<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
X Quarterly report pursuant to Section 13 or 15(d) of the Securities
---
Exchange Act of 1934
For three months ended September 30, 1999
OR
___ Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission File Number: 0-27696
GENSYM CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 04-2932756
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
125 CambridgePark Drive
Cambridge, MA 02140
(Address of principal executive offices)
Telephone Number (617) 547-2500
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days:
Yes X No ___
---
As of October 27, 1999 there were 6,163,187 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.
--------
<S> <C> <C>
Item 1. Condensed Consolidated Financial Statements:
Condensed Consolidated Balance Sheets
September 30, 1999 and December 31, 1998 3
Condensed Consolidated Statements of Operations for the
three and nine months ended September 30, 1999 and 1998 4
Condensed Consolidated Statements of Cash Flows for the
nine months ended September 30, 1999 and 1998 5
Notes to Condensed Consolidated Financial Statements 6-8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9-19
Item 3. Quantitative and Qualitative Disclosures About Market Risk 19
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 20
Item 2. Changes in Securities 20
Item 3. Defaults Upon Senior Securities 20
Item 4. Submission of Matters to a Vote of Security Holders 20
Item 5. Other Information 20
Item 6. Exhibits and Reports on Form 8-K 20
Signatures 21
</TABLE>
2
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Part I. Financial Information
Item 1. Condensed Consolidated Financial Statements
GENSYM CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(Unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
(in thousands) 1999 1998
--------------- -------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 6,497 $13,696
Short-term investments 5,957 838
Accounts receivable, net 8,725 7,578
Prepaid expenses 1,964 1,775
Deferred income taxes 1,548 1,548
--------------- -------------
Total current assets 24,691 25,435
Property and Equipment, net 1,453 1,982
Long-term deferred income taxes 612 612
Deposits and other assets 235 239
--------------- -------------
$26,991 $28,268
=============== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 456 $ 517
Accrued expenses 4,034 3,862
Deferred revenue 6,306 6,406
--------------- -------------
Total current liabilities 10,796 10,785
Stockholders' Equity:
Common stock 67 65
Capital in excess of par value 20,708 20,427
Treasury stock (1,869) (1,279)
Retained earnings (1,633) (1,101)
Cumulative translation adjustment (1,078) (629)
--------------- -------------
Total stockholder's equity 16,195 17,483
--------------- -------------
$26,991 $28,268
=============== =============
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
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GENSYM CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
REVENUES: 1999 1998 1999 1998
---------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Product $ 5,205 $ 4,258 $ 14,602 $ 13,402
Service 3,980 4,489 12,680 13,453
---------- ---------- ---------- -----------
Total revenues 9,185 8,747 27,282 26,855
COST OF REVENUES 2,113 2,193 6,438 6,568
---------- ---------- ---------- -----------
Gross profit 7,072 6,554 20,844 20,287
---------- ---------- ---------- -----------
OPERATING EXPENSES:
Sales and marketing 4,421 4,563 13,428 13,512
Research and development 1,631 1,516 4,956 4,506
General and administrative 926 934 3,207 3,011
---------- ---------- ---------- -----------
6,978 7,013 21,591 21,029
---------- ---------- ---------- -----------
Operating income (loss) 94 (459) (747) (742)
OTHER INCOME, NET 114 179 342 512
---------- ---------- ---------- -----------
Income (loss) before provision
for income taxes 208 (280) (405) (230)
PROVISION FOR INCOME TAXES 45 0 127 50
---------- ---------- ---------- -----------
Net income (loss) $ 163 $ (280) $ (532) $ (280)
========== ========== ========== ===========
Basic and diluted earnings
(loss) per share $ 0.03 $ (0.04) $ (0.09) $ (0.04)
========== ========== ========== ===========
Weighted average common shares
outstanding - Basic 6,146 6,377 6,132 6,413
========== ========== ========== ===========
Weighted average common shares
outstanding - Diluted 6,153 6,377 6,132 6,413
========== ========== ========== ===========
</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)
(in thousands)
<TABLE>
<CAPTION>
Nine months ended
September 30,
1999 1998
-------------- ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (533) $ (280)
Adjustments to reconcile net loss to net
cash (used in) provided by operating activities:
Depreciation and amortization 856 926
Restructuring liability - (144)
Changes in assets and liabilities:
Accounts receivable (1,211) 348
Prepaid expenses (277) (54)
Accounts payable (49) 21
Accrued expenses 261 (592)
Deferred revenue (99) 426
-------------- ------------
Net cash (used in) provided by operating activities (1,052) 651
-------------- ------------
CASH FLOW FROM INVESTING ACTIVITIES:
(Purchases) sales of short-term investments (5,119) 1,616
Sales of long-term investments - 1,041
Purchases of property and equipment (327) (767)
Decrease in other assets 6 84
-------------- ------------
Net cash (used in) provided by investing activities (5,440) 1,974
-------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Purchase of treasury stock (591) (731)
Proceeds from exercise of stock options under stock plans 283 248
-------------- ------------
Net cash used in financing activities (308) (483)
-------------- ------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (399) (5)
-------------- ------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (7,199) 2,137
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 13,696 10,958
-------------- ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 6,497 $ 13,095
============== ============
</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 intelligent operations management in a broad range of
industries, including manufacturing, telecommunications, government, aerospace,
transportation, and financial services.
