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 June 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
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 August 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 June 30, 1997
and December 31, 1996 3
Consolidated Statements of Operations for the
Three and Six Months Ended June 30, 1997 and 1996 4
Consolidated Statements of Cash Flows for the
Six Months Ended June 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 3. Legal Proceedings 12
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)
<TABLE>
<CAPTION>
ASSETS
June 30, December 31,
1997 1996
---- ----
<S> <C> <C>
Current assets:
Cash and cash equivalents................ $ 852 $ 2,450
Contract receivables .................... 26,217 27,457
Inventories.............................. 3,206 3,538
Prepaid expenses and other current
assets................................... 2,304 2,701
Deferred income taxes.................... 1,560 1,454
-------- --------
Total current assets......... 34,139 37,600
Property and equipment, net.............. 5,285 5,318
Software development costs, net ........ 7,083 5,176
Goodwill and other intangible
assets, net.............................. 1,970 2,059
Deferred income taxes.................... 1,764 569
Other assets............................. 453 284
-------- --------
Total assets ................ $ 50,694 $ 51,006
======== ========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Lines of credit.......................... $ 7,708 $ 2,582
Accounts payable......................... 8,374 8,604
Accrued expenses......................... 3,861 4,430
Notes payable to related parties......... 17 -
Obligations under capital lease.......... 284 186
Accrued severance costs.................. 969 -
Billings in excess of revenues earned.... 5,258 5,358
Accrued contract reserve................. 92 233
Accrued warranty reserve................. 560 1,408
Other current liabilities................ 172 281
Income taxes payable..................... 241 651
-------- --------
Total current liabilities.... 27,536 23,733
Notes payable to related parties............... 176 202
Obligations under capital lease................ 300 420
Billings in excess of revenues earned.......... - 803
Accrued contract and warranty reserves......... 797 687
Other liabilities.............................. 391 468
-------- --------
Total liabilities............ 29,200 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..... 5,438 8,464
Cumulative translation adjustment....... (260) (87)
-------- --------
Total stockholders' equity.. 21,494 24,693
-------- --------
Total liabilities &
stockholders' equity........ $ 50,694 $ 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 Three months
ended ended
June 30, June 30,
1997 1996
---- ----
<S> <C> <C>
Contract revenue................................ $ 20,630 $ 26,168
Cost of revenue................................. 14,535 17,898
------- -------
Gross profit.............................. 6,095 8,270
------- -------
Operating expenses:
Selling, general and administrative.......... 6,940 5,986
Depreciation and amortization................ 632 511
Business combination costs................... - 1,105
Employee severance and termination costs..... - -
------- -------
Total operating expenses..................... 7,572 7,602
------- -------
Operating (loss) income................... (1,477) 668
Interest expense............................. 172 115
Other (income) expense....................... (97) (103)
------- -------
(Loss) income before income taxes.......... (1,552) 656
(Benefit from) provision for income taxes..... (515) 230
------- -------
Net (loss) income......................... $ (1,037) $ 426
======= =======
(Loss) earnings per common share.............. $ (0.20) $ 0.08
======= =======
Weighted average common shares outstanding... 5,065,700 5,087,000
========= =========
</TABLE>
<TABLE>
<CAPTION>
Six months Six months
ended ended
June 30, June 30,
1997 1996
---- ----
<S> <C> <C>
Contract revenue................................ $ 39,957 $ 48,471
Cost of revenue................................. 28,298 32,597
------- -------
Gross profit.............................. 11,659 15,874
Operating expenses:
Selling, general and administrative.......... 13,189 11,450
Depreciation and amortization................ 1,200 990
Business combination costs................... - 1,105
Employee severance and termination costs..... 1,349 -
------- -------
Total operating expenses..................... 15,738 13,545
------- -------
Operating (loss) income................... (4,079) 2,329
Interest expense............................. 359 254
Other (income) expense....................... 113 (277)
------- -------
(Loss) income before income taxe .......... (4,551) 2,352
(Benefit from) provision for income taxes..... (1,525) 835
------- -------
Net (loss) income......................... $ (3,026) $ 1,517
======= =======
(Loss) earnings per common share.............. $ (0.60) $ $0.30
======= =======
