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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark one)
|X| Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the fiscal year ended December 31, 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.)
52 Second Avenue
Burlington, MA 01803-4411
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (781) 265-7100
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12 (g) of the Act:
Common Stock, $.01 par value
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days:
Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. |_|
As of March 12, 2001 there were 6,466,970 shares of the Registrant's
Common Stock outstanding. As of that date, the aggregate market value of the
voting stock held by non-affiliates of the registrant was $6,466,970 based on
the last reported sale price of the registrant's Common Stock on the Nasdaq
National Market as of the close of business on March 12, 2001.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive Proxy Statement for the 2001
Annual Meeting of Stockholders to be held on Wednesday, May 16, 2001 are
incorporated by reference in items 10, 11, 12 and 13 of Part III of this
Form 10-K.
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GENSYM CORPORATION
FORM 10-K INDEX
Page No.
--------
PART I
Item 1. Business 3-8
Item 2. Properties 8
Item 3. Legal Proceedings 8
Item 4. Submission of Matters to a Vote of Security Holders 8
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 10
Item 6. Selected Financial Data 11
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 12-22
Item 7A. Qualitative and Quantitative Disclosures about Market Risk 22
Item 8. Financial Statements and Supplementary Data 23-38
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 39
PART III
Item 10. Directors and Executive Officers of the Registrant 39
Item 11. Executive Compensation 39
Item 12. Security Ownership of Certain Beneficial Owners and Management 39
Item 13. Certain Relationships and Related Transactions 39
PART IV
Item 14. Exhibits, Financial Statements and Reports on Form 8-K 40
Signatures 41
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PART I.
ITEM 1. BUSINESS
Gensym Corporation ("Gensym" or "the Company") develops, markets and
supports adaptive software products for managing e-business infrastructure. The
Company has built a unique foundation of reasoning technologies through its
flagship product, G2(R), and a family of G2-based products. These products are
used for communications and data network management; strategic supply-chain
design; and expert manufacturing in many different industries, including
chemical, oil, gas and pharmaceuticals. In 2000 Gensym began to transition
itself from being primarily a developer of customizable software and services to
being a developer of out-of-the-box software products and robust, extensible
software platforms. Gensym embarked on this new strategic direction in April
2000. During the course of the year, the company introduced its first two
out-of-the box products -- e-SCOR, for strategic supply-chain design, and
NetSleuth(TM), a network management product.
Gensym uses its direct sales force, coupled with OEM's and systems
integrators, to market its e-infrastructure products for network management and
supply chain design. In January 2001, the Company adopted an indirect sales
strategy for its expert manufacturing software platforms. The Company continues
to provide direct support to its installed base of manufacturing customers in
the manufacturing industry. Gensym now works with its network of value added
resellers, system integrators, original equipment manufacturers and other
partners, who include Gensym software in the products they develop to sell its
software and services to new end-user customers at leading companies around the
world. Gensym also is working to develop relationships with new original
equipment manufacturers and value-added reseller partners who have domain
expertise in the many different fields of manufacturing.
STRATEGY
Gensym's strategy is to build a leadership position in the
business-to-business e-infrastructure market (network management and
supply-chain design) while continuing to build on our technology leadership in
expert manufacturing.
The rapid growth of the e-business marketplace and, most importantly,
business-to-business applications are directly dependent on the quality of the
information infrastructure and its ability to adapt to the fast pace of change.
Gensym's broad expertise in applying real-time reasoning technology to complex
problems creates a unique opportunity to deliver easy-to-use products that
manage the complex, fast-changing networks and systems infrastructure of
e-business. Gensym delivers high value, adaptive products that can provide
immediate return on investment by improving e-business infrastructure up time,
while expanding staff efficiency.
PRODUCTS
Gensym's core technology is an extensible, customizable software platform
known as G2. The Company sells G2 and a growing number of products based on it.
Since April 2000, the Company has pursued a strategic direction based upon the
development of off-the-shelf products that are intended to bring the benefits of
Gensym technology to more customers more quickly than ever before. As part of
its new strategic direction, the Company adopted new product-packaging and
customer-service programs designed to make it easier for customers to do
business with the Company and enable Gensym to align its business practices with
software industry norms. The Company introduced these new programs in July 2000,
and they were formally implemented in September 2000. The packaged version of G2
that Gensym markets is known as G2 Classic.
G2 Classic
G2, Gensym's core technology, is a comprehensive development and
deployment environment for intelligent management and optimization of
complex, dynamic operations. G2 applies knowledge that represents the
experience of the best operations personnel, combined with analytical
models constructed by engineers and business professionals and models
derived from past performance, to real-time or model data, in order to
reach conclusions, provide advice, and take real or simulated actions in a
timely fashion. G2 can follow multiple lines of reasoning based on this
knowledge and consider multiple problems concurrently. G2 maintains an
understanding of the behavior of processes over time and the timeliness of
information, both of which are important for real-time management of
operations. G2 incorporates a broad array of integrated technologies that
enable application developers to implement object-oriented applications
without the need for conventional computer programming.
G2 enables an application developer to express objects, rules, models and
procedures using structured natural language so that they can be readily
understood and modified. The G2 development environment enables a
developer to test an application using simulated data and to view the
results graphically. In this way, an application can be tested under
various scenarios before deployment. Rapid incremental application
development can be done interactively to facilitate application
improvements during prototyping, during development and even while in
deployment. Using G2's ability to support rapid application development, a
developer can show a dynamic, graphically animated prototype of an
application to an end-user at an early stage.
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Using G2, an application developer can model a process in terms of
interrelated objects, which may be in graphical or schematic diagram form.
These object-based graphical connections enable G2 to reason about the
interdependent behavior of connected process objects. G2's high-level
representation of knowledge enables persons in many positions and roles in
an organization to develop applications more quickly and easily, while
aiding the ability to maintain and reuse the applications. Using
Telewindows, a component of G2, developers at multiple geographic
locations can work in teams to concurrently develop applications.
Applications built on G2 are portable and interoperable across a number of
computer platforms, so solutions can be offered on a wide range of
platforms and later migrated to new and more powerful computers and
operating systems. G2 currently runs on PCs running Windows NT and on
workstations from Compaq/Digital, Hewlett-Packard, IBM, Sun Microsystems
and others. G2 currently runs under Windows NT, as well as the UNIX and
VMS operating systems.
G2 enables many procedures or rules to be active concurrently. A procedure
or rule can be executing, suspended to allow other computations to occur,
or waiting for a triggering event. G2 enhances the reliability of online
applications by its facility to save "snapshots" of a process state and
"warm boot" to the last saved state, so that an intelligent real-time
system can resume after power failures or other interruptions.
Applications can also be modified without interrupting the running of the
application.
G2 can support concurrent access to multiple sources of data and
high-performance data exchange. Once an application is deployed, Gensym
products such as Telewindows and Gensym's G2 WebLink enable multiple users
to share that application concurrently. Telewindows and G2 WebLink are
available on all G2 platforms as well as on PCs running Windows.
NeurOn-Line
NeurOn-Line(R) is an extensible software platform that enables
non-programmers who have little or no experience with neural networks to
take advantage of this technology, particularly for online, dynamic
applications. NeurOn-Line can identify and generate models of the physical
behavior of processes and of relationships among process variables, when
given a sufficient set of data. These models can then be used online to
compare process behavior with the model's prediction and to control
processes. The development of neural network applications in NeurOn-Line
is done graphically by selecting objects from menus, connecting them, and
entering attribute and control information. NeurOn-Line Studio is a
Windows desktop tool for off-line analysis, modeling, and design
optimization of processes, based on data from a data historian or
spreadsheet data arrays. To make the tool easy for process engineers to
use, many technical decisions such as selection of relevant inputs, time
delays, and network architecture are automated. Once a model has been
built for a process, NeurOn-Line Studio enables users to discover more
profitable ways to run it through simulation and optimization. NeurOn-Line
Studio models can be deployed either in a G2 environment or as Microsoft
ActiveX objects in embedded Windows applications.
Optegrity
Optegrity(TM) is an extensible software platform that delivers abnormal
condition management applications for the process manufacturing
industries. Optegrity applications ensure sustained operational
performance and continuous availability of production assets. Its
applications detect and resolve abnormal process conditions early --
before they disrupt productivity and threaten quality and profits.
Optegrity enables process manufacturers to effectively manage their
production processes. Applications based on the Optegrity platform turn
data into information to quickly identify, isolate and solve operational
problems. Optegrity applications also enable process manufacturers to
increase the availability of production assets; reduce off-specification
production; minimize or eliminate unplanned shutdowns; improve operator
productivity; lower production costs; raise operational safety levels;
increase process utilization and enable non-stop operation.
Integrity
Integrity (which was known as Operations Expert or OPEX until the second
quarter of 2000) is an integrated and extensible platform for
e-infrastructure management and root-cause intelligence. Network service
providers, network management companies, telecommunications equipment
manufacturers and end-user corporations use Integrity to manage the
performance of many different types of networks. Applications based on
Integrity can interoperate with a number of other network management
programs, such as HP OpenView and IBM NetView, and provide intelligent
operations support capable of addressing today's complex communications
operations problems. With Integrity, users have an enhanced ability to
meet service-level agreements, to manage growth cost-effectively, to
minimize the risks of implementing new services and technologies, and to
gain competitive advantage. Key functional uses include early detection of
network problems, alarm/message/event filtering, alarm correlation across
disparate platforms, root-cause analysis, anticipating effects of network
failures, and recommending and/or automating appropriate corrective
actions.
e-SCOR
e-SCOR is Gensym's supply-chain design software product. e-SCOR was the
first out-of-the-box product introduced by the Company in April 2000.
Gensym developed e-SCOR based on the Supply Chain Council's Supply Chain
Operations Reference
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(SCOR) model. e-SCOR enables businesses to simulate various supply-chain
configurations, test the robustness of a supply chain and identify the
service levels required of itself and its partners. Gensym designed e-SCOR
to enable customers to perform "what-if" analyses of their supply-chain
options, before they make changes that could affect the performance of
their supply chain and their business. e-SCOR is intended to help
businesses keep up with today's fast-paced Internet-driven world of
e-business.
NetSleuth
NetSleuth(TM) is a network discovery and Internet Protocol (IP)
availability analysis software product. NetSleuth, which Gensym began
shipping in October 2000, was the Company's second out-of-the-box software
product. Gensym sells NetSleuth primarily through an e-commerce Web site
(www.getnetsleuth.com). NetSleuth automatically constructs an accurate
model of a network and all of its devices and performs IP availability
analysis to quickly reveal the root cause of a network outage. NetSleuth
delivers benefits to corporate network managers and network service
providers. With NetSleuth, they can experience increased confidence in the
stability of their network, handle larger networks without adding staff,
save time and money by minimizing the effects of outages and provide
higher levels of service.
TARGET MARKET AND CUSTOMERS
The Company's customers include end-users, value-added resellers, systems
integrators and OEMs. Many of the largest industrial corporations in the world
are customers of Gensym. The use of Gensym's products in many large industrial
corporations is a key asset to the Company in its ability to build its new
e-infrastructure business. The Company's customers span virtually every industry
- -- ranging from NASA to Pfizer to Fidelity Investments. All of these customers
use Gensym software to analyze and resolve complex problems related to running
their critical business processes. Gensym platforms and products are designed to
help businesses in many different industries successfully navigate the rapidly
changing world of e-business.
Gensym markets its platforms, products and services to three related
markets: 1) expert manufacturing, 2) network management, and 3) the strategic
supply-chain design segments of the overall e-infrastructure marketplace. Our
target market in expert manufacturing continues to be companies looking to
manage complex processes in order to improve product quality, manufacturing
systems availability, or increase the safe operation of their facilities.
Working with our network of VARs, systems integrators and through our own
consulting organization customers deploy custom applications based on Gensym
technology that fit their particular requirements.
Our strategic supply-chain design product, e-SCOR, is targeted at
enterprises or enterprise groups that understand the critical need to constantly
evaluate and modify their supply chain. Gensym developed e-SCOR based on the
Supply Chain Council's Supply Chain Operations Reference (SCOR) model. e-SCOR
enables senior supply-chain and executive managers to evaluate the state of
their supply chain and perform "what-if" analyses of their supply-chain options,
before they make changes that could affect the performance of their supply chain
and their business. e-SCOR is designed to help businesses keep up with today's
fast-paced Internet-driven world of e-business.
Gensym has been delivering technology platforms and solutions to network
equipment manufacturers and service providers for many years. Companies such as
AT&T and Computer Sciences Corp. use Gensym technology platforms in their
network operations centers to help increase system availability by deciphering
and resolving complex network problems. Motorola, Ericsson, and Nokia all have
original equipment manufacturer partnerships with Gensym and include the
Company's software in their own network management solutions. Service providers
and original equipment manufacturers continue to be principal target markets for
Gensym. NetSleuth, the Company's first out-of-the-box network-management
product, has enabled Gensym to introduce its technology to enterprise customers
and service providers who have not historically been a target audience for the
Company's customizable platforms, such as Integrity. The functionality in
NetSleuth previously was only available to customers as part of a more
expensive, customized solution. Gensym's original equipment manufacturer
partners embed the Company's software within their own product offerings. Gensym
has established relationships with several original equipment manufacturers,
including Motorola and Ericsson Hewlett-Packard Telecommunications, an
independent software company established by Ericsson Hewlett-Packard
Telecommunications. Motorola uses Gensym's G2 technology for the intelligence
within their Network Health Analyzer, a product within their cellular
infrastructure family. Ericsson Hewlett-Packard Telecommunications has chosen
Gensym's G2 software as the foundation for its Fault Management eXpert product
that intelligently handles network faults.
SALES AND MARKETING
The Company uses both a direct sales force and selected distribution
partners to bring its products and services to end-users.
As of December 31, 2000, the Company had sales offices in major U.S. and
European cities. In 2000, 1999 and 1998, the Company received 44%, 46% and 47%
of its total revenues, respectively, from international operations. See Note 7
of Notes to Consolidated Financial Statements for financial information by
geographic area.
5
The Company's direct sales force sells to major accounts and provides
personal contact with customers, both directly and through partners. Solutions
engineers perform demonstrations at customer sites and assist customers in
evaluating their technical requirements and in implementing Gensym technology.
Regular seminars and workshops are hosted at the Company's larger offices and
via Web seminars to demonstrate the Company's products. The Company offers basic
and advanced training courses that teach prospective and new customers how to
build and deploy applications using Gensym software.
The Company also distributes its products through a network of systems
integrators and value-added resellers, who are selected for their capability to
provide end users with focused application solutions built on G2 and the
Company's other software platforms. These systems integrators and value-added
resellers currently include organizations such as ABB Automation, Electronic
Data Systems, Foxboro Company, Siemens, Science Systems, and L3 Communications.
Product revenues from systems integrators and value-added resellers represented
over 28%, 25% and 25% of the Company's product revenues for 2000, 1999 and 1998,
respectively.
Gensym markets its products in Japan, Brazil, South Africa and certain
other countries through distributors. These distributors have technical
competence in the application of G2 and other Gensym technologies, market the
Company's products, provide local training and support assistance to customers,
translate documentation, help localize software, and provide systems integration
services.
The Company's marketing personnel engage in a variety of activities,
including lead generation, in-person and Web-based seminars, trade shows, public
relations, direct marketing, advertising, and promotion of customer applications
for publication in industry magazines and journals. More than 300 case studies
of successful applications have been documented.
SERVICE AND SUPPORT
Gensym believes that a high level of customer service and support is
critical to customer satisfaction and project and application success. Most
Gensym customers attend one to three weeks of training and implement their
applications using the development features of Gensym software. The Company
offers a regular schedule of courses in its offices in North America and Europe,
and special on-site training courses are offered around the world on an
as-needed basis. Direct application-engineering services are available to
customers internationally, to support end users as well as Gensym marketing
partners.
The Company offers several customer service options that all include
various levels of telephone support, software updates , FTP bulletin board
access, membership in the Gensym Users Society and access to HelpLink, a
workflow-enabled Web application that greatly enhances the service experience.
The highest level of customer service support includes 24x7 callback service.
Maintenance is mandatory for the first year after purchase and may be renewed in
subsequent years. Gensym typically charges a percentage of the list price
bundled fee for customer service. The Company has service centers in North
America and Europe. Local marketing partners provide service in Asia and other
areas of the world.
Gensym offers a variety of application engineering and consulting services
on a fee-for-service basis. Gensym has expertise in applying its software in a
variety of areas, including network and systems management; manufacturing
process management; process design, modeling and simulation; pharmaceutical
process design and control; water treatment; logistics; transportation; and
finance. A key mission of the consulting staff is to assist partners, as well as
end users, in the successful development and deployment of intelligent systems
applications based on G2 and the company's other platforms.
The Company offers a progressive series of introductory, intermediate and
advanced training courses for customers, partners and potential users of its
products. The courses are taught at the Company's corporate headquarters in
Burlington, Massachusetts, at its worldwide sales offices, and at customer
locations.
Gensym provides continuing support to the Gensym Users Society, an
organization consisting of users of the Company's software who are covered by
current maintenance contracts.
RESEARCH AND DEVELOPMENT
The Company believes that its future success will depend upon its ability
to enhance existing products as well as to develop and introduce new products
that keep pace with technological developments in the marketplace and address
the increasingly sophisticated needs of its customers. The Company intends to
expand existing product offerings and to introduce new applications. While the
Company expects that certain new products will be developed internally, the
Company may, based on timing and cost considerations, acquire or license
technology and/or products from third parties or consultants.
New products and enhancements to existing products are typically developed
in response to market analysis and feedback from customers obtained by the
Company's customer support and consulting personnel. New product initiatives are
also taken to address targeted markets and industry standards.
6
COMPETITION
Gensym faces competition for it's network management products, NetSleuth
and Integrity, from a number of companies in this market. Micromuse, System
Management Arts (SMARTS) and RiverSoft are a few of the more widely known
competitors. Each of these companies offers products that differ from Gensym's
products in a variety of ways. Customers select products based on the particular
features and overall management approach to network availability each vendor
delivers. Gensym offers products at both ends of a spectrum: NetSleuth, for
example, has very fixed functionality designed to deliver network mapping and
Internet Protocol availability analysis, while Integrity is a more comprehensive
management platform that is customizable to meet each customer's particular
network management requirements.
Gensym differentiates Integrity from the competition by virtue of its
customization capabilities, which is a key element for large organizations
managing diverse complex networks such as those operated by Computer Sciences
Corporation and AT&T. NetSleuth is chosen by large and small enterprises for the
accuracy of its network mapping, the speed with which it locates devices and
creates maps and its sophisticated event filtering to find the correct root
cause of network problems. Gensym believes that its heritage of providing
sophisticated reasoning technology to the market is a major competitive
advantage over the competition, as customers try to manage increasingly complex
networks.
In the expert manufacturing market, a number of software companies offer
products that perform certain functions of G2 for specific applications. The
Company believes that its products offer, as a single seamlessly integrated
environment, the most comprehensive set of software technologies available to
successfully build a broad range of intelligent system applications. Competition
in the expert manufacturing market includes point solutions, real-time and
expert system products and traditional programming or internally developed
software.
Companies such as Aspen Technology, Pavilion and Ilog S.A., sell solutions
that compete with the Company's products with respect to specific applications
or uses. An intelligent system based on point solutions, however, requires the
integration of various software packages from different vendors, and is often
difficult to maintain. Although the Company's competitors' systems may provide a
faster implementation, such systems may fail to provide the capabilities and
flexibility needed to satisfy the changing requirements of a dynamic complex
environment. Point solutions may also fail to provide the extensibility to add
rules and neural networks, and may be difficult to migrate to more powerful
computers.
The principal competitive factors in all of the Company's markets are
functionality, ease of use, price, distribution capabilities, quality,
performance, customer support, and availability of application software
implementation services. In order to maintain its competitive position, the
Company must continue to enhance its existing products and introduce new
products that meet evolving customer requirements. There is no assurance that
the market position or the competitive advantages of the Company will continue.
See "Certain Factors That May Affect Future Results - Competition."
PROPRIETARY RIGHTS
The Company relies primarily on a combination of patent law, copyright law
and trade secret law to protect its proprietary technology. The Company also has
internal policies and systems to limit access to and keep confidential its trade
secrets. The Company distributes its products under software license agreements
that contain various provisions to protect the Company's ownership of and the
confidentiality of the underlying technology. The Company also requires its
employees and other parties with access to its confidential information to
execute agreements prohibiting the unauthorized use or disclosure of the
Company's technology. In addition, the Company periodically reviews its
proprietary technology for its ability to be patented, and has one patent
covering specific aspects of G2. The Company has also placed technical
inhibitors in its software that prevent the software from running on
unauthorized computers. Despite these precautions, it may be possible for a
third party to misappropriate the Company's technology or to develop similar
technology independently. In addition, effective patent, copyright and trade
secret protection may not be available in every foreign county in which the
Company's products are distributed.
Certain technology used in the Company's products is licensed from third
parties. The Company believes that, in general, comparable licenses are
available on commercially comparable terms from a number of licensors and does
not believe that any of the Company's products are significantly dependent upon
such licensed technologies.
Despite the Company's efforts to protect its proprietary rights, attempts
may be made to copy or reverse engineer aspects of the Company's products or to
obtain and use information that the Company regards as proprietary. There can be
no assurance that others will not develop products that infringe the Company's
proprietary rights or are similar or superior to those developed by the Company.
Policing the unauthorized use of the Company's products is difficult. Litigation
may be necessary in the future to enforce the Company's intellectual property
rights, to protect the Company's trade secrets or to determine the validity and
scope of the proprietary rights of others. Such litigation could result in
substantial costs and diversion of resources and could have a material adverse
effect on the Company's business, results of operations and financial condition.
Also, there can be no assurance that third parties will not assert infringement
claims against the Company in the future with respect to current or future
products. Any such
7
assertion could require the Company to enter into royalty arrangements or result
in costly litigation, which could have a material adverse effect on the
Company's business, results of operations and financial condition.
Gensym(R), G2(R), NeurOn-Line(R), ReThink(R), and Operations Expert(R) are
registered trademarks of the Company. The Gensym logo, GDA, ReThink, G2 WebLink,
OPEX, NetSleuth and Optegrity are trademarks of the Company. The Company has
filed applications to register Gensym, G2, NeurOn-Line, and OPEX in certain
foreign jurisdictions. In addition, the Company has an exclusive, worldwide,
royalty-free, perpetual license from Microsoft Corporation to use the trademark
Telewindows.
BACKLOG
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.
EMPLOYEES
As of December 31, 2000, the Company had 224 full-time employees,
including 77 in sales and marketing, 48 in product development, 37 in consulting
services, 36 in customer support, production and licensing, and educational
services, and 26 in general and administrative functions. None of the Company's
employees is represented by a labor union, and the Company believes that its
employee relations are good.
ITEM 2. PROPERTIES
At December 31, 2000, the Company's headquarters and principal operations
were located in a leased facility with 52,322 square feet in Cambridge,
Massachusetts. The lease on the Cambridge facility expired on January 31, 2001.
In February 2001 the Company's headquarters and principal operations relocated
to a 27,250 square feet facility in Burlington, Massachusetts. The lease on the
Burlington facility expires on January 31, 2006, with an option to renew for an
additional term of five years. In addition to rental expenses, the Company must
also pay an allocated portion of operating expenses and taxes each year. The
Company also leases sales office space in the metropolitan areas of several
cities throughout North America, as well as France, The Netherlands, Tunisia and
the United Kingdom. The Company's aggregate facilities rental expense, net of
rental income from sub-leases, for all facilities during 2000 was $1.9 million.
Gensym believes that its existing facilities are adequate for its current needs
and that suitable additional space will be available as required.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of the Company's securityholders during
the fourth quarter of 2000.
EXECUTIVE OFFICERS OF THE COMPANY
The executive officers of the Company and their respective ages as of
March 10, 2001 as follows:
Name Age Position
- ---------------- ----- --------------------------------------------------
Patrick Courtin 57 Chairman of the Board of Directors, Chief
Executive Officer and President
Jeffery A. Weber 54 Vice President, Finance and Administration and
Chief Financial Officer
James J. Slane 46 Vice President, Marketing
Joseph Massey 50 Vice President, Engineering
Marilyn Kain 40 Vice President, Global Sales and Services
Mr. Courtin has served as Chairman of the Board, Chief Executive Officer and
President since November 1999. Mr. Courtin has been a member of Gensym's board
of directors since May 1999. From February 1996 to May 1999, he was president
and chief executive officer of M3i Systems Inc. Prior to joining M3i Systems,
Mr. Courtin served as chairman and chief executive officer of Comstream Inc.
from February 1994 to August 1995. Mr Courtin has previously held senior
executive positions at SPAR Aerospace, Proteon Inc., TIE Communications, and
Digital Equipment Corporation.
Mr. Weber joined the Company in February 2000 as Vice President, Finance and
Chief Financial Officer. From June 1999 to January 2000, Mr. Weber provided
management consulting services to several companies. From July 1997 to June
1999, Mr. Weber was Vice President, Finance and Chief Financial Officer of Summa
Four, a manufacturer of open programmable telephony switches that was acquired
by Cisco Systems in November 1998. From June 1994 to June 1997, Mr. Weber was
Senior Vice President,
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Operations and Finance and Chief Financial Officer of Computer Identics, a
manufacturer of bar code data collection products that was acquired by Robotic
Vision Systems in August 1996.
Mr. Slane joined the Company in February 2000, as Vice President, Marketing.
From March 1998 to February 2000 Mr. Slane was vice president of marketing for
PictureTel Corporation responsible for all marketing and product management.
Prior to joining PictureTel, Mr. Slane was the vice president of marketing and
director with Onsett International, an IT technology consulting firm from March
1995 to March 1998. Mr. Slane earned a bachelor's degree from Saint Michael's
College, an MBA from American International University and he has completed
executive technical and management programs at the Wharton School and Babson
College.
Mr. Massey joined the Company in July 2000 as Vice President, Engineering. From
September 1999 to July 2000 he was vice president of engineering for @Comm
Corporation, a designer and manufacturer of telemanagement systems and solutions
for the enterprise market, formerly XIOX Corporation. From 1997 to 1999 Mr.
Massey was Director of Telephony/RAS Application Development at Lucent
Technologies. Mr. Massey was Director of SPECTRUMTM (network management
platform) Product Development at Cabletron Systems from 1992 to 1997. He earned
a BA from Millersville University and an MBA from Boston University.
Ms. Kain joined the Company in February 2001 as Vice President of Global Sales
and Services. From September 1999 through February 2001 she took a career
sabbatical to pursue personal interests. In 1999 she was vice president of Asia
Pacific, Japan and Latin American Sales & Operations for Intel Network Systems.
From 1997 to 1999 she held the same position with Shiva Corporation, a leader in
remote access networking and virtual private networking solutions, prior to its
acquisition by Intel. From 1992 to 1997 Ms. Kain was a director of international
sales with Shiva. She also held senior sales positions with Sigma Designs, Inc.,
from 1986 to 1992.
9
PART II.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
(a) Market Information
Gensym's common stock is quoted on the Nasdaq National Market under the
symbol "GNSM". The following table sets forth the high and low closing sales
prices per share of the Company's Common Stock as reported by the Nasdaq
National Market for each period indicated.
2000 High Low
------------------- -------- ------
First quarter 17 1/2 4 3/4
Second quarter 10 3 1/4
Third quarter 4 1/4 3
Fourth quarter 3 1/4 23/32
1999 High Low
------------------- -------- ------
First quarter 3 7/8 2 5/8
Second quarter 4 1/8 2 9/16
Third quarter 4 7/16 3 1/4
Fourth quarter 6 11/16 3 1/8
The Company has never declared or paid cash dividends on its capital
stock. The Company does not anticipate paying any cash dividends in the
foreseeable future. Payment of future dividends, if any, will be at the
discretion of the Company's Board of Directors after taking into account various
factors, including the Company's financial condition, operating results, current
and anticipated cash needs and plans for expansion.
On March 26, 2001, the Company received a notice from the Nasdaq National
Market that its common stock had failed to maintain the required minimum market
value public float of $5,000,000 over the previous 30 consecutive days as
required for listing on the Nasdaq National Market. As a result, the Company has
until June 25, 2001 to regain compliance with the Nasdaq National Market listing
standards or its common stock will be delisted from trading on the Nasdaq
National Market. If the Company does not regain compliance with the listing
standards by June 25, 2001, it may request a hearing before the Nasdaq
Qualifications Hearing Panel for a determination that its common stock should
continue to be listed on the Nasdaq National Market despite the failure to
comply with the listing requirements. If the Company's common stock is delisted
from the Nasdaq National Market, its liquidity and trading price could be
negatively impacted.
The number of holders of record of the Company's Common Stock at March 12,
2001 was 94. This number does not include stockholders for whom shares are held
in a "nominee" or "street" name.
(b) Stock Repurchase Program
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. As of December 31,
2000, 501,300 shares had been repurchased at a cost of $1,869,000. No shares
have been repurchased since March 31, 1999.
10
ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated balance sheet data presented below as of
December 31, 2000 and 1999 and the selected consolidated statement of operations
data for each of the three years in the period ended December 31, 2000 are
derived from the Company's Consolidated Financial Statements, included elsewhere
in this Annual Report on Form 10-K, and have been audited by Arthur Andersen
LLP, independent public accountants (the "Consolidated Financial Statements").
The selected consolidated balance sheet data presented below as of December 31,
1998, 1997, and 1996, and the selected consolidated statement of operations data
for the years ended December 31, 1997 and 1996, are derived from the Company's
Consolidated Financial Statements, not included in this Annual Report on Form
10-K, all of which have been audited by Arthur Andersen LLP, independent public
accountants. These data should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Consolidated Financial Statements and related Notes included elsewhere in
this Annual Report on Form 10-K.
YEAR ENDED DECEMBER 31,
CONSOLIDATED STATEMENT OF 2000 1999 1998 1997 1996
OPERATIONS DATA: -------- -------- -------- -------- --------
Revenues:
Product $ 11,992 $ 19,628 $ 16,911 $ 18,433 $ 21,358
Services 15,583 16,799 18,067 17,076 15,877
-------- -------- -------- -------- --------
Total revenues 27,575 36,427 34,978 35,509 37,235
Cost of revenues 8,396 8,574 8,698 9,352 7,385
-------- -------- -------- -------- --------
Gross profit 19,179 27,853 26,280 26,157 29,850
-------- -------- -------- -------- --------
Operating expenses:
Sales and marketing 17,379 18,214 18,276 18,802 17,433
Research and development 7,614 6,470 6,023 6,977 5,984
General and administrative 4,942 5,288 4,134 4,528 3,699
Restructuring charge -- -- -- 1,558 --
-------- -------- -------- -------- --------
Total operating expenses 29,935 29,972 28,433 31,865 27,116
-------- -------- -------- -------- --------
Operating (loss) income (10,756) (2,119) (2,153) (5,708) 2,734
Other income (net) 211 503 715 779 518
-------- -------- -------- -------- --------
(Loss) income before provision for income taxes (10,545) (1,616) (1,438) (4,929) 3,252
Provision for income taxes 2,271 336 50 40 1,204
-------- -------- -------- -------- --------
Net (loss) income $(12,816) $ (1,952) $ (1,488) $ (4,969) $ 2,048
======== ======== ======== ======== ========
Basic (loss) income per share (1) $ (2.01) $ (0.32) $ (0.23) $ (0.79) $ 0.35
======== ======== ======== ======== ========
Diluted (loss) income per share (1) $ (2.01) $ (0.32) $ (0.23) $ (0.79) $ 0.33
======== ======== ======== ======== ========
Weighted average common shares outstanding (1) 6,365 6,149 6,371 6,310 5,910
======== ======== ======== ======== ========
Weighted average common shares outstanding
assuming dilution (1) 6,365 6,149 6,371 6,310 6,286
======== ======== ======== ======== ========
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments $ 3,355 $ 11,685 $ 14,534 $ 15,801 $ 19,590
Working capital 285 12,814 14,650 15,149 20,470
Total assets 15,540 26,934 28,268 31,517 36,258
Total stockholders' equity 2,412 14,922 17,483 19,828 24,068
(1) Computed as described in Note 1(i) of Notes to Consolidated Financial
Statements.
11
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The Company was incorporated in 1986 to provide software products for
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.
In order to reach the broadest possible market, the Company employs a
direct sales force and selected resellers to bring its products and services to
end users around the world. The Company sells to major accounts and provides
personal contact with customers, both directly and through partners. Solutions
engineers perform demonstrations at customer sites and assist customers in
evaluating their technical requirements and in implementing Gensym technology.
Regular seminars and workshops are hosted at the Company's larger offices and
via Web seminars to demonstrate the Company's products. The Company offers basic
and advanced training courses that teach prospective and new customers how to
build application solutions using Gensym products.
The Company also distributes its products through a network of systems
integrators and value-added resellers, who are selected for their capability to
provide end users with focused application solutions built on G2 and the
Company's other software platforms.
Gensym markets its products in Japan, Brazil, South Africa and certain
other countries through distributors. These distributors have technical
competence in the application of G2 and other Gensym technologies, market the
Company's products, provide local training and support assistance to customers,
translate documentation, help localize software, and provide systems integration
services.
This Annual Report on Form 10-K contains forward-looking statements. For
this purpose, any statements contained herein that are not statements of
historical fact may be deemed to be forward-looking statements. Without limiting
the foregoing, the words "believes," "anticipates," "plans," "expects,"
"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".
12
RESULTS OF OPERATIONS
The following table sets forth, as a percentage of total revenues, consolidated
statements of operations data for the periods indicated:
Year ended December 31,
2000 1999 1998
----- ----- -----
Revenues:
Product 43.5% 53.9% 48.3%
Service 56.5 46.1 51.7
----- ----- -----
Total revenues 100.0 100.0 100.0
Cost of revenues 30.4 23.5 24.9
----- ----- -----
Gross margin 69.6 76.5 75.1
----- ----- -----
Operating expenses:
Sales and marketing 63.0 50.0 52.3
Research and development 27.6 17.8 17.2
General and administrative 18.0 14.5 11.8
----- ----- -----
Total operating expenses 108.6 82.3 81.3
----- ----- -----
Operating loss (39.0) (5.8) (6.2)
Other income, net 0.8 1.4 2.0
----- ----- -----
Loss before provision for income taxes (38.2) (4.4) (4.2)
Provision for income taxes 8.3 0.9 0.1
----- ----- -----
Net loss (46.5)% (5.3)% (4.3)%
===== ===== =====
YEARS ENDED DECEMBER 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 $27.6 million for the year ended December 31, 2000 and
$36.4 million for the same period in 1999, a decrease of $8.9 million, or 24.3%.
The decrease in total revenues was attributable to both a decrease in sales of
product licenses and application consulting services. International revenues
accounted for 44% and 46% of total revenues in 2000 and 1999; respectively.
Product. Product revenues decreased $7.6 million, or 38.9%, to $12.0
million for the year ended December 31, 2000 from $19.6 million in 1999. The
decrease in product revenues was across all product lines and occurred in both
domestic and international markets. Much of the decrease is attributable to the
Company's new pricing and product line packaging policies implemented in 2000.
As part of its new strategic direction, the Company introduced new
product-packaging and customer service programs designed to make it easier for
customers to do business with the Company and enable Gensym to align its
business practices with software industry norms. Implementing the new strategic
direction was disruptive to the Company's business in the second half of the
year. Also, in 1999, product revenue included $2.9 million from a single
customer, BMC Software, Inc.
Service. Service revenues decreased $1.2 million, or 7.2%, to $15.6
million for the year ended December 31, 2000 from $16.8 million in 1999. The
decrease in service revenues was primarily due to decreases in application
consulting revenues and training fees. Consulting and training revenues
decreased primarily as a result of decreased product sales. Customer support
revenues for the year ended December 31, 2000 increased $400,000, from $9.4
million to $9.8 million in 2000. Strong maintenance contract renewals attributed
to the increase.
13
Cost of Revenues
Cost of revenues primarily consists of consulting labor, technical support
costs, and the costs of material and labor involved in producing and
distributing the Company's software. Cost of revenues remained virtually
unchanged in 2000. Cost of revenues were $8.4 million for the year ended
December 31, 2000 and $8.6 million for the same period in 1999, a decrease of
$0.2 million, or 2.1%. A decrease in consulting costs was partially offset by
higher royalty expenses year over year. Gross margin on revenues for the year
ended December 31, 2000 was 69.6%, as compared to 76.5% in 1999. The decrease in
gross profit resulted primarily from lower revenue in 2000 compared to 1999.
Operating Expenses
Total operating expenses remained consistent with 1999. Total operating
expenses were $29.9 million for the year ended December 31, 2000, a decrease of
0.1%, from $30.0 million in 1999. Research and development costs increased
during 2000 consistent with the Company's plan to develop new products. The
increase in research and development costs was almost entirely offset by
decreased spending in sales and administrative costs.
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. For the year ended December
31, 2000, sales and marketing expenses decreased $835,000, or 4.6%, to $17.4
million (63.0% of total revenues) from $18.2 million (50.0% of total revenues)
in 1999. The decrease was primarily a result of lower sales commissions
resulting from lower sales in 2000, plus cost savings resulting from the
consolidation of field sales offices. Sales and marketing expenses increased as
a percent of total revenue, as a result of lower revenue in 2000 from 1999.
Research and Development. Research and development expenses consist
primarily of costs of personnel, equipment, and facilities. These expenses
increased $1.1 million or 17.7% to $7.6 million (27.6% of total revenue) for the
year ended December 31, 2000 from $6.5 million (17.8% of total revenue) in 1999.
The increase is directly attributable to an increase in subcontract labor and
recruitment costs for product development. The increase in research and
development as a percent of total revenue is twofold; research and development
expense increased and total revenue was lower in 2000 as compared to 1999.
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
decreased $346,000, or 6.5% to $4.9 million (17.9% of total revenue) for the
year ended December 31, 2000 from $5.3 million (14.5% of total revenue) in 1999.
The decrease was primarily due to fewer general and administrative personnel in
2000 over 1999, which was partially offset by increased subcontractor and
recruitment costs. General and administrative expenses increased as a percent of
total revenue, due to lower revenue in 2000 as compared to 1999.
Other Income
Other income consists primarily of interest income partially offset by
foreign exchanges transaction gains and losses. For the year ended December 31,
2000, other income decreased $292,000 or 58.1% to $211,000 from $503,000 for
1999. The decrease in other income was due to decreased interest income
resulting from lower cash balances and foreign exchange fluctuations.
Income Taxes
The Company recorded a provision for income taxes of $2,271,000 and
$336,000, for the years ended December 31, 2000 and 1999, respectively. The
provision for the year ended December 31, 2000 included a charge of $1,873,000
in accordance with the increase in the tax valuation allowance to equal the
entire deferred tax asset as discussed below. The balance of the tax provision
for 2000 of $398,000 and the 1999 provision of $336,000 represents income taxes
on income generated in certain foreign jurisdictions (where the Company does not
have operating loss carryforwards) and revenue withholding tax on sales in
certain foreign jurisdictions. The Company generated significant U.S. tax loss
carryforwards during the years ended December 31, 2000 and 1999.
Under SFAS No. 109, a deferred tax asset related to the future benefit of
a tax loss carryforward should be recorded unless the Company makes a
determination that it is "more likely than not" that such deferred tax asset
would not be realized. Accordingly, a valuation allowance would be provided
against the deferred tax asset to the extent that the Company cannot demonstrate
that it is "more likely than not" that the deferred tax asset 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 periodically reviews
its deferred tax asset to determine if such asset is realizable. In 2000, the
Company concluded, in accordance with SFAS No. 109, that the Company should not
recognize the value of its deferred tax asset under the "more likely than not"
test and therefore increased the amount of its valuation allowance to equal the
entire deferred tax asset. The increase in the valuation allowance resulted in a
charge to the provision for income taxes of $1,873,000 during the year ended
December 31, 2000. The primary factors considered in
14
evaluating the realizability of the deferred tax asset and the level of
valuation allowance were the operating losses through December 31, 2000. See
Note 4 of Notes to Consolidated Financial Statements
YEARS ENDED DECEMBER 31, 1999 AND 1998
Revenues
Total revenues were $36.4 million for the year ended December 31, 1999 as
compared to $35.0 million for 1998, an increase of $1.4 million or 4.1%. The
increase in total revenues was attributable to increased sales of product
licenses, partially offset by a decrease in service revenues. International
revenues accounted for 46% and 47% of total revenue in 1999 and 1998,
respectively.
Product. Product revenues increased to $19.6 million for the year ended
December 31, 1999 from $16.9 million in 1998, an increase of 16.1%. The increase
in product revenues primarily reflects an increased demand for the Company's
products in the telecommunications industry. Product revenues increased year
over year in both North America (up $1.1 million) and Europe (up $1.5 million);
product revenues were unchanged year over year in the Asia-Pacific region.
Service. Service revenues decreased to $16.8 million for the year ended
December 31, 1999 from $18.1 million in the same period in 1998, a decrease of
7.0%. The decrease in service revenues was primarily due to a decrease in
application consulting revenues and, to a lesser extent, decreased educational
services fees. Maintenance revenues increased to $9.4 million for the year ended
December 31, 1999 from $9.2 million in the same period in 1998, an increase of
2.2%. Consulting revenue decreased to $6.4 million for the year ended December
31, 1999 from $7.6 million in the same period in 1998, a decrease of 15.8%. Fees
for educational services decreased to $1.1 million for the year ended December
31, 1999 from $1.3 million in the same period in 1998, a decrease of 15.4%.
Cost of Revenues
Total cost of revenues decreased slightly for 1999 to $8.6 million (23.5%
of total revenue) compared to $8.7 million (24.9% of total revenue) for 1998.
Gross margin on revenue increased to 76.5% for the period ended December 31,
1999 from 75.1% in the same period for 1998. The increase in gross margin
resulted from greater product revenue and lower infrastructure costs.
Operating Expenses
Total operating expenses increased to $30.0 million (82.3% of total
revenue) for the year ended December 31, 1999 from $28.4 million (81.3% of total
revenue) in the same period in 1998, an increase of 5.4%. The increase in
spending was in general and administrative and research and development.
Sales and Marketing. Total expenses remained relatively unchanged at $18.2
million (50.0% of total revenue) for year ended December 31 1999, from $18.3
million (52.3% of total revenue) for the comparable period in 1998. The decrease
as a percent of revenue was due to higher revenues in 1999 compared to 1998.
Research and Development. Research and development expenses increased 7.4%
to $6.5 million (17.8% of total revenues) for the year ended December 31, 1999
from $6.0 million (17.2% of total revenues) for the comparable period in 1998.
The increase in spending was primarily due to the cost associated with the
hiring and retaining of engineering personnel.
General and Administrative. These expenses increased 27.9% to $5.3 million
(14.5% of total revenues) for the year ended December 31, 1999 from $4.1 million
(11.8% of total revenues) for the comparable period in 1998. The increase in
expenses was due to increased personnel recruiting costs, severance costs, and
costs associated with accounting and legal services.
Other Income
For the year ended December 31, 1999, other income was $503,000 compared
to $715,000 for the comparable period in 1998. The decrease was due to decreased
interest income due to lower cash balances. The Company has historically
experienced nominal net foreign exchange transaction gains or losses.
Income Taxes
The Company recorded a provision for income taxes of $336,000 and $50,000,
for the years ended December 31, 1999 and 1998, respectively. The provision in
both years represents income taxes on income generated in foreign jurisdictions
(where the Company does not have operating loss carryforwards) and revenue
withholding tax on sales in certain foreign jurisdictions. The Company generated
significant U.S. tax loss carryforwards during the years ended December 31, 1999
and 1998.
15
Selected Quarterly Operating Results
The Company's operating results have fluctuated in the past and may
fluctuate significantly in the future. Because the Company ships software
products within a short period after receipt of an order, the Company typically
does not have a material backlog of unfilled orders for software products.
Accordingly, revenues from software licenses in any quarter are substantially
dependent on orders for software products booked in the 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. 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. Since the Company's
expense levels are based in part on its expectations as to future revenues, the
Company may be unable to adjust spending in a timely manner to compensate for
any revenue shortfall. Accordingly, any revenue shortfalls would likely have a
disproportionate adverse effect on net income.
In the quarter ended September 30, 2000, the Company recorded a provision
for income taxes of $1,963,000. The provision included a charge of $1,873,000 in
accordance with the increase in the tax valuation allowance to equal the entire
deferred tax asset.
Under SFAS No. 109, a deferred tax asset related to the future benefit of
a tax loss carryforward should be recorded unless the company makes a
determination that it is "more likely than not" that such deferred tax asset
would not be realized. Accordingly, a valuation allowance would be provided
against the deferred tax asset to the extent that the Company cannot demonstrate
that it is "more likely than not" that the deferred tax asset 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 periodically reviews
its deferred tax asset to determine if such asset is realizable. At September
30, 2000, the Company concluded, in accordance with SFAS No. 109, that the
Company should not recognize the value of its deferred tax asset under the "more
likely than not' test and therefore increased the amount of its valuation
allowance to equal the entire deferred tax asset. The increase in the valuation
allowance resulted in a charge to the provision for income taxes of $1,873,000
in the period ended September 30, 2000. The primary factors considered in
evaluating the realizability of the deferred tax asset and the level of
valuation allowance were the continued operating losses through September 30,
2000 and that the Company expected a loss for the fourth quarter and for the
year ending December 31, 2000. Also included in the Company's provision for
income taxes are income taxes in foreign jurisdictions, where the Company does
not have operating loss carryforwards.
The following tables present unaudited financial information for the
Company's eight most recent quarters. The following selected quarterly
information includes all adjustments (consisting only of normal recurring
adjustments) that the Company considers necessary for a fair presentation. The
Company believes that quarter-to-quarter comparisons of its financial results
are not necessarily meaningful and that such comparisons should not be relied
upon as an indication of future performance.
16
Quarter Ended
Dec. 31, Sept. 30, June 30, Mar. 31, Dec. 31, Sept. 30, June 30, Mar. 31,
2000 2000 2000 2000 1999 1999 1999 1999
-----------------------------------------------------------------------------------
Revenues:
Product $ 3,619 $ 2,139 $ 3,268 $ 2,966 $ 5,026 $ 5,205 $ 5,337 $ 4,060
Services 4,102 3,341 4,005 4,135 4,119 3,980 4,404 4,296
------- ------- ------- ------- ------- ------- ------- -------
Total revenues 7,721 5,480 7,273 7,101 9,145 9,185 9,741 8,356
Cost of revenues 2,105 1,929 1,996 2,366 2,136 2,113 2,180 2,145
------- ------- ------- ------- ------- ------- ------- -------
Gross profit 5,616 3,551 5,277 4,735 7,009 7,072 7,561 6,211
------- ------- ------- ------- ------- ------- ------- -------
Operating expenses:
Sales and marketing 4,796 4,199 4,057 4,327 4,786 4,421 4,529 4,478
Research and development 1,893 1,959 1,957 1,805 1,514 1,631 1,768 1,557
General and administrative 1,274 1,062 1,102 1,504 2,081 926 1,121 1,160
------- ------- ------- ------- ------- ------- ------- -------
Total operating expenses 7,963 7,220 7,116 7,636 8,381 6,978 7,418 7,195
------- ------- ------- ------- ------- ------- ------- -------
Operating (loss) income (2,347) (3,669) (1,839) (2,901) (1,372) 94 143 (984)
Other income (net) 53 98 (9) 69 161 114 117 111
------- ------- ------- ------- ------- ------- ------- -------
(Loss) income before provision for
income taxes (2,294) (3,571) (1,848) (2,832) (1,211) 208 260 (873)
Provision for income taxes 233 1,963 15 60 209 45 37 45
------- ------- ------- ------- ------- ------- ------- -------
Net (loss) income $(2,527) $(5,534) $(1,863) $(2,892) $(1,420) $ 163 $ 223 $ (918)
======= ======= ======= ======= ======= ======= ======= =======
Basic and diluted (loss) earnings
per share $ (0.39) $ (0.86) $ (0.29) $ (0.46) $ (0.23) $ 0.03 $ 0.04 $ (0.15)
======= ======= ======= ======= ======= ======= ======= =======
Weighted average shares
outstanding - Basic 6,433 6,400 6,367 6,260 6,202 6,146 6,099 6,150
======= ======= ======= ======= ======= ======= ======= =======
Weighted average shares
outstanding - Diluted 6,433 6,400 6,367 6,260 6,202 6,153 6,103 6,150
======= ======= ======= ======= ======= ======= ======= =======
Quarter Ended
Dec. 31, Sept. 30, June 30, Mar. 31, Dec. 31, Sept. 30, June 30, Mar. 31,
2000 2000 2000 2000 1999 1999 1999 1999
------------------------------------------------------------------------------------
(as a percentage of total revenues)
Revenues:
Product 46.9% 39.0% 44.9% 41.8% 55.0% 56.7% 54.8% 48.6%
Services 53.1 61.0 55.1 58.2 45.0 43.3 45.2 51.4
------- ------- ------- ------- ------- ------- ------- -------
Total revenues 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Cost of revenues 27.3 35.2 27.4 33.3 23.4 23.0 22.4 25.7
------- ------- ------- ------- ------- ------- ------- -------
Gross profit 72.7 64.8 72.6 66.7 76.6 77.0 77.6 74.3
------- ------- ------- ------- ------- ------- ------- -------
Operating expenses:
Sales and marketing 62.1 76.6 55.8 60.9 52.3 48.1 46.5 53.6
Research and development 24.5 35.8 26.9 25.4 16.5 17.8 18.1 18.6
General and administrative 16.5 19.4 15.2 21.2 22.8 10.1 11.5 13.9
------- ------- ------- ------- ------- ------- ------- -------
Total operating expenses 103.1 131.8 97.9 107.5 91.6 76.0 76.1 86.1
------- ------- ------- ------- ------- ------- ------- -------
Operating (loss) income (30.4) (67.0) (25.3) (40.8) (15.0) 1.0 1.5 (11.8)
Other income (net) 0.7 1.8 (0.1) 1.0 1.8 1.3 1.2 1.3
------- ------- ------- ------- ------- ------- ------- -------
(Loss) income before provision for
income taxes (29.7) (65.2) (25.4) (39.8) (13.2) 2.3 2.7 (10.5)
Provision for income taxes 3.0 35.8 0.2 0.8 2.3 0.5 0.4 0.5
------- ------- ------- ------- ------- ------- ------- -------
Net (loss) income (32.7)% (101.0)% (25.6)% (40.6)% (15.5)% 1.8% 2.3% (11.0)%
======= ======= ======= ======= ======= ======= ======= =======
17
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.
At December 31, 2000, cash, cash equivalents, and short-term investments
had decreased by $8.3 million to $3.4 million. The Company regularly invests
excess funds in highly-rated money market funds, government securities, and
commercial paper.
Cash and cash equivalents decreased $3.0 million from $5.7 million at
December 31, 1999 to $2.7 million at December 31, 2000.
Cash used for operations in 2000 was $7.1 million: $10.0 million was used
for the funding of the Company's operating loss, $420,000 was used in the
recognition of deferred revenue, $780,000 was provided by a decrease in
accounts receivables, $727,000 was provided by an increase in accrued expenses,
$1.2 million was provided by a decrease in prepaid expenses, and $670,000 was
provided by an increase in accounts payable.
Cash provided by investing activities was $3.6 million: $5.3 million was
provided by sales of short-term investments, $1.2 million was used to purchase
equipment, and $523,000 resulted from the increase in other assets.
Cash provided in financing activities in 2000 was $700,000 and resulted
from the exercise of incentive stock options and from the exercise of stock
issued under the employee stock purchase plan.
Cash decreased $253,000 in 2000 due to the effect of currency fluctuation.
The Company has incurred operating losses for each of the three years in
the period ended December 31, 2000 and may need to obtain additional funding or
alternative means of financial support, or both, in order to continue as a going
concern. The accompanying consolidated financial statements have been prepared
assuming the Company will continue as a going concern. Management's plan to
continue as a going concern relies heavily on achieving profitability in the
third quarter of 2001 and beyond. This return to profitability is based on
expense control, cost reductions, and increased revenues from new and existing
products in the e-Infrastructure marketplace. Management is also seeking to
identify additional funding sources of an equity and/or debt nature. However,
there can be no assurance that such plans will be successful or that such
funding or financial support will be available or adequate to allow the Company
to continue as a going concern. These factors raise substantial doubt concerning
the Company's ability to continue as a going concern. The accompanying financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
On March 28, 2001, the Company entered into a credit facility with Silicon
Valley Bank. The credit facility provides the Company the ability to borrow up
to 80% of the Company's qualified and eligible gross domestic accounts
receivable up to a maximum of $2.5 million. Borrowings under this agreement will
be at an interest rate of 2% per month of the average gross daily purchase
account balance, plus an administration fee of 1% of gross purchased account
receivables. This agreement is subject to certain restrictive covenants,
including an adjusted quick ratio. Amounts under this credit facility are
secured by substantially all of the corporate assets of Gensym Corporation. At
March 31, 2001, the Company may not be in compliance with the adjusted quick
ratio covenant.
18
Stock Repurchase Program
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. As of December 31,
2000, 501,300 shares had been repurchased at a cost of $1,869,000. There has
been no repurchase of shares since March 31, 1999.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board, (FASB), issued
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 Nos. 137 and 138, 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 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 was effective for the fourth quarter 2000. The Company's
adoption of SAB 101 did not have a material impact on the Company's results of
operations.
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:
Liquidity. The Company has incurred operating losses for each of the
three years in the period ended December 31, 2000 and may need to obtain
additional funding or alternative means of financial support, or both, in order
to continue as a going concern. The accompanying consolidated financial
statements have been prepared assuming the Company will continue as a going
concern. Management's plan to continue as a going concern relies heavily on
achieving profitability in the third quarter of 2001 and beyond. This return to
profitability is based on expense control, cost reductions, and increased
revenues from new and existing products in the e-Infrastructure marketplace.
Management is also seeking to identify additional funding sources of an equity
and/or debt nature. However, there can be no assurance that such plans will be
successful or that such funding or financial support will be available or
adequate to allow the Company to continue as a going concern. These factors
raise substantial doubt concerning the Company's ability to continue as a going
concern. The accompanying financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
Possible Delisting from the Nasdaq National Market. The Company has
received a notice from the Nasdaq National Market that its common stock has
failed to maintain minimum market value public float of $5,000,000 over a
period of 30 consecutive trading days. As a result, the Nasdaq National Market
has provided us with 90 calendar days, or until June 25, 2001, to regain
compliance with this requirement or be delisted from trading. If we are unable
to regain compliance with this requirement during this time, and any appeal to
the Nasdaq National Market for relief from this requirement is unsuccessful, the
Company's common stock will be delisted from trading by the Nasdaq National
Market. If the Company's common stock is delisted from the Nasdaq National
Market, its liquidity and trading price could be negatively impacted.
Emerging Market for Intelligent Operations Management Systems.
Substantially all of the Company's revenues are derived from the licensing and
support of software platforms and products for expert manufacturing, network
management and supply-chain design. Although many organizations have begun to
deploy, or have announced plans to deploy, such e-business infrastructure
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 e-business
infrastructure management systems successfully, nor that such systems will gain
widespread acceptance. In addition, the timing of the implementation of
e-business infrastructure 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.
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, original equipment manufacturers and
distributors, which are not under the control of the Company. Sales of the
Company's products by value-added resellers and systems integrators represented
28%, 25%, and 25% of the Company's product revenues in 2000, 1999, and 1998,
respectively. In January 2001, the Company significantly reduced its direct
sales force for its expert manufacturing products. The Company continues to
manage its relationships with existing expert manufacturing customers. But
Gensym now relies solely on its indirect sales partners for sales of its expert
manufacturing products to new customers. The loss of major original equipment
manufacturers 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 or other Company core technology
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
19
customers, and any deficiencies in such service and support could adversely
affect the Company's business, results of operations, or financial condition.
Dependence Upon Development of Sales and Marketing Force. The Company's
future success in the e-business infrastructure marketplace 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 recorded quarterly losses in each quarter
in 2000, 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 that 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, a
customizable object-oriented development and deployment platform for building
intelligent expert manufacturing systems, and software application products
based on G2 and other core technologies. Accordingly, the Company's business and
financial results are substantially dependent upon the continued customer
acceptance and deployment of G2 and its other 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
distribution 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 partners and market acceptance
of such G2-based products. Any decline in the demand for G2 and its other
products, whether as a result of competitive products, price competition, the
lack of success of the Company's 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. There also 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."
20
Risks Associated With International Operations. The Company's
international revenues represented 44%, 46%, and 47%, of total revenues in 2000,
1999, and 1998, 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 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 network management 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,
RiverSoft and Systems Management Arts (SMARTS), sell "point solutions" that
compete with the Company's network management products with respect to specific
applications or uses. Several companies, including Aspen Tech, Ilog S.A.,
Pavilion and System Management Arts, offer expert manufacturing products with
limited real-time, expert system, or fault isolation capabilities at lower price
points than those provided by the Company. Many of 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 Gensym 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 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
21
bound by employment agreements that require them to remain with the Company. The
Company's success will depend in significant part upon its ability to attract
and retain highly skilled management, technical, and sales and marketing
personnel. Competition for such personnel in the software industry is intense,
and there can be no assurance that the Company will be successful in attracting
and retaining such personnel, or that new key personnel will integrate
successfully into the senior management team. The loss of certain key employees
or the Company's inability to attract and retain other qualified employees or to
adequately replace key personnel who depart the Company could have a material
adverse effect on the Company's business, results of operations, or financial
condition.
ITEM 7A. 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 Maturing
Value at in
12/31/00 FY 2001
-------- -----------
Cash Equivalents $ 103 $ 103
Weighted Average Interest Rate 6.60% 6.60%
Investments $ 698 $ 698
Weighted Average Interest Rate 7.28% 7.28%
Total Portfolio $ 801 $ 801
Weighted Average Interest Rate 7.19% 7.19%
Impact of Foreign Currency Rate Changes
Compared to 1999, the U.S. dollar was stronger, on average, in 2000
relative to the European currencies in which the company has subsidiaries.
However, the translation of the parent Company's intercompany receivables and
foreign entities' assets and liabilities did not have a material impact on the
consolidated results of the Company. The Company does not use foreign exchange
forward contracts to hedge its foreign currency denominated receivables. There
can be no assurance that changes in foreign currency rates, relative to the U.S.
dollar, will not materially affect the consolidated results of the Company in
the future.
