.6 41.6 41.7
----- ----- -----
Total revenues 100.0 100.0 100.0
----- ----- -----
Cost of revenues:
Product 1.6 1.9 1.3
Service 18.3 17.0 13.1
----- ----- -----
Total cost of revenues 19.9 18.9 14.4
----- ----- -----
Gross margin 80.1 81.1 85.6
----- ----- -----
Operating expenses:
Sales and marketing 46.8 51.8 47.9
Research and development 16.1 18.7 23.4
General and administrative 9.9 9.3 13.4
----- ----- -----
Total operating expenses 72.8 79.8 84.7
----- ----- -----
Operating income 7.3 1.3 0.9
Other income, net 1.4 0.9 1.3
----- ----- -----
Income before provision for
income taxes 8.7 2.2 2.2
Provision for income taxes 3.2 1.5 1.5
----- ----- -----
Net income 5.5% 0.7% 0.7%
===== ===== =====
Gross margin:
Product revenues 97.3% 96.8% 97.7%
Service revenues 57.1 59.1 68.6
</TABLE>
19
<PAGE> 20
YEARS ENDED DECEMBER 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 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 $37.2 million for the year ended December 31, 1996 as
compared to $28.1 million in 1995, an increase of $9.1 million or 32.3%. The
increase in total revenues was attributable to increased sales of both software
product licenses and related services. International revenues accounted for 42%
and 44% of total revenue in 1996 and 1995, respectively
Product. Product revenues increased to $21.4 million for the year ended
December 31, 1996 from $16.4 million in 1995, an increase of 29.9%. The increase
in product revenues reflected the results of earlier expansion of the Company's
direct sales force, and increased number of marketing partnerships (value-added
resellers, systems integrators, and distributors), as well as greater acceptance
of G2 and G2-based products in both existing and new market segments.
Service. Service revenues increased to $15.9 million for the year ended
December 31, 1996 from $11.7 million in the same period in 1995, an increase of
35.7%. The increase in service revenues was primarily due to increased
maintenance fees and application consulting. Maintenance fees increased to $7.9
million for the year ended December 31, 1996 from $6.0 million in the same
period in 1995, an increase of 31.7%. The increase in maintenance fees was due
to a larger customer base and increased maintenance renewals. Consulting
revenues increased to $6.1 for the year ended December 31, 1996 from $3.9
million in the same period in 1995, an increase of 55.9%. Consulting revenues as
a percentage of total revenues increased to 16.3% in 1996 from 13.8% in 1995.
The Company expects to continue to expand its application consulting resources
to meet the growing demand from customers and partners for assistance with
application design and development.
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 $578,000 for the year ended December 31, 1996 from $525,000 in
1995, an increase of 10.0%. This increase was primarily due to the increase in
the number of licenses sold during 1996. Gross margin on product revenues
increased slightly to 97.3% from 96.8% for the years ended December 31, 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 $6.8 million for
the year ended December 31, 1996 from $4.8 million for the year ended December
31, 1995, an increase of 42.1%. The increase in cost of service revenues was due
primarily to an increase in consulting labor costs associated with providing
increased consulting services. Gross margin on service revenues decreased to
57.1% for the year ended December 31, 1996 from 59.1% in same period in 1995,
largely due to a greater percentage of lower margin consulting revenues versus
higher margin product support and training 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 expenses, trade shows,
advertising, and promotional materials. For the year ended December 31, 1996,
these expenses increased 19.7% to $17.4 million (46.8% of total revenues) from
$14.6 million (51.8% of total revenues) for the comparable period in 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 decline as a percentage of
revenues over time, should revenue growth continue.
20
<PAGE> 21
Research and Development. Research and development expenses consist
primarily of costs of personnel, equipment, and facilities. These expenses
increased 13.6% to $6.0 million (16.1% of total revenues) for the year ended
December 31, 1996 from $5.3 million (18.7% of total revenues) for the comparable
period in 1995. The increase in absolute dollars was primarily due to an
increase in engineering personnel devoted to new product features and
enhancements in the G2 product family and the development of new products. The
decrease as a percentage of revenues was primarily due to increased revenues.
General and Administrative. General and administrative expenses consist
primarily of personnel costs for finance, administration, operations,
information systems, and general management, as well as legal and accounting
expenses. These expenses increased 41.2% to $3.7 million (9.9% of total
revenues) for the year ended December 31, 1996 from $2.6 million (9.3% of total
revenues) for the comparable period in 1995. This increase was primarily due to
an increase in the number of personnel in the Company's finance, administrative,
and information systems departments.
Other Income
Other income consists primarily of interest income and foreign exchange
transaction gains and losses. For the year ended December 31, 1996, other income
increased 119.4% to $518,000 from $236,000 for the comparable period in 1995.
This increase was primarily due to an increase in interest income related to
higher cash, short-term investment, and long-term investment balances available
for investment, as a result of the proceeds from the Company's initial public
offering in February 1996, offset by losses in other investing activities. In
1996, interest income increased 175.6% to $608,000 from $220,000 in the same
period in 1995. The Company has historically experienced nominal net foreign
exchange transaction gains or losses.
Income Taxes
The Company's effective tax rate for the years ended December 31, 1996 and
1995 was 37.0% and 67.6%, respectively. The effective tax rate for the year
ended December 31, 1995 was higher than the statutory rate principally due to
the effect of taxes on foreign income and due to foreign withholding taxes. See
Note 4 of Notes to Consolidated Financial Statements.
YEARS ENDED DECEMBER 31, 1995 AND 1994
Total revenues increased to $28.1 million in 1995 from $19.6 million in 1994, an
increase of $8.5 million or 43.6%. The increase in total revenues was
attributable to increased sales of both software product licenses and related
services. International revenues accounted for 44% of total revenues in both
1995 and 1994.
Product. Product revenues increased to $16.4 million in 1995 from $11.4
million in 1994, an increase of 43.9%. 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 $11.7 million in 1995 from $8.2
million in 1994, an increase of 43.3%. The increase in service revenues was
primarily due to increased application consulting. Consulting revenues increased
to $3.9 million in 1995 from $1.7 million in 1994, an increase of 126.6%. The
Company continued to expand its application consulting organization to meet the
growing demand from customers and partners for assistance with application
design and development, and to aggressively enter into new market segments such
as telecommunications.
Cost of Revenues
Cost of Product. Cost of product revenues increased to $526,000 in 1995
from $258,000 in 1994, an increase of 103.7%. 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 and a
major product release. Gross margin on product revenues remained relatively
constant at 96.8% and 97.7% in 1995 and 1994, respectively.
Cost of Service. Cost of service increased to $4.8 million in 1995 from
$2.6 million in 1994, an increase of 86.7%, primarily due to an increase in
consulting labor costs. Gross margin on service revenues decreased to 59.1% in
1995 from 68.6% in 1994, largely due to a greater percentage of lower margin
consulting revenues.
21
<PAGE> 22
Operating Expenses
Sales and Marketing. Sales and marketing expenses increased to $14.6
million in 1995 from $9.4 million in 1994, an increase of 55.4%. As a percentage
of total revenues, sales and marketing expenses increased to 51.8% in 1995 from
47.9% in 1994. This increase was primarily a result of the continued investment
in the Company's global sales and marketing capabilities, including the addition
of sales personnel in new and existing offices.
Research and Development. Research and development expenses increased to
$5.3 million (18.7% of total revenues) in 1995 from $4.6 million (23.4% of total
revenues) in 1994, an increase of 14.8%. 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 total revenues reflected the
Company's revenue growth in 1995.
General and Administrative. General and administrative expenses remained
relatively constant at $2.6 million in 1995 and 1994. As a percentage of total
revenues, general and administrative expenses decreased to 9.3% in 1995 from
13.4% in 1994. The decrease as a percentage of total revenues reflected the
Company's revenue growth in 1995.
Other Income
Other income consists primarily of interest income and foreign exchange
transaction gains and losses. Other income decreased to $236,000 in 1995 from
$258,000 in 1994, a decrease of 8.5%. This decrease was primarily due to lower
cash balances available for investment resulting in reduced interest income.
Income Taxes
Income taxes increased to $411,000 (67.6% of income before the provision
for income taxes) in 1995 from $302,000 (69.6% of income before the provision
for income taxes) in 1994. The effective tax rate was higher than the statutory
rate in both years principally due to the effect of taxes on foreign income and
due to foreign withholding taxes. See Note 4 of Notes to Consolidated Financial
Statements.
22
<PAGE> 23
<TABLE>
Selected Quarterly Operating Results
The following tables present unaudited financial information for the Company's eight most recent
quarters. The following selected quarterly information includes all adjustments (consisting only of
normal recurring adjustments) that the Company considers necessary for a fair presentation. In view
of the Company's recent growth and other factors, the Company believes that quarter-to-quarter
comparisons of its financial results are not necessarily meaningful and that such comparisons should
not be relied upon as an indication of future performance. In addition, the Company's results of
operations may fluctuate from quarter to quarter in the future.
<CAPTION>
QUARTER ENDED
DEC. 31 SEPT. 30 JUNE 30 MAR. 31 DEC. 31 SEPT. 30 JUNE 30 MAR. 31
1996 1996 1996 1996 1995 1995 1995 1995
------- ------ ------ ------ ------ ------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Product $ 6,062 $4,925 $5,649 $4,723 $5,239 $4,293 $3,657 $3,249
Service 4,339 3,968 3,852 3,718 3,542 3,225 2,480 2,456
------- ------ ------ ------ ------ ------ ------ ------
Total revenues 10,401 8,893 9,501 8,441 8,781 7,518 6,137 5,705
------- ------ ------ ------ ------ ------ ------ ------
Cost of revenues:
Product 202 118 138 121 136 203 105 82
Service 1,877 1,732 1,673 1,525 1,455 1,321 1,100 913
------- ------ ------ ------ ------ ------ ------ ------
Total cost of revenues 2,079 1,850 1,811 1,646 1,591 1,524 1,205 995
------- ------ ------ ------ ------ ------ ------ ------
Gross margin 8,322 7,043 7,690 6,795 7,190 5,994 4,932 4,710
------- ------ ------ ------ ------ ------ ------ ------
Operating expenses:
Sales and marketing 4,559 4,317 4,344 4,214 4,380 3,600 3,536 3,052
Research and development 1,529 1,596 1,462 1,397 1,360 1,247 1,378 1,282
General and administrative 1,054 992 920 732 756 687 586 590
------- ------ ------ ------ ------ ------ ------ ------
Total operating expenses 7,142 6,905 6,726 6,343 6,496 5,534 5,500 4,924
------- ------ ------ ------ ------ ------ ------ ------
Operating income (loss) 1,180 138 964 452 694 460 (568) (214)
Other income, net 129 173 153 63 59 28 77 73
------- ------ ------ ------ ------ ------ ------ ------
Income (loss) before provision for
(benefit from) income taxes 1,309 311 1,117 515 753 488 (491) (141)
Provision for (benefit from) income
taxes 493 115 414 182 509 329 (332) (95)
------- ------ ------ ------ ------ ------ ------ ------
Net income (loss) $ 816 $ 196 $ 703 $ 333 $ 244 $ 159 $ (159) $ (46)
======= ====== ====== ====== ====== ====== ====== ======
</TABLE>
23
<PAGE> 24
<TABLE>
<CAPTION>
QUARTER ENDED
DEC. 31 SEPT. 30 JUNE 30 MAR. 31 DEC. 31 SEPT. 30 JUNE 30 MAR. 31
1996 1996 1996 1996 1995 1995 1995 1995
----- ----- ----- ----- ----- ----- ----- -----
(AS A PERCENTAGE OF TOTAL REVENUES)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Product 58.3% 55.4% 59.5% 56.0% 60.0% 57.1% 59.6% 57.0%
Service 41.7 44.6 40.5 44.0 40.0 42.9 40.4 43.0
----- ----- ----- ----- ----- ----- ----- -----
Total revenues 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
----- ----- ----- ----- ----- ----- ----- -----
Cost of revenues:
Product 1.9 1.3 1.4 1.4 1.5 2.7 1.7 1.4
Service 18.1 19.5 17.6 18.1 16.6 17.6 17.9 16.0
----- ----- ----- ----- ----- ----- ----- -----
Total cost of revenues 20.0 20.8 19.0 19.5 18.1 20.3 19.6 17.4
----- ----- ----- ----- ----- ----- ----- -----
Gross margin 80.0 79.2 81.0 80.5 81.9 79.7 80.4 82.6
----- ----- ----- ----- ----- ----- ----- -----
Operating expenses:
Sales and marketing 43.8 48.5 45.7 49.9 49.9 47.9 57.6 53.6
Research and development 14.7 17.9 15.4 16.5 15.5 16.6 22.5 22.5
General and administration 10.1 11.2 9.7 8.7 8.6 9.1 9.5 10.3
----- ----- ----- ----- ----- ----- ----- -----
Total operating expenses 68.6 77.6 70.8 75.1 74.0 73.6 89.6 86.4
----- ----- ----- ----- ----- ----- ----- -----
Operating income (loss) 11.4 1.6 10.2 5.4 7.9 6.1 (9.2) (3.8)
Other income, net 1.2 1.9 1.6 0.7 0.7 0.4 1.2 1.3
----- ----- ----- ----- ----- ----- ----- -----
Income (loss) before provision for
(benefit from) income taxes 12.6 3.5 11.8 6.1 8.6 6.5 (8.0) (2.5)
Provision for (benefit from) income taxes 4.7 1.3 4.4 2.2 5.7 4.4 (5.4) (1.7)
----- ----- ----- ----- ----- ----- ----- -----
Net income (loss) 7.9% 2.2% 7.4% 3.9% 2.9% 2.1% (2.6)% (0.8)%
===== ===== ===== ===== ===== ===== ===== =====
</TABLE>
24
<PAGE> 25
LIQUIDITY AND CAPITAL RESOURCES
The Company currently finances its operations (including capital
expenditures) primarily through cash flow from operations and existing financial
resources. In addition, the Company has $4.8 million of equipment under
long-term operating leases. The Company's lease commitments consist of operating
leases primarily for the Company's facilities and computers. The Company
generated cash from operations of $3.9 million for the year ended December 31,
1996, used $131,000 in cash for operations in 1995 and generated $1.8 million in
cash from operations in 1994. Cash generated from operations in 1996 was
primarily due to increased net income and increases in accrued expenses and
deferred revenue, partially offset by an increase in accounts receivable and
prepaid expenses.
At December 31, 1996, the Company had cash, cash equivalents, short-term
investments, and long-term investments of $20.3 million. The Company regularly
invests excess funds in 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 $12.0 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. In
addition, the Company has received approximately $940,000 in 1996 through the
exercise of stock options and the sale of shares through the employee stock
purchase plan.
At December 31, 1996, the Company had available a bank line of credit
allowing for borrowings up to $1.0 million and providing for interest at the
current prime rate. This bank 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 December 31, 1996. There were no borrowings under the
bank line of credit for the year ended December 31, 1996.
Investing activities utilized cash of $7.2 million, $4.6 million and
$907,000 for the years ended 1996, 1995 and 1994, respectively. The principal
uses in 1996 were to fund the purchase of $4.9 million of short-term
investments, $742,000 in long-term investments and $1.6 million 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 available funds and cash generated from
operations will be sufficient to meet the Company's business requirements at
least through December 31, 1997.
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
A number of uncertainties exist that could offset the Company's operating
results, including, without limitation, the following:
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
nor 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. In addition,
the Company believes that end-users in its market are increasingly seeking
complete solutions, rather than software tools with which to develop such
solutions. Meeting this demand has required the Company to modify its sales
approach and increase its capabilities to deliver complete solutions. The
Company is also increasingly reliant on value-added resellers and systems
integrators to deliver services to implement these solutions. The modified
sales approach may also lengthen the Company's average sales cycle. Failure by
the Company to respond appropriately to such a shift in market demand could
have a material adverse effect on the Company's business, results of
operations, or financial condition.
25
<PAGE> 26
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 12 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 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. See "Emerging Market for Intelligent
Systems."
26
<PAGE> 27
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 28% of the Company's product revenues in 1994, 1995 and 1996,
respectively. Sales of the Company's products by distributors, primarily the
Company's Japanese distributor, accounted for 19%, 14% and 14% of the Company's
product revenues in 1994, 1995 and 1996, respectively. The loss of one or more
major third-party distributors or resellers of the Company's products, 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 and implement the Company's products. In addition, the Company
relies on third-party resellers to provide post-sales service and support to its
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 42% of total revenues in 1994, 1995 and 1996,
respectively. Revenues are categorized by the Company according to product
shipment destination and therefore do not necessarily reflect the ultimate
country of installation. 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 local 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 unintended 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 functions of the Company's
products. 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 application
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 alternatives 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 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.
27
<PAGE> 28
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 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. Any future strategic transactions such as acquisitions or equity
investments would place additional strains upon the Company's management
resources. 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, and 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 or to adequately
replace key personnel who depart the Company could have a material adverse
effect on the Company's business, results of operations, or financial condition.
