<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
X Act of 1934
- ---
For three months ended September 30, 1997
OR
Transition report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
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Commission File Number: 0-27696
GENSYM CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 04-2932756
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
125 CambridgePark Drive
Cambridge, MA 02140
(Address of principal executive offices)
Telephone Number (617) 547-2500
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days:
Yes X No
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As of October 31, 1997 there were 6,346,112 shares of the Registrant's
Common Stock outstanding.
1
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GENSYM CORPORATION
Form 10-Q INDEX
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page No.
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<S> <C> <C>
Item 1. Condensed Consolidated Financial Statements:
Condensed Consolidated Balance Sheets
September 30, 1997 and December 31, 1996 3
Condensed Consolidated Statements of Operations
Three and nine months ended September 30, 1997 and 1996 4
Condensed Consolidated Statements of Cash Flows
Nine months ended September 30, 1997 and 1996 5
Notes to Condensed Consolidated Financial Statements 6-7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8-17
Item 3. Quantitative and Qualitative Disclosures About Market Risk 17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 2. Changes in Securities and Use of Proceeds 18
Item 3. Defaults Upon Senior Securities 19
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 5. Other Information 19
Item 6. Exhibits and Reports on Form 8-K 19
Signatures 20
</TABLE>
2
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Part I. Financial Information
Item 1. Condensed Consolidated Financial Statements
GENSYM CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
(in thousands) September 30, December 31,
1997 1996
------------------- -------------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 10,665 $ 11,679
Short-term investments 5,458 7,911
Accounts receivable, net 8,077 9,736
Prepaid expenses 1,441 1,754
Deferred income taxes 1,579 1,579
------------------- -------------------
Total current assets 27,220 32,659
------------------- -------------------
Property and Equipment, net 2,622 2,641
Long-term investments 1,045 742
Deposits and other assets 279 215
------------------- -------------------
$ 31,166 $ 36,257
=================== ===================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 1,038 $ 1,262
Accrued expenses 5,250 5,109
Deferred revenue 5,452 5,818
------------------- -------------------
Total current liabilities 11,740 12,189
------------------- -------------------
Stockholders' Equity:
Common stock 63 62
Capital in excess of par value 19,574 18,727
Retained earnings 183 5,356
Cumulative translation adjustment (394) (77)
------------------- -------------------
Total stockholders' equity 19,426 24,068
------------------- -------------------
$ 31,166 $ 36,257
=================== ===================
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
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GENSYM CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
(in thousands except per share amounts)
Three months ended Nine months ended
September 30, September 30,
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
REVENUES:
Product $ 3,889 $4,925 $13,158 $15,297
Service 4,202 3,968 12,839 11,538
----------- --------- ------------ -----------
Total revenues 8,091 8,893 25,997 26,835
----------- --------- ------------ -----------
COST OF REVENUES 2,388 1,850 7,128 5,307
----------- --------- ------------ -----------
Gross profit 5,703 7,043 18,869 21,528
----------- --------- ------------ -----------
OPERATING EXPENSES:
Sales and marketing 4,471 4,317 14,219 12,874
Research and development 1,654 1,596 5,423 4,455
General and administrative 1,150 992 3,444 2,645
Restructuring charge (credit) (485) - 1,557 -
----------- --------- ------------ -----------
6,790 6,905 24,643 19,974
----------- --------- ------------ -----------
Operating income (loss) (1,087) 138 (5,774) 1,554
OTHER INCOME, NET 507 173 641 389
----------- --------- ------------ -----------
Income (loss) before provision for (580) 311 (5,133) 1,943
income taxes
PROVISION FOR INCOME TAXES - 115 40 711
----------- --------- ------------ -----------
Net income (loss) $ (580) $ 196 $ (5,173) $ 1,232
=========== ========= ============ ===========
Net income (loss) per share $ (0.09) $ 0.03 $ (0.82) $ 0.20
=========== ========= ============ ===========
Weighted average common and common
equivalent shares outstanding 6,338 6,507 6,287 6,248
=========== ========= ============ ===========
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
4
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GENSYM CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
(in thousands) Nine months ended
September 30,
1997 1996
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (5,173) $ 1,232
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation 887 798
Deferred income taxes - 72
Restructuring charge 1,525 -
Changes in assets and liabilities:
Accounts receivable 1,616 (742)
Prepaid expenses (313) (596)
Accounts payable (196) (3)
Accrued expenses (472) 1,510
Deferred revenue (358) 406
------------- -------------
Net cash provided by (used in) operating activities (2,484) 2,677
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
(Purchases) sales of short-term investments 2,453 (4,424)
Purchases of long-term investments (303) (1,059)
Purchases of property and equipment (1,162) (952)
(Increase) decrease in other assets (77) 32
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Net cash provided by (used in) investing activities 911 (6,403)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock under stock plans 848 589
Proceeds from initial public offering - net - 11,953
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Net cash provided by financing activities 848 12,542
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EFFECT OF EXCHANGE RATE CHANGES ON CASH (289) (48)
------------- -------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (1,014) 8,768
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 11,679 2,126
------------- -------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 10,665 $ 10,894
============= =============
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
5
<PAGE>
GENSYM CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Operations
Gensym Corporation (the "Company") is a leading supplier of software products
and services for developing and deploying intelligent solutions in a broad range
of industrial, scientific, commercial and government markets.
2. Basis of Presentation
The unaudited condensed consolidated financial statements included herein have
been prepared by the Company pursuant to the rules and regulations of the
Securities and Exchange Commission (the "SEC"). Certain information and footnote
disclosures, normally included in financial statements prepared in accordance
with generally accepted accounting principles, have been condensed or omitted
pursuant to such SEC rules and regulations; nevertheless, the management of the
Company believes that the disclosures herein are adequate to make the
information presented not misleading. In the opinion of management, the
condensed consolidated financial statements reflect all adjustments (of a normal
and recurring nature) which are necessary to present fairly the consolidated
financial position of the Company as of September 30, 1997 and the results of
its operations for the three and nine month periods ended September 30, 1997 and
1996 and its cash flows for the nine months then ended. These condensed
consolidated financial statements and notes thereto should be read in
conjunction with the consolidated financial statements and notes thereto
included in the Company's Annual Report on Form 10-K filed with the SEC on March
31, 1997. The results of operations for the interim period are not necessarily
indicative of the results of operations for the full year.
3. Joint Venture
From October 1996 to June 1997, the Company invested and expensed a total of
$800,000 in a joint venture, PDS Technologies LLC ("PDS"), in which it held a
50% interest. In September 1997, the Company sold its interest in PDS for
approximately $900,000. The Company recorded a benefit from the recovery of its
investment in PDS during the three months ended September 30, 1997 (see Note 5).
4. Investments
The Company applies Statement of Financial Accounting Standards ("SFAS") No.
115, Accounting for Certain Investments in Debt and Equity Securities.
Accordingly, the Company's investments are classified as available-for-sale and
are recorded at fair value, which approximates amortized cost at September 30,
1997 and 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 September 30, 1997 and 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 September 30, 1997 and December
31, 1996 consist of municipal bonds with original maturity dates of greater than
one year.
6
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5. Restructuring Charge
In June, 1997, the Company implemented a plan of restructuring intended to lower
operating expenses in subsequent quarters by reducing its workforce by
approximately 15%, closing and consolidating several field sales offices, and
consolidating office space in its corporate headquarters. Accordingly, the
Company recorded a restructuring charge of approximately $2.0 million in the
quarter ended June 30, 1997. This amount included $850,000 for estimated rent
and lease termination costs for consolidating facilities and equipment, $725,000
for severance and other employee termination costs, and $425,000 for the
write-off of certain assets that will provide no future benefit to the Company
as a result of the restructuring plan.