Weighted average common shares outstanding... 5,065,700 5,082,000
========= =========
</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>
Six months Six months
Ended Ended
June 30, June 30,
1997 1996
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income............................. $ (3,026) $ 1,517
Adjustments to reconcile net (loss) income
to net cash (used in) operating activities:
Depreciation and amortization............. 1,369 1,313
Accrued facility costs.................... - (163)
Accrued severance......................... 969 -
Provision for doubtful contract
receivables............................... (71) -
Non-cash stock compensation............... - 175
Deferred income taxes..................... (1,567) 272
Changes in assets and liabilities:
Contract receivables.................... 822 858
Inventories............................. 324 (285)
Prepaid expenses and other current
assets.................................. 261 (94)
Other assets............................ (187) (81)
Accounts payable and accrued expenses... (620) (871)
Billings in excess of revenue earned.... (905) (5,207)
Accrued contract and warranty reserves.. (876) (322)
Other current liabilities............... (23) (174)
Income taxes payable.................... (74) 164
Other liabilities....................... (1) (72)
------- -------
Net cash (used in) operating activities (3,605) (2,970)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures...................... (715) (883)
Capitalization of software development
costs..................................... (2,084) (1,995)
------- -------
Net cash used in investing activities......... (2,799) (2,878)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in lines of credit with bank..... 5,126 (212)
(Repayments) borrowings under capital
lease obligations......................... (373) 29
Principal payments under term-note........ (77) -
Decrease in notes payable to related
parties................................... (8) (196)
------- -------
Net cash provided by (used in) financing
activities.................................... 4,668 (379)
Effect of exchange rate changes on cash....... 138 (39)
------- -------
Net decrease in cash and cash equivalents..... (1,598) (6,266)
Cash and cash equivalents at beginning of
period........................................ 2,450 9,016
------- -------
Cash and cash equivalents at end of period.... $ 852 $ 2,750
======= =======
</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
June 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 June 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>
June 30, December 31,
1997 1996
---- ----
<S> <C> <C>
(in thousands)
Raw materials................................... $ 1,811 $ 2,115
Service parts................................... 1,395 1,423
------ ------
Total........................ $ 3,206 $ 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 $1,091,000, and $697,000
for the three months ended June 30, 1997 and 1996, respectively, and $2,084,000
and $1,995,000 for the six months ended June 30, 1997 and 1996, respectively.
Total amortization expense was $33,000 and $161,000 for the three months
ended June 30, 1997 and 1996, respectively, and $177,000 and $323,000 for the
six months ended June 30, 1997 and 1996, respectively.
6. Financing Arrangements
The Company maintains, through it subsidiaries, two lines of credit 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 June 30, 1997, there were $7,707,200 of borrowings under the lines of
credit, and letters of credit issued in the ordinary course of business
amounted to approximately $214,000. Although the Company was not in
compliance with its cash flow coverage ratio or minimum tangible net worth
ratio covenants at June 30, 1997, the Company has received a waiver of such
covenants from its bank.
7. Contract Receivables
The components of contract receivables are as follows (in thousands):
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
---- ----
<S> <C> <C>
Billed receivables.............................. $ 16,411 $ 18,041
Recoverable costs and accrued profit
not billed...................................... 10,033 9,714
Allowance for doubtful accounts................. (227) (298)
------- -------
Total contract receivables...................... $ 26,217 $ 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 for 1997 is immaterial. However, in 1996 the effect of
changes in estimates increased gross profit by $1,100,000 and $1,324,000 for
the three and six months ended June 30, 1996, 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 six months
ended June 30, 1997 and 1996 is primarily the results of the effects of foreign
operations at different tax rates and state income taxes.
9. Employee Severance and Termination Costs
During the six months ended June 30, 1997, the Company approved a charge for
severance and other employee obligations of $1,349,000 corresponding to a
reduction in its workforce of approximately 5%. As of June 30, 1997, a
total of $380,000 has been expended.
