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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark one)
X Annual report pursuant to Section 13 or 15(d) of the
--- Securities Exchange Act of 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
OR
Transition report pursuant to Section 13 or 15(d) of the
--- Securities Exchange Act of 1934
COMMISSION FILE NUMBER: 0-27696
GENSYM CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 04-2932756
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
125 CAMBRIDGEPARK DRIVE
CAMBRIDGE, MA 02140
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (617) 547-2500
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12 (g) of the Act:
Common Stock, $.01 par value
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days:
Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. _____
As of March 26, 1997 there were 6,242,286 shares of the Registrant's
Common Stock outstanding. As of that date, the aggregate market value of the
voting stock held by non-affiliates of the registrant was $21,208,152 based on
the last reported sale price of the registrant's common stock on the Nasdaq
National Market as of the close of business on March 26, 1997.
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DOCUMENTS INCORPORATED BY REFERENCE
Part of Form 10-K
Document into which incorporated.
-------- ------------------------
Portions of the Registrant's Items 10, 11, 12 and 13 of Part III
Proxy Statement for the 1997
Annual Meeting of Stockholders.
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GENSYM CORPORATION
Form 10-K INDEX
Page No.
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PART I
Item 1. Business 4-13
Item 2. Properties 14
Item 3. Legal Proceedings 14
Item 4. Submission of Matters to a Vote of Security Holders 14-15
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 16
Item 6. Selected Financial Data 17
Item 7. Management Discussion and Analysis of Financial Condition and
Results of Operations 18-28
Item 8. Financial Statements and Supplementary Data 29-41
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 41
PART III
Item 10. Directors and Executive Officers of the Registrant 41
Item 11. Executive Compensation 41
Item 12. Security Ownership of Certain Beneficial Owners and Management 41
Item 13. Certain Relationships and Related Transactions 41
PART IV
Item 14. Exhibits, Financial Statements and Reports on Form 8-K 42
Signatures 43
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PART I.
ITEM 1. BUSINESS
Gensym Corporation ("Gensym" or the "Company") is a leading supplier of software
products and services for developing and deploying intelligent systems for
decision support and control. Applications built with the Company's products can
be used to monitor complex operations, analyze data, detect problems and
opportunities, provide advice, make decisions, and take action in real time.
These products are also used off-line in the design, planning, and scheduling of
operations. The Company's core product, G2, and G2-based products, are sold to
customers for a broad array of applications in a wide range of industries,
including manufacturing, telecommunications, aerospace, transportation, and
financial services.
The Company's early success in delivering intelligent systems to visionary
customers has put the Company in a position to provide application-specific
solutions to the much larger mainstream market. In January 1997, the Company
established three strategic business units, Manufacturing, Communications, and
Advanced Systems, to manage the domain-specific expertise, products, and
services required to serve mainstream customers. In conjunction with this, the
Company has also adopted a solutions-oriented approach in its sales, marketing,
product development and service organizations.
INDUSTRY BACKGROUND
Commercial organizations today face mounting pressures in the global
competitive environment. These pressures are driving organizations to increase
efficiency through improved productivity and better utilization of resources,
improve the quality of products and services, and respond more quickly to
customer needs. Organizations must also be more flexible in their operations and
bring new products and services to market faster. These challenges are present
in a broad range of industries, including manufacturing, telecommunications,
aerospace, transportation, financial services, and many others.
As organizations have become larger and more complex, effective management
of operations has become an increasingly difficult task. The data-rich
environment resulting from the growing capabilities of computer systems and
networks and the broad availability of measurements and historical data from
local and remote sources have compounded the difficulty of this task. Data must
be analyzed and decisions and actions must be effected in a timely manner, often
in real time. Failure to optimize resources or manage operations effectively can
adversely affect quality, increase cost, or delay a product's time to market,
with a resulting deterioration of competitive position in the marketplace.
In an attempt to respond to these challenges, organizations have
implemented low level computer monitoring and process management systems, which
have limited functionality. For example, in manufacturing, computerized
monitoring systems are capable of maintaining steady surveillance of variables
and allowing operators to display trend graphs of measured values. However,
operators are typically required to monitor basic measurement information, apply
expertise to hundreds or thousands of constantly changing measurements, diagnose
unexpected behavior, make decisions, and take corrective action.
These challenges are also present in the telecommunications industry.
Efficient utilization of network resources and optimum levels of quality service
for customers require constant monitoring of network conditions, rapid diagnosis
of network faults, and implementation of recovery actions. Increasingly complex
networks challenge the ability of computer monitoring systems and their
operators to cope with the changing availability of resources and the vast
amounts of network status and alarm information.
In an effort to add intelligence to low level computer monitoring and
process management systems, a number of software products have been developed
which offer "point solutions" designed for specific purposes. Such point
solutions may satisfy part of the need for effective decision support and
control, but they are generally inflexible and only address specific needs. In
addition, the integration of various point solution packages from different
vendors into a complete decision support and control system can be difficult to
implement and maintain. When point solutions are unavailable or inadequate,
custom development using general purpose programming tools is a common and often
costly approach. The resulting programs typically have limited scalability and
are hard to update and maintain as requirements change.
The Company believes that comprehensive intelligent systems are required
for organizations to meet their competitive challenges most effectively. These
systems must analyze, interpret, and act on large amounts of data by applying
"knowledge" that represents the expertise and experience of the best operational
personnel combined with analytical models constructed by engineers and business
professionals.
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THE GENSYM SOLUTION
Gensym software products allow organizations to develop and deploy
intelligent systems for decision support and control. Gensym's products include
G2, the Company's core product, and a growing number of products based on G2. G2
is an object-oriented development and deployment environment used to build
intelligent applications. G2 allows organizations to apply knowledge to data in
order to reach conclusions, provide advice, and take actions, often in real
time. G2 can follow numerous lines of reasoning based on this knowledge and
analyze large amounts of data and trends concurrently. G2 maintains an
understanding of the behavior of processes over time and the currency of
information, both of which are important for real-time decision support and
control.
Products based on G2 augment G2's broad capabilities with additional
functionality specific to such problems as fault diagnosis, dynamic scheduling,
process design, process simulation, and network management. Such products are
offered both by Gensym and Gensym's marketing partners.
G2 and G2-based products offer the following advantages:
Knowledge as a Corporate Resource. Knowledge, once represented in G2, can
be readily understood and reused, allowing organizations to capture operational
knowledge and experience and transform it into a growing and evolving resource.
This knowledge can be organized, stored, and incorporated within G2
applications. The combined expertise of many persons in an organization,
accumulated over time, can provide a long-term corporate resource for
replicating and extending intelligent decision support and control applications.
Functionality. G2 includes many features that facilitate intelligent
decision support and control. G2's reasoning engines can deal with large numbers
of tasks concurrently in real time, thereby providing timely attention and
response to multiple simultaneous problems. G2 can apply intelligent analysis to
measurements to detect abnormal behavior before alarm limits are reached.
Priorities can be assigned so that execution of critical tasks will not be
delayed by less critical tasks and so that knowledge appropriate to an analysis
can be accessed and used quickly. The Company believes that G2 extends object
technology beyond that generally available in other products. Objects in G2 can
correspond to physical objects in the real world, such as pieces of fixed
equipment, production materials, or transportation vehicles. Because G2 can
model real world objects, their physical locations and interconnections, their
dynamic behavior, and causal and logical relationships among them, G2 can trace
the root cause of a problem or anticipate the consequences of an abnormal
condition.
Ease of Development and Maintainability. G2 provides a development
environment that allows more productive development of intelligent system
applications than conventional programming. Development in G2 is facilitated by
the use of natural language rules and procedures, which are intuitive and
require less specialized training to write than functions and methods in
conventional programming languages such as C, C++, and Java. A single rule or
procedure can apply to multiple measurements or situations, reducing the size of
an application and the time needed to build it. An application can be
constructed and tested incrementally, assisted by G2's built-in simulator,
allowing operational experts to modify and validate the application before it is
deployed. Developers and users have the ability to search, test, and modify
knowledge in an application using G2's knowledge management facilities. Using
Gensym's Telewindows product, individuals at multiple geographic locations can
concurrently develop an application. G2's development features can provide
productivity advantages for existing and follow-on applications and can reduce
the cost and time to deployment for new applications.
Ease of Deployment and Support. G2 provides for a seamless transition from
development to deployment. The customer can select the computer platform on
which to deploy G2 from a broad range of workstations and personal computers.
Apart from external interfaces, G2 applications are portable and can run on a
variety of computer platforms without modification or recompilation. Multiple
users can have concurrent, shared access to any G2 application via Telewindows
or via standard Intranet browsers and Gensym's G2 Weblink product. G2 also
allows interactive support of an application while it is running, avoiding
system down-time. Using Telewindows, this interactive support can be done
remotely over a network, reducing maintenance expense. Gensym offers a set of
modules that allow G2 to interface concurrently to multiple sources of real-time
data from production systems and databases, so that G2 can integrate information
from many sources. These interface modules allow G2 to accept and respond to
high-priority event information with immediate actions, while G2 continues to
perform routine monitoring and control activities.
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STRATEGY
Gensym's objectives are to increase the market for intelligent systems and
extend its leadership in this market. To achieve these objectives, the Company
employs the following strategies:
- Extend Technological Leadership and Enhance Ease of Use. The Company
plans to build upon its technology base by adding new features and
functionalities to its existing products and expanding its product
line, particularly in the direction of industry standards and
solutions to common mission-critical problems in its major markets.
The Company believes that its leadership is primarily a result of its
extensive set of advanced software technologies. The Company plans to
continue to develop features to enhance the ease of use of its
products, such as object libraries, interfaces to other software
systems, and links to networks such as the Internet.
- Focus on Key Accounts. Gensym intends to continue to expand the
market for intelligent systems by selling and delivering solutions
directly and with partners to large organizations with complex
operations and the potential for extensive application proliferation.
The Company works in close cooperation with end-users and partners
around the world in order to expand the features and capabilities of
its products. After proving the effectiveness of its solutions in
initial applications, Gensym both promotes proliferation of additional
applications at additional sites within that organization and
publicizes those successes as references for new customers.
- Expand Relationships with Marketing Partners. To encourage faster
growth of the market for intelligent systems, the Company seeks to
continue to form strategic relationships with systems integrators and
value-added resellers that have experience in various targeted
application markets and can build and install solutions using G2 and
G2-based products.
- Strengthen Worldwide Presence. The Company strives to have sales and
support presence in geographic regions in which the Company believes
there is demand for its products and services. Gensym has a total of
26 direct sales offices in North America, Europe, Africa, and Asia. In
addition, the Company has established local distribution channels in
Japan, South Africa and other international markets and has customer
support service centers in North America and Europe. Gensym plans to
increase the worldwide technical support capabilities of its
international offices.
- Broaden Product Line to Increase Market Penetration. Gensym intends
to expand the markets for its products through the introduction of
additional products which add functionality and knowledge applicable
to manufacturers, communication service providers, financial service
providers, and utilities. The Company plans to expand its relationship
with its strategic partners to help accomplish this goal.
PRODUCTS
Gensym sells G2 and a growing number of products used with or based on G2.
G2
G2 is a comprehensive development and deployment environment for
intelligent decision support and control applications. G2 applies knowledge that
represents the experience of the best operations personnel, combined with the
analytical models constructed by engineers and business professionals and models
derived from past performance, to real-time or model data, in order to reach
conclusions, provide advice, and take real or simulated actions in a timely
fashion. G2 can follow multiple lines of reasoning based on this knowledge and
consider multiple problems concurrently. G2 maintains an understanding of the
behavior of processes over time and the currency of information, both of which
are important for real-time decision support and control. G2 incorporates a
broad array of integrated technologies that allow application developers to
implement object-oriented applications without the need for conventional
computer programming.
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Development Features
G2 allows an application developer to express objects, rules, models
and procedures using structured natural language so that they can be
readily understood and modified. The built-in editor automatically
shows the user the list of permissible words, checks statements as
they are entered, and indicates errors. The G2 development environment
allows a developer to test an application using simulated data and to
view the results graphically. In this way, an application can be
tested under various scenarios before deployment. Rapid incremental
application development can be done interactively, to facilitate
application improvements during prototyping, during development and
even while in deployment. Using G2's ability to support rapid
application development, a developer can show a dynamic, graphically
animated prototype of an application to an end-user at an early stage.
Using G2, an application developer can model a process in terms of
interrelated objects, which may be in graphical or schematic diagram
form. These object-based graphical connections enable G2 to reason
about the interdependent behavior of connected process objects. An
integrated knowledge management facility contained within G2 can
access all available knowledge (the objects, rules, models, and
procedures) in order to facilitate intelligent knowledge queries for
examining and modifying knowledge. G2's high-level representation of
knowledge allows persons in many positions and roles in an
organization to develop applications more quickly and easily, while
aiding maintainability and reusability. Using Gensym's Telewindows
product, developers at multiple geographic locations can work in teams
to concurrently develop applications.
Deployment Features
Applications built on G2 are portable and interoperable across a
number of computer platforms, so solutions can be offered on any of a
wide range of platforms and knowledge migrated to new and more
powerful computers and operating systems. G2 currently runs on
workstations from Digital Equipment Corporation, Hewlett-Packard, IBM,
Sun Microsystems, and others, as well as on personal computers. G2
currently runs under the UNIX, VMS, and Windows NT operating systems.
G2 allows many procedures or rules to be active concurrently. A
procedure or rule can be executing, suspended to allow other
computations to occur, or waiting for a triggering event. G2 enhances
the reliability of on-line applications by its facility to save
"snap-shots" of a process state and "warm boot" to the last saved
state, so that an intelligent real-time system can resume after power
failures or other interruptions. Applications can also be modified
without interrupting the running of the application.