As of September 30, 1997, approximately $1.3 million of restructuring costs have
been incurred and charged against the restructuring liability. The Company
recorded a restructuring credit in the quarter ended September 30, 1997 for the
recovery of its investment in PDS, a portion of which had been included in the
restructuring charge in the previous quarter.
6. Significant Accounting Policies
In March 1997, the Financial Accounting Standards Board issued SFAS No. 128,
Earnings Per Share. SFAS No. 128 establishes standards for computing and
presenting earnings per share and applies to entities with publicly held common
stock or potential common stock. This statement is effective for fiscal years
ending after December 15, 1997, and early adoption is not permitted. When
adopted, the statement will require restatement of prior years' earnings per
share. The Company will adopt this statement for its fiscal year ended December
31, 1997. The Company believes that the adoption of SFAS No. 128 will not have a
material effect on its reported earnings per share.
7. Net Income (Loss) Per Share
For the three and nine months ended September 30, 1996, net income per common
and common equivalent share was computed using the weighted average number of
common and common equivalent shares outstanding during the period in accordance
with the treasury stock method. For the three and nine months ended September
30, 1997, net loss per common and common equivalent share was computed using the
weighted average number of common shares outstanding and excludes shares
issuable from assumed exercise of options, as their effect would be
antidilutive.
7
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
The Company was incorporated in 1986 to provide software products for
developing and deploying intelligent systems for decision support and control.
The Company released the first version of G2, its core product, in May 1988, and
since that time has introduced enhanced versions of G2 and has expanded its
product line to include several G2-based application products as well as several
G2 connectivity products. In addition, the Company derives significant service
revenues from maintenance contracts, consulting services, and training courses
related to its software products.
The Company markets and sells its products through its direct sales
force in the United States, Europe, Africa, and Asia, as well as through
selected distributors in other countries, including Japan. 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 has also licensed OEM customers to include the Company's
software as part of the OEM's complete solution offering. The Company believes
that there is a trend among end-users in its markets to purchase 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 services and integrated solutions to end-users,
and it has also led the Company to increase its own capabilities to deliver
complete solutions in certain markets. In January 1997, the Company established
three strategic business units, Manufacturing, Communications, and Advanced
Systems, to manage domain-specific expertise, products, and services as required
to serve mainstream customers in their respective focus markets. The Company has
also adopted a solutions-oriented approach in its sales, marketing, product
development and service organizations.
This Quarterly Report on Form 10-Q contains forward-looking statements.
For this purpose, any statements contained herein that are not statements of
historical fact may be deemed to be forward-looking statements. Without limiting
the foregoing, the words "believes," "anticipates," "plans," "expects,"
"intends" 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".
8
<PAGE>
Results of Operations
The following table sets forth, as a percentage of total revenues,
consolidated statement of operations data for the periods indicated:
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
1997 1996 1997 1996
--------- --------- --------- --------
<S> <C> <C> <C> <C>
REVENUES:
Product 48.1% 55.4% 50.6% 57.0%
Service 51.9% 44.6% 49.4% 43.0%
--------- --------- --------- --------
Total revenues 100.0% 100.0% 100.0% 100.0%
--------- --------- --------- --------
COST OF REVENUES 29.5% 20.8% 27.4% 19.8%
--------- --------- --------- --------
Gross profit 70.5% 79.2% 72.6% 80.2%
--------- --------- --------- --------
OPERATING EXPENSES:
Sales and marketing 55.3% 48.5% 54.7% 48.0%
Research and development 20.4% 17.9% 20.9% 16.6%
General and administrative 14.2% 11.2% 13.2% 9.9%
Restructuring charge (credit) (6.0%) - 6.0% -
--------- --------- --------- --------
83.9% 77.6% 94.8% 74.4%
--------- --------- --------- --------
Operating income (loss) (13.4%) 1.6% (22.2%) 5.8%
--------- --------- --------- --------
OTHER INCOME, NET 6.2% 1.9% 2.5% 1.4%
--------- --------- --------- --------
Income (loss) before provision for
income taxes (7.2%) 3.5% (19.7%) 7.2%
PROVISION FOR INCOME TAXES - 1.3% 0.2% 2.6%
--------- --------- --------- --------
Net income (loss) (7.2%) 2.2% (19.9%) 4.6%
========= ========= ========= ========
</TABLE>
9
<PAGE>
Three and Nine Months Ended September 30, 1997 and 1996
Revenues
The Company's revenues are derived from two sources: product licenses
and services. Product revenues include revenues from sales of licenses for use
of the Company's software products. Service revenues consist of fees for
maintenance contracts, consulting services, and training courses related to the
Company's products.
Total revenues were $8.1 million for the quarter ended September 30,
1997 as compared to $8.9 million for the same period in 1996, a decrease of
9.0%. The decrease in total revenues was attributable to decreased sales of
product licenses, partially offset by an increase in services. Total revenues
were $26.0 million for the nine month period ended September 30, 1997 as
compared to $26.8 million for the same period in 1996, a decrease of 3.1%. The
decrease in total revenues was attributable to decreased sales of product
licenses largely offset by an increase in services. International revenues
accounted for 38.6% and 40.5% of total revenues in the third quarter of 1997 and
1996, respectively, and 43.9% and 43.8% of total revenues for the first nine
months of 1997 and 1996, respectively.
Product. Product revenues decreased to $3.9 million in the third
quarter of 1997 from $4.9 million in the third quarter of 1996, a decrease of
21.0%. For the nine month period ended September 30, 1997 product revenues
decreased to $13.2 million from $15.3 million in the same period in 1996, a
decrease of 14.0%. The decrease in product revenues reflected lower bookings in
the third quarter and in the nine month period, which the Company believes is
primarily due to the reorganization of the Company's sales force, especially in
the Americas, and a longer sales cycle caused by the Company's shift to selling
complete solutions. In addition, orders from the Company's distributor in Japan
have slowed during the current year. The Company does not have a material amount
of backlog at any given time. The Company anticipates that product revenues will
increase on a successive quarter basis.
Service. Service revenues increased to $4.2 million in the third
quarter of 1997 from $4.0 million in the third quarter of 1996, an increase of
5.9%. For the nine month period ended September 30, 1997 service revenues
increased to $12.8 million from $11.5 million in the same period in 1996, an
increase of 11.3%. The increase in service revenues was primarily due to
increased maintenance fees derived from an increased customer base. The
remaining increase in service revenues was attributable to an increase in
application consulting services, partially offset by a decrease in training
fees.
Cost of Revenues
Cost of revenues primarily consists of consulting labor, technical
support costs and the costs of material and labor involved in producing and
distributing the Company's software. Cost of revenues increased to $2.4 million
in the third quarter of 1997 from $1.9 million in the third quarter of 1996, an
increase of 29.1%. For the nine month period ended September 30, 1997 cost of
revenues increased to $7.1 million from $5.3 million in the same period of 1996,
an increase of 34.3%. The increase was primarily due to an increase in the cost
of service revenues, which consisted primarily of increases in consulting labor
costs. Gross margin on revenues decreased to 70.5% for the third quarter of 1997
from 79.2% for the third quarter of 1996. For the first nine months of 1997,
gross margin on revenues decreased to 72.6% from 80.2% in the same period in
1996. This decrease in gross margin reflected primarily a higher percentage of
lower margin service revenues as a percentage of total revenues, and to a lesser
extent, an increase in consulting personnel, including outside contractors, as
well as an increase in technical support personnel. The Company anticipates that
higher margin product revenues will increase as a percentage of total revenues,
and that overall margins will increase.
10
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Operating Expenses
In June, 1997, the Company implemented a plan of restructuring intended
to lower operating expenses in subsequent quarters by reducing its workforce by
approximately 15%, closing and consolidating several field sales offices, and by
consolidating office space in its corporate headquarters. At September 30, 1997,
the Company had taken actions in all intended areas consistent with the
restructuring plan and had incurred and charged approximately $1.3 million of
costs against the restructuring liability. As a result, the Company reduced
certain operating costs, including payroll and payroll related costs, building
rent, and leased equipment, by approximately $1 million in the three months
ended September 30, 1997 as compared to the three months ended June 30, 1997.
