SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the Quarterly Period Ended September 30, 1997.
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the Transition Period from ____ to ____.
Commission File Number: 0-26494
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GSE SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
Delaware 52-1868008
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
8930 Stanford Boulevard, Columbia, Maryland, 21045
(Address of principal executive office and zip code)
Registrant's telephone number,
including area code: (410) 312-3700
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Sections 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
---- ----
As of November 14, 1997, there were 5,065,688 shares of the Registrant's
common stock (par value $ .01 per share) outstanding.
GSE SYSTEMS, INC.
QUARTERLY REPORT ON FORM 10-Q
INDEX
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets as of September 30, 1997
and December 31, 1996 3
Consolidated Statements of Operations for the Three
and Nine Months Ended September 30, 1997 and 1996 4
Consolidated Statements of Cash Flows for the Nine Months
Ended September 30, 1997 and 1996 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition 9
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 13
Item 4. Submission of Matters to a Vote of Security Holders 13
Item 5. Other Information 13
Item 6. Exhibits and Reports on Form 8-K 14
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
GSE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
(Unaudited)
ASSETS
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
---- ----
<S> <C>
Current assets:
Cash and cash equivalents....................... $ 1,124 $ 2,450
Contract receivables............................ 24,618 27,457
Inventories..................................... 3,397 3,538
Prepaid expenses and other current assets....... 2,297 2,701
Deferred income taxes........................... 1,099 1,454
------- -------
Total current assets.......................... 32,535 37,600
Property and equipment, net....................... 4,181 5,318
Software development costs, net................... 7,505 5,176
Goodwill and other intangible assets, net ........ 1,924 2,059
Deferred income taxes............................. 2,514 569
Other assets .................................... 448 284
------- -------
Total assets.................................. $ 49,107 $ 51,006
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Lines of credit................................. $ 8,863 $ 2,582
Accounts payable................................ 6,888 8,604
Accrued expenses................................ 4,232 4,430
Notes payable to related parties................ 18 -
Obligations under capital lease................. 289 186
Accrued severance costs......................... 413 -
Billings in excess of revenues earned........... 4,944 5,358
Accrued contract reserve........................ 396 233
Accrued warranty reserve........................ 1,134 1,408
Other current liabilities....................... 336 281
Income taxes payable............................ 190 651
------- -------
Total current liabilities.................... 27,703 23,733
Notes payable to related parties.................. 172 202
Obligations under capital lease................... 221 420
Billings in excess of revenues earned............. - 803
Accrued contract and warranty reserves............ 212 687
Other liabilities................................. 368 468
------- -------
Total liabilities............................ 28,676 26,313
------- -------
Stockholders' equity:
Common stock $.01 par value, 8,000,000 shares authorized,
5,065,688 shares issued and outstanding....... 50 50
Additional paid-in capital...................... 21,378 21,378
Retained earnings (deficit) - at formation...... (5,112) (5,112)
Retained earnings - since formation............. 4,532 8,464
Cumulative translation adjustment............... (417) (87)
------- -------
Total stockholders' equity................... 20,431 24,693
------- -------
Total liabilities & stockholders' equity..... $ 49,107 $ 51,006
======= =======
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
GSE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C>
Contract revenue..................... $ 19,021 $ 23,500 $ 58,978 $ 71,971
Cost of revenue...................... 13,527 15,874 41,825 48,471
-------- -------- -------- --------
Gross profit...................... 5,494 7,626 17,153 23,500
Operating expenses:
Selling, general and administrative. 6,068 5,188 19,257 16,638
Depreciation and amortization....... 675 571 1,875 1,561
Business combination costs.......... - - - 1,105
Employee severance and termination
costs............................... (225) - 1,124 -
-------- -------- -------- --------
Total operating expenses............ 6,518 5,759 22,256 19,304
-------- -------- -------- --------
Operating (loss) income........... (1,024) 1,867 (5,103) 4,196
