-----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, KmhNmlPXqdRphl/PAdIh1KySFexVXDaYoHrhbfExchEjIpdrKIr79XZitreHa+ZM 2tecfKrdUWm/MkP1XvoQtg== 0000944480-98-000010.txt : 19980520 0000944480-98-000010.hdr.sgml : 19980520 ACCESSION NUMBER: 0000944480-98-000010 CONFORMED SUBMISSION TYPE: 10-Q/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19980519 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/A SEC ACT: SEC FILE NUMBER: 000-26494 FILM NUMBER: 98627682 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/A 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q/A (Amendment #1) [X]Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the Quarterly Period Ended March 31, 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) 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 May 7, 1998, there were 5,065,688 shares of the Registrant's common stock (par value $ .01 per share) outstanding. This amended filing is being submitted due to typographical errors in Part I, Item 1, Financial Statements and Part II, Item 5, Other Information. In the opinion of Management, none of the changes made in this amended 10 Q constitute a material difference in information previously submitted. 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, 1998 (Unaudited) and December 31, 1997 3 Unaudited Consolidated Statements of Operations for the Three Months Ended March 31, 1998 and 1997 4 Unaudited Consolidated Statements of Cash Flows for the Three Months Ended March 31, 1998 and 1997 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 12 Item 5. Other Information 13 SIGNATURES 20 PART I - FINANCIAL INFORMATION Item 1. Financial Statements GSE SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands, except share data) ASSETS
March 31, December 31, 1998 1997 ---- ---- (unaudited) Current assets: Cash and cash equivalents $ 754 $ 334 Contract receivables 22,944 24,371 Inventories 2,898 2,700 Prepaid expenses and other current assets 2,161 1,739 Deferred income taxes 2,570 2,570 ------ ------ Total current assets 31,327 31,714 Property and equipment, net 3,290 3,864 Investment in joint venture 188 252 Software development costs, net 7,638 7,526 Goodwill and other intangible assets, net 2,888 2,974 Deferred income taxes 1,730 1,730 Other assets 322 302 ------ ------ Total assets $ 47,383 $ 48,362 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Lines of credit $ 8,939 $ 9,032 Accounts payable 7,755 7,919 Accrued expenses 4,686 4,304 Obligations under capital lease 67 208 Accrued severance costs 60 148 Billings in excess of revenue earned 7,223 6,719 Accrued contract reserves 155 287 Accrued warranty reserves 675 625 Other current liabilities 211 513 Income taxes payable 305 313 ------ ------ Total current liabilities 30,076 30,068 Notes payable to related parties 181 185 Obligations under capital lease 183 234 Accrued contract and warranty reserves 649 675 Other liabilities 1,270 1,276 ------ ------ Total liabilities 32,359 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 21,378 21,378 Retained earnings (deficit) - at formation (5,112) (5,112) Retained earnings (deficit) - since formation (965) (239) Cumulative translation adjustment (327) (153) ------ ------ Total stockholders' equity 15,024 15,924 ------ ------ Total liabilities & stockholders' equity $ 47,383 $ 48,362 ====== ======
The accompanying notes are an integral part of these 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 March 31, March 31, 1998 1997 ---- ---- Contract revenue $ 17,454 $ 19,327 Cost of revenue 12,243 13,763 ------ ------ Gross profit 5,211 5,564 Operating expenses: Selling, general and administrative 5,327 6,249 Depreciation and amortization 561 568 Employee severance and termination costs - 1,349 ------ ------ Total operating expenses 5,888 8,166 ------ ------ Operating income (loss) (677) (2,602) Interest expense 165 187 Other expense (income) (428) 210 ------ ------ Income (loss) before income taxes (414) (2,999) ------ ------ Provision for (benefit from) income taxes 40 (1,010) ------ ------ Net (loss) $ (454) $ (1,989) ====== ====== Basic and diluted (loss) per common share $ (.09) $ (0.39) ====== ====== Weighted average common shares outstanding 5,065,688 5,065,688
The accompanying notes are an integral part of these consolidated financial statements. GSE SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (Unaudited)
Three months Three months ended ended March 31, 1998 March 31, 1997 -------------- -------------- Cash Flows From Operating Activities: Net (loss) $ (454) $ (1,989) Adjustments made to reconcile net income (loss) to net cash (used in) provided by operating activities: Depreciation and amortization 1,170 712 Accrued severance -- 1,349 Deferred income taxes -- (390) Changes in assets and liabilities: Contract receivables 1,671 1,520 Inventories (138) 438 Prepaid expenses and other current assets (398) (307) Other assets 123 83 Accounts payable and accrued expenses (984) (2,050) Billings in excess of revenue earned 1,233 (1,371) Accrued contract and warranty reserves (166) (328) Other current liabilities (622) (584) Income taxes payable (14) (532) Other liabilities -- (1) ------ ------ Net cash (used in) operating activities 1,421 (3,450) ------ ------ Cash Flows From Investing Activities: Capital expenditures (25) (340) Capitalization of software development costs (722) (993) ------ ------ Net cash (used in) investing activities (747) (1,333) ------ ------ Cash Flows From Financing Activities: Increase in lines of credit with bank (93) 4,056 Repayments under capital lease obligations (188) (285) Principal payments under term-note 4 (23) Decrease in borrowings from related parties (4) (4) ------ ------ Net cash (used in) provided by financing activities(281) 3,744 Effect of exchange rate changes on cash 17 (204) ------ ------ Net increase (decrease) in cash and cash equivalents 410 (1,243) Cash and cash equivalents at beginning of period 344 2,450 ------ ------ Cash and cash equivalents at end of period $ 754 $ 1,207 ====== ======