The increases in operating expenses for the comparable nine month periods ended
September 30, 1997 and 1996 occurred primarily in the first six months of those
periods.
Sales and Marketing. Sales and marketing expenses consist primarily of
costs associated with personnel involved in the sales and marketing process,
sales commissions, sales facilities, travel and living, trade shows and
seminars, advertising and promotional materials. These expenses increased to
$4.5 million (55.3% of revenues) in the third quarter of 1997 from $4.3 million
(48.5% of revenues) in the third quarter of 1996, an increase of 3.6%. For the
nine month period ended September 30, 1997, these expenses were $14.2 million
(54.7% of revenues) and $12.9 million (48.0% of revenue) for the same period in
1996, an increase of 10.4%. The increase in absolute dollars was primarily due
to continued investment in the Company's global sales and marketing resources,
including the opening of new sales offices in the United States and in
Asia/Pacific. The increase as a percentage of total revenues was primarily due
to the lower product revenues reported for the periods. While the Company plans
to hire more direct sales personnel in the coming quarters, the Company expects
sales and marketing expenses to decrease as a percentage of total revenues due
to the reduction already taken of certain sales and marketing administrative
personnel, the consolidation of certain sales offices, and other measures taken
as part of the second quarter restructuring plan.
Research and Development. Research and development expenses consist
primarily of costs of personnel, equipment, and facilities. These expenses
increased to $1.7 million (20.4% of revenues) in the third quarter of 1997 from
$1.6 million (17.9% of revenues) in the third quarter of 1996, an increase of
3.6%. For the nine month period ended September 30, 1997, these expenses were
$5.4 million (20.9% of revenues) as compared to $4.5 million (16.6% of revenue)
in the same period in 1996, an increase of 21.7%. The increase in absolute
dollars in the nine month period was primarily due to an increase through the
second half of 1996 and the first half of 1997 in engineering personnel devoted
to enhancements, new features, and quality assurance for the G2 product family,
as well as to the development of new products. The Company achieved several
major commercial releases of the Company's products in the second quarter of
1997. The increase as a percentage of total revenues was primarily due to the
lower product revenues reported for the periods. The Company plans to control
both hiring and overall research and development expenses relative to
anticipated future revenues during the coming quarters and expects that research
and development expenses will decrease as a percentage of total revenues.
11
<PAGE>
General and Administrative. General and administrative expenses consist
primarily of personnel costs for finance, administration, operations, and
general management, as well as legal and accounting expenses. These expenses
increased to $1.2 million (14.2% of revenues) in the third quarter of 1997 from
$1.0 million (11.2% of revenues) in the third quarter of 1996, an increase of
15.9%. For the nine month period ended September 30, 1997, these expenses
increased to $3.4 million (13.2% of revenues) from $2.6 million (9.9% of
revenue) in the same period in 1996, an increase of 30.2%. The increase in
absolute dollars was primarily due to an increase in the accounts receivable
allowance, as well as to amortization of a newly implemented financial
information system and costs related to being a public company, such as proxy
statement preparation and shareholders' meeting expenses. The increase as a
percentage of total revenues was due to the above factors as well as to the
lower product revenues reported for the periods. The Company expects that these
expenses will decline as a percentage of total revenues primarily due to the
reduction already taken in administrative personnel, the control of hiring, the
consolidation of facilities and other actions taken as part of the second
quarter restructuring plan.
Restructuring Charge (Credit). The Company recorded a restructuring
credit in the third quarter of 1997 of $485,000. The restructuring credit
represents the recovery, through the Company's sale of its interest in PDS, of
certain assets that were included in the restructuring charge in the second
quarter of 1997.
Other Income
Other income consists primarily of interest income partially offset by
foreign exchange transaction gains and losses and by Gensym's share of the net
loss in PDS. Other income increased to $641,000 in the first nine months of 1997
from $389,000 in the same period of 1996. The increase was primarily due to the
Company's recovery of its investment in PDS and an increase in interest income,
partially offset by the Company's share of the net loss in PDS recorded in 1997.
The increase in interest income was primarily due to increased balances in cash,
cash equivalents and short and long-term investments, primarily as a result of
proceeds from the Company's initial public offering in February 1996.
Income Taxes
The Company generated a significant tax loss carryforward during the
nine months ended September 30, 1997. Under SFAS No. 109, the Company cannot
recognize a deferred tax asset for the future benefit of its tax loss
carryforward unless it concludes that it is "more likely than not" that such
deferred tax asset would be realized. Accordingly, the Company has established a
valuation allowance against its deferred tax asset to the extent that it cannot
conclusively demonstrate that these assets "more likely than not" will be
realized. In determining the amount of valuation allowance required, the Company
considers numerous factors, including historical profitability, estimated future
taxable income and the volatility of its historical earnings and of the industry
in which it operates.
12
<PAGE>
Liquidity and Capital Resources
The Company currently finances its operations (including capital
expenditures) primarily through cash flow from operations and its current cash
and short-term investments balances. In addition, the Company has $4.5 million
of equipment financed under long-term operating leases. The Company's operating
lease commitments consist primarily of operating leases for the Company's
facilities and computers. The Company used cash in operating activities of $2.5
million during the first nine months of 1997. Cash used in operations in the
first nine months of 1997 was primarily due to the net loss, decreases in
accounts payable, accrued expenses and deferred revenue, partially offset by the
restructuring charge and a decrease in accounts receivable.
At September 30, 1997, the Company had cash, cash equivalents, and
short-term investments of $16.1 million. The Company regularly invests excess
funds in short-term, highly rated money market funds, government securities, and
commercial paper. In addition, the Company had long-term investments of $1.0
million, primarily consisting of municipal bonds with original maturity dates of
greater than one year.
At September 30, 1997, the Company expected that cash requirements to
settle its restructuring obligations would be approximately $700,000. These cash
requirements pertain primarily to severance and lease termination costs and are
expected to be fulfilled within the next nine months. The Company believes that
the settlement of its restructuring obligations will not materially impact
future liquidity.
At September 30, 1997, the Company had available a bank line of credit
to borrow up to $1.0 million at an interest rate of prime. This bank line of
credit will expire on May 31, 1998 and requires the Company to maintain certain
financial covenants. The Company was in compliance with all covenants contained
in the bank line of credit at September 30, 1997 and during the first nine
months of 1997. There were no borrowings under the bank line of credit for the
quarter ended September 30, 1997.
Investing activities provided $911,000 during the first nine months of
1997 and utilized $6.4 million during the first nine months of 1996. During the
first nine months of 1997 the sale of short-term investments provided $2.5
million, which was offset primarily by the purchase of property and equipment
($1.2 million) and the purchase of long-term investments ($300,000). The
principal uses in the first nine months of 1996 were to fund the purchase of
$4.4 million of short-term investments, $1.1 million of long-term investments
and $1.0 million of property and equipment. The Company expects that its
requirements for computers, office facilities, and office equipment will
fluctuate as staffing requirements dictate and that such equipment and
facilities will be available when needed.
The Company believes that the currently available funds and cash
generated from operations will be sufficient to meet the Company's business
requirements at least through September 30, 1998.
13
<PAGE>
Certain Factors That May Affect Future Results
A number of uncertainties exist that could affect 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. 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 markets 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 shifts in market demand could have a material adverse effect on the Company's
business, results of operations, or financial condition.
Variability of Quarterly Operating Results. The Company has experienced,
and may experience in the future, significant quarter-to-quarter fluctuations in
its operating results. The Company has, on occasion, recorded quarterly losses,
and there can be no assurance that revenue growth or profitable operations can
be attained 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.
