-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, P2bRDWt8eIx4gt+UJ1fjzo8oyvqg4J/HAdwSKgYU+AXPf57VXCjNHuEMixPevaCu JSBfY3VM6ZFR0rIJfteh2w== 0000944480-97-000040.txt : 19970815 0000944480-97-000040.hdr.sgml : 19970815 ACCESSION NUMBER: 0000944480-97-000040 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970814 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: GSE SYSTEMS INC CENTRAL INDEX KEY: 0000944480 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 521868008 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-26494 FILM NUMBER: 97663143 BUSINESS ADDRESS: STREET 1: 8930 STANFORD BLVD CITY: COLUMBIA STATE: MD ZIP: 21045 BUSINESS PHONE: 4103123500 MAIL ADDRESS: STREET 1: 8930 STANFORD BLVD CITY: COLUMBIA STATE: MD ZIP: 21045 10-Q 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the Quarterly Period Ended June 30, 1997. or [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the Transition Period from ________ to ________ . Commission File Number: 0-26494 GSE SYSTEMS, INC. (Exact name of registrant as specified in its charter) Delaware 52-1868008 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 8930 Stanford Boulevard, Columbia, Maryland, 21045 (Address of principal executive office and zip code) Registrant's telephone number, including area code: (410) 312-3700 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- As of August 14, 1997, there were 5,065,688 shares of the Registrant's common stock (par value $ .01 per share) outstanding. GSE SYSTEMS, INC. QUARTERLY REPORT ON FORM 10-Q INDEX PAGE ---- PART I. FINANCIAL INFORMATION Item 1. Financial Statements: Consolidated Balance Sheets as of June 30, 1997 and December 31, 1996 3 Consolidated Statements of Operations for the Three and Six Months Ended June 30, 1997 and 1996 4 Consolidated Statements of Cash Flows for the Six Months Ended June 30, 1997 and 1996 5 Notes to Condensed Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition 9 PART II. OTHER INFORMATION Item 3. Legal Proceedings 12 Item 4. Submission of Matters to a Vote of Security Holders 13 Item 5. Other Information 13 Item 6. Exhibits and Reports on Form 8-K 14 PART I - FINANCIAL INFORMATION Item 1. Financial Statements GSE SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands, except share data) (Unaudited)
ASSETS June 30, December 31, 1997 1996 ---- ---- Current assets: Cash and cash equivalents................ $ 852 $ 2,450 Contract receivables .................... 26,217 27,457 Inventories.............................. 3,206 3,538 Prepaid expenses and other current assets................................... 2,304 2,701 Deferred income taxes.................... 1,560 1,454 -------- -------- Total current assets......... 34,139 37,600 Property and equipment, net.............. 5,285 5,318 Software development costs, net ........ 7,083 5,176 Goodwill and other intangible assets, net.............................. 1,970 2,059 Deferred income taxes.................... 1,764 569 Other assets............................. 453 284 -------- -------- Total assets ................ $ 50,694 $ 51,006 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Lines of credit.......................... $ 7,708 $ 2,582 Accounts payable......................... 8,374 8,604 Accrued expenses......................... 3,861 4,430 Notes payable to related parties......... 17 - Obligations under capital lease.......... 284 186 Accrued severance costs.................. 969 - Billings in excess of revenues earned.... 5,258 5,358 Accrued contract reserve................. 92 233 Accrued warranty reserve................. 560 1,408 Other current liabilities................ 172 281 Income taxes payable..................... 241 651 -------- -------- Total current liabilities.... 27,536 23,733 Notes payable to related parties............... 176 202 Obligations under capital lease................ 300 420 Billings in excess of revenues earned.......... - 803 Accrued contract and warranty reserves......... 797 687 Other liabilities.............................. 391 468 -------- -------- Total liabilities............ 29,200 26,313 -------- -------- Stockholders' equity: Common stock $.01 par value, 8,000,000 shares authorized, 5,065,688 shares issued and outstanding................... 50 50 Additional paid-in capital............... 21,378 21,378 Retained earnings (deficit) - at formation............................... (5,112) (5,112) Retained earnings - since formation..... 5,438 8,464 Cumulative translation adjustment....... (260) (87) -------- -------- Total stockholders' equity.. 21,494 24,693 -------- -------- Total liabilities & stockholders' equity........ $ 50,694 $ 51,006 ======== ========
The accompanying notes are an integral part of these condensed consolidated financial statements. GSE SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except share and per share data) (Unaudited)
