UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
| x | Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the quarterly period ended September 30, 2004
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 incorporation or organization) |
(I.R.S. Employer Identification No.) |
52 Second Avenue
Burlington, MA 01803
(Address of principal executive offices)
Telephone Number (781) 265-7100
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes x No ¨
Indicate by checkmark whether the registrant is an accelerated filer (as defined in Rule 12-b-2 of the Exchange Act) Yes ¨ No x
As of November 15, 2004 there were 7,255,377 shares of the Registrant’s Common Stock outstanding.
INDEX
2
ITEM 1. Consolidated Financial Statements
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(in thousands, except share amounts)
| September 30, 2004 |
December 31, 2003 |
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| ASSETS |
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| Current Assets: |
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| Cash and cash equivalents |
$ | 2,969 | $ | 1,818 | ||||
| Accounts receivable, net |
2,733 | 4,015 | ||||||
| Prepaid and other current assets |
585 | 872 | ||||||
| Total current assets |
6,287 | 6,705 | ||||||
| Property and equipment, net |
582 | 908 | ||||||
| Deposits and other assets |
528 | 673 | ||||||
| Total Assets |
$ | 7,397 | $ | 8,286 | ||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY |
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| Current Liabilities: |
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| Accounts payable |
666 | 235 | ||||||
| Accrued expenses |
1,671 | 2,134 | ||||||
| Current portion of capital lease obligations |
40 | 83 | ||||||
| Deferred revenue |
3,704 | 4,991 | ||||||
| Total current liabilities |
6,081 | 7,443 | ||||||
| Other long-term liabilities |
10 | 41 | ||||||
| Long-term deferred revenue |
94 | 150 | ||||||
| Total liabilities |
6,185 | 7,634 | ||||||
| Stockholders’ Equity: |
||||||||
| Preferred stock, $.01 par value—Authorized—2,000,000 shares; issued and outstanding - none |
— | — | ||||||
| Common stock, $.01 par value—Authorized—20,000,000 shares; issued—7,599,962 shares in 2004 and 7,501,105 shares in 2003 |
||||||||
| Outstanding—7,231,643 shares in 2004 and 7,111,893 in 2003 |
76 | 75 | ||||||
| Capital in excess of par value |
21,955 | 21,889 | ||||||
| Treasury stock—368,319 shares in 2004 and 389,212 shares in 2003, at cost |
(1,373 | ) | (1,458 | ) | ||||
| Accumulated deficit |
(19,741 | ) | (20,086 | ) | ||||
| Accumulated other comprehensive income |
293 | 232 | ||||||
| Total stockholders’ equity |
1,212 | 652 | ||||||
| Total liabilities and stockholders’ equity |
$ | 7,397 | $ | 8,286 | ||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
3
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except per share amounts)
| Three months ended September 30, |
Nine months ended September 30, |
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| 2004 |
2003 |
2004 |
2003 |
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| Revenues: |
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| Product |
$ | 1,607 | $ | 1,267 | $ | 5,376 | $ | 3,269 | ||||||||
| Services |
2,822 | 2,603 | 7,509 | 7,409 | ||||||||||||
| Total revenues |
4,429 | 3,870 | 12,884 | 10,678 | ||||||||||||
| Cost of revenues: |
||||||||||||||||
| Product |
109 | 248 | 588 | 579 | ||||||||||||
| Services |
1,319 | 884 | 3,049 | 2,276 | ||||||||||||
| Total cost of revenues |
1,428 | 1,132 | 3,637 | 2,855 | ||||||||||||
| Gross profit |
3,001 | 2,738 | 9,247 | 7,823 | ||||||||||||
| Operating expenses: |
||||||||||||||||
| Sales and marketing |
1,077 | 1,200 | 3,225 | 4,315 | ||||||||||||
| Research and development |
822 | 869 | 2,568 | 2,547 | ||||||||||||
| General and administrative |
969 | 1,214 | 2,906 | 3,010 | ||||||||||||
| Restructuring charge |
— | — | — | 250 | ||||||||||||
| Total operating expenses |
2,868 | 3,283 | 8,699 | 10,122 | ||||||||||||
| Operating income (loss) |
133 | (545 | ) | 548 | (2,299 | ) | ||||||||||
| Other income (expense), net |
(110 | ) | 220 | (175 | ) | 329 | ||||||||||
| Income (loss) before provision for income taxes |
23 | (325 | ) | 373 | (1,970 | ) | ||||||||||
| Provision (benefit) for income taxes |
(68 | ) | 16 | (24 | ) | 195 | ||||||||||
| Net income (loss) |
$ | 91 | $ | (341 | ) | $ | 397 | $ | (2,165 | ) | ||||||
| Basic earnings (loss) per share |
$ | 0.01 | $ | (0.05 | ) | $ | 0.06 | $ | (0.31 | ) | ||||||
| Diluted earnings (loss) per share |
$ | 0.01 | $ | (0.05 | ) | $ | 0.05 | $ | (0.31 | ) | ||||||
| Basic weighted average common shares outstanding |
7,225 | 7,012 | 7,175 | 6,931 | ||||||||||||
| Diluted weighted average common shares outstanding |
8,033 | 7,012 | 7,896 | 6,931 | ||||||||||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
4
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
| Nine months ended September 30, |
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| 2004 |
2003 |
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| CASH FLOWS FROM OPERATING ACTIVITIES: |
||||||||
| Net income (loss) |
$ | 397 | $ | (2,165 | ) | |||
| Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: |
||||||||
| Depreciation and amortization |
413 | 548 | ||||||
| Loss on disposal of equipment |
6 | 30 | ||||||
| Non-cash compensation |
35 | 45 | ||||||
| Provision for bad debt |
(93 | ) | 9 | |||||
| Changes in assets and liabilities: |
||||||||
| Accounts receivable |
1,371 | 1,004 | ||||||
| Prepaid expenses and other assets |
(121 | ) | (150 | ) | ||||
| Accounts payable |
431 | 68 | ||||||
| Accrued expenses |
(457 | ) | (262 | ) | ||||
| Decrease in deposits and other assets |