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 Three months
ended ended
June 30, June 30,
1997 1996
---- ----
<S> <C> <C>
Contract revenue........................... 100.0% 100.0%
Cost of revenue............................ 70.6 68.4
----- -----
Gross profit....................... 29.4 31.6
Operating expenses:
Selling, general and administrative... 33.5 22.9
Depreciation and amortization......... 3.1 2.0
Business combination costs............ - 4.2
Employee severance and termination
costs................................. - -
----- -----
Total operating expenses.............. 36.6 29.1
----- -----
Operating (loss) income............ (7.2) 2.5
Interest expense........................... 0.8 0.4
Other (income) expense..................... (0.5) (0.4)
----- -----
(Loss) income before income taxes...... (7.5) 2.5
(Benefit from) provision for income taxes.. (2.5) 0.9
----- -----
Net (loss) income..................... (5.0)% 1.6%
===== =====
</TABLE>
<TABLE>
<CAPTION>
Six months Six months
ended ended
June 30, June 30,
1997 1996
---- ----
<S> <C> <C>
Contract revenue........................... 100.0% 100.0%
Cost of revenue............................ 70.8 67.3
----- -----
Gross profit....................... 29.2 32.7
Operating expenses:
Selling, general and administrative... 33.0 23.6
Depreciation and amortization......... 3.0 2.0
Business combination costs............ - 2.3
Employee severance and termination
costs................................. 3.4 -
----- -----
Total operating expenses.............. 39.4 27.9
----- -----
Operating (loss) income............ (10.2) 4.8
Interest expense........................... 0.9 0.5
Other (income) expense..................... 0.3 (0.6)
----- -----
(Loss) income before income taxes... (11.4) 4.9
(Benefit from) provision for income taxes.. (3.8) 1.7
----- -----
Net (loss) income.................. (7.6)% 3.2%
===== =====
</TABLE>
______________________________________
Revenues. Revenues for the three and six months ended June 30, 1997 amounted
to $20.6 million and $40.0 million, respectively, as compared with revenues
of $26.2 million and $48.5 million in the three and six months ended June 30,
1996, respectively. This decrease was mainly due to a decrease in nuclear
simulation revenues of approximately 47% for both the three and six months
ended June 30, 1997, respectively, compared to the corresponding periods in
1996, which was also partially offset by changes in the other businesses.
Gross Profit. Gross profit decreased to $6.1 million, a gross margin of
29.4%, in the three months ended June 30, 1997 from $8.3 million, a gross
margin of 31.6%, in the corresponding period of 1996. Gross profit decreased
to $11.7 million, a gross margin of 29.2%, in the six months ended June 30,
1997 from $15.9 million, a gross margin of 32.7%, in the corresponding
period of 1996. The decrease in the gross profit amount is primarily
attributable to lower revenues; the decrease in the gross profit percentage
was also affected by lower utilization and training start-up costs associated
with the Business Systems business unit, as well as a higher percentage of
government contract-related revenues in the power simulation business.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased to $7.0 million, or 33.5% of revenues,
during the three months ended June 30, 1997 from $6.0 million, or 22.9% of
revenues, during the corresponding period in 1996. Selling, general and
administrative expenses increased to $13.1 million, or 33.0% of revenues,
during the six months ended June 30, 1997 from $11.5 million, or 23.6% of
revenues, during the corresponding period in 1996. The increase in selling,
general and administrative expenses is primarily attributable to increased
sales force, bid and proposal activities, and business expansion efforts.
Gross research and product development expenditures were $1.5 million and
$1.1 million in the three months ended June 30, 1997 and 1996, respectively,
and $2.8 million and $2.7 million in the six months ended June 30, 1997 and
1996, respectively. Capitalized software development costs totaled $1.1
million and $697,000 during the quarters ended June 30, 1997 and 1996 and
$2.1 million and 2.0 million during the six months ended June 30, 1997 and
1996, respectively. Net research and development costs expensed and included
within selling, general and administrative expenses were $392,000 and $429,000
during the quarters ended June 30, 1997 and 1996, respectively, and $752,000
and $680,000 during the six months ended June 30, 1997 and 1996,
respectively. The Company continued investing in the conversion of its DCS
product to the Windows NT platform, SCADA system enhancements to the Windows
NT platform and the productization of its SimSuite software tools.
Employee Severance and Termination Costs. For the six months ending June 30,
1997, there was a charge for severance and other employee obligations of
$1,349,000 in connection with cost reduction efforts initiated to offset the
impact of a decrease in project revenues. As of June 30, 1997, $380,000 of
this charge has been expended.
Depreciation and Amortization. Depreciation expense amounted to $530,000
and $465,000 during the three months ended June 30, 1997 and 1996,
respectively. Depreciation expense amounted to $1,044,000 and $901,000 during
the six months ended June 30, 1997 and 1996, respectively. This increase was
attributable to higher levels of capital expenditures.
Amortization of goodwill and intangibles was $102,000 and $46,000 during the
three months ended June 30, 1997 and 1996, respectively, and $156,000 and
$89,000 during the six months ended June 30, 1997 and 1996, respectively.
This increase was attributable to the commencement of amortization of certain
intangible costs.
Business Combination Costs. During the three and six months ended June 30,
1996, the Company incurred business combination costs related to the
acquisition of Erudite Software, of $1,105,000. 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 (loss) income decreased $2.1 million to
($1.5) million, or (7.2%) of revenues, during the three months ended June 30,
1997 from $668,000, or 2.5 % of revenues, during the corresponding period of
1996. Operating (loss) income decreased $6.4 million to ($4.1) million, or
(10.2%) of revenues, during the six months ended June 30, 1997 from $2.3
million, or 4.8 % of revenues, during the corresponding period of 1996. This
decrease in operating income is attributable to the decline in simulation
revenues, lower gross margins and higher expenses relating to selling and
marketing efforts and the employee severance and termination costs.