Three months Three months ended ended June 30, June 30, 1997 1996 ---- ---- Contract revenue................................ $ 20,630 $ 26,168 Cost of revenue................................. 14,535 17,898 ------- ------- Gross profit.............................. 6,095 8,270 ------- ------- Operating expenses: Selling, general and administrative.......... 6,940 5,986 Depreciation and amortization................ 632 511 Business combination costs................... - 1,105 Employee severance and termination costs..... - - ------- ------- Total operating expenses..................... 7,572 7,602 ------- ------- Operating (loss) income................... (1,477) 668 Interest expense............................. 172 115 Other (income) expense....................... (97) (103) ------- ------- (Loss) income before income taxes.......... (1,552) 656 (Benefit from) provision for income taxes..... (515) 230 ------- ------- Net (loss) income......................... $ (1,037) $ 426 ======= ======= (Loss) earnings per common share.............. $ (0.20) $ 0.08 ======= ======= Weighted average common shares outstanding... 5,065,700 5,087,000 ========= =========
Six months Six months ended ended June 30, June 30, 1997 1996 ---- ---- Contract revenue................................ $ 39,957 $ 48,471 Cost of revenue................................. 28,298 32,597 ------- ------- Gross profit.............................. 11,659 15,874 Operating expenses: Selling, general and administrative.......... 13,189 11,450 Depreciation and amortization................ 1,200 990 Business combination costs................... - 1,105 Employee severance and termination costs..... 1,349 - ------- ------- Total operating expenses..................... 15,738 13,545 ------- ------- Operating (loss) income................... (4,079) 2,329 Interest expense............................. 359 254 Other (income) expense....................... 113 (277) ------- ------- (Loss) income before income taxe .......... (4,551) 2,352 (Benefit from) provision for income taxes..... (1,525) 835 ------- ------- Net (loss) income......................... $ (3,026) $ 1,517 ======= ======= (Loss) earnings per common share.............. $ (0.60) $ $0.30 ======= ======= Weighted average common shares outstanding... 5,065,700 5,082,000 ========= =========
The accompanying notes are an integral part of these condensed consolidated financial statements. GSE SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (Unaudited)
Six months Six months Ended Ended June 30, June 30, 1997 1996 ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES: Net (loss) income............................. $ (3,026) $ 1,517 Adjustments to reconcile net (loss) income to net cash (used in) operating activities: Depreciation and amortization............. 1,369 1,313 Accrued facility costs.................... - (163) Accrued severance......................... 969 - Provision for doubtful contract receivables............................... (71) - Non-cash stock compensation............... - 175 Deferred income taxes..................... (1,567) 272 Changes in assets and liabilities: Contract receivables.................... 822 858 Inventories............................. 324 (285) Prepaid expenses and other current assets.................................. 261 (94) Other assets............................ (187) (81) Accounts payable and accrued expenses... (620) (871) Billings in excess of revenue earned.... (905) (5,207) Accrued contract and warranty reserves.. (876) (322) Other current liabilities............... (23) (174) Income taxes payable.................... (74) 164 Other liabilities....................... (1) (72) ------- ------- Net cash (used in) operating activities (3,605) (2,970) ------- ------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures...................... (715) (883) Capitalization of software development costs..................................... (2,084) (1,995) ------- ------- Net cash used in investing activities......... (2,799) (2,878) ------- ------- CASH FLOWS FROM FINANCING ACTIVITIES: Increase in lines of credit with bank..... 5,126 (212) (Repayments) borrowings under capital lease obligations......................... (373) 29 Principal payments under term-note........ (77) - Decrease in notes payable to related parties................................... (8) (196) ------- ------- Net cash provided by (used in) financing activities.................................... 4,668 (379) Effect of exchange rate changes on cash....... 138 (39) ------- ------- Net decrease in cash and cash equivalents..... (1,598) (6,266) Cash and cash equivalents at beginning of period........................................ 2,450 9,016 ------- ------- Cash and cash equivalents at end of period.... $ 852 $ 2,750 ======= =======