28
<PAGE> 29
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
GENSYM CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<CAPTION>
DECEMBER 31,
1996 1995
----------- -----------
ASSETS
<S> <C> <C>
Current Assets:
Cash and cash equivalents $11,678,903 $ 2,126,259
Short-term investments 7,910,949 2,965,942
Accounts receivable, less reserves of $453,000 in 1996
and $415,000 in 1995 9,735,914 8,263,549
Prepaid expenses 1,754,309 1,114,952
Deferred income taxes 1,578,869 941,544
----------- -----------
Total current assets 32,658,944 15,412,246
----------- -----------
Property and Equipment, at cost:
Computer equipment and software 6,749,039 5,638,117
Furniture and fixtures 1,540,013 1,262,154
Leasehold improvements 322,797 149,361
----------- -----------
8,611,849 7,049,632
Less accumulated depreciation and amortization (5,970,845) (4,883,187)
----------- -----------
2,641,004 2,166,445
----------- -----------
Long-term investments 742,175 -
Deposits and other assets 215,498 267,804
----------- -----------
$36,257,621 $17,846,495
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 1,262,273 $ 1,027,110
Accrued expenses 5,109,359 3,789,297
Deferred revenue 5,817,534 4,419,511
----------- -----------
Total current liabilities 12,189,166 9,235,918
----------- -----------
Commitments (Note 5)
Stockholders' Equity:
Preferred stock, $.01 par value
Authorized - 2,000,000 shares in 1996 and none in 1995
Issued and outstanding - none in 1996 and 1995 - -
Series A convertible preferred stock, $.10 par value
Authorized, issued and outstanding - 300,000 shares in 1995 - 30,000
Series B convertible preferred stock, $.10 par value
Authorized - 474,900 shares in 1995
Issued and outstanding - 353,460 shares in 1995 - 35,346
Common stock, $.01 par value
Authorized - 20,000,000 shares
Issued and outstanding - 6,190,317 shares in 1996
and 4,001,000 in 1995 61,903 40,010
Capital in excess of par value 18,727,438 5,233,955
Retained earnings 5,355,641 3,307,419
Cumulative translation adjustment (76,527) (36,153)
----------- -----------
Total stockholders' equity 24,068,455 8,610,577
----------- -----------
$36,257,621 $17,846,495
=========== ===========
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
29
<PAGE> 30
<TABLE>
GENSYM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<CAPTION>
YEAR ENDED DECEMBER 31,
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
REVENUES:
Product $21,358,295 $16,438,400 $11,426,593
Service 15,877,240 11,702,577 8,164,778
----------- ----------- -----------
Total revenues 37,235,535 28,140,977 19,591,371
----------- ----------- -----------
COST OF REVENUES:
Product 578,144 525,452 257,946
Service 6,807,071 4,789,202 2,565,091
----------- ----------- -----------
Total cost of revenues 7,385,215 5,314,654 2,823,037
----------- ----------- -----------
Gross profit 29,850,320 22,826,323 16,768,334
----------- ----------- -----------
OPERATING EXPENSES:
Sales and marketing 17,432,861 14,568,045 9,371,574
Research and development 5,983,741 5,267,461 4,590,220
General and administrative 3,699,254 2,619,103 2,630,943
----------- ----------- -----------
Total operating expenses 27,115,856 22,454,609 16,592,737
----------- ----------- -----------
Operating income 2,734,464 371,714 175,597
OTHER INCOME, NET 517,758 236,030 258,077
----------- ----------- -----------
Income before provision for income taxes 3,252,222 607,744 433,674
PROVISION FOR INCOME TAXES 1,204,000 411,000 302,000
----------- ----------- -----------
Net income $ 2,048,222 $ 196,744 $ 131,674
=========== =========== ===========
Net income per common and
common equivalent share $ 0.33 $ 0.04
=========== ===========
Weighted average common and common
equivalent shares outstanding 6,286,170 4,804,108
=========== ===========
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
30
<PAGE> 31
GENSYM CORPORATION AND SUBSIDIARIES
<TABLE>
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY
<CAPTION>
Series A Series B
Convertible Convertible
Preferred Stock Preferred Stock Common Stock
---------------------- --------------------- --------------------
Number $0.10 Number $0.10 Number $0.01
of Shares Par Value of Shares Par Value of Shares Par Value
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <S> <C>
BALANCE, DECEMBER 31, 1993 300,000 $30,000 353,460 $35,346 3,988,350 $39,884
Exercise of stock options - - - - 5,250 52
Translation adjustment - - - - - -
Net Income - - - - - -
-------- ------- -------- ------- --------- -------
BALANCE, DECEMBER 31, 1994 300,000 30,000 353,460 35,346 3,993,600 39,936
Exercise of stock options - - - - 7,400 74
Translation adjustment - - - - - -
Net Income - - - - - -
-------- ------- -------- ------- --------- -------
BALANCE, DECEMBER 31, 1995 300,000 30,000 353,460 35,346 4,001,000 40,010
Conversion of Series A convertible
preferred stock into common stock (300,000) (30,000) - - 300,000 3,000
Conversion of Series B convertible
preferred stock into common stock - - (353,460) (35,346) 353,460 3,534
Issuance of common stock from Initial
Public Offering, net of issuance
costs of $758,737 - - - - 1,366,788 13,668
Exercise of stock options - - - - 134,900 1,549
Issuance of common stock under Employee
Stock Purchase Plan (ESPP) - - - - 34,169 342
Tax benefit from exercise of incentive
stock options and shares purchased
under ESPP - - - - - -
Translation adjustment - - - - - -
Net Income - - - - - -
-------- ------- -------- ------- --------- -------
BALANCE, DECEMBER 31, 1996 - - - - 6,190,317 $61,903
======== ======= ======== ======= ========= =======
<CAPTION>
Capital in Cumulative Total
Excess of Retained Translation Stockholders'
Par Value Earnings Adjustment Equity
----------- ---------- ----------- ------------
<C> <C> <C> <C>
BALANCE, DECEMBER 31, 1993 $ 5,192,341 $2,979,001 $(76,694) $ 8,199,878
Exercise of stock options 12,648 - - 12,700
Translation adjustment - - 15,992 15,992
Net Income - 131,674 - 131,674
----------- ---------- -------- -----------
BALANCE, DECEMBER 31, 1994 5,204,989 3,110,675 (60,702) 8,360,244
Exercise of stock options 28,966 - - 29,040
Translation adjustment - - 24,549 24,549
Net Income - 196,744 - 196,744
----------- ---------- -------- -----------
BALANCE, DECEMBER 31, 1995 5,233,955 3,307,419 (36,153) 8,610,577
Conversion of Series A convertible
preferred stock into common stock 27,000 - - -
Conversion of Series B convertible
preferred stock into common stock 31,812 - - -
Issuance of common stock from Initial
Public Offering, net of issuance
costs of $758,737 11,938,723 - - 11,952,391
Exercise of stock options 611,541 - - 612,890
Issuance of common stock under Employee
Stock Purchase Plan (ESPP) 326,407 - - 326,749
Tax benefit from exercise of incentive
stock options and shares purchased
under ESPP 558,000 - - 558,000
Translation adjustment - - (40,374) (40,374)
Net Income - 2,048,222 - 2,048,222
----------- ---------- -------- -----------
BALANCE, DECEMBER 31, 1996 $18,727,438 $5,355,641 $(76,527) $24,068,455
=========== ========== ======== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
31
<PAGE> 32
GENSYM CORPORATION AND SUBSIDIARIES
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
YEAR ENDED DECEMBER 31,
1996 1995 1994
----------- ---------- ----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,048,222 $ 196,744 $ 131,674
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities:
Depreciation and amortization 1,087,658 959,109 791,851
Deferred income taxes (637,325) (724,788) (216,756)
Changes in assets and liabilities:
Accounts receivable (1,481,427) (3,113,369) 139,624
Prepaid expenses (691,719) (659,872) 41,196
Accounts payable 242,060 414,545 214,066
Accrued expenses 1,902,329 1,920,121 (156,744)
Deferred revenue 1,398,857 876,153 877,174
----------- ---------- ----------
Net cash provided by (used in)
operating activities 3,868,655 (131,357) 1,822,085
----------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of short-term investments (4,945,007) (2,965,942) -
Purchases of long-term investments (742,175) - -
Purchases of property and equipment (1,562,217) (1,610,019) (863,110)
Decrease (increase) in deposits and
other assets 37,391 (4,307) (44,364)
----------- ---------- ----------
Net cash used in investing activities (7,212,008) (4,580,268) (907,474)
----------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options 612,890 29,040 12,700
Proceeds from issuance of common stock
under employee stock purchase plan 326,749 - -
Proceeds from initial public offering,
net of issuance costs 11,952,391 - -
----------- ---------- ----------
Net cash provided by financing activities 12,892,030 29,040 12,700
----------- ---------- ----------
EFFECT OF EXCHANGE RATE CHANGES ON CASH 3,967 36,173 39,891
----------- ---------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 9,552,644 (4,646,412) 967,202
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 2,126,259 6,772,671 5,805,469
----------- ---------- ----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $11,678,903 $2,126,259 $6,772,671
=========== ========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for -
Income Taxes $ 608,805 $ 586,801 $ 310,883
=========== ========== ==========
Interest $ - $ 10,032 $ -
=========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
32
<PAGE> 33
GENSYM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
The Company is a leading supplier of software products and services for
developing and deploying intelligent solutions for a broad range of industrial,
scientific, commercial, and government applications.
The accompanying consolidated financial statements reflect the application of
certain significant accounting policies, as described in this note and elsewhere
in the accompanying consolidated financial statements and notes.
(a) Principles of Consolidation
The accompanying consolidated financial statements include the
accounts of the Company and its wholly owned subsidiaries. All
material intercompany transactions and balances have been eliminated
in consolidation.
(b) Cash Equivalents and Investments
The Company applies Statement of Financial Accounting Standards (SFAS)
No. 115, Accounting for Certain Investments in Debt and Equity
Securities. The Company's investments are classified as
available-for-sale and are recorded at fair value, which approximates
amortized cost at December 31, 1996. Cash equivalents are short-term,
highly liquid investments with original maturity dates of less than
three months. Short-term investments held as of December 31, 1996
consist of municipal bonds with original maturity dates greater than
three months and less than one year. Long-term investments held as of
December 31, 1996, consist of municipal bonds with original maturity
dates of greater than one year.
(c) Depreciation and Amortization
<TABLE>
The Company provides for depreciation and amortization using the
straight-line method by charges to operations in amounts that allocate
the cost of the assets over their estimated useful lives as follows:
<CAPTION>
Estimated
Asset Classification Useful Lives
---------------------------------------------- ------------
<S> <C>
Computer equipment and software............... 3 Years
Furniture and fixtures........................ 5 Years
Leasehold improvements........................ Life of lease
</TABLE>
(d) Revenue Recognition
Product revenues are recognized upon shipment or upon the completion
of all significant obligations by the Company, whichever is later.
Revenue from the sale of multicopy licenses is recognized upon the
shipment of the product master or the first copy of the software
product if the product master is not to be delivered. The Company
recognizes service revenues from consulting and training upon
performance of the services. Software maintenance fees are recognized
as revenue ratably over the period to which they relate. Deferred
revenue represents advance billings for software services, which
include maintenance, consulting, training and license prepayment fees.
33
<PAGE> 34
(e) Research and Development and Software Development Costs
In accordance with SFAS No. 86, Accounting for the Costs of Computer
Software to Be Sold, Leased, or Otherwise Marketed, the Company has
evaluated the establishment of technological feasibility of its
various products during the development phase. Due to the dynamic
changes in the market, the Company has concluded that it cannot
determine technological feasibility until the development phase of the
project is nearly complete. The time period during which costs could
be capitalized from the point of reaching technological feasibility
until the time of general product release is very short and,
consequently, the amounts that could be capitalized are not material
to the Company's financial position or results of operations.
Therefore, the Company charges all research and development expenses
to operations in the period incurred.
(f) Foreign Currency Translation
Assets and liabilities of the foreign subsidiaries are translated in
accordance with SFAS No. 52, Foreign Currency Translation. In
accordance with SFAS No. 52, assets and liabilities of the Company's
foreign operations are translated into U.S. dollars at current
exchange rates, and income and expense items are translated at average
rates of exchange prevailing during the year. Gains and losses arising
from translation are accumulated as a separate component of
stockholders' equity. Gains and losses arising from transactions
denominated in foreign currencies are included in other income and
were not material in the periods presented.
(g) Postretirement Benefits
The Company has no obligations for postretirement benefits.
(h) Concentration of Credit Risk
SFAS No. 105, Disclosure of Information about Financial Instruments
with Off-Balance-Sheet Risk and Financial Instruments with
Concentration of Credit Risk, requires disclosure of any significant
off-balance-sheet and credit risk concentrations. Financial
instruments, which potentially subject the Company to concentrations
of credit risk, are principally cash, cash equivalents, investments
and accounts receivable. The Company places its cash, cash equivalents
and investments in highly rated institutions. No single customer
accounted for greater than 10% of total revenues or represented a
significant credit risk to the Company in either 1996 or 1995. As of
December 31, 1996, one customer accounted for approximately 12% of
accounts receivable. No customer accounted for greater than 10% of
accounts receivable as of December 31, 1995. The Company has no
significant off-balance-sheet concentration of credit risk such as
foreign exchange contracts, options contracts, or other foreign
hedging arrangements.
(i) Net Income per Common and Common Equivalent Share
For the year ended December 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 year ended December
31, 1995, the weighted average number of common and common equivalent
shares outstanding assumes 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 (see Note 3(a)) have
been outstanding for the periods presented, computed in accordance
with the treasury stock method. Net income per common and common
equivalent share has not been presented for the year ended December
31, 1994, as the information is not considered to be relevant or
meaningful.
(j) Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
34
<PAGE> 35
(k) Reclassification
Certain balances have been reclassified to conform with current year
presentation.
(l) Stock Compensation Plans
The Company applies Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees (APB No. 25), in accounting
for stock-option activity for employees and directors. The Company has
adopted the disclosure provisions of SFAS No. 123, Accounting for
Stock Based Compensation (see Note 3(e)).
(2) LINE OF CREDIT
The Company has a working capital line of credit with a bank under which
borrowings and/or letters of credit are limited to $1,000,000. The line of
credit is unsecured, and borrowings bear interest at the prime rate (8.25% as of
December 31, 1996). The line of credit expires on May 31, 1997. As of December
31, 1996 there were no borrowings outstanding under the line of credit. Under
this credit facility, the Company is required to maintain certain financial
ratios and minimum levels of net worth.
(3) STOCKHOLDERS' EQUITY
(a) Initial Public Offering
In February 1996, the Company sold, through an underwritten public offering,
1,200,000 shares of its common stock at $10 per share. Also in February 1996,
the Company sold an additional 166,788 shares, at $10 per share, pursuant to an
underwriters over-allotment provision. The Company received proceeds of
$11,952,381 from its initial public offering which are net of issuance costs of
$758,737.
(b) Common Stock
On January 16, 1996, the Stockholders increased the Company's authorized
capitalization to 20,000,000 shares of common stock and 2,000,000 shares of
preferred stock.
(c) Series A and Series B Convertible Preferred Stock
The Series A and Series B convertible preferred stock were converted into common
shares upon the closing of the Company's initial public offering in February
1996.
(d) Stock and Stock Option Plans
Through December 31, 1996, the Company maintained three stock option plans. The
1987 Stock Plan provides for the grant of incentive stock options, nonqualified
stock options, stock awards, and direct sales of stock. The Company is
authorized to award up to 600,000 shares of options under this plan. The 1994
Stock Option Plan provides for the grant of incentive stock options and
nonqualified stock options. The Company is authorized to award up to 534,850
stock options under this plan. Under these plans, incentive stock options may be
granted at an exercise price not less than the fair market value of the
Company's common stock on the date of grant or, in the case of 10% stockholders,
not less than 110% of the fair market value, as determined by the Board of
Directors. Nonqualified options may be granted by the Board of Directors at its
discretion. The difference, if any, between the exercise price and the fair
value of the underlying common stock at the measurement date is charged to
operations over the vesting period of such options. The terms of exercise of
options granted under these plans are determined by the Board of Directors.
Incentive stock options expire no later than 10 years after the date of grant.
35
<PAGE> 36
The 1995 Director Stock Option Plan (the "Director Plan") was approved by the
stockholders in January 1996. The Director Plan provides for the grant of
options to purchase a maximum of 100,000 shares of common stock of the Company
to non-employee directors of the Company. Upon completion of the Company's
initial public offering of the Company's common stock, each non-employee
director was granted an option under the Director Plan to purchase 2,000 shares
of common stock at the initial public offering price. On June 30 of each year,
beginning in 1997, each non-employee director will be granted an option to
purchase 2,000 shares of common stock at an exercise price equal to the last
reported sale price of the Company's common stock on the NASDAQ National Market
on the date of grant. Such options vest in equal portions over a five year
period and expire 10 years from the date of grant.
<TABLE>
The following schedule summarizes the stock option activity for the three years
ended December 31, 1996:
<CAPTION>
Number Option Price Wtd. Avg.
of Shares Per Share Option Price
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Outstanding at December 31, 1993 368,550 $1.60 - $7.50 $ 4.91
Granted 140,000 7.50 7.50
Exercised (5,250) 1.60 - 6.00 1.94
Canceled (26,200) 3.00 - 7.50 6.04
- -----------------------------------------------------------------------------
Outstanding at December 31, 1994 477,100 1.60 - 7.50 5.71
Granted 227,750 7.50 7.50
Exercised (7,400) 3.00 - 7.50 3.95
Canceled (35,600) 3.00 - 7.50 6.93
- -----------------------------------------------------------------------------
Outstanding at December 31, 1995 661,850 1.60 - 7.50 6.30
Granted 251,000 10.00 - 21.25 17.49
Exercised (134,900) 1.60 - 7.50 4.54
Canceled (193,890) 7.50 - 21.25 14.20
- -----------------------------------------------------------------------------
Outstanding at December 31, 1996 584,060 $1.60 - $20.00 $ 8.73
=============================================================================
Exercisable at December 31, 1996 232,560 $ 1.60 - 20.00 $ 5.81
=============================================================================
</TABLE>
The Company's 1995 Employee Stock Purchase Plan (the "Purchase Plan") was
adopted by the Board of Directors in November 1995 and approved by the
stockholders in January 1996. The Purchase Plan authorizes the sale of up to a
total of 200,000 shares of common stock to participating employees.
All employees of the Company meeting certain eligibility requirements are
eligible to participate in the Purchase Plan. An employee may elect to have a
whole number percentage from 1% to 10% of his or her base pay withheld during
the payroll deduction period (Offering Period) for purposes of purchasing shares
under the Purchase Plan. The price at which shares may be purchased during each
offering will be 85% of the fair market value per share of the common stock on
either the first day or the last day of the Offering Period, whichever is lower.
The Compensation Committee of the Board of Directors may, at its discretion,
choose an Offering Period of 12 months or less for each of the offerings and
choose a different Offering Period for each offering. Under the Purchase Plan,
the Company had sold 34,169 shares as of December 31, 1996. As of December 31,
1996, 165,831 shares of common stock were available for future sale under the
Purchase Plan.
36
<PAGE> 37
(e) Stock-Based Compensation
The Company accounts for its stock-based compensation plan under Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees. In
October 1995, the Financial Accounting Standards Board issued SFAS No. 123,
Accounting for Stock-Based Compensation, Effective for fiscal years beginning
after December 15, 1995. SFAS No. 123 establishes a fair-value based method of
accounting for stock-based compensation plans. The Company has adopted the
disclosure-only alternative under SFAS No. 123, which requires disclosure of the
pro forma effects on earnings and earnings per share as if SFAS No. 123 had been
adopted, as well as certain other information.
<TABLE>
The Company has computed the pro forma disclosure required under SFAS No. 123
for all stock compensation plans during the years ended December 31, 1996 and
1995 using the Black-Scholes option pricing model prescribed by SFAS No. 123.