The accompanying notes are in integral part of these condensed consolidated financial statements. GSE SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS March 31, 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 March 31, 1998 are not necessarily indicative of what the operating results for the full year will be. 2. Subsequent Event - Disposal of Assets ------------------------------------- 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 $9.86 million (consisting of $8.86 million in cash and $1.0 million in the form of an unsecured promissory note due on April 30, 1999, subject to certain adjustments). In connection with the transaction, Keane purchased certain assets of approximately $4.4 million and assumed certain operating liabilities of Erudite totaling approximately $2.2 million. The Company anticipates recognizing a gain on this transaction in excess of $5.0 million. In connection with the sale of these assets, the Company has written off approximately $800,000 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 expected 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 Closing Balance Sheet indicates that the "Net Asset Value" (defined in the Asset Purchase Agreement), which is an amount equal to (a) the assets purchased by Keane minus (b) the assumed liabilities, is greater than, or less than $2.2 million, the purchase price will be increased or decreased by that positive or negative difference (the "Closing Net Book Value Adjustment"), respectively. With the proceeds from the sale of the Erudite assets, the Company reduced its outstanding bank debt by approximately $3.8 million, and will use the remainder of the proceeds to pay for transaction expenses and for general corporate purposes. The Company acquired Erudite on May 22, 1996. This acquisition, which was accounted for as a pooling of interests, was made to facilitate the Company's efforts to enter the client/server IT solutions market. As previously disclosed, as a result of the Company's decision to re-focus its strategy on its core businesses, the Company decided to divest itself of Erudite. 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 March 31, 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. 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:
March 31, December 31, 1998 1997 ---- ---- (in thousands) Raw materials $1,784 $1,610 Service parts 1,114 1,090 ------ ------ Total $2,898 $2,700 ====== ======
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 $700,000 and $1.0 million for the three months ended March 31, 1998 and 1997. Total amortization expense was $609,000 and $144,000 for the three months ended March 31, 1998 and 1997. 6. Financing Arrangements ---------------------- The Company maintained, through its subsidiaries, two lines of credit with its bank that provided for borrowings up to $14.0 million to support foreign letters of credit, margin requirements on foreign exchange contracts and working capital needs, which were due to expire June 30, 1998. At March 31, 1998, the Company had approximately $8.9 million of borrowings under the lines of credit with its bank. Concurrent with the sale of the Erudite assets described in Note 2, the line of credit for Process Solutions was reduced from $7.0 million to $3.0 million, reducing the two lines of credit to $10.0 million with the same maturity date of June 30, 1998. The Company reduced its bank debt by $3.8 million after the Erudite closing. Letters of credit issued from its bank amounted to approximately $850,000 at March 31, 1998. As previously disclosed, the aforementioned lines of credit contain certain restrictive covenants. The Company was in violation of the cash flow coverage ratio as of March 31, 1998. As of March 6, 1998, the bank has waived such covenant violations at March 31, 1998. Should a violation of any loan covenant occur at any future measurement date, the bank would have the right to declare an event of default, and the loans would be payable on demand. With respect to the potential liquidity issues related to the June 30, 1998 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 March 31, 1999, in the form of credit enhancements or by taking actions that would result in additional liquidity to the Company. In consideration for the guaranties, the Company has agreed to grant both of ManTech and GP Strategies warrants to purchase shares of the Company's common stock. The number of shares of common stock and other provisions for such warrants have not been finalized as of the date of this report. When the terms of the warrants become finalized, including the number of shares of common stock into which the warrants will be exercisable and the related exercise price, the Company will recognize the fair value of such warrants in the consolidated financial statements. 7. Contract Receivables -------------------- The components of contract receivables are as follows:
March 31, December 31, 1998 1997 ---- ---- (in thousands) Billed receivables $ 16,403 $ 16,994 Recoverable costs and accrued profit not billed 7,321 8,398 Allowance for doubtful accounts (780) (1,021) ------ ------ Total contract receivables $ 22,944 $ 24,371 ====== ======