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, 1999 and the results of
its operations for the three- and nine-month periods ended September 30, 1999
and 1998 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
26, 1999. The results of operations for the interim period are not necessarily
indicative of the results of operations for the full year.
3. Cash Equivalents and 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,
1999. 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, 1999 consist of commercial paper and U.S. government agency
securities with original maturity dates greater than three months that mature
within one year.
4. Recently Issued Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board released Statement
of Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities ("SFAS No. 133"). SFAS No. 133 establishes the accounting
and reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, (collectively referred to as
derivatives) and for hedging activities. It requires that an entity recognize
all derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. SFAS No. 133 is effective
for fiscal quarters beginning after June 15, 2000. The Company does not expect
the adoption of SFAS No. 133 to have a material impact to its financial
position.
5. Comprehensive Income
The Company applies Statement of Financial Accounting Standards No. 130,
Reporting Comprehensive Income ("SFAS No. 130"), which requires that items
defined as other comprehensive income, such as foreign currency translation
adjustments, be separately classified in the financial statements and that the
accumulated balance of other comprehensive income be reported separately from
retained earnings and additional paid-in capital in the equity section of the
balance sheet. The
6
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components of comprehensive income for the three and nine months ended September
30, 1999 and 1998 are as follows (in thousands):
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
1999 1998 1999 1998
-------- -------- ------- --------
<S> <C> <C> <C> <C>
Comprehensive income (loss):
Net income (loss) $ 163 $ (280) $ (532) $ (280)
Other comprehensive loss
Foreign currency adjustment (99) 77 (499) (32)
-------- -------- ------- --------
Comprehensive income (loss): $ 64 $ (203) $ (981) $ (312)
======== ======== ======= ========
</TABLE>
6. Earnings Per Share
In accordance with SFAS No. 128, Earnings per Share, basic net earnings
or loss per share was computed by dividing net earnings or loss by the weighted
average number of common shares outstanding during the three and nine months
period ended September 30, 1999 and 1998. Diluted income per share was computed
using the weighted average number of common and potential common shares
outstanding in accordance with the treasury stock method. For the three months
ended September 30, 1999, 7,205 potential common shares from stock options were
included in the computation of diluted net earnings per share. For the nine-
month period ended September 30, 1999, and for the three- and nine-month period
ended September 30, 1998, 758,561 and 938,586 stock options respectively, were
not included in diluted weighted average shares outstanding, as the effect would
have been antidilutive.
7. Stockholders' Equity
In the third quarter of 1998, the Company began a program to repurchase
up to 650,000 shares of its Common Stock on the open market. Under this program,
an aggregate of 501,300 shares were repurchased at a cost of $1,869,000. No
shares were repurchased under this program for the period beginning April 1,
1999 through September 30, 1999.
8. Segment Reporting
On December 31, 1998, the Company adopted SFAS No. 131, Disclosure about
Segments of an Enterprise and Related Information. This pronouncement
established standards for public companies relating to the reporting of
financial and descriptive information about their operating segments in
financial statements. Operating segments are defined as components of an
enterprise about which separate financial information is available that is
evaluated regularly by management in deciding how to allocate resources and in
assessing performance of the business.
The Company is organized into four business units: Manufacturing,
Communications, Advanced Systems, and EMA (Europe/Middle East/Africa). These
business units generally have their own specialized sales, business development,
consulting, and product development resources to provide the level of
application and industry specific knowledge needed to achieve sustained growth
and profitability in their respective markets.
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 value-added resellers and systems integrators, who provide
consulting services and integrated solutions to their customers. The Company
further
7
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licenses technology to original equipment manufacturers, or OEMs, who embed the
technology within their product offerings.
