Conformed
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, 1998.
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)
9189 Red Branch Road, Columbia, Maryland, 21045
(Address of principal executive office and zip code)
Registrant's telephone number,
including area code: (410) 772-3500
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, 1998, there were 5,065,688 shares of the Registrant's
common stock (par-value $ .01 per share) outstanding.
<PAGE>
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, 1998
and December 31, 1997 4
Consolidated Statements of Operations for the Three
and Nine Months Ended September 30, 1998 and 1997 5
Consolidated Statements of Cash Flows for the Nine Months
Ended September 30, 1998 and 1997 6
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition 10
Item 3. Quantitative and Qualitative Disclosure about Market Risk 13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 13
Item 2. Changes in Securities and Use of Proceeds 13
Item 3. Defaults upon Senior Securities 13
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 5. Other Information 14
Item 6. Exhibits and Reports on Form 8-K 15
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
GSE SYSTEMS, INC, AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
ASSETS
Unaudited
September 30, December 31,
1998 1997
----------- ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,937 $ 334
Contract receivables 22,913 24,371
Note Receivable 1,000 -
Inventories 2,825 2,700
Prepaid expenses and other current assets 1,223 1,739
Deferred income taxes 41 2,570
----------- ------------
Total current assets 29,939 31,714
Property and equipment, net 2,297 3,864
Investment in joint venture - 252
Software development costs, net 4,844 7,526
Goodwill and other intangible assets, net 3,194 2,974
Deferred income taxes 3,893 1,730
Other assets 1,347 302
----------- ------------
Total assets $ 45,514 $ 48,362
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Lines of credit $ 5,668 $ 9,032
Accounts payable 7,347 7,919
Accrued expenses 3,959 4,304
Obligations under capital lease 223 208
Accrued severance costs - 148
Billings in excess of revenue earned 8,873 6,719
Accrued contract reserves 211 287
Accrued warranty reserves 569 625
Other current liabilities 198 513
Income taxes payable 196 313
----------- ------------
Total current liabilities 27,244 30,068
Notes payable to related parties 173 185
Obligations under capital lease 50 234
Accrued contract and warranty reserves 421 675
Other liabilities 1,634 1,276
----------- ------------
Total liabilities 29,522 32,438
----------- ------------
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 21,679 21,378
Retained earnings (deficit) - at formation (5,112) (5,112)
Retained earnings (deficit) - since formation (97) (239)
Cumulative translation adjustment (528) (153)
----------- ------------
Total stockholders' equity 15,992 15,924
----------- ------------
Total liabilities & stockholders' equity $ 45,514 $ 48,362
=========== ============
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
<PAGE>
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,
1998 1997 1998 1997
------------------ ----------------
<S> <C> <C> <C> <C>
Contract revenue $ 19,244 $ 19,021 $ 53,418 $ 58,978
Cost of revenue 12,695 13,527 37,012 41,825
-------- -------- -------- --------
Gross profit 6,549 5,494 16,406 17,153
Operating expenses
Selling, general and administrative 4,404 6,068 14,891 19,257
Depreciation and amortization 405 675 1,340 1,875
Employee severance and termination costs - (225) - 1,124
-------- -------- -------- --------
Total operating expenses 4,809 6,518 16,231 22,256
-------- -------- -------- --------
Operating income (loss) 1,740 (1,024) 175 (5,103)
Gain (loss) on sale of assets (5,025) - 550 -
Interest (expense) (81) (207) (295) (566)
Other (expense) income (80) 83 370 (30)
-------- -------- -------- --------
Income (loss) before income taxes (3,446) (1,148) 800 (5,699)
Provision for (benefit from) income taxes (1,276) (242) 659 (1,767)
-------- -------- -------- --------
Net income (loss) $ (2,170) $ (906) $ 141 $ (3,932)
======== ======== ======== ========
Basic earnings (loss) per common share $ (0.43) $ (0.18) $ 0.03 $ (0.78)
======== ======== ======== ========
Diluted earnings (loss) per common share $ (0.43) $ (0.18) $ 0.03 $ (0.78)
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
<PAGE>
GSE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
For the nine months ended
September 30,
1998 1997
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 141 $ (3,932)
Adjustments to reconcile net income (loss) to net cash provided by
used in operating activities:
Depreciation and amortization 2,936 2,331
Accrued severance - 413
Provision for doubtful contract receivables (245) (31)
Fair value of warrants issued to non-employees 120 -
Deferred income taxes 409 (1,682)
Equity in loss of investee 128 -
Gain on disposal of assets (550) -
Changes in assets and liabilities
Contract receivables (1,618) 2,130
Inventories (117) 130
Prepaid expenses and other current assets (485) 266
Other assets (638) (189)
Accounts payable and accrued expenses (2,156) (1,307)
Billings in excess of revenues earned 2,458 (1,215)
Accrued contract and warranty reserves (42) (579)
Other current liabilities (677) 72
Income taxes payable 572 (301)
Other liabilities 83 (2)
-------- --------
Net cash provided by operating activities 319 (3,896)
-------- --------
Cash flows from investment activities:
Proceeds from sale of assets 8,955 -
Capital expenditures (1,591) (1,002)
Capitalization of software development costs (2,414) (2,804)
Proceeds from sale/leaseback transaction - 521
-------- --------
Net cash provided by (used in) investing activities 4,950 (3,285)
-------- --------
Cash flows from financing activities:
(Decrease)increase in lines of credit with banks (3,364) 6,282
Repayments under capital lease obligations (143) (203)
Principal payments under long term notes - (99)
Decrease in notes payable to related parties (12) (12)
-------- --------
Net cash provided by (used in) financing activities (3,519) 5,968
-------- --------
Effect of exchange rate changes on cash (147) (113)
-------- --------
Net increase (decrease) in cash and cash equivalents 1,603 (1,326)
Cash and cash equivalents at beginning of period 334 2,450
======== ========
Cash and cash equivalents at end of period $ 1,937 $ 1,124
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
<PAGE>
GSE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998
(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, 1997 filed with Securities and Exchange
Commission on March 31, 1998. The results of operations for the period
ended September 30, 1998 are not necessarily indicative of what the
operating results for the full year will be.