Through its G2 Standard Interface technology, G2 can support
concurrent access to multiple sources of data and high-performance
data exchange. Once an application is deployed, Telewindows and
Gensym's G2 Weblink allows multiple users to share that application
concurrently.
G2 application server licenses are typically perpetual and carry a
North American list price of $48,000. The Company offers volume and
other discounts to encourage large projects and product proliferation.
TELEWINDOWS AND G2 WEBLINK
Telewindows operates in conjunction with G2 and enables concurrent shared
access to G2 from multiple geographic locations. Telewindows gives each member
of a development team full concurrent access to an application as a native
developer, with immediate awareness of and access to objects and other knowledge
created by other team members. Telewindows enables remote system maintenance by
allowing full developer access to on-line deployed applications remotely across
a network. Once an application is deployed, Telewindows allows multiple users to
share that application concurrently.
Multiple end-users on a network can access multiple applications via
Telewindows. Each user is provided with specific capabilities and restrictions
according to the authorized level of access. For example, in typical
manufacturing operations, the process or plant operators may have access to
intelligent diagnostics and other decision support while the maintenance group,
plant management, plant engineers and others may share the knowledge and
real-time analysis appropriate to their respective tasks.
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In addition to Telewindows, Gensym introduced and released in 1996 a new
product, G2 WebLink, that enables users to interact with G2 applications
remotely from browsers like Netscape and Microsoft Explorer. This new product
"web-enables" G2, that is, provides standard user access over Internet or
intranet connections.
Pricing for Telewindows or G2 WebLink capability is based on the number of
users and whether those users are specifically identified or not. Pricing for
an identified user is $6,000, in single user quantities.
DATA INTERFACE MODULES
The Company and many of its marketing partners offer specific interface
modules to allow on-line integration of G2 with external programs, systems, and
databases. The Company offers interfaces to many standard databases such as
those offered by Informix, Oracle, and Sybase. Interfaces to most popular
factory control systems are available either from the Company or, in several
cases, directly from the vendors of these systems. The North American list price
for Data Interface Modules ranges from $4,000 to $10,000, in single unit
quantities.
G2-BASED PRODUCTS
The Company also offers a number of products that are built on G2. The
Company's G2-based products include:
G2 Diagnostic Assistant
G2 Diagnostic Assistant ("GDA") is a graphical tool set that can be used to
create diagnostic and control applications. GDA is based on functional blocks,
which are graphical objects that can be selected from menus and connected to
create an application. The functional blocks include logic and fuzzy logic
blocks, rule blocks, statistical tests, and alarm actions. New blocks can be
created by the user and added to the application to address specific needs. GDA
has built-in facilities for alarm handling and explanations of diagnostic
conclusions, including the capability to quantify the degree of certainty of
such conclusions. GDA was first released in 1993 and, as of December 31, 1996,
there were more than 700 copies deployed in manufacturing and other
applications. The North American list price of GDA is $16,000, in single unit
quantities. GDA is also offered bundled with G2, at a North American list price
of $53,000.
NeurOn-Line
NeurOn-Line is designed to allow non-programmers who have little or no
experience with neural networks to take advantage of this technology,
particularly for on-line, dynamic applications. NeurOn-Line is used to identify
and generate models of the physical behavior of processes and of relationships
among process variables, when given a sufficient set of data. These models can
then be used on-line to compare process behavior with the model's prediction and
to control processes. The development of neural network applications in
NeurOn-Line is done graphically by selecting objects from menus, connecting
them, and entering attribute and control information. NeurOn-Line was first
released in 1994 and, as of December 31, 1996, there were more than 250 copies
deployed in manufacturing and other applications. The North American list price
for NeurOn-Line is $20,000, in single unit quantities. NeurOn-Line is also
offered bundled with G2, at a North American list price of $60,000.
ReThink
ReThink is a graphical toolkit and process simulator for business process
analysis, re-engineering, and continual decision support. It includes a wide
range of tools for performing what-if analyses and animating the process
models, allowing the user to visualize the process at various levels of detail
and helping the user to recognize, understand and address difficulties. ReThink
allows business managers to quickly and intuitively design and experiment with
alternative business process structures, determining how such alternative
structures could impact cost and cycle time and identifying potential
bottlenecks. ReThink is currently licensed to several large consulting
organizations for use in their business process re-engineering services.
ReThink was first released in 1996 and as of December 31, 1996, there were more
than 120 copies deployed. ReThink is sold in various configurations depending
on use, starting at a North American list price of $20,000 for a one-year,
single-user only license.
PRODUCTS UNDER DEVELOPMENT
The Company is presently developing new G2-based products. The one listed
below is in pre-release testing and is sold with application support services.
Fault Expert
Fault Expert, formerly "Operations Assistant" or "OPA", is a software
toolkit that helps solve network management problems, such as alarm
flooding, traffic congestion, and lost connections. Fault Expert is
used to filter, correlate, and prioritize alarms; recognize patterns
and predict incipient failures; and diagnose problems and recommend
corrective actions to operations personnel. Fault Expert augments
standard network management software such as HP OpenView, DEC
Polycenter and IBM NetView, adding capabilities for higher level
diagnostics and rule-based reasoning. Fault Expert is currently
installed at more than 40 beta sites. Release is currently planned
in stages in 1997.
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CUSTOMERS AND APPLICATIONS
The Company's customers include end-users, value-added resellers, and
systems integrators. Many of the largest industrial corporations in the world
are customers of the Company. Listed below is a sampling of the Company's
customers, each of which has generated at least $100,000 in license revenues
over the last three years:
AEROSPACE METALS/MINING
Lockheed Martin British Steel Plc
NASA Dofasco
McDonnell Douglas Corporation ISCOR
Storm Integration, Inc. Krupp
AUTOMOBILE PHARMACEUTICAL
Siemens AG Biochemie GmbH
Toyota Eli Lilly & Company
Glaxo
CEMENT
ABB Industrie AG
Lafarge PIPELINE TRANSMISSION
El Paso Energy Corp.
CHEMICAL/PETROLEUM Shell UK Limited
Asahi Chemical Texas Eastern Transmission Corporation
AspenTech
Citgo POWER INDUSTRY
Exxon British Nuclear Fuels
Saudi Aramco National Power (United Kingdom)
Yamatake-Honeywell Corporation Ltd.
DISCRETE MANUFACTURING
Gillette Company TELECOMMUNICATIONS
Hitachi AT&T
Seagate Ericsson Hewlett-Packard AG
France Telecom
FINANCIAL MCI Telecommunications
S.W.I.F.T. Motorola
NEC
FOOD AND BEVERAGE Stanford Telecommunications Inc.
Nabisco
TRANSPORTATION
Mass Transit Railway Corporation
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The Company has sold more than 7,000 licenses for its products to over 600
industrial, service and governmental organizations in more than 40 countries
worldwide. The Company's products are used internationally in a broad array of
applications, including the following:
- AMOCO OIL PETROLEUM PRODUCTS
Amoco estimates that it processes over 400,000 barrels of crude oil
every day at its refinery in Texas City, Texas. The crude oil is
separated into five different product streams, including diesel and
kerosene. Knowing the exact composition of each stream is critical,
but the refinery's on-stream analyzers were subject to frequent
and costly time delays. Using Gensym's GDA and NeurOn-Line, Amoco has
been able to make real-time assessments and take control of stream
quality. The refinery now has tighter control of the process, with
closed-loop utilization rates of over 95%, and Amoco estimates that
it has saved over $500,000 per year in recovered product.
- CORPOVEN S.A.
Corpoven's Puerto La Cruz Refinery in Venezuela operates a conversion
plant that transforms light hydrocarbons into high-value petroleum
products, a very complex process which must meet tight tolerances to
comply with environmental requirements. Corpoven implemented a
G2-based system to incorporate the knowledge of its more experienced
refinery operators so that all operators at this plant would have the
benefit of their expertise. The G2-based system can now forecast
potential operating deviations approximately two hours in advance.
- MOTOROLA SATELLITE COMMUNICATIONS
Utilizing a network of 66 low earth orbit satellites linked to ground
stations around the world, the IRIDIUM(R) network is a global personal
communications system designed to handle voice, data, fax, and paging
transmissions. The IRIDIUM satellites will feature moving cells that
can be shared by access providers worldwide. Motorola's Satellite
Communications Group in Chandler, Arizona relies on Gensym's G2(R)
and Fault Expert(TM) software to manage this complex network and
keep it operational.
- FORD MOTOR COMPANY
Ford's Automatic Transmissions New Product Center in Livonia, Michigan
had a cell controller based on a proprietary architecture. Design and
process revisions were cumbersome, and new hardware and software were
difficult to incorporate. Ford wanted a flexible manufacturing system
(FMS) which could manage all the complexities of prototype
manufacturing and was easy to use and easy to integrate with industry
standard equipment. Ford chose G2 to control the movement of all
parts through the FMS. The FMS issues control commands to machine
tools and allows process engineers to create flexible routes for
pallets of raw materials. Shop-floor staff began using the FMS with no
formal training and functional modules are continuously being added,
including part tracking, tool management, and decision support.
- NABISCO BISCUIT COMPANY
The Nabisco Biscuit Company's Atlanta bakery wanted to reduce the
waste that results from products not meeting its strict quality
standards. Simons Engineering, a Gensym Solution Partner, worked with
Nabisco to develop Process Operator Guidelines (POG), a G2-based
application that performs SCADA, statistical process control, and
recipe management functions. While providing proactive process control
advice to line operators, the POG system gives Nabisco real-time
expert analysis, allowing bakery personnel to recognize problems
quickly and respond to them intelligently. Since implementing the new
system, the Atlanta bakery has achieved higher product consistency,
improved product quality, and reduced product loss by two-thirds.
Based on the success in Atlanta, Nabisco has introduced the system to
five other facilities.
- NEUCHATEL POLICE, SWITZERLAND
In Switzerland, the Neuchatel Police use Gensym's G2 at their Traffic
Management Center for an operator decision system to help control
traffic lights, speed and direction signs in a network of tunnels and
highways. G2 accesses 28,000 data points from sensors deployed
throughout a system consisting of 37 kilometers of tunnels and covered
highways with 900 traffic lights and 650 variable message signs. When
an operator receives
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information about an incident along the highway, the operator selects
which segments of the system need to be closed off. G2 then calculates
the control strategy to redirect traffic around the closed-off
segments based on its knowledge of traffic flow and behavior, safety
procedures, geographic constraints, and operating procedures. Upon
confirmation by the operator, G2 executes the control strategy by
sending signals to the traffic lights and variable-message signs along
the highway.
SALES AND MARKETING
In order to reach the broadest possible market, the Company utilizes its
direct sales force and applications engineering personnel and over 200 selected
marketing partners.
The Company markets its products in North America, Europe, Africa, and
parts of Asia through a direct sales organization composed of 36 salespersons
and sales managers and 27 applications engineers as of December 31, 1996. The
Company currently has 14 sales offices in North America and direct sales offices
in Australia, England, France, Germany, Hong Kong, Italy, the Netherlands,
Scotland, South Korea, Sweden, and Tunisia. The Company intends to continue to
expand its direct sales organization. In 1994, 1995, and 1996, the Company
received 44%, 44%, and 42% of its total revenues, respectively, from
international operations. See Note 7 of Notes to Consolidated Financial
Statements for financial information by geographic area.
The direct sales force focuses on selling to major accounts and provides
face-to-face contact with customers. Applications engineers work with the direct
sales force to perform demonstrations at customer sites and to assist customers
in evaluating their technical requirements and implementing G2 application
prototypes. Regular seminars and workshops are hosted at the Company's larger
offices to demonstrate the G2 family of products and related applications. The
Company's local offices offer basic and advanced training courses that teach
prospective and new customers how to build application solutions using the
Company's G2 and G2 based products.
The Company also distributes its products through a network of more than
200 systems integrators and value-added resellers which are selected for their
capability to add substantial value by providing end-users with focused
application solutions built on G2. Third party resellers currently include
organizations such as Asea Brown Boveri, EDS, The Foxboro Company, Honeywell,
IBM, Loral, SEMA Group, Setpoint, Siemens, and Storm Integration. Product
revenues from systems integrators and value-added resellers represented over
29%, 26%, and 28% of the Company's product revenues for 1994, 1995, and 1996,
respectively.
Gensym markets its products in Japan, South Africa and certain other
countries through distributors. These distributors have technical competence in
the application of G2, market the Company's products, provide local training and
support assistance to customers, translate documentation, help localize software
and provide systems integration services. Sales of the Company's products by
distributors, primarily the Company's Japanese distributor, accounted for 19%,
14%, and 14% of the Company's product revenues in 1994, 1995, and 1996,
respectively.
The Company employs 18 marketing personnel to position, promote and market
the Company's products. These individuals are engaged in a variety of
activities, including public relations, direct marketing, trade shows,
advertising, seminars, and promotion of customer applications for publication in
industry magazines and journals. More than 250 case studies of successful G2
applications have been published.
SERVICE AND SUPPORT
Gensym believes that a high level of customer service and support is
critical to customer satisfaction and project and application success. Most
Gensym customers attend one or two weeks of training and then implement their
applications using the development features of Gensym software. The Company
offers a regular schedule of product training in its offices in North America,
Europe, and Asia, and special on-site training courses are offered on a demand
basis around the world. Direct application engineering services are offered to
customers around the world, to support end-users as well as Gensym marketing
partners.