Recoverable costs and accrued profit not billed represent costs incurred and profit accrued on contracts that will become billable upon future milestones or completion of contracts. Revisions in estimated contract costs at completion are reflected in the period during which facts and circumstances necessitating such a change first become known. Revenue under long-term, fixed-price contracts generally is accounted for on the percentage-of-completion method, based on contract costs incurred to date and estimated costs to complete. The effect of changes in estimates of contract profits was to increase gross profit by $139,523 and $237,000 during the three months ended March 31, 1998. 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 months ended March 31, 1998 and 1997 is primarily the result of a valuation allowance against all of the net operating losses generated during the three months ended March 31, 1998, the effects of foreign operations at different tax rates and state income taxes. For the three months ended March 31, 1997, the Company recorded an income tax benefit on the pre-tax losses incurred by the Company's domestic operations. 9. Comprehensive Income -------------------- Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" is effective for the three months ended March 31, 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 March 31, 1998 and 1997, the Company had a comprehensive loss of $788,000 and $2,279,000, respectively. The difference between the comprehensive loss and the net loss as reported in the statements of operations related to foreign currency translation adjustments. 10. Recent Pronouncements --------------------- The Financial Accounting Standards Board has issued Statement of Financial Accounting Standard No. 131. "Disclosures 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. Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition ------------------------------------------------------------- General Business Environment - ---------------------------- GSE 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 is finalizing the 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. Additionally, the Company has completed the sale of Erudite to Keane. The results to date of the efforts to re-focus and reduce costs are evidenced by the improvement in operating results from the first quarter of 1997 to the first quarter of 1998, reflected in the operating losses of $677,000 versus $2.6 million, respectively. The operating results for the first quarter of 1998 were a substantial improvement over each quarter in 1997. On May 1, 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 Erudite sale is part of the Company's continuing plan and effort to refocus and reduce costs. As a result of the Erudite sale, the Company was able to reduce its debt by approximately $3.8 million, while improving its cash position by approximately $4.1 million. (Refer to Liquidity and Capital Resources, Item 5 of Part II, Other Information, Acquisition and Disposition of Assets, below, and Note 2, Subsequent Events - Disposal of Assets - "Notes to the Condensed Consolidated Financial Statements" for a further discussion of the sale). 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.
Three months ended Three months ended March 31, 1998 March 31, 1997 -------------- -------------- Contract revenue $17,454 100.0% $19,327 100.0% Cost of revenue 12,243 70.1 13,763 71.2 ------ ----- ------ ----- Gross profit 5,211 29.9 5,564 28.8 Operating expenses: Selling, general and administrative 5,327 30.6 6,249 32.3 Depreciation and amortization 561 3.2 568 3.0 Employee severance and termination costs -- 0.0 1,349 7.0 ------ ----- ------ ----- Total operating expenses 5,888 33.8 8,166 42.3 ------ ----- ------ ----- Operating income (loss) (677) (3.9) (2,602) (13.5) Interest expense 165 1.0 187 1.0 Other expense (income) (428) (2.5) 210 1.1 ------ ----- ------ ----- Income (loss) before income taxes (414) (2.4) (2,999) (15.5) Provision for income taxes 40 (0.3) (1,010) (5.2) ------ ----- ------ ----- Net income $ (454) (2.6)% $ (1,989) (10.3)% ====== ===== ====== =====
Revenues. Revenues for the three months ended March 31, 1998 amounted to $17.5 million, as compared with revenues of $19.3 million in the three months ended March 31, 1997, respectively. This decrease was mainly due to temporary delays in customer orders. Gross Profit. Gross profit decreased to $5.2 million in the three months ended March 31, 1998 from $5.6 million in the corresponding period of 1997. The decrease in the gross profit amount is primarily attributable to lower revenues. Selling, General and Administrative Expenses. Selling, general and administrative expenses decreased to $5.3 million, or 30.6% of revenues, during the three months ended March 31, 1998, from $6.2 million, or 32.3% of revenues, during the corresponding period of 1997, due to the Company's outgoing efforts to reduce costs. Total research and product development expenditures were $1.1 million and $1.4 million in the three months ended March 31, 1998 and 1997, respectively. Capitalized software development costs totaled $0.7 and $1.0 million during the quarters ended March 31, 1998 and 1997, respectively. Net research and development costs expensed and included within selling, general and administrative expenses were $425,000 and $360,000 during the quarters ended March 31, 1998 and 1997, respectively. The Company continued investing in the conversion of its DCS product to the Windows NT(r) platform, SCADA system enhancements for the Windows NT(r) platform and the productization of its SimSuite(tm) software tools. Depreciation and Amortization. Depreciation expense amounted to $478,000 and $514,000 during the three months ended March 31, 1998 and 1997, respectively. Amortization of