2. Disposition of Assets
Oil & Gas. On November 10, 1998, the Company completed the sale of
certain assets related to activities of its Oil & Gas business unit
("O&G"), to Valmet Automation (USA), Inc. ("Valmet"), pursuant to an
Asset Purchase Agreement, effective as of October 30, 1998, by and
between the Company and Valmet. The Company has recognized a loss on
this transaction, in the quarter ended September 30, 1998, of $5.0
million, including the write-off of approximately $2.9 million in
capitalized software development costs, since all operations that would
support the recoverability of these captialized costs have been sold.
The Company received approximately $742,000 in cash, subject to certain
adjustments described in the next paragraph, and Valmet assumed certain
identified liabilities. Valmet purchased assets with a book value of
approximately $3.0 million. The Company will use the proceeds to pay for
transaction expenses and for general corporate purposes.
The purchase price is subject to post-closing adjustment based upon a
balance sheet as of closing (the "Closing Balance Sheet"). If the net
assets purchased on the Closing Balance differ from the calculated
purchase price, the purchase price would be increased or decreased by
that positive or negative difference.
The agreement further stipulates that, subject to the occurrence to
certain events, the Company is entitled to royalties over a five-year
period relative to certain software of the Company which has been
licensed to Valmet. Such royalties would not exceed $1 million in the
aggregate and would be recorded as earned.
The Company is liable for any cost overruns on certain development and
project contracts, beyond estimates stipulated in the asset purchase
agreement, such liabilities not to exceed $800,000. In addition to the
$800,000 overruns liability, the Company remains responsible for certain
liabilities not assumed by Valmet, including liabilities unknown as of
the date of closing. The Company has accrued $400,000 and included such
amount in the loss recognized on this transaction, based on a present
estimate of exposure relative to these liabilities.
Included in the Consolidated Statement of Operations for the nine month
period ended September 30, 1998, are revenues of $1.1 million and net
operating losses of $3.9 million attributable to the Oil & Gas business
unit.
Erudite. On May 1, 1998, the Company completed the sale of substantially
all of the assets of its wholly owned subsidiary, GSE Erudite Software,
Inc. ("Erudite"), to Keane, Inc. ("Keane"), pursuant to an Asset
Purchase Agreement, dated as of April 30, 1998, by and among the
Company, Erudite and Keane.
The aggregate purchase price for the Erudite assets was approximately
$9.9 million (consisting of $8.9 million in cash and $1.0 million in the
form of an unsecured promissory note due on April 30, 1999, subject to
certain adjustments described in the next paragraph). In connection with
the transaction, Keane purchased certain assets of approximately $4.4
million and assumed certain operating liabilities totaling approximately
$2.2 million. The Company has recognized a gain on this transaction, of
$5.6 million. In connection with the sale of these assets, the Company
has written off approximately $800,000 in capitalized software
development costs, as well as $321,000 of purchased software, since all
operations that would support the recoverability of these costs have
been sold. The write-off of these costs is reflected in the calculation
of the gain on the sale.
As previously disclosed, the purchase price was subject to post-closing
adjustment based upon a balance sheet as of closing (the "Closing
Balance Sheet"). The Closing Balance Sheet indicated that if the "Net
Asset Value" (defined in the Asset Purchase Agreement), as an amount
equal to (a) the assets purchased by Keane minus (b) the assumed
liabilities, was greater than, or less than $2.2 million, the purchase
price would be increased or decreased by that positive or negative
difference (the "Closing Net Book Value Adjustment"). Keane informed the
Company, subsequent to closing, that, under the terms of the agreement,
the Closing Net Book Value Adjustment resulted in an additional amount
due Keane of approximately $186,000. The Company has engaged in
communications with Keane regarding certain differences in valuation
amounts. The Company has accrued $186,000 as a reduction to the gain on
the sale of the Erudite assets. With the proceeds from the sale of the
Erudite assets, the Company reduced its outstanding borrowings under
credit facilities by approximately $3.8 million, and is using the
remainder of the proceeds to pay for transaction expenses and for
general corporate purposes.
3. Basic and Diluted Loss Per Common Share
Effective December 31, 1997, the Company adopted Statement of Financial
Accounting Standards No. 128, "Earnings Per Share," which requires the
presentation of basic earnings per share and diluted earnings per share.
Basic earnings per share is based on the weighted average number of
outstanding common shares for the period. Diluted earnings per share
adjusts the weighted average for the potential dilution that could occur
if stock options, warrants or other convertible securities were
exercised or converted into common stock. Diluted earnings per share is
the same as basic earnings per share for the three months ended
September 30, 1998 and 1997 and the nine months ended September 30, 1998
and 1997 because the effects of such items were anti-dilutive. The
earnings per share computations have been restated for all periods
presented to conform to FAS 128.
The following is a reconciliation of the weighted average number of
outstanding common shares and potential common shares during each period
presented for purposes of computing basic and diluted earnings per
share.
