<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 March 31, 2000
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 May 5, 2000 there were 6,336,089 shares of the Registrant's
Common Stock outstanding.
<PAGE>
GENSYM CORPORATION
Form 10-Q INDEX
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page No.
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<S> <C>
Item 1. Condensed Consolidated Financial Statements:
Condensed Consolidated Balance Sheets
March 31, 2000 and December 31, 1999 3
Condensed Consolidated Statements of Operations for the
three months ended March 31, 2000 and 1999 4
Condensed Consolidated Statements of Cash Flows for the
three months ended March 31, 2000 and 1999 5
Notes to Condensed Consolidated Financial Statements 6-8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9-16
Item 3. Quantitative and Qualitative Disclosures About Market Risk 17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 2. Changes in Securities 18
Item 3. Defaults Upon Senior Securities 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 18
Signatures 19
</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>
(in thousands) March 31, December 31,
2000 1999
--------------- ---------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 8,616 $ 5,710
Short-term investments 3,978 5,975
Accounts receivable, net 6,531 9,528
Prepaid expenses 2,696 2,352
Deferred income taxes 1,261 1,261
---------- ----------
Total current assets 23,082 24,826
Property and Equipment, net 1,330 1,295
Long-term deferred income taxes 612 612
Deposits and other assets 189 201
---------- ----------
$ 25,213 $ 26,934
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 628 $ 387
Accrued expenses 5,519 4,694
Deferred revenue 6,831 6,931
---------- ----------
Total current liabilities 12,978 12,012
Stockholders' Equity:
Common stock 68 67
Capital in excess of par value 21,301 20,923
Treasury stock (1,869) (1,869)
Accumulated deficit (5,946) (3,053)
Cumulative translation adjustment (1,319) (1,146)
---------- ----------
Total stockholder's equity 12,235 14,922
---------- ----------
$ 25,213 $ 26,934
========== ==========
</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)
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three months ended
March 31,
REVENUES: 2000 1999
--------- ----------
<S> <C> <C>
Product $ 2,966 $ 4,060
Service 4,135 4,296
--------- ----------
Total revenues 7,101 8,356
COST OF REVENUES 2,366 2,145
--------- ----------
Gross profit 4,735 6,211
--------- ----------
OPERATING EXPENSES:
Sales and marketing 4,327 4,478
Research and development 1,805 1,557
General and administrative 1,504 1,160
--------- ----------
7,636 7,195
--------- ----------
Operating loss (2,901) (984)
OTHER INCOME, NET 69 111
--------- ----------
Loss before provision for
income taxes (2,832) (873)
PROVISION FOR INCOME TAXES 60 45
--------- ---------
Net loss $(2,892) $ (918)
========= =========
Basic and diluted loss
per share $ (0.46) $ (0.15)
========= =========
Weighted average common shares
outstanding 6,260 6,150
========= =========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
<PAGE>
GENSYM CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
Three months ended
March 31,
2000 1999
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (2,892) $ (918)
Adjustments to reconcile net loss to net
cash (used in) provided by operating activities:
Depreciation and amortization 197 289
Changes in assets and liabilities:
Accounts receivable 2,962 67
Prepaid expenses (400) (203)
Accounts payable 247 (35)
Accrued expenses 897 198
Deferred revenue (94) (64)
---------- ----------
Net cash provided by (used in) operating activities 917 (666)
---------- ----------
CASH FLOW FROM INVESTING ACTIVITIES:
Sales of short-term investments 3,473 838
Purchases of short-term investments (1,476) -
Purchases of property and equipment (232) (83)
Decrease in other assets 7 1
---------- ----------
Net cash provided by investing activities 1,772 756
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Purchase of treasury stock - (591)
Proceeds from exercise of stock options under stock plans 379 -
---------- ----------
Net cash provided by (used in) financing activities 379 (591)
---------- ----------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (162) (148)
---------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 2,906 (649)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 5,710 13,696
---------- ----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 8,616 $13,047
========== ==========
</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 March 31, 2000 and the results of its
operations for the three-month period ended March 31, 2000 and 1999 and its cash
flows for the three 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 29, 2000. 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 accounts for investments under Statement of Financial
Accounting Standards (SFAS) No. 115, Accounting for Certain Investments in Debt
and Equity Securities. The Company's investments are classified as
held-to-maturity and are recorded at amortized cost at March 31, 2000 and
December 31, 1999. Cash equivalents are short-term, highly liquid investments
with original maturity dates of less than three months. Short-term investments
held as of March 31, 2000 and December 31, 1999 consist of U.S. and municipal
agency bonds and commercial paper with original maturity dates greater than
three months that mature within one year.
4. Recently Issued Accounting Pronouncements
The Securities and Exchange Commission released Staff Accounting Bulletin
(SAB) No. 101, Revenue Recognition in Financial Statements, on December 3, 1999.
This SAB provides additional guidance on the accounting for revenue recognition,
including both broad conceptual discussions as well as certain industry-specific
guidance. The guidance is effective for the second quarter 2000. The Company
does not expect the adoption of SAB 101 to have a material impact on the
Company's results of operations.
In June 1998, the Financial Accounting Standards Board, or FASB, issued
Statement of Financial Accounting Standards, or SFAS, No. 133, Accounting for
Derivative Instruments and Hedging Activities. This statement establishes
accounting and reporting standards for derivative instruments, including
derivative instruments embedded in other contracts, and for hedging activities.
SFAS No. 133, as amended by SFAS No. 137, is effective for all fiscal quarters
of fiscal years beginning after June 15, 2000. SFAS No. 133 is not expected to
have a material impact on the Company's consolidated financial statements.
The Company follows the provisions of the American Institute of Certified
Public Accountants (AICPA) Statement of Position (SOP) 97-2, Software Revenue
Recognition, as amended by SOP 98-9 in December of 1998. SOP 98-9 requires use
of the residual method of recognition of revenues when vendor specific objective
evidence exists for undelivered elements but does not exist for delivered
elements of a software arrangement. The Company is required to comply with the
provisions of SOP 98-9 for applicable transactions entered into beginning
January 1, 2000. The adoption of SOP 98-9 did not have a material effect on its
financial position or operating results.
Product revenues are recognized upon shipment or upon the completion of all
significant obligations by the Company, whichever is later, provided that the
fee is fixed or determinable and deemed collectible by management. If conditions
for acceptance are required subsequent to delivery, revenues are recognized upon
customer acceptance. Revenues from the sale of multicopy licenses are recognized
upon the shipment of the product master or the first copy of the software
product if the product master is not to be delivered. Revenues derived from
consulting and training are recognized upon performance of the services provided
that the amounts due from customers are fixed or determinable and deemed
collectible by management. Software maintenance fees are recognized as revenue
ratably over the period to which they relate. Deferred revenue primarily
represents advance billings for software services, which include maintenance,
consulting, training and license prepayment fees.
6
<PAGE>
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 components of comprehensive income for the three-month period
ended March 31, 2000 and 1999 are as follows (in thousands):
Three months ended
March 31,
2000 1999
--------- ---------
Comprehensive income (loss):
Net loss $(2,892) $ (918)
Other comprehensive loss
Foreign currency adjustment (173) (179)
--------- ---------
Comprehensive loss $(3,065) $(1,097)
========= =========
6. Income (Loss) Per Share
In accordance with SFAS No. 128, Earnings per Share, basic income (loss)
per share was computed by dividing net income (loss) by the weighted average
number of common shares outstanding during the period. Diluted income (loss)
per share was computed using the weighted average number of common and potential
common shares outstanding during the periods in accordance with the treasury
stock method. For the three-month period ended March 31, 2000 and 1999, the
computation for diluted loss per share excludes the effect of 1,284,312 and
666,074 shares, respectively, issuable from assumed exercise of options, as
their effect would be antidilutive.
7. 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.
Beginning in 2000, the Company changed the way it evaluates its operations.
The Company views its business as having two worldwide field operations: 1) the
Expert Operation product line, which focuses on expanding Gensym's presence in
chemical, oil and gas, pharmaceutical, and other manufacturing; and 2) the e-
Infrastructure product line, which focuses on building Gensym's entrance into
7
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Business-to-Business electronic infrastructure of networks, e-marketplace
entrants, and Fortune 1000 companies.
These business operations have their own specialized sales, business
development, consulting, and training 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 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 selling costs. Identifiable assets consist
primarily of: 1) accounts receivable in support of segment revenues, and 2)
prepaid expenses, property and equipment, and deposits in support of employees
dedicated to the specific segments. Information as to the operations of the
different segments is set forth below:
(in thousands)
<TABLE>
<CAPTION>
Unallocated
Expert Corporate
Operation e-Infrastructure Costs Total
------------- ---------------- ----------- ----------
<S> <C> <C> <C> <C>
Three months ended
March 31, 2000
Revenues $ 2,983 $ 4,118 $ 7,101
============= ============ ==========
Net contribution $ 2 $ 1,111 $ (705) $ 408
============= ============ =========== ==========
Identifiable assets $ 4,203 $ 5,028 $ 1,515 $ 10,746
============= ============ =========== ==========
Fixed asset depreciation $ 53 $ 54 $ 23 $ 130
============= ============ =========== ==========
</TABLE>
<TABLE>
<CAPTION>
Unallocated
Expert Corporate
Operation e-Infrastructure Costs Total
------------- ---------------- ----------- ----------
<S> <C> <C> <C> <C>
Three months ended
March 31, 1999
Revenues $ 4,035 $ 4,321 $ 8,356
============ ============ =========
Net contribution $ 554 $ 1,492 $ (313) $ 1,733
============ ============ =========== =========
Identifiable assets $ 4,203 $ 5,028 $ 1,519 $ 10,750
============ ============ =========== =========
Fixed asset depreciation $ 68 $ 70 $ 26 $ 164
============ ============ =========== =========
</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 deliver adaptive software
products for modeling and managing complex business processes. 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.