471 | — | ||||||
| Restructuring |
— | 211 | ||||||
| Deferred revenue |
(1,340 | ) | (872 | ) | ||||
| Net cash provided by (used in) operating activities |
1,113 | (1,534 | ) | |||||
| CASH FLOWS FROM INVESTING ACTIVITIES: |
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| Purchases of property and equipment |
(32 | ) | (309 | ) | ||||
| Purchase of intangible assets |
— | (250 | ) | |||||
| Net cash used in investing activities |
(32 | ) | (559 | ) | ||||
| CASH FLOWS FROM FINANCING ACTIVITIES: |
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| Borrowing under capital lease arrangements |
102 | |||||||
| Payments on capital lease obligations |
(73 | ) | (113 | ) | ||||
| Proceeds from exercise of stock options and issuance of common stock under stock plans |
66 | 56 | ||||||
| Net cash provided by (used in ) financing activities |
(7 | ) | 19 | |||||
| EFFECT OF EXCHANGE RATE CHANGES ON CASH |
77 | 143 | ||||||
| NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS |
1,151 | (1,911 | ) | |||||
| CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD |
1,818 | 3,884 | ||||||
| CASH AND CASH EQUIVALENTS, END OF PERIOD |
$ | 2,969 | $ | 1,973 | ||||
| SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING ACTIVITIES |
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| Acquisition of equipment under capital lease obligations |
$ | — | $ | 54 | ||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Operations
We are a provider of operations management and expert systems software products and services. Our products emulate the reasoning of human experts, using process knowledge and often real-time data, and then, on the basis of such reasoning, make recommendations or take direct operational actions. Most applications of our products are in the areas of abnormal condition and process performance management in manufacturing, supply chain and logistics management, and network management. Benefits derived from the use of our products include waste reduction, avoidance of off-specification product, avoidance of system downtime in mission-critical networks, and proactive alarms that signify potential process problems and avoid plant shutdowns. Our products have been used in the manufacturing, transportation, communications, aerospace and government sectors for many years.
2. Basis of Presentation
We have prepared the unaudited consolidated financial statements included in this report pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) for interim financial reporting. Certain information and footnote disclosures, normally included in financial statements prepared for the full year in accordance with accounting principles generally accepted in the United States of America, have been condensed or omitted pursuant to such SEC rules and regulations; nevertheless, our management believes that the disclosures in this report are adequate to make the information presented not misleading. In the opinion of management, the consolidated financial statements reflect all adjustments (of a normal and recurring nature) that are necessary to present fairly our consolidated financial position as of September 30, 2004 and our results of operations and cash flows for the three- and nine- month periods ended September 30, 2004 and 2003. These consolidated financial statements and notes thereto should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2003, filed with the SEC on March 30, 2004. The results of operations for interim periods are not necessarily indicative of the results of operations for the full year or any other interim period. Certain prior period amounts have been reclassified to conform to the current period presentation.
During the year ended December 31, 2003, we sustained a significant loss in the first half of the year. Based on these results, management affected a restructuring plan designed to return the Company to profitability by year’s end without sacrificing our significant engineering investments in a next generation of products. Previously, we had achieved operating and overall profitability as well as positive cash flows for the year ended December 31, 2002. We believe that our cash and cash equivalents and cash flows from operations will be sufficient to meet our operating, investing and financing cash flow requirements through at least the next 12 months. Our ability to maintain growth and profitability in 2004 and beyond is dependent on market acceptance of our existing and next generation of G2 and G2-based products and related services and on renewal of maintenance contracts for customer support at near-current levels.
Our financial statements have been prepared under the assumption that we will continue as a going concern. Based on current forecasts, management believes that we have sufficient liquidity to finance operations for the next twelve months. Management’s expectations for future revenue growth, profitability, and operating cash flows involve significant judgments and estimates. Should these judgments and estimates prove to be inaccurate, we have the intent and ability to reduce our costs and delay, scale back, or eliminate certain of our activities in order to ensure that we maintain positive cash and working capital. Any of these actions could have a material adverse long-term effect on our business, financial condition and results of operations.
6
GENSYM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
3. Comprehensive Income (Loss )
The components of comprehensive income (loss) for the three- and nine-month periods ended September 30, 2004 and 2003 are as follows (in thousands):
| Three months ended September 30, |
Nine months ended September 30, |
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