<TABLE>
<CAPTION>
Three months ended Six months ended
September 30, September 30,
1998 1997 1998 1997
------------------ ----------------
<S> <C> <C> <C> <C>
Weighted average shares outstanding - basic 5,065,688 5,065,688 5,065,688 5,065,688
Potential common shares - - 153,733 -
--------- --------- --------- ---------
Weighted average shares outstanding - Diluted 5,065,688 5,065,688 5,219,421 5,065,688
========= ========= ========= =========
</TABLE>
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 (in thousands) at:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------ ------------
<S> <C> <C>
Raw Materials $ 1,678 $ 1,610
Service parts 1,147 1,090
------------ ------------
Total inventories $ 2,825 $ 2,700
============ ============
</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 $690,000 and $720,000
for the three months ended September 30, 1998 and 1997, respectively,
and $1.9 million and $2.8 million for the nine months ended September
30, 1998 and 1997, respectively. Total amortization expense was $339,000
and $298,000 for the three months ended September 30, 1998 and 1997,
respectively, and $1,368,000 and $475,000 for the nine months ended
September 30, 1998 and 1997, respectively.
6. Financing Arrangements
The Company maintains, through it subsidiaries, two lines of credit that
provide for borrowings up to $10.0 million to support foreign letters of
credit, margin requirements on foreign exchange contracts and working
capital needs. The lines of credit expire December 31, 1998. The line of
credit related to theCompnay's Power Systems unit is 90% guaranteed by
the Export Import Bank of the United States ("EXIM"), which guaranty
expires November 30, 1998. The Company is currently engaged in
duscussions with EXIM regarding the EXIM guaranty, however, there can be
no assurance that an extension to such guaranty will be granted. At
September 30, 1998, there were $5.7 million of borrowings under the
lines of credit, and letters of credit issued in the ordinary course of
business amounted to approximately $730,000.
The aforementioned lines of credit contain certain restrictive
covenants. Although the Company was in violation of the cash flow
coverage ratio as of September 30, 1998, the bank has waived such
covenant violations.
With respect to the potential liquidity issues related to the maturity
date on the lines of credit, certain of the Company's principal
stockholders, ManTech International Corporation ("ManTech") and GP
Strategies Corporation ("GP Strategies"), have agreed to provide working
capital support to the Company through June 30, 1999, in the form of
credit enhancements or by taking actions that would result in additional
liquidity to the Company.
7. Contract Receivables
The components of contract receivables are as follows (in thousands):
<TABLE>
<CAPTION>
<S> <C> <C>
September 30, December 31,
1998 1997
------------ ------------
Bill receivables $ 13,078 $ 16,994
Recoverable costs and accruals profit not billed 10,611 8,398
Allowance for doubtful accounts (776) (1,021)
------------ ------------
Total contract receivables $ 22,913 $ 24,371
============ ============
</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 all periods
presented is immaterial.
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, 1998 is primarily the results
of a valuation allowance against all of the net operating losses
generated during the six months ended June 30, 1998, the effects of
foreign operations at different tax rates and state income taxes. For
the three months ended September 30, 1998 and 1997, the Company recorded
an income tax benefit on the pre-tax losses incurred by the Company's
domestic operations. The benefit recorded in the third quarter of 1998
is based on management's estimate that the Company will generate income
before income taxes for the year ending December 31, 1998.
9. Comprehensive Income
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" is effective for the nine months ended September
30, 1998. SFAS No. 130 establishes standards for reporting comprehensive
income on an annual basis in a full set of general purpose financial
statements either in the statement of operations or in a separate
statement. For the three months ended September 30, 1998 and 1997, the
Company had a comprehensive net (loss) of $(2.5) million and $(1.1)
million, respectively. For the nine months ended September 30, 1998 and
1997 the Company had a comprehensive loss of $(234,000) and $(4.3)
million, respectively. The difference between the comprehensive income
(loss) and the net income (loss) as reported in the statements of
operations is related to foreign currency translation adjustments.
10. Recent Pronouncements
The Financial Accounting Standards Board has issued Statement of
Financial Accounting Standard No. 131, "Disclosure about Segments of an
Enterprise and Related Information." SFAS No. 131 establishes standards
for reporting information about operating segments, including related
disclosures, and products, services, geographic areas and major
customers and is effective for the year ending December 31, 1998.
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities. This Statement requires that an
entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair
value. The Company will be required to adopt this new accounting
standard by January 1, 2000. Management does not anticipate early
adoption. The Company believes that the effect of adoption of SFAS
No.133 will not be material.
Item 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition
General Business Environment
The Company designs, develops and delivers business solutions by
applying high-technology-related process control and high fidelity
simulation systems and services into applications for worldwide
industries including energy and process manufacturing. The Company's
solutions and services assist customers in improving quality, safety and
throughput; reducing operating expenses; addressing environmental
issues; and enhancing overall productivity.
As previously disclosed, the Company has made senior management changes,
and has set a course to reduce costs and to return the Company's focus
to its core businesses of controls and simulation.
The results to date of the efforts to re-focus and reduce costs are
evidenced by the improvement in operating results for the three months
and nine months ended September 30, 1998 as compared to the three months
and nine months ended September 30, 1997. This is reflected in the
operating income of $1.7 million and $175,000 versus operating (losses)
of $(1.0 million) and $(5.1 million), for the three and nine months
periods ended September 30, 1998 and 1997, respectively. The operating
results for the first three quarters of 1998 were a substantial
improvement over each quarter in 1997.
The Company believes these actions will result in an ongoing, viable
enterprise more closely focused on its core businesses.