The assumptions used are as follows:
<CAPTION>
1996 1995
<S> <C> <C>
Risk-free interest rate 5.47-6.88% 5.86-7.74%
Expected dividend yield 0 0
Expected lives 6.5 Years 6.5 Years
Expected volatility 65% 65%
<CAPTION>
The effect of applying SFAS No. 123
would be as follows:
1996 1995
<S> <C> <C>
Net income as reported $2,048,222 $196,744
Pro forma net income as adjusted 1,736,170 156,783
Net income per share as reported 0.33 0.04
Pro forma net income per share as adjusted 0.28 0.03
</TABLE>
(4) INCOME TAXES
<TABLE>
The components of the provision for income taxes for the three years ended
December 31, 1996 are as follows:
<CAPTION>
December 31,
1996 1995 1994
---------- --------- ---------
<S> <C> <C> <C>
Federal
Current $ 758,694 $ 25,000 $ 31,482
Deferred (122,463) (565,400) (361,822)
---------- ---------- ---------
636,231 (540,400) (330,340)
---------- ---------- ---------
State
Current 252,898 -- 22,058
Deferred (40,821) (23,439) (27,789)
---------- ---------- ---------
212,077 (23,439) (5,731)
---------- ---------- ---------
Foreign
Withholding 443,000 386,541 253,781
Income 386,733 751,109 211,000
---------- ---------- ---------
829,733 1,137,650 464,781
---------- ---------- ---------
Change in Valuation Allowance (474,041) (162,811) 173,290
---------- ---------- ---------
$1,204,000 $ 411,000 $ 302,000
========== ========== =========
</TABLE>
37
<PAGE> 38
Foreign withholding taxes represent amounts withheld by foreign customers and
remitted to the applicable foreign tax authorities in connection with foreign
revenues. Foreign income taxes represent corporate income taxes relating to the
operations of the Company's foreign subsidiaries.
The components of the net deferred tax asset recognized in the accompanying
consolidated balance sheets with the approximate income tax effect of each type
of temporary difference are as follows:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Research and development tax credit carryforward $ 697,889 $ 455,574
Net operating loss carryforwards
47,153 306,010
Depreciation
58,500 112,291
Deferred revenue
220,350 75,060
Other temporary differences
554,977 466,650
---------- ----------
1,578,869 1,415,585
Valuation allowance
-- (474,041)
---------- ----------
Net deferred tax asset $1,578,869 $ 941,544
========== ==========
</TABLE>
The valuation allowance at December 31, 1995 related to deferred tax assets for
which realization was not assured. In 1996 it is expected that future taxable
income will be sufficient to utilize the net deferred tax assets.
The provision for income taxes differs from the amount computed by applying the
statutory federal income tax rate as follows:
<TABLE>
<CAPTION>
December 31,
1996 1995 1994
----- ----- -----
<S> <C> <C> <C>
Provision at federal statutory rate 34.0% 34.0% 34.0%
State income tax, net of federal benefits 4.3 (2.5) (0.9)
Foreign income and withholding taxes 19.6 82.3 26.9
Change in valuation allowance (14.6) (26.8) 39.9
Utilization of tax credits (9.5) (16.4) (35.9)
Other, net 3.2 (3.0) 5.6
----- ----- -----
37.0% 67.6% 69.6%
===== ===== =====
</TABLE>
(5) COMMITMENTS
The Company leases its facilities and certain equipment under operating leases.
The future minimum annual payments under these leases at December 31, 1996 are
as follows:
<TABLE>
<CAPTION>
Year Amount
- ---------- -----------
<S> <C>
1997 $ 3,260,000
1998 2,613,000
1999 2,355,000
2000 1,807,000
2001 249,000
Thereafter 195,000
-----------
$10,479,000
===========
</TABLE>
Expenses recorded by the Company under the above leases for the three years
ended December 31, 1996, 1995 and 1994 were approximately $3,102,000,
$2,226,000, and $1,855,000, respectively.
38
<PAGE> 39
(6) ACCRUED EXPENSES
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
December 31,
1996 1995
<S> <C> <C>
Accrued payroll and related expenses $1,273,115 $ 895,131
Accrued commissions 1,001,359 709,589
Other accrued expenses 2,834,885 2,184,577
---------- ----------
$5,109,359 $3,789,297
========== ==========
</TABLE>
(7) FINANCIAL INFORMATION BY GEOGRAPHIC AREA
Domestic and international sales as a percentage of total revenues are as
follows:
<TABLE>
<CAPTION>
For the year ended
December 31,
1996 1995 1994
<S> <C> <C> <C>
United States 58% 56% 56%
Europe 24 24 22
Other 18 20 22
--- --- ---
100% 100% 100%
=== === ===
</TABLE>
39
<PAGE> 40
Revenues, net income (loss) and identifiable assets for the Company's United
States, European and other operations are as follows:
<TABLE>
<CAPTION>
United
States Europe Other Eliminations Consolidated
----------- ---------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1996:
Revenues $36,004,203 $1,125,677 $ 105,655 $ -- $37,235,535
Transfers between
geographic locations
271,044 5,474,003 324,359 (6,069,406) --
----------- ---------- ----------- ----------- -----------
Total
revenues $36,275,247 $6,599,680 $ 430,014 $(6,069,406) $37,235,535
=========== ========== =========== =========== ===========
Net income (loss) $ 2,814,838 $ 414,125 $(1,180,741) $ -- $ 2,048,222
=========== ========== =========== =========== ===========
Identifiable assets $33,064,227 $2,700,284 $ 493,110 $ -- $36,257,621
=========== ========== =========== =========== ===========
Year ended December 31, 1995:
Revenues $27,184,435 $ 910,006 $ 46,536 $ -- $28,140,977
Transfers between
geographic locations
264,624 4,756,239 302,714 (5,323,577) --
----------- ---------- ----------- ----------- -----------
Total
revenues $27,449,059 $5,666,245 $ 349,250 $(5,323,577) $28,140,977
=========== ========== =========== =========== ===========
Net income (loss) $ 404,440 $ 490,296 $ (697,992) $ -- $ 196,744
=========== ========== =========== =========== ===========
Identifiable assets $15,963,186 $1,520,166 $ 363,143 $ -- $17,846,495
=========== ========== =========== =========== ===========
Year ended December 31, 1994:
Revenues $19,225,386 $ 343,508 $ 22,477 $ -- $19,591,371
Transfers between
geographic locations 391,660 3,186,006 182,512 (3,760,178) --
----------- ---------- ----------- ----------- -----------
Total
revenues $19,617,046 $3,529,514 $ 204,989 $(3,760,178) $19,591,371
=========== ========== =========== =========== ===========
Net income (loss) $ (8,944) $ 421,912 $ (281,294) $ -- $ 131,674
=========== ========== =========== =========== ===========
Identifiable assets $13,586,523 $ 503,456 $ 245,252 $ -- $14,335,231
=========== ========== =========== =========== ===========
</TABLE>
40
<PAGE> 41
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Gensym Corporation:
We have audited the accompanying consolidated balance sheets of Gensym
Corporation (a Delaware corporation) and subsidiaries as of December 31, 1996
and 1995, and the related consolidated statements of operations, stockholder's
equity, and cash flows for each of the three years in the period ended December
31, 1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Gensym Corporation and
subsidiaries as of December 31, 1996 and 1995, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1996, in conformity with generally accepted accounting
principles.
/s/ ARTHUR ANDERSEN LLP
----------------------------
ARTHUR ANDERSEN LLP
Boston, Massachusetts
January 23, 1997
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is contained in part under the caption
"Executive Officers of the Company" in Part I hereof, and the remainder is
contained under the caption "PROPOSAL 1 - ELECTION OF DIRECTORS" in the
Company's Proxy Statement dated April 18, 1997, for the Annual Meeting of
Shareholders to be held on May 21, 1997 (the "Proxy Statement"). Such
information is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is contained under the captions "Director
Compensation" and "Compensation to Executive Officers" in the Company's Proxy
Statement. Such information is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is contained under the caption "Security
Ownership of Certain Beneficial Owners and Management" in the Company's Proxy
Statement. Such information is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is contained under the caption "Certain
Transactions" in the Company's Proxy Statement. Such information is incorporated
herein by reference.
41
<PAGE> 42
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) FINANCIAL STATEMENTS
The following documents are included in Item 8 of this Annual Report on
Form 10-K:
* Consolidated Balance Sheets as of December 31, 1996 and 1995
* Consolidated Statements of Operations for the three years ended
December 31, 1996, 1995 and 1994
* Consolidated Statements of Stockholders' Equity for the three
years ended December 31, 1996, 1995 and 1994
* Consolidated Statements of Cash Flows for the three years ended
December 31, 1996, 1995 and 1994
* Notes to Consolidated Financial Statements
* Report of Independent Public Accountants
(a)(2) FINANCIAL STATEMENT SCHEDULES
The following consolidated financial statement schedules are included
in Item 14(d):
Schedule II - Valuation and Qualifying Accounts
All other schedules have been omitted since the required information is
not present or not present in amounts sufficient to require submission
of the schedule, or because the information required is included in the
consolidated financial statements or the notes thereto.
(a)(3) EXHIBITS
The Exhibits listed in the Exhibit Index immediately preceding such Exhibits are
filed as part of this Annual Report on Form 10-K.
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the quarter ended
December 31, 1996
42
<PAGE> 43
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)
By: /s/ Lowell B. Hawkinson
-----------------------
Dated: March 26, 1997 Lowell B. Hawkinson
Chief Executive Officer
Pursuant to the requirements of the Securities and Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on March 26, 1997:
/s/ Lowell B. Hawkinson Chairman, Chief Executive Officer, Director
- ----------------------- (Principal Executive Officer and Acting
Lowell B. Hawkinson Principal Financial and Accounting
Officer)
/s/ Robert L. Moore President and Director
- -------------------
Robert L. Moore
/s/ John A. Shane Director
- -----------------
John A. Shane
/s/ Theodore Johnson Director
- --------------------
Theodore Johnson
/s/ Nancy Pfund Director
- ---------------
Nancy Pfund
43
<PAGE> 44
ITEM 14(d) FINANCIAL STATEMENT SCHEDULE
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SUPPLEMENTARY SCHEDULE
To Gensym Corporation:
We have audited, in accordance with generally accepted auditing standards, the
consolidated financial statements of Gensym Corporation and subsidiaries and
have issued our report thereon dated January 23, 1997. Our audit was made for
the purpose of forming an opinion on those consolidated financial statements
taken as a whole. The schedule listed in the financial statement schedule index
is the responsibility of the Company's management and is presented for the
purpose of complying with the Securities and Exchange Commission's rules and is
not part of the basic consolidated financial statements. This schedule has been
subjected to auditing procedures applied in the audit of the basic consolidated
financial statements and, in our opinion, fairly states, in all material
respects, the financial data required to be set forth therein in relation to the
basic consolidated financial statements taken as a whole.
/s/ ARTHUR ANDERSEN LLP
-----------------------------
Arthur Andersen LLP
Boston, Massachusetts
January 23, 1997
<TABLE>
GENSYM CORPORATION
SCHEDULE II-VALUATION AND QUALIFYING ACCOUNTS
FOR THE THREE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<CAPTION>
Balance at Addition Balance at
Beginning of Charged to End of
Description Period Expense Deductions Period
- ----------- -------- -------- ---------- --------
<S> <C> <C> <C> <C>
ALLOWANCE FOR DOUBTFUL ACCOUNTS:
Year ended December 31, 1996 $414,612 $124,600 $85,893 $453,319
======== ======== ======= ========
Year ended December 31, 1995 $488,091 $ -- $73,479 $414,612
======== ======== ======= ========
Year ended December 31, 1994 $488,295 $ 43,196 $43,400 $488,091
======== ======== ======= ========
</TABLE>
44
<PAGE> 45
<TABLE>
EXHIBIT INDEX
<CAPTION>
Exhibit # Description
- --------- -----------
<S> <C>
3.1 - Amended and Restated Certificate of Incorporation of the Registrant
3.2 - Amended and Restated By-Laws of the Registrant
4.1(1) - Specimen certificate for shares of the Registrant's Common Stock
* 10.1(1) - 1987 Stock Plan, as amended to date
* 10.2(1) - 1994 Stock Option Plan
10.3(1) - 1995 Employee Stock Purchase Plan
* 10.4(1) - 1995 Director Stock Option Plan
10.5(1) - Amended and Restated Registration Rights Agreement dated as of
August 12, 1991 by and among the Registrant and the parties named
therein
10.6(1) - Lease dated as of January 1, 1995 by and between the Registrant and
CambridgePark One Limited Partnership
10.7 - First Amendment to Lease dated as of December 2, 1996 between the
Registrant and CambridgePark One Limited Partnership
10.8 - Second Amendment to Lease dated as of January 24, 1997 between the Registrant
and CambridgePark One Limited Partnership
10.9 - Third Amendment to Lease dated as of January 24, 1997 between the Registrant
and CambridgePark One Limited Partnership
10.10(2) - Amendment to the Business Loan Agreement dated June 20, 1991
between Gensym Corporation and State Street Bank and Trust
Company, as amended to date
+10.11(1) - Distribution Agreement, dated as of January 1, 1995, by and among
the Registrant, Itochu Corporation and Itochu Techno-Science
Corporation
*10.12 - Severance arrangement with Raymond Wood dated December 6, 1996,
as modified on December 31, 1996 and January 22, 1997.
11 - Computation of Net Income Per Share
21 - Subsidiaries of the Registrant
23 - Consent of Arthur Andersen LLP
27 - Financial Data Schedule
<FN>
(1) Incorporated by reference to the Registration Statement on Form S-1 of the
Registrant (Registration No. 33-80727) filed on December 21, 1995.
(2) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1996.
+ Confidential treatment has been granted with respect to certain portions
of this agreement.
* Management contract or compensatory plan or arrangement required to be
filed as an exhibit to this Annual Report on Form 10-K.
</TABLE>
45
<PAGE> 1
Exhibit 3.1
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
GENSYM CORPORATION
Pursuant to Sections 242 and 245 of the General
Corporation Law of the State of Delaware
-----------------------------------------------
GENSYM CORPORATION (hereinafter, the "Corporation"), a corporation
organized and existing under and by virtue of the General Corporation Law of the
State of Delaware (the "Delaware Law"), does hereby certify that (a) at a
meeting of the Board of Directors of the Corporation in accordance with the
Delaware Law, the Board of Directors adopted a resolution pursuant to Sections
242 and 245 of the Delaware Law, proposing and declaring advisable an amendment
and restatement of the Certificate of Incorporation of the Corporation, and (b)
at a special meeting of the Stockholders, the Stockholders approved said
Amendment in accordance with the provisions of Section 242 of the Delaware Law.
This Amended and Restated Certificate of Incorporation further amends the
Certificate of Incorporation of the Corporation as follows:
1. That the Corporation be, and hereby is, authorized to issue a new
class of undesignated Preferred Stock, $.01 par value per share, consisting of
2,000,000 shares, the terms and rights of which may be designated from time to
time by the Board of Directors.
2. That Article FOURTH of the Certificate of Incorporation be, and
hereby is, deleted in its entirety and replaced with the following:
<PAGE> 2
"FOURTH: The total number of shares of all classes of stock which the
Corporation shall have authority to issue is 22,000,000 shares, consisting of
(i) 20,000,000 shares of Common Stock, $.01 par value per share ("Common
Stock"), and (ii) 2,000,000 shares of Preferred Stock, $.01 par value per share
("Preferred Stock").
The following is a statement of the designations and the powers,
privileges and rights, and the qualifications, limitations or restrictions
thereof in respect of each class of capital stock of the Corporation.
A. COMMON STOCK.
------------
1. GENERAL. The voting, dividend and liquidation rights of the
holders of the Common Stock are subject to and qualified by the rights of the
holders of the Preferred Stock of any series as may be designated by the Board
of Directors upon any issuance of the Preferred Stock of any series.
2. VOTING. The holders of the Common Stock are entitled to one vote
for each share held at all meetings of stockholders (and written actions in lieu
of meetings). There shall be no cumulative voting.
The number of authorized shares of Common Stock may be increased or
decreased (but not below the number of shares thereof then outstanding) by the
affirmative vote of the holders of a majority of the stock of the Corporation
entitled to vote, irrespective of the provisions of Section 242(b)(2) of the
General Corporation Law of Delaware.
3. DIVIDENDS. Dividends may be declared and paid on the Common Stock
from funds lawfully available therefor as and when determined by the Board of
Directors and subject to any preferential dividend rights of any then
outstanding Preferred Stock.
4. LIQUIDATION. Upon the dissolution or liquidation of the
Corporation, whether voluntary or involuntary, holders of Common Stock will be
entitled to receive all assets of the Corporation available for distribution to
its stockholders, subject to any preferential rights of any then outstanding
Preferred Stock.
B. PREFERRED STOCK.
---------------
Preferred Stock may be issued from time to time in one or more series,
each of such series to have such terms as stated or expressed herein and in the
resolution or resolutions providing for the issue of such series adopted by the
Board of Directors of the Corporation as hereinafter provided. Any shares of
Preferred Stock which may be redeemed, purchased or acquired by the Corporation
may be reissued except as otherwise provided by law. Different series of
Preferred Stock shall not be construed to constitute different classes of shares
for the purposes of voting
<PAGE> 3
by classes unless expressly provided.
Authority is hereby expressly granted to the Board of Directors from time
to time to issue the Preferred Stock in one or more series, and in connection
with the creation of any such series, by resolution or resolutions providing for
the issue of the shares thereof, to determine and fix such voting powers, full
or limited, or no voting powers, and such designations, preferences and relative
participating, optional or other special rights, and qualifications, limitations
or restrictions thereof, including without limitation thereof, dividend rights,
conversion rights, redemption privileges and liquidation preferences, as shall
be stated and expressed in such resolutions, all to the full extent now or
hereafter permitted by the General Corporation Law of Delaware. Without limiting
the generality of the foregoing, the resolutions providing for issuance of any
series of Preferred Stock may provide that such series shall be superior or rank
equally or be junior to the Preferred Stock of any other series to the extent
permitted by law. Except as otherwise provided in this Certificate of
Incorporation, no vote of the holders of the Preferred Stock or Common Stock
shall be a prerequisite to the designation or issuance of any shares of any
series of the Preferred Stock authorized by and complying with the conditions of
this Certificate of Incorporation, the right to have such vote being expressly
waived by all present and future holders of the capital stock of the
Corporation."
The Certificate of Incorporation of the Corporation, as previously
amended and as amended above, is hereby restated to read in its entirety as
follows:
FIRST. The name of the Corporation is Gensym Corporation.
SECOND. The address of its registered office in the State of Delaware is
Corporation Trust Center, 1209 Orange Street, in the City of Wilmington, County
of New Castle, Delaware 19801. The name of its registered agent at such address
is The Corporation Trust Company System, Inc.
THIRD. The nature of the business or purposes to be conducted or promoted
is as follows:
To engage in any lawful act or activity for which corporations may be
organized under the General Corporation Law of Delaware.
FOURTH: The total number of shares of all classes of stock which the
Corporation shall have authority to issue is 22,000,000
<PAGE> 4
shares, consisting of (i) 20,000,000 shares of Common Stock, $.01 par value per
share ("Common Stock"), and (ii) 2,000,000 shares of Preferred Stock, $.01 par
value per share ("Preferred Stock").
The following is a statement of the designations and the powers,
privileges and rights, and the qualifications, limitations or restrictions
thereof in respect of each class of capital stock of the Corporation.
A. COMMON STOCK.
------------
1. GENERAL. The voting, dividend and liquidation rights of the
holders of the Common Stock are subject to and qualified by the rights of the
holders of the Preferred Stock of any series as may be designated by the Board
of Directors upon any issuance of the Preferred Stock of any series.
2. VOTING. The holders of the Common Stock are entitled to one vote
for each share held at all meetings of stockholders (and written actions in lieu
of meetings). There shall be no cumulative voting.
The number of authorized shares of Common Stock may be increased or
decreased (but not below the number of shares thereof then outstanding) by the
affirmative vote of the holders of a majority of the stock of the Corporation
entitled to vote, irrespective of the provisions of Section 242(b)(2) of the
General Corporation Law of Delaware.
3. DIVIDENDS. Dividends may be declared and paid on the Common Stock
from funds lawfully available therefor as and when determined by the Board of
Directors and subject to any preferential dividend rights of any then
outstanding Preferred Stock.
4. LIQUIDATION. Upon the dissolution or liquidation of the
Corporation, whether voluntary or involuntary, holders of Common Stock will be
entitled to receive all assets of the Corporation available for distribution to
its stockholders, subject to any preferential rights of any then outstanding
Preferred Stock.
B. PREFERRED STOCK.
---------------
Preferred Stock may be issued from time to time in one or more series,
each of such series to have such terms as stated or expressed herein and in the
resolution or resolutions providing for the issue of such series adopted by the
Board of Directors of the Corporation as hereinafter provided. Any shares of
Preferred Stock which may be redeemed, purchased or acquired by the Corporation
may be reissued except as otherwise provided by law. Different series of
Preferred Stock shall not be construed to constitute different classes of shares
for the purposes of voting by classes unless expressly provided.
<PAGE> 5
Authority is hereby expressly granted to the Board of Directors from time
to time to issue the Preferred Stock in one or more series, and in connection
with the creation of any such series, by resolution or resolutions providing for
the issue of the shares thereof, to determine and fix such voting powers, full
or limited, or no voting powers, and such designations, preferences and relative
participating, optional or other special rights, and qualifications, limitations
or restrictions thereof, including without limitation thereof, dividend rights,
conversion rights, redemption privileges and liquidation preferences, as shall
be stated and expressed in such resolutions, all to the full extent now or
hereafter permitted by the General Corporation Law of Delaware. Without limiting
the generality of the foregoing, the resolutions providing for issuance of any
series of Preferred Stock may provide that such series shall be superior or rank
equally or be junior to the Preferred Stock of any other series to the extent
permitted by law. Except as otherwise provided in this Certificate of
Incorporation, no vote of the holders of the Preferred Stock or Common Stock
shall be a prerequisite to the designation or issuance of any shares of any
series of the Preferred Stock authorized by and complying with the conditions of
this Certificate of Incorporation, the right to have such vote being expressly
waived by all present and future holders of the capital stock of the
Corporation.
FIFTH. The Corporation is to have perpetual existence.
SIXTH. The Board of Directors is expressly authorized to adopt, amend or
repeal the By-Laws of the Corporation.
SEVENTH. Whenever a compromise or arrangement is proposed between this
corporation and its creditors or any class of them and/or between this
corporation and its stockholders or any class of them, any court of equitable
jurisdiction within the State of Delaware may, on the application in a summary
way of this corporation or of any creditor or stockholder thereof, or on the
application of any receiver or receivers appointed for this corporation under
the provisions of section 291 of Title 8 of the Delaware Code or on the
application of trustees in dissolution or of any receiver or receivers appointed
for this corporation under the provisions of section 279 of Title 8 of the
Delaware Code order a meeting of the creditors or class of creditors, and/or of
the stockholders or class of stockholders of this corporation, as the case may
be, to be summoned in such manner as the said court directs. If a majority in
number representing three-fourths in value of the creditors or class of
creditors, and/or of the stockholders or class of stockholders of this
corporation, as the case may be, agree to any compromise or arrangement and to
any promise or arrangement, the said compromise or arrangement and the said
reorganization shall, if sanctioned by the court to which the said application
has been made, be binding on all the
<PAGE> 6
creditors or class of creditors, and/or on all the stockholders or class of
stockholders, of this corporation, as the case may be, and also on this
corporation.
EIGHTH. Except to the extent that the General Corporation Law of the
State of Delaware prohibits the elimination or limitation of liability of
directors for breaches of fiduciary duty, no director of the Corporation shall
be personally liable to the Corporation or its stockholders for monetary damages
for any breach of fiduciary duty as a director, notwithstanding any provision of
law imposing such liability. No amendment to or repeal of this provision shall
apply to or have any effect on the liability or alleged liability of any
director of the Corporation for or with respect to any acts or omissions of such
director occurring prior to such amendment.
NINTH. 1. ACTIONS, SUITS AND PROCEEDINGS OTHER THAN BY OR IN THE RIGHT OF
THE CORPORATION. The Corporation shall indemnify each person who was or is a
party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the Corporation), by
reason of the fact that he is or was, or has agreed to become, a director or
officer of the Corporation, or is or was serving, or has agreed to serve, at the
request of the Corporation, as a director, officer or trustee of, or in a
similar capacity with, another corporation, partnership, joint venture, trust or
other enterprise (including any employee benefit plan) (all such persons being
referred to hereafter as an "Indemnitee"), or by reason of any action alleged to
have been taken or omitted in such capacity, against all expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred by him or on his behalf in connection with such action, suit
or proceeding and any appeal therefrom, if he acted in good faith and in a
manner he reasonably believed to be in, or not opposed to, the best interests of
the Corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful. The termination of any
action, suit or proceeding by judgment, order, settlement, conviction or upon a
plea of NOLO CONTENDERE or its equivalent, shall not, of itself, create a
presumption that the person did not act in good faith and in a manner which he
reasonably believed to be in, or not opposed to, the best interests of the
Corporation, and, with respect to any criminal action or proceeding, had
reasonable cause to believe that his conduct was unlawful. Notwithstanding
anything to the contrary in this Article, except as set forth in Section 6
below, the Corporation shall not indemnify an Indemnitee seeking indemnification
in connection with a proceeding (or part thereof) initiated by the Indemnitee
unless the initiation thereof was approved by the Board of Directors of the
Corporation.
2. ACTIONS OR SUITS BY OR IN THE RIGHT OF THE CORPORATION. The
Corporation shall indemnify any Indemnitee who was or is a
<PAGE> 7
party or is threatened to be made a party to any threatened, pending or
completed action or suit by or in the right of the Corporation to procure a
judgment in its favor by reason of the fact that he is or was, or has agreed to
become, a director or officer of the Corporation, or is or was serving, or has
agreed to serve, at the request of the Corporation, as a director, officer or
trustee of, or in a similar capacity with, another corporation, partnership,
joint venture, trust or other enterprise (including any employee benefit plan),
or by reason of any action alleged to have been taken or omitted in such
capacity, against all expenses (including attorneys' fees) and amounts paid in
settlement actually and reasonably incurred by him or on his behalf in
connection with such action, suit or proceeding and any appeal therefrom, if he
acted in good faith and in a manner he reasonably believed to be in, or not
opposed to, the best interests of the Corporation, except that no
indemnification shall be made in respect of any claim, issue or matter as to
which such person shall have been adjudged to be liable to the Corporation
unless and only to the extent that the Court of Chancery of Delaware or the
court in which such action or suit was brought shall determine upon application
that, despite the adjudication of such liability but in view of all the
circumstances of the case, such person is fairly and reasonably entitled to
indemnity for such expenses (including attorneys' fees) which the Court of
Chancery of Delaware or such other court shall deem proper.
3. INDEMNIFICATION FOR EXPENSES OF SUCCESSFUL PARTY. Notwithstanding
the other provisions of this Article, to the extent that an Indemnitee has been
successful, on the merits or otherwise, in defense of any action, suit or
proceeding referred to in Sections 1 and 2 of this Article, or in defense of any
claim, issue or matter therein, or on appeal from any such action, suit or
proceeding, he shall be indemnified against all expenses (including attorneys'
fees) actually and reasonably incurred by him or on his behalf in connection
therewith. Without limiting the foregoing, if any action, suit or proceeding is
disposed of, on the merits or otherwise (including a disposition without
prejudice), without (i) the disposition being adverse to the Indemnitee, (ii) an
adjudication that the Indemnitee was liable to the Corporation, (iii) a plea of
guilty or NOLO CONTENDERE by the Indemnitee, (iv) an adjudication that the
Indemnitee did not act in good faith and in a manner he reasonably believed to
be in or not opposed to the best interests of the Corporation, and (v) with
respect to any criminal proceeding, an adjudication that the Indemnitee had
reasonable cause to believe his conduct was unlawful, the Indemnitee shall be
considered for the purposes hereof to have been wholly successful with respect
thereto.
4. Notification and Defense of Claim. As a condition
---------------------------------
<PAGE> 8
precedent to his right to be indemnified, the Indemnitee must notify the
Corporation in writing as soon as practicable of any action, suit, proceeding or
investigation involving him for which indemnity will or could be sought. With
respect to any action, suit, proceeding or investigation of which the
Corporation is so notified, the Corporation will be entitled to participate
therein at its own expense and/or to assume the defense thereof at its own
expense, with legal counsel reasonably acceptable to the Indemnitee. After
notice from the Corporation to the Indemnitee of its election so to assume such
defense, the Corporation shall not be liable to the Indemnitee for any legal or
other expenses subsequently incurred by the Indemnitee in connection with such
claim, other than as provided below in this Section 4. The Indemnitee shall have
the right to employ his own counsel in connection with such claim, but the fees
and expenses of such counsel incurred after notice from the Corporation of its
assumption of the defense thereof shall be at the expense of the Indemnitee
unless (i) the employment of counsel by the Indemnitee has been authorized by
the Corporation, (ii) counsel to the Indemnitee shall have reasonably concluded
that there may be a conflict of interest or position on any significant issue
between the Corporation and the Indemnitee in the conduct of the defense of such
action or (iii) the Corporation shall not in fact have employed counsel to
assume the defense of such action, in each of which cases the fees and expenses
of counsel for the Indemnitee shall be at the expense of the Corporation, except
as otherwise expressly provided by this Article. The Corporation shall not be
entitled, without the consent of the Indemnitee, to assume the defense of any
claim brought by or in the right of the Corporation or as to which counsel for
the Indemnitee shall have reasonably made the conclusion provided for in clause
(ii) above.
5. ADVANCE OF EXPENSES. Subject to the provisions of Section 6 below,
in the event that the Corporation does not assume the defense pursuant to
Section 4 of this Article of any action, suit, proceeding or investigation of
which the Corporation receives notice under this Article, any expenses
(including attorneys' fees) incurred by an Indemnitee in defending a civil or
criminal action, suit, proceeding or investigation or any appeal therefrom shall
be paid by the Corporation in advance of the final disposition of such matter,
PROVIDED, HOWEVER, that the payment of such expenses incurred by an Indemnitee
in advance of the final disposition of such matter shall be made only upon
receipt of an undertaking by or on behalf of the Indemnitee to repay all amounts
so advanced in the event that it shall ultimately be determined that the
Indemnitee is not entitled to be indemnified by the Corporation as authorized in
this Article. Such undertaking may be accepted without reference to the
financial ability of such person to make such repayment.
6. PROCEDURE FOR INDEMNIFICATION. In order to obtain indemnification
or advancement of expenses pursuant to Section 1, 2, 3 or 5 of this Article, the
Indemnitee shall submit to the Corporation a written request, including in such
request such documentation and information as is reasonably available to the
<PAGE> 9
Indemnitee and is reasonably necessary to determine whether and to what extent
the Indemnitee is entitled to indemnification or advancement of expenses. Any
such indemnification or advancement of expenses shall be made promptly, and in
any event within 60 days after receipt by the Corporation of the written request
of the Indemnitee, unless with respect to requests under Section 1, 2 or 5 the
Corporation determines, by clear and convincing evidence, within such 60-day
period that the Indemnitee did not meet the applicable standard of conduct set
forth in Section 1 or 2, as the case may be. Such determination shall be made in
each instance by (a) a majority vote of a quorum of the directors of the
Corporation consisting of persons who are not at that time parties to the
action, suit or proceeding in question ("disinterested directors"), (b) if no
such quorum is obtainable, a majority vote of a committee of two or more
disinterested directors, (c) a majority vote of a quorum of the outstanding
shares of stock of all classes entitled to vote for directors, voting as a
single class, which quorum shall consist of stockholders who are not at that
time parties to the action, suit or proceeding in question, (d) independent
legal counsel (who may be regular legal counsel to the Corporation), or (e) a
court of competent jurisdiction.
7. REMEDIES. The right to indemnification or advances as granted by
this Article shall be enforceable by the Indemnitee in any court of competent
jurisdiction if the Corporation denies such request, in whole or in part, or if
no disposition thereof is made within the 60-day period referred to above in
Section 6. Unless otherwise provided by law, the burden of proving that the
Indemnitee is not entitled to indemnification or advancement of expenses under
this Article shall be on the Corporation. Neither the failure of the Corporation
to have made a determination prior to the commencement of such action that
indemnification is proper in the circumstances because the Indemnitee has met
the applicable standard of conduct, nor an actual determination by the
Corporation pursuant to Section 6 that the Indemnitee has not met such
applicable standard of conduct, shall be a defense to the action or create a
presumption that the Indemnitee has not met the applicable standard of conduct.
The Indemnitee's expenses (including attorneys' fees) incurred in connection
with successfully establishing his right to indemnification, in whole or in
part, in any such proceeding shall also be indemnified by the Corporation.
8. SUBSEQUENT AMENDMENT. No amendment, termination or repeal of this
Article or of the relevant provisions of the General Corporation Law of Delaware
or any other applicable laws shall affect or diminish in any way the rights of
any Indemnitee to indemnification under the provisions hereof with respect to
any action, suit, proceeding or investigation arising out of or relating to any
actions, transactions or facts occurring prior to
<PAGE> 10
the final adoption of such amendment, termination or repeal.
9. OTHER RIGHTS. The indemnification and advancement of expenses
provided by this Article shall not be deemed exclusive of any other rights to
which an Indemnitee seeking indemnification or advancement of expenses may be
entitled under any law (common or statutory), agreement or vote of stockholders
or disinterested directors or otherwise, both as to action in his official
capacity and as to action in any other capacity while holding office for the
Corporation, and shall continue as to an Indemnitee who has ceased to be a
director or officer, and shall inure to the benefit of the estate, heirs,
executors and administrators of the Indemnitee. Nothing contained in this
Article shall be deemed to prohibit, and the Corporation is specifically
authorized to enter into, agreements with officers and directors providing
indemnification rights and procedures different from those set forth in this
Article. In addition, the Corporation may, to the extent authorized from time to
time by its Board of Directors, grant indemnification rights to other employees
or agents of the Corporation or other persons serving the Corporation and such
rights may be equivalent to, or greater or less than, those set forth in this
Article.
10. PARTIAL INDEMNIFICATION. If an Indemnitee is entitled under any
provision of this Article to indemnification by the Corporation for some or a
portion of the expenses (including attorneys' fees), judgments, fines or amounts
paid in settlement actually and reasonably incurred by him or on his behalf in
connection with any action, suit, proceeding or investigation and any appeal
therefrom but not, however, for the total amount thereof, the Corporation shall
nevertheless indemnify the Indemnitee for the portion of such expenses
(including attorneys' fees), judgments, fines or amounts paid in settlement to
which the Indemnitee is entitled.
11. INSURANCE. The Corporation may purchase and maintain insurance, at
its expense, to protect itself and any director, officer, employee or agent of
the Corporation or another corpora tion, partnership, joint venture, trust or
other enterprise (including any employee benefit plan) against any expense,
liability or loss incurred by him in any such capacity, or arising out of his
status as such, whether or not the Corporation would have the power to indemnify
such person against such expense, liability or loss under the General
Corporation Law of Delaware.
12. MERGER OR CONSOLIDATION. If the Corporation is merged into or
consolidated with another corporation and the Corporation is not the surviving
corporation, the surviving corporation shall assume the obligations of the
Corporation under this Article with respect to any action, suit, proceeding or
investigation arising out of or relating to any actions, transactions or facts
occurring prior to the date of such merger or consolidation.
13. Savings Clause. If this Article or any portion hereof
--------------
<PAGE> 11
shall be invalidated on any ground by any court of competent jurisdiction, then
the Corporation shall nevertheless indemnify each Indemnitee as to any expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement in
connection with any action, suit, proceeding or investigation, whether civil,
criminal or administrative, including an action by or in the right of the
Corporation, to the fullest extent permitted by any applicable portion of this
Article that shall not have been invalidated and to the fullest extent permitted
by applicable law.
14. DEFINITIONS. Terms used herein and defined in Section 145(h) and
Section 145(i) of the General Corporation Law of Delaware shall have the
respective meanings assigned to such terms in such Section 145(h) and Section
145(i).
15. SUBSEQUENT LEGISLATION. If the General Corporation Law of Delaware
is amended after adoption of this Article to expand further the indemnification
permitted to Indemnitees, then the Corporation shall indemnify such persons to
the fullest extent permitted by the General Corporation Law of Delaware, as so
amended.
TENTH. The Corporation reserves the right to amend, alter, change or
repeal any provision contained in this Amended and Restated Certificate of
Incorporation, in the manner now or hereafter prescribed by statute and this
Amended and Restated Certificate of Incorporation, and all rights conferred upon
stockholders herein are granted subject to this reservation.
ELEVENTH. This Article is inserted for the management of the business and
for the conduct of the affairs of the Corporation.
1. NUMBER OF DIRECTORS. The number of directors of the Corporation
shall not be less than three. The exact number of directors within the
limitations specified in the preceding sentence shall be fixed from time to time
by, or in the manner provided in, the Corporation's By-Laws.
2. CLASSES OF DIRECTORS. The Board of Directors shall be and is
divided into three classes: Class I, Class II and Class III. No one class shall
have more than one director more than any other class. If a fraction is
contained in the quotient arrived at by dividing the designated number of
directors by three, then, if such fraction is one-third, the extra director
shall be a member of Class I, and if such fraction is two-thirds, one of the
extra directors shall be a member of Class I and one of the extra directors
shall be a member of Class II, unless otherwise provided from time to time by
resolution adopted by the Board of Directors.