22
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
GENSYM CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
December 31,
2000 1999
-------- --------
ASSETS
Current Assets:
Cash and cash equivalents $ 2,657 $ 5,710
Short-term investments 698 5,975
Accounts receivable, less reserves of $385
in 2000 and $364 in 1999 8,800 9,528
Prepaid expenses 1,258 2,352
Deferred income taxes -- 1,261
-------- --------
Total current assets 13,413 24,826
-------- --------
Property and equipment, at cost
Computer equipment and software 8,955 8,264
Furniture and fixtures 1,950 1,932
Leasehold improvements 428 423
-------- --------
11,333 10,619
Accumulated depreciation and amortization (9,936) (9,324)
-------- --------
1,397 1,295
-------- --------
Long-term deferred income taxes -- 612
Deposits and other assets 730 201
-------- --------
$ 15,540 $ 26,934
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 1,068 $ 387
Accrued expenses 5,541 4,694
Deferred revenue 6,519 6,931
-------- --------
Total current liabilities 13,128 12,012
-------- --------
Commitments (Note 5)
Stockholders' Equity:
Preferred Stock, $.01 par value - Authorized 2,000,000 shares
Issued and outstanding - none -- --
Common Stock, $.01 par value - Authorized - 20,000,000 shares
Issued - 6,968,270 and 6,744,565 shares in 2000 and 1999,
respectively
Outstanding - 6,466,970 and 6,243,265 shares in 2000 and
1999, respectively 70 67
Capital in excess of par value 21,620 20,923
Treasury stock - 501,300 shares in 2000 and 1999, at cost (1,869) (1,869)
Accumulated deficit (15,869) (3,053)
Cumulative translation adjustment (1,540) (1,146)
-------- --------
Total stockholders' equity 2,412 14,922
-------- --------
$ 15,540 $ 26,934
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
23
GENSYM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
YEAR ENDED DECEMBER 31,
2000 1999 1998
-------- -------- --------
Revenues:
Product $ 11,992 $ 19,628 $ 16,911
Services 15,583 16,799 18,067
-------- -------- --------
Total revenues 27,575 36,427 34,978
Cost of revenues 8,396 8,574 8,698
-------- -------- --------
Gross profit 19,179 27,853 26,280
-------- -------- --------
Operating expenses:
Sales and marketing 17,379 18,214 18,276
Research and development 7,614 6,470 6,023
General and administrative 4,942 5,288 4,134
-------- -------- --------
Total operating expenses 29,935 29,972 28,433
-------- -------- --------
Operating loss (10,756) (2,119) (2,153)
Other income:
Interest income 380 505 678
Other income (expense) (169) (2) 37
-------- -------- --------
211 503 715
-------- -------- --------
Loss before provision for income taxes (10,545) (1,616) (1,438)
Provision for income taxes 2,271 336 50
-------- -------- --------
Net loss $(12,816) $ (1,952) $ (1,488)
======== ======== ========
Basic and diluted loss per share $ (2.01) $ (0.32) $ (0.23)
======== ======== ========
Weighted average common shares outstanding 6,365 6,149 6,371
======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
24
GENSYM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands, except share data)
Common Stock
---------------------- Capital in Accumulated Cumulative Total Compre-
Number of $0.01 Excess of Treasury Earnings Translation Stockholders' hensive
Shares Par Value Par Value Stock (Deficit) Adjustment Equity loss
--------- --------- ---------- --------- ----------- ----------- ------------ ---------
BALANCE, DECEMBER 31, 1997 6,409,397 $ 64 $ 19,941 $ -- $ 387 $ (564) $ 19,828
Exercise of stock options 18,050 -- 82 -- -- -- 82
Issuance of common stock under
Employee Stock Purchase Plan
(ESPP) 129,821 1 404 -- -- -- 405
Treasury Stock - 345,200 shares -- -- -- (1,278) -- -- (1,278)
Translation adjustment -- -- -- -- -- (66) (66) (66)
Net loss -- -- -- -- (1,488) -- (1,488) (1,488)
---------
Comprehensive net loss for the
year ended December 31, 1998 $ (1,554)
--------- --------- --------- --------- --------- --------- --------- =========
BALANCE, DECEMBER 31, 1998 6,557,268 65 20,427 (1,278) (1,101) (630) 17,483
Exercise of stock options 24,156 -- 74 -- -- -- 74
Issuance of common stock under
ESPP 163,141 2 422 -- -- -- 424
Treasury Stock - 156,100 shares -- -- -- (591) -- -- (591)
Translation adjustment -- -- -- -- -- (516) (516) (516)
Net loss -- -- -- -- (1,952) -- (1,952) (1,952)
---------
Comprehensive net loss for the
year ended December 31, 1999 $ (2,468)
--------- --------- --------- --------- --------- --------- --------- =========
BALANCE, DECEMBER 31, 1999 6,744,565 67 20,923 (1,869) (3,053) (1,146) 14,922
Exercise of stock options 93,744 1 389 -- -- -- 390
Issuance of common stock under
ESPP 129,961 2 308 -- -- -- 310
Translation adjustment -- -- -- -- -- (394) (394) (394)
Net loss -- -- -- -- (12,816) -- (12,816) (12,816)
---------
Comprehensive net loss for the
year ended December 31, 2000 $ (13,210)
--------- --------- --------- --------- --------- --------- --------- =========
BALANCE, DECEMBER 31, 2000 6,968,270 $ 70 $ 21,620 $ (1,869) $ (15,869) $ (1,540) $ 2,412
========= ========= ========= ========= ========= ========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
25
GENSYM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Year ended December 31,
2000 1999 1998
-------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(12,816) $ (1,952) $ (1,488)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 911 1,123 1,245
Deferred taxes 1,873 287 --
Changes in assets and liabilities:
Accounts receivable 780 (2,055) 747
Prepaid expenses 1,177 (720) (214)
Accounts payable 670 (112) (400)
Accrued expenses 727 982 (1,155)
Deferred revenue (420) 527 611
-------- -------- --------
Net cash used in operating activities (7,098) (1,920) (654)
-------- -------- --------
CASH FLOW FROM INVESTING ACTIVITIES:
Sales (purchases) of short-term investments 5,277 (5,137) 4,005
Sales of long-term investments -- -- 1,041
Purchases of property and equipment (1,156) (436) (843)
(Increase) decrease in other assets (523) 38 32
-------- -------- --------
Net cash provided by (used in) investing activities 3,598 (5,535) 4,235
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Purchase of treasury stock -- (591) (1,278)
Proceeds from exercise of stock options and issuance of
common stock under stock plans 700 498 487
-------- -------- --------
Net cash provided by (used in) financing activities 700 (93) (791)
-------- -------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (253) (437) (53)
-------- -------- --------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (3,053) (7,985) 2,737
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 5,710 13,695 10,958
-------- -------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 2,657 $ 5,710 $ 13,695
======== ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for -
Income taxes $ 214 $ 221 $ 424
======== ======== ========
26
GENSYM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
The Company is a supplier of software products and services for developing and
deploying intelligent systems that manage and improve complex, dynamic
operations for a broad range of industrial, scientific, commercial, and
government applications.
The Company has incurred operating losses for each of the three years in the
period ended December 31, 2000 and may need to obtain additional funding or
alternative means of financial support, or both, in order to continue as a going
concern. The accompanying consolidated financial statements have been prepared
assuming the Company will continue as a going concern. Management's plan to
continue as a going concern relies heavily on achieving profitability in the
third quarter of 2001 and beyond. This return to profitability is based on
expense control, cost reductions, and increased revenues from new and existing
products in the e-Infrastructure marketplace. Management is also seeking to
identify additional funding sources of an equity and/or debt nature. However,
there can be no assurance that such plans will be successful or that such
funding or financial support will be available or adequate to allow the Company
to continue as a going concern. These factors raise substantial doubt concerning
the Company's ability to continue as a going concern. The accompanying financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
The accompanying consolidated financial statements reflect the application of
certain significant accounting policies, as described in this note and elsewhere
in the accompanying consolidated financial statements and notes.
(a) Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries. All material intercompany
transactions and balances have been eliminated in consolidation.
(b) Cash Equivalents and Investments
The Company 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 December 31, 2000
and 1999. Cash equivalents are short-term, highly liquid investments with
original maturity dates of less than three months. Short-term investments
held as of December 31, 2000 and 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.
December 31, 2000 December 31, 1999
------------------- --------------------
(In thousands) Total Total Total Total
Contracted Market Amortized Market Amortized
Description Maturity Value Value Value Value
------------ ---------- -------- -------- -------- --------
Cash and Cash Equivalents:
Cash and cash equivalents N/A $ 2,554 $ 2,554 $ 4,211 $ 4,187
Commerical paper 0-3 months - - 990 994
Money market funds 0-3 months 103 103 529 529
-------- -------- -------- --------
Total cash and cash equivalents 2,657 2,657 5,730 5,710
======== ======== ======== ========
Short-Term Investments:
Corporate bonds 4-12 months 701 698 950 975
Commercial paper 4-12 months - - 1,999 2,000
Government agency 4-12 months - - 2,995 3,000
-------- -------- -------- --------
Total short-term investments 701 698 5,944 5,975
======== ======== ======== ========
$ 3,358 $ 3,355 $ 11,674 $ 11,685
======== ======== ======== ========
(c) Depreciation and Amortization
The Company provides for depreciation using the straight-line method over
the estimated useful lives of the assets. Certain assets under capital
leases are amortized using the straight-line method. The estimated useful
lives by asset class are as follows:
Estimated
Asset Classification Useful Lives
-------------------- ------------
Computer equipment
and software.................. 3 Years
Furniture and fixtures............ 5 Years
Leasehold improvements............ Shorter of lease term or useful life
(d) Revenue Recognition
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.
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.
(e) Research and Development and Software Development Costs
In accordance with SFAS No. 86, Accounting for the Costs of Computer
Software to Be Sold, Leased, or Otherwise Marketed, the Company has
evaluated the establishment of technological feasibility of its various
products during the development phase. Due to the dynamic changes in the
market, the Company has concluded that it cannot determine technological
feasibility until the development phase of the project is nearly complete.
The time period during which costs could be capitalized from the point of
reaching technological feasibility until the time of general product
release is very short and, consequently, the amounts that could
27
be capitalized are not material to the Company's financial position or
results of operations. Therefore, the Company charges all research and
development expenses to operations in the period incurred.
(f) Foreign Currency Translation
Assets and liabilities of the foreign subsidiaries are translated in
accordance with SFAS No. 52, Foreign Currency Translation. In accordance
with SFAS No. 52, assets and liabilities of the Company's foreign
operations are translated into U.S. dollars at current exchange rates, and
income and expense items are translated at average rates of exchange
prevailing during the year. Gains and losses arising from translation are
accumulated as a separate component of stockholders' equity. Gains and
losses arising from transactions denominated in foreign currencies are
included in other income and were not material for the periods presented.
(g) Retirement Plan
Effective January 1997, the Company amended the Gensym Corporation 401(k)
Plan (the "Plan") to allow for employer matching contributions. The
Company has elected to contribute an amount equal to 50% of the first 4%,
and 25% of the next 4% of an employee's compensation (as defined)
contributed to the Plan as an elective deferral. The Company's
contributions to the Plan were $267,000 in 2000, $262,000 in 1999 and
$316,000 in 1998.
(h) Concentration of Credit Risk
Generally accepted accounting principles require disclosure of any
significant off-balance-sheet and credit risk concentrations. Financial
instruments, which potentially subject the Company to concentrations of
credit risk, are principally cash, cash equivalents, investments and
accounts receivable. The Company places its cash, cash equivalents and
investments in highly rated institutions. For the fiscal years ended
December 31, 2000 and 1998, no single customer accounted for more than 10%
of the Company's total revenue. One customer accounted for 12% of the
total revenue in 1999. No single customer accounted for greater than 10%
of accounts receivable at December 31, 2000 or 1999. The Company has no
significant off-balance-sheet risk such as foreign exchange contracts,
options contracts, or other foreign hedging arrangements.
(i) Comprehensive Loss
In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS
No. 130, Reporting Comprehensive Income. SFAS No. 130 requires disclosure
of all components of comprehensive income on an annual and interim basis.
Comprehensive income is defined as the change in equity of a business
enterprise during a period from transactions, other events and
circumstances from nonowner sources. Comprehensive loss is disclosed in
the accompanying consolidated statements of stockholder's equity.
(j) 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 periods. Diluted
income (loss) per share is the same as basic income (loss) per share due
to the net loss recorded in all years presented. For the years ended
December 31, 2000, 1999, and 1998, the computation for diluted loss per
share excludes the effect of 1,705,412 shares, 1,169,294 shares, and
729,639 shares, respectively, issuable from assumed exercise of options,
as their effect would be antidilutive.
(k) Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
(l) New Accounting Pronouncements
In June 1998, the FASB issued 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.
In March 2000, the FASB issued Interpretation No. 44, "Accounting for
Certain Transactions Involving Stock Compensation--an Interpretation of
APB Opinion No. 25." The interpretation clarifies the application of APB
Opinion No. 25 in certain situations, as defined. The interpretation is
effective July 1, 2000, but covers certain events occurring during the
period after December 15, 1998. The adoption of this interpretation did
not have an impact on the accompanying financial statements.
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 was effective as of the
beginning of 2000. The Company's adoption of SAB 101 did not have a
material impact on the Company's results of operations.
28
(2) LINE OF CREDIT
On March 28, 2001, the Company entered into a credit facility with a bank.
The credit facility provides the Company the ability to borrow up to 80%
of the Company's qualified and eligible gross domestic accounts receivable
up to a maximum of $2.5 million. Borrowing under this agreement will be at
an interest rate of 2% per month, plus an administration fee of 1% of
gross account receivables held as collateral. This agreement is subject to
certain restrictive covenants, including an adjusted quick ratio. Amounts
under this credit facility are secured by substantially all corporate
assets of Gensym Corporation. At March 31, 2001, the Company may not be in
compliance with the adjusted quick ratio covenant.
(3) STOCKHOLDERS' EQUITY
(a) Common Stock
The Company's authorized capitalization consists of 20,000,000 shares of
Common Stock and 2,000,000 shares of Preferred Stock.
(b) Stock Option Plans
The following table shows the Company's stock option plans, the number of
shares reserved for issuance by the Company's Board of Directors, and the
number of shares available for future issuance as of December 31, 2000:
Number of Shares
Available for Future
Number of Shares Issuance as of
Plan Name Reserved for Issuance December 31, 2000
------------------------------------------- ----------------------- ----------------------
1987 Stock Plan 600,000 --
1994 Stock Option Plan 534,850 787
1995 Director Stock Option Plan 100,000 18,000
1995 Employee Stock Purchase Plan 700,000 115,422
1997 Stock Incentive Plan 500,000 25,873
2000 Stock Incentive Plan 800,000 504,900
----------------------- ----------------------
3,234,850 664,982
======================= ======================
The 1987 Stock Plan provided for the grant of incentive stock options,
nonqualified stock options, stock awards, and direct sales of stock. The
Board of Directors has resolved not to grant any more options under the
1987 Stock Plan. The 1994 Stock Option Plan provides for the grant of
incentive stock options and nonqualified stock options. The 1997 Stock
Incentive Plan provides for the grant of incentive stock options,
nonqualified stock options, restricted stock and other stock-based awards.