The Company evaluates performance of its segments based on revenues and
segment profitability. Segment profitability is defined by the Company as net
contribution, which is computed based on gross profit less identifiable
operating costs--principally sales, marketing, and direct research and
development costs. Identifiable assets consist primarily of accounts receivable,
prepaid expenses, property and equipment, and deposits. Information as to the
operations of the different segments is set forth below:
(in thousands)
<TABLE>
<CAPTION>
Europe
Manu- Communi- Advanced Middle-East
facturing cations Systems & Africa Total
------------- ----------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Three months ended
September 30, 1999
Revenues $ 2,473 $ 2,855 $ 1,426 $ 2,431 $ 9,185
============= =========== =========== =========== =============
Net contribution $ 873 $ 723 $ 479 $ 532 $ 2,607
============= =========== =========== =========== =============
Identifiable assets $ 3,122 $ 3,589 $ 1,837 $ 3,827 $ 12,375
============= =========== =========== =========== =============
Three months ended
September 30, 1998
Revenues $ 2,696 $ 2,235 $ 1,447 $ 2,369 $ 8,747
============= =========== =========== =========== =============
Net contribution $ 768 $ 777 $ 490 $ 305 $ 2,340
============= =========== =========== =========== =============
Identifiable assets $ 3,699 $ 2,900 $ 1,850 $ 3,531 $ 11,980
============= =========== =========== =========== =============
</TABLE>
<TABLE>
<CAPTION>
Europe
Manu- Communi- Advanced Middle-East
facturing cations Systems & Africa Total
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Nine months ended
September 30, 1998
Revenues $ 7,199 $ 8,240 $ 4,000 $ 7,843 $ 27,282
============= ============= ============= ============= =============
Net contribution $ 1,946 $ 2,183 $ 1,303 $ 2,221 $ 7,653
============= ============= ============= ============= =============
Identifiable assets 3,122 $ 3,589 $ 1,837 $ 3,827 $ 12,375
============= ============= ============= ============= =============
Nine months ended
September 30, 1998
Revenues $ 8,987 $ 6,059 $ 4,209 $ 7,600 $ 26,855
============= ============= ============= ============= =============
Net contribution $ 2,310 $ 1,582 $ 1,318 $ 1,650 $ 6,860
============= ============= ============= ============= =============
Identifiable assets $ 3,699 $ 2,900 $ 1,850 $ 3,531 $ 11,980
============= ============= ============= ============= =============
</TABLE>
8
<PAGE>
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
intelligent operations management. The Company's core product, G2, and G2-based
products are sold to customers for a broad array of intelligent operations
management applications in a wide range of industries, including manufacturing,
telecommunications, government, aerospace, transportation, and financial
services. 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 value-added resellers and systems integrators, who provide
consulting services and integrated solutions to their customers. The Company
further licenses technology to OEMs, which embed it within their product
offerings.
In order to better meet the requirements of companies in its primary target
markets, the Company is organized into four business units: Manufacturing,
Communications, Advanced Systems, and EMA (Europe/Middle East/Africa). These
business units generally have their own specialized sales, business development,
consulting, and product development resources to provide the level of
application and industry specific knowledge needed to best serve their
respective markets.
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".
9
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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,
1999 1998 1999 1998
----------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
REVENUES:
Product 56.7% 48.7% 53.5% 49.9%
Service 43.3% 51.3% 46.5% 50.1%
----------- ----------- ----------- -----------
Total revenues 100.0% 100.0% 100.0% 100.0%
COST OF REVENUES 23.0% 25.1% 23.6% 24.5%
----------- ----------- ----------- -----------
Gross profit 77.0% 74.9% 76.4% 75.5%
----------- ----------- ----------- -----------
OPERATING EXPENSES:
Sales and marketing 48.1% 52.2% 49.2% 50.3%
Research and development 17.8% 17.3% 18.2% 16.8%
General and administration 10.1% 10.7% 11.8% 11.2%
----------- ----------- ----------- -----------
76.0% 80.2% 79.2% 78.3%
Operating income (loss) 1.0% (5.3%) (2.8%) (2.8%)
OTHER INCOME, NET 1.3% 2.0% 1.3% 1.9%
----------- ----------- ----------- -----------
Income loss before provision
for income taxes 2.3% (3.3%) (1.5%) (0.9%)
PROVISION FOR INCOME TAXES 0.5% 0.0% 0.5% 0.2%
----------- ----------- ----------- -----------
Net income (loss) 1.8% (3.3%) (2.0%) (1.1%)
=========== =========== =========== ===========
</TABLE>
10
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Three and Nine Months Ended September 30, 1999 and 1998
Revenues
The Company's operating 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 for the three and nine months ended September 30, 1999
were $9.2 million and $27.3 million, respectively, an increase of $0.4 million,
or 5.0%, for the three-month period ended September 30, 1999 as compared to the
same period in 1998 and an increase of $0.4 million, or 1.6%, for the nine-month
period ended September 30, 1999 as compared to the same period in 1998. For the
three and nine-month periods ended September 30, 1999, compared to the same
periods ended September 30, 1998, the increase in total revenue was attributable
to increased sales of product licenses, which more than offset a decrease in
service revenue. For the three and nine-month periods ended September 30, 1999,
total revenues increased in both North America and Europe compared to the same
periods ended September 30, 1998.