<PAGE> 12
3. ELECTION OF DIRECTORS. Elections of directors need not be by
written ballot except as and to the extent provided in the By-Laws of the
Corporation.
4. TERMS OF OFFICE. Each director shall serve for a term ending on
the date of the third annual meeting following the annual meeting at which such
director was elected; PROVIDED, that each initial director in Class I shall
serve for a term ending on the date of the annual meeting in 1997; each initial
director in Class II shall serve for a term ending on the date of the annual
meeting in 1998; and each initial director in Class III shall serve for a term
ending on the date of the annual meeting in 1999; and PROVIDED FURTHER, that the
term of each director shall be subject to the election and qualification of his
successor and to his earlier death, resignation or removal.
5. ALLOCATION OF DIRECTORS AMONG CLASSES IN THE EVENT OF INCREASES OR
DECREASES IN THE NUMBER OF DIRECTORS. In the event of any increase or decrease
in the authorized number of directors, (i) each director then serving as such
shall nevertheless continue as a director of the class of which he is a member
and (ii) the newly created or eliminated directorships resulting from such
increase or decrease shall be apportioned by the Board of Directors among the
three classes of directors so as to ensure that no one class has more than one
director more than any other class. To the extent possible, consistent with the
foregoing rule, any newly created directorships shall be added to those classes
whose terms of office are to expire at the latest dates following such
allocation, and any newly eliminated directorships shall be subtracted from
those classes whose terms of offices are to expire at the earliest dates
following such allocation, unless otherwise provided from time to time by
resolution adopted by the Board of Directors.
6. QUORUM; ACTION AT MEETING. A majority of the directors at any time
in office shall constitute a quorum for the transaction of business. In the
event one or more of the directors shall be disqualified to vote at any meeting,
then the required quorum shall be reduced by one for each director so
disqualified, provided that in no case shall less than one-third of the number
of directors fixed pursuant to Section 1 above constitute a quorum. If at any
meeting of the Board of Directors there shall be less than such a quorum, a
majority of those present may adjourn the meeting from time to time. Every act
or decision done or made by a majority of the directors present at a meeting
duly held at which a quorum is present shall be regarded as the act of the Board
of Directors unless a greater number is required by law, by the By-Laws of the
Corporation or by this Amended and Restated Certificate of Incorporation.
7. REMOVAL. Directors of the Corporation may be removed only for
cause by the affirmative vote of the holders of at least two-thirds of the
shares of the capital stock of the Corporation issued and outstanding and
entitled to vote.
<PAGE> 13
8. VACANCIES. Any vacancy in the Board of Directors, however
occurring, including a vacancy resulting from an enlargement of the board, shall
be filled only by a vote of a majority of the directors then in office, although
less than a quorum, or by a sole remaining director. A director elected to fill
a vacancy shall be elected to hold office until the next election of the class
for which such director shall have been chosen, subject to the election and
qualification of his successor and to his earlier death, resignation or removal.
9. STOCKHOLDER NOMINATIONS AND INTRODUCTION OF BUSINESS, ETC. Advance
notice of stockholder nominations for election of directors and other business
to be brought by stockholders before a meeting of stockholders shall be given in
the manner provided by the By-Laws of the Corporation.
10. AMENDMENTS TO ARTICLE. Notwithstanding any other provisions of
law, this Amended and Restated Certificate of Incorporation or the By-Laws of
the Corporation, each as amended, and notwithstanding the fact that a lesser
percentage may be specified by law, the affirmative vote of the holders of at
least seventy-five percent (75%) of the shares of capital stock of the
Corporation issued and outstanding and entitled to vote shall be required to
amend or repeal, or to adopt any provision inconsistent with, this Article
ELEVENTH.
TWELFTH. Stockholders of the Corporation may not take any action by
written consent in lieu of a meeting. Notwithstanding any other provisions of
law, the Amended and Restated Certificate of Incorporation or the By-Laws of the
Corporation, each as amended, and notwithstanding the fact that a lesser
percentage may be specified by law, the affirmative vote of the holders of at
least seventy-five percent (75%) of the shares of capital stock of the
Corporation issued and outstanding and entitled to vote shall be required to
amend or repeal, or to adopt any provision inconsistent with, this Article
TWELFTH.
THIRTEENTH. Special meetings of stockholders may be called at any time by
only the Chairman of the Board of Directors, the Chief Executive Officer (or if
there is no Chief Executive Officer, the President) or the Board of Directors.
Business transacted at any special meeting of stockholders shall be limited to
matters relating to the purpose or purposes stated in the notice of meeting.
Notwithstanding any other provision of law, this Amended and Restated
Certificate of Incorporation or the By-Laws of the Corporation, each as amended,
and notwithstanding the fact that a lesser percentage may be specified by law,
the affirmative vote of the holders of at least seventy-five percent (75%) of
the shares of capital stock of the Corporation issued and outstanding and
entitled to vote shall be required to amend or repeal, or to adopt any provision
<PAGE> 14
inconsistent with, this Article THIRTEENTH.
FOURTEENTH. Section 203 of the General Corporation Law of Delaware, as it
may be amended from time to time, shall apply to the Corporation.
Signed this 22nd day of February, 1996.
/s/ Robert L. Moore
-----------------------------------------
Robert L. Moore, President
<PAGE> 1
Exbibit 3.2
AMENDED AND RESTATED
BY-LAWS
OF
GENSYM CORPORATION
<PAGE> 2
AMENDED AND RESTATED BY-LAWS
----------------------------
TABLE OF CONTENTS
-----------------
Page
----
ARTICLE 1 - Stockholders........................................ 1
Section 1.1 Place of Meetings............................. 1
Section 1.2 Annual Meeting................................ 1
Section 1.3 Special Meetings.............................. 1
Section 1.4 Notice of Meetings............................ 2
Section 1.5 Voting List................................... 2
Section 1.6 Quorum........................................ 2
Section 1.7 Adjournments.................................. 2
Section 1.8 Voting and Proxies............................ 3
Section 1.9 Action at Meeting............................. 3
Section 1.10 Nomination of Directors....................... 3
Section 1.11 Notice of Business at Annual Meetings......... 4
Section 1.12 Action without Meeting........................ 5
Section 1.13 Organization.................................. 5
ARTICLE 2 - Directors........................................... 6
Section 2.1 General Powers................................ 6
Section 2.2 Number; Election and Qualification............ 6
Section 2.3 Classes of Directors.......................... 6
Section 2.4 Terms of Office............................... 6
Section 2.5 Allocation of Directors Among Classes
in the Event of Increases or
Decreases in the Number of Directors.......... 7
Section 2.6 Vacancies..................................... 7
Section 2.7 Resignation................................... 7
Section 2.8 Regular Meetings.............................. 7
Section 2.9 Special Meetings.............................. 8
Section 2.10 Notice of Special Meetings.................... 8
Section 2.11 Meetings by Telephone Conference
Calls....................................... 8
Section 2.12 Quorum........................................ 8
Section 2.13 Action at Meeting............................. 8
Section 2.14 Action by Consent............................. 9
Section 2.15 Removal....................................... 9
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<PAGE> 3
Section 2.16 Committees.................................... 9
Section 2.17 Compensation of Directors..................... 9
ARTICLE 3 - Officers............................................ 10
Section 3.1 Enumeration................................... 10
Section 3.2 Election...................................... 10
Section 3.3 Qualification................................. 10
Section 3.4 Tenure........................................ 10
Section 3.5 Resignation and Removal....................... 10
Section 3.6 Vacancies..................................... 11
Section 3.7 Chairman of the Board and Vice
Chairman of the Board....................... 11
Section 3.8 President..................................... 11
Section 3.9 Vice Presidents............................... 11
Section 3.10 Secretary and Assistant Secretaries........... 12
Section 3.11 Treasurer and Assistant Treasurers............ 12
Section 3.12 Salaries...................................... 13
ARTICLE 4 - Capital Stock....................................... 13
Section 4.1 Issuance of Stock............................. 13
Section 4.2 Certificates of Stock......................... 13
Section 4.3 Transfers..................................... 13
Section 4.4 Lost, Stolen or Destroyed
Certificates................................ 14
Section 4.5 Record Date................................... 14
ARTICLE 5 - General Provisions.................................. 15
Section 5.1 Fiscal Year................................... 15
Section 5.2 Corporate Seal................................ 15
Section 5.3 Waiver of Notice.............................. 15
Section 5.4 Voting of Securities.......................... 15
Section 5.5 Evidence of Authority......................... 15
Section 5.6 Certificate of Incorporation.................. 15
Section 5.7 Transactions with Interested Parties.......... 15
Section 5.8 Severability.................................. 16
Section 5.9 Pronouns...................................... 16
ARTICLE 6 - Amendments.......................................... 17
Section 6.1 By the Board of Directors..................... 17
Section 6.2 By the Stockholders........................... 17
Section 6.3 Certain Provisions............................ 17
<PAGE> 4
AMENDED AND RESTATED BY-LAWS
OF
GENSYM CORPORATION
ARTICLE 1 - Stockholders
------------------------
1.1 PLACE OF MEETINGS. All meetings of stockholders shall be held at
such place within or without the State of Delaware as may be designated from
time to time by the Board of Directors or the President or, if not so
designated, at the registered office of the corporation.
1.2 ANNUAL MEETING. The annual meeting of stockholders for the
election of directors and for the transaction of such other business as may
properly be brought before the meeting shall be held within six months after the
end of each fiscal year of the corporation on a date to be fixed by the Board of
Directors or the President (which date shall not be a legal holiday in the place
where the meeting is to be held) at the time and place to be fixed by the Board
of Directors or the President and stated in the notice of the meeting. If no
annual meeting is held in accordance with the foregoing provisions, the Board of
Directors shall cause the meeting to be held as soon thereafter as convenient.
If no annual meeting is held in accordance with the foregoing provisions, a
special meeting may be held in lieu of the annual meeting, and any action taken
at that special meeting shall have the same effect as if it had been taken at
the annual meeting, and in such case all references in these By-Laws to the
annual meeting of the stockholders shall be deemed to refer to such special
meeting.
1.3 SPECIAL MEETINGS. Special meetings of stockholders may be called
at any time by the Chairman of the Board of Directors, the Chief Executive
Officer (or, if there is no Chief Executive Officer, the President) or the Board
of Directors. Business transacted at any special meeting of stockholders shall
be limited to matters relating to the purpose or purposes stated in the notice
of meeting.
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<PAGE> 5
1.4 NOTICE OF MEETINGS. Except as otherwise provided by law, written
notice of each meeting of stockholders, whether annual or special, shall be
given not less than 10 nor more than 60 days before the date of the meeting to
each stockholder entitled to vote at such meeting. The notices of all meetings
shall state the place, date and hour of the meeting. The notice of a special
meeting shall state, in addition, the purpose or purposes for which the meeting
is called. If mailed, notice is given when deposited in the United States mail,
postage prepaid, directed to the stockholder at his address as it appears on the
records of the corporation.
1.5 VOTING LIST. The officer who has charge of the stock ledger of the
corporation shall prepare, at least 10 days before every meeting of
stockholders, a complete list of the stockholders entitled to vote at the
meeting, arranged in alphabetical order, and showing the address of each
stockholder and the number of shares registered in the name of each stockholder.
Such list shall be open to the examination of any stockholder, for any purpose
germane to the meeting, during ordinary business hours, for a period of at least
10 days prior to the meeting, at a place within the city where the meeting is to
be held. The list shall also be produced and kept at the time and place of the
meeting during the whole time of the meeting, and may be inspected by any
stockholder who is present.
1.6 QUORUM. Except as otherwise provided by law, the Certificate of
Incorporation or these By-Laws, the holders of a majority of the shares of the
capital stock of the corporation issued and outstanding and entitled to vote at
the meeting, present in person or represented by proxy, shall constitute a
quorum for the transaction of business.
1.7 ADJOURNMENTS. Any meeting of stockholders may be adjourned to any
other time and to any other place at which a meeting of stockholders may be held
under these By-Laws by the stockholders present or represented at the meeting
and entitled to vote, although less than a quorum, or, if no stockholder is
present, by any officer entitled to preside at or to act as Secretary of such
meeting. It shall not be necessary to notify any stockholder of any adjournment
of less than 30 days if the time and place of the adjourned meeting are
announced at the meeting at which adjournment is taken, unless after the
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adjournment a new record date is fixed for the adjourned meeting. At the
adjourned meeting, the corporation may transact any business which might have
been transacted at the original meeting.
1.8 VOTING AND PROXIES. Each stockholder shall have one vote for each
share of stock entitled to vote held of record by such stockholder and a
proportionate vote for each fractional share so held, unless otherwise provided
by the General Corporation Law of the State of Delaware, the Certificate of
Incorporation or these By-Laws. Each stockholder of record entitled to vote at a
meeting of stockholders, or to express consent or dissent to corporate action in
writing without a meeting, may vote or express such consent or dissent in person
or may authorize another person or persons to vote or act for him by written
proxy executed by the stockholder or his authorized agent and delivered to the
Secretary of the corporation. No such proxy shall be voted or acted upon after
three years from the date of its execution, unless the proxy expressly provides
for a longer period.
1.9 ACTION AT MEETING. When a quorum is present at any meeting, the
holders of a majority of the stock present or represented and voting on a matter
(or if there are two or more classes of stock entitled to vote as separate
classes, then in the case of each such class, the holders of a majority of the
stock of that class present or represented and voting on a matter) shall decide
any matter to be voted upon by the stockholders at such meeting, except when a
different vote is required by express provision of law, the Certificate of
Incorporation or these By-Laws. Any election by stockholders shall be determined
by a plurality of the votes cast by the stockholders entitled to vote at the
election.
1.10 NOMINATION OF DIRECTORS. Only persons who are nominated in
accordance with the following procedures shall be eligible for election as
directors. Nomination for election to the Board of Directors of the corporation
at a meeting of stockholders may be made by the Board of Directors or by any
stockholder of the corporation entitled to vote for the election of directors at
such meeting who complies with the notice procedures set forth in this Section
1.10. Such nominations, other than those made by or on behalf of the Board of
Directors,
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<PAGE> 7
shall be made by notice in writing delivered or mailed by first class United
States mail, postage prepaid, to the Secretary, and received not less than 60
days nor more than 90 days prior to such meeting; provided, however, that if
less than 70 days' notice or prior public disclosure of the date of the meeting
is given to stockholders, such nomination shall have been mailed or delivered to
the Secretary not later than the close of business on the 10th day following the
date on which the notice of the meeting was mailed or such public disclosure was
made, whichever occurs first. Such notice shall set forth (a) as to each
proposed nominee (i) the name, age, business address and, if known, residence
address of each such nominee, (ii) the principal occupation or employment of
each such nominee, (iii) the number of shares of stock of the corporation which
are beneficially owned by each such nominee, and (iv) any other information
concerning the nominee that must be disclosed as to nominees in proxy
solicitations pursuant to Regulation 14A under the Securities Exchange Act of
1934, as amended (including such person's written consent to be named as a
nominee and to serve as a director if elected); and (b) as to the stockholder
giving the notice (i) the name and address, as they appear on the corporation's
books, of such stockholder and (ii) the class and number of shares of the
corporation which are beneficially owned by such stockholder. The corporation
may require any proposed nominee to furnish such other information as may
reasonably be required by the corporation to determine the eligibility of such
proposed nominee to serve as a director of the corporation.
The chairman of the meeting may, if the facts warrant, determine and
declare to the meeting that a nomination was not made in accordance with the
foregoing procedure, and if he should so determine, he shall so declare to the
meeting and the defective nomination shall be disregarded.
1.11 NOTICE OF BUSINESS AT ANNUAL MEETINGS. At an annual meeting of the
stockholders, only such business shall be conducted as shall have been properly
brought before the meeting. To be properly brought before an annual meeting,
business must be (a) specified in the notice of meeting (or any supplement
thereto) given by or at the direction of the Board of Directors, (b) otherwise
properly brought before the meeting by or at the direction of the Board of
Directors, or (c) otherwise properly brought before an annual meeting by a
stockholder. For business
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<PAGE> 8
to be properly brought before an annual meeting by a stockholder, if such
business relates to the election of directors of the corporation, the procedures
in Section 1.10 must be complied with. If such business relates to any other
matter, the stockholder must have given timely notice thereof in writing to the
Secretary. To be timely, a stockholder's notice must be delivered to or mailed
and received at the principal executive offices of the corporation not less than
60 days nor more than 90 days prior to the meeting; provided, however, that in
the event that less than 70 days' notice or prior public disclosure of the date
of the meeting is given or made to stockholders, notice by the stockholder to be
timely must be so received not later than the close of business on the 10th day
following the date on which such notice of the date of the meeting was mailed or
such public disclosure was made, whichever occurs first. A stockholder's notice
to the Secretary shall set forth as to each matter the stockholder proposes to
bring before the annual meeting (a) a brief description of the business desired
to be brought before the annual meeting and the reasons for conducting such
business at the annual meeting, (b) the name and address, as they appear on the
corporation's books, of the stockholder proposing such business, (c) the class
and number of shares of the corporation which are beneficially owned by the
stockholder, and (d) any material interest of the stockholder in such business.
Notwithstanding anything in these By-Laws to the contrary, no business shall be
conducted at any annual meeting except in accordance with the procedures set
forth in this Section 1.11 and except that any stockholder proposal which
complies with Rule 14a-8 of the proxy rules (or any successor provision)
promulgated under the Securities Exchange Act of 1934, as amended, and is to be
included in the corporation's proxy statement for an annual meeting of
stockholders shall be deemed to comply with the requirements of this Section
1.11.
The chairman of the meeting shall, if the facts warrant, determine and
declare to the meeting that business was not properly brought before the meeting
in accordance with the provisions of this Section 1.11, and if he should so
determine, the chairman shall so declare to the meeting that any such business
not properly brought before the meeting shall not be transacted.
1.12 Action without Meeting. Stockholders may not take any
----------------------
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<PAGE> 9
action by written consent in lieu of a meeting.
1.13 ORGANIZATION. The Chairman of the Board, or in his absence the
Vice Chairman of the Board designated by the Chairman of the Board, or the
President, in the order named, shall call meetings of the stockholders to order,
and shall act as chairman of such meeting; PROVIDED, however, that the Board of
Directors may appoint any stockholder to act as chairman of any meeting in the
absence of the Chairman of the Board. The Secretary of the corporation shall act
as secretary at all meetings of the stockholders; but in the absence of the
Secretary at any meeting of the stockholders, the presiding officer may appoint
any person to act as secretary of the meeting.
ARTICLE 2 - Directors
---------------------
2.1 GENERAL POWERS. The business and affairs of the corporation shall
be managed by or under the direction of a Board of Directors, who may exercise
all of the powers of the corporation except as otherwise provided by law, the
Certificate of Incorporation or these By-Laws. In the event of a vacancy in the
Board of Directors, the remaining directors, except as otherwise provided by
law, may exercise the powers of the full Board until the vacancy is filled.