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 September 30, Nine months ended September 30,
1998 % 1997 % 1998 % 1997 %
------------------------------------ ------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Contract revenue 19,244 100.0% 19,021 100.0% 53,418 100.0% 58,978 100.0%
Cost of revenue 12,695 66.0% 13,527 71.1% 37,012 69.3% 41,825 70.9%
------ ----- ------ ------ ------ ----- ------ -----
Gross profit 6,549 34.0% 5,494 28.9% 16,406 30.7% 17,153 29.1%
Operating Expenses:
Selling, general and administrative 4,404 22.9% 6,068 31.9% 14,891 27.9% 19,257 32.7%
Depreciation and amortization 405 2.1% 675 3.5% 1,340 2.5% 1,875 3.2%
Employee severance and termination costs - 0.0% (225) -1.2% - 0.0% 1,124 1.9%
------ ----- ------ ------ ------ ----- ------ -----
Total operating expenses 4,809 25.0% 6,518 34.3% 16,231 30.4% 22,256 37.7%
------ ----- ------ ------ ------ ----- ------ -----
Operating income (loss) 1,740 9.0% (1,024) -5.3% 175 0.3% (5,103) -8.7%
Gain/(loss) on disposition of assets (5,025) -26.1% - 0.0% 550 1.0% - 0.0%
Interest (expense) (81) -0.4% (207) -1.1% (295) -0.6% (566) -1.0%
Other (expense) income (80) -0.4% 83 0.4% 370 0.7% (30) -0.1%
------ ----- ------- ------ ------ ----- ------ -----
Income (loss) before income taxes (3,446) -17.9% (1,148) -6.0% 800 1.5% (5,699) -9.7%
Provision for (benefit from) taxes (1,276) -6.6% (242) -1.3% 659 1.2% (1,767) -3.0%
------ ----- ------- ------ -------- ----- ------ -----
Net income (loss) (2,170) -11.3% (906) -4.8% 141 0.3% (3,932) -6.7%
====== ===== ======= ====== ======== ===== ====== =====
</TABLE>
Revenues. Revenues for the three and nine months ended September 30,
1998 amounted to $19.2 million and $53.4 million, respectively, as
compared with revenues of $19.0 million and $59.0 million in the three
and nine months ended September 30, 1997, respectively. This decrease
for the nine months was mainly due to the disposal of the Erudite
assets. In the three and nine months ended September 30, 1998, Erudite
accounted for no sales and $5.3 million of revenue, respectively,
compared with $5.5 million and $13.5 million during the same periods in
1997. Excluding Erudite, the increase in revenue was mainly due to
increases in customer orders in the core businesses.
Gross Profit. Gross profit increased to $6.5 million, a gross margin of
34.0%, in the three months ended September 30, 1998 from $5.5 million, a
gross margin of 28.9%, in the corresponding period of 1997. Gross profit
decreased to $16.4 million, a gross margin of 30.7%, in the nine months
ended September 30, 1998 from $17.2 million, a gross margin of 29.1%, in
the corresponding period of 1997. The increase for the three months is
primarily due to more profitable contracts. The decrease in the gross
profit for the nine months is primarily attributable to lower revenues
resulting from the disposition of the Erudite assets, which was offset
by higher margins in the core businesses.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased to $4.4 million, or 22.9% of revenues,
during the three months ended September 30, 1998 from $6.1 million, or
31.9% of revenues, during the corresponding period in 1997. Selling,
general and administrative expenses decreased to $14.9 million, or 27.9%
of revenue during the nine months ended September 30, 1998 from $19.3
million, or 32.7% of revenues, during the corresponding period in 1997.
The decrease in selling, general and administrative expenses is
primarily attributable to the disposition of the Erudite assets and the
Company's ongoing efforts to reduce costs.
Gross research and product development expenditures were $1.4 million
and $1.2 million in the three months ended September 30, 1998 and 1997,
respectively, and $3.9 million and $4.0 million in the nine months ended
September 30, 1998 and 1997, respectively. Capitalized software
development costs totaled $690,000 and $720,000 during the quarters
ended September 30, 1998 and 1997 and $2.4 million and $2.8 million
during the nine months ended September 30, 1998 and 1997, respectively.
Net research and development costs expensed and included within selling,
general and administrative expenses were $710,000 and $480,000 during
the quarters ended September 30, 1998 and 1997, respectively, and $2.5
million and $1.2 million during the nine months ended September 30, 1998
and 1997, respectively. The Company continued investing in the
conversion of its DCS product to the Windows NT platform, SCADA system
enhancements for the Windows NT platform and the productization of its
SimSuite software tools.
Depreciation and Amortization. Depreciation expense amounted to $324,000
and $609,000 during the three months ended September 30, 1998 and 1997,
respectively. Depreciation expense amounted to $1.1 and $1.7 million
during the nine months ended September 30, 1998 and 1997, respectively.
This decrease was attributable to the sale of the Erudite assets, and
lower depreciation expense after the facilities move.
Amortization of goodwill and intangibles was $81,000 and $66,000 during
the three months ended September 30, 1998 and 1997, respectively, and
$245,000 and $223,000 during the nine months ended September 30, 1998
and 1997, respectively. The increase for the nine months was due to the
previously-reported acquisition of J. L. Ryan, Inc. in December of 1997.
Employee Severance and Termination. For the three and nine months ending
September 30, 1998, there were no charges for severance. During the nine
months ended September 30, 1997, there was a 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.
Operating Income (Loss) . Operating income (loss) for the three months
ended September 30, 1998, increased to $1.7 million or 9.0% of revenues,
from $(1.0 million), or (5.3%) of revenues, during the corresponding
period of 1997. Operating income (loss) for the nine months ended
September 30, 1998, increased to $175,000, or 0.3% of revenues, from
$(5.1) million, or (8.6%) of revenues, during the corresponding period
of 1997. The 1998 increases are attributable to the increase in revenue
and gross margin within the core businesses, decrease in Employee
Severance and Termination Costs, as well as decreased selling, and
general administrative expenses. Erudite accounted for $(700,000) and
$(1.4) million of the loss, respectively, for the three and nine months
ended September 30, 1997.
Gain (Loss) on Disposal of Assets. For the three months ended September
30, 1998, the Company recognized a $(5.0 million) loss on the
disposition of the O&G assets. During the second quarter, the Company
recorded a gain of $5.6 million on the sale of the Erudite assets. The
sales and related gains and losses are described more fully under Note
2, Disposal of Assets - "Notes to the Condensed Consolidated Financial
Statements", "Liquidity and Capital Resources" below, and by the
provisions of the applicable asset purchase agreement, which, in the
case of the Erudite assets, was included as Exhibit 2.3 to the Company's
Form 10-Q for the quarter ended March 31, 1998 and is incorporated
herein by reference.