The 2000 Stock Incentive Plan, approved by the stockholders in June 2000,
provides for the grant of incentive stock options, nonqualified stock
options, restricted stock and other stock-based awards. Under these plans,
incentive stock options may be granted at an exercise price not less than
the fair market value of the Company's Common Stock on the date of grant
or, in the case of 10% stockholders, not less than 110% of the fair market
value. Nonqualified options may be granted by the Board of Directors at
its discretion. The difference, if any, between the exercise price and the
fair value of the underlying Common Stock at the measurement date is
charged to operations over the vesting period of such options. The terms
of exercise of options granted under these plans are determined by the
Board of Directors. Incentive stock options expire no later than 10 years
after the date of grant.
The Board of Directors, on October 22, 1998, authorized the repricing of
certain incentive stock options. Under the repricing plan, option holders
were permitted to voluntarily exchange their old options for new options.
The new options allow the option holders to purchase 80% of the number of
shares of Common Stock represented by the old options at a price equal to
the closing price of the Company's Common Stock, or for officers, at a
price equal to 110% of the closing price, on November 20, 1998. All other
terms and conditions of the new options remain identical to the old
options agreement. The closing price of the Common Stock on November 20,
1998 was $3.88. Under the repricing plan, 670,160 incentive stock options
were cancelled and 539,948 incentive stock options were reissued.
The 1995 Director Stock Option Plan (the "Director Plan") was approved by
the stockholders in January 1996 and amended in May 1997. The Director
Plan provides for the grant of options to purchase Common Stock of the
Company to non-employee directors of the Company. On June 30 of each year,
beginning in 1997, each non-employee director is granted an option to
29
purchase 3,000 shares of common stock at an exercise price equal to the
then current fair market value. These options vest in equal portions over
a five-year period and expire 10 years from the date of grant.
During 1999, in conjunction with the hiring of the chief executive
officer, the company granted options to purchase 361,111 shares at an
exercise price of $3.25, outside of any existing stock option plans.
During 2000, in conjunction with the hiring of the vice president
marketing and the hiring of the vice president finance & administration
and CFO, the company granted options to purchase 10,000 and 34,845 shares,
respectfully, at an exercise price of $5.44, outside of any existing
option plans. These stock options were issued at the fair market value on
the date of grant and are included in the table below.
The following table summarizes the stock option activity for each the
three years in the period ended December 31, 2000:
Number of Option Price Weighted Average
Shares per Share Option Price
------------- ---------------- --------------------
Outstanding at December 31, 1997 819,780 $ 1.60 - $20.00 $ 6.65
Granted 835,698 3.00 - 7.50 4.94
Exercised (18,050) 1.60 - 7.50 4.58
Canceled (907,789) 3.81 - 20.00 6.90
------------- ---------------- --------------------
Outstanding at December 31, 1998 729,639 $ 3.00 - $10.00 $ 4.44
Granted 656,320 2.75 - 5.25 3.45
Exercised (24,156) 3.00 - 3.88 3.13
Canceled (192,509) 3.00 - 7.50 4.35
------------- ---------------- --------------------
Outstanding at December 31, 1999 1,169,294 $ 2.75 - $10.00 $ 3.92
Granted 773,600 0.72 - 9.31 3.53
Exercised (93,744) 2.81 - 7.50 4.11
Canceled (143,738) 2.75 - 9.31 4.78
------------- ---------------- --------------------
Outstanding at December 31, 2000 1,705,412 $ 0.72 - $10.00 $ 3.66
============= ================ ====================
Exercisable at December 31, 2000 605,177 $ 2.75 - $10.00 $ 4.17
============= ================ ====================
Exercisable at December 31, 1999 340,741 $ 3.00 - $10.00 $ 4.53
============= ================ ====================
Exercisable at December 31, 1998 250,366 $ 3.00 - $10.00 $ 4.59
============= ================ ====================
The range of exercise prices for options outstanding and options
exercisable at December 31, 2000 is as follows:
Options Outstanding Options Exercisable
----------------------- ----------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Options Contractual Exercise Options Exercise
Exercise Prices Outstanding Life Price Exercisable Price
---------------- ----------- ----------- -------- ----------- --------
$ 0.72-1.00 236,600 9.99 $ 0.81 0 $ 0.00
$ 1.88-2.50 56,250 9.81 2.26 0 0.00
$ 2.75-4.50 1,102,020 8.53 3.61 523,960 3.80
$ 4.75-6.38 233,143 8.65 5.53 38,210 5.05
$ 7.50-10.00 77,399 7.19 8.22 43,007 7.73
----------- ----------- -------- ----------- --------
1,705,412 8.76 $ 3.66 605,177 $ 4.17
=========== =========== ======== =========== ========
The Company's 1995 Employee Stock Purchase Plan (the "Purchase Plan") was
adopted by the Board of Directors in November 1995 and approved by the
stockholders in January 1996. The Purchase Plan authorizes the sale of
common stock to participating employees. In January 1998 the board of
directors amended the Purchase Plan to increase the number of shares of
Common Stock reserved for issuance under the Plan from 200,000 to 500,000.
In June 2000 the board of directors amended the Purchase Plan to increase
the number of shares of Common Stock reserved for issuance under the Plan
from 500,000 to 700,000.
All employees of the Company meeting certain eligibility requirements are
eligible to participate in the Purchase Plan. An employee may elect to
have a whole number percentage from 1% to 10% of his or her base pay
withheld during the payroll deduction period "Offering Period" for
purposes of purchasing shares under the Purchase Plan. The price at which
shares may be purchased during each offering will be 85% of the fair
market value per share of the Common Stock on either the first day or the
30
last day of the Offering Period, whichever is lower. The compensation
committee of the board of directors may, at its discretion, choose an
Offering Period of 12 months or less for each of the offerings and choose
a different Offering Period for each offering. Under the Purchase Plan,
the Company has sold 584,578 shares as of December 31, 2000.
(c) Stock-Based Compensation
SFA No. 123 Accounting for Stock-Based Compensation, requires the
measurement of the fair value of stock options to be included in the
statement of income or disclosed in the notes to financial statements.
The Company has determined that it will continue to account for stock-
based compensation for employees under Accounting Principles Board Opinion
No. 25. Accounting for Stock Issue to Employees, and elect the disclosure-
only alternative under SFAS No. 123.
The Company has computed the pro forma disclosure required under SFAS No.
123 for all stock compensation plans during the three years ended December
31, 2000, using the Black-Scholes option pricing model under the fair
value method prescribed by SFAS No. 123. The assumptions used are as
follows:
2000 1999 1998
-------------- --------------- --------------
Risk-free interest rate 5.24 - 6.6% 4.80 - 6.38% 4.65 - 5.71%
Expected dividend yield 0 0 0
Expected lives of option grants 7.0 Years 7.0 Years 7.0 Years
Expected volatility 160% 90% 70%
Weighted average fair value of
options granted $3.53 $2.85 $3.25
For the purposes of pro forma disclosure, the estimated fair value of
options is amortized to expense over the vesting period. Had compensation
costs for options and Purchase Plan shares been determined based on the
fair value at the grant dates as prescribed by SFAS No. 123, the effect
would have been as follows:
2000 1999 1998
---------- --------- ---------
(In thousands, except per share amounts)
Net loss as reported $ (12,816) $ (1,952) $ (1,488)
Pro forma net loss as adjusted (14,316) (2,883) (2,384)
Basic and diluted loss per share as reported ($2.01) ($0.32) ($0.23)
Pro forma basic and diluted loss per share as adjusted ($2.52) ($0.53) ($0.43)
(d) Stock Repurchase Program
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. No shares were
purchased in 2000. As of December 31, 2000, 501,300 shares had been
repurchased at a cost of $1,869,000.
(4) INCOME TAXES
(Loss) income before provision for income taxes consists of the following
(in thousands):
Years ended December 31, 2000 1999 1998
------ ------ ------
Domestic $ (11,051) $ (2,753) $ (545)
Foreign 506 1,137 (893)
----------- ---------- ----------
Total $ (10,545) $ (1,616) $ (1,438)
31
The components of the provision for income taxes for each of the three years in
the period ended December 31, 2000 are as follows:
2000 1999 1998
------- ------- -------
(In thousands)
Federal
Current $ (7) $ -- $ (71)
Deferred (4,159) (1,680) (675)
------- ------- -------
(4,166) (1,680) (746)
------- ------- -------
State
Current 17 6 7
Deferred (66) (36) (31)
------- ------- -------
(49) (30) (24)
------- ------- -------
Foreign
Withholding 77 133 48
Income 311 203 66
------- ------- -------
388 336 114
------- ------- -------
Change in Valuation Allowance 6,098 1,710 706
------- ------- -------
$ 2,271 $ 336 $ 50
======= ======= =======
Foreign withholding taxes represent amounts withheld by foreign customers and
remitted to the applicable foreign tax authorities in connection with foreign
revenues. Foreign income taxes represent corporate income taxes relating to the
operations of the Company's foreign subsidiaries.
The components of the net deferred tax asset recognized in the accompanying
consolidated balance sheets with the approximate income tax effect of each type
of temporary difference are as follows:
2000 1999
-------- --------
(In thousands)
Net operating loss carryforward $ 6,607 $ 3,152
Research and development tax credit carryforward 1,561 1,305
Depreciation 199 201
Deferred revenue 312 345
Other temporary differences 1,503 954
-------- --------
10,182 5,957
Valuation allowance (10,182) (4,084)
-------- --------
Net deferred tax asset $ -- $ 1,873
======== ========
The net operating loss carryforwards expire on various dates through 2020 and
are subject to review and possible adjustment by the Internal Revenue Service.
The Internal Revenue Code contains provisions that may limit the net operating
loss and credit carryforwards that the Company may utilize in any one year in
the event of certain cumulative changes in ownership over a three year period.
In the event that the Company has had a change in ownership, as defined,
utilization of the carryforwards may be restricted.
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. Under SFAS No. 109, a deferred tax asset for
the future benefit of a tax loss carryforward should be recorded unless a
company makes a determination that it is "more likely than not" that such
deferred tax asset would not be realized. Accordingly, a valuation allowance
would be provided against the deferred tax asset to the extent that the Company
cannot demonstrate that it is "more likely than not" that the deferred tax asset
will be realized. In
32
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 periodically reviews
its deferred tax asset to determine if such asset is realizable. In 2000, the
Company concluded, in accordance with SFAS No. 109, that the Company should not
recognize the value of its deferred tax asset under the "more likely than not"
test and therefore increased the amount of its valuation allowance to equal the
entire deferred tax asset. The increase in the valuation allowance resulted in a
charge to the provision for income taxes of $1,873,000 in the year ended
December 31, 2000. The primary factors considered in evaluating the
realizability of the deferred tax asset and the level of valuation allowance
were the volatility of the historical earnings and the operating losses through
December 31, 2000.
The provision for income taxes differs from the amount computed by applying the
statutory federal income tax rate as follows:
2000 1999 1998
------ ------ ------
Provision at federal statutory rate (34.0)% (34.0)% (34.0)%
State income tax, net of federal benefits (0.3) (1.2) (1.1)
Foreign income and withholding taxes 1.8 (24.0) 27.9
Change in valuation allowance 57.8 105.8 49.1
Utilization of tax credits -- (17.8) (21.0)
Other, net (3.8) (8.0) (17.4)
------ ------ ------
21.5% 20.8% 3.5%
====== ====== ======
(5) COMMITMENTS
The Company leases its facilities and certain equipment under operating leases.
The future minimum annual payments under these leases at December 31, 2000 are
as follows:
For the
Year Ended Amounts
December 31, (In thousands)
---------------- ----------------
2001 $ 2,156
2002 1,579
2003 1,148
2004 966
2005 885
Thereafter 379
----------------
$ 7,113
Rent, office lease and equipment lease expense under the above leases, net of
rental income from sub-leases, was approximately $3,114,000 in 2000, $3,159,000
in 1999, and $2,931,000 in 1998.