2.2 NUMBER; ELECTION AND QUALIFICATION. The number of directors which
shall constitute the whole Board of Directors shall be determined by resolution
of the Board of Directors, but in no event shall be less than three. The number
of directors may be decreased at any time and from time to time by a majority of
the directors then in office, but only to eliminate vacancies existing by reason
of the death, resignation, removal or expiration of the term of one or more
directors. The directors shall be elected at the annual meeting of stockholders
by such stockholders as have the right to vote on such election. Directors need
not be stockholders of the corporation.
2.3 CLASSES OF DIRECTORS. The Board of Directors shall be and is
divided into three classes: Class I, Class II and Class III. No one class shall
have more than one director more than any other class. If a fraction is
contained in the quotient
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<PAGE> 10
arrived at by dividing the designated number of directors by three, then, if
such fraction is one-third, the extra director shall be a member of Class I, and
if such fraction is two-thirds, one of the extra directors shall be a member of
Class I and one of the extra directors shall be a member of Class II, unless
otherwise provided from time to time by resolution adopted by the Board of
Directors.
2.4 TERMS OF OFFICE. Each director shall serve for a term ending on
the date of the third annual meeting following the annual meeting at which such
director was elected; PROVIDED, that each initial director in Class I shall
serve for a term ending on the date of the first annual meeting of stockholders
held following calendar year 1995; each initial director in Class II shall serve
for a term ending on the date of the first annual meeting of stockholders held
following calendar year 1996; and each initial director in Class III shall serve
for a term ending on the date of the first annual meeting of stockholders held
following calendar year 1997; and PROVIDED FURTHER, that the term of each
director shall be subject to the election and qualification of his successor and
to his earlier death, resignation or removal.
2.5 ALLOCATION OF DIRECTORS AMONG CLASSES IN THE EVENT OF INCREASES OR
DECREASES IN THE NUMBER OF DIRECTORS. In the event of any increase or decrease
in the authorized number of directors, (i) each director then serving as such
shall nevertheless continue as a director of the class of which he is a member
and (ii) the newly created or eliminated directorships resulting from such
increase or decrease shall be apportioned by the Board of Directors among the
three classes of directors so as to ensure that no one class has more than one
director more than any other class. To the extent possible, consistent with the
foregoing rule, any newly created directorships shall be added to those classes
whose terms of office are to expire at the latest dates following such
allocation, and any newly eliminated directorships shall be subtracted from
those classes whose terms of offices are to expire at the earliest dates
following such allocation, unless otherwise provided from time to time by
resolution adopted by the Board of Directors.
2.6 VACANCIES. Any vacancy in the Board of Directors, however
occurring, including a vacancy resulting from an
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<PAGE> 11
enlargement of the Board, shall be filled only by vote of a majority of the
directors then in office, although less than a quorum, or by a sole remaining
director. A director elected to fill a vacancy shall be elected for the
unexpired term of his predecessor in office, and a director chosen to fill a
position resulting from an increase in the number of directors shall hold office
until the next election of the class for which such director shall have been
chosen, subject to the election and qualification of his successor and to his
earlier death, resignation or removal.
2.7 RESIGNATION. Any director may resign by delivering his written
resignation to the corporation at its principal office or to the President or
Secretary. Such resignation shall be effective upon receipt unless it is
specified to be effective at some other time or upon the happening of some other
event.
2.8 REGULAR MEETINGS. Regular meetings of the Board of Directors may
be held without notice at such time and place, either within or without the
State of Delaware, as shall be determined from time to time by the Board of
Directors; provided that any director who is absent when such a determination is
made shall be given notice of the determination. A regular meeting of the Board
of Directors may be held without notice immediately after and at the same place
as the annual meeting of stockholders.
2.9 SPECIAL MEETINGS. Special meetings of the Board of Directors may
be held at any time and place, within or without the State of Delaware,
designated in a call by the Chairman of the Board, President, two or more
directors, or by one director in the event that there is only a single director
in office.
2.10 NOTICE OF SPECIAL MEETINGS. Notice of any special meeting of
directors shall be given to each director by the Secretary or by the officer or
one of the directors calling the meeting. Notice shall be duly given to each
director (i) by giving notice to such director in person or by telephone at
least 24 hours in advance of the meeting, (ii) by sending a telegram, telecopy,
or telex, or delivering written notice by hand, to his last known business or
home address at least 24 hours in advance of the meeting, or (iii) by mailing
written notice to his last known business or home address at least 72 hours in
advance of
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<PAGE> 12
the meeting. A notice or waiver of notice of a meeting of the Board of Directors
need not specify the purposes of the meeting.
2.11 MEETINGS BY TELEPHONE CONFERENCE CALLS. Directors or any members
of any committee designated by the directors may participate in a meeting of the
Board of Directors or such committee by means of conference telephone or similar
communications equipment by means of which all persons participating in the
meeting can hear each other, and participation by such means shall constitute
presence in person at such meeting.
2.12 QUORUM. A majority of the total number of the whole Board of
Directors shall constitute a quorum at all meetings of the Board of Directors.
In the event one or more of the directors shall be disqualified to vote at any
meeting, then the required quorum shall be reduced by one for each such director
so disqualified; provided, however, that in no case shall less than one-third
(1/3) of the number so fixed constitute a quorum. In the absence of a quorum at
any such meeting, a majority of the directors present may adjourn the meeting
from time to time without further notice other than announcement at the meeting,
until a quorum shall be present.
2.13 ACTION AT MEETING. At any meeting of the Board of Directors at
which a quorum is present, the vote of a majority of those present shall be
sufficient to take any action, unless a different vote is specified by law, the
Certificate of Incorporation or these By-Laws.
2.14 ACTION BY CONSENT. Any action required or permitted to be taken at
any meeting of the Board of Directors or of any committee of the Board of
Directors may be taken without a meeting, if all members of the Board or
committee, as the case may be, consent to the action in writing, and the written
consents are filed with the minutes of proceedings of the Board or committee.
2.15 REMOVAL. Directors of the corporation may be removed only for
cause by the affirmative vote of the holders of two-thirds of the shares of the
capital stock of the corporation issued and outstanding and entitled to vote.
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2.16 COMMITTEES. The Board of Directors may, by resolution passed by a
majority of the whole Board, designate one or more committees, each committee to
consist of one or more of the directors of the corporation. The Board may
designate one or more directors as alternate members of any committee, who may
replace any absent or disqualified member at any meeting of the committee. In
the absence or disqualification of a member of a committee, the member or
members of the committee present at any meeting and not disqualified from
voting, whether or not he or they constitute a quorum, may unanimously appoint
another member of the Board of Directors to act at the meeting in the place of
any such absent or disqualified member. Any such committee, to the extent
provided in the resolution of the Board of Directors and subject to the
provisions of the General Corporation Law of the State of Delaware, shall have
and may exercise all the powers and authority of the Board of Directors in the
management of the business and affairs of the corporation and may authorize the
seal of the corporation to be affixed to all papers which may require it. Each
such committee shall keep minutes and make such reports as the Board of
Directors may from time to time request. Except as the Board of Directors may
otherwise determine, any committee may make rules for the conduct of its
business, but unless otherwise provided by the directors or in such rules, its
business shall be conducted as nearly as possible in the same manner as is
provided in these By-Laws for the Board of Directors.
2.17 COMPENSATION OF DIRECTORS. Directors may be paid such compensation
for their services and such reimbursement for expenses of attendance at meetings
as the Board of Directors may from time to time determine. No such payment shall
preclude any director from serving the corporation or any of its parent or
subsidiary corporations in any other capacity and receiving compensation for
such service.
ARTICLE 3 - Officers
--------------------
3.1 ENUMERATION. The officers of the corporation shall consist of a
President, a Secretary, a Treasurer and such other officers with such other
titles as the Board of Directors shall determine, including a Chairman of the
Board, a Vice-Chairman of
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the Board, and one or more Vice Presidents, Assistant Treasurers, and Assistant
Secretaries. The Board of Directors may appoint such other officers as it may
deem appropriate.
3.2 ELECTION. The President, Treasurer and Secretary shall be elected
annually by the Board of Directors at its first meeting following the annual
meeting of stockholders. Other officers may be appointed by the Board of
Directors at such meeting or at any other meeting.
3.3 QUALIFICATION. No officer need be a stockholder. Any two or more
offices may be held by the same person.
3.4 TENURE. Except as otherwise provided by law, by the Certificate of
Incorporation or by these By-Laws, each officer shall hold office until his
successor is elected and qualified, unless a different term is specified in the
vote choosing or appointing him, or until his earlier death, resignation or
removal.
3.5 RESIGNATION AND REMOVAL. Any officer may resign by delivering his
written resignation to the corporation at its principal office or to the
President or Secretary. Such resignation shall be effective upon receipt unless
it is specified to be effective at some other time or upon the happening of some
other event.
Any officer may be removed at any time, with or without cause, by vote of
a majority of the entire number of directors then in office.
Except as the Board of Directors may otherwise determine, no officer who
resigns or is removed shall have any right to any compensation as an officer for
any period following his resigna tion or removal, or any right to damages on
account of such removal, whether his compensation be by the month or by the year
or otherwise, unless such compensation is expressly provided in a duly
authorized written agreement with the corporation.
3.6 VACANCIES. The Board of Directors may fill any vacancy occurring
in any office for any reason and may, in its discretion, leave unfilled for such
period as it may determine any offices other than those of President, Treasurer
and
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Secretary. Each such successor shall hold office for the unexpired term of his
predecessor and until his successor is elected and qualified, or until his
earlier death, resignation or removal.
3.7 CHAIRMAN OF THE BOARD AND VICE CHAIRMAN OF THE BOARD. The Board of
Directors may appoint a Chairman of the Board. If the Board of Directors
appoints a Chairman of the Board, he shall perform such duties and possess such
powers as are assigned to him by the Board of Directors. If the Board of
Directors appoints a Vice Chairman of the Board, he shall, in the absence or
disability of the Chairman of the Board, perform the duties and exercise the
powers of the Chairman of the Board and shall perform such other duties and
possess such other powers as may from time to time be vested in him by the Board
of Directors.
3.8 PRESIDENT. The President shall, subject to the direction of the
Board of Directors, have general charge and supervision of the business of the
corporation. Unless otherwise provided by the Board of Directors, he shall
preside at all meetings of the stockholders, if he is a director, at all
meetings of the Board of Directors. Unless the Board of Directors has designated
the Chairman of the Board or another officer as Chief Executive Officer, the
President shall be the Chief Executive Officer of the corporation. The President
shall perform such other duties and shall have such other powers as the Board of
Directors may from time to time prescribe.
3.9 VICE PRESIDENTS. Any Vice President shall perform such duties and
possess such powers as the Board of Directors or the President may from time to
time prescribe. In the event of the absence, inability or refusal to act of the
President, the Vice President (or if there shall be more than one, the Vice
Presidents in the order determined by the Board of Directors) shall perform the
duties of the President and when so performing shall have all the powers of and
be subject to all the restrictions upon the President. The Board of Directors
may assign to any Vice President the title of Executive Vice President, Senior
Vice President or any other title selected by the Board of Directors.
3.10 SECRETARY AND ASSISTANT SECRETARIES. The Secretary shall perform
such duties and shall have such powers as the Board
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<PAGE> 16
of Directors or the President may from time to time prescribe. In addition, the
Secretary shall perform such duties and have such powers as are incident to the
office of the secretary, including without limitation the duty and power to give
notices of all meetings of stockholders and special meetings of the Board of
Directors, to attend all meetings of stockholders and the Board of Directors and
keep a record of the proceedings, to maintain a stock ledger and prepare lists
of stockholders and their addresses as required, to be custodian of corporate
records and the corporate seal and to affix and attest to the same on documents.
Any Assistant Secretary shall perform such duties and possess such powers
as the Board of Directors, the President or the Secretary may from time to time
prescribe. In the event of the absence, inability or refusal to act of the
Secretary, the Assistant Secretary (or if there shall be more than one, the
Assistant Secretaries in the order determined by the Board of Directors) shall
perform the duties and exercise the powers of the Secretary.
In the absence of the Secretary or any Assistant Secretary at any meeting
of stockholders or directors, the person presiding at the meeting shall
designate a temporary secretary to keep a record of the meeting.
3.11 TREASURER AND ASSISTANT TREASURERS. The Treasurer shall perform
such duties and shall have such powers as may from time to time be assigned to
him by the Board of Directors or the President. In addition, the Treasurer shall
perform such duties and have such powers as are incident to the office of
treasurer, including without limitation the duty and power to keep and be
responsible for all funds and securities of the corporation, to deposit funds of
the corporation in depositories selected in accordance with these By-Laws, to
disburse such funds as ordered by the Board of Directors, to make proper
accounts of such funds, and to render as required by the Board of Directors
statements of all such transactions and of the financial condition of the
corporation.
The Assistant Treasurers shall perform such duties and possess such
powers as the Board of Directors, the President or the Treasurer may from time
to time prescribe. In the event of
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<PAGE> 17
the absence, inability or refusal to act of the Treasurer, the Assistant
Treasurer (or if there shall be more than one, the Assistant Treasurers in the
order determined by the Board of Directors) shall perform the duties and
exercise the powers of the Treasurer.
3.12 SALARIES. Officers of the corporation shall be entitled to such
salaries, compensation or reimbursement as shall be fixed or allowed from time
to time by the Board of Directors.
ARTICLE 4 - Capital Stock
-------------------------
4.1 ISSUANCE OF STOCK. Unless otherwise voted by the stockholders and
subject to the provisions of the Certificate of Incorporation, the whole or any
part of any unissued balance of the authorized capital stock of the corporation
or the whole or any part of any unissued balance of the authorized capital stock
of the corporation held in its treasury may be issued, sold, transferred or
otherwise disposed of by vote of the Board of Directors in such manner, for such
consideration and on such terms as the Board of Directors may determine.
4.2 CERTIFICATES OF STOCK. Every holder of stock of the corporation
shall be entitled to have a certificate, in such form as may be prescribed by
law and by the Board of Directors, certifying the number and class of shares
owned by him in the corporation. Each such certificate shall be signed by, or in
the name of the corporation by, the Chairman or Vice Chairman, if any, of the
Board of Directors, or the President or a Vice President, and the Treasurer or
an Assistant Treasurer, or the Secretary or an Assistant Secretary of the
corporation. Any or all of the signatures on the certificate may be a facsimile.
Each certificate for shares of stock which are subject to any restriction
on transfer pursuant to the Certificate of Incorporation, the By-Laws,
applicable securities laws or any agreement among any number of stockholders or
among such holders and the corporation shall have conspicuously noted on the
face or back of the certificate either the full text of the restriction or a
statement of the existence of such restriction.
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<PAGE> 18
4.3 TRANSFERS. Except as otherwise established by rules and
regulations adopted by the Board of Directors, and subject to applicable law,
shares of stock may be transferred on the books of the corporation by the
surrender to the corporation or its transfer agent of the certificate
representing such shares properly endorsed or accompanied by a written
assignment or power of attorney properly executed, and with such proof of
authority or the authenticity of signature as the corporation or its transfer
agent may reasonably require. Except as may be otherwise required by law, by the
Certificate of Incorporation or by these By-Laws, the corporation shall be
entitled to treat the record holder of stock as shown on its books as the owner
of such stock for all purposes, including the payment of dividends and the right
to vote with respect to such stock, regardless of any transfer, pledge or other
disposition of such stock until the shares have been transferred on the books of
the corporation in accordance with the requirements of these By-Laws.
4.4 LOST, STOLEN OR DESTROYED CERTIFICATES. The corporation may issue
a new certificate of stock in place of any previously issued certificate alleged
to have been lost, stolen, or destroyed, upon such terms and conditions as the
Board of Directors may prescribe, including the presentation of reasonable
evidence of such loss, theft or destruction and the giving of such indemnity as
the Board of Directors may require for the protection of the corporation or any
transfer agent or registrar.
4.5 RECORD DATE. The Board of Directors may fix in advance a date as a
record date for the determination of the stockholders entitled to notice of or
to vote at any meeting of stockholders, or entitled to receive payment of any
dividend or other distribution or allotment of any rights in respect of any
change, conversion or exchange of stock, or for the purpose of any other lawful
action. Such record date shall not be more than 60 nor less than 10 days before
the date of such meeting, nor more than 60 days prior to any other action to
which such record date relates.
If no record date is fixed, the record date for determining stockholders
entitled to notice of or to vote at a meeting of stockholders shall be at the
close of business on the day before the day on which notice is given, or, if
notice is waived, at the close of business on the day before the day on which
the meeting
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<PAGE> 19
is held. The record date for determining stockholders for any other purpose
shall be at the close of business on the day on which the Board of Directors
adopts the resolution relating to such purpose.
A determination of stockholders of record entitled to notice of or to
vote at a meeting of stockholders shall apply to any adjournment of the meeting;
provided, however, that the Board of Directors may fix a new record date for the
adjourned meeting.
ARTICLE 5 - General Provisions
------------------------------
5.1 FISCAL YEAR. Except as from time to time otherwise designated by
the Board of Directors, the fiscal year of the corporation shall begin on the
first day of January in each year and end on the last day of December in each
year.
5.2 CORPORATE SEAL. The corporate seal shall be in such form as shall
be approved by the Board of Directors.
5.3 WAIVER OF NOTICE. Whenever any notice whatsoever is required to be
given by law, by the Certificate of Incorporation or by these By-Laws, a waiver
of such notice either in writing signed by the person entitled to such notice or
such person's duly authorized attorney, or by telegraph, cable or any other
available method, whether before, at or after the time stated in such waiver, or
the appearance of such person or persons at such meeting in person or by proxy,
shall be deemed equivalent to such notice.
5.4 VOTING OF SECURITIES. Except as the directors may otherwise
designate, the President or Treasurer may waive notice of, and act as, or
appoint any person or persons to act as, proxy or attorney-in-fact for this
corporation (with or without power of substitution) at, any meeting of
stockholders or shareholders of any other corporation or organization, the
securities of which may be held by this corporation.
5.5 EVIDENCE OF AUTHORITY. A certificate by the Secretary, or an
Assistant Secretary, or a temporary Secretary, as to any action taken by the
stockholders, directors, a
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<PAGE> 20
committee or any officer or representative of the corporation shall as to all
persons who rely on the certificate in good faith be conclusive evidence of such
action.
5.6 Certificate of Incorporation. All references in these By-Laws to
the Certificate of Incorporation shall be deemed to refer to the Certificate of
Incorporation of the corporation, as amended and in effect from time to time.