The accompanying notes are an integral part of these condensed consolidated financial statements. GSE SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS June 30, 1997 (Unaudited) 1. Basis of Presentation The condensed consolidated financial statements included herein have been prepared by the Company without independent audit. In the opinion of the Company's management, all adjustments and reclassifications of a normal and recurring nature necessary to present fairly the financial position, results of operations and cash flows for the periods presented have been made. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. It is suggested that these condensed consolidated financial statements be read in conjunction with the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the period ended December 31, 1996 filed with Securities and Exchange Commission on March 31, 1997. The results of operations for the period ended June 30, 1997 are not necessarily indicative of what the operating results for the full year will be. 2. Pooling of Interests On May 22, 1996, the Company acquired all of the outstanding shares of capital stock of Erudite Software & Consulting, Inc. ("Erudite Software"), a leading supplier of cost-effective client/server technology providing consulting services, custom applications, software development, training services, and hardware-software sales. Erudite Software is headquartered in Salt Lake City, Utah, with a primary development facility in Provo, Utah. This acquisition was accomplished through the issuance of approximately 840,700 shares of the Company's Common Stock in exchange for all outstanding shares of capital stock of Erudite Software. The acquisition was accounted for under the pooling-of-interests method of accounting. The accompanying condensed consolidated financial statements of the Company have been prepared giving retroactive effect to the acquisition of Erudite Software. All prior period historical consolidated financial statements presented herein have been restated to include the financial position, results of operations, and cash flows of Erudite Software. 3. Earnings Per Share Net income per common share is based on the weighted average number of shares of Common Stock outstanding during the period and the assumed issuance of approximately 840,700 shares of Common Stock, at the beginning of each period presented, in connection with the acquisition of Erudite Software. The difference between primary and fully-diluted per share amounts is insignificant. In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, "Earnings Per Share" (FAS 128). FAS 128 simplifies the existing earnings per share (EPS) computations under Accounting Principles Board Opinion No. 15, "Earnings Per Share" (APB 15), revises disclosure requirements, and increases the comparability of EPS data on an international basis. In simplifying the EPS computations, the presentation of primary EPS is replaced with basic EPS, with the principal difference being that common stock equivalents are not considered in computing basic EPS. In addition, FAS 128 requires dual presentation of basic and diluted EPS. FAS 128 is effective for financial statements issued for periods ending after December 15, 1997. The Company does not expect the EPS amounts calculated under FAS 128 to be materially different from the amounts presented in the financial statements under APB 15. 4. Inventories Inventories are stated at the lower of cost, as determined by the average cost method, or market. Obsolete or unsaleable inventory is reflected at its estimated net realizable value. Inventories, net, consist of the following at:
June 30, December 31, 1997 1996 ---- ---- (in thousands) Raw materials................................... $ 1,811 $ 2,115 Service parts................................... 1,395 1,423 ------ ------ Total........................ $ 3,206 $ 3,538 ====== ======
5. Software Development Costs Certain computer software development costs are capitalized in the accompanying consolidated balance sheets. Capitalization of computer software development costs begins upon the establishment of technological feasibility. Capitalization ceases and amortization of capitalized costs begins when the software product is commercially available for general release to customers. Amortization of capitalized computer software development costs is included in cost of revenues and is provided at the greater of the amount computed using (a) the ratio of current gross revenues for a product to the total of current and anticipated future gross revenues or (b) the straight-line method over the remaining estimated economic life of the product, not to exceed five years. Software development costs capitalized were $1,091,000, and $697,000 for the three months ended June 30, 1997 and 1996, respectively, and $2,084,000 and $1,995,000 for the six months ended June 30, 1997 and 1996, respectively. Total amortization expense was $33,000 and $161,000 for the three months ended June 30, 1997 and 1996, respectively, and $177,000 and $323,000 for the six months ended June 30, 1997 and 1996, respectively. 