Interest expense..................... 207 92 566 346
Other (income) expense............... (83) 2 30 (275)
-------- -------- -------- --------
(Loss) income before income taxes. (1,148) 1,773 (5,699) 4,125
(Benefit from) provision for income
taxes................................ (242) 607 (1,767) 1,442
-------- -------- -------- --------
Net (loss) income................. $ (906) $ 1,166 $ (3,932) $ 2,683
======== ======== ======== ========
(Loss) earnings per common share..... $ (0.18) $ 0.23 $ (0.78) $ 0.53
======== ======== ======== ========
Weighted average common shares
outstanding.......................... 5,065,700 5,066,000 5,065,700 5,077,000
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
GSE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine months Nine months
Ended Ended
September 30, September 30,
1997 1996
---- ----
<S> <C>
Cash Flows From Operating Activities:
Net (loss) income .............................. $ (3,932) $ 2,683
Adjustments to reconcile net (loss) income
to net cash used in operating activities:
Depreciation and amortization................. 2,331 2,042
Accrued facility reserve...................... - (1,103)
Provision for doubtful contract receivables... (31) -
Non-cash stock compensation................... - 175
Deferred income taxes ........................ (1,682) (48)
Changes in assets and liabilities:
Contract receivables........................ 2,130 3,602
Inventories................................. 130 (659)
Prepaid expenses and other current assets... 266 (25)
Other assets................................ (189) 36
Accounts payable and accrued expenses ...... (1,307) (1,428)
Accrued severance........................... 413 -
Billings in excess of revenue earned........ (1,215) (6,855)
Accrued contract and warranty reserves...... (579) (1,031)
Other current liabilities................... 72 206
Income taxes payable ....................... (301) 902
Other liabilities........................... (2) 91
------- -------
Net cash used in operating activities........... (3,896) (1,412)
------- -------
Cash Flows From Investing Activities:
Capital expenditures.......................... (1,002) (2,039)
Capitalization of software development costs.. (2,804) (2,719)
Proceeds from sale/leaseback transaction...... 521 -
------- -------
Net cash used in investing activities........... (3,285) (4,758)
------- -------
Cash Flows From Financing Activities:
Increase in (repayments under) lines of credit
with bank..................................... 6,282 (163)
Repayments under capital lease obligations.... (203) (56)
Principal payments under term-note............ (99) -
Decrease in notes payable to related parties . (12) (196)
------- -------
Net cash provided by (used in) financing
activities...................................... 5,968 (415)
Effect of exchange rate changes on cash......... (113) (124)
------- -------
Net decrease in cash and cash equivalents....... (1,326) (6,709)
Cash and cash equivalents at beginning of
period.......................................... 2,450 9,016
------- -------
Cash and cash equivalents at end of period...... $ 1,124 $ 2,307
======= =======
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
GSE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997
(Unaudited)
1. Basis of Presentation
The condensed consolidated financial statements included herein have been
prepared by the Company without independent audit. In the opinion of the
Company's management, all adjustments and reclassifications of a normal
and recurring nature necessary to present fairly the financial position,
results of operations and cash flows for the periods presented have been
made. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. It is suggested that
these condensed consolidated financial statements be read in conjunction
with the consolidated financial statements and notes thereto included in
the Company's Annual Report on Form 10-K for the period ended December 31,
1996 filed with Securities and Exchange Commission on March 31, 1997. The
results of operations for the period ended September 30, 1997 are not
necessarily indicative of what the operating results for the full year will
be.
2. Pooling of Interests
On May 22, 1996, the Company acquired all of the outstanding shares of
capital stock of Erudite Software & Consulting, Inc. ("Erudite Software"),
a leading supplier of cost-effective client/server technology providing
consulting services, custom applications, software development, training
services, and hardware-software sales. Erudite Software is headquartered
in Salt Lake City, Utah, with a primary development facility in Provo, Utah.
This acquisition was accomplished through the issuance of approximately
840,700 shares of the Company's Common Stock in exchange for all
outstanding shares of capital stock of Erudite Software. The acquisition
was accounted for under the pooling-of-interests method of accounting.