14
<PAGE>
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 product
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, the shift in customer demand
toward complete solutions, 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, new
products, capabilities, or technologies may be announced 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".
Reliance Upon Indirect Distribution Channels. The Company sells its
products in part through value-added resellers, systems integrators, OEM's and
distributors, who are not under the control of the Company. Sales of the
Company's products by value-added resellers and systems integrators represented
26%, 28% and 36% of the Company's product revenues in 1995, 1996 and the first
nine months of 1997, respectively. Sales of the Company's products by
distributors, primarily the Company's Japanese distributor, accounted for 14%,
14% and 9% of the Company's product revenues in 1995, 1996 and the first nine
months of 1997, respectively. The loss of one or more major third-party
distributors, OEM's 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%, 42% and 44% of total revenues in 1995, 1996, and the
first nine months of 1997, 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
15
<PAGE>
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.
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 or that compete across all of the markets the Company
addresses, 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 they 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.
16
<PAGE>
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 that could cause delays in product introduction
and shipments or require design modifications that could adversely affect the
Company's business, results of operations, or financial condition.
Dependence Upon Proprietary Technology. The Company's success is heavily
dependent upon its proprietary technology. The Company relies upon a combination
of trade secret, contract, copyright, patent, and trademark law to protect its
proprietary rights in its products and technology. The Company enters into
confidentiality and/or license agreements with its employees, third-party
resellers, and end-users and limits access to and distribution of its software,
documentation, and other proprietary information. In addition, the Company has
placed technical inhibitors in its software that prevent such software from
running on unauthorized computers. However, effective patent, copyright, and
trade secret protection may not be available in every country in which the
Company's products are 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 develop similar technology independently. 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.
Dependence on Key Personnel. The Company's success depends in large part upon
certain key employees, including executive officers, the loss of any of whom
could have a material adverse effect on the Company. In particular, the Company
has hired several new executive officers in 1997, resulting in a significant
percentage of key personnel having less than one year of experience with 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,
or that new key personnel will integrate successfully into the senior management
team. 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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not Applicable
17
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities and Use of Proceeds
This Item 2 contains information with respect to the use of proceeds
from the Company's initial public offering of Common Stock (the "Offering").
(1) The effective date of the Company's Registration Statement
on Form S-1 (File No. 33-80727)(the "Registration Statement")
relating to the Offering, for which the following use of
proceeds information is being disclosed, was February 15, 1996.
(2) The date on which the Offering commenced was February 15,
1996.
(3) Not applicable.
(4) (i) The Offering terminated after the sale of all
securities registered pursuant to the Registration Statement.
The closing of the Offering occurred on February 22, 1996.
(ii) The managing underwriters of the Offering were:
Hambrecht & Quist LLC
Montgomery Securities
(iii) The Company registered Common Stock, $.01 par value
per share, pursuant to the Registration Statement
(iv) For the account of the Company, (a) 1,366,788 shares
of Common Stock were registered pursuant to the Registration
Statement, (b) the aggregate Offering price of the amount
registered was $13,667,880, (c) the amount sold pursuant to the
Offering was 1,366,788 shares of Common Stock and (d) the
aggregate Offering price of the amount sold was $13,667,880.
For the accounts of the Selling Stockholders in the
Offering, (a) 933,212 shares of Common Stock were registered
pursuant to the Registration Statement, (b) the aggregate
Offering price of the amount registered was $9,332,120, (c) the
amount sold pursuant to the Offering was 933,212 shares of
Common Stock and (d) the aggregate Offering price of the amount
sold was $933,120.
(v) In connection with the Offering, the Company made
direct or indirect payments to persons other than: directors,
officers, general partners of the Company or their associates;
persons owning ten percent or more of any class of equity
securities of the Company; or affiliates of the Company as
follows:
<TABLE>
<CAPTION>
<S> <C>
Underwriting Discount and Commissions $956,752
Expenses paid to or for Underwriters $16,788
Other Expenses $741,948*
Total Expenses $1,715,488*
</TABLE>
* Estimate
(vi) The net Offering proceeds to the Company after
deducting the Total Expenses described in (v) above were
$11,952,392.
(vii) From the effective date of the Registration
Statement through September 30, 1997, the Company has used the
net Offering proceeds to the Company as follows:
<TABLE>
<S> <C>
Investment in highly-rated money market
funds, government securities and
commercial paper $11,952,392
</TABLE>
All of the above-listed payments were direct or indirect
payments to persons other than; directors, officers, general
partners of the Company or their associates; persons owning ten
percent or more of any class of equity securities of the
Company; or affiliates of the Company.
(viii) Not applicable.
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports of Form 8-K
(a) Exhibit Index
Exhibit 10.1 - Sublease Agreement dated August 26, 1997 between
Gensym Corporation and Spaulding & Slye Services Limited
Partnership
Exhibit 10.2 - Secured Promissory Note dated October 1, 1997 from
Stephen R. Quehl to Gensym Corporation
Exhibit 10.3 - Pledge Agreement dated October 1, 1997 between
Gensym Corporation and
Stephen R. Quehl
Exhibit 11 - Computation of Net Income (Loss) Per Share
Exhibit 27 - Financial Data Schedule
(b) No reports on Form 8-K were filed by Gensym during the quarter
ended September 30, 1997.
18
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GENSYM CORPORATION
(Registrant)
/s/ Lowell B. Hawkinson
-----------------------
Dated: November 12, 1997 Lowell B. Hawkinson
Chief Executive Officer
(Principal Executive Officer)
/s/ Richard M. Darer
-----------------------
Dated: November 12, 1997 Richard M. Darer
Vice President of Finance and
Administration, and Chief Financial
Officer (Principal Financial and
Accounting Officer)
19
<PAGE>
SUBLEASE AGREEMENT
SUBLEASE AGREEMENT made this 26th day of August, 1997 by and between Gensym
Corporation ("Sublessor") and Spaulding and Slye Services Limited Partnership
("Sublessee").
WITNESSETH THAT
WHEREAS, pursuant to a lease dated January 1, 1995 and as amended by the First
Amendment to Lease dated December 2, 1996, the Second Amendment to Lease dated
January 24, 1997 and the Third Amendment to Lease dated January 24, 1997,
between Gensym Corporation and CambridgePark One Limited Partnership, a copy of
which is attached hereto as Exhibit A (the "Main Lease"), CambridgePark One
Limited Partnership ("Landlord") leased 65,545 rentable square feet of office
space at 125 CambridgePark Drive, more officially described in the Main Lease
(the "Main Premises"), to Sublessor, as Tenant, for a term of approximately 6
years; and
WHEREAS, Sublessor has agreed to sublease approximately 18,523 rentable square
feet of the Main Premises, which space is shown cross-hatched on Exhibit B
attached hereto (the "Sublease Premises"), to Sublessee on the terms stated
herein;
NOW, THEREFORE, in consideration of the mutual covenants herein contained and
for other good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, Sublessor and Sublessee hereby agree as follows:
1. Premises. Sublessor hereby leases to Sublessee, and Sublessee hereby leases
---------
from Sublessor, the Sublease Premises. Sublessee shall have, as appurtenant to
the Sublease Premises, rights to use in common with others entitled thereto,
common lobbies, hallways, ramps, stairways and other common areas of the
Building (as defined in the Main Lease), if, any; the common walkways and
driveways necessary for access to the Building; and the HVAC systems and common
utility equipment, pipes, ducts, conduits, wires and appurtenant equipment
serving the Sublease Premises.
2. Term. To have and to hold for a term of 39 months commencing on
-----
October 1, 1997 and terminating on December 31, 2000, unless sooner
terminated as herein provided (the "Term"). Commencing October 1, 1997,
Sublessee shall lease and have access to 13,923 RSF and the balance of
4,600 RSF shall be leased by Sublessee and Sublessee shall have access to
the entire 18,523 RSF as of November 1, 1997.
3. Rent. Sublessee covenants and agrees to pay to Sublessor as rent hereunder
-----
$29,586.38 for the month of October 1997, and commencing on November 1,
1997, equal monthly installments of $39,361.38 (The "Fixed Rent") and shall
be payable in advance on the first day of each month of the Term at such
place as Sublessor shall from time to time designate in writing.
Notwithstanding anything herein to the contrary, Sublessor
<PAGE>
Sublease Agreement
Page 2 of 7
agrees that Sublessee shall be obligated to pay Fixed Rent on 13,923 RSF
commencing October 1, 1997 and 18,523 RSF commencing November 1, 1997 plus
additional rent as set forth herein.
4. Additional Rent. Sublessee covenants and agrees to pay the Sublessor, as
----------------
additional rent, its proportionate share of any increase in Operating
Expenses over $9.50 per rentable square foot as stated in Section 1.1 of
the Lease between Gensym Corporation and CambridgePark One Limited
Partnership dated January 1, 1995. Payment will made on or before the 30th
day following receipt by the Sublessee of notice, in reasonable detail,
that the increase has been paid or must be paid within thirty (30) days
thereafter (Sublessor's Statement). The Sublessee shall be liable for such
additional rent only as it relates to the period covered by this Sublease.
Sublessee shall have no liability for additional rent attributable to
periods prior to the commencement or subsequent to the expiration of the
Term hereunder. Commencing October 1, 1997 and continuing until October 31,
1997 as used herein, Sublessee's "Proportionate Share" shall be the
fraction comprised of 13,923 RSF (representing the square footage of the
Subleased Premises) as the numerator and 65,545 square feet (representing
the total square footage of the Main Premises) as the denominator.
Commencing November 1, 1997 and continuing until the Sublease termination
date as used herein, Sublessee's "Proportionate Share" shall be the
fraction comprised of 18,523 RSF (representing the square footage of the
Subleased Premises) as the numerator and 65,545 square feet (representing
the total square footage of the Main Premises) as the denominator.
5. Electricity. Subessee covenants to pay to Sublessor, as additional rent,
------------
its proportionate share of Annual Estimated Electrical Costs of $.85 per
square foot as stated in Section 1.1 of the Lease between Gensym
Corporation and CambridgePark One Limited Partnership dated January 1,
1995.
6. Additional Sublessee Covenants. Sublessee hereby covenants:
-------------------------------
a. To comply with the terms and provisions of the Main Lease, to the
extent the same are not inconsistent with the terms and provisions of
this Sublease Agreement, and to do nothing which will subject the Main
Lease to termination by Landlord under the provisions of the Main
Lease.
b. To maintain the Sublease Premises in the same conditions as they are
at the commencement of the Term, reasonable wear and tear, damage by
fire and other casualty excepted. In the event that Sublessee
<PAGE>
Sublease Agreement
Page 3 of 7
defaults in its obligations under this paragraph (b), Sublessor may
cure such default, in which event Sublessee shall reimburse Sublessor
for any costs incurred by Sublessor to cure such default.
c. To remove all of Sublessee's goods and effects from the Sublease
Premises at the termination of this Sublease Agreement and to deliver
to Sublessor the Sublease Premises in the same condition as they are
at the commencement of the Term, or as they were put in during the
Term, reasonable wear and tear, damage by fire or other casualty
excepted.
d. To indemnify and hold the Sublessor harmless from and against any
claim arising from Sublessee's use of the Sublease Premises or the
conduct of its business or from any activity, work or thing done,
permitted or suffered by Sublessee on or about the Sublease Premises,
or arising from any breach of Sublessee's obligations hereunder, and
from any claim for injury or damage to any person or property while on
or about the Sublease during the term of this Sublease.
e. Sublessee shall maintain comprehensive general liability insurance
indemnifying Sublessor and Sublessee against any liabilities assumed
by Sublessee hereunder in amounts which shall, at the beginning of the
Term, be not less than those limits set forth in Section 1.1 of the
Main Lease, and from time to time during the Term, in amounts which
are customarily carried in the Boston area on property similar to the
Building and used for similar purposes.
7. Condition of the Premises. By its execution hereof, Sublessee acknowledges
--------------------------
that it accepts the Sublease Premises in an "as is" condition.
8. Fire, Casualty and Eminent Domain. In the event the Sublease Premises, or a
----------------------------------
portion thereof, are rendered substantially unsuitable for their intended
use by fire or other casualty or are taken by eminent domain, a just and
proportionate abatement of rent shall be made to the extent Sublessor is
entitled to an abatement of rent under the Main Lease.
9. Default and Enforcement. It is agreed that the relationship between, and
------------------------
the rights of, Sublessor and Sublessee shall, with respect to enforcement
of the provisions of this Sublease Agreement and termination hereof, be
governed by Article IX of the Main Lease as if they were Landlord and
Tenant respectively.
<PAGE>
Sublease Agreement
Page 4 of 7
10. Estoppel Certificate. Sublessee agrees, from time to time, upon not less
---------------------
than fifteen (15) days' prior written request by Sublessor, to execute,
acknowledge and deliver to Sublessor a statement in writing, addressed to
such party as Sublessor shall designate in its notice to Sublessee,
certifying that this Sublease Agreement is unmodified and in full force and
effect and that Sublessee has no defenses, offsets or counterclaims against
its obligations to pay the fixed rent and additional rent and to perform
its other covenants under this Sublease Agreement (or, if there have been
any modifications that the same is in full force and effect as modified and
stating the modifications and, if there are any defenses, offsets,
counterclaims or defaults, setting them forth in reasonable detail), the
dates to which the fixed rent and additional rent have been paid and a
statement that Sublessor is not in default hereunder (or if in default, the
nature of such default, in reasonable detail).
Any statement delivered pursuant to this Section 10 may be relied upon by
any prospective purchaser or mortgagee of the Sublease Premises.
11. Sublease Subordinate. This Sublease Agreement shall be subject and
---------------------
subordinate to any mortgage now or hereafter placed on the Main Premises,
or any portion or portions thereof or interest therein. This paragraph 11
shall be self-operative and no further instrument of subordination shall be
required.
12. Waiver of Subrogation. Any insurance carried by either party with respect
----------------------
to the Main Premises (or any portion thereof) and property therein or
occurrences thereon shall, if it can be so written without additional
premium, or with an additional premium which the other party agrees to pay,
include a clause or endorsement denying to the insurer rights of
subrogation against the other party to the extent rights have been waived
by the insured prior to occurrence of injury or loss. Each party,
notwithstanding any provisions of this Lease to the contrary, hereby waives
any rights of recovery against the other for injury or loss due to hazards
covered by insurance containing such clause or endorsement to the extent of
the indemnification received thereunder.
13. Assignment and Subletting. Notwithstanding anything contained in the Main
--------------------------
Lease to the contrary, Sublessee shall have the right to Sublease all or
any portion of the Sublease Premises provided (i) Sublessee does not
further
<PAGE>
Sublease Agreement
Page 5 of 7
sublease the Premises during the first twelve (12) months of the term, and
(ii) Sublessee shall provide Sublessor with a written notice of its intent
to sublease.
14. Right to Recapture. Upon said written notice as provided for in Paragraph
-------------------
13, Sublessor shall have the right to recapture the premises by providing
Sublessee with written notice within ten business (10) days of its intent
to recapture the premises.
15. Relationship between Sublessor and Sublessee. The parties hereto agree that
---------------------------------------------
the relationship between Sublessor and Sublessee hereunder shall, except
as otherwise provided herein, be governed by the provisions of the Main
Lease as if they were Landlord and Tenant under the Main Lease.