Gensym has created two product line units responsible for sales,
technical support, and consulting services. The Expert Operations unit serves
Gensym's core customers in the chemical, oil and gas, pharmaceutical and other
manufacturing-intensive industries with such leading products as G2 and NeurOn-
Line. The new e-Infrastructure unit focuses on the business-to-business
electronic infrastructure of networks, e-marketplace entrants and Fortune 1000
companies with current products, such as OpEx and ReThink, and new products such
as e-SCOR, that will further address customers' Web-based, dynamic supply
chains.
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
<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
March 31,
2000 1999
--------- --------
<S> <C> <C>
REVENUES:
Product 41.8% 48.6%
Service 58.2% 51.4%
-------- -------
Total revenues 100.0% 100.0%
COST OF REVENUES 33.3% 25.7%
-------- -------
Gross profit 66.7% 74.3%
-------- -------
OPERATING EXPENSES:
Sales and marketing 60.9% 53.6%
Research and development 25.4% 18.6%
General and administration 21.2% 13.9%
-------- -------
107.5% 86.1%
Operating income (loss) (40.8%) (11.8%)
OTHER INCOME, NET 1.0% 1.3%
-------- -------
Income loss before provision
for income taxes (39.8%) (10.5%)
PROVISION FOR INCOME TAXES 0.8% 0.5%
-------- -------
Net income (loss) (40.6%) (11.0%)
======== =======
</TABLE>
Three Months Ended March 31, 2000 and 1999
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 were $7.1 million for the three months ended March 31,
2000 as compared to $8.4 million for the same period in 1999, a decrease of $1.3
million, or 15.0%. The decrease was driven primarily by lower license sales.
10
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Product. Product revenues decreased to $3.0 million in the three months
ended March 31, 2000 from $4.1 million in the three months ended March 31, 1999,
a decrease of $1.1 million, or 26.9%. The decrease in product revenue was
primarily attributable to a reorganization of the Company's sales force in line
with the creation of two worldwide field operating units--Expert Operations and
e-Infrastructure.
Service. Service revenues decreased to $4.1 million in the three months
ended March 31, 2000, from $4.3 million in the same period of 1999, a decrease
of $0.2 million, or 3.7%. The decrease in service revenues was mainly
attributable to a decrease in consulting revenue, partially offset by an
increase in maintenance and training revenue.
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 months ended
March 31, 2000 were $2.4 million. This was an increase of $0.2 million, or
10.3%, compared with the first quarter of fiscal 1999. The increase in cost was
primarily due to an increase in subcontracted consulting costs. Gross margin on
revenues for the three months ended March 31, 2000 was 66.7% compared with 74.3%
for the three-month period ended March 31, 1999. The decrease in gross margin
resulted primarily from a $1.3 million decline in revenues and from a modest
increase in royalty 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
months ended March 31, 2000 were $4.3 million, a decrease of $0.2 million, or
3.4%, from $4.5 million in the comparable quarter for fiscal 1999. The decrease
was primarily due to lower commission expenses related to lower sales volume. As
a percentage of revenues, sales and marketing expenses were 60.9% for the
quarter ended March 31, 2000 as compared to 53.6% for the comparable period in
fiscal 1999. The increase was primarily due to lower sales.
Research and Development. Research and development expenses consist
primarily of costs of personnel, equipment, and facilities. These expenses for
the quarter ended March 31, 2000 were $1.8 million, an increase of $0.2 million,
or 15.9%, from $1.6 million in the comparable quarter of fiscal 1999. The
increased expense was primarily due to an increase in personnel related costs:
recruitment, subcontracted labor, and compensation expenses. As a percentage of
revenues, research and development expenses were 25.4% for the quarter ended
March 31, 2000 as compared to 18.6% for the comparable quarter in fiscal 1999.
The increase was a result of both higher expenses and lower sales.
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 quarter ended March 31, 2000 were $1.5 million, an increase of $0.3 million,
or 29.7%, from $1.2 million for the comparable quarter in fiscal 1999. The
increase in expense was primarily due to increased legal and recruitment costs.
As a percentage of revenues, general and administrative expenses were 21.2% for
the quarter ended March 31, 2000 as compared to 13.9% for the comparable period
in fiscal 1999. This increase was due the higher expenses in addition to lower
sales.
Other Income
Other income consists primarily of interest income partially offset by
foreign exchange transaction gains and losses. Other income for the quarter
ended March 31, 2000 was $69,000 as compared to $111,000 for the comparable
period of fiscal 1999. The decrease was primarily due to decreased interest
income due to lower cash balances. The Company has historically experienced
nominal net foreign exchange transaction gains and losses.
11
<PAGE>
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, along with 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 March 31, 2000 cash and cash equivalents balance of $8.6
million increased $2.9 million from the period ended December 31, 1999: $917,000
was provided by operating activities (primarily from the collection of accounts
receivable), $2.0 million was received from the sales of short-term securities,
$232,000 was used to purchase equipment and other assets, $379,000 was received
from the exercise of stock options and from issuance of stock under the
Company's Employee Stock Purchase Plan, and cash decreased $162,000 due to the
effect of currency fluctuation.
At March 31, 2000, the Company had cash, cash equivalents, and
short-term investments of $12.6 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 December 31, 2000.
Year 2000 Disclosure
- --------------------
Many currently installed computer systems and software products are
coded to accept or recognize only two digit entries in the date code field.
These systems and software products will need to accept four digit entries to
distinguish 21st century dates from 20th century dates. This could result in
system failures or miscalculations causing disruption of operations for any
company using computer programs or hardware. As a result, many companies'
computer systems may need to be upgraded or replaced in order to avoid "Year
2000" issues.
We have not experienced any difficulties that we are aware of relating
to Year 2000 issues. Our operations have not, to date, been adversely affected
by any such difficulties experienced by any of our suppliers or customers in
connection with Year 2000 issues. However, we could experience latent Year 2000
problems. As such, we will continue to monitor our systems for potential
difficulties for the remainder of calendar year 2000.
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
12
<PAGE>
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
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 main 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
13
<PAGE>
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.
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 22% and 30% of the Company's
product revenues in the first three months of 2000 and 1999, 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.
14
<PAGE>
Concentration of Credit Risk. For the three-month period ended March
31, 2000, sales to one customer, BMC Software, accounted for approximately 10%
of the Company's total revenue. For the fiscal year ended December 31, 1999,
sales to BMC accounted for approximately 12% of the Company's total revenue. As
a result, the loss of BMC as a customer could materially and adversely affect
the Company's business and results of operations. No single customer accounted
for greater than 10% of total revenues or represented a significant credit risk
to the Company in 1998. No single customer accounted for greater than 10% of
accounts receivable at March 31, 2000 or December 31, 1999.
Risks Associated With International Operations. The Company's international
revenues represented 43% and 50% of total revenues in the first three months of
2000 and 1999, 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 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
15
<PAGE>
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.
16
<PAGE>
ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
Investment Portfolio
- --------------------
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 information about the
Company's investment portfolio, which excludes the Company's funds in demand
deposit and money market accounts. For investment securities, the table presents
principal cash flows and related weighted average interest rates by expected
maturity dates.
Principal amounts by expected maturity in U.S. dollars
(in thousands except interest rates)
Investments
Fair value at maturing in:
March 31, 2000 FY 2000
-------------- --------
Cash equivalents $ 2,562 $ 2,562
Weighted average interest rate 6.06% 6.06%
Investments $ 3,978 3,978
Weighted average interest rate 6.08% 6.08%
Total Portfolio $ 6,540 $ 6,540
Weighted average interest rate 6.07% 6.07%
The Company conducts business in various foreign countries, 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.
17
<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
None
Item 6. Exhibits and Reports of Form 8-K
(a) Exhibit Index
Exhibit 10.1 - Severance agreement with Robert Moore
Exhibit 27 - Financial Data Schedule
(b) No reports on Form 8-K were filed by Gensym during the quarter
ended March 31, 2000.
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/ Patrick Courtin
-------------------
Dated: May 12, 2000 Patrick Courtin
Chief Executive Officer and President
(Principal Executive Officer)
/s/ Jeffrey A. Weber
--------------------
Dated May 12, 2000 Jeffrey A. Weber
Vice President of Finance and
Administration, and Chief Financial Officer
(Principal Financial and Accounting Officer)
19
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