33
(6) ACCRUED EXPENSES
Accrued expenses consist of the following:
(In thousands)
2000 1999
------ ------
Accrued payroll and related expenses $1,651 $1,730
Accrued commissions 467 624
Accrued bonuses 246 286
Accrued professional fees 481 201
Accrued taxes 568 826
Accrued sales office closing 522 --
Other accrued expenses 1,606 1,027
------ ------
$5,541 $4,694
====== ======
(7) FINANCIAL INFORMATION BY GEOGRAPHIC AREA
Domestic and international sales as a percentage of total revenues are as
follows:
2000 1999 1998
----- ----- -----
United States 56% 54% 53%
Europe 32 31 27
Other 12 15 20
----- ----- -----
100% 100% 100%
===== ===== =====
Domestic and international long-lived assets are as follows:
2000 1999
------ ------
United States $1,755 $1,037
Europe 347 355
Other 25 104
------ ------
$2,127 $1,496
====== ======
(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 views its business as having two main product lines: 1) the
Expert Manufacturing product line, which focuses on expanding Gensym's presence
in chemical, oil and gas, pharmaceutical, and other manufacturing industries;
and 2) the Network Management product line, which focuses on building Gensym's
entrance into the Business-to-Business electronic infrastructure of networks,
e-marketplace entrants, and Fortune 1000 companies. These product lines have
their own specialized sales strategies, but share 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.
In order to reach the broadest possible market, the Company employs a
direct sales force and selected resellers to bring its products and services to
end users around the world. The Company's direct sales force sells to major
accounts and provide personal contact with customers, both directly and through
partners.
The Company also distributes its products through a network of systems
integrators and value-added resellers, who are selected for their capability to
provide end users with focused application solutions built on G2 and the
Company's other software platforms.
Gensym markets its products in Japan, Brazil, South Africa and certain
other countries through distributors. These distributors have technical
competence in the application of G2 and other Gensym technologies, market the
Company's products, provide local training and support assistance to customers,
translate documentation, help localize software, and provide systems integration
services.
The Company evaluates performance of its product line 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
34
segments. Unallocated corporate costs include operating expenses and assets not
specifically identifiable to the Company's operating segments. Information as to
the operations of the different segments is set forth below:
Unallocated
Expert Network Corporate
Manufacturing Management Costs/Assets Total
------------- ---------- ------------ --------
Year ended December 31, 2000
Revenues $ 11,965 $ 15,610 $ 27,575
======== ======== ========
Net contribution $ 570 $ 4,012 $(15,338) $(10,756)
======== ======== ======== ========
Identifiable assets $ 4,454 $ 6,537 $ 4,549 $ 15,540
======== ======== ======== ========
Fixed asset depreciation $ 206 $ 245 $ 460 $ 911
======== ======== ======== ========
Unallocated
Expert Network Corporate
Manufacturing Management Costs/Assets Total
------------- ---------- ------------ --------
Year ended December 31, 1999
Revenues $ 17,196 $ 19,231 $ 36,427
======== ======== ========
Net contribution $ 4,381 $ 5,975 $(12,475) $ (2,119)
======== ======== ======== ========
Identifiable assets $ 6,690 $ 5,398 $ 14,846 $ 26,934
======== ======== ======== ========
Fixed asset depreciation $ 284 $ 296 $ 543 $ 1,123
======== ======== ======== ========
Unallocated
Expert Network Corporate
Manufacturing Management Costs/Assets Total
------------- ---------- ------------ --------
Year ended December 31, 1998
Revenues $ 18,107 $ 16,871 $ 34,978
======== ======== ========
Net contribution $ 4,438 $ 4,008 $(10,599) $ (2,153)
======== ======== ======== ========
Identifiable assets $ 5,513 $ 4,723 $ 18,032 $ 28,268
======== ======== ======== ========
Fixed asset depreciation $ 357 $ 289 $ 599 $ 1,245
======== ======== ======== ========
(9) VALUATION AND QUALIFYING ACCOUNTS
Balance at Balance at
Beginning of End of
Description Period Additions Deductions Period
- ----------- ------------ --------- ---------- ----------
Allowance for Doubtful Accounts:
Year ended December 31, 2000 $364 $134 $113 $385
==== ==== ==== ====
Year ended December 31, 1999 $423 $305 $364 $364
==== ==== ==== ====
Year ended December 31, 1998 $354 $110 $ 41 $423
==== ==== ==== ====
35
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Gensym Corporation:
We have audited the accompanying consolidated balance sheets of Gensym
Corporation (a Delaware corporation) and subsidiaries as of December 31,
2000 and 1999, and the related consolidated statements of operations,
stockholders' equity, and cash flows for each of the three years in the
period ended December 31, 2000. These financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing
the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for
our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Gensym Corporation and
subsidiaries as of December 31, 2000 and 1999, and the results of their
operations and their cash flows for each of the three years in the period
ended December 31, 2000, in conformity with accounting principles
generally accepted in the United States.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. The Company has incurred losses
for each of the three years in the period ended December 31, 2000 and may
need to obtain additional funding or alternative means of financial
support, or both, in order to continue as a going concern. These factors
raise substantial doubt concerning the Company's ability to continue as a
going concern. Management's plans in regard to these matters are discussed
in Note 1. The accompanying financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
/s/ARTHUR ANDERSEN LLP
----------------------
ARTHUR ANDERSEN LLP
Boston, Massachusetts
March 30, 2001
36
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is contained in part under
"Executive Officers of the Company" in Part I of this Form 10-K, and the
remainder will be included in the Company's definitive Proxy Statement for its
2001 Annual Meeting of Stockholders to be held May 16, 2001 and is incorporated
herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item will be included in the Company's
definitive Proxy Statement for its 2001 Annual Meeting of Stockholders to be
held May 16, 2001 and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item will be included in the Company's
definitive Proxy Statement for its 2001 Annual Meeting of Stockholders to be
held May 16, 2001 and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item will be included in the Company's
definitive Proxy Statement for its 2001 Annual Meeting of Stockholders to be
held May 16, 2001 and is incorporated herein by reference.
37
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) FINANCIAL STATEMENTS
The following documents are included in Item 8 of this Annual Report on
Form 10-K:
Consolidated Balance Sheets as of December 31, 2000 and 1999
Consolidated Statements of Operations for the three years ended
December 31, 2000
Consolidated Statements of Stockholders' Equity for the three years ended
December 31, 2000
Consolidated Statements of Cash Flows for the three years ended
December 31, 2000
Notes to Consolidated Financial Statements
Report of Independent Public Accountants
(2) FINANCIAL STATEMENT SCHEDULES
All schedules have been omitted since the required information is not
present or not present in amounts sufficient to require submission of the
schedule, or because the information required is included in the
consolidated financial statements or the notes thereto.
(3) EXHIBITS
The exhibits filed as part of this Form 10-K are listed in the Exhibit
Index immediately preceding such exhibits, which index is incorporated
herein by reference.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter or year ended
December 31, 2000
38
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GENSYM CORPORATION
(Registrant)
By: /s/ Patrick Courtin
-------------------
Dated: March 30, 2001 Patrick Courtin
Chief Executive Officer
Pursuant to the requirements of the Securities and Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated:
/s/ Patrick Courtin Chairman of the Board, Chief Executive Officer, March 30, 2001
- ------------------- and President (Principal Executive Officer)
Patrick Courtin
/s/ Jeffrey A. Weber Chief Financial Officer (Principal Financial and March 30, 2001
- -------------------- Accounting Officer)
Jeffrey A. Weber
/s/ Lowell B. Hawkinson Director March 30, 2001
- -----------------------
Lowell B. Hawkinson
/s/ John A. Shane Director March 30, 2001
- -----------------
John A. Shane
/s/ Theodore Johnson Director March 26, 2001
- --------------------
Theodore Johnson
/s/ Thomas E. Swithenbank Director March 26, 2001
- -------------------------
Thomas E. Swithenbank
/s/ Barry R. Gorsun Director March 23, 2001
- -------------------
Barry R. Gorsun
/s/ Robert A. Degan Director March 27, 2001
- -------------------
Robert A. Degan
/s/ Daniel J. Gatti Director March 27, 2001
- -------------------
Daniel J. Gatti
39
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
3.1 Amended and Restated Certificate of Incorporation of the
Registrant (Incorporated by reference to the Registrant's
Annual Report on Form 10-K filed on March 31, 1997)
3.2 Amended and Restated By-Laws of the Registrant (Incorporated
by reference to the Registrant's Annual Report on Form 10-K
filed on March 31, 1997)
4.1 Specimen certificate for shares of the Registrant's Common
Stock (Incorporated by reference to the Registration Statement
on Form S-1 of the Registrant filed on December 21, 1995)
+10.1 1987 Stock Plan, as amended to date (Incorporated by reference
to the Registration Statement on Form S-1 of the Registrant
filed on December 21, 1995)
+10.2 1994 Stock Option Plan (Incorporated by reference to the
Registration Statement on Form S-1 of the Registrant filed on
December 21, 1995)
+10.3* 1995 Employee Stock Purchase Plan, as amended
+10.4 1995 Director Stock Option Plan, as amended (Incorporated by
reference to the Registrant's Quarterly Report on Form 10-Q
filed on August 13, 1997)
10.5 Amended and Restated Registration Rights Agreement dated as of
August 12, 1991 by and among the Registrant and the parties
named therein (Incorporated by reference to the Registration
Statement on Form S-1 of the Registrant filed on December 21,
1995)
10.6 Lease dated as of January 1, 1995 by and between the
Registrant and CambridgePark One Limited Partnership
(Incorporated by reference to the Registration Statement on
Form S-1 of the Registrant filed on December 21, 1995)
10.7 First Amendment to Lease dated as of December 2, 1996 between
the Registrant and CambridgePark One Limited Partnership
(Incorporated by reference to the Registrant's Annual Report
on Form 10-K filed on March 31, 1997)
10.8 Second Amendment to Lease dated as of January 24, 1997 between
the Registrant and CambridgePark One Limited Partnership
(Incorporated by reference to the Registrant's Annual Report
on Form 10-K filed on March 31, 1997)
10.9 Third Amendment to Lease dated as of January 24, 1997 between
the Registrant and CambridgePark One Limited Partnership
(Incorporated by reference to the Registrant's Annual Report
on Form 10-K filed on March 31, 1997)
10.10 Fourth Amendment to Lease dated as of December 4, 1998 between
the Registrant and CambridgePark One Limited Partnership
(Incorporated by reference to Registrant's Annual Report on
Form 10-K filed on March 29, 2000)
10.11# Distribution Agreement, dated as of January 1, 1995, by and
among the Registrant, Itochu Corporation and Itochu
Techno-Science Corporation (Incorporated by reference to the
Registration Statement on Form S-1 of the Registrant filed on
December 21, 1995)
+10.12 1997 Stock Incentive Plan (Incorporated by reference to the
Registrant's Quarterly Report on Form 10-Q filed on August 13,
1997)
10.13 Sublease Agreement dated August 26, 1997 between Gensym
Corporation and Spaulding & Slye Services Limited Partnership
(Incorporated by reference to the Registrant's Quarterly
Report on Form 10-Q filed on November 12, 1997)
10.14 Rights Agreement, dated as of April 8, 1997, between Gensym
Corporation and State Street Bank & Trust Company, as Rights
Agent (Incorporated by reference to the Registrant's Current
Report on Form 8-K filed on April 17, 1997)
+10.15 Severance arrangement with Lowell Hawkinson dated June 24,
1999.
+10.16* Severance arrangement with Robert Moore dated October 29,
1999.
+10.17* Severance arrangement with William Wood dated September 8,
1999.
+10.18* Severance arrangement with Carl Davies dated February 12,
2001.
10.19* Lease dated as of June 27, 2000 by and between the
Registrant and Rodger P. Nordbloom and Peter C. Nordbloom, as
Trustees
+10.20 2000 Stock Incentive Plan (Incorporated by reference to
the Registrants Definitive Proxy Statement on Schedule 14A
filed on April 24, 2000)
21* Subsidiaries of the Registrant
23* Consent of Arthur Andersen LLP
Notes
- -----
* Filed herewith.
# Identifies exhibit with respect to which certain portions have been granted
confidential treatment.
+ Identifies exhibits constituting management contract or compensatory plan or
arrangement required to be filed as an exhibit to this Annual Report on Form
10-K.
40