6. Financing Arrangements The Company maintains, through it subsidiaries, two lines of credit that provide for borrowings up to $14.0 million to support foreign letters of credit, margin requirements on foreign exchange contracts and working capital needs. The lines of credit expire January 1, 1998. At June 30, 1997, there were $7,707,200 of borrowings under the lines of credit, and letters of credit issued in the ordinary course of business amounted to approximately $214,000. Although the Company was not in compliance with its cash flow coverage ratio or minimum tangible net worth ratio covenants at June 30, 1997, the Company has received a waiver of such covenants from its bank. 7. Contract Receivables The components of contract receivables are as follows (in thousands):
June 30, December 31, 1997 1996 ---- ---- Billed receivables.............................. $ 16,411 $ 18,041 Recoverable costs and accrued profit not billed...................................... 10,033 9,714 Allowance for doubtful accounts................. (227) (298) ------- ------- Total contract receivables...................... $ 26,217 $ 27,457
Recoverable costs and accrued profit not billed represent costs incurred and profit accrued on contracts that will become billable upon future milestones or completion of contracts. Revisions in estimated contract costs at completion are reflected in the period during which facts and circumstances necessitating such a change first become known. Revenue under long-term, fixed-price contracts generally is accounted for on the percentage-of-completion method, based on contract costs incurred to date and estimated costs to complete. The effect of changes in estimates of contract profits for 1997 is immaterial. However, in 1996 the effect of changes in estimates increased gross profit by $1,100,000 and $1,324,000 for the three and six months ended June 30, 1996, from that which would have been reported had the revised estimates been used as the basis of recognition of contract profits in the preceding periods. 8. Income Taxes The Company's effective tax rate is based on the best current estimate of its expected annual effective tax rate. The difference between the statutory U.S. tax rate and the Company's effective tax rate for the three and six months ended June 30, 1997 and 1996 is primarily the results of the effects of foreign operations at different tax rates and state income taxes. 9. Employee Severance and Termination Costs During the six months ended June 30, 1997, the Company approved a charge for severance and other employee obligations of $1,349,000 corresponding to a reduction in its workforce of approximately 5%. As of June 30, 1997, a total of $380,000 has been expended. Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition Results of Operations - --------------------- The following table sets forth the results of operations for the periods presented expressed as a percentage of revenues.
Three months Three months ended ended June 30, June 30, 1997 1996 ---- ---- Contract revenue........................... 100.0% 100.0% Cost of revenue............................ 70.6 68.4 ----- ----- Gross profit....................... 29.4 31.6 Operating expenses: Selling, general and administrative... 33.5 22.9 Depreciation and amortization......... 3.1 2.0 Business combination costs............ - 4.2 Employee severance and termination costs................................. - - ----- ----- Total operating expenses.............. 36.6 29.1 ----- ----- Operating (loss) income............ (7.2) 2.5 Interest expense........................... 0.8 0.4 Other (income) expense..................... (0.5) (0.4) ----- ----- (Loss) income before income taxes...... (7.5) 2.5 (Benefit from) provision for income taxes.. (2.5) 0.9 ----- ----- Net (loss) income..................... (5.0)% 1.6% ===== =====
Six months Six months ended ended June 30, June 30, 1997 1996 ---- ---- Contract revenue........................... 100.0% 100.0% Cost of revenue............................ 70.8 67.3 ----- ----- Gross profit....................... 29.2 32.7 Operating expenses: Selling, general and administrative... 33.0 23.6 Depreciation and amortization......... 3.0 2.0 Business combination costs............ - 2.3 Employee severance and termination costs................................. 3.4 - ----- ----- Total operating expenses.............. 39.4 27.9 ----- ----- Operating (loss) income............ (10.2) 4.8 Interest expense........................... 0.9 0.5 Other (income) expense..................... 0.3 (0.6) ----- ----- (Loss) income before income taxes... (11.4) 4.9 (Benefit from) provision for income taxes.. (3.8) 1.7 ----- ----- Net (loss) income.................. (7.6)% 3.2% ===== =====