Interest Expense. Interest expense decreased to $81,000 and $295,000
during the three and nine months ended September 30, 1998, respectively,
from $207,000 and $566,000 during the three and nine months ended
September 30, 1997, respectively. The decreases are due to lower levels
of borrowings during the periods.
Other Income (Expense). Other income (expense) fluctuated significantly
during the periods presented primarily due to the effect of gains and
losses on foreign currency transactions from the Company's Asian
operations.
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 months and nine months ended September
30, 1998 and 1997 is primarily the result of a valuation allowance
against all of the net operating losses generated during the six months
ended June 30, 1998, the effects of foreign operations at different tax
rates and state income taxes. For the three and nine months ended
September 30, 1997, the Company recorded an income tax benefit on the
pre-tax losses incurred by the domestic operations.
Liquidity and Capital Resources
During the nine months ended September 30, 1998, the Company's
operations used $181,000 of net cash. At September 30, 1997, net cash
used by operations was $3.9 million.
At September 30, 1998, the Company had cash and cash equivalents
totaling approximately $1.9 million.
In November 1998, the Company completed the sale of certain assets
related to activities of its Oil & Gas business unit ("O&G"), to Valmet
Automation (USA), Inc. ("Valmet"), pursuant to an Asset Purchase
Agreement, effective as of October 30, 1998, by and between the Company,
and Valmet. The Company has recognized a loss on this transaction, in
the quarter ended September 30, 1998, of $5.0 million. In connection
with the sale of these assets, the Company has written off approximately
$2.9 million in capitalized software development costs, since all
operations that would support the recoverability of these costs have
been sold. The write-off of these costs is reflected in the calculation
of the loss on the sale.
The Company received approximately $742,000 in cash, subject to certain
adjustments described in the next paragraph, and Valmet assumed certain
identified liabilities. Valmet purchased assets with a book value of
approximately $3.0 million. The Company will use the proceeds to pay for
transaction expenses and for general corporate purposes.
The purchase price is subject to post-closing adjustment based upon a
balance sheet as of closing (the "Closing Balance Sheet"). If the net
assets purchased on the Closing Balance differ from the calculated
purchase price, the purchase price would be increased or decreased by
that positive or negative difference.
The agreement further stipulates that, subject to the occurrence to
certain events, the Company is entitled to royalties over a five-year
period relative to certain software of the Company which has been
licensed to Valmet. Such royalties would not exceed $1 million in the
aggregate and would be recorded as earned.
The Company is liable for any cost overruns on certain development and
project contracts, beyond estimates stipulated in the asset purchase
agreement, such liabilities not to exceed $800,000. In addition to the
$800,000 overruns liability, the Company remains responsible for certain
liabilities not assumed by Valmet, including liabilities unknown as of
the date of closing. The Company has accrued $400,000 and included such
amount in the loss recognized on this transaction, based on a present
estimate of exposure relative to these liabilities.
In May 1998, the Company completed the sale of substantially all of the
assets of Erudite to Keane, pursuant to an Asset Purchase Agreement,
dated as of April 30, 1998, by and among the Company, Erudite and Keane.
The purchase price for the Erudite assets was $9.9 million ($8.9 million
in cash and $1.0 million in the form of an unsecured promissory note due
on April 30, 1999, subject to certain adjustments) plus the assumption
by Keane of certain operating liabilities totaling approximately $2.2
million. Net cash proceeds to be received in 1998 in connection with the
sale of Erudite, including transaction costs, is estimated at $4.1
million, after reducing outstanding debt as described below. The
foregoing description of the Asset Purchase Agreement is qualified in
its entirety by the full text of the Asset Purchase Agreement, which was
included as Exhibit 2.3 to the Company's Form 10-Q for the quarter ended
March 31, 1998 and is incorporated herein by reference. Refer to Note 2,
Disposal of Assets - "Notes to Consolidated Financial Statements" for a
further discussion of the sale.
The Company continues to maintain two lines of credit amounting to $10.0
million. The first line for $7.0 million is collateralized by the
contract receivable and inventory of GSE Power Systems, Inc. ("Power
Systems"), and provides for borrowings of up to 90% of eligible
receivable and 60% of unbilled receivables. The second line for $3.0
million is collateralized by substantially all the assets of GSE Process
Solutions, Inc. ("Process Solutions"), and provides for borrowing up to
85% of eligible receivables and 20% of inventory (not to exceed
$500,000).
At September 30, 1998, there were $5.7 million in borrowings under these
lines of credit, and letters of credit issued in the ordinary course of
business amounted to $730,000. The lines of credit expire December 31,
1998; however, the Company anticipates that these lines will be extended
or replaced. The Company intends to continue to seek to replace or
renegotiate its credit facilities, which expire on December 31, 1998.
For further discussion, see Note 6, Financing Arrangements - "Notes to
Consolidated Financial Statements".
The line of credit related to the Power Systems is 90% guaranteed by the
Export Import Bank of the United States ("EXIM"), which guaranty expires
November 30, 1998. The Company is currently engaged in discussions with
EXIM regarding the EXIM guaranty, however, there can be no assurance
that an extension to such guaranty will be granted.
The aforementioned lines of credit contain certain restrictive
covenants. Although the Company was in violation of the cash flow
coverage ratio as of September 30, 1998, the bank has waived such
covenant violations.
Certain of the Company's principal stockholders, ManTech and GP
Strategies, have agreed to provide working capital support to the
Company through June 30, 1999, in the form of credit enhancements or by
taking actions that would result in additional liquidity to the Company.