Product. Product revenues for the three and nine months ended
September 30, 1999 were $5.2 million and $14.6 million, respectively, an
increase of $0.9 million, or 22.2%, and an increase of $1.2 million, or 9.0%,
from the comparable periods of fiscal 1998. The increase in product revenues
for the three- and nine-month periods ended September 30, 1999 was primarily due
to revenue growth from the Company's communications customers. Specifically,
$0.7 million in license revenue in the three-month period ended September 30,
1999 and $2.4 million in license revenue for the nine-month period ended
September 30, 1999 were from BMC Software, Inc.
Service. Service revenues for the three and nine months ended
September 30, 1999 were $4.0 million and $12.7 million, respectively, a decrease
of $0.5 million, or 11.3%, and a decrease $0.8 million, or 5.7%, from the
comparable periods of fiscal 1998. The decrease in service revenues for both
the three and nine-month periods ended September 30, 1999 was primarily due to
decreases in application consulting revenues and 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. These costs for the three and nine months
ended September 30, 1999 were $2.1 million and $6.4 million, respectively. This
was a decrease of $0.1 million, or 3.6%, and a decrease of $0.1 million, or
2.0%, from the comparable periods of fiscal 1998. These decreases in costs were
primarily due to a decrease in subcontracted consulting costs. Gross margins on
revenues for the three and nine months ended September 30, 1999 were 77.0% and
76.4% respectively. Gross margin for the three months ended September 30, 1999
was an improvement from 74.9% for the three-month period ended September 30,
1998. The increases in gross margin resulted primarily from a higher percentage
of higher margin product revenues as a percentage of total revenues and from
decreased subcontractor costs.
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, sales facilities, travel and lodging, trade shows and
seminars, advertising, and promotional materials. These expenses for the three
and nine months ended September 30, 1999 were $4.4 million and $13.4 million,
respectively. These expenses represent a decrease of $0.1 million, or 3.1%, and
$0.1 million, or 0.6%, from the comparable periods of fiscal 1998. As a
percentage of revenues, sales and marketing expenses were 48.1% and 49.2%,
respectively, for the three and nine months ended September 30, 1999 as compared
to 52.2% and 50.3% for the comparable periods in fiscal 1998. The decreases
were primarily due to lower sales and marketing headcount.
11
<PAGE>
Research and Development. Research and development expenses consist
primarily of costs of personnel, equipment, and facilities. These expenses for
the three and nine months ended September 30, 1999 were $1.6 million and $5.0
million, respectively, an increase of $0.1 million, or 7.6% and $0.5 million, or
10.0%, from $1.5 million and $4.5 million in the comparable periods of fiscal
1998. As a percentage of revenues, research and development expenses were 17.8%
and 18.2%, respectively, for the three and nine months ended September 30, 1999
as compared to 17.3% and 16.8% for the comparable periods in fiscal 1998. The
increases were primarily due to an increase in compensation levels to bring them
in line with competitive rates.
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
for the three and nine months ended September 30, 1999 were $0.9 million and
$3.2 million, respectively. These expenses remained unchanged relative to the
comparable quarter in 1998, and increased $0.2 million, or 6.5%, from $3.0
million in the comparable nine-month period of fiscal 1998. As a percentage of
revenues, general and administrative expenses were 10.1% and 11.8%,
respectively, for the three and nine months ended September 30, 1999 as compared
to 10.7% and 11.2% for the comparable periods in fiscal 1998. The increase for
the nine-month period was primarily due to an increase in legal costs.
Other Income
Other income consists primarily of interest income partially offset by
foreign exchange transaction gains and losses. Other income for the three and
nine months ended September 30, 1999 was $0.1 million and $0.3 million,
respectively, as compared to $0.2 million and $0.5 million in the comparable
periods of fiscal 1998. The decreases were primarily attributable to decreased
interest income due to lower cash balances, and to an increase in foreign
exchange transaction losses compared to comparable periods in fiscal 1998.
Income Taxes
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, the
volatility of the historical earnings, and the volatility of earnings of the
industry in which it operates. The Company's provision for income taxes
primarily pertained to income taxes in foreign jurisdictions, where the Company
does not have operating loss carryforwards.
Liquidity and Capital Resources
The Company currently finances its operations (including capital
expenditures) primarily through cash flows from operations and its current cash
and short-term investment balances. The Company's lease commitments consist of
operating leases primarily for the Company's facilities and computer equipment.
The Company's September 30, 1999 cash and cash equivalents balance decreased
$7.2 million from the period ended December 31, 1998: $5.1 million was invested
in short-term securities, $1.1 million was used for operations, $0.6 million was
used to repurchase shares of the Company's common stock, $0.3 million was
received from the exercise of stock options and from issuance of stock under the
Company's Employee Stock Purchase Plan, $0.3 million was used to purchase
equipment and other assets, and cash decreased $0.4 million due to the effect of
currency fluctuation. Two weeks subsequent to the period ended September 30,
1999, the Company received $2.1 million in payments on its accounts receivable.
12
<PAGE>
The Company's repurchase of shares of its common stock on the open market
is pursuant to its stock repurchase program adopted in the third quarter of
1998. The Company also received $283,000 from the issuance of common stock under
the Employee Stock Purchase Plan and from the exercise of stock options.
At September 30, 1999, the Company had cash, cash equivalents, and short-
term investments of $12.5 million. The Company regularly invests excess funds in
highly-rated money market funds, government securities, and commercial paper.
The Company believes that its available funds and cash generated from
operations will be sufficient to meet the Company's business requirements at
least through September 30, 2000.
Year 2000 Disclosure
- --------------------
Historically, certain computer programs have been written using two digits,
rather than four digits, to define the applicable year. This could lead, for
example, to a computer's interpreting "00" as the year 1900 rather than the year
2000. This phenomenon could result in major computer system failures or
miscalculations and is generally referred to as the "Year 2000" problem or
issue.
The Company has developed a phased Year 2000 readiness plan for the current
versions of its products. The plan includes development of corporate awareness,
assessment, implementation (including remediation, upgrading and replacement of
certain product versions), validation testing, and contingency planning. The
Company continues to respond to customer concerns about prior versions of its
products on a case-by-case basis.
The Company has defined "Year 2000 compliant" as the ability to (i)
correctly handle date information needed for the December 31, 1999 to January 1,
2000 date change; (ii) function according to the product documentation provided
for this date change, without changes in operation resulting from the advent of
a new century, assuming correct configuration; (iii) where appropriate, respond
to two-digit date input in a way that resolves the ambiguity as to century in a
disclosed, defined, and predetermined manner; (iv) if the date elements in
interfaces and data storage specify the century, store and provide output of
date information in ways that are unambiguous as to century; and (v) recognize
year 2000 as a leap year. The Company has not tested its products on all
platforms or all versions of operating systems that it currently supports and
has advised its customers to verify that their platforms and operating systems
support the transition to the year 2000.
The Company has completed a review and assessment of its products and, with
the exception of the products discussed below, the Company believes that its
current products are Year 2000 compliant. For example, the Company's core G2
product has two built-in techniques for storing and processing time and date
information. These techniques are time stamps and intervals. Time stamps are
64-bit IEEE floating point numbers. Intervals are stored as integers. Neither
of these representations imposes a practical limit on the size of the date value
stored and do not pose any problems with the passing of the millennium.
Therefore, the Company does not believe that the Company's products, except
those discussed below, will be adversely affected by date changes to the year
2000. However, there can be no assurance that the Company's products contain
and will contain all features and functionality considered necessary by
customers, including ISVs, end users and distributors, to be Year 2000
compliant. In addition, there can be no assurances that the Company's current
products do not contain undetected errors or defects associated with Year 2000
date functions that may result in material costs to the Company.
While the Company believes that current versions of its products are Year
2000 compliant, other factors may result in an application created using the
Company's products not being Year 2000 compliant. Some of these factors include
improper programming techniques used by customers or third parties in creating
the application or non-compliance of the underlying hardware, operating system,
or software on which the application runs. Known or unknown errors or defects
in the Company's products could result in delay or loss of revenue, diversion of
development resources, damage to the Company's reputation, or increased service
and warranty costs, any of which could
13
<PAGE>
materially adversely affect the Company's business, operating results or
financial condition. Some commentators have predicted significant litigation
regarding Year 2000 compliance issues, and the Company is aware of such lawsuits
against other software vendors. Because of the unprecedented nature of such
litigation, it is uncertain whether or to what extent the Company may be
affected by it.