The Company offers product maintenance and update services for an annual
fee, typically equal to 15% of the license fee list price of the underlying
product. Maintenance is mandatory for the first year after purchase and
thereafter is optional. The Company's telephone support staff assists customers
and partners in the installation and use of the Company's products. Telephone
support is provided by the Company in North America and Europe and by local
marketing partners in Japan and other areas of the world where Gensym does not
have a direct presence.
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Gensym offers a variety of application engineering and consulting services
on a fee-for-service basis. Gensym has specialized consulting resources in the
following five areas: network and systems management; manufacturing process
management; process design, modeling, and simulation; pharmaceutical process
design and control; and water treatment. A key mission of the consulting staff
is to assist partners, as well as end-users, in the successful development and
deployment of intelligent systems applications based on G2. As of December 31,
1996, the Company employed a staff of 43 full-time consultants, which it
supplements, when necessary, with external contractors.
The Company offers several training courses, including two five-day G2
courses for beginning and more advanced users. In addition, the Company provides
courses on interfacing G2 to data sources and on its GDA, NeurOn-Line, and
ReThink products. The courses are given at the Company several times per month
and are also often provided at local offices and at customer sites. Outside
North America, the courses are offered by the Company where resources permit, as
well as under license from the Company by distributors and training contractors.
In 1996, more than 1,200 individuals worldwide completed courses offered by the
Company. The fee for a full week course is approximately $2,300 per student.
Gensym provides continuing support to the Gensym Users Society, an
organization of all G2 users covered by current maintenance contracts. The
Society sponsors an annual worldwide meeting plus additional regional and local
meetings. These meetings are organized as professional technical conferences,
with formal presentations of G2 applications by end-users and partners, company
and product updates by Gensym, product planning forums, panel discussions,
tutorials, workshops, and site visits. The Society publishes its "Inspect"
newsletter several times per year and has a number of special interest groups in
such areas as manufacturing and engineering design.
RESEARCH AND DEVELOPMENT
The Company believes that its future success will depend upon its ability
to enhance existing products as well as to develop and introduce new products
that keep pace with technological developments in the marketplace and address
the increasingly sophisticated needs of its customers. The Company intends to
expand existing product offerings and to introduce new applications. While the
Company expects that certain new products will be developed internally, the
Company may, based on timing and cost considerations, acquire or license
technology and/or products from third parties or consultants.
New products and enhancements to existing products are typically developed
in response to discussions at user groups and customer feedback obtained by the
Company's customer support personnel. New product initiatives are also taken to
address targeted markets. Recent areas of focus include conformance to Microsoft
Windows and NT standards (including ActiveX), CORBA compliance, component-based
product architectures, Internet and World Wide Web technologies (standard
browsers and Java), and agent-based intelligent systems.
As of December 31, 1996, Gensym had 58 employees engaged in research and
development, including software and hardware engineering, test and quality
assurance and technical documentation. In 1994, 1995 and 1996, Gensym's
research and development expenditures totalled $4.6 million, $5.3 million, and
$6.0 million, respectively, representing 23.4%, 18.7% and 16.1% of total
revenues, respectively.
COMPETITION
The Company believes that there are no other commercially available
products that offer the full range of high-level capabilities embodied in the
Company's products. While a number of software companies offer products that
perform certain of the functions of G2 for specific applications, the Company
believes that only the Company's products offer, as a single seamlessly
integrated system, the concentration of software technologies required to build
successfully a broad range of intelligent system applications.
Certain companies sell "point solutions" that compete with the Company's
products with respect to certain applications or uses. However, an intelligent
decision support system based on point solutions requires the integration of
various software packages from different vendors which are often difficult to
maintain. Some potential customers opt to build their own intelligent systems.
These systems require that knowledge be programmed, usually at a high cost and
are typically difficult to adapt, reuse, maintain, and scale up.
Several companies offer products with real-time capabilities or expert
system based development environments. However, the Company believes that these
products lack the capabilities of its G2 environment and G2-based products.
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The principal competitive factors in all of the Company's markets are
functionality, ease of use, price, distribution capabilities, quality,
performance, customer support, and availability of application software
implementation services. The Company believes that its products are superior in
terms of functionality, ease of use, and performance in the high-level
applications that constitute the Company's principal market, and that it
competes favorably on the basis of these factors in both high-level and lower
level markets. In order to maintain its competitive position, the Company must
continue to enhance its existing products and introduce new products that meet
evolving customer requirements. There is no assurance that the market position
or the competitive advantages of the Company will continue.
PROPRIETARY RIGHTS
The Company relies primarily on a combination of patent law, copyright law
and trade secret law to protect its proprietary technology. The Company also has
internal policies and systems to limit access to and keep confidential its trade
secrets. The Company distributes its products under software license agreements
that contain various provisions to protect the Company's ownership of and the
confidentiality of the underlying technology. The Company also requires its
employees and other parties with access to its confidential information to
execute agreements prohibiting the unauthorized use or disclosure of the
Company's technology. In addition, the Company periodically reviews its
proprietary technology for patentability and has one patent covering specific
aspects of G2. The Company has also placed technical inhibitors in its software
that prevent the software from running on unauthorized computers. Despite these
precautions, it may be possible for a third party to misappropriate the
Company's technology or to independently develop similar technology. In
addition, effective patent, copyright and trade secret protection may not be
available in every foreign county in which the Company's products are
distributed.
Certain technology used in the Company's products is licensed from third
parties. The Company believes that, in general, comparable licenses are
available on commercially comparable terms from a number of licensors and does
not believe that any of the Company's products are significantly dependent upon
such licensed technologies.
Despite the Company's efforts to protect its proprietary rights, attempts
may be made to copy or reverse engineer aspects of the Company's products or to
obtain and use information that the Company regards as proprietary. There can be
no assurance that others will not develop products that infringe the Company's
proprietary rights or are similar or superior to those developed by the Company.
Policing the unauthorized use of the Company's products is difficult. Litigation
may be necessary in the future to enforce the Company's intellectual property
rights, to protect the Company's trade secrets or to determine the validity and
scope of the proprietary rights of others. Such litigation could result in
substantial costs and diversion of resources and could have a material adverse
effect on the Company's business, results of operations and financial condition.
Also, there can be no assurance that third parties will not assert infringement
claims against the Company in the future with respect to current or future
products. Any such assertion could require the Company to enter into royalty
arrangements or result in costly litigation, which could have a material adverse
effect on the Company's business, results of operations and financial condition.
Gensym, G2, and NeurOn-Line are registered trademarks of the Company. The
Gensym logo, NeurOn-line, GDA, ReThink, G2 WebLink, and Fault Expert are
trademarks of the Company. The Company has filed applications to register
Gensym, G2, and other marks in certain foreign jurisdictions. In addition, the
Company has an exclusive, worldwide, royalty- free, perpetual license to use
the trademark Telewindows.
BACKLOG
The Company's products are generally shipped immediately upon the receipt
of an order. As a result, the Company has no significant backlog at any given
time.
EMPLOYEES
As of December 31, 1996, the Company had 284 full-time employees, including
110 in sales and marketing, 60 in product development, 45 in consulting
services, 32 in customer support, production and licensing, and educational
services, and 37 in general and administrative functions. None of the Company's
employees is represented by a labor union, and the Company believes that its
employee relations are good.
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ITEM 2. PROPERTIES
The Company's headquarters and principal operations are located in a leased
facility with 52,000 square feet in Cambridge, Massachusetts. The Company's
lease expires on December 31, 2000 and contains a commitment to increase the
amount of space to 66,000 square feet at different times over the life of the
lease. In addition to rental expenses, the Company must also pay an allocated
portion of operating expenses and taxes each year. The Company also leases
twelve sales offices in the United States, eight in Europe, and one each in
Australia, Canada, Hong Kong, South Korea and Tunisia. The Company's aggregate
rental expense for all facilities during 1996 was $1.9 million. Gensym believes
that its existing facilities are adequate for its current needs, and that
suitable additional space will be available as required.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any litigation that it believes could have a
material adverse effect on the Company or its business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of the Company's security holders during the
fourth quarter of 1996.
EXECUTIVE OFFICERS OF THE COMPANY
The executive officers of the Company and their respective ages as of March 26, 1997 are as follows:
Name Age Position
---- --- --------
Lowell B. Hawkinson........... 54 Chairman of the Board, Chief Executive Officer,
Treasurer and Secretary
Robert L. Moore............... 54 President and Director
Richard M. Darer(1)........... 43 Vice President, Finance and Administration and Chief Financial Officer
Troy A. Heindel............... 35 Vice President, Support Services and Chief
Information Officer
Kathy L. Kessel............... 45 Vice President, Marketing
Michael Levin(2).............. 57 Vice President, Technology
James T. Pepe................. 52 Vice President, Product Development
Mark H. Whitworth............. 45 Vice President, Advanced Systems Business Unit
Bill H. Wood.................. 58 Vice President, Communications Business Unit
(1) Will commence employment April 10, 1997.
(2) Mr. Levin has informed the Company that he will be resigning effective
April 15,1997.
Mr. Hawkinson, a founder of the Company, has served as Chairman of the Board,
Chief Executive Officer, Treasurer and Secretary since September 1986. Prior to
founding the Company, Mr. Hawkinson was a Manager of Expert Systems Development
at Lisp Machines Inc., a specialty computer manufacturer, from 1983 to 1986.
From 1973 to 1983, Mr. Hawkinson was Research Associate in the field of
artificial intelligence at the Laboratory for Computer Science at the
Massachusetts Institute of Technology. Mr. Hawkinson is also a director of
GenRad, Inc.
Dr. Moore, a founder of the Company, has served as President and a director
since September 1986. Prior to founding the Company, Dr. Moore founded and was
Vice President of the Process Systems Division of Lisp Machines Inc. from 1983
to 1986. From 1981 to 1983, Dr. Moore was President of Sentrol Systems Inc., a
supplier of process control systems. Dr. Moore received his undergraduate
degrees in Electrical Engineering and Engineering Mathematics from the
University of Michigan, his Ph.D. degree from the Massachusetts Institute of
Technology, with a major in Automatic Control and a minor in Industrial
Management.
Mr. Darer is joining the Company in April 1997 as Vice President of Finance and
Administration and Chief Financial Officer. From May 1996 to March 1997 he
served as Chief Financial Officer and Vice President of Administration at White
Pine Software, Inc., a videoconferencing software products company. Mr. Darer
served as Vice President, Treasurer and Controller of Sequoia Systems, Inc., a
computer systems company, from January 1996 to May 1996, and Corporate
Controller from July 1994 to December 1995. From 1982 to 1994, Mr. Darer held
several positions in financial management at Computervision Corporation, a
CAD/CAM software and services company, the most recent of which was the
Controller of the Computervision Group. Mr. Darer received an M.B.A. from the
Harvard Graduate School of Business Administration, an M.S. from Northeastern
University and a B.S. from the Polytechnic Institute of Brooklyn.
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Mr. Heindel joined the Company in 1991 as a telecommunications marketing
specialist and was promoted to his current position of Vice President, Support
Services and Chief Information Officer in November 1995. Prior to joining
Gensym, Mr. Heindel worked at NASA's Johnson Space Center as a Space Shuttle
Operations Flight Controller and Project Manager from 1985 to 1991.
Ms. Kessel joined the Company in May 1992 and has served as Vice President,
Marketing since May 1995. From 1992 to 1995 Ms. Kessel served as the Director
of Corporate and Product Marketing. Prior to joining the Company, Ms. Kessel
held various senior market development and engineering positions at Texas
Instruments, Automatix, and from 1988 to 1992 at Concentra Corporation, where
she served most recently as Director of Marketing. Ms. Kessel holds an M.S. in
Management of Technology from the Massachusetts Institute of Technology Sloan
School of Management and a B.S. in Mechanical Engineering from the University
of New Hampshire.
Mr. Levin, a founder of the Company, has served as Vice President, Technology
since 1989. Mr. Levin holds a B.S. degree in mathematics from the Massachusetts
Institute of Technology.
Dr. Pepe joined the Company in June 1994 as Vice President of Product
Development. From 1990 to 1994, Dr. Pepe served with DEC as Group Manager for
transaction processing software development. Dr. Pepe holds SB, SM, and Ph.D.
degrees in mathematics from the Massachusetts Institute of Technology.
Mr. Whitworth joined the Company in July 1992 as its Director of Consulting
Services and has served as Vice President, Advanced Systems Business Unit since
January 1997. From May 1995 to December 1996 Mr. Whitworth served as the Vice
President of Consulting Services. Prior to joining the Company, Mr. Whitworth
was Director of Consulting Services at MainStream Software Company from 1990 to
1992.
Mr. Wood joined the Company in March 1997 as the Vice President, Communications
Business Unit after serving as a consultant to the Company for three months.
From July 1995 through December 1996 Mr. Wood served as the Vice President and
General Manager, North American Operations of Information Systems Management at
Bull Information Systems. Mr. Wood held various senior management positions at
Candle Corporation from 1984 to July 1995, where he most recently served as
Vice President of Worldwide Marketing.
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PART II.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The common stock of the Company is traded on The NASDAQ Stock Market under the
symbol "GNSM". The common stock was first traded on NASDAQ on February 16, 1996
concurrent with the underwritten initial public offering of shares of the
Company's Common Stock (the "Offering"). Prior to the Offering there was no
established public trading market for the Company's shares.
The table below sets forth the high and low sales prices of the Company's Common
Stock in 1996 from February 16, 1996, the date of the Offering, through the end
of the first quarter of 1996 and for each full quarterly period thereafter in
1996.