5.7 Transactions with Interested Parties. No contract or transaction
between the corporation and one or more of the directors or officers, or between
the corporation and any other corporation, partnership, association, or other
organization in which one or more of the directors or officers are directors or
officers, or have a financial interest, shall be void or voidable solely for
this reason, or solely because the director or officer is present at or
participates in the meeting of the Board of Directors or a committee of the
Board of Directors which autho rizes the contract or transaction or solely
because his or their votes are counted for such purpose, if:
(1) The material facts as to his relationship or interest and
as to the contract or transaction are disclosed or are known to the Board
of Directors or the committee, and the Board or committee in good faith
authorizes the contract or transaction by the affirmative votes of a
majority of the disinterested directors, even though the disinterested
directors be less than a quorum;
(2) The material facts as to his relationship or interest and
as to the contract or transaction are disclosed or are known to the
stockholders entitled to vote thereon, and the contract or transaction is
specifically approved in good faith by vote of the stockholders; or
(3) The contract or transaction is fair as to the corporation
as of the time it is authorized, approved or ratified, by the Board of
Directors, a committee of the Board of Directors, or the stockholders.
Common or interested directors may be counted in determining the presence
of a quorum at a meeting of the Board of Directors or of a committee which
authorizes the contract or transaction.
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<PAGE> 21
5.8 SEVERABILITY. Any determination that any provision of these
By-Laws is for any reason inapplicable, illegal or ineffec tive shall not affect
or invalidate any other provision of these By-Laws.
5.9 PRONOUNS. All pronouns used in these By-Laws shall be deemed to
refer to the masculine, feminine or neuter, singular or plural, as the identity
of the person or persons may require.
ARTICLE 6 - Amendments
----------------------
6.1 BY THE BOARD OF DIRECTORS. These By-Laws may be altered, amended
or repealed or new by-laws may be adopted by the affirmative vote of a majority
of the directors present at any regular or special meeting of the Board of
Directors at which a quorum is present.
6.2 BY THE STOCKHOLDERS. Except as otherwise provided in Section 6.3,
these By-Laws may be altered, amended or repealed or new by-laws may be adopted
by the affirmative vote of the holders of a majority of the shares of the
capital stock of the corporation issued and outstanding and entitled to vote at
any regular or special meeting of stockholders, provided notice of such
alteration, amendment, repeal or adoption of new by-laws shall have been stated
in the notice of such regular or special meeting.
6.3 CERTAIN PROVISIONS. Notwithstanding any other provision of law,
the Certificate of Incorporation or these ByLaws, and notwithstanding the fact
that a lesser percentage may be specified by law, the affirmative vote of the
holders of at least seventy-five percent (75%) of the shares of the capital
stock of the corporation issued and outstanding and entitled to vote shall be
required to amend or repeal, or to adopt any provision inconsistent with Section
1.3, Section 1.10, Section 1.11, Section 1.12, Section 1.13, Article 2 or
Article 6 of these By-Laws.
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<PAGE> 1
Exhibit 10.7
FIRST AMENDMENT TO LEASE
------------------------
This First Amendment to Lease dated this 2nd day of December, 1996 between
CambridgePark One Limited Partnership ("Landlord") and Gensym Corporation
("Tenant").
WITNESSETH
WHEREAS, Landlord and Tenant entered into a lease dated as of January 1,
1995 for space located in the building known as 125 CambridgePark Drive,
Cambridge, Massachusetts (the "Lease"); and
WHEREAS, Landlord and Tenant wish to amend the lease as set forth herein
for purposes of expanding the premises which Tenant presently occupies.
NOW, therefore, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, Landlord and Tenant agree to amend
the lease as follows:
1. All capitalized terms used herein and not defined herein shall have the
meanings ascribed to them in the lease.
2. Landlord and Tenant acknowledge and agree that, in accordance with the
provisions of Section 2.1 of the Lease, the original Premises (consisting of the
First Takedown Space) was expanded effective on October 1, 1995 to include the
Third TakeDown Space (the "Effective Date"). Notwithstanding the provisions of
the Lease, the parties acknowledge that the Third Takedown Space consists of
3,642 rentable square feet as shown on page A-3 of Exhibit A attached hereto.
The Lease is hereby amended to delete page A-3 of Exhibit A to the Lease headed
"Third Takedown Space" and to substitute the attached page A-3 of Exhibit A
therefor. Accordingly, as of the Effective Date, the Premises consisted of
47,022 rentable square feet.
3. Section 1.1 of the lease is hereby amended by inserting the following on
page 2 after the data following the subject "Fourth Takedown Space":
FIFTH TAKEDOWN SPACE: Approximately 4,879 r.s.f., located on the third
floor of the Building, being the cross-hatched area
shown on EXHIBIT A, which shall be automatically
included in the
<PAGE> 2
Premises on the Substantial Completion Date for the
Fifth Takedown Space, in accordance with
Section 2.1 hereof.
SIXTH TAKEDOWN SPACE: Approximately 3,333 r.s.f., located on the third
floor of the Building, being the cross-hatched area
shown on EXHIBIT A, which shall be automatically
included in the Premises on the Substantial
Completion Date for the Sixth Takedown Space, in
accordance with Section 2.1 hereof.
ORIGINAL TAKEDOWN
SPACES: The First Takedown Space, the Second Takedown Space,
the Third Takedown Space and the Fourth Takedown
Space.
NEW TAKEDOWN SPACES: The Fifth Takedown Space and the Sixth Takedown
Space.
4. Section 1.1 of the Lease is hereby amended by deleting the data which
corresponds to the subject "Annual Base Rent" and replacing it with the
following data:
Lease Year Annual Base Rent (p.r.s.f.)
---------- ----------------
1 $7.00 for the Original Takedown Spaces
2 $7.25 for the Original Takedown Spaces and,
effective on expansion of the Premises to include
New Takedown Space as provided herein, $11.50 for
the New Takedown Spaces
3 $7.50 for the Original Takedown Spaces and $11.50
for the New Takedown Spaces
4 $7.75 for the Original Takedown Spaces and $11.50
for the New Takedown Spaces
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<PAGE> 3
5 $8.00 for the Original Takedown Spaces and $11.50
for the New Takedown Spaces
6 $8.25 for the Original Takedown Spaces and $11.50
for the New Takedown Spaces
5. Section 1.1 of the Lease is hereby amended by deleting the data which
corresponds to the subject "Annual Rent" and replacing it with the following
data:
Lease Year Annual Rent
---------- -----------
1 $7.00 Annual Base Rent (p.r.s.f.) + $9.50 Annual
Estimated Operating Costs (p.r.s.f.) + $.85 Annual
Estimated Electrical Costs to Tenant's Space
(p.r.s.f.) = $17.35 (p.r.s.f.) x Rentable Floor Area
of the Original Expansion Spaces as the same may be
increased during the Lease Year in accordance with
Section 2.1 and Section 3.2 = Annual Rent.
2 The sum of: (a) with respect to the Original
Expansion Spaces, $7.25 Annual Base Rent (p.r.s.f.)
+ $9.50 Annual Estimated Operating costs (p.r.s.f.)
+ $.85 Annual Estimated Electrical Costs to Tenant's
Space (p.r.s.f.) = $17.60 (p.r.s.f.) x Rentable
Floor Area of the Original Expansion Spaces, as the
same may be increased during the Lease Year in
accordance with Section 2.1 and Section 3.2 = Annual
Rent for the Original Expansion Spaces, and (b) with
respect to the New Expansion Spaces, $11.50 Annual
Base Rent (p.r.s.f.) + $9.50 Annual Estimated
Operating Costs (p.r.s.f.) + $.85 Annual Estimated
Electrical Costs to Tenant's Space (p.r.s.f.) =
$21.85 (p.r.s.f.) x Rentable Floor Area of the New
Expansion Spaces as the same
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<PAGE> 4
may be increased during the Lease Year in accordance
with Section 2.1 and Section 3.2 = Annual Rent for
the New Expansion Spaces.
3 The sum of: (a) with respect to the Original
Expansion Spaces, $7.50 Annual Base Rent (p.r.s.f.)
+ $9.50 Annual Estimated Operating Costs (p.r.s.f.)
+ $.85 Annual Estimated Electrical Costs to Tenant's
Space (p.r.s.f.) = $17.85 (p.r.s.f.) x Rentable
Floor Area of the Original Expansion Spaces, as the
same may be increased during the Lease Year in
accordance with Section 2.1 and Section 3.2 = Annual
Rent for the Original Expansion Spaces, and (b) with
respect to the New Expansion Spaces, $11.50 Annual
Base Rent (p.r.s.f.) + $9.50 Annual Estimated
Operating Costs (p.r.s.f.) + $.85 Annual Estimated
Electrical Costs to Tenant's Space (p.r.s.f.) =
$21.85 (p.r.s.f.) x Rentable Floor Area of the New
Expansion Spaces as the same may be increased during
the Lease Year in accordance with Section 2.1 and
Section 3.2 = Annual Rent for the New Expansion
Spaces.
4 The sum of: (a) with respect to the Original
Expansion Spaces, $7.75 Annual Base Rent (p.r.s.f.)
+ $9.50 Annual Estimated Operating costs (p.r.s.f.)
+ $.85 Annual Estimated Electrical Costs to Tenant's
Space (p.r.s.f.) = $18.10 (p.r.s.f.) x Rentable
Floor Area of the Original Expansion Spaces, as the
same may be increased during the Lease Year in
accordance with Section 2.1 and Section 3.2 = Annual
Rent for the Original Expansion Spaces, and (b) with
respect to the New Expansion Spaces, $11.50 Annual
Base Rent (p.r.s.f.) + $9.50 Annual Estimated
Operating Costs (p.r.s.f.) + $.85 Annual Estimated
Electrical Costs to Tenant's Space (p.r.s.f.) =
$21.85
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<PAGE> 5
(p.r.s.f.) x Rentable Floor Area of the New
Expansion Spaces as the same may be increased during
the Lease Year in accordance with Section 2.1 and
Section 3.2 = Annual Rent for the New Expansion
Spaces.
5 The sum of: (a) with respect to the Original
Expansion Spaces, $8.00 Annual Base Rent (p.r.s.f.)
+ $9.50 Annual Estimated Operating costs (p.r.s.f.)
+ $.85 Annual Estimated Electrical Costs to Tenant's
Space (p.r.s.f.) = $18.35 (p.r.s.f.) x Rentable
Floor Area of the Original Expansion Spaces, as the
same may be increased during the Lease Year in
accordance with Section 2.1 and Section 3.2 = Annual
Rent for the Original Expansion Spaces, and (b) with
respect to the New Expansion Spaces, $11.50 Annual
Base Rent (p.r.s.f.) + $9.50 Annual Estimated
Operating Costs (p.r.s.f.) + $.85 Annual Estimated
Electrical Costs to Tenant's Space (p.r.s.f.) =
$21.85 (p.r.s.f.) x Rentable Floor Area of the New
Expansion Spaces as the same may be increased during
the Lease Year in accordance with Section 2.1 and
Section 3.2 = Annual Rent for the New Expansion
Spaces.
6 The sum of: (a) with respect to the Original
Expansion Spaces, $8.25 Annual Base Rent (p.r.s.f.)
+ $9.50 Annual Estimated Operating costs (p.r.s.f.)
+ $.85 Annual Estimated Electrical Costs to Tenant's
Space (p.r.s.f.) = $18.60 (p.r.s.f.) x Rentable
Floor Area of the Original Expansion Spaces, as the
same may be increased during the Lease Year in
accordance with Section 2.1 and Section 3.2 = Annual
Rent for the Original Expansion Spaces, and (b) with
respect to the New Expansion Spaces, $11.50 Annual
Base Rent (p.r.s.f.) + $9.50 Annual Estimated
Operating Costs (p.r.s.f.) + $.85
-5-
<PAGE> 6
Annual Estimated Electrical Costs to Tenant's Space
(p.r.s.f.) = $21.85 (p.r.s.f.) x Rentable Floor Area
of the New Expansion Spaces as the same may be
increased during the Lease Year in accordance with
Section 2.1 and Section 3.2 = Annual Rent for the
New Expansion Spaces
6. Section 1.1 of the Lease is hereby amended by inserting the word
"Original" before "Takedown Space" in the data following the subject "Tenant's
Design Completion Date"
7. Section 1.1 of the Existing Lease is hereby amended by inserting the
following after the data following the subject "Scheduled Substantial Completion
Dates":
Fifth Takedown Space: October 15, 1996
Sixth Takedown Space: 45 days after the Sixth Takedown Space Possession
Date (as defined in Section 3.1(a) hereof)
8. Section 3.1 of the Lease is hereby amended by inserting the word
"Original" before the phrase "Takedown Space" in the second and seventh lines of
subsection (a) and wherever such phrase appears in subsection (b), except where
reference is made to the First Takedown Space, Second Takedown Space, Third
Takedown Space or the Fourth Takedown Space, and by inserting the following at
the end of Section 3.1:
"Notwithstanding any other provision of the Lease to the contrary, the
Fifth Takedown Space and the Sixth Takedown Space shall be provided by
Landlord to Tenant, and accepted by Tenant from Landlord, "as is", "where
is", with all faults and without any representation, warranty, or guaranty
of any kind by Landlord to Tenant, except that Landlord shall, at
Landlord's expense, remove and construct any demising walls which are
required in connection with the Fifth Takedown Space and the Sixth Takedown
Space, which construction shall be consistent with Building standards.
Subject to all provisions hereof other than the payment of Annual Rent,
Tenant shall be given access to the Fifth Takedown Space to commence
improvements to the Fifth Takedown Space on October 1, 1996. Subject to all
provisions hereof other than the payment of Annual Rent, Tenant shall be
given access to the Sixth Takedown Space to commence improvements to the
Sixth Takedown Space no later than five (5) business days after the Tenant
currently located in such space is relocated by Landlord or otherwise quits
the Sixth Takedown Space (such
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<PAGE> 7
date on which Tenant is given access being referred to herein as the "Sixth
Takedown Space Possession Date"). Within thirty (30) days after notice from
Tenant to Landlord that Tenant's construction of improvements in the Fifth
Takedown Space or the Sixth Takedown Space, as applicable, has been
completed, together with an itemization of and paid invoices for the
out-of-pocket costs incurred by Tenant in constructing such improvements,
Landlord shall pay to Tenant an allowance equal to the lesser of such costs
or $7.50 (plus architectural and engineering fees) per Rentable Square Foot
of such space. All construction to be undertaken by Tenant shall be subject
to the applicable provisions of the Lease, including, without limitation,
applicable provisions of Sections 3.1, 3.2 and 6.1.15."
9. Section 3.2 of the Lease is hereby amended by inserting the word
"Original" before the phrase "Takedown Space" wherever such phrase appears in
Section 3.2, and by inserting the following at the end of Section 3.2:
"Tenant agrees to use reasonable efforts to have each New Takedown
Space ready for occupancy on or before the applicable Scheduled Substantial
Completion Date for each such New Takedown Space, which shall, however, be
extended in the case of each New Takedown Space for a period equal to that
of any delays due to governmental regulations, unusual scarcity of or
inability to obtain labor or materials, labor difficulties, casualty or
other causes beyond Tenant's reasonable control. As used herein, the term
"Substantial Completion Date" for each New Takedown Space shall mean and
refer to the date on which the improvements to such New Takedown Space have
been substantially completed as reasonably determined by Landlord's
representative, with the exception of minor items which can be fully
completed without material interference with Tenant, provided that none of
said items are necessary to make the applicable New Takedown Space
tenantable for the permitted Uses; provided, however, that if completion is
delayed due to Tenant's failure to proceed with construction diligently and
in good faith or otherwise due to delays caused by Tenant, then the
applicable New Takedown Space shall be deemed ready for occupancy no later
than the Scheduled Substantial Completion Date applicable to such New
Takedown Space, upon which date the Annual Rent, the Rentable Floor Area of
Tenant's Space and all other charges due hereunder shall be adjusted in
accordance with Sections 2.1, 2.3, and 3.2 as though the Substantial
Completion Date for such New Takedown Space had actually occurred on such
Scheduled Substantial Completion Date."
-7-
<PAGE> 8
10. Pages A-5 and A-6 attached hereto are hereby attached to the Lease as
pages A-5 and A-6 of EXHIBIT A to the Lease.
11. Exhibit G to the Lease is hereby amended by revising the chart for the
"Number of Cars to be Issued for:" with respect to the Third Takedown Space by
substituting the number "3" for the number "5" in the column headed "Blue Lot"
and the number "8" for the number "10" in the column headed "Red Lot" and by
adding the following information in such chart in the corresponding columns:
Upon Occupancy of % Blue Lot Red Lot
------------------- -------- -------
Fifth Takedown Space 5 10
Sixth Takedown Space 3 7
12. Tenant and Landlord represent and warrant to each other that they have
dealt with no brokers in connection with this First Amendment to Lease other
than Spaulding and Slye Collier's Limited Partnership and agree to defend, with
counsel approved by the other, indemnify and save the other harmless from and
against any and all cost, expense or liability for any compensation, commissions
or charges claimed by a broker or agent, other than Spaulding and Slye Collier's
Limited Partnership in connection with this First Amendment to Lease.
13. Except as set forth herein, the Lease shall remain unmodified and in
full force and effect.
EXECUTED as a sealed instrument as of the day and year first written above.
LANDLORD
CAMBRIDGEPARK ONE LIMITED
PARTNERSHIP, by its Agent,
Spaulding and Slye Services Limited
Partnership
By: /s/ Robert Lemons
--------------------------------
Name: Robert Lemons
Title: Senior Vice President
-8-
<PAGE> 9
TENANT
GENSYM CORPORATION
By: /s/ Stephen Gregorio
-------------------------------------
Name: Stephen Gregorio
Title: Vice President of Finance
and Administration and C.F.O.
-9-
<PAGE> 1
EXHIBIT 10.8
SECOND AMENDMENT TO LEASE
This Second Amendment made as of 24th day of January, 1997 between
CAMBRIDGEPARK ONE LIMITED PARTNERSHIP ("Landlord") and GENSYM CORPORATION
("Tenant").
WITNESSETH
WHEREAS, Landlord and Tenant entered into a Lease dated January 1, 1995 as
amended by a First Amendment to Lease dated December 2, 1996 for space located
in the Building known as 125 CambridgePark Drive, Cambridge, Massachusetts (as
amended, the "Lease"); and
WHEREAS, Landlord and Tenant wish to amend the Lease as set forth herein
for purposes of expanding the Premises which Tenant presently occupies.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, Landlord and Tenant agree to amend
the Lease as follows:
1. All capitalized terms used herein and not defined herein shall have the
meanings ascribed to them in the Lease.