______________________________________ Revenues. Revenues for the three and six months ended June 30, 1997 amounted to $20.6 million and $40.0 million, respectively, as compared with revenues of $26.2 million and $48.5 million in the three and six months ended June 30, 1996, respectively. This decrease was mainly due to a decrease in nuclear simulation revenues of approximately 47% for both the three and six months ended June 30, 1997, respectively, compared to the corresponding periods in 1996, which was also partially offset by changes in the other businesses. Gross Profit. Gross profit decreased to $6.1 million, a gross margin of 29.4%, in the three months ended June 30, 1997 from $8.3 million, a gross margin of 31.6%, in the corresponding period of 1996. Gross profit decreased to $11.7 million, a gross margin of 29.2%, in the six months ended June 30, 1997 from $15.9 million, a gross margin of 32.7%, in the corresponding period of 1996. The decrease in the gross profit amount is primarily attributable to lower revenues; the decrease in the gross profit percentage was also affected by lower utilization and training start-up costs associated with the Business Systems business unit, as well as a higher percentage of government contract-related revenues in the power simulation business. Selling, General and Administrative Expenses. Selling, general and administrative expenses increased to $7.0 million, or 33.5% of revenues, during the three months ended June 30, 1997 from $6.0 million, or 22.9% of revenues, during the corresponding period in 1996. Selling, general and administrative expenses increased to $13.1 million, or 33.0% of revenues, during the six months ended June 30, 1997 from $11.5 million, or 23.6% of revenues, during the corresponding period in 1996. The increase in selling, general and administrative expenses is primarily attributable to increased sales force, bid and proposal activities, and business expansion efforts. Gross research and product development expenditures were $1.5 million and $1.1 million in the three months ended June 30, 1997 and 1996, respectively, and $2.8 million and $2.7 million in the six months ended June 30, 1997 and 1996, respectively. Capitalized software development costs totaled $1.1 million and $697,000 during the quarters ended June 30, 1997 and 1996 and $2.1 million and 2.0 million during the six months ended June 30, 1997 and 1996, respectively. Net research and development costs expensed and included within selling, general and administrative expenses were $392,000 and $429,000 during the quarters ended June 30, 1997 and 1996, respectively, and $752,000 and $680,000 during the six months ended June 30, 1997 and 1996, respectively. The Company continued investing in the conversion of its DCS product to the Windows NT platform, SCADA system enhancements to the Windows NT platform and the productization of its SimSuite software tools. Employee Severance and Termination Costs. For the six months ending June 30, 1997, there was a charge for severance and other employee obligations of $1,349,000 in connection with cost reduction efforts initiated to offset the impact of a decrease in project revenues. As of June 30, 1997, $380,000 of this charge has been expended. Depreciation and Amortization. Depreciation expense amounted to $530,000 and $465,000 during the three months ended June 30, 1997 and 1996, respectively. Depreciation expense amounted to $1,044,000 and $901,000 during the six months ended June 30, 1997 and 1996, respectively. This increase was attributable to higher levels of capital expenditures. Amortization of goodwill and intangibles was $102,000 and $46,000 during the three months ended June 30, 1997 and 1996, respectively, and $156,000 and $89,000 during the six months ended June 30, 1997 and 1996, respectively. This increase was attributable to the commencement of amortization of certain intangible costs. Business Combination Costs. During the three and six months ended June 30, 1996, the Company incurred business combination costs related to the acquisition of Erudite Software, of $1,105,000. These consisted primarily of investment bank fees, legal and accounting expenses, and compensation expense for the shares issued to employees by the owners of Erudite Software pursuant to Stock Transfer Agreements. Operating (Loss) Income. Operating (loss) income decreased $2.1 million to ($1.5) million, or (7.2%) of revenues, during the three months ended June 30, 1997 from $668,000, or 2.5 % of revenues, during the corresponding period of 1996. Operating (loss) income decreased $6.4 million to ($4.1) million, or (10.2%) of revenues, during the six