Furthermore, each of ManTech and GP Strategies has previously provided
certain guaranties to the Company's bank on behalf of the Company.
As previously disclosed, in consideration for the above-mentioned
guaranties, the Company has granted each of ManTech and GP Strategies
warrants to purchase shares of the Company's common stock; each of such
warrants provide the right to purchase at least 150,000 shares of common
stock at $2.375 per share. The Company has recognized $300,000 as the
estimated fair value of such warrants in the consolidated financial
statements. During the three months and nine months ended September 30,
1998, the Company recognized $60,000 and $120,000 respectively of
expense related to these warrants. The Company will expense the
remainder of the fair value over the term of the guarantees.
Management believes the Company has sufficient liquidity and working
capital resources necessary for currently planned business operations,
debt service requirements, planned investments, and capital
expenditures.
Year 2000
General. The Company is aware of general industry concerns regarding the
Year 2000 problem. The Year 2000 problem concerns the inability of
information systems to properly recognize and process date-sensitive
information beyond January 1, 2000. The Company has established a
compliance program intended to bring its software and systems into Year
2000 compliance in time to minimize any significant detrimental effects
on operations. This program covers the Company's own products and
installed base, significant vendors and customers, and financial and
administrative systems. The Company's program recognizes that
date-sensitive systems may fail at different points in time depending on
their function. Systems having forward-looking planning and production
functions may fail earlier and require corrective actions sooner to
allow for reasonable testing. Other applications may fail only during
the transition to Year 2000. The Company plans to utilize internal
personnel, contractors and vendors to identify Year 2000 noncompliance
problems, modify code and test the modifications. In some cases,
non-compliant software and hardware will be replaced.
Current Product Offerings. The Company believes that it has identified
substantially all potential Year 2000 problems with the current versions
of the software products it develops and markets. However, management
also believes that it is not possible to determine with complete
certainty that all Year 2000 problems affecting the Company's software
products have been identified or corrected due to complexity of these
products and the fact that these products interact with other third
party vendor products and integrate with computer systems which are not
under the Company's control. The Company's program includes the testing
and, if necessary, the modification of new versions of its products to
ensure Year 2000 readiness.
Previous Versions and Installed Base. Older versions of the Company's
software will require modification to work properly through and after
the Year 2000. The Company offers Year 2000 evaluation services to its
customers having older systems to determine the scope of work required
to correct any problems. The Company's program also includes the
development of patches for certain previous versions of the Company's
products, which may be purchased by customers. However, there can be no
assurance that such patches would correct all Year 2000 problems in such
previous versions, and there can be no assurance that evaluation
services and patches will be purchased and implemented by the Company's
customers.
Suppliers. The Company has initiated communications with third party
suppliers of the major computer system components, software, and other
equipment used, operated, or maintained by the Company to identify and,
to the extent possible, to resolve issues involving the Year 2000
problem. However, the Company has limited or no control over the actions
of these third party suppliers. Thus, while the Company expects that it
will be able to resolve any significant Year 2000 problems with these
systems, there can be no assurance that these suppliers will resolve any
or all Year 2000 problems with these systems before the occurrence of a
material disruption to the business of the Company or any of its
customers.
Financial and Administrative Systems. The Company also relies on various
administrative and financial applications (e.g., order processing and
collection systems) that require correction to properly handle Year 2000
dates. In the event one of these systems is not adequately corrected,
the Company's ability to capture, schedule and fulfill customer demands
could be impaired. Likewise, if a collection processing system were to
fail, the Company may not be able to properly apply payments to customer
balances or correctly determine cash balances. The Company plans to
implement a replacement of its primary accounting system in the second
quarter of 1999 and other centrally controlled administrative
applications are being assessed and tested. Various non-centrally
controlled systems are also utilized by the Company's businesses. The
impact of a failure of these systems would be limited to the business
using the affected system, and then only to the extent that manual or
other alternate processes were not able to meet processing requirements.
Such an occurrence is not expected to have a significant adverse impact
on the Company.
Significant Customers. The Company is also dependent upon its customers
for sales and cash flow. Year 2000 interruptions in the Company's
customers' operations could result in reduced sales, increased inventory
or receivable levels and cash flow reductions. While these events are
possible, the Company anticipates that its customer base is broad enough
to minimize the affects of a such interruptions. The Company plans,
however, to monitor the status of the Company's customers as a means of
determining risks and alternatives.
Costs. The Company is currently quantifying the impact of the
incremental costs associated with the initiatives outlined above.
Although this cost estimate has not yet been completed, the majority of
these costs are expected to be incurred during the next twelve months.
While the Company believes its efforts will provide reasonable assurance
that material disruptions to its internal systems and installed products
will not occur, the potential for interruption still exists. The
Company's policy is to expense as incurred information system
maintenance costs and to capitalize the cost of new software and
hardware and amortize or depreciate it over the assets' useful lives.
Contingency Plans. The Company is currently developing contingency plans
to be implemented as part of its efforts to identify and correct Year
2000 problems affecting its internal systems and installed products. The
Company expects to complete its contingency plans by the end of 1998.
Depending on the systems affected, these plans could include accelerated
replacement of affected equipment or software, short to medium-term use
of backup equipment and software, increased work hours for Company
personnel or use of contract personnel to correct on an accelerated
schedule any Year 2000 problems that arise or to provide manual
workarounds for information systems, and similar approaches. If the
Company is required to implement any of these contingency plans, it
could have a material adverse effect on the Company's financial
condition and results of operations.