Year ended
December 31, 1996
High Low
------ ------
First quarter (from February 16, 1996) 19 1/2 10
Second quarter 23 3/4 18 1/4
Third quarter 23 3/4 18 3/4
Fourth quarter 22 3/8 8 5/8
The Company has never declared or paid cash dividends on its capital stock. The
Company currently intends to retain its earnings for future growth and,
therefore does not anticipate paying any cash dividends in the foreseeable
future. Payment of future dividends, if any, will be at the discretion of the
Company's Board of Directors after taking into account various factors,
including the Company's financial condition, operating results, current and
anticipated cash needs and plans for expansion.
The number of holders of record of the Company's Common Stock at March 26, 1997
was 128. This number does not include shareholders for whom shares are held in
a "nominee" or "street" name.
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ss
ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated balance sheet data presented below as of December 31, 1996 and 1995, and the selected consolidated
statement of operations data for each of the three years in the period ended December 31, 1996, are derived from the Company's
Consolidated Financial Statements, included elsewhere in this Annual Report which have been audited by Arthur Andersen LLP,
independent public accountants (the "Consolidated Financial Statements") . The selected consolidated balance sheet data presented
below as of December 31, 1994, 1993 and 1992 and the selected consolidated statement of operations data for the years ended
December 31, 1993 and 1992 are derived from the Company's Consolidated Financial Statements, not included in this Annual Report on
Form 10-K, all of which have been audited by Arthur Andersen LLP, independent public accountants. These data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Consolidated
Financial Statements and related Notes included elsewhere in this Annual Report on Form 10-K.
Year ended December 31,
-----------------------------------------------------------------------
1996 1995 1994 1993 1992
----------- ----------- ----------- ----------- ----------
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues:
Product $21,358,295 $16,438,400 $11,426,593 $11,280,211 $ 9,712,901
Service 15,877,240 11,702,577 8,164,778 6,470,862 4,124,788
----------- ----------- ----------- ----------- -----------
Total revenues 37,235,535 28,140,977 19,591,371 17,751,073 13,837,689
----------- ----------- ----------- ----------- -----------
Cost of revenues:
Product 578,144 525,452 257,946 223,385 199,477
Service 6,807,071 4,789,202 2,565,091 1,777,692 1,581,049
----------- ----------- ----------- ----------- -----------
Total cost of revenues 7,385,215 5,314,654 2,823,037 2,001,077 1,780,526
----------- ----------- ----------- ----------- -----------
Gross profit 29,850,320 22,826,323 16,768,334 15,749,996 12,057,163
----------- ----------- ----------- ----------- -----------
Operating expenses:
Sales and marketing 17,432,861 14,568,045 9,371,574 7,747,776 6,132,387
Research and development 5,983,741 5,267,461 4,590,220 4,070,243 3,544,646
General and administrative 3,699,254 2,619,103 2,630,943 2,004,783 1,523,600
----------- ----------- ----------- ----------- -----------
Total operating expenses 27,115,856 22,454,609 16,592,737 13,822,802 11,200,633
----------- ----------- ----------- ----------- -----------
Operating income 2,734,464 371,714 175,597 1,927,194 856,530
Other income, net 517,758 236,030 258,077 78,223 144,520
----------- ----------- ----------- ----------- -----------
Income before provision for income taxes 3,252,222 607,744 433,674 2,005,417 1,001,050
Provision for income taxes 1,204,000 411,000 302,000 772,000 210,000
----------- ----------- ----------- ----------- -----------
Net income $ 2,048,222 $ 196,744 $ 131,674 $ 1,233,417 $ 791,050
=========== =========== =========== =========== ===========
Net income per common and common
equivalent share (1) (2) $ 0.33 $ 0.04
=========== ===========
Weighted average common and common
equivalent shares outstanding (1) (2) 6,286,170 4,804,108
=========== ===========
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments $19,589,852 $ 5,092,201 $ 6,772,671 $ 5,805,469 $ 3,923,005
Working capital 20,469,778 6,176,328 6,585,277 6,542,286 5,551,629
Total assets 36,257,621 17,846,495 14,335,231 13,189,483 10,798,355
Long-term obligations, less current portion - - - - 71,667
Total stockholders' equity 24,068,455 8,610,577 8,360,244 8,199,878 6,927,375
(1) Computed as described in Note 1(i) of Notes to Consolidated Financial Statements.
(2) Net income per common and common equivalent share and weighted average common and common equivalent shares outstanding have
not been presented for the years ended December 31, 1994, 1993 and 1992 as the information is not considered to be relevant
or meaningful.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
The Company was incorporated in 1986 to provide software products for
developing and deploying intelligent systems for decision support and control.
The Company released the first version of G2, its core product, in May 1988, and
has been profitable each year since 1989. Since 1988, the Company has released
enhanced versions of G2, has introduced add-on products that complement G2 in
areas of data connectivity and graphical user interfaces, and has further
expanded its product line to include G2-based application products. In
addition, the Company derives significant service revenues from maintenance
contracts, consulting services, and training courses related to its software
products.
The Company markets and sells its products through its 26 direct sales
offices in the United States, Europe, Africa, and Asia, as well as through
selected distributors in other countries, including Japan. In 1994, the Company
made a strategic decision to aggressively expand its direct sales force and
consulting services organization, leading to an increase in both product and
service revenues in 1995 and 1996. The Company also sells its products through a
network of value-added resellers and systems integrators who provide consulting
services and integrated solutions to their customers. The Company believes that
there is a trend among end-users in its markets toward purchasing complete
solutions, rather than software tools with which to develop such solutions. This
trend has increased the Company's reliance on such value-added resellers and
systems integrators to provide consulting services and integrated solutions to
end-users, and has lead the Company to increase its own capabilities to deliver
complete solutions directly.
This Annual Report on Form 10-K contains forward-looking statements. For
this purpose, any statements contained herein that are not statements of
historical fact may be deemed to be forward-looking statements. Without limiting
the foregoing, the words "believes," "anticipates," "plans," "expects" and
similar expressions are intended to identify forward-looking statements. There
are a number of important factors that could cause the Company's actual results
to differ materially from those indicated by such forward-looking statements.
These factors include, without limitation, those set forth below under the
caption "Certain Factors That May Affect Future Results."
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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,
1996 1995 1994
----- ----- -----
Revenues:
Product 57.4% 58.4% 58.3%
Service 42.6 41.6 41.7
----- ----- -----
Total revenues 100.0 100.0 100.0
----- ----- -----
Cost of revenues:
Product 1.6 1.9 1.3
Service 18.3 17.0 13.1
----- ----- -----
Total cost of revenues 19.9 18.9 14.4
----- ----- -----
Gross margin 80.1 81.1 85.6
----- ----- -----
Operating expenses:
Sales and marketing 46.8 51.8 47.9
Research and development 16.1 18.7 23.4
General and administrative 9.9 9.3 13.4
----- ----- -----
Total operating expenses 72.8 79.8 84.7
----- ----- -----
Operating income 7.3 1.3 0.9
Other income, net 1.4 0.9 1.3
----- ----- -----
Income before provision for
income taxes 8.7 2.2 2.2
Provision for income taxes 3.2 1.5 1.5
----- ----- -----
Net income 5.5% 0.7% 0.7%
===== ===== =====
Gross margin:
Product revenues 97.3% 96.8% 97.7%
Service revenues 57.1 59.1 68.6
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YEARS ENDED DECEMBER 31, 1996 AND 1995
Revenues
The Company's revenues are derived from two sources: product licenses and
services. Product revenues include revenues from sales of licenses for use of G2
and associated software products. Service revenues consist of fees for
maintenance contracts, consulting services, and training courses related to the
Company's products.
Total revenues were $37.2 million for the year ended December 31, 1996 as
compared to $28.1 million in 1995, an increase of $9.1 million or 32.3%. The
increase in total revenues was attributable to increased sales of both software
product licenses and related services. International revenues accounted for 42%
and 44% of total revenue in 1996 and 1995, respectively
Product. Product revenues increased to $21.4 million for the year ended
December 31, 1996 from $16.4 million in 1995, an increase of 29.9%. The increase
in product revenues reflected the results of earlier expansion of the Company's
direct sales force, and increased number of marketing partnerships (value-added
resellers, systems integrators, and distributors), as well as greater acceptance
of G2 and G2-based products in both existing and new market segments.
Service. Service revenues increased to $15.9 million for the year ended
December 31, 1996 from $11.7 million in the same period in 1995, an increase of
35.7%. The increase in service revenues was primarily due to increased
maintenance fees and application consulting. Maintenance fees increased to $7.9
million for the year ended December 31, 1996 from $6.0 million in the same
period in 1995, an increase of 31.7%. The increase in maintenance fees was due
to a larger customer base and increased maintenance renewals. Consulting
revenues increased to $6.1 for the year ended December 31, 1996 from $3.9
million in the same period in 1995, an increase of 55.9%. Consulting revenues as
a percentage of total revenues increased to 16.3% in 1996 from 13.8% in 1995.
The Company expects to continue to expand its application consulting resources
to meet the growing demand from customers and partners for assistance with
application design and development.
Cost of Revenues
Cost of Product. Cost of product revenues consists primarily of the cost of
product media and duplication, manuals, packaging materials, and the direct
labor involved in producing and distributing the Company's software. These costs
increased to $578,000 for the year ended December 31, 1996 from $525,000 in
1995, an increase of 10.0%. This increase was primarily due to the increase in
the number of licenses sold during 1996. Gross margin on product revenues
increased slightly to 97.3% from 96.8% for the years ended December 31, 1996 and
1995, respectively.
Cost of Service. Cost of service revenues consists primarily of consulting
labor costs and product support costs. These costs increased to $6.8 million for
the year ended December 31, 1996 from $4.8 million for the year ended December
31, 1995, an increase of 42.1%. The increase in cost of service revenues was due
primarily to an increase in consulting labor costs associated with providing
increased consulting services. Gross margin on service revenues decreased to
57.1% for the year ended December 31, 1996 from 59.1% in same period in 1995,
largely due to a greater percentage of lower margin consulting revenues versus
higher margin product support and training revenues.
Operating Expenses
Sales and Marketing. Sales and marketing expenses consist primarily of
costs associated with personnel involved in the sales and marketing process,
sales commissions, seminars, sales facilities expenses, trade shows,
advertising, and promotional materials. For the year ended December 31, 1996,
these expenses increased 19.7% to $17.4 million (46.8% of total revenues) from
$14.6 million (51.8% of total revenues) for the comparable period in 1995. The
increase in absolute dollars was primarily a result of the continued investment
in the Company's global sales and marketing capabilities, including the addition
of sales and sales-related personnel in new and existing offices. While the
Company plans to continue to increase its sales and marketing expenses over the
coming years, the Company expects these expenses to decline as a percentage of
revenues over time, should revenue growth continue.
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Research and Development. Research and development expenses consist
primarily of costs of personnel, equipment, and facilities. These expenses
increased 13.6% to $6.0 million (16.1% of total revenues) for the year ended
December 31, 1996 from $5.3 million (18.7% of total revenues) for the comparable
period in 1995. The increase in absolute dollars was primarily due to an
increase in engineering personnel devoted to new product features and
enhancements in the G2 product family and the development of new products. The
decrease as a percentage of revenues was primarily due to increased revenues.
General and Administrative. General and administrative expenses consist
primarily of personnel costs for finance, administration, operations,
information systems, and general management, as well as legal and accounting
expenses. These expenses increased 41.2% to $3.7 million (9.9% of total
revenues) for the year ended December 31, 1996 from $2.6 million (9.3% of total
revenues) for the comparable period in 1995. This increase was primarily due to
an increase in the number of personnel in the Company's finance, administrative,
and information systems departments.
Other Income
Other income consists primarily of interest income and foreign exchange
transaction gains and losses. For the year ended December 31, 1996, other income
increased 119.4% to $518,000 from $236,000 for the comparable period in 1995.
This increase was primarily due to an increase in interest income related to
higher cash, short-term investment, and long-term investment balances available
for investment, as a result of the proceeds from the Company's initial public
offering in February 1996, offset by losses in other investing activities. In
1996, interest income increased 175.6% to $608,000 from $220,000 in the same
period in 1995. The Company has historically experienced nominal net foreign
exchange transaction gains or losses.
Income Taxes
The Company's effective tax rate for the years ended December 31, 1996 and
1995 was 37.0% and 67.6%, respectively. The effective tax rate for the year
ended December 31, 1995 was higher than the statutory rate principally due to
the effect of taxes on foreign income and due to foreign withholding taxes. See
Note 4 of Notes to Consolidated Financial Statements.
YEARS ENDED DECEMBER 31, 1995 AND 1994
Total revenues increased to $28.1 million in 1995 from $19.6 million in 1994, an
increase of $8.5 million or 43.6%. The increase in total revenues was
attributable to increased sales of both software product licenses and related
services. International revenues accounted for 44% of total revenues in both
1995 and 1994.
Product. Product revenues increased to $16.4 million in 1995 from $11.4
million in 1994, an increase of 43.9%. The increase in product revenues
reflected earlier expansion of the Company's direct sales force and marketing
partnerships, as well as greater acceptance of G2 and G2-based products in both
existing and new market segments.
Service. Service revenues increased to $11.7 million in 1995 from $8.2
million in 1994, an increase of 43.3%. The increase in service revenues was
primarily due to increased application consulting. Consulting revenues increased
to $3.9 million in 1995 from $1.7 million in 1994, an increase of 126.6%. The
Company continued to expand its application consulting organization to meet the
growing demand from customers and partners for assistance with application
design and development, and to aggressively enter into new market segments such
as telecommunications.