months ended June 30, 1997 from $2.3 million, or 4.8 % of revenues, during the corresponding period of 1996. This decrease in operating income is attributable to the decline in simulation revenues, lower gross margins and higher expenses relating to selling and marketing efforts and the employee severance and termination costs. Interest Expense. Interest expense increased to $172,000 and $359,000 during the three and six months ended June 30, 1997, respectively, from $115,000 and $254,000 during the three and six months ended June 30, 1996, respectively. This increase is attributable to a higher level of borrowings during the period. Other (Income) Expense. Other (income) expense decreased significantly to ($97,000) and $113,000 during the three and six months ended June 30, 1997, respectively, from ($103,000) and ($277,000) during the corresponding periods in 1996, primarily due to the effect of foreign currency exchange and a decrease in the interest earned on short-term investments. Liquidity and Capital Resources - ------------------------------- During the six months ended June 30, 1997, the Company's operations used $3.6 million of net cash, primarily resulting from the net loss adjusted for the non-cash deferred tax benefit which were offset by an increase in payments of accounts payable and accrued expense payments and reductions in contract receivables and in customer advances. At June 30, 1996, net cash used by operations was $3.0 million. At June 30, 1997, the Company had cash and cash equivalents totaling approximately $852,000. The Company continues to maintain its lines of credit amounting to $14.0 million. At June 30, 1997, there were $7,707,200 in borrowings under these lines of credit, and letters of credit issued in the ordinary course of business amounted to $214,000. The lines of credit expire January 1, 1998; however, the Company anticipates that these lines will be extended. For further discussion, see Note 6 of "Notes to Condensed Consolidated Financial Statements". Although the Company was not in compliance with its cash flow coverage ratio or minimum tangible net worth ratio covenants as of June 30, 1997, the Company has received a waiver of such covenants from its bank. Management believes the Company has sufficient liquidity and working capital resources necessary for planned business operations, debt service requirements, planned investments, and capital expenditures. PART II - OTHER INFORMATION Item 3. Legal Proceedings In January 1997, GSE Power Systems, Inc. ("Power Systems") filed a lawsuit in the U.S. District Court for the District of Maryland in Baltimore against J.L. Ryan, Inc., of Columbia, Maryland ("Ryan"), Yankee Atomic Electric Co., of Bolton, Massachusetts, and North Coast Software Inc., of Oswego, New York, among others. Power Systems suit asserts causes of action for copywright infringement, misappropriation of trade secrets, false designation of origin under the Lanham Act, breach of contract and unfair competition. The subject matter of the suit is the defendants' distribution and sale of a simulation executive system which Power Systems believes to be an infringement of its simulation executive product. Subsequent to the filing of the suit, Power Systems reached separate settlements with Yankee Atomic Electric Co. and North Coast Software, Inc., respectively, and has dismissed claims against these parties. As of this date, Power Systems continues to pursue its claims against Ryan and the other remaining defendants. A trial date has been set for January 1998. The Company cannot reasonably predict the likely outcome of this suit at this time. In August 1997, Ryan filed a counterclaim against Power Systems in connection with the aforementioned lawsuit. In its counterclaim, Ryan alleges that Power Systems has engaged in activity which constitutes: violation(s) of the Lanham Act; violation(s) of Maryland's Unfair or Deceptive Trade Practices Act; unfair competition; tortious interference with prospective advantage; and commercial disparagement. The subject matter of the counterclaim involves certain communications between Power Systems and power plant operating companies occurring after the filing of Power Systems' lawsuit against Ryan. The Company cannot reasonably predict the outcome of this counterclaim at this time. Various other actions and proceedings are presently pending to which the Company is a party. In the opinion of management, the aggregate liabilities, if any, arising from such actions are not expected to have a material adverse effect on the financial position of the Company. Item 4. Submission of Matters to a Vote of Security Holders The Annual Meeting of Stockholders was held on May 29, 1997. At the meeting the following actions were taken:
Votes Broker Proposal For Against Abstain Withheld Non-Votes - -------- --- ------- ------- -------- --------- 1)Election of Directors Michael J. Cromwell, III 4,415,055 - - 1,390 - Martin M. Pollak 4,415,605 - - 840 - Sylvan Schefler 4,275,330 - - 141,115 - 2)Ratification of Coopers & Lybrand L.L.P. as Independent Auditors 4,415,605 840 - - -