The accompanying condensed consolidated financial statements of the Company
have been prepared giving retroactive effect to the acquisition of Erudite
Software. All prior period historical consolidated financial statements
presented herein have been restated to include the financial position,
results of operations, and cash flows of Erudite Software.
3. Earnings Per Share
Net income per common share is based on the weighted average number of
shares of Common Stock outstanding during the period and the assumed
issuance of approximately 840,700 shares of Common Stock, at the beginning
of each period presented, in connection with the acquisition of Erudite
Software. The difference between primary and fully-diluted per share
amounts is insignificant.
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings Per Share" (FAS 128).
FAS 128 simplifies the existing earnings per share (EPS) computations under
Accounting Principles Board Opinion No. 15, "Earnings Per Share" (APB 15),
revises disclosure requirements, and increases the comparability of EPS
data on an international basis. In simplifying the EPS computations, the
presentation of primary EPS is replaced with basic EPS, with the principal
difference being that common stock equivalents are not considered in
computing basic EPS. In addition, FAS 128 requires dual presentation of
basic and diluted EPS. FAS 128 is effective for financial statements
issued for periods ending after December 15, 1997. The Company does not
expect the EPS amounts calculated under FAS 128 to be materially different
from the amounts presented in the financial statements under APB 15.
4. Inventories
Inventories are stated at the lower of cost, as determined by the average
cost method, or market. Obsolete or unsaleable inventory is reflected at
its estimated net realizable value.
Inventories, net, consist of the following at:
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
---- ----
<S> <C>
(in thousands)
Raw materials.......................... $ 1,908 $ 2,115
Service parts.......................... 1,489 1,423
----- -----
Total................................ $ 3,397 $ 3,538
===== =====
</TABLE>
5. Software Development Costs
Certain computer software development costs are capitalized in the
accompanying consolidated balance sheets. Capitalization of computer
software development costs begins upon the establishment of technological
feasibility. Capitalization ceases and amortization of capitalized costs
begins when the software product is commercially available for general
release to customers. Amortization of capitalized computer software
development costs is included in cost of revenues and is provided at the
greater of the amount computed using (a) the ratio of current gross
revenues for a product to the total of current and anticipated future
gross revenues or (b) the straight-line method over the remaining
estimated economic life of the product, not to exceed five years. Software
development costs capitalized were $720,000 and $723,000 for the three
months ended September 30, 1997 and 1996, respectively, and $2.8 million and
$2.7 million for the nine months ended September 30, 1997 and 1996,
respectively. Total amortization expense was $298,000 and $166,000 for the
three months ended September 30, 1997 and 1996, respectively, and $475,000
and $481,000 for the nine months ended September 30, 1997 and 1996,
respectively.
6. Financing Arrangements
The Company maintains, through its subsidiaries, two lines of credit with
its bank that provide for borrowings up to $14.0 million to support
foreign letters of credit, margin requirements on foreign exchange
contracts and working capital needs. The lines of credit expire
January 1, 1998.
At September 30, 1997, the Company had $8.9 million of borrowings under the
lines of credit with its bank. Letters of credit issued in the ordinary
course of business from its bank amounted to approximately $134,000.
Although the Company was not in compliance with its cash flow coverage
ratio or minimum tangible net worth ratio covenants at September 30, 1997,
the Company has received a written waiver of such covenants from its bank.
During the third quarter of 1997, the Company entered into an agreement
which established a leasing line of credit in the amount of $1.2 million to
expire on December 31, 1997. The Company utilized $521,000 of this line
through a sale/leaseback of certain computer equipment originally purchased
for internal use in 1997.
7. Contract Receivables
The components of contract receivables are as follows:
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
---- ----
<S> <C>
(in thousands)
Billed receivables........................ $ 16,949 $ 18,041
Recoverable costs and accrued profit
not billed................................ 7,936 9,714
Allowance for doubtful accounts........... (267) (298)
-------- --------
Total contract receivables............. $ 24,618 $ 27,457
======== ========
</TABLE>
Recoverable costs and accrued profit not billed represent costs incurred
and profit accrued on contracts that will become billable upon future
milestones or completion of contracts.