Cost of Revenues
Cost of Product. Cost of product revenues increased to $526,000 in 1995
from $258,000 in 1994, an increase of 103.7%. Cost of product revenues increased
due to increased costs of product media and duplication, manuals, packaging
materials and direct labor associated with increased product shipments and a
major product release. Gross margin on product revenues remained relatively
constant at 96.8% and 97.7% in 1995 and 1994, respectively.
Cost of Service. Cost of service increased to $4.8 million in 1995 from
$2.6 million in 1994, an increase of 86.7%, primarily due to an increase in
consulting labor costs. Gross margin on service revenues decreased to 59.1% in
1995 from 68.6% in 1994, largely due to a greater percentage of lower margin
consulting revenues.
21
22
Operating Expenses
Sales and Marketing. Sales and marketing expenses increased to $14.6
million in 1995 from $9.4 million in 1994, an increase of 55.4%. As a percentage
of total revenues, sales and marketing expenses increased to 51.8% in 1995 from
47.9% in 1994. This increase was primarily a result of the continued investment
in the Company's global sales and marketing capabilities, including the addition
of sales personnel in new and existing offices.
Research and Development. Research and development expenses increased to
$5.3 million (18.7% of total revenues) in 1995 from $4.6 million (23.4% of total
revenues) in 1994, an increase of 14.8%. The increase in absolute dollars was
primarily due to an increase in engineering personnel devoted to significant new
product features and enhancements in the G2 product family and the development
of new products. The decrease as a percentage of total revenues reflected the
Company's revenue growth in 1995.
General and Administrative. General and administrative expenses remained
relatively constant at $2.6 million in 1995 and 1994. As a percentage of total
revenues, general and administrative expenses decreased to 9.3% in 1995 from
13.4% in 1994. The decrease as a percentage of total revenues reflected the
Company's revenue growth in 1995.
Other Income
Other income consists primarily of interest income and foreign exchange
transaction gains and losses. Other income decreased to $236,000 in 1995 from
$258,000 in 1994, a decrease of 8.5%. This decrease was primarily due to lower
cash balances available for investment resulting in reduced interest income.
Income Taxes
Income taxes increased to $411,000 (67.6% of income before the provision
for income taxes) in 1995 from $302,000 (69.6% of income before the provision
for income taxes) in 1994. The effective tax rate was higher than the statutory
rate in both years principally due to the effect of taxes on foreign income and
due to foreign withholding taxes. See Note 4 of Notes to Consolidated Financial
Statements.
22
23
Selected Quarterly Operating Results
The following tables present unaudited financial information for the Company's eight most recent
quarters. The following selected quarterly information includes all adjustments (consisting only of
normal recurring adjustments) that the Company considers necessary for a fair presentation. In view
of the Company's recent growth and other factors, the Company believes that quarter-to-quarter
comparisons of its financial results are not necessarily meaningful and that such comparisons should
not be relied upon as an indication of future performance. In addition, the Company's results of
operations may fluctuate from quarter to quarter in the future.
QUARTER ENDED
DEC. 31 SEPT. 30 JUNE 30 MAR. 31 DEC. 31 SEPT. 30 JUNE 30 MAR. 31
1996 1996 1996 1996 1995 1995 1995 1995
------- ------ ------ ------ ------ ------ ------ ------
(IN THOUSANDS)
Revenues:
Product $ 6,062 $4,925 $5,649 $4,723 $5,239 $4,293 $3,657 $3,249
Service 4,339 3,968 3,852 3,718 3,542 3,225 2,480 2,456
------- ------ ------ ------ ------ ------ ------ ------
Total revenues 10,401 8,893 9,501 8,441 8,781 7,518 6,137 5,705
------- ------ ------ ------ ------ ------ ------ ------
Cost of revenues:
Product 202 118 138 121 136 203 105 82
Service 1,877 1,732 1,673 1,525 1,455 1,321 1,100 913
------- ------ ------ ------ ------ ------ ------ ------
Total cost of revenues 2,079 1,850 1,811 1,646 1,591 1,524 1,205 995
------- ------ ------ ------ ------ ------ ------ ------
Gross margin 8,322 7,043 7,690 6,795 7,190 5,994 4,932 4,710
------- ------ ------ ------ ------ ------ ------ ------
Operating expenses:
Sales and marketing 4,559 4,317 4,344 4,214 4,380 3,600 3,536 3,052
Research and development 1,529 1,596 1,462 1,397 1,360 1,247 1,378 1,282
General and administrative 1,054 992 920 732 756 687 586 590
------- ------ ------ ------ ------ ------ ------ ------
Total operating expenses 7,142 6,905 6,726 6,343 6,496 5,534 5,500 4,924
------- ------ ------ ------ ------ ------ ------ ------
Operating income (loss) 1,180 138 964 452 694 460 (568) (214)
Other income, net 129 173 153 63 59 28 77 73
------- ------ ------ ------ ------ ------ ------ ------
Income (loss) before provision for
(benefit from) income taxes 1,309 311 1,117 515 753 488 (491) (141)
Provision for (benefit from) income
taxes 493 115 414 182 509 329 (332) (95)
------- ------ ------ ------ ------ ------ ------ ------
Net income (loss) $ 816 $ 196 $ 703 $ 333 $ 244 $ 159 $ (159) $ (46)
======= ====== ====== ====== ====== ====== ====== ======
23
24
QUARTER ENDED
DEC. 31 SEPT. 30 JUNE 30 MAR. 31 DEC. 31 SEPT. 30 JUNE 30 MAR. 31
1996 1996 1996 1996 1995 1995 1995 1995
----- ----- ----- ----- ----- ----- ----- -----
(AS A PERCENTAGE OF TOTAL REVENUES)
Revenues:
Product 58.3% 55.4% 59.5% 56.0% 60.0% 57.1% 59.6% 57.0%
Service 41.7 44.6 40.5 44.0 40.0 42.9 40.4 43.0
----- ----- ----- ----- ----- ----- ----- -----
Total revenues 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
----- ----- ----- ----- ----- ----- ----- -----
Cost of revenues:
Product 1.9 1.3 1.4 1.4 1.5 2.7 1.7 1.4
Service 18.1 19.5 17.6 18.1 16.6 17.6 17.9 16.0
----- ----- ----- ----- ----- ----- ----- -----
Total cost of revenues 20.0 20.8 19.0 19.5 18.1 20.3 19.6 17.4
----- ----- ----- ----- ----- ----- ----- -----
Gross margin 80.0 79.2 81.0 80.5 81.9 79.7 80.4 82.6
----- ----- ----- ----- ----- ----- ----- -----
Operating expenses:
Sales and marketing 43.8 48.5 45.7 49.9 49.9 47.9 57.6 53.6
Research and development 14.7 17.9 15.4 16.5 15.5 16.6 22.5 22.5
General and administration 10.1 11.2 9.7 8.7 8.6 9.1 9.5 10.3
----- ----- ----- ----- ----- ----- ----- -----
Total operating expenses 68.6 77.6 70.8 75.1 74.0 73.6 89.6 86.4
----- ----- ----- ----- ----- ----- ----- -----
Operating income (loss) 11.4 1.6 10.2 5.4 7.9 6.1 (9.2) (3.8)
Other income, net 1.2 1.9 1.6 0.7 0.7 0.4 1.2 1.3
----- ----- ----- ----- ----- ----- ----- -----
Income (loss) before provision for
(benefit from) income taxes 12.6 3.5 11.8 6.1 8.6 6.5 (8.0) (2.5)
Provision for (benefit from) income taxes 4.7 1.3 4.4 2.2 5.7 4.4 (5.4) (1.7)
----- ----- ----- ----- ----- ----- ----- -----
Net income (loss) 7.9% 2.2% 7.4% 3.9% 2.9% 2.1% (2.6)% (0.8)%
===== ===== ===== ===== ===== ===== ===== =====
24
25
LIQUIDITY AND CAPITAL RESOURCES
The Company currently finances its operations (including capital
expenditures) primarily through cash flow from operations and existing financial
resources. In addition, the Company has $4.8 million of equipment under
long-term operating leases. The Company's lease commitments consist of operating
leases primarily for the Company's facilities and computers. The Company
generated cash from operations of $3.9 million for the year ended December 31,
1996, used $131,000 in cash for operations in 1995 and generated $1.8 million in
cash from operations in 1994. Cash generated from operations in 1996 was
primarily due to increased net income and increases in accrued expenses and
deferred revenue, partially offset by an increase in accounts receivable and
prepaid expenses.
At December 31, 1996, the Company had cash, cash equivalents, short-term
investments, and long-term investments of $20.3 million. The Company regularly
invests excess funds in highly rated money market funds, government securities,
and commercial paper. Included in these balances are the proceeds from the
Company's initial public offering of Common Stock in February 1996. A total of
2,300,000 shares of Common Stock were sold in the offering, of which 1,366,788
were sold by the Company and 933,212 were sold by the selling stockholders. The
net proceeds received by the Company were approximately $12.0 million after
deducting underwriting discounts and expenses of the offering. The Company did
not receive any proceeds from the sale of shares by the selling stockholders. In
addition, the Company has received approximately $940,000 in 1996 through the
exercise of stock options and the sale of shares through the employee stock
purchase plan.
At December 31, 1996, the Company had available a bank line of credit
allowing for borrowings up to $1.0 million and providing for interest at the
current prime rate. This bank line of credit will expire on May 31, 1997. The
bank line of credit requires the Company to maintain certain financial
covenants. The Company was in compliance with all covenants contained in the
bank line of credit at December 31, 1996. There were no borrowings under the
bank line of credit for the year ended December 31, 1996.
Investing activities utilized cash of $7.2 million, $4.6 million and
$907,000 for the years ended 1996, 1995 and 1994, respectively. The principal
uses in 1996 were to fund the purchase of $4.9 million of short-term
investments, $742,000 in long-term investments and $1.6 million of property and
equipment. The Company expects that its requirements for computers, office
facilities, and office equipment will grow as staffing requirements dictate and
that such equipment and facilities will be available when needed.
The Company believes that the available funds and cash generated from
operations will be sufficient to meet the Company's business requirements at
least through December 31, 1997.
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
A number of uncertainties exist that could offset the Company's operating
results, including, without limitation, the following:
Emerging Market for Intelligent Systems. Substantially, all of the
Company's revenues are derived from the licensing and support of software
products that enable organizations to implement intelligent systems for
decision support and control applications. Although many organizations have
begun to deploy, or have announced plans to deploy, intelligent systems, these
systems are different from the basic monitoring and control systems that are
traditionally employed by these organizations. There can be no assurance that
these organizations will be able to introduce intelligent systems successfully
nor that such systems will gain widespread acceptance. In addition, the timing
of the implementation of intelligent systems by organizations may be affected
by economic factors, government regulations, and other factors. Delays in the
introduction of intelligent systems or the failure of these systems to gain
widespread market acceptance would materially and adversely affect the
Company's business, results of operations, or financial condition. In addition,
the Company believes that end-users in its market are increasingly seeking
complete solutions, rather than software tools with which to develop such
solutions. Meeting this demand has required the Company to modify its sales
approach and increase its capabilities to deliver complete solutions. The
Company is also increasingly reliant on value-added resellers and systems
integrators to deliver services to implement these solutions. The modified
sales approach may also lengthen the Company's average sales cycle. Failure by
the Company to respond appropriately to such a shift in market demand could
have a material adverse effect on the Company's business, results of
operations, or financial condition.
25
26
Variability of Quarterly Operating Results. The Company has experienced,
and may experience in the future, significant quarter-to-quarter fluctuations in
its operating results. Although the Company has been profitable for each of the
past seven fiscal years, the Company has, on occasion, recorded quarterly
losses, and there can be no assurance that revenue growth or profitable
operations can be sustained on a quarterly or annual basis in the future. The
Company's sales cycle typically ranges from six to 12 months, and the cost of
acquiring the Company's software, building and deploying applications, and
training users represents a significant expenditure for customers. The
Company's relatively long sales cycle and high license fees, together with
fixed short-term expenses, can cause significant variations in operating
results from quarter to quarter, based on a relatively small variation in the
timing of major orders. Factors such as the timing of new product introductions
and upgrades, the timing of significant orders, the mix of products sold, and
the mix of domestic versus international revenues could contribute to this
quarterly variability. For example, the Company has experienced in the past,
and may experience in the future, delays in customer maintenance renewals due
to unforeseen delays in product releases. In addition, the Company's expense
levels are based, in part, on expectations of future revenue levels. A shortfall
in expected revenues could therefore result in a disproportionate decrease in
the Company's net income. The Company's financial performance has generally
been somewhat weaker in the first quarter than in the other fiscal quarters,
due to customer purchasing patterns.
Economic Factors. Because capital expenditures are often viewed as
discretionary by organizations, sales of the Company's products for capital
budget projects are subject to general economic conditions. Such capital
expenditures are also susceptible to industry-specific economic downturns.
Certain industries have experienced weakened demand in the past, which has
adversely affected the Company's revenues, gross margin, and operating results
during such periods. There can be no assurance that future recessionary
conditions in the markets for the Company's products will not adversely affect
the Company's business, results of operations, or financial condition.
Product Concentration. The Company's only current product offerings are G2,
an object-oriented development and deployment environment for building
intelligent systems, and software products which operate in conjunction with G2.
Accordingly, the Company's business and financial results are substantially
dependent upon the continued customer acceptance and deployment of G2 and
related products. The timing of major G2 releases may affect the timing of
purchases of the Company's products. The Company has introduced several G2-based
products for building applications and is developing others. The Company
believes that market acceptance of these products will be important to the
Company's future growth. There can be no assurance that such products will
achieve market acceptance or that new products will be successfully developed.