Item 5. Other Information Forward-Looking Statements This Form 10-Q contains certain "forward-looking statements," within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which are subject to the safe harbors created by those Acts. These statements include the plans and objectives of management for future operations, including plans and objectives relating to the development of the Company's business in the domestic and international marketplace. All forward-looking statements involve risks and uncertainties, including, without limitation, risks relating to the Company's ability to enhance existing software products and to introduce new products in a timely and cost-effective manner, reduced development of nuclear power plants that may utilize the Company's products, a long pay-back cycle from the investment in software development, uncertainties regarding the ability of the Company to grow its revenues and successfully integrate operations through expansion of its existing business and strategic acquisitions, the ability of the Company to respond adequately to rapid technological changes in the markets for process control, data acquisition and simulation software and systems, significant quarter-to-quarter volatility in revenues and earnings as a result of customer purchasing cycles and other factors, dependence upon key personnel, and general market conditions and competition. The forward-looking statements included herein are based on current expectations that involve numerous risks and uncertainties as set forth herein, the failure of any one of which could materially adversely affect the operations of the Company. The Company's plans and objectives are also based on the assumptions that market conditions and competitive conditions within the Company's business areas will not change materially or adversely and that there will be no material adverse change in the Company's operations or business. Assumptions relating to the foregoing involve judgments with respect, among other things, to future economic, competitive and market conditions and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond the control of the Company. Although the Company believes that the assumptions underlying the forward-looking statements are reasonable, any of the assumptions could be inaccurate and there can, therefore, be no assurance that the forward-looking statements included in this Form 10-Q will prove to be accurate. In light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by the Company or any other person that the objectives and plans of the Company will be achieved. Item 6. Exhibits and Reports on Form 8-K (a) Exhibit Index Exhibit 11.1 Statement Regarding Computation of Earnings per Share (b) Reports on Form 8-K None SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Date: August 14, 1997 GSE SYSTEMS, INC. /S/ Jerome I. Feldman ------------------------------- Jerome I. Feldman Chairman of the Board (Principal Executive Officer) /S/ Michael J. Cromwell III ------------------------------- Michael J. Cromwell III Vice Chairman of the Board (Principal Financial and Accounting Officer) EX-11.1 2 EXHIBIT 11.1 GSE SYSTEMS, INC. AND SUBSIDIARIES (in thousands, except per share data) STATEMENT REGARDING COMPUTATION OF EARNINGS PER SHARE
Three Months Three Months Ended Ended June 30, June 30, 1996 1997 ---- ---- Net (loss) income available to common shares..................................... $ (1,037) $ 426 ======= ======= Weighted average common shares outstanding................................ 5,066 5,066 Dilutive effect of common stock equivalents - stock options................ - 21 ------- ------- Total shares used for earnings per share... 5,066 5,087 ======= ======= (Loss)earnings per share................... $ (0.20) $ 0.08 ======= ======= Six Months Six Months Ended Ended June 30, June 30, 1997 1996 ---- ---- Net (loss) income available to common shares..................................... $ (3,026) $ 1,517 ======= ====== Weighted average common shares outstanding................................ 5,066 5,066 Dilutive effect of common stock equivalents - stock options................ - 16 ------- ------ Total shares used for earnings per share... 5,066 5,082 ======= ====== (Loss)earnings per share................... $ (0.60) $ 0.43 ======= ======
EX-27 3
5 1,000 6-MOS DEC-31-1997 JAN-01-1997 JUN-30-1997 852 0 26,444 227 3,206 34,139 5,285 0 50,694 27,536 0 0 0 50 21,444 50,694 39,957 39,957 28,298 28,298 15,738 0 359 (4,551) (1,525) (3,026) 0 0 0 (3,026) (0.60) (0.60)
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