2. Landlord and Tenant acknowledge and agree that in accordance with the
provisions of Section 2.1 of the Lease, the Premises were expanded effective on
October 15, 1996 to include the Fifth Takedown Space. Accordingly, as of October
15, 1996, the Premises consisted of 51,901 rentable square feet.
3. The Premises shall be expanded to include 7,970 Rentable Square Feet located
on the 3rd floor of the Building, being the cross-hatched area shown on EXHIBIT
A (the "Expansion Premises") which shall be automatically included by Tenant for
the purpose of conducting its business on March 1, 1997 (the "Expansion Premises
Commencement Date"). The Expansion Premises shall be delivered by Landlord to
Tenant, and accepted by Tenant from Landlord, "As Is", "Where Is", with all
faults, and without representation warranty or guaranty of any kind from
Landlord to Tenant, Tenant acknowledging that it has had a reasonable
opportunity to inspect the Expansion Premises. Landlord shall, however, at
Landlord's expense, construct any demising walls which are required in
connection with the Expansion Premises, which construction shall be consistent
with Building Standards. Tenant shall be given access to the Expansion Premises
upon the approval by Landlord of Plans and Specifications for Tenant's occupancy
thereof prepared by Tenant, such approval to be subject to the applicable
provisions of the Lease, including Section 6.1.15. Tenant's entry upon and
occupancy of the Expansion Premises prior the Expansion Premises Commencement
Date shall be subject to all the terms and provisions of the Lease, other than
the payment of Annual Rent for the Expansion Premises. Upon notice from Tenant
to Landlord that the Expansion Premises have been
<PAGE> 2
substantially completed for Tenant's occupancy for the conduct of its business,
together with a breakdown in reasonable detail of the out-of-pocket costs
incurred by Tenant in so completing the Expansion Premises and invoices
therefor, Landlord shall pay a Tenant Improvement Allowance equal to $12.50 per
rentable square foot included in the Expansion Premises, plus architectural and
engineering fees paid by Tenant in connection with the improvement of the
Expansion Premises for Tenant's occupancy, but not to exceed the costs so
incurred by Tenant.
4. In connection with the foregoing, effective on the Expansion Premises
Commencement Date, Section 1.1 of the Lease shall be deemed amended by deleting
the data which corresponds to the subject "Rentable Floor Area of Tenant's
Space" and replacing it with the following:
Approximately 59,871 rentable square feet (r.s.f.), consisting of (i)
33,172 rentable square feet being shown as cross-hatched area on EXHIBIT A and
referred to herein as the "First Takedown Space" (as hereinafter defined), (ii)
10,208 rentable square feet being shown as cross-hatched area on EXHIBIT A and
referred to herein as "Second Takedown Space" (as hereinafter defined), (iii)
3,642 rentable square feet being shown as cross-hatched area on EXHIBIT A and
referred to herein as "Third Takedown Space" (as hereinafter defined), (iv)
4,879 rentable square feet being shown as a cross-hatched area on EXHIBIT A and
referred to herein as the "Fifth Takedown Space" (as hereinafter defined) and
(v) 7,970 rentable square feet (r.s.f.), being shown as a cross-hatched area on
EXHIBIT A and referred to herein as the "Expansion Premises" (as hereinafter
defined) subject to expansion to include the second, third, fourth and sixth
takedown spaces in accordance with Section 2.1 and Section 10.18 hereof. On the
respective Substantial Completion Dates, such additional Takedown Spaces shall
be automatically included in the Premises and in the Rentable Floor Area of
Tenant's Space.
5. Section 1.1 of the Lease is hereby amended by inserting the following on page
2 just before the subject "Total Rentable Floor Area of the Building":
EXPANSION PREMISES: Approximately 7,970 r.s.f., located on the 3rd floor of
the Building, being the cross-hatched area shown on EXHIBIT A, which shall be
automatically included in the Premises on the Expansion Premises Commencement
Date in accordance with the Second Amendment to Lease between Landlord and
Tenant.
6. Section 1.1 of the Lease is hereby amended by inserting after the existing
data for Lease Year 3 following the subject "Annual Base Rent" the language
"and, effective on the Expansion Premises Commencement Date, $15.00 for the
Expansion Premises".
7. Section 1.1 is amended by inserting after the existing data for Lease Years
4, 5 and 6 following the subject "Annual Base Rent" the language, "and $15.00
for the Expansion Premises".
<PAGE> 3
8. Section 1.1 of the Lease is hereby amended by inserting the following
additional data after the existing data following the subject "Annual Rent" for
each Lease Years 3, 4, 5 and 6:
,and (c)with respect to the Expansion Premises, $15.00 Annual Base Rent
(p.r.s.f.) + $9.50 Annual Estimated Operating Costs (p.r.s.f.) + $0.85
Annual Estimated Electrical Cost to Tenant Space (p.r.s.f.) = $25.35
(p.r.s.f.) X Rentable Floor Area of the Expansion Premises - Annual Rent
for the Expansion Premises.
9. Page A-7 attached hereto is hereby attached to the Lease as page A-7 to the
Lease.
10. Exhibit G to the Lease is hereby amended by adding the following information
in such a chart in the corresponding columns:
Upon Occupancy of: Blue Lot Red Lot
------------------ -------- -------
Expansion Premises 8 16
11. Tenant and Landlord represent and warrant to each other that they have dealt
with no brokers in connection with this Second Amendment to Lease other than
Spaulding and Slye Collier's Limited Partnership and agree to defend, with
counsel approved by the other, indemnify and save the other harmless from and
against any and all cost, expense or liability for any compensation, commissions
or charges claimed by a broker or agent, other than Spaulding and Slye Collier's
Limited Partnership in connection with this Second Amendment to Lease.
12. Except as set forth herein, the Lease shall remain unmodified and in full
force and effect.
EXECUTED as a sealed instrument as of the day and year first written above.
LANDLORD
CAMBRIDGEPARK ONE LIMITED PARTNERSHIP,
by its Agent, Spaulding and Slye Services
Limited Partnership
By:/s/ Peter A. Bailey
--------------------------------------------
Name: Peter A. Bailey
Title: Vice President
TENANT
GENSYM CORPORATION
By: /s/ Stephen Gregorio
--------------------------------------------
Name: Stephen Gregorio
Title: C.F.O & VP of Finance
<PAGE> 1
EXHIBIT 10.9
THIRD AMENDMENT TO LEASE
This Third Amendment made as of 24th day of January, 1997 between
CAMBRIDGEPARK ONE LIMITED PARTNERSHIP ("Landlord") and GENSYM CORPORATION
("Tenant").
WITNESSETH
WHEREAS, Landlord and Tenant entered into a Lease dated January 1, 1995
as amended by a First Amendment to Lease dated December 2, 1996 and as amended
by a Second Amendment to Lease dated January 24, 1997 for space located in the
Building known as 125 CambridgePark Drive, Cambridge, Massachusetts
(as amended, the "Lease"); and
WHEREAS, Landlord and Tenant wish to amend the Lease as set forth herein
for purposes of expanding the Premises which Tenant presently occupies.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, Landlord and Tenant agree to amend
the Lease as follows:
1. All capitalized terms used herein and not defined herein shall have the
meanings ascribed to them in the Lease.
2. Landlord and Tenant acknowledge and agree that in accordance with the
provisions of Section 2.1 of the Lease, the Premises were expanded effective on
October 15, 1996 to include the Fifth Takedown Space. Accordingly, as of October
15, 1996, the Premises consisted of 51,901 rentable square feet.
3. The Premises shall be expanded to include 2,341 Rentable Square Feet located
on the 3rd floor of the Building, being the cross-hatched area shown on EXHIBIT
A (the "Expansion Premises") which shall be automatically included by Tenant
for the purpose of conducting its business on or before May 1, 1997 (the
"Expansion Premises Commencement Date"). The Expansion Premises shall be
delivered by Landlord to Tenant, and accepted by Tenant from Landlord, "As Is",
"Where Is", with all faults, and without representation warranty or guaranty of
any kind from Landlord to Tenant, Tenant acknowledging that it has had a
reasonable opportunity to inspect the Expansion Premises. Landlord shall,
however, at Landlord's expense, construct any demising walls which are required
in connection with the Expansion Premises, which construction shall be
consistent with Building Standards. Tenant shall be given access to the
Expansion Premises upon the approval by Landlord of Plans and Specifications
for Tenant's occupancy thereof prepared by Tenant, such approval to be subject
to the applicable provisions of the Lease, including Section 6.1.15. Tenant's
entry upon and occupancy of the Expansion Premises prior the Expansion
Premises Commencement Date shall be subject to all the terms and provisions of
the Lease, other than the payment of Annual Rent for the Expansion Premises.
<PAGE> 2
4. In connection with the foregoing, effective on the Expansion Premises
Commencement Date, Section 1.1 of the Lease shall be deemed amended by deleting
the data which corresponds to the subject "Rentable Floor Area of Tenant's
Space" and replacing it with the following:
Approximately 62,212 rentable square feet (r.s.f.), consisting of (i)
33,172 rentable square feet being shown as cross-hatched area on EXHIBIT A and
referred to herein as the "First Takedown Space" (as hereinafter defined), (ii)
10,208 rentable square feet being shown as cross-hatched area on EXHIBIT A and
referred to herein as "Second Takedown Space" (as hereinafter defined), (iii)
3,642 rentable square feet being shown as cross-hatched area on EXHIBIT A and
referred to herein as "Third Takedown Space" (as hereinafter defined), (iv)
4,879 rentable square feet being shown as a cross-hatched area on EXHIBIT A and
referred to herein as the "Fifth Takedown Space" (as hereinafter defined) and
(v) 7,970 rentable square feet and (vi) 2,341 rentable square feet (r.s.f.),
being shown as a cross-hatched area on EXHIBIT A and referred to herein as the
"Expansion Premises" (as hereinafter defined) subject to expansion to include
the second, third, fourth and sixth takedown spaces in accordance with Section
2.1 and Section 10.18 hereof. On the respective Substantial Completion Dates,
such additional Takedown Spaces shall be automatically included in the Premises
and in the Rentable Floor Area of Tenant's Space.
5. Section 1.1 of the Lease is hereby amended by inserting the following on page
2 just before the subject "Total Rentable Floor Area of the Building":
EXPANSION PREMISES: Approximately 2,341 r.s.f., located on the 3rd floor of
the Building, being the cross-hatched area shown on EXHIBIT A, which shall be
automatically included in the Premises on the Expansion Premises Commencement
Date in accordance with the Second Amendment to Lease between Landlord and
Tenant.
6. Section 1.1 of the Lease is hereby amended by inserting after the existing
data for Lease Year 3 following the subject "Annual Base Rent" the language
"and, effective on the Expansion Premises Commencement Date, $16.50 for the
Expansion Premises".
7. Section 1.1 is amended by inserting after the existing data for Lease Years
4, 5 and 6 following the subject "Annual Base Rent" the language, "and $16.50
for the Expansion Premises".
8. Section 1.1 of the Lease is hereby amended by inserting the following
additional data after the existing data following the subject "Annual Rent" for
each Lease Years 3, 4, 5 and 6:
,and (c)with respect to the Expansion Premises, $16.50 Annual Base Rent
(p.r.s.f.) + $9.50 Annual Estimated Operating Costs (p.r.s.f.) + $0.85
Annual Estimated Electrical Cost to Tenant Space (p.r.s.f.) = $26.85
(p.r.s.f.) X Rentable Floor Area of the Expansion Premises - Annual Rent
for the Expansion Premises.
9. Page A-7 attached hereto is hereby attached to the Lease as page A-7 to the
Lease.
<PAGE> 3
10. Exhibit G to the Lease is hereby amended by adding the following information
in such a chart in the corresponding columns:
Upon Occupancy of: Blue Lot Red Lot
------------------ -------- -------
Expansion Premises 2 5
11. Tenant and Landlord represent and warrant to each other that they have dealt
with no brokers in connection with this Third Amendment to Lease other than
Spaulding and Slye Collier's Limited Partnership and agree to defend, with
counsel approved by the other, indemnify and save the other harmless from and
against any and all cost, expense or liability for any compensation, commissions
or charges claimed by a broker or agent, other than Spaulding and Slye Collier's
Limited Partnership in connection with this Third Amendment to Lease.
12. Except as set forth herein, the Lease shall remain unmodified and in full
force and effect.
EXECUTED as a sealed instrument as of the day and year first written above.
LANDLORD
CAMBRIDGEPARK ONE LIMITED PARTNERSHIP,
by its Agent, Spaulding and Slye Services
Limited Partnership
By:/s/ Peter A. Bailey
--------------------------------------------
Name: Peter A. Bailey
Title: Vice President
TENANT
GENSYM CORPORATION
By: /s/ Stephen Gregorio
--------------------------------------------
Name: Stephen Gregorio
Title: C.F.O. & VP of Finance
<PAGE> 1
[GENSYM LOGO] Exhibit 10.12
Personal & Confidential
Decmeber 6, 1996
Mr. Ray Wood
336 East Main Street
Apt. #5
Marlboro, MA 01752
Dear Ray:
In accepting your resignation effective December 31, 1996, Gensym agrees to the
following separation package:
*Nine (9) months severance (based on your current annual base
salary) paid out over a nine month period.
*You will be entitled to any earned 1996 bonus as per your
employment agreement.
*Gensym will provide $5,000 worth of outplacement assistance.
*You will be eligible to continue your health and dental insurance
through COBRA for a period of 18 months.
You agree not to disparage Gensym or any individual associated with the
company. You also agree not to interfere with any Gensym business, employee or
customer. In addition, you agree to be bound by the terms of your employment
agreement and non-disclosure, non-competition agreement.
Ray, if you agree with these terms please acknowledge your acceptance by
signing and returning this letter to me today.
Sincerely,
/s/ Lowell Hawkinson
Lowell Hawkinson
Chairman and CEO
By:/s/Ray Wood Date 12/6/96
------------ ---------------
(Ray Wood)
cc: Stephen Gregorio
Human Resources
Gensym Corporation
125 CambridgePark Drive, Cambridge, MA 02140 U.S.A.
Telephone:(617)547-2500 FAX:(617)547-1962
<PAGE> 2
[GENSYM LOGO]
Date: December 31,1996
To: Ray Wood
From: Lowell Hawkinson
Re: Exercisable Stock Options
Ray, as per our discussion, the Board of Directors has approved extending the
period of exercise of your stock options (40,000 shares) through April
30,1997.
Gensym Corporation
125 CambridgePark Drive, Cambridge, MA 02140 U.S.A.
Telephone:(617)547-2500 FAX(617)547-1962
<PAGE> 3
[GENSYM LOGO]
Intelligent Real-Time Systems
Amendment to Severance Agreement
--------------------------------
This amendment to the severance agreement/interoffice memorandum between
Raymond T. Wood, Jr.("Wood") and Gensym Corporation ("Gensym") dated December
31, 1996 is hereby modified as follows:
1. Whereas the 40,000 Gensym Incentive stock options vested by Wood were
extended by two (2) months for purposes of exercising the options from
February 28, 1997 to April 30, 1997, both parties agree to delete that
specific provision of the severance agreement. The revised date to which
Wood may exercise his stock options is now February 28, 1997.
2. In consideration of the elimination of the additional two-month period,
Gensym agrees to increase Wood's 1996 bonus payment from 10% of base salary
to 15% of base salary pursuant to his 1996 compensation plan. Such bonus
payout will occur in early February, 1997.
3. No other provision of the severance agreement is changed by this amendment.
Both parties agree to the foregoing provisions.
Raymond T. Wood, Jr. Gensym Corporation
/s/ Raymond T. Wood, Jr. /s/ Stephen Gregorio
Stephen Gregorio
Vice President Finance and
Administration and CFO
1/22/97 1/22/97
- -------------- --------------
Date Date
Gensym Corporation
125 CambridgePark Drive, Cambridge, MA 02140 U.S.A.
Telephone: (617) 547-2500 FAX: (617) 547-1926
<PAGE> 1
<TABLE>
GENSYM CORPORATION
EXHIBIT 11 - STATEMENT REGARDING COMPUTATION OF NET INCOME PER SHARE
<CAPTION>
For the year ended
December 31,
1996 1995
---------- ----------
<S> <C> <C>
Weighted average common shares outstanding
during the period 5,909,511 3,993,600
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 376,659 115,185
---------- ----------
Weighted average common and common
equivalent shares 6,286,170 4,804,108
========== ==========
Net income $2,048,222 $ 196,744
========== ==========
Net income per common and
common equivalent share (1) $ 0.33 $ 0.04
========== ==========
<FN>
(1) Net income per common and common equivalent share and weighted average
common and common equivalent shares outstanding have not been presented for
the years ended December 31, 1994, 1993 and 1992 as the information is not
considered to be relevant or meaningful.
</TABLE>
<PAGE> 1
GENSYM CORPORATION
EXHIBIT 21 - SUBSIDIARIES OF THE REGISTRANT
NAME JURISDICTION OF INCORPORATION
- ---- -----------------------------
Gensym International Corporation Delaware
Gensym Securities Corporation Massachusetts
Gensym FSC U.S. Virgin Islands
Gensym B.V. The Netherlands
Gensym Canada Ltd. Canada
Gensym GmbH Germany
Gensym S.A. France
Gensym Ltd. United Kingdom
Gensym Srl. Italy
Gensym MENA Tunisia
<PAGE> 1
GENSYM CORPORATION
EXHIBIT 23 - CONSENT OF ARTHUR ANDERSEN LLP
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Gensym Corporation:
As independent public accountants, we hereby consent to the incorporation by
reference in this Form 10-K of our report dated January 23, 1997 included in the
Registration Statement File No. 33-80727.
/s/ ARTHUR ANDERSEN LLP
-------------------------------
Arthur Andersen LLP
Boston, Massachusetts
March 28, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S.DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-1-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 1
<CASH> 11,678,903
<SECURITIES> 8,653,124
<RECEIVABLES> 10,189,233
<ALLOWANCES> 453,319
<INVENTORY> 0
<CURRENT-ASSETS> 32,658,944
<PP&E> 8,611,849
<DEPRECIATION> 5,970,845
<TOTAL-ASSETS> 36,257,621
<CURRENT-LIABILITIES> 12,189,166
<BONDS> 0
0
0
<COMMON> 61,903
<OTHER-SE> 24,006,552
<TOTAL-LIABILITY-AND-EQUITY> 36,257,621
<SALES> 37,235,535
<TOTAL-REVENUES> 37,235,535
<CGS> 7,385,215
<TOTAL-COSTS> 7,385,215
<OTHER-EXPENSES> 27,115,856
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 3,252,222
<INCOME-TAX> 1,204,000
<INCOME-CONTINUING> 2,048,222
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,048,222
<EPS-PRIMARY> 0.33
<EPS-DILUTED> 0.33
</TABLE>