In addition, the Company relies on many of its marketing partners to develop
G2-based products for specialized markets. Accordingly, the Company's business
and financial results are also linked to the continued successful development by
its marketing partners and market acceptance of such G2-based products. Any
decline in the demand for G2 and related products, whether as a result of
competitive products, price competition, the lack of success of the Company's
marketing partners, technological change, or other factors could have a material
adverse effect on the Company's business, results of operations, or financial
condition.
New Products and Rapid Technological Change. The market for the Company's
products is relatively new and is characterized by rapid technological change,
evolving industry standards, changes in end-user requirements, and frequent new
product introductions, and enhancements. The Company's future success will
depend in part upon its ability to enhance its existing products, to introduce
new products and features to meet changing customer requirements and emerging
industry standards, and to manage transitions from one product release to the
next. The Company has from time to time experienced delays in introducing new
products and product enhancements. There can be no assurance that the Company
will not experience difficulties that could delay or prevent the successful
development, introduction, and marketing of new products, and product
enhancements. Also there can be no assurance that the Company will successfully
complete the development of new or enhanced products, that the Company will
successfully manage the transition to future versions of G2, or that the
Company's future products will achieve market acceptance. In addition, the
introduction of products embodying new technologies and the emergence of new
industry standards could render the Company's existing products and products
currently under development obsolete and unmarketable. From time to time, the
Company or others may announce new products, capabilities, or technologies that
have the potential to replace or shorten the life cycle of the Company's
existing product offerings. There can be no assurance that announcements of
currently planned or other new product offerings will not cause customers to
defer purchasing existing Company products. See "Emerging Market for Intelligent
Systems."
26
27
Reliance Upon Indirect Distribution Channels. The Company sells its
products in part through value-added resellers, systems integrators, and
distributors, none of which is under the control of the Company. Sales of the
Company's products by value-added resellers and systems integrators represented
29%, 26% and 28% of the Company's product revenues in 1994, 1995 and 1996,
respectively. Sales of the Company's products by distributors, primarily the
Company's Japanese distributor, accounted for 19%, 14% and 14% of the Company's
product revenues in 1994, 1995 and 1996, respectively. The loss of one or more
major third-party distributors or resellers of the Company's products, a
significant decline in their sales, or difficulty on the part of such
third-party developers or resellers in developing successful G2-based products
and applications, could have a material adverse effect on the Company's
business, results of operations, or financial condition. There can be no
assurance that the Company will be able to attract or retain additional
qualified third-party resellers or that third-party resellers will be able to
effectively sell and implement the Company's products. In addition, the Company
relies on third-party resellers to provide post-sales service and support to its
customers, and any deficiencies in such service and support could adversely
affect the Company's business, results of operations, or financial condition.
Risks Associated With International Operations. The Company's international
revenues represented 44%, 44% and 42% of total revenues in 1994, 1995 and 1996,
respectively. Revenues are categorized by the Company according to product
shipment destination and therefore do not necessarily reflect the ultimate
country of installation. The international portion of the Company's business is
subject to a number of inherent risks, including difficulties in building and
managing international operations, difficulties in localizing products and
translating documentation into local languages, fluctuations in the value of
international currencies, fluctuating import/export duties and quotas, and
unexpected regulatory, economic, or political changes in international markets.
There can be no assurance that these factors will not adversely affect the
Company's business, results of operations, or financial condition.
Potential for Undetected Errors. Complex software products such as those
offered by the Company may contain unintended errors or failures commonly
referred to as "bugs." There can be no assurance that, despite significant
testing by the Company and by current and potential customers, errors will not
be found in new products after commencement of commercial shipments. Although
the Company has not experienced material adverse effects resulting from any such
errors or defects to date, there can be no assurance that errors or defects will
not be discovered in the future, causing delays in product introduction and
shipments or requiring design modifications that could adversely affect the
Company's business, results of operations, or financial condition.
Competition. Although the Company believes that there are no other
commercially available products that offer the full range of high-level
capabilities embodied in the Company's products, a number of companies offer
point solution products that perform certain functions of the Company's
products. Moreover, new competitors could enter the intelligent systems market,
and existing competitors could expand the capabilities of their products to
equal or exceed those of the Company's products. In addition, there are
commercially available software development tools that software application
developers or potential customers could use to build software having
functionality similar to the Company's products.
The Company's software is integrated into industry-specific solutions by
value-added resellers. A number of software companies offer products that
compete in specific application areas addressed by these value-added resellers,
such as cement kiln control and refinery scheduling, and could be successful in
supplying alternatives to products based on the Company's software.
The Company's products can also be used to perform lower-level functions
such as monitoring, supervisory control, cell control, and other similar
functions that do not utilize all of G2's capabilities. For these functions, G2
competes with products offered by a number of other companies. The Company
believes that its products compete favorably in these functional areas where
breadth of applicability, flexibility, maintainability, scalability, and ease of
use are important considerations. However, certain competitors in this
category have greater financial and other resources than the Company and might
introduce new or improved products to compete with G2, possibly at lower prices.
The Company believes that continued investment in research and development
and sales and marketing will be required to maintain its competitive advantages.
There can be no assurance that competitors will not develop products or provide
services that are superior to the Company's products or services or achieve
greater market acceptance. Competitive pressures faced by the Company could
force the Company to reduce its prices, which could result in reduced
profitability. There can be no assurance that the Company will be able to
compete successfully against current and future sources of competition or that
competition will not have a material adverse effect on the Company's business,
results of operations, or financial condition.
27
28
Dependence Upon Proprietary Technology. The Company's success is heavily
dependent upon its proprietary technology. The Company relies upon a combination
of trade secret, contract, copyright, patent, and trademark law to protect its
proprietary rights in its products and technology. The Company enters into
confidentiality and/or license agreements with its employees, third-party
resellers, and end-users and limits access to, and distribution of its software,
documentation, and other proprietary information. In addition, the Company has
placed technical inhibitors in its software that prevent such software from
running on unauthorized computers. However, effective patent, copyright, and
trade secret protection may not be available in every country in which the
Company's products are distributed. There can be no assurance that the steps
taken by the Company to protect its proprietary technology will be adequate to
prevent misappropriation of its technology by third parties, or that third
parties will not be able to independently develop similar technology. In
addition, there can be no assurance that third parties will not assert
infringement claims in the future or that such claims will not be successful.
Management of Growth. The Company's business has grown significantly over
the past several years. This growth has resulted in an increase in
responsibilities placed upon the Company's management and has placed added
pressures on the Company's operating and financial systems. For example, the
Company's expansion of its international operations introduced significant
legal, tax, and accounting complexities, as well as the challenges associated
with managing geographically dispersed operations. To manage its growth
effectively, the Company will be required to implement additional management and
financial systems and controls, and to expand, train, and manage its employee
base. There can be no assurance that the management and systems currently in
place will be adequate if the Company continues to grow, or that the Company
will be able to implement additional systems successfully and in a timely manner
as required. Any future strategic transactions such as acquisitions or equity
investments would place additional strains upon the Company's management
resources. There can be no assurance that the Company will be effective in
managing its future growth or that any failure to manage growth will not have a
material adverse effect on the Company's business, results of operations, or
financial condition.
Dependence on Key Personnel. The Company's success depends in large part
upon certain key employees, the loss of any of whom could have a material
adverse effect on the Company. The Company's key employees are not bound by
employment agreements that require them to remain with the Company. The
Company's success will depend in significant part upon its ability to attract
and retain highly-skilled management, technical, and sales and marketing
personnel. Competition for such personnel in the software industry is intense,
and there can be no assurance that the Company will be successful in attracting
and retaining such personnel. The loss of certain key employees or the Company's
inability to attract and retain other qualified employees or to adequately
replace key personnel who depart the Company could have a material adverse
effect on the Company's business, results of operations, or financial condition.
28
29
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
GENSYM CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
1996 1995
----------- -----------
ASSETS
Current Assets:
Cash and cash equivalents $11,678,903 $ 2,126,259
Short-term investments 7,910,949 2,965,942
Accounts receivable, less reserves of $453,000 in 1996
and $415,000 in 1995 9,735,914 8,263,549
Prepaid expenses 1,754,309 1,114,952
Deferred income taxes 1,578,869 941,544
----------- -----------
Total current assets 32,658,944 15,412,246
----------- -----------
Property and Equipment, at cost:
Computer equipment and software 6,749,039 5,638,117
Furniture and fixtures 1,540,013 1,262,154
Leasehold improvements 322,797 149,361
----------- -----------
8,611,849 7,049,632
Less accumulated depreciation and amortization (5,970,845) (4,883,187)
----------- -----------
2,641,004 2,166,445
----------- -----------
Long-term investments 742,175 -
Deposits and other assets 215,498 267,804
----------- -----------
$36,257,621 $17,846,495
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 1,262,273 $ 1,027,110
Accrued expenses 5,109,359 3,789,297
Deferred revenue 5,817,534 4,419,511
----------- -----------
Total current liabilities 12,189,166 9,235,918
----------- -----------
Commitments (Note 5)
Stockholders' Equity:
Preferred stock, $.01 par value
Authorized - 2,000,000 shares in 1996 and none in 1995
Issued and outstanding - none in 1996 and 1995 - -
Series A convertible preferred stock, $.10 par value
Authorized, issued and outstanding - 300,000 shares in 1995 - 30,000
Series B convertible preferred stock, $.10 par value
Authorized - 474,900 shares in 1995
Issued and outstanding - 353,460 shares in 1995 - 35,346
Common stock, $.01 par value
Authorized - 20,000,000 shares
Issued and outstanding - 6,190,317 shares in 1996
and 4,001,000 in 1995 61,903 40,010
Capital in excess of par value 18,727,438 5,233,955
Retained earnings 5,355,641 3,307,419
Cumulative translation adjustment (76,527) (36,153)
----------- -----------
Total stockholders' equity 24,068,455 8,610,577
----------- -----------
$36,257,621 $17,846,495
=========== ===========
The accompanying notes are an integral part of these consolidated financial statements.
29
30
GENSYM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31,
1996 1995 1994
----------- ----------- -----------
REVENUES:
Product $21,358,295 $16,438,400 $11,426,593
Service 15,877,240 11,702,577 8,164,778
----------- ----------- -----------
Total revenues 37,235,535 28,140,977 19,591,371
----------- ----------- -----------
COST OF REVENUES:
Product 578,144 525,452 257,946
Service 6,807,071 4,789,202 2,565,091
----------- ----------- -----------
Total cost of revenues 7,385,215 5,314,654 2,823,037
----------- ----------- -----------
Gross profit 29,850,320 22,826,323 16,768,334
----------- ----------- -----------
OPERATING EXPENSES:
Sales and marketing 17,432,861 14,568,045 9,371,574
Research and development 5,983,741 5,267,461 4,590,220
General and administrative 3,699,254 2,619,103 2,630,943
----------- ----------- -----------
Total operating expenses 27,115,856 22,454,609 16,592,737
----------- ----------- -----------
Operating income 2,734,464 371,714 175,597
OTHER INCOME, NET 517,758 236,030 258,077
----------- ----------- -----------
Income before provision for income taxes 3,252,222 607,744 433,674
PROVISION FOR INCOME TAXES 1,204,000 411,000 302,000
----------- ----------- -----------
Net income $ 2,048,222 $ 196,744 $ 131,674
=========== =========== ===========
Net income per common and
common equivalent share $ 0.33 $ 0.04
=========== ===========
Weighted average common and common
equivalent shares outstanding 6,286,170 4,804,108
=========== ===========
The accompanying notes are an integral part of these consolidated financial statements.