16. Notices. All notices required or permitted hereunder shall be in writing
--------
and shall be deemed duly served if and when delivered by hand or mailed by
registered, certified or express mail, postage prepaid, return receipt
requested and addressed:
If to Sublessor: Gensym Corporation
Attention: CFO
125 CambridgePark Drive
Cambridge, MA 02140
If to Sublessee: Spaulding and Slye Services Limited
Partnership
Attention: CFO
125 CambridgePark Drive
Cambridge, MA 02140
Any of the persons named in this Section 16 may change the address for
notices by written notice sent to each of the other persons at the
addresses as set forth herein.
17. Severability. If any provision of this Sublease Agreement shall to any
-------------
extent be determined by any court of competent jurisdiction to be invalid
or unenforceable for any reason, the parties agree to amend this Sublease
<PAGE>
Sublease Agreement
Page 6 of 7
Agreement so as to effectuate the original intent of the Sublessor and
Sublessee. There are no oral or written agreements between Sublessor and
Sublessee affecting this Sublease Agreement.
18. Amendment. This Sublease Agreement may not be amended, altered, or
----------
modified except by instrument in writing and executed by Sublessor and
Sublessee.
19. Governing Law. This Sublease Agreement shall be governed by and construed
--------------
in accordance with the laws of the State of Massachusetts.
20. Bind and Inure. This Sublease Agreement shall be binding upon and inure
---------------
to the benefit of the parties hereto and their respective successors and
assigns.
Notwithstanding anything herein to the contrary, no partner, general or
limited, of Sublessee shall be personally liable for the observance or
performance of Sublessee's obligations hereunder, all such liability being
limited to the assets of Sublessee.
21. Sublessee hereby indemnifies Sublessor from any obligations Sublessor may
have to reimburse the Landlord for legal fees in connection with the
Landlord's consent of this Sublease.
<PAGE>
Sublease Agreement
Page 7 of 7
EXECUTED under seal this 29th day of August, 1997.
Sublessor: Gensym Corporation
/s/ Richard M. Darer
------------------------------
Richard M. Darer,
Vice President of Finance
and Administration and CFO
------------------------------
(Please print name and title)
EXECUTED under seal this 26th day of August, 1997.
Sublessee: Spaulding and Slye Services Limited
Partnership
/s/ Peter A. Bailey
------------------------------
Peter A. Bailey,
Vice President
------------------------------
(Please print name and title)
<PAGE>
Exhibit B
18,523 rsf
cross-hatched for exhibit purposes only.
0 16 32ft
| | | |
- -----------------
THIRD FLOOR
[Drawing of Floor Plan appears here]
[Logo of Spaulding&Slye appears here] [Logo of Cambridge Park appears here]
<PAGE>
EXHIBIT 10.2
SECURED PROMISSORY NOTE
-----------------------
October 1, 1997
$100,000 Cambridge, Massachusetts
FOR VALUE RECEIVED, Stephen R. Quehl (the "Maker"), promises to pay to
Gensym Corporation ("Gensym"), or order, at the offices of Gensym or at such
other place as the holder of this Note may designate, the principal sum of
$100,000, together with interest on the unpaid principal balance of this Note
from time to time outstanding at the rate of 8.5% per year (the prime rate of
lending of BankBoston, N.A., in effect on the date hereof).
Principal and interest shall be due and payable on October 1, 2000,
provided, however, that in the event the Maker has continuously been employed by
Gensym from the date hereof until October 1, 2000, all principal and interest
due and payable under this Note shall be forgiven by Gensym on October 1, 2000,
and further provided, however, that in the event the Maker's employment with
Gensym is involuntarily terminated by Gensym for any reason other than gross
misconduct or negligence prior to October 1, 2000, then Gensym shall forgive
such portion of the principal and interest due and payable under this Note as is
equal to such principal and interest multiplied by a fraction, the numerator of
which will equal the number of full months during which the Maker was employed
by Gensym and the denominator of which will be 36.
Notwithstanding the foregoing, all principal and interest due and payable
under this Note shall be forgiven by Gensym in the event that, prior to October
1, 2000, (i) there is an Acquisition (as defined below) of Gensym in which the
consideration per share received by holders of Gensym Common Stock in the
Acquisition is less than $5.8735, (ii) at the time of the Acquisition, the Maker
has been continuously employed by Gensym from the date hereof and (iii) after
the Acquisition, the Maker is not retained by or offered a position with the
surviving or acquiring entity (the "Acquiror"), with responsibilities and
compensation at least equivalent to his responsibilities and compensation with
Gensym on the day before the execution of the definitive agreement with respect
to the Acquisition.
For the purposes of this Note, "Acquisition" shall mean any merger or
consolidation which results in the voting securities of Gensym outstanding
immediately prior thereto representing immediately thereafter (either by
remaining outstanding or by being converted into voting securities of the
Acquiror) less than a majority of the combined voting power of the voting
securities of the Acquiror outstanding immediately after such merger or
consolidation.
Interest on this Note shall be computed on the basis of a year of 365 days
for the actual number of days elapsed. All payments by the Maker under this
Note shall be in immediately available funds.
Payment of this Note is secured by a security interest in certain property
of the
<PAGE>
Maker (the "Collateral") pursuant to a pledge agreement of even date herewith
between the Maker and Gensym (the "Pledge Agreement").
This Note shall become immediately due and payable without notice or demand
upon the occurrence at any time of any of the following events of default
(individually, "an Event of Default" and collectively, "Events of Default"):
(1) default in the payment or performance of this or any other liability or
obligation of the Maker to the holder, including the payment when due
of any principal, premium or interest under this Note;
(2) death, incapacity or insolvency of the Maker;
(3) the termination of the Maker's employment with Gensym (subject to the
reduction in principal and interest due and payable under this Note
provided for in the second paragraph of this Note);
(4) the occurrence of any event of default under the Pledge Agreement;
(5) the institution by or against the Maker or any indorser or guarantor of
this Note of any proceedings under the United States Bankruptcy Code or
any other federal or state bankruptcy, reorganization, receivership,
insolvency or other similar law affecting the rights of creditors
generally or the making by the Maker or any indorser or guarantor of
this Note of a composition or an assignment or trust mortgage for the
benefit of creditors; or
(6) determination by the holder that it is insecure with respect to the
payment of any obligation of the Maker to the holder.
Upon the occurrence of an Event of Default, the holder shall have then, or
at any time thereafter, all of the rights and remedies afforded by the Uniform
Commercial Code as from time to time in effect in the Commonwealth of
Massachusetts or afforded by other applicable law.
Every amount overdue under this Note shall bear interest from and after the
date on which such amount first became overdue at an annual rate which is two
(2) percentage points above the rate per year specified in the first paragraph
of this Note (the "Default Rate"). Such interest on overdue amounts under this
Note shall be payable on demand and shall accrue and be compounded monthly until
the obligation of the Maker with respect to the payment of such interest has
been discharged (whether before or after judgment).
In no event shall any interest charged, collected or reserved under this
Note exceed the maximum rate then permitted by applicable law and if any such
payment
2
<PAGE>
is paid by the Maker, then such excess sum shall be credited by the holder as a
payment of principal.
All payments by the Maker under this Note shall be made without set-off or
counterclaim and be free and clear and without any deduction or withholding for
any taxes or fees of any nature whatever, unless the obligation to make such
deduction or withholding is imposed by law. The Maker shall pay and save the
holder harmless from all liabilities with respect to or resulting from any delay
or omission to make any such deduction or withholding required by law.
Whenever any amount is paid under this Note, all or part of the amount paid
may be applied to principal, premium or interest in such order and manner as
shall be determined by the holder in its discretion.
No reference in this Note to the Pledge Agreement or any guaranty shall
impair the obligation of the Maker, which is absolute and unconditional, to pay
all amounts under this Note strictly in accordance with the terms of this Note.