Revisions in estimated contract costs at completion are reflected in the
period during which facts and circumstances necessitating such a change
first become known. Revenue under long-term, fixed-price contracts
generally is accounted for on the percentage-of-completion method, based
on contract costs incurred to date and estimated costs to complete. The
effect of changes in estimates of contract profits was to increase gross
profit by $237,000 and $423,000 during the three months ended September 30,
1997 and 1996, respectively, and to (decrease) increase gross profit by
($188,000) and $2.2 million during the nine months ended September 30, 1997
and 1996, respectively, from that which would have been reported had the
revised estimates been used as the basis of recognition of contract profits
in the preceding periods.
8. Income Taxes
The Company's effective tax rate is based on the best current estimate of its
expected annual effective tax rate. The difference between the statutory
U.S. tax rate and the Company's effective tax rate for the three and nine
months ended September 30, 1997 and 1996 is primarily the result of the
effects of foreign operations at different tax rates, state income taxes
and a valuation allowance against foreign net operating loss carryforwards.
9. Employee Severance and Termination Costs
During the first quarter of 1997, the Company approved a charge for severance
and other employee obligations of $1.3 million corresponding to a reduction
in its workforce of approximately 5%. As of September 30, 1997, a total of
$711,000 has been expended.
During the third quarter of 1997, the Company realized its original severance
charge was higher than will be actually incurred, and therefore reduced
its prior severance charge by $225,000 to a net charge for the nine months
ended September 30, 1997 of $1.1 million.
Item 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition
Results of Operations
The following table sets forth the results of operations for the periods
presented expressed as a percentage of revenues.
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C>
Contract revenue....................... 100.0 % 100.0 % 100.0 % 100.0 %
Cost of revenue........................ 71.2 67.5 70.9 67.3
----- ----- ----- -----
Gross profit...................... 28.8 32.5 29.1 32.7
Operating expenses:
Selling, general and administrative.. 31.8 22.1 32.7 23.1
Depreciation and amortization........ 3.5 2.4 3.2 2.2
Business combination costs........... - - - 1.5
Employee severance and termination
costs................................ (1.2) - 1.8 -
----- ----- ----- -----
Total operating expenses............. 34.1 24.5 37.7 26.8
----- ----- ----- -----
Operating (loss) income........... (5.3) 8.0 (8.6) 5.9
Interest expense....................... 1.1 0.4 1.0 0.5
Other (income) expense ................ (0.4) - 0.1 (0.4)
----- ----- ----- -----
(Loss) income before income taxes. (6.0) 7.6 (9.7) 5.8
(Benefit from) provision for income
taxes.................................. (1.3) 2.6 (3.0) 2.0
----- ----- ----- -----
Net (loss) income................ (4.7)% 5.0 % (6.7)% 3.8 %
===== ===== ===== =====
</TABLE>
_____________________________________
Revenues. Revenues for the three and nine months ended September 30, 1997
amounted to $19.0 million and $59.0 million, respectively, as compared with
revenues of $23.5 million and $72.0 million in the three and nine months ended
September 30, 1996, respectively. This decrease was mainly due to a reduction
of nuclear simulation revenues and lower revenues of the business systems
unit from third party hardware sales. This decline was partially offset by
an increase in the process business during the nine months ended
September 30, 1997.
Gross Profit. Gross profit decreased to $5.5 million in the three months ended
September 30, 1997 from $7.6 million in the corresponding period of 1996. Gross
profit decreased to $17.2 million in the nine months ended September 30, 1997
from $23.5 million in the corresponding period of 1996. The decrease in the
gross profit amount is primarily attributable to lower revenues as well as
revenue recognized on lower margin contracts. The decrease in the gross profit
percentage, which was down to 29.1% for the nine months ended September 30,
1997 from 32.7% for the corresponding period in 1996, was affected by lower
labor utilization in the business systems business unit and a higher percentage
of government contract-related revenues in the power simulation business with
corresponding lower margins.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased to $6.1 million, or 31.8% of revenues, during
the three months ended September 30, 1997, from $5.2 million, or 22.1% of
revenues, during the corresponding period of 1996. Selling, general and
administrative expenses increased to $19.3 million, or 32.7% of revenues,
during the nine months ended September 30, 1997, from $16.6 million, or 23.1%
of revenues, during the corresponding period of 1996. The increase in selling,
general and administrative expenses is primarily attributable to increased
sales and marketing costs, recruiting and relocation costs, and costs related
to legal proceedings (covered in Item 1 of Part II - Other Information).
Expenses for the third quarter of 1996 reflect a $1.0 million decrease
attributable to consolidation of duplicate facilities, partially offset by a
charge for severance and employee related obligations of $325,000.
Total research and product development expenditures were $1.2 million and $1.3
million in the three months ended September 30, 1997 and 1996, respectively, and
$4.0 million and $3.9 million in the nine months ended September 30, 1997 and
1996, respectively. Capitalized software development costs totaled $720,000
and $723,000 during the quarters ended September 30, 1997 and 1996,
respectively, and $2.8 million and $2.7 million during the nine months ended
September 30, 1997 and 1996, respectively. Net research and development costs
expensed and included within selling, general and administrative expenses were
$448,000 and $651,000 during the quarters ended September 30, 1997 and 1996,
respectively, and $1.2 million during both the nine months ended September 30,
1997 and 1996, respectively. The Company continued investing in the conversion
of its DCS product to the Windows NT(r) platform, SCADA system enhancements for
the Windows NT(r) platform and the productization of its SimSuite(tm) software
tools.
Employee Severance and Termination Costs. For the nine months ended September
30, 1997, there was a net charge for severance and other employee obligations
of $1.1 million, after a third quarter reduction of $225,000, in connection with
cost reduction efforts initiated to offset the impact of a decrease in project
revenues. Of this charge, $711,000 has been expended as of September 30, 1997.
Depreciation and Amortization. Depreciation expense amounted to $609,000 and
$532,000 during the three months ended September 30, 1997 and 1996,
respectively. Depreciation expense amounted to $1.7 million and $1.4 million
during the nine months ended September 30, 1997 and 1996, respectively. This
increase was attributable to depreciation of the additional fixed asset
purchases made in 1996 and a third quarter year-to-date charge related to
items not previously depreciated.
Amortization of goodwill and intangibles was $66,000 and $38,000 during the
three months ended September 30, 1997 and 1996, respectively, and $223,000
and $122,000 during the nine months ended September 30, 1997 and 1996,
respectively. This increase was attributable to the re-evaluation of the useful
life of intangible assets.
Business Combination Costs. During the three and nine months ended September
30, 1996, the Company incurred business combination costs related to the
acquisition of Erudite Software, of $1.1 million. These consisted primarily of
investment bank fees, legal and accounting expenses, and compensation expense
for the shares issued to employees by the owners of Erudite Software pursuant
to Stock Transfer Agreements.
Operating (Loss) Income. Operating results decreased to a loss of $1.0 million,
or (5.3%) of revenues, during the three months ended September 30, 1997, from
income of $1.8 million, or 8.0% of revenues, during the corresponding period of
1996. The loss for the nine months ended September 30, 1997 was $5.1 million
or (8.6%) of revenues, compared with income of $4.1 million, or 5.9% of
revenues, during the corresponding period of 1996. The 1997 loss is
attributable to the decline in simulation revenues, lower contract gross
margins and the expense related to the employee severance and termination
costs.
Interest Expense. Interest expense increased to $207,000 and $566,000 during
the three and nine months ended September 30, 1997, respectively, from $92,000
and $346,000 during the three and nine months ended September 30, 1996,
respectively. This increase is attributable to a higher level of borrowings
made during the period to fund working capital requirements.
Other (Income) Expense. Other (income) expense increased for the three months
ended September 30, 1997 compared to the same period of 1996, from an expense
of $2,000 to income of $83,000 due to gains on foreign currency transactions.
For the nine months ended September 30, 1997, other (income) expense
decreased to an expense of $30,000 compared to income of $275,000 for the
period ended September 30, 1996, primarily due to investment income earned in
1996.
Liquidity and Capital Resources
During the nine months ended September 30, 1997, the Company's operations used
$3.9 million of net cash, primarily resulting from the net loss adjusted for
the non-cash deferred tax benefit which was offset by an increase in payments
of accounts payable and accrued expense payments and reductions in contract
receivables and in customer advances. During the nine months ended
September 30, 1996, net cash used by operations was $1.4 million.
At September 30, 1997, the Company had cash and cash equivalents totaling
approximately $1.1 million compared with $2.3 million at September 30, 1996.
The Company continues to maintain its lines of credit with its bank amounting
to $14.0 million. At September 30, 1997, there were $8.9 million in
borrowings under these lines of credit, and letters of credit from its bank
issued in the ordinary course of business amounted to $134,000. The lines
of credit expire January 1, 1998; although there can be no assurance that
these lines will be extended, the Company anticipates that this will occur.
For further discussion, see Note 6 of "Notes to Condensed Consolidated
Financial Statements". Although the Company was not in compliance with its
cash flow coverage ratio or minimum tangible net worth ratio covenants as of
September 30, 1997, the Company has received a written waiver of such
covenants from its bank.
Additionally, the Company entered into a lease arrangement which provides up to
$1.2 million of available credit. The Company has utilized $521,000 of this
credit. The remaining available credit will expire on December 31, 1997 if
not utilized.
Management believes the Company has sufficient liquidity and working capital
resources necessary for planned business operations, debt service requirements,
planned investments, and capital expenditures.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
In January 1997, GSE Power Systems, Inc. ("Power Systems") filed a lawsuit
in the U.S. District Court for the District of Maryland in Baltimore against
J.L. Ryan, Inc., of Columbia, Maryland ("Ryan"), Yankee Atomic Electric Co., of
Bolton, Massachusetts, and North Coast Software Inc., of Oswego, New York,
among others. Power Systems' suit asserts causes of action for copyright
infringement, misappropriation of trade secrets, false designation of origin
under the Lanham Act, breach of contract and unfair competition. The subject
matter of the suit is the defendants' distribution and sale of a simulation
executive system which Power Systems believes to be an infringement of its
simulation executive product. Subsequent to the filing of the suit, Power
Systems reached separate settlements with Yankee Atomic Electric Co. and North
Coast Software, Inc., respectively, and has dismissed claims against these
parties. As of this date, Power Systems continues to pursue its claims against
Ryan and the other remaining defendants. A trial date has been set for January
1998. The Company cannot reasonably predict the likely outcome of this suit
at this time.
In August 1997, Ryan filed a counterclaim against Power Systems in connection
with the aforementioned lawsuit. In its counterclaim, Ryan alleges that Power
Systems has engaged in activity which constitutes: violation(s) of the Lanham
Act; violation(s) of Maryland's Unfair or Deceptive Trade Practices Act; unfair
competition; tortious interference with prospective advantage; and commercial
disparagement. The subject matter of the counterclaim involves certain
communications between Power Systems and power plant operating companies
occurring after the filing of Power Systems' lawsuit against Ryan. The
Company cannot reasonably predict the outcome of this counterclaim at this
time.
Various other actions and proceedings are presently pending to which the
Company is a party. In the opinion of management, the aggregate liabilities,
if any, arising from such actions are not expected to have a material adverse
effect on the financial position of the Company.
Item 4. Submission of Matters to a Vote of Security Holders.
None
Item 5. Other Information
Forward-Looking Statements
This Form 10-Q contains certain "forward-looking statements," within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended, which are subject to
the safe harbors created by those Acts. These statements include the plans
and objectives of management for future operations, including plans and
objectives relating to the development of the Company's business in the
domestic and international marketplace. All forward-looking statements
involve risks and uncertainties, including, without limitation, risks relating
to the Company's ability to enhance existing software products and to introduce
new products in a timely and cost-effective manner, reduced development of
nuclear power plants that may utilize the Company's products, a long pay-back
cycle from the investment in software development, uncertainties regarding the
ability of the Company to grow its revenues and successfully integrate
operations through expansion of its existing business and strategic
acquisitions, the ability of the Company to respond adequately to rapid
technological changes in the markets for process control, data acquisition
and simulation software and systems, significant quarter-to-quarter volatility
in revenues and earnings as a result of customer purchasing cycles and other
factors, dependence upon key personnel, and general market conditions and
competition. The forward-looking statements included herein are based on
current expectations that involve numerous risks and uncertainties as set forth
herein, the failure of any one of which could materially adversely affect the
operations of the Company. The Company's plans and objectives are also based
on the assumptions that market conditions and competitive conditions within
the Company's business areas will not change materially or adversely and that
there will be no material adverse change in the Company's operations or
business. Assumptions relating to the foregoing involve judgments with
respect, among other things, to future economic, competitive and market
conditions and future business decisions, all of which are difficult or
impossible to predict accurately and many of which are beyond the control of
the Company. Although the Company believes that the assumptions underlying the
forward-looking statements are reasonable, any of the assumptions could be
inaccurate and there can, therefore, be no assurance that the forward-looking
statements included in this Form 10-Q will prove to be accurate. In light of
the significant uncertainties inherent in the forward-looking statements
included herein, the inclusion of such information should not be regarded as
a representation by the Company or any other person that the objectives and
plans of the Company will be achieved.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit Index
Exhibit 11.1 Statement Regarding Computation of Earnings per Share
(b) Reports on Form 8-K
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: November 14, 1997 GSE SYSTEMS, INC.
/S/ Jerome I. Feldman
----------------------------
Jerome I. Feldman
Chairman of the Board
(Principal Executive Officer)
/S/ Robert W. Stroup
----------------------------
Robert W. Stroup
Executive Vice President and Treasurer
EXHIBIT 11.1
GSE SYSTEMS, INC. AND SUBSIDIARIES
(in thousands, except per share data)
STATEMENT REGARDING COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
September 30, September 30, September 30, September 30,
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C>
Net (loss) income available
to common shares.......... $ (906) $ 1,166 $ (3,932) $ 2,683
===== ===== ======= =====
Weighted average common
shares outstanding........ 5,066 5,066 5,066 5,066
Dilutive effect of common
stock equivalents
- stock options.......... -- -- -- 11
----- ----- ----- -----
Total shares used for
earnings per share........$ 5,066 $ 5,066 $ 5,066 $ 5,077
===== ===== ===== =====
(Loss) earnings per share.$ (0.18) $ 0.23 $ (0.78) $ 0.53
====== ==== ====== ====
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 1,124
<SECURITIES> 0
<RECEIVABLES> 24,885
<ALLOWANCES> 267
<INVENTORY> 3,397
<CURRENT-ASSETS> 32,535
<PP&E> 4,181
<DEPRECIATION> 0
<TOTAL-ASSETS> 49,107
<CURRENT-LIABILITIES> 27,703
<BONDS> 0
0
0
<COMMON> 50
<OTHER-SE> 20,381
<TOTAL-LIABILITY-AND-EQUITY> 49,107
<SALES> 58,978
<TOTAL-REVENUES> 58,978
<CGS> 41,825
<TOTAL-COSTS> 41,825
<OTHER-EXPENSES> 22,256
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 566
<INCOME-PRETAX> (5,699)
<INCOME-TAX> (1,767)
<INCOME-CONTINUING> (3,932)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,932)
<EPS-PRIMARY> (0.78)
<EPS-DILUTED> (0.78)
</TABLE>