Testing has revealed that in versions of G2 prior to Rev. 3, a specific G2
system procedure and the use of two-digit years in the built-in displays are not
Year 2000 compliant. These problems were fixed in G2 5.0 Rev. 3 released in
June 1998.
The Company's internal systems include both its information technology
("IT") and non-IT systems. The Company has completed a baseline assessment of
its material internal IT systems (including both the Company's own software
products and third-party software and hardware technology) and its non-IT
systems. As of September 30, 1999, the Company has substantially achieved year
2000 compliance. To the extent the Company is not able to test the technology
provided by third-party vendors, the Company has received certain written
certificates from third-party vendors and is continuing to seek assurances from
other vendors that their systems are Year 2000 compliant. Although the Company
is not currently aware of any material operational issues or costs associated
with preparing its internal IT and non-IT systems for the Year 2000, the Company
may experience material unanticipated problems and costs caused by undetected
errors or defects in the technology used in its internal IT and non-IT systems.
There can be no assurance that the Company will not experience unanticipated
negative consequences or material costs caused by undetected errors or defects
in the technology used in its internal systems.
The Company does not in general have information concerning the Year 2000
compliance status of its customers. As is the case with other similarly
situated software companies, if the Company's current or future customers fail
to achieve Year 2000 compliance, or if they divert technology expenditures to
address Year 2000 compliance problems, the Company's business, results of
operations, or financial condition could be materially adversely affected.
The Company has funded its Year 2000 plan from operating cash flows and has
not separately accounted for these costs. The Company may incur additional
costs related to the Year 2000 plan for administrative personnel to manage the
project, outside contractor assistance, technical support for its products,
product engineering and customer satisfaction. The Company may experience
material problems and costs with Year 2000 compliance that could adversely
affect the Company's business, results of operations, and financial condition.
The Company has developed a contingency plan to address situations that may
result if the Company is unable to achieve Year 2000 readiness of its
operations. The contingency plan will be revised from time to time as deemed
appropriate.
Finally, the Company is subject to external forces that might generally
affect industry and commerce, such as utility company Year 2000 compliance
failures and related services interruptions. The Company does not anticipate
that any of these potential issues will have a material adverse effect on the
Company's business, financial condition and operating results.
Additionally, there can be no assurance that the Company will not be the
subject of lawsuits regarding the failure of the Company's products (former or
present) in the event they are not Year 2000 compliant. Despite the testing and
remediation efforts undertaken by the Company, the Company's products may
contain errors or defects associated with the year 2000. Known or unknown
errors or defects in the Company's products could result in delay or loss of
revenue, diversion of development resources, damage to the Company's reputation
or increased service and warranty costs, any of which could materially adversely
affect the Company's business, operating results and financial condition. In
addition, because the computer system in which the Company's products are used
involve different hardware, software and firmware components from different
manufacturers, it may be difficult to determine which component in a system
caused a Year 2000 issue. As a result, the Company may be subjected to Year
2000-related lawsuits independent of whether its products are Year 2000
compliant. Any Year 2000-related suits, if adversely determined, could have a
material adverse effect on the Company's business, operating results and
financial conditions.
14
<PAGE>
The foregoing review of the Company's Year 2000 readiness is based on
management's current information and involves numerous assumptions. There can
be no assurance that this information and these assumptions are correct, and
results could differ materially from those anticipated. Specific factors that
might cause such material difference include, but are not limited to, the
ability of the Company to identify and correct all relevant computer code and
the success of third parties with whom the Company does business in addressing
their Year 2000 issues.
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 Operations Management Systems. Substantially
all of the Company's revenues are derived from the licensing and support of
software products that enable organizations to implement intelligent operations
management systems for decision support and control. Although many
organizations have begun to deploy, or have announced plans to deploy,
intelligent operations management 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 operations management systems successfully, nor that
such systems will gain widespread acceptance. In addition, the timing of the
implementation of intelligent operations management systems by organizations may
be affected by economic factors, government regulations, and other factors.
Delays in the introduction of intelligent operations management 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 application-specific products and components as well as
complete solutions, rather than general software tools with which to develop
application-specific functionality and solutions. Meeting this demand has
required the Company to modify its sales approach. The Company is also
increasingly reliant on value-added resellers and systems integrators to satisfy
market requirements. 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.