Interest Expense. Interest expense increased to $172,000 and $359,000 during
the three and six months ended June 30, 1997, respectively, from $115,000 and
$254,000 during the three and six months ended June 30, 1996, respectively.
This increase is attributable to a higher level of borrowings during the
period.
Other (Income) Expense. Other (income) expense decreased significantly to
($97,000) and $113,000 during the three and six months ended June 30, 1997,
respectively, from ($103,000) and ($277,000) during the corresponding periods
in 1996, primarily due to the effect of foreign currency exchange and a
decrease in the interest earned on short-term investments.
Liquidity and Capital Resources
- -------------------------------
During the six months ended June 30, 1997, the Company's operations used $3.6
million of net cash, primarily resulting from the net loss adjusted for the
non-cash deferred tax benefit which were offset by an increase in payments of
accounts payable and accrued expense payments and reductions in contract
receivables and in customer advances. At June 30, 1996, net cash used by
operations was $3.0 million.
At June 30, 1997, the Company had cash and cash equivalents totaling
approximately $852,000.
The Company continues to maintain its lines of credit amounting to $14.0
million. At June 30, 1997, there were $7,707,200 in borrowings under these
lines of credit, and letters of credit issued in the ordinary course of
business amounted to $214,000. The lines of credit expire January 1, 1998;
however, the Company anticipates that these lines will be extended. 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 June 30,
1997, the Company has received a waiver of such covenants from its bank.
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 3. 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 copywright
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
The Annual Meeting of Stockholders was held on May 29, 1997. At the meeting
the following actions were taken:
<TABLE>
<CAPTION>
Votes Broker
Proposal For Against Abstain Withheld Non-Votes
- -------- --- ------- ------- -------- ---------
<S> <C> <C> <C> <C> <C>
1)Election of Directors
Michael J. Cromwell, III 4,415,055 - - 1,390 -
Martin M. Pollak 4,415,605 - - 840 -
Sylvan Schefler 4,275,330 - - 141,115 -
2)Ratification of Coopers
& Lybrand L.L.P. as
Independent Auditors 4,415,605 840 - - -
</TABLE>
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: August 14, 1997 GSE SYSTEMS, INC.
/S/ Jerome I. Feldman
-------------------------------
Jerome I. Feldman
Chairman of the Board
(Principal Executive Officer)
/S/ Michael J. Cromwell III
-------------------------------
Michael J. Cromwell III
Vice Chairman of the Board
(Principal Financial and
Accounting Officer)
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
Ended Ended
June 30, June 30,
1996 1997
---- ----
<S> <C> <C>
Net (loss) income available to common
shares..................................... $ (1,037) $ 426
======= =======
Weighted average common shares
outstanding................................ 5,066 5,066
Dilutive effect of common stock
equivalents - stock options................ - 21
------- -------
Total shares used for earnings per share... 5,066 5,087
======= =======
(Loss)earnings per share................... $ (0.20) $ 0.08
======= =======
Six Months Six Months
Ended Ended
June 30, June 30,
1997 1996
---- ----
<S> <C> <C>
Net (loss) income available to common
shares..................................... $ (3,026) $ 1,517
======= ======
Weighted average common shares
outstanding................................ 5,066 5,066
Dilutive effect of common stock
equivalents - stock options................ - 16
------- ------
Total shares used for earnings per share... 5,066 5,082
======= ======
(Loss)earnings per share................... $ (0.60) $ 0.43
======= ======
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 852
<SECURITIES> 0
<RECEIVABLES> 26,444
<ALLOWANCES> 227
<INVENTORY> 3,206
<CURRENT-ASSETS> 34,139
<PP&E> 5,285
<DEPRECIATION> 0
<TOTAL-ASSETS> 50,694
<CURRENT-LIABILITIES> 27,536
<BONDS> 0
0
0
<COMMON> 50
<OTHER-SE> 21,444
<TOTAL-LIABILITY-AND-EQUITY> 50,694
<SALES> 39,957
<TOTAL-REVENUES> 39,957
<CGS> 28,298
<TOTAL-COSTS> 28,298
<OTHER-EXPENSES> 15,738
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 359
<INCOME-PRETAX> (4,551)
<INCOME-TAX> (1,525)
<INCOME-CONTINUING> (3,026)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,026)
<EPS-PRIMARY> (0.60)
<EPS-DILUTED> (0.60)
</TABLE>