The Maker agrees to pay on demand all costs of collection, including
reasonable attorneys' fees, incurred by the holder in enforcing the obligations
of the Maker under this Note.
No delay or omission on the part of the holder in exercising any right
under this Note or the Pledge Agreement shall operate as a waiver of such right
or of any other right of such holder, nor shall any delay, omission or waiver on
any one occasion be deemed a bar to or waiver of the same or any other right on
any future occasion. The Maker and every indorser or guarantor of this Note
regardless of the time, order or place of signing waives presentment, demand,
protest and notices of every kind and assents to any extension or postponement
of the time of payment or any other indulgence, to any substitution, exchange or
release of collateral, and to the addition or release of any other party or
person primarily or secondarily liable.
This Note may be prepaid in whole or in part at any time or from time to
time upon five (5) days' prior written notice with the consent of the holder,
with the giving of such consent to be in the sole discretion of the holder. Any
such prepayment shall be without premium or penalty.
None of the terms or provisions of this Note may be excluded, modified or
amended except by a written instrument duly executed on behalf of the holder
expressly referring to this Note and setting forth the provision so excluded,
modified or amended.
3
<PAGE>
All rights and obligations hereunder shall be governed by the laws of the
Commonwealth of Massachusetts and this Note is executed as an instrument under
seal.
/s/ Stephen R. Quehl
__________________________
Stephen R. Quehl
Witness:
___________________________
Name:_____________________
4
<PAGE>
EXHIBIT 10.3
PLEDGE AGREEMENT
This Pledge Agreement is made, as of the 1st day of October, 1997, by and
among Stephen R. Quehl, an individual residing at 3 Wingate Lane, Acton, MA
01720 (the "Pledgor"), and Gensym Corporation, a Delaware corporation having a
place of business at 125 CambridgePark Drive, Cambridge, MA 02140 (the
"Pledgee").
WITNESSETH:
WHEREAS, Pledgor has executed and delivered a secured promissory note (the
"Note") of even date herewith in the original principal amount of $100,000
payable to the Pledgee; and
WHEREAS, the Pledgor is the owner of the shares of common stock of the
Pledgee, as set forth on Exhibit A; and
---------
WHEREAS, as collateral security for the obligations of the Pledgor under
the Note, the Pledgor has agreed to pledge and grant to the Pledgee a first
priority security interest in the shares set forth on Exhibit A (the "Pledged
---------
Shares"), as more fully set forth herein;
NOW THEREFORE, the parties hereto agree and acknowledge that the foregoing
recitals are true and correct and to the following:
1. Pledge of Collateral. As collateral security for the performance of
--------------------
the obligations of the Pledgor under the Note (the "Obligations"), the Pledgor
hereby pledges and grants to the Pledgee a security interest in and to all of
the Pledged Shares held by the Pledgor, as identified in Exhibit A annexed
---------
hereto, along with any and all stock rights, powers and other distributions,
dividends or proceeds thereof (the "Shares"). In addition, any stock rights,
dividends, powers or other distributions or proceeds received by the Pledgor
shall be held in trust for and delivered to the Pledgee to be held in accordance
with the terms of this Agreement, and shall be included in the Shares described
above.
2. Delivery of the Shares. The Shares have been delivered to the Pledgee
----------------------
on the date hereof, together with undated stock powers executed in blank. Upon
payment in full of the Note, or such lesser portion of the Note as is owed, the
Pledgee shall return to the Pledgor the Shares, undated stock powers as well as
such other instruments, documents, stock certificates, money and goods as may
come into Pledgee's possession from time to time, whether through delivery by
Pledgor or otherwise.
3. Pledgee's Rights and Duties with Respect to the Collateral. Pledgee's
----------------------------------------------------------
only duty with respect to the Shares shall be to exercise reasonable care to
secure the safe
<PAGE>
custody thereof all other duties being hereby expressly disclaimed. Pledgee
shall have the right, but not the obligation, to (a) demand, sue for, receive
and collect all money or money damages payable on account of any Shares, (b)
protect, preserve or assert any other rights of Pledgor or take any other action
with respect to the Shares, and (c) pay any taxes, liens, assessments, insurance
premiums or other charges pertaining to Shares. Any expenses incurred by Pledgee
under the preceding sentence shall be paid by Pledgor upon demand, become part
of the Obligations secured by the Shares and bear interest at the per annum rate
equal to the Default Rate set forth in the Note until paid. Pledgee shall be
relieved of all responsibility for the Shares upon surrendering them to Pledgor.
4. Pledgor's Warranties and Indemnity.
----------------------------------
4.1 Pledgor represents, warrants and covenants (a) that Pledgor is
the lawful owner of the Shares, (b) that the Shares are fully paid and
nonassessable, (c) that as of the date hereof, the Shares are free and clear of
all liens, encumbrances, and security interests, other than the security
interest granted by the Pledgor hereunder, and this pledge constitutes a valid
and perfected security interest in the Shares enforceable against the Pledgor,
(d) that the Shares are not subject to any outstanding rights of redemption or
options to purchase or sell, (e) that the Pledgor has the sole right and lawful
authority to pledge the Shares and otherwise to comply with the provisions
hereof, (f) no litigation is pending or threatened against the Pledgor, which if
adversely determined, would have a material adverse effect against the Pledgor
or the Pledgee's rights in respect of the Shares, (g) that the Pledgor agrees to
defend the Pledgee's title in the Shares and the security interest therein
against any and all claims and demands, and (h) this Pledge Agreement
constitutes the legal, valid and binding obligation of the Pledgor, enforceable
against the Pledgor in accordance with its terms.
4.2 If any adverse claim is asserted in respect of the Shares or any
portion thereof, except as such may arise from the wanton or reckless acts of
the Pledgee, the Pledgor agrees to indemnify the Pledgee and hold the Pledgee
harmless from and against any reasonable liabilities or damages, and reasonable
attorney's fees incurred by the Pledgee in exercising any right, power or remedy
of the Pledgee hereunder. Any such loss, liability or expense so incurred shall
be paid by the Pledgor upon demand, become part of the Obligations secured by
the Shares and bear interest at the per annum rate equal to the Default Rate (as
defined in the Note).
5. Voting of Collateral. While Pledgor is not in default hereunder,
--------------------
Pledgor may vote the Shares, provided that said voting shall be in conformity
with the Pledgor's performance under this Agreement and the Note.
6. Dividends and Other Distributions. While Pledgor is not in default
---------------------------------
hereunder, Pledgor may receive all cash dividends, payments of principal and
interest, and other distributions payable with respect to Shares, provided,
--------
however, that Pledgor
- -------
-2-
<PAGE>
shall immediately inform Pledgee of the receipt of any such dividend, payment or
other distribution and shall hold the amount thereof in trust for Pledgee unless
and until Pledgee shall in writing release Pledgor from such trust. Pledgor
shall cause all non-cash dividends and distributions with respect to Shares to
be distributed directly to Pledgee, to be held by Pledgee as additional Shares,
and if any such distribution is made to Pledgor he shall receive such
distribution in trust for Pledgee and shall immediately transfer it to Pledgee.