goodwill and intangibles was $83,000 and $54,000 during the three months ended March 31, 1998 and 1997, respectively. This increase is attributable to the acquisition of J. L. Ryan, Inc. in December of 1997, as previously disclosed. Operating (Loss). Operating results improved to a loss of $(677,000), or (3.9%) of revenues, during the three months ended March 31, 1998, from a loss of $(2.6) million, or (13.5%) of revenues, during the corresponding period of 1997. The 1998 reduction in loss is attributable to the decrease in Employee Severance and Termination Costs, as well as decreased selling, general and administrative expenses, which partially offset the reduction in revenues and gross profit. Interest Expense. Interest expense decreased to $165,000 during the three months ended March 31, 1998, respectively, from $187,000 during the three months ended March 31, 1997, respectively. Other (Income) Expense. Other (income) expense increased for the three months ended March 31, 1998 compared to the same period of 1997, from an expense of $ 210,000 to income of $ 428,000 primarily due to gains 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, 1998 and 1997 is primarily the result of a valuation allowance against all of the net operating losses generated during the three months ended March 31, 1998, the effects of foreign operations at different tax rates and state income taxes. For the three months ended March 31, 1997, the Company recorded an income tax benefit on the pre-tax losses incurred by the domestic operations. Liquidity and Capital Resources - ------------------------------- During the three months ended March 31, 1998, the Company's operations provided $1.4 million of net cash, primarily resulting from collections of receivables. At March 31, 1998, the Company had cash and cash equivalents totaling approximately $754,000 compared with $334,000 at December 31, 1997. On May 1, 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 $9.86 million ($8.86 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 is filed as Exhibit 2.3 to this report and is incorporated herein by reference. Refer to Item 5 of Part II, Other Information, Acquisition and Disposition of Assets, below, and Note 2, Subsequent Event - Disposal of Assets - "Notes to the Condensed Consolidated Financial Statements" for a further discussion of the sale. The Company maintained, through its subsidiaries, two lines of credit with its bank that provided for borrowings up to $14.0 million to support foreign letters of credit, margin requirements on foreign exchange contracts and working capital needs, which are due to expire June 30, 1998. At March 31, 1998, the Company had approximately $8.9 million of borrowings under the lines of credit with its bank. Concurrent with the sale of the Erudite assets described in Notes 2, the line of credit for Process Solutions was reduced from $7.0 million to $3.0 million using approximately $3.8 million of the proceeds from the Erudite transaction. Available borrowings under the two lines of credit now total $10.0 million with the same maturity date of June 30, 1998. The Company intends to continue to seek to replace or renegotiate its expiring credit facilities. In addition to the approximately $4.1 million of cash proceeds from the Erudite sale, certain of the Company's principal stockholders, ManTech and GP Strategies, have agreed to provide working capital support to the Company through March 31, 1999, in the form of credit enhancements or by taking actions that would result in additional liquidity to the Company. In consideration for the guaranties, the Company has agreed to grant both of ManTech and GP Strategies warrants to purchase shares of the Company's common stock. The number of shares of common stock and other provisions for such warrants have not been finalized as of the date of this report. When the terms of the warrants become finalized, including the number of shares of common stock into which the warrants will be exercisable and the related exercise price, the Company will recognize the fair value of such warrants in the consolidated financial statements. The aforementioned lines of credit also contain certain restrictive covenants. The Company was in violation of the cash flow coverage ratio and the tangible net worth covenants as of March 31, 1998. The bank has waived such covenant violations at March 31, 1998. Should a violation of any loan covenant occur at any future measurement date, the bank would have the right to declare an event of default, and the loans would be payable on demand. For further discussion, see Note 6 of "Notes to Condensed Consolidated Financial Statements". 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. PART II - OTHER INFORMATION - --------------------------- Item 5. Other Information Acquisition or Disposition of Assets - ------------------------------------ On May 1, 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 approximately $9.86 million ($8.86 million in cash and $1.0 million in the form of an unsecured promissory note due on April 30, 1999, subject to certain adjustments). In connection with the transaction, Keane purchased certain assets of approximately $4.4 million and assumed certain operating liabilities totaling approximately $2.2 million (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). The purchase price is subject to post-closing adjustment based upon a balance sheet as of the closing date (the "Closing Balance Sheet"). If the Closing Balance Sheet indicates that the "Net Asset Value" (defined in the Asset Purchase Agreement), which is an amount equal to (a) the assets purchased by Keane minus (b) the assