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 March 31, 1999.
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 May 7, 1999, 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 3
Item 1. Financial Statements:
Consolidated Balance Sheets as of March 31, 1999
and December 31, 1998 3
Consolidated Statements of Operations for the Three
Months Ended March 31, 1999 and March 31, 1998 4
Consolidated Statements of Comprehensive Income (Loss)
for the Three Months Ended March 31, 1999 and March 31, 1998 5
Consolidated Statements of Cash Flows for the Three Months
Ended March 31, 1999 and March 31, 1998 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 14
PART II. OTHER INFORMATION 14
Item 1. Legal Proceedings 14
Item 2. Changes in Securities and Use of Proceeds 14
Item 3. Defaults upon Senior Securities 14
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
SIGNATURES 16
<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)
March 31, December 31,
1999 1998
----------- ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,584 $ 2,240
Contract receivables 22,491 24,426
Note Receivable 1,000 1,000
Inventories 2,876 2,892
Prepaid expenses and other current assets 2,045 1,654
Deferred income taxes 150 150
----------- ------------
Total current assets 30,146 32,362
Property and equipment, net 2,832 2,714
Software development costs, net 4,728 4,715
Goodwill and other intangible assets, net 2,517 2,781
Deferred income taxes 2,961 3,366
Other assets 2,523 2,805
----------- ------------
Total assets $ 45,707 $ 48,743
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Lines of credit $ 3,311 $ 6,746
Accounts payable 8,213 8,407
Accrued expenses 3,991 4,344
Obligations under capital lease 120 143
Billings in excess of revenue earned 7,441 6,359
Accrued contract and warranty reserves 906 846
Other current liabilities 770 1,308
Income taxes payable 123 151
----------- ------------
Total current liabilities 24,875 28,304
Notes payable to related parties 163 148
Obligations under capital lease - 10
Accrued contract and warranty reserves 540 596
Other liabilities 2,200 2,596
----------- ------------
Total liabilities 27,778 31,654
----------- ------------
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 21,678 21,678
Retained earnings (deficit) - at formation (5,112) (5,112)
Retained earnings - since formation 2,017 1,158
Accumulated other comprehensive income (704) (685)
----------- ------------
Total stockholders' equity 17,929 17,089
----------- ------------
Total liabilities & stockholders' equity $ 45,707 $ 48,743
=========== ============
</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 per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1999 1998
--------- ---------
<S> <C> <C>
Contract revenue $ 17,578 $ 17,454
Cost of revenue 10,879 12,243
-------- ---------
Gross profit 6,699 5,211
Operating expenses
Selling, general and administrative 4,880 5,327
Depreciation and amortization 350 561
-------- ---------
Total operating expenses 5,230 5,888
-------- ---------
Operating income (loss) 1,469 (677)
Interest expense, net (114) (165)
Other income 33 428
-------- ---------
Income (loss) before income taxes 1,388 (414)
Provision for income taxes 528 40
-------- ---------
Net income (loss) $ 860 $ (454)
======== =========
Basic earnings (loss) per common share $ 0.17 $ (0.09)
======== =========
Diluted earnings (loss) per common share $ 0.17 $ (0.09)
======== =========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
<PAGE>
GSE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Period Ending March 31,
1999 1998
-------- --------
<S> <C> <C>
Net income (loss) $ 860 $ (454)
Other comprehensive income (loss):
Foreign currency translation adjustment (19) (174)
-------- --------
Comprehensive income (loss) $ 841 $ (628)
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
<PAGE>
GSE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1999 1998
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 860 $ (454)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation and amortization 751 1,170
Provision for doubtful contract receivables (29) (240)
Foreign currency transaction (gain) loss (33) (331)
Amortization of fair value of warrants issued to non-employees 60 -
Deferred income taxes 405 -
Changes in assets and liabilities:
Contract receivables 1,844 1,911
Inventories 6 (138)
Prepaid expenses and other current assets (233) (398)
Other assets 199 123
Accounts payable and accrued expenses (473) (984)
Billings in excess of revenues earned 1,082 1,233
Accrued contract and warranty reserves 14 (166)
Other current liabilities (666) (291)
Income taxes payable 343 (14)
Other liabilities (396) -
-------- --------
Net cash provided by operating activities 3,734 1,421
-------- --------
Cash flows from investment activities:
Capital expenditures (440) (25)
Capitalization of software development costs (446) (722)
-------- --------
Net cash used in investing activities (886) (747)
-------- --------
Cash flows from financing activities:
Decrease in lines of credit with banks (3,435) (93)
Repayments under capital lease obligations (32) (188)
Principal payments under long term notes - 4
Decrease in notes payable to related parties (22) (4)
-------- --------
Net cash used in financing activities (3,489) (281)
-------- --------
Effect of exchange rate changes on cash (15) 27
-------- --------
Net increase (decrease) in cash and cash equivalents (656) 420
Cash and cash equivalents at beginning of period 2,240 334
======== ========
Cash and cash equivalents at end of period $ 1,584 $ 754
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
<PAGE>
GSE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1999
(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,
1998 filed with the Securities and Exchange Commission on March 30,
1999.
2. Basic and Diluted Loss Per Common Shares
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 shares outstanding 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 March 31, 1998 because the effects of such
items were anti-dilutive.
The number of common shares and common share equivalents used in the
determination of basic and diluted earnings (loss) per share was as
follows for the three months ended:
<TABLE>
<CAPTION>
March 31, March 31,
1999 1998
--------- ---------
<S> <C> <C>
Weighted average shares outstanding - Basic 5,065,688 5,065,688
========= =========
Weighted average shares outstanding - Diluted 5,167,936 5,065,688
========= =========
</TABLE>
The difference between the basic and diluted number of weighted average
shares outstanding for the three months ended March 31, 1999 represents
dilutive options and warrants to purchase shares of common stock computed
under the treasury stock method, using the average market price during the
period.
3. 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>
(in thousands)
March 31, December 31,
1999 1998
------------ ------------
<S> <C> <C>
Raw Materials $ 1,958 $ 1,873
Service parts 918 1,019
------------ ------------
Total inventories $ 2,876 $ 2,892
============ ============
</TABLE>
4. Financing Arrangements
The Company maintains, through it subsidiaries, two lines of bank
credit which have been extended through June 30, 1999, based on
modification agreements dated January 1, 1999. These lines of credit,
which are cross-collateralized, provide for borrowings up to a total
of $8.0 million to support foreign letters of credit, margin
requirements or foreign exchange contracts and working capital needs.
The first line, for $7.0 million, used by the Power business unit
("Power"), is 90% guaranteed by the Export-Import Bank of the United
States ("EXIM"), is collateralized by substantially all of Power's
assets, and provides for borrowings up to 90% of eligible receivables
and 50% of unbilled receivables. The extension of this line is
conditional based upon the Company's obtaining an extension on the
EXIM guarantee through at least June 30, 1999. The Company has
received preliminary approval from EXIM to extend the EXIM guarantee,
which currently expires May 30, 1999, through March 31, 2000. Under
the terms of the preliminary approval, the Power line will be reduced
to $6 million, when the approval becomes final. The second line, for
$1.0 million, used by the Process business unit ("Process"), is
collateralized by substantially all of Process' assets, and provides
for borrowing up to 85% of eligible receivables. Both lines are
guaranteed by the Company and collateralized by substantially all of
the Company's assets.
The lines require the Company to comply with certain financial ratios
and preclude the Company from paying dividends and making acquisitions
beyond certain limits without the bank's consent. The Company was in
compliance with all covenants as of March 31, 1999.
The Company has received a commitment letter from a financial
institution for a new credit facility with a maturity date of March
31, 2002, which the Company expects to timely finalize. The terms and
conditions of the new facility, which would provide for a $6 million
Power line and a $3 million Process line, are substantially the same
as the existing facility, including the requirement for the EXIM
guarantee and the guarantees described below.
In connection with the existing lines of credit and the new facility,
the Company has arranged for certain guarantees to be provided on its
behalf by GP Strategies Corporation ("GP Strategies") and ManTech
International Corporation ("ManTech"), both of which are shareholders
of the Company. In consideration for these guarantees, the Company has
granted each of ManTech and GP Strategies warrants to purchase shares
of the Company's common stock; each of such warrants provides the
right to purchase at least 150,000 shares of the Company's common
stock at an exercise price of $2.375 per share. In 1998, the Company
recorded $300,000 as the estimated fair value of such warrants in the
consolidated financial statements and is amortizing such value over
the life of the initial guarantee, which expires June 30, 1999. The
Company has recognized $60,000 of expense related to these warrants in
the first quarter of 1999. The fair value of the warrants was
determined using the Black-Scholes valuation model. Assumptions used
in the calculation were as follows: dividend yield of 0%, expected
volatility of 61%, risk-free interest rates of 5.6% and expected terms
of 2.5 years.
Although the Company intends to replace its expiring credit
facilities, as described above, there can be no assurance that such
financing will be completed. In the event that the Company is
unsuccessful in extending or obtaining new lines of credit, GP
Strategies and ManTech each have agreed to provide working capital
support of up to $1.8 million ($3.6 million in the aggregate) to the
Company.
5. 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 ended March 31, 1999 is primarily due to the effects of
foreign operations being taxed at different rates and state income
taxes.
6. Segment Reporting
The Company is primarily organized on the basis of two business units,
Process and Power. The Company has a wide range of knowledge of
control and simulation systems and the processes those systems are
intended to improve, control and model. The Company's knowledge is
concentrated heavily in the process industries, which include the
chemicals, food and beverage, and pharmaceutical fields, as well as in
the power generation industry. The Process business unit is primarily
engaged in process control and simulation in a variety of commercial
industries. Contracts typically range from three to nine months. The
Power business unit is primarily engaged in simulation for the power
generation industry, with the vast majority of customers being in the
nuclear power industry. Contracts typically range from 18 months to
three years or longer.
GSE evaluates the performance of its business units utilizing
"Business Unit Contribution", which is substantially equivalent to
earnings before interest and taxes (EBIT) before allocating any
corporate expenses. The segment information regarding two businesses
divested during 1998 is included in "All Other".
The table below presents information about reported segments:
<TABLE>
<CAPTION>
(in thousands)
Three Months Ended March 31,
--------------------------------------
1999
--------------------------------------
Process Power Total
<S> <C> <C> <C>
Contract revenue $ 10,216 $ 7,362 $ 17,578
========== ========= =========
Business unit contribution $ 1,601 $ 1,217 $ 2,818
========== ========= =========
</TABLE>
<TABLE>
<CAPTION>
1998
--------------------------------------
Process Power Total
<S> <C> <C> <C>
Contract revenue $ 6,907 $ 5,859 $ 12,766
========== ========= =========
Business unit contribution $ 107 $ 907 $ 1,014
========== ========= =========
</TABLE>
A reconciliation of segment revenue to consolidated revenue and
segment business unit contribution to consolidated income (loss)
before taxes for the three months ended March 31, 1999 and March 31,
1998 is as follows:
<TABLE>
<CAPTION>
(in thousands)
Three Months Ended March 31,
----------------------------
1999 1998
---------- ---------
<S> <C> <C>
Total segment revenue $ 17,578 $ 12,766
All other - 4,688
---------- ---------
Consolidated contract $ 17,578 $ 17,454
revenue ========== =========
Segment business unit contribution $ 2,818 $ 1,014
All other business unit contribution - 127
Corporate expenses (1,316) (1,390)
Interest expense, net (114) (165)
---------- ---------
Consolidated income (loss) before taxes $ 1,388 $ (414)
========== =========
</TABLE>
7. Recent Pronouncements
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 FAS No.133 will not be material.
8. Subsequent Events
In April 1999, the Company completed two asset purchase transactions
for the Process business unit. On April 20, the Company purchased
certain assets and employed the associates of BatchCAD Ltd., a United
Kingdom based supplier of batch process development and design
consulting services and simulation software tools. On April 30, the
Company acquired all proprietary technology and software assets from,
and assumed substantially all customer contracts of, Mitech
Corporation, a Massachuesetts company and supplier of event and alarm
management and reporting software tools.
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
General Business Environment
GSE Systems, Inc. (the Company) designs, develops and delivers
business and technology 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; and enhancing overall productivity.
In 1998, the Company divested the assets of its Oil and Gas business
unit and of its wholly owned subsidiary Erudite Software, and
refocused its attention on its two core businesses units, Power and
Process. The Power business unit primarily provides simulation systems
and services to the power generation industry, while the Process
business unit focuses on providing process control and simulation in
various process industries. For a breakdown of relevant financial
information by segment, see Note 6 to the Consolidated Financial
Statements, above.
The Company has begun the pursuit of strategic growth opportunities
that will complement the Company's core businesses and can be effected
without diverting the focus of the Company. In April 1999, the Company
completed two asset purchase transactions for the Process business
unit. On April 20, the Company purchased certain assets and employed
the associates of BatchCAD Ltd, a United Kingdom based supplier of
batch process development and design consulting services and
simulation software tools. With this acquisition, the Company has
gained a presence in the United Kingdom with an office in Hexham,
England which will provide the baseline for future expansion in the
region. On April 30, the Company acquired all proprietary technology
and software assets from, and assumed substantially all customer
contracts of, Mitech Corporation, a Massachusetts company and supplier
of event and alarm management and reporting software tools. Both of
these acquisitions have added to the current customer base of GSE
Systems and offer new opportunities in promoting the Company's
existing products and services.
Results of Operations
The following table sets forth the results of operations for the
periods presented expressed as a percentage of revenues (in
thousands).
<TABLE>
<CAPTION>
Three Months Ended March 31,
------------------------------------
1999 % 1998 %
------ --- ------ ---
<S> <C> <C> <C> <C>
Contract revenue $17,578 100.0% $17,454 100.0%
Cost of revenue 10,879 61.9% 12,243 70.1%
------ ----- ------ ------
Gross profit 6,699 38.1% 5,211 29.9%
Operating expenses:
Selling, general and administrative 4,880 27.8% 5,327 30.6%
Depreciation and amortization 350 2.0% 561 3.2%
------ ----- ------ ------
Total operating expenses 5,230 29.8% 5,888 33.8%
------ ----- ------ ------
Operating income (loss) 1,469 8.3% (677) -3.9%
Interest expense, net (114) -0.6% (165) -1.0%
Other income 33 0.2% 428 2.5%
------ ----- ------- ------
Income (loss) before income taxes 1,388 7.9% (414) -2.4%
Provision for income taxes 528 3.0% 40 -0.2%
------ ----- ------- ------
Net income (loss) $ 860 4.9% $ (454) -2.6%
====== ===== ======= ======
</TABLE>
Revenues. Revenues for the three months ended March 31, 1999 totaled $17.6
million, as compared with revenues of $17.5 million in the three months
ended March 31, 1998. Included in the 1998 results were revenues of $4.0
million related to the Company's Erudite subsidiary and $.7 million of
revenues related to its Oil and Gas business unit. As previously disclosed,
the assets of these businesses were divested in 1998. The reduction in the
Company's revenues from these dispositions was offset by a 48% increase in
the Process business unit's revenues and a 26% increase in the Power
business unit's revenues resulting from increased orders.
Gross Profit. Gross profit increased to $6.7 million (38.1% of revenues)
for the three months ended March 31, 1999 from $5.2 million (29.9% of
revenues) for the corresponding period in 1998. The increase mainly
reflects more profitable contracts in the Process business unit.
Selling, General and Administrative Expenses. Selling, general and
administrative (SG&A) expenses totaled $4,880 in the three months ended
March 31, 1999, an 8.4% decrease from the corresponding period in March
1998. The reduction mainly reflects the disposition of the Erudite and Oil
and Gas assets in 1998.
Gross research and product development expenditures were $1.1 million in
each of the quarters ended March 31, 1999 and March 31, 1998. Capitalized
software development costs totaled $446,000 and $677,000 for the first
quarter 1999 and 1998, respectively; accordingly, net research and
development costs expensed and included in SG&A were $654,000 and
$423,000,for the three months ended March 31, 1999 and 1998, respectively.
The Company continues to invest in the conversion of its D/3 DCS(TM),
FlexBatch(R), and SimSuite Pro(R) products to the Microsoft Windows NT(R)
platform and the productization of its SimSuite software tools.
Depreciation and Amortization. Depreciation expense amounted to $258,000
and $478,000 during the three months ended March 31, 1999 and March 31,
1998, respectively; amortization of goodwill and intangibles was $92,000
and $83,000 during the same periods, respectively. The decrease in
depreciation expense reflects the disposition of the Erudite and Oil and
Gas assets in 1998.
Operating Income (Loss). Operating income (loss) for the three months ended
March 31, 1999 increased to $1.5 million or 8.3% of revenues, from $(.7
million) or (3.9%) of revenues during the corresponding period of 1998.
This significant increase in operating income reflects the disposition of
unprofitable businesses, increases in revenues in the core business units,
and improved contract margins.
Interest Expense, net. Net interest expense decreased to $114,000 during
the three months ended March 31, 1999, a 31% decrease from the
corresponding period in 1998. The decrease was due to lower levels of
borrowings.
Other Income. Other income 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 ended March 31, 1999 is primarily due to the effects of
foreign operations being taxed at different rates and state income taxes.
Liquidity and Capital Resources
During the three months ended March 31, 1999, the Company's operations
provided $3.7 million of net cash, primarily resulting from collections of
receivables. At March 31, 1999, the Company had cash and cash equivalents
totaling approximately $1.6 million.
Cash used in investing activities during the first quarter of 1999 of $.9
million relates primarily to the Company's capitalization of software
development costs and normal capital expenditures.
The Company maintains, through it subsidiaries, two lines of bank credit
that have been extended through June 30, 1999, based on modification
agreements dated January 1, 1999. These lines of credit, which are
cross-collateralized, provide for borrowings up to a total of $8.0 million
to support foreign letters of credit, margin requirements or foreign
exchange contracts and working capital needs. See Note 4 to the
Consolidated Financial Statements above, for complete details about these
lines of credit. Borrowings under the lines of credit were reduced by $3.4
million in the first quarter, 1999; at March 31, 1999, there were $3.3
million in borrowings under these lines of credit, and letters of credit
issued in the ordinary course of business amounted to $735,000.
The Company has received a commitment letter from a financial institution
for a new credit facility with a maturity date of March 31, 2002, which the
Company expects to timely finalize. The terms and conditions of the new
facility, which would provide for a $6 million Power line and a $3 million
Process line, are substantially the same as the existing facility,
including a requirement for guarantee from EXIM on the Power line of
credit, and certain guarantees to be provided on its behalf by GP
Strategies and ManTech for both lines of credit. See Note 4 to the
Consolidated Financial Statements above for additional discussion.
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.
Impact of the Year 2000 Issue
The Year 2000 issue, which arises in date calculations, is caused by
computer systems using two digits rather than four to define the applicable
year. After December 31, 1999, such systems may recognize "00" as 1900
rather than 2000. This could result in a system failure or miscalculation
causing disruptions to operations, including, among other things, a
temporary inability to process data or engage in normal business operations
and activities.
To address these contingencies, the Company has instituted a compliance
program covering not only the Company's products, but also its internal
administrative and financial systems. The program is intended to minimize
significant detrimental effects on both the Company's operations and the
software products it develops and markets to its customers.