30
31
GENSYM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY
Series A Series B
Convertible Convertible
Preferred Stock Preferred Stock Common Stock
---------------------- --------------------- --------------------
Number $0.10 Number $0.10 Number $0.01
of Shares Par Value of Shares Par Value of Shares Par Value
--------- --------- --------- --------- --------- ---------
BALANCE, DECEMBER 31, 1993 300,000 $30,000 353,460 $35,346 3,988,350 $39,884
Exercise of stock options - - - - 5,250 52
Translation adjustment - - - - - -
Net Income - - - - - -
-------- ------- -------- ------- --------- -------
BALANCE, DECEMBER 31, 1994 300,000 30,000 353,460 35,346 3,993,600 39,936
Exercise of stock options - - - - 7,400 74
Translation adjustment - - - - - -
Net Income - - - - - -
-------- ------- -------- ------- --------- -------
BALANCE, DECEMBER 31, 1995 300,000 30,000 353,460 35,346 4,001,000 40,010
Conversion of Series A convertible
preferred stock into common stock (300,000) (30,000) - - 300,000 3,000
Conversion of Series B convertible
preferred stock into common stock - - (353,460) (35,346) 353,460 3,534
Issuance of common stock from Initial
Public Offering, net of issuance
costs of $758,737 - - - - 1,366,788 13,668
Exercise of stock options - - - - 134,900 1,549
Issuance of common stock under Employee
Stock Purchase Plan (ESPP) - - - - 34,169 342
Tax benefit from exercise of incentive
stock options and shares purchased
under ESPP - - - - - -
Translation adjustment - - - - - -
Net Income - - - - - -
-------- ------- -------- ------- --------- -------
BALANCE, DECEMBER 31, 1996 - - - - 6,190,317 $61,903
======== ======= ======== ======= ========= =======
Capital in Cumulative Total
Excess of Retained Translation Stockholders'
Par Value Earnings Adjustment Equity
----------- ---------- ----------- ------------
BALANCE, DECEMBER 31, 1993 $ 5,192,341 $2,979,001 $(76,694) $ 8,199,878
Exercise of stock options 12,648 - - 12,700
Translation adjustment - - 15,992 15,992
Net Income - 131,674 - 131,674
----------- ---------- -------- -----------
BALANCE, DECEMBER 31, 1994 5,204,989 3,110,675 (60,702) 8,360,244
Exercise of stock options 28,966 - - 29,040
Translation adjustment - - 24,549 24,549
Net Income - 196,744 - 196,744
----------- ---------- -------- -----------
BALANCE, DECEMBER 31, 1995 5,233,955 3,307,419 (36,153) 8,610,577
Conversion of Series A convertible
preferred stock into common stock 27,000 - - -
Conversion of Series B convertible
preferred stock into common stock 31,812 - - -
Issuance of common stock from Initial
Public Offering, net of issuance
costs of $758,737 11,938,723 - - 11,952,391
Exercise of stock options 611,541 - - 612,890
Issuance of common stock under Employee
Stock Purchase Plan (ESPP) 326,407 - - 326,749
Tax benefit from exercise of incentive
stock options and shares purchased
under ESPP 558,000 - - 558,000
Translation adjustment - - (40,374) (40,374)
Net Income - 2,048,222 - 2,048,222
----------- ---------- -------- -----------
BALANCE, DECEMBER 31, 1996 $18,727,438 $5,355,641 $(76,527) $24,068,455
=========== ========== ======== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
31
32
GENSYM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
1996 1995 1994
----------- ---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,048,222 $ 196,744 $ 131,674
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities:
Depreciation and amortization 1,087,658 959,109 791,851
Deferred income taxes (637,325) (724,788) (216,756)
Changes in assets and liabilities:
Accounts receivable (1,481,427) (3,113,369) 139,624
Prepaid expenses (691,719) (659,872) 41,196
Accounts payable 242,060 414,545 214,066
Accrued expenses 1,902,329 1,920,121 (156,744)
Deferred revenue 1,398,857 876,153 877,174
----------- ---------- ----------
Net cash provided by (used in)
operating activities 3,868,655 (131,357) 1,822,085
----------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of short-term investments (4,945,007) (2,965,942) -
Purchases of long-term investments (742,175) - -
Purchases of property and equipment (1,562,217) (1,610,019) (863,110)
Decrease (increase) in deposits and
other assets 37,391 (4,307) (44,364)
----------- ---------- ----------
Net cash used in investing activities (7,212,008) (4,580,268) (907,474)
----------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options 612,890 29,040 12,700
Proceeds from issuance of common stock
under employee stock purchase plan 326,749 - -
Proceeds from initial public offering,
net of issuance costs 11,952,391 - -
----------- ---------- ----------
Net cash provided by financing activities 12,892,030 29,040 12,700
----------- ---------- ----------
EFFECT OF EXCHANGE RATE CHANGES ON CASH 3,967 36,173 39,891
----------- ---------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 9,552,644 (4,646,412) 967,202
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 2,126,259 6,772,671 5,805,469
----------- ---------- ----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $11,678,903 $2,126,259 $6,772,671
=========== ========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for -
Income Taxes $ 608,805 $ 586,801 $ 310,883
=========== ========== ==========
Interest $ - $ 10,032 $ -
=========== ========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
32
33
GENSYM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
The Company is a leading supplier of software products and services for
developing and deploying intelligent solutions for a broad range of industrial,
scientific, commercial, and government applications.
The accompanying consolidated financial statements reflect the application of
certain significant accounting policies, as described in this note and elsewhere
in the accompanying consolidated financial statements and notes.
(a) Principles of Consolidation
The accompanying consolidated financial statements include the
accounts of the Company and its wholly owned subsidiaries. All
material intercompany transactions and balances have been eliminated
in consolidation.
(b) Cash Equivalents and Investments
The Company applies Statement of Financial Accounting Standards (SFAS)
No. 115, Accounting for Certain Investments in Debt and Equity
Securities. The Company's investments are classified as
available-for-sale and are recorded at fair value, which approximates
amortized cost at December 31, 1996. Cash equivalents are short-term,
highly liquid investments with original maturity dates of less than
three months. Short-term investments held as of December 31, 1996
consist of municipal bonds with original maturity dates greater than
three months and less than one year. Long-term investments held as of
December 31, 1996, consist of municipal bonds with original maturity
dates of greater than one year.
(c) Depreciation and Amortization
The Company provides for depreciation and amortization using the
straight-line method by charges to operations in amounts that allocate
the cost of the assets over their estimated useful lives as follows:
Estimated
Asset Classification Useful Lives
---------------------------------------------- ------------
Computer equipment and software............... 3 Years
Furniture and fixtures........................ 5 Years
Leasehold improvements........................ Life of lease
(d) Revenue Recognition
Product revenues are recognized upon shipment or upon the completion
of all significant obligations by the Company, whichever is later.
Revenue from the sale of multicopy licenses is recognized upon the
shipment of the product master or the first copy of the software
product if the product master is not to be delivered. The Company
recognizes service revenues from consulting and training upon
performance of the services. Software maintenance fees are recognized
as revenue ratably over the period to which they relate. Deferred
revenue represents advance billings for software services, which
include maintenance, consulting, training and license prepayment fees.
33
34
(e) Research and Development and Software Development Costs
In accordance with SFAS No. 86, Accounting for the Costs of Computer
Software to Be Sold, Leased, or Otherwise Marketed, the Company has
evaluated the establishment of technological feasibility of its
various products during the development phase. Due to the dynamic
changes in the market, the Company has concluded that it cannot
determine technological feasibility until the development phase of the
project is nearly complete. The time period during which costs could
be capitalized from the point of reaching technological feasibility
until the time of general product release is very short and,
consequently, the amounts that could be capitalized are not material
to the Company's financial position or results of operations.
Therefore, the Company charges all research and development expenses
to operations in the period incurred.
(f) Foreign Currency Translation
Assets and liabilities of the foreign subsidiaries are translated in
accordance with SFAS No. 52, Foreign Currency Translation. In
accordance with SFAS No. 52, assets and liabilities of the Company's
foreign operations are translated into U.S. dollars at current
exchange rates, and income and expense items are translated at average
rates of exchange prevailing during the year. Gains and losses arising
from translation are accumulated as a separate component of
stockholders' equity. Gains and losses arising from transactions
denominated in foreign currencies are included in other income and
were not material in the periods presented.
(g) Postretirement Benefits
The Company has no obligations for postretirement benefits.
(h) Concentration of Credit Risk
SFAS No. 105, Disclosure of Information about Financial Instruments
with Off-Balance-Sheet Risk and Financial Instruments with
Concentration of Credit Risk, requires disclosure of any significant
off-balance-sheet and credit risk concentrations. Financial
instruments, which potentially subject the Company to concentrations
of credit risk, are principally cash, cash equivalents, investments
and accounts receivable. The Company places its cash, cash equivalents
and investments in highly rated institutions. No single customer
accounted for greater than 10% of total revenues or represented a
significant credit risk to the Company in either 1996 or 1995. As of
December 31, 1996, one customer accounted for approximately 12% of
accounts receivable. No customer accounted for greater than 10% of
accounts receivable as of December 31, 1995. The Company has no
significant off-balance-sheet concentration of credit risk such as
foreign exchange contracts, options contracts, or other foreign
hedging arrangements.
(i) Net Income per Common and Common Equivalent Share
For the year ended December 31, 1996, net income per common and common
equivalent share was computed using the weighted average number of
common and common equivalent shares outstanding during the period in
accordance with the treasury stock method. For the year ended December
31, 1995, the weighted average number of common and common equivalent
shares outstanding assumes that all series of Convertible Preferred
Stock had been converted to common stock as of the original issuance
dates and that common stock options granted in the one-year period
preceding the Company's initial public offering (see Note 3(a)) have
been outstanding for the periods presented, computed in accordance
with the treasury stock method. Net income per common and common
equivalent share has not been presented for the year ended December
31, 1994, as the information is not considered to be relevant or
meaningful.
(j) Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
34
35
(k) Reclassification
Certain balances have been reclassified to conform with current year
presentation.
(l) Stock Compensation Plans
The Company applies Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees (APB No. 25), in accounting
for stock-option activity for employees and directors. The Company has
adopted the disclosure provisions of SFAS No. 123, Accounting for
Stock Based Compensation (see Note 3(e)).
(2) LINE OF CREDIT
The Company has a working capital line of credit with a bank under which
borrowings and/or letters of credit are limited to $1,000,000. The line of
credit is unsecured, and borrowings bear interest at the prime rate (8.25% as of
December 31, 1996). The line of credit expires on May 31, 1997. As of December
31, 1996 there were no borrowings outstanding under the line of credit. Under
this credit facility, the Company is required to maintain certain financial
ratios and minimum levels of net worth.
(3) STOCKHOLDERS' EQUITY
(a) Initial Public Offering
In February 1996, the Company sold, through an underwritten public offering,
1,200,000 shares of its common stock at $10 per share. Also in February 1996,
the Company sold an additional 166,788 shares, at $10 per share, pursuant to an
underwriters over-allotment provision. The Company received proceeds of
$11,952,381 from its initial public offering which are net of issuance costs of
$758,737.
(b) Common Stock
On January 16, 1996, the Stockholders increased the Company's authorized
capitalization to 20,000,000 shares of common stock and 2,000,000 shares of
preferred stock.
(c) Series A and Series B Convertible Preferred Stock
The Series A and Series B convertible preferred stock were converted into common
shares upon the closing of the Company's initial public offering in February
1996.
(d) Stock and Stock Option Plans
Through December 31, 1996, the Company maintained three stock option plans. The
1987 Stock Plan provides for the grant of incentive stock options, nonqualified
stock options, stock awards, and direct sales of stock. The Company is
authorized to award up to 600,000 shares of options under this plan. The 1994
Stock Option Plan provides for the grant of incentive stock options and
nonqualified stock options. The Company is authorized to award up to 534,850
stock options under this plan. Under these plans, incentive stock options may be
granted at an exercise price not less than the fair market value of the
Company's common stock on the date of grant or, in the case of 10% stockholders,
not less than 110% of the fair market value, as determined by the Board of
Directors. Nonqualified options may be granted by the Board of Directors at its
discretion. The difference, if any, between the exercise price and the fair
value of the underlying common stock at the measurement date is charged to
operations over the vesting period of such options. The terms of exercise of
options granted under these plans are determined by the Board of Directors.
Incentive stock options expire no later than 10 years after the date of grant.
35
36
The 1995 Director Stock Option Plan (the "Director Plan") was approved by the
stockholders in January 1996. The Director Plan provides for the grant of
options to purchase a maximum of 100,000 shares of common stock of the Company
to non-employee directors of the Company. Upon completion of the Company's
initial public offering of the Company's common stock, each non-employee
director was granted an option under the Director Plan to purchase 2,000 shares
of common stock at the initial public offering price. On June 30 of each year,
beginning in 1997, each non-employee director will be granted an option to
purchase 2,000 shares of common stock at an exercise price equal to the last
reported sale price of the Company's common stock on the NASDAQ National Market
on the date of grant. Such options vest in equal portions over a five year
period and expire 10 years from the date of grant.
The following schedule summarizes the stock option activity for the three years
ended December 31, 1996:
Number Option Price Wtd. Avg.
of Shares Per Share Option Price
- -----------------------------------------------------------------------------
Outstanding at December 31, 1993 368,550 $1.60 - $7.50 $ 4.91
Granted 140,000 7.50 7.50
Exercised (5,250) 1.60 - 6.00 1.94
Canceled (26,200) 3.00 - 7.50 6.04
- -----------------------------------------------------------------------------
Outstanding at December 31, 1994 477,100 1.60 - 7.50 5.71
Granted 227,750 7.50 7.50
Exercised (7,400) 3.00 - 7.50 3.95
Canceled (35,600) 3.00 - 7.50 6.93
- -----------------------------------------------------------------------------
Outstanding at December 31, 1995 661,850 1.60 - 7.50 6.30
Granted 251,000 10.00 - 21.25 17.49
Exercised (134,900) 1.60 - 7.50 4.54
Canceled (193,890) 7.50 - 21.25 14.20
- -----------------------------------------------------------------------------
Outstanding at December 31, 1996 584,060 $1.60 - $20.00 $ 8.73
=============================================================================
Exercisable at December 31, 1996 232,560 $ 1.60 - 20.00 $ 5.81
=============================================================================
The Company's 1995 Employee Stock Purchase Plan (the "Purchase Plan") was
adopted by the Board of Directors in November 1995 and approved by the
stockholders in January 1996. The Purchase Plan authorizes the sale of up to a
total of 200,000 shares of common stock to participating employees.
All employees of the Company meeting certain eligibility requirements are
eligible to participate in the Purchase Plan. An employee may elect to have a
whole number percentage from 1% to 10% of his or her base pay withheld during
the payroll deduction period (Offering Period) for purposes of purchasing shares
under the Purchase Plan. The price at which shares may be purchased during each
offering will be 85% of the fair market value per share of the common stock on
either the first day or the last day of the Offering Period, whichever is lower.
The Compensation Committee of the Board of Directors may, at its discretion,
choose an Offering Period of 12 months or less for each of the offerings and
choose a different Offering Period for each offering. Under the Purchase Plan,
the Company had sold 34,169 shares as of December 31, 1996. As of December 31,
1996, 165,831 shares of common stock were available for future sale under the
Purchase Plan.
36
37
(e) Stock-Based Compensation
The Company accounts for its stock-based compensation plan under Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees. In
October 1995, the Financial Accounting Standards Board issued SFAS No. 123,
Accounting for Stock-Based Compensation, Effective for fiscal years beginning
after December 15, 1995. SFAS No. 123 establishes a fair-value based method of
accounting for stock-based compensation plans. The Company has adopted the
disclosure-only alternative under SFAS No. 123, which requires disclosure of the
pro forma effects on earnings and earnings per share as if SFAS No. 123 had been
adopted, as well as certain other information.