Dependence Upon Development of Sales and Marketing Force. The Company's future
success will depend, in part, upon the productivity of its sales and marketing
personnel and the ability of the Company to continue to attract, integrate,
train, motivate and retain new sales and marketing personnel. There can be no
assurance that the Company's investment in sales and marketing will ultimately
prove to be successful. In addition, there can be no assurance that the
Company's sales and marketing personnel will be able to compete successfully
against the significantly more extensive and better funded sales and marketing
operations of many of the Company's current and potential competitors. The
Company's inability to manage its sales and marketing personnel effectively
could have a material adverse effect on the Company's business, operating
results and 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 and the timing of
significant orders could contribute to this quarterly variability. In addition,
the Company ships software products within a short period after receipt of an
order and typically does not have a material backlog of unfilled orders of
software products. Therefore, revenues from software licenses in any quarter
are substantially dependent on orders booked in that quarter. Historically, a
majority of each quarter's revenues from software licenses has come from license
15
<PAGE>
contracts that have been effected in the final weeks of that quarter. The
revenues for a quarter typically include a number of large orders. If the
timing of any of these orders is delayed, it could result in a substantial
reduction in revenues for that quarter. 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. Future recessionary
conditions in the industries which use the Company's products may 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 operations management systems, and software application 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 these 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 to successor
technology, 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 Operations Management Systems."
Migration to Microsoft Windows and Object Exchange Standards. The Company
believes that client user interfaces compliant with Microsoft Windows and MOTIF
are increasingly the preferred choice of its customers. In order to gain wider
customer penetration, the Company must respond to this market choice.
Accordingly, the Company has developed and achieved initial commercial release
of a client access product that is Microsoft Windows and MOTIF compliant. There
can be no assurance that the Company will be successful in further developing
and marketing this new product. Any delay or failure to meet market
expectations with this product could affect the Company's competitive position
or limit its growth opportunities.
16
<PAGE>
Reliance Upon Indirect Distribution Channels and Risks Associated with
Strategic Partner Relationships. The Company sells its products in part through
value-added resellers, systems integrators, OEMs 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 23%, 33%, and 35% of the
Company's product revenues in the first nine months of 1999, 1998, and 1997,
respectively. The loss of major OEMs 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 42%, 44%, and 46%, of total revenues in the first nine
months of 1999, 1998, and 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 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 including the
new Euro, fluctuating import/export duties and quotas, and unexpected
regulatory, economic, or political changes in international markets. In
particular, the continuing economic problems in Asia pose challenges to the
Company's sales and marketing operations in that region. 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, a number of companies offer
products that perform certain functions of G2 for specific applications. In all
of the Company's markets, there is competition from "point solutions", real-time
and expert system products, and internally developed software. At the
fundamental level, 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.
Certain companies such as Objective Systems Integrators, Inc., Micromuse, and
Systems Management Arts (SMARTS), sell "point solutions" that compete with the
Company's products with respect to specific applications or uses. Several
companies, including Ilog S.A. and System Management Arts, offer products with
limited real-time, expert system, or fault isolation capabilities at lower price
points than those provided by the Company. These products often require
extensive programming with languages such as C or C++ for complete
implementation. Although the Company believes that these products offer a less
productive development environment than G2 and that they lack the comprehensive
capabilities of G2-based products, 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's software is also 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.
Many of the Company's customers have significant investments in their existing
solutions and have the resources necessary to enhance existing products and to
develop future products. These customers may develop and incorporate competing
technologies into their systems or may outsource responsibility for such systems
to others who do not use the Company's products. There is no assurance that the
Company can successfully persuade development personnel within these customers'
organizations to use G2-based products that can cost effectively compete with
their
17
<PAGE>
internally developed products. This would reduce the need for the Company's
products and services and limit future opportunities for the Company.
The Company believes that continued investment in research and development and
sales and marketing will be required to maintain its competitive position.
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
such competition will not have a material adverse effect on 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 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 its executive officers, 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, 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.
Year 2000 Compliance. Many installed computer systems and software products
are coded to use only two digits to represent the year. Systems that do not
properly deal with such information could generate erroneous data or cause a
system to fail. Although the Company believes that its current products and
systems are Year 2000 compliant, the Company utilizes third party equipment and
software that may not be Year 2000 compliant. Known or unknown errors or
defects, with regard to the year 2000 and thereafter, in the Company's products
and systems could result in delay or loss of revenue, diversion of development
resources, damage to the Company's reputation, increased service and warranty
costs, or significant litigation, any of which could materially adversely affect
the Company's business, operating results or financial condition. Furthermore,
the purchasing patterns of customers or potential customers may be affected by
Year 2000 issues as companies expend significant resources to correct their
current systems for Year 2000 compliance. These expenditures
18
<PAGE>
may result in reduced funds available to purchase products and services such as
those offered by the Company.
ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not use derivative financial instruments in its investing
portfolio. The Company places its investments in instruments that meet high
credit quality standards such as money market funds, government securities, and
commercial paper. The Company limits the amount of credit exposure to any one
issuer. The Company does not expect any material loss with respect to its
investment portfolio. The following table provides weighted average interest
rates and dates of maturity for the Company's investment portfolio; the
investment portfolio excludes operating cash held in both interest bearing and
non-interest bearing demand deposit accounts. The fair value of the marketable
securities portfolio is affected by changes in short-term U.S. dollar interest
rates.
<TABLE>
<CAPTION>
Principal amounts by expected maturity in U.S. dollars
(in 000's except interest rates) Investments
Fair value at maturing in:
----------------------
September 30, 1999 FY 1999 FY 2000
------------------ ------- -------
<S> <C> <C> <C>
Cash equivalents $5,639 $5,639 -
Weighted average interest rate 5.39% 5.39% -
Investments $2,976 - $2,976
Weighted average interest rate 5.98% - 5.98%
Total Portfolio $8,615 $5,639 2,976
Weighted average interest rate 5.60% 5.39% 5.98%
</TABLE>
The Company conducts business in various foreign currencies, primarily in
Canada, Europe, Middle East, Australia, Japan and other Asian countries. As a
result, the Company is exposed to the effect of foreign currency exchange rate
fluctuations on the U.S. dollar value of foreign currency-denominated revenues
and expenses. And, to the extent that the Company's foreign subsidiaries
maintain large intercompany payable balances with the U.S. parent, the potential
exists for significant cumulative translation adjustments in the equity section
of the consolidated balance sheet. The Company does not use foreign exchange
forward contracts to hedge its foreign currency denominated receivables. Looking
forward, there can be no assurance that changes in foreign currency rates,
relative to the U.S. dollar, will not materially adversely affect the
consolidated results of the Company.
19
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
Stockholder Proposals for 2000 Annual Meeting
Stockholder proposals submitted pursuant to Rule 14a-8 under the
Exchange Act for inclusion in the Company's proxy materials for its 2000 Annual
Meeting of Stockholders must be received by the Secretary of the Company at the
principal offices of the Company no later than December 23, 1999.
In addition, the Company's by-laws require that the Company be given
advance notice of stockholder nominations for election to the Company's Board of
Directors and of other matters which stockholders wish to present for action at
an annual meeting of stockholders (other than matters included in the Company's
proxy statement in accordance with Rule 14a-8). The required notice must be (i)
made in writing, (ii) delivered to or mailed and received by the Secretary of
the Company at the principal offices of the Company, and, if relating to a
nomination of directors, by first class United States mail, postage prepaid, and
(iii) received not less than 60 days nor more than 90 days prior to the 2000
Annual 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
notice must be received by the Company not later than the close of business on
the 10th day following the date on which the notice of the date of the meeting
was mailed or such public disclosure was made, whichever occurs first. The 2000
Annual Meeting is currently expected to be held on May 17, 2000. Assuming that
this date does not change and the Company provides at least 70 days' notice of
the date of the meeting, in order to comply with the time periods set forth in
the Company's by-laws, appropriate notice would need to be provided by a
stockholder no earlier than January 24, 2000 and no later than February 22,
2000.
Item 6. Exhibits and Reports of Form 8-K
(a) Exhibit Index
Exhibit 27 - Financial Data Schedule
(b) No reports on Form 8-K were filed by Gensym during the quarter
ended September 30, 1999.
20
<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: October 29, 1999 Lowell B. Hawkinson
Chief Executive Officer
and Treasurer
(Principal Executive Officer,
Principal Financial and
Accounting Officer)
21
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<PAGE>
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<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JUL-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 6,497
<SECURITIES> 5,957
<RECEIVABLES> 9,112
<ALLOWANCES> 387
<INVENTORY> 0
<CURRENT-ASSETS> 24,691
<PP&E> 10,648
<DEPRECIATION> 9,195
<TOTAL-ASSETS> 26,991
<CURRENT-LIABILITIES> 10,796
<BONDS> 0
0
0
<COMMON> 67
<OTHER-SE> 16,128
<TOTAL-LIABILITY-AND-EQUITY> 26,991
<SALES> 9,185
<TOTAL-REVENUES> 9,185
<CGS> 2,113
<TOTAL-COSTS> 2,113
<OTHER-EXPENSES> 6,978
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 208
<INCOME-TAX> 45
<INCOME-CONTINUING> 163
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 163
<EPS-BASIC> .03
<EPS-DILUTED> .03
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