While the Company believes that it has identified substantially all of the
potential "Year 2000" problems which could effect current versions of its
products, it is not possible to determine with certainty that all such
problems have been identified or corrected, with either current products or
previous versions thereof, due both to the complexity of these products,
and the fact that they interact with products of third-party vendors not
under the Company's control. Failure to have identified and remedied these
problems could have a material adverse effect on the Company's business,
results of operations, and financial performance and condition.
The Company also relies on various administrative and financial
applications of computer products and software, including processing of
customer orders and collection of customer accounts, which require
correction to properly handle "Year 2000" related dates. In the event that
one or more of these systems is not adequately corrected, the Company's
ability to obtain customers, and schedule and fulfill their demands, could
be impaired. Further, if a collection processing system, or a component
thereof, were to fail, the Company may not be able to properly determine
and apply payments to customer account balances or correctly determine cash
balances. While these events are possible, the Company anticipates that the
breadth of its customer base and its compliance programs and corrective
measures taken will effectively minimize the affects of such interruptions
without significant adverse effect on the Company. However, there can be no
assurance that such events will not have a material adverse effect on the
Company's business, results of operations, business prospects, or financial
performance and condition.
The Company estimates that the aggregate cost to address the Year 2000
issue will not exceed approximately $1.9 million in 1999. The Company
believes that most of the customer related costs associated with the Year
2000 issue would have occurred as part of its normal operations. The
Company does not track these costs separately. Of the amount to be expended
in 1999, the Company believes that approximately $225,000, primarily
related to upgrades to internal systems, is incremental to normal operating
costs. 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 exits. There
can be no assurance that the cost estimates associated with the Company's
Year 2000 issue will prove to be accurate or that the actual costs will not
have a material adverse effect on the Company's business, results of
operation or financial condition.
Item 3. Quantitative and Qualitative Disclosure about Market Risk.
The Company's market risk is principally confined to changes in foreign
currency exchange rates and potentially adverse effects of differing tax
structures. The Company's exposure to foreign exchange rate fluctuations
arises in part from inter-company accounts in which costs incurred in one
entity are charged to other entities in different foreign jurisdictions.
The Company is also exposed to foreign exchange rate fluctuations as the
financial results of all foreign subsidiaries are translated into U.S.
dollars in consolidation. As exchange rates vary, those results when
translated may vary from expectations and adversely impact overall expected
profitability.
The Company is also subject to market risk related to the interest rates on
their existing lines of credit. Such interest rates are currently based on
the prime rate plus three percent.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
In accordance with its conduct in the ordinary course of business, certain
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 adverse effect on the financial
condition of the Company.
Item 2. Changes in Securities and Use of Proceeds
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
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 to, among other things, 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
None
<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: May 14, 1999 GSE SYSTEMS, INC.
/S/ Christopher M. Carnavos
---------------------------
Christopher M. Carnavos
President and Director
(Principal Executive Officer)
/S/ Jeffery G. Hough
--------------------
Jeffery G. Hough
Senior Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000944480
<NAME> GSE SYSTEMS, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1998
<CASH> 1,584
<SECURITIES> 0
<RECEIVABLES> 23,346
<ALLOWANCES> (855)
<INVENTORY> 2,876
<CURRENT-ASSETS> 30,146
<PP&E> 10,633
<DEPRECIATION> (7,801)
<TOTAL-ASSETS> 45,707
<CURRENT-LIABILITIES> 24,875
<BONDS> 0
0
0
<COMMON> 21,728
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 45,707
<SALES> 17,578
<TOTAL-REVENUES> 17,578
<CGS> 10,879
<TOTAL-COSTS> 5,230
<OTHER-EXPENSES> (33)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 114
<INCOME-PRETAX> 1,388
<INCOME-TAX> 528
<INCOME-CONTINUING> 860
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 860
<EPS-PRIMARY> .17
<EPS-DILUTED> .17
</TABLE>