The Company has computed the pro forma disclosure required under SFAS No. 123
for all stock compensation plans during the years ended December 31, 1996 and
1995 using the Black-Scholes option pricing model prescribed by SFAS No. 123.
The assumptions used are as follows:
1996 1995
Risk-free interest rate 5.47-6.88% 5.86-7.74%
Expected dividend yield 0 0
Expected lives 6.5 Years 6.5 Years
Expected volatility 65% 65%
The effect of applying SFAS No. 123
would be as follows:
1996 1995
Net income as reported $2,048,222 $196,744
Pro forma net income as adjusted 1,736,170 156,783
Net income per share as reported 0.33 0.04
Pro forma net income per share as adjusted 0.28 0.03
(4) INCOME TAXES
The components of the provision for income taxes for the three years ended
December 31, 1996 are as follows:
December 31,
1996 1995 1994
---------- --------- ---------
Federal
Current $ 758,694 $ 25,000 $ 31,482
Deferred (122,463) (565,400) (361,822)
---------- ---------- ---------
636,231 (540,400) (330,340)
---------- ---------- ---------
State
Current 252,898 -- 22,058
Deferred (40,821) (23,439) (27,789)
---------- ---------- ---------
212,077 (23,439) (5,731)
---------- ---------- ---------
Foreign
Withholding 443,000 386,541 253,781
Income 386,733 751,109 211,000
---------- ---------- ---------
829,733 1,137,650 464,781
---------- ---------- ---------
Change in Valuation Allowance (474,041) (162,811) 173,290
---------- ---------- ---------
$1,204,000 $ 411,000 $ 302,000
========== ========== =========
37
38
Foreign withholding taxes represent amounts withheld by foreign customers and
remitted to the applicable foreign tax authorities in connection with foreign
revenues. Foreign income taxes represent corporate income taxes relating to the
operations of the Company's foreign subsidiaries.
The components of the net deferred tax asset recognized in the accompanying
consolidated balance sheets with the approximate income tax effect of each type
of temporary difference are as follows:
1996 1995
---------- ----------
Research and development tax credit carryforward $ 697,889 $ 455,574
Net operating loss carryforwards
47,153 306,010
Depreciation
58,500 112,291
Deferred revenue
220,350 75,060
Other temporary differences
554,977 466,650
---------- ----------
1,578,869 1,415,585
Valuation allowance
-- (474,041)
---------- ----------
Net deferred tax asset $1,578,869 $ 941,544
========== ==========
The valuation allowance at December 31, 1995 related to deferred tax assets for
which realization was not assured. In 1996 it is expected that future taxable
income will be sufficient to utilize the net deferred tax assets.
The provision for income taxes differs from the amount computed by applying the
statutory federal income tax rate as follows:
December 31,
1996 1995 1994
----- ----- -----
Provision at federal statutory rate 34.0% 34.0% 34.0%
State income tax, net of federal benefits 4.3 (2.5) (0.9)
Foreign income and withholding taxes 19.6 82.3 26.9
Change in valuation allowance (14.6) (26.8) 39.9
Utilization of tax credits (9.5) (16.4) (35.9)
Other, net 3.2 (3.0) 5.6
----- ----- -----
37.0% 67.6% 69.6%
===== ===== =====
(5) COMMITMENTS
The Company leases its facilities and certain equipment under operating leases.
The future minimum annual payments under these leases at December 31, 1996 are
as follows:
Year Amount
- ---------- -----------
1997 $ 3,260,000
1998 2,613,000
1999 2,355,000
2000 1,807,000
2001 249,000
Thereafter 195,000
-----------
$10,479,000
===========
Expenses recorded by the Company under the above leases for the three years
ended December 31, 1996, 1995 and 1994 were approximately $3,102,000,
$2,226,000, and $1,855,000, respectively.
38
39
(6) ACCRUED EXPENSES
Accrued expenses consist of the following:
December 31,
1996 1995
Accrued payroll and related expenses $1,273,115 $ 895,131
Accrued commissions 1,001,359 709,589
Other accrued expenses 2,834,885 2,184,577
---------- ----------
$5,109,359 $3,789,297
========== ==========
(7) FINANCIAL INFORMATION BY GEOGRAPHIC AREA
Domestic and international sales as a percentage of total revenues are as
follows:
For the year ended
December 31,
1996 1995 1994
United States 58% 56% 56%
Europe 24 24 22
Other 18 20 22
--- --- ---
100% 100% 100%
=== === ===
39
40
Revenues, net income (loss) and identifiable assets for the Company's United
States, European and other operations are as follows:
United
States Europe Other Eliminations Consolidated
----------- ---------- ----------- ------------ ------------
Year ended December 31, 1996:
Revenues $36,004,203 $1,125,677 $ 105,655 $ -- $37,235,535
Transfers between
geographic locations
271,044 5,474,003 324,359 (6,069,406) --
----------- ---------- ----------- ----------- -----------
Total
revenues $36,275,247 $6,599,680 $ 430,014 $(6,069,406) $37,235,535
=========== ========== =========== =========== ===========
Net income (loss) $ 2,814,838 $ 414,125 $(1,180,741) $ -- $ 2,048,222
=========== ========== =========== =========== ===========
Identifiable assets $33,064,227 $2,700,284 $ 493,110 $ -- $36,257,621
=========== ========== =========== =========== ===========
Year ended December 31, 1995:
Revenues $27,184,435 $ 910,006 $ 46,536 $ -- $28,140,977
Transfers between
geographic locations
264,624 4,756,239 302,714 (5,323,577) --
----------- ---------- ----------- ----------- -----------
Total
revenues $27,449,059 $5,666,245 $ 349,250 $(5,323,577) $28,140,977
=========== ========== =========== =========== ===========
Net income (loss) $ 404,440 $ 490,296 $ (697,992) $ -- $ 196,744
=========== ========== =========== =========== ===========
Identifiable assets $15,963,186 $1,520,166 $ 363,143 $ -- $17,846,495
=========== ========== =========== =========== ===========
Year ended December 31, 1994:
Revenues $19,225,386 $ 343,508 $ 22,477 $ -- $19,591,371
Transfers between
geographic locations 391,660 3,186,006 182,512 (3,760,178) --
----------- ---------- ----------- ----------- -----------
Total
revenues $19,617,046 $3,529,514 $ 204,989 $(3,760,178) $19,591,371
=========== ========== =========== =========== ===========
Net income (loss) $ (8,944) $ 421,912 $ (281,294) $ -- $ 131,674
=========== ========== =========== =========== ===========
Identifiable assets $13,586,523 $ 503,456 $ 245,252 $ -- $14,335,231
=========== ========== =========== =========== ===========
40
41
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Gensym Corporation:
We have audited the accompanying consolidated balance sheets of Gensym
Corporation (a Delaware corporation) and subsidiaries as of December 31, 1996
and 1995, and the related consolidated statements of operations, stockholder's
equity, and cash flows for each of the three years in the period ended December
31, 1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Gensym Corporation and
subsidiaries as of December 31, 1996 and 1995, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1996, in conformity with generally accepted accounting
principles.
/s/ ARTHUR ANDERSEN LLP
----------------------------
ARTHUR ANDERSEN LLP
Boston, Massachusetts
January 23, 1997
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is contained in part under the caption
"Executive Officers of the Company" in Part I hereof, and the remainder is
contained under the caption "PROPOSAL 1 - ELECTION OF DIRECTORS" in the
Company's Proxy Statement dated April 18, 1997, for the Annual Meeting of
Shareholders to be held on May 21, 1997 (the "Proxy Statement"). Such
information is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is contained under the captions "Director
Compensation" and "Compensation to Executive Officers" in the Company's Proxy
Statement. Such information is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is contained under the caption "Security
Ownership of Certain Beneficial Owners and Management" in the Company's Proxy
Statement. Such information is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is contained under the caption "Certain
Transactions" in the Company's Proxy Statement. Such information is incorporated
herein by reference.
41
42
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) FINANCIAL STATEMENTS
The following documents are included in Item 8 of this Annual Report on
Form 10-K:
* Consolidated Balance Sheets as of December 31, 1996 and 1995
* Consolidated Statements of Operations for the three years ended
December 31, 1996, 1995 and 1994
* Consolidated Statements of Stockholders' Equity for the three
years ended December 31, 1996, 1995 and 1994
* Consolidated Statements of Cash Flows for the three years ended
December 31, 1996, 1995 and 1994
* Notes to Consolidated Financial Statements
* Report of Independent Public Accountants
(a)(2) FINANCIAL STATEMENT SCHEDULES
The following consolidated financial statement schedules are included
in Item 14(d):
Schedule II - Valuation and Qualifying Accounts
All other schedules have been omitted since the required information is
not present or not present in amounts sufficient to require submission
of the schedule, or because the information required is included in the
consolidated financial statements or the notes thereto.
(a)(3) EXHIBITS
The Exhibits listed in the Exhibit Index immediately preceding such Exhibits are
filed as part of this Annual Report on Form 10-K.
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the quarter ended
December 31, 1996
42
43
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GENSYM CORPORATION
(Registrant)
By: /s/ Lowell B. Hawkinson
-----------------------
Dated: March 26, 1997 Lowell B. Hawkinson
Chief Executive Officer
Pursuant to the requirements of the Securities and Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on March 26, 1997:
/s/ Lowell B. Hawkinson Chairman, Chief Executive Officer, Director
- ----------------------- (Principal Executive Officer and Acting
Lowell B. Hawkinson Principal Financial and Accounting
Officer)
/s/ Robert L. Moore President and Director
- -------------------
Robert L. Moore
/s/ John A. Shane Director
- -----------------
John A. Shane
/s/ Theodore Johnson Director
- --------------------
Theodore Johnson
/s/ Nancy Pfund Director
- ---------------
Nancy Pfund
43
44
ITEM 14(d) FINANCIAL STATEMENT SCHEDULE
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SUPPLEMENTARY SCHEDULE
To Gensym Corporation:
We have audited, in accordance with generally accepted auditing standards, the
consolidated financial statements of Gensym Corporation and subsidiaries and
have issued our report thereon dated January 23, 1997. Our audit was made for
the purpose of forming an opinion on those consolidated financial statements
taken as a whole. The schedule listed in the financial statement schedule index
is the responsibility of the Company's management and is presented for the
purpose of complying with the Securities and Exchange Commission's rules and is
not part of the basic consolidated financial statements. This schedule has been
subjected to auditing procedures applied in the audit of the basic consolidated
financial statements and, in our opinion, fairly states, in all material
respects, the financial data required to be set forth therein in relation to the
basic consolidated financial statements taken as a whole.
/s/ ARTHUR ANDERSEN LLP
-----------------------------
Arthur Andersen LLP
Boston, Massachusetts
January 23, 1997
GENSYM CORPORATION
SCHEDULE II-VALUATION AND QUALIFYING ACCOUNTS
FOR THE THREE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
Balance at Addition Balance at
Beginning of Charged to End of
Description Period Expense Deductions Period
- ----------- -------- -------- ---------- --------
ALLOWANCE FOR DOUBTFUL ACCOUNTS:
Year ended December 31, 1996 $414,612 $124,600 $85,893 $453,319
======== ======== ======= ========
Year ended December 31, 1995 $488,091 $ -- $73,479 $414,612
======== ======== ======= ========
Year ended December 31, 1994 $488,295 $ 43,196 $43,400 $488,091
======== ======== ======= ========
44
45
EXHIBIT INDEX
Exhibit # Description
- --------- -----------
3.1 - Amended and Restated Certificate of Incorporation of the Registrant
3.2 - Amended and Restated By-Laws of the Registrant
4.1(1) - Specimen certificate for shares of the Registrant's Common Stock
* 10.1(1) - 1987 Stock Plan, as amended to date
* 10.2(1) - 1994 Stock Option Plan
10.3(1) - 1995 Employee Stock Purchase Plan
* 10.4(1) - 1995 Director Stock Option Plan
10.5(1) - Amended and Restated Registration Rights Agreement dated as of
August 12, 1991 by and among the Registrant and the parties named
therein
10.6(1) - Lease dated as of January 1, 1995 by and between the Registrant and
CambridgePark One Limited Partnership
10.7 - First Amendment to Lease dated as of December 2, 1996 between the
Registrant and CambridgePark One Limited Partnership
10.8 - Second Amendment to Lease dated as of January 24, 1997 between the Registrant
and CambridgePark One Limited Partnership
10.9 - Third Amendment to Lease dated as of January 24, 1997 between the Registrant
and CambridgePark One Limited Partnership
10.10(2) - Amendment to the Business Loan Agreement dated June 20, 1991
between Gensym Corporation and State Street Bank and Trust
Company, as amended to date
+10.11(1) - Distribution Agreement, dated as of January 1, 1995, by and among
the Registrant, Itochu Corporation and Itochu Techno-Science
Corporation
*10.12 - Severance arrangement with Raymond Wood dated December 6, 1996,
as modified on December 31, 1996 and January 22, 1997.
11 - Computation of Net Income Per Share
21 - Subsidiaries of the Registrant
23 - Consent of Arthur Andersen LLP
27 - Financial Data Schedule
(1) Incorporated by reference to the Registration Statement on Form S-1 of the
Registrant (Registration No. 33-80727) filed on December 21, 1995.
(2) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1996.
+ Confidential treatment has been granted with respect to certain portions
of this agreement.
* Management contract or compensatory plan or arrangement required to be
filed as an exhibit to this Annual Report on Form 10-K.
45