7. Pledgor's Default. Pledgor shall be in default hereunder upon the
-----------------
occurrence of any of the following events:
7.1 Demand shall have been made or any event of default shall occur
under the Note;
7.2 If any lien, encumbrance or adverse claim of any nature
whatsoever is asserted with respect to any Shares;
7.3 If any representation or warranty of Pledgor hereunder is or
shall become false; or
7.4 If Pledgor fails to fulfill any obligation hereunder.
8. Pledgee's Rights upon Default. Upon the occurrence of any default as
-----------------------------
defined in Section 7 hereof, Pledgee may, if Pledgee so elects in its sole
discretion, take any one or more of the following:
8.1 At any time and from time to time sell, assign and deliver all or
any part of the Shares, or any interest therein, at any public or private sale,
for cash, on credit or for other property, for immediate or future delivery
without any assumption of credit risk, and for such price or prices and on such
terms as Pledgee in its absolute discretion may determine; provided that (i) at
--------
least ten (10) days' notice of the time and place of any such sale shall be
given to Pledgor, and (ii) in the case of any private sale, such notice shall
also contain the terms of the proposed sale and Pledgee shall sell the Shares
proposed to be sold to any purchaser procured by Pledgor who is ready, willing
and able to purchase, and who prior to the time of such sale tenders the
purchase price of, such Shares on terms more favorable to Pledgee than the terms
contained in such notice; provided, further, the Pledgor acknowledges that the
-------- -------
Pledgee may be unable to effect a public sale of all or part of the Shares by
reason of certain prohibitions contained in the Securities Act of 1933, as
amended, and may be compelled to resort to one or more private sales to a
restricted group of purchasers who will be obligated to agree, among other
things, to acquire such securities for their own account, for investment, and
not with a view to the distribution or resale thereof. The Pledgor acknowledges
that any such private sale may be at prices and on terms less favorable to the
seller than if sold at public sales and that private sales shall be deemed to be
made in a commercially
-3-
<PAGE>
reasonable manner notwithstanding that such a private sale may result in a lower
sale price.
8.2 Exercise the right to vote, the right to receive cash dividends
and other distributions, and all other rights with respect to the Shares as
though Pledgee were the absolute owner thereof, whether or not such rights were
retained by Pledgor as against Pledgee before default; and
8.3 Exercise all other rights available to a secured party under the
Uniform Commercial Code and other applicable law.
8.4 The rights and remedies available pursuant to this Agreement are
cumulative, and not exclusive of any other rights or remedies otherwise
available to the Pledgee.
9. Application of Sale Proceeds. In the event of a sale of Shares, the
----------------------------
proceeds shall first be applied to the payment of the expenses of the sale,
including brokers' commissions, counsel fees, any taxes or other charges imposed
by law upon the Shares or the transfer thereof and all other charges paid or
incurred by Pledgee pertaining to the sale; and, second, to satisfy outstanding
Obligations, in the order in which Pledgee elects in its sole discretion; and,
third, the surplus (if any) shall be paid to Pledgor.
10. Notices. All notices made or required to be made hereunder shall be
-------
sent by United States first class or certified or registered mail, with postage
prepaid, or delivered by hand to Pledgee or to Pledgor at the addresses first
above written. Notice by mail shall be deemed to have been made on the date
when the notice is deposited in the mail.
11. Heirs, Successors, Etc. This Agreement and all of its terms and
----------------------
provisions shall benefit and bind the heirs, successors, assigns, transferees,
executors and administrators of each of the parties hereto.
12. Pledgee's Forbearance. Any forbearance, failure or delay by Pledgee
---------------------
in exercising any right, power or remedy hereunder shall not be deemed a waiver
of such right, power or remedy. Any single or partial exercise of any right,
power or remedy of Pledgee shall continue in full force and effect until such
right, power or remedy is specifically waived in writing by Pledgee.
13. Further Assurances. The Pledgor covenants and agrees to execute and
------------------
deliver, or cause to be executed or delivered, all such other stock powers,
proxies, instruments, and documents, and will take such other action or actions
as the Pledgee may reasonably request from time to time in order to carry out
the provisions and purposes hereof.
-4-
<PAGE>
14. Termination. This Agreement and the pledge and security interest
-----------
represented hereby shall terminate upon the indefeasible payment in full of the
Obligations.
15. Miscellaneous.
-------------
(a) This Agreement or any part thereof cannot be changed, waived, or
amended except by an instrument in writing signed by Pledgee; and waiver on one
occasion shall not operate as a waiver on any other occasion.
(b) The Uniform Commercial Code and other laws of the Commonwealth of
Massachusetts shall govern the construction and enforcement of this Agreement.
(c) If any part of this Agreement or any agreement, document, or
instrument executed in connection herewith shall be deemed invalid or
unenforceable by a court of competent jurisdiction, the remaining provisions
shall remain in full force and effect, and shall continue to be binding upon the
parties.
(d) This Agreement may be executed in one or more counterparts, each
of which shall constitute an original, but all of which, when taken together,
shall constitute one and the same instrument.
16. Jurisdiction. The Pledgor irrevocably submits to the jurisdiction of
------------
the courts of the Commonwealth of Massachusetts and the United States District
Court for the District of Massachusetts for the purpose of any suit, action or
other proceeding brought by the Lender arising out of or relating to this
Agreement, and the Pledgor waives and agrees not to assert by way of motion, as
a defense or otherwise in any such suit, action or proceeding, any claim that
the Pledgor is not personally subject to the jurisdiction of the courts of the
Commonwealth of Massachusetts or the United States District Court for the
District of Massachusetts or that the Pledgor's property is exempt or immune
from execution or attachment, either prior to judgment or in aid of execution,
that the suit, action or proceeding is brought in an inconvenient forum or that
the venue of the suit, action or proceeding is improper, or that this Pledge
Agreement or the subject matter hereof may not be enforced in or by such court.
-5-
<PAGE>
THE PLEDGOR HEREBY WAIVES ANY AND ALL RIGHTS TO A TRIAL BY JURY IN ANY
ACTION OR PROCEEDING IN CONNECTION WITH ALL MATTERS CONTEMPLATED HEREBY AND
DOCUMENTS EXECUTED IN CONNECTION HEREWITH.
EXECUTED under seal as of the date first above written.
PLEDGOR:
/s/ Stephen R. Quehl
__________________________________________
Stephen R. Quehl
PLEDGEE:
GENSYM CORPORATION
By: /s/ Lowell B. Hawkinson
________________________________________
Its: Chairman and Chief Executive Officer
________________________________________
-6-
<PAGE>
Exhibit 10.3
EXHIBIT A
TO
PLEDGE AGREEMENT
DATED OCTOBER 1, 1997
<TABLE>
<CAPTION>
Description Certificate No. No. of Shares
- ----------- --------------- -------------
<S> <C> <C>
Gensym Corporation 17,000
Common Stock
</TABLE>
-7-
<PAGE>
GENSYM CORPORATION
EXHIBIT 11 - STATEMENT REGARDING COMPUTATION OF NET INCOME (LOSS) PER SHARE
<TABLE>
(in thousands except per share amounts) Three months ended Nine months ended
September 30, September 30,
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Weighted average common shares outstanding
during the period 6,338 6,114 6,287 5,824
Shares issuable from assumed exercise of options,
computed in accordance with the treasury
stock method - 393 - 424
----------- ----------- ----------- -----------
Weighted average common and common
equivalent shares 6,338 6,507 6,287 6,248
=========== =========== =========== ===========
Net income (loss) $ (580) $ 196 $ (5,173) $ 1,232
=========== =========== =========== ===========
Net income (loss) per share $ (0.09) $ 0.03 $ (0.82) $ 0.20
=========== =========== =========== ===========
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 10,665
<SECURITIES> 5,458
<RECEIVABLES> 8,421
<ALLOWANCES> 344
<INVENTORY> 0
<CURRENT-ASSETS> 27,220
<PP&E> 9,457
<DEPRECIATION> (6,835)
<TOTAL-ASSETS> 31,166
<CURRENT-LIABILITIES> 11,740
<BONDS> 0
0
0
<COMMON> 63
<OTHER-SE> 19,363
<TOTAL-LIABILITY-AND-EQUITY> 31,166
<SALES> 25,997
<TOTAL-REVENUES> 25,997
<CGS> 7,128
<TOTAL-COSTS> 7,128
<OTHER-EXPENSES> 24,643
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (5,133)
<INCOME-TAX> 40
<INCOME-CONTINUING> (5,173)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,173)
<EPS-PRIMARY> (.82)
<EPS-DILUTED> (.82)
</TABLE>