THE ABOVE DISCUSSION OF THE COMPANY'S EFFORTS, AND MANAGEMENT'S
EXPECTATIONS, RELATING TO YEAR 2000 COMPLIANCE ARE FORWARD-LOOKING
STATEMENTS. THE COMPANY'S ABILITY TO ACHIEVE YEAR 2000 COMPLIANCE AND
THE LEVEL OF INCREMENTAL COSTS ASSOCIATED THEREWITH, COULD BE ADVERSELY
IMPACTED BY, AMONG OTHER THINGS, THE AVAILABILITY AND COST OF
PROGRAMMING AND TESTING RESOURCES, SUPPLIERS' ABILITY TO BRING THEIR
SYSTEMS INTO YEAR 2000 COMPLIANCE, AND UNANTICIPATED PROBLEMS IDENTIFIED
IN THE COMPANY'S ONGOING COMPLIANCE REVIEW.
Item 3. Quantitative and Qualitative Disclosure about Market Risk
Not Applicable
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
The Company is not a party to any current litigation; various actions
and proceedings are 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 effect on the financial
condition of the Company.
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Acquisition or Disposition of Assets
In November 1998, the Company completed the sale of certain assets
related to activities of its Oil & Gas business unit ("O&G"), to Valmet
Automation (USA), Inc. ("Valmet"), pursuant to an Asset Purchase
Agreement, effective as of October 30, 1998, by and between the Company,
and Valmet.
The Company received approximately $742,000 in cash, subject to certain
adjustments described in the next paragraph and Valmet assumed certain
identified liabilities. Valmet purchased assets with a book value of
approximately 3.0 million.
The Company has recognized a loss on this transaction, in the quarter
ended September 30, 1998, of $5.0 million. In connection with the sale
of these assets, the Company has written off approximately $2.9 million
in capitalized software development costs, since all operations that
would support the recoverability of these costs have been sold. The
write-off of these costs is reflected in the calculation of the gain on
the sale.
The purchase price is subject to post-closing adjustment based upon a
balance sheet as of closing (the "Closing Balance Sheet"). If the net
assets purchased on the Closing Balance Sheet differ from the calculated
purchase price, the purchase price would be increased or decreased by
that positive or negative difference. The Company will use the proceeds
to pay for transaction expenses and for general corporate purposes.
The agreement further stipulates that, subject to the occurrence to
certain events, the Company is entitled to royalties over a five-year
period relative to certain software of the Company which has been
licensed to Valmet. Such royalties would not exceed $1 million in the
aggregate and would be recorded as earned.
The Company is liable for any cost overruns on certain development and
project contracts, beyond estimates stipulated in the asset purchase
agreement, such liabilities not to exceed $800,000. In addition to the
$800,000 overruns liability, the Company remains responsible for
liabilities not assumed by Valmet, including certain liabilities unknown
as of the date of closing. The Company has accrued $400,000 and included
such amount in the loss recognized on this transaction, based on a
present estimate of exposure relative to these liabilities.(Refer to
Item 2, Management's Discussion and Analysis of the Results of
Operations and Financial Condition, General Business Environment and
Liquidity and Capital Resources, above, and Note 2, Subsequent Event -
Disposal of Assets - "Notes to the Condensed Consolidated Financial
Statements" for a further discussion of the sale).
Pro Forma Financial Statements
The following unaudited Pro Forma Balance Sheet as of September 30, 1998
and Pro Forma Consolidated Statements of Operations for the three and
nine months ended September 30, 1998 and the year ended December 31,
1997, are presented to give effect to the sale of the O&G assets.
Historical financial data used to prepare the pro forma financial
statements were derived from the audited consolidated financial
statements included in the Company's Annual Report on Form 10-K for the
year ended December 31, 1997 and the unaudited condensed consolidated
financial statements included in the Company's Quarterly Report on Forms
10-Q herein for the nine-months September 30, 1998. These pro forma
financial statements should be read in conjunction with such historical
financial statements and notes thereto.
The pro forma adjustments reflected herein are based on available
information and certain assumptions that the Company's management
believes are reasonable. Pro Forma adjustments to the unaudited pro
forma Balance Sheet assume that the sale of Oil & Gas was consummated on
September 30, 1998. Pro forma adjustments to the unaudited Pro Forma
Consolidated Statements of Operations assume that the sale of O&G was
consummated on January 1, 1998 and January 1, 1997 in the unaudited Pro
Forma Statements of Operations for the nine months ended September 30,
1998 and for the year ended December 31, 1997, respectively.
The Pro Forma Statements of Operations are based on assumptions and
approximations and, therefore, do not reflect the impact of the
transaction on the historical financial statements. In addition, such
pro forma financial statements should not be used as a basis for
forecasting the future operations of the Company.
<PAGE>
GSE SYSTEMS, INC. AND SUBSIDIARIES
PROFORMA CONSOLIDATED BALANCE SHEET
(in thousands, except share and per share data)
As of September 30, 1998
Unaudited
ASSETS
<TABLE>
<CAPTION>
Proforma
Historical Adjustments Proforma
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 1,937 $ 642 $ 2,579
Contract receivables 22,913 22,913
Note Receivable 1,000 1,000
Inventories 2,825 2,825
Prepaid expenses and other current assets 1,223 1,223
Deferred income taxes 41 41
-------- -------- -------
Total current assets 29,939 642 30,581
Property and equipment, net 2,297 2,297
Software development costs, net 4,844 4,844
Goodwill and other intangible assets, net 3,194 3,194
Deferred income taxes 3,893 3,893
Other assets 1,347 1,347
-------- -------- --------
Total assets $ 45,514 $ 642 $ 46,156
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Lines of credit $ 5,668 $ - $ 5,668
Accounts payable 7,347 7,347
Accrued expenses 3,959 642 4,601
Obligations under capital lease 223 223
Billings in excess of revenue earned 8,873 8,873
Accrued contract reserves 211 211
Accrued warranty reserves 569 569
Other current liabilities 198 198
Income taxes payable 196 196
------- -------- -------
Total current liabilities 27,244 642 27,886
Notes payable to related parties 173 173
Obligations under capital lease 50 50
Accrued contract and warranty reserves 421 421
Other liabilities 1,634 1,634
------- -------- -------
Total liabilities 29,522 642 30,164
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 21,679 21,679
Retained earnings (deficit) - at formation (5,112) (5,112)
Retained earnings (deficit) - since formation (97) (97)
Cumulative translation adjustment (528) (528)
-------- -------- --------
Total stockholders' equity 15,992 - 15,992
-------- -------- --------
Total liabilities & stockholders' equity $ 45,514 $ 642 $ 46,156
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
<PAGE>
GSE SYSTEMS, INC.
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
For the nine months ended September 30, 1998
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Less Pro forma
Historical O&G adjustments Pro Forma
Contract revenue $ 53,418 $ 1,137 $ $ 52,281
Cost of revenue 37,012 1,061 35,951
------ ------ ------ ------
Gross profit 16,406 76 16,330
------ ------ ------ ------
Operating expenses:
Selling, general and administrative 14,891 1,177 13,714
Depreciation and amortization 1,340 47 1,293
------ ------ ------ ------
Total operating expenses 16,231 1,224 15,007
------ ------ ------ ------
Operating (loss) income 175 (1,148) 1,323
Gain (loss) on disposal of assets 550 (5,025) 5,575
Interest expense, net (295) (295)
Other income expense 370 370
------ ------ ------ ------
Income (loss) before income taxes 800 (6,173) 6,973
Benefit from (provision for) income taxes (659) 2,284 (2,943)
------ ------ ------ ------
Net income (loss) $ 141 $ 3,889 $ $ 4,030
====== ====== ====== ======
Basic earnings per common share $ 0.03 $ (0.77) $ 0.00 $ 0.80
====== ====== ====== ======
Diluted earnings per share $ 0.03 $ (0.77) $ 0.00 $ 0.77
====== ====== ====== ======
</TABLE>
<PAGE>
GSE SYSTEMS, INC.
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
For the year ended December 31, 1997
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Less Pro forma
Historical O&G adjustments Pro Forma
Contract revenue $ 79,711 $ 2,323 $ $ 77,388
Cost of revenue 58,326 2,288 56,038
------ ------ ------ ------
Gross profit 21,385 35 21,350
------ ------ ------ ------
Operating expenses:
Selling, general and administrative 27,320 2,353 24,967
Depreciation and amortization 2,368 201 2,167
Employee severance and termination costs 1,124 1,124
------ ------ ------ ------
Total operating expenses 30,812 2,554 28,258
------ ------ ------ ------
Operating income (loss) (9,427) (2,519) (6,908)
Interest expense, net (765) (765)
Other income expense (1,228) (1,228)
------ ------ ------ ------
Income (loss) before income taxes (11,420) (2,519) (8,901)
Benefit from (provision for) income taxes 2,717 932 1,785
------ ------ ------ ------
Net (loss) income $ (8,703) $ 1,587 $ 0.00 $ (7,116)
====== ====== ====== ======
Basic and diluted (loss) earnings per common $ (1.72) $ 0.31 $ 0.00 $ (1.40)
share
====== ====== ====== ======
</TABLE>
<PAGE>
GSE SYSTEMS, INC.
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Historical. The historical balances represent the results of
operations for the nine months ended September 30, 1998 and for the
year ended December 31, 1997 as reported in the historical
consolidated financial statements of GSE Systems, Inc. (the Company),
by reference to the Annual Report on Form 10-K of GSE Systems, Inc.
for the year ended December 31, 1997.
2. Sale of the O&G assets. The Company has sold substantially all the
O&G assets. The O&G operations, as set forth in this column, have
been excluded from the historical statements of operations of the
Company in the unaudited pro forma consolidated statements of
operations for the nine months ended September 30, 1998 and the year
ended December 31, 1997, respectively.
3. Pro Forma adjustment. The adjustment in the Pro Forma Consolidated
Balance Sheet reflects the receipt of cash for the net assets sold.
The Oil & Gas assets sold have not been presented separately as all
the assets disposed of and the resulting loss on the disposition are
reflected in the historical amounts as of September 30, 1998.
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 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
None
(b) Reports on Form 8-K
The Company filed a report on Form 8-K (September 24,
1998) regarding a letter of intent between the Company and
Valmet Automation, Inc. with respect to Valmet's intention
to purchase the Company's Oil & Gas business unit. This
report on Form 8-K included the text of a press release
dated September 21, 1998.
<PAGE>
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, 1998 GSE SYSTEMS, INC.
/S/ Christopher M. Carnavos
Christopher M. Carnavos
President and Director
(Principal Executive Officer)
/S/ Stephen J. Fogarty
Stephen J. Fogarty
Senior Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000944480
<NAME> GSE SYSTEMS, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 1,937
<SECURITIES> 0
<RECEIVABLES> 23,689
<ALLOWANCES> (776)
<INVENTORY> 2,825
<CURRENT-ASSETS> 29,939
<PP&E> 9,081
<DEPRECIATION> (6,784)
<TOTAL-ASSETS> 45,514
<CURRENT-LIABILITIES> 27,244
<BONDS> 0
0
0
<COMMON> 21,728
<OTHER-SE> (5,736)
<TOTAL-LIABILITY-AND-EQUITY> 45,514
<SALES> 19,244
<TOTAL-REVENUES> 19,244
<CGS> 12,695
<TOTAL-COSTS> 17,504
<OTHER-EXPENSES> (80)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (81)
<INCOME-PRETAX> (3,446)
<INCOME-TAX> (1,276)
<INCOME-CONTINUING> (2,070)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,070)
<EPS-PRIMARY> (0.43)
<EPS-DILUTED> (0.43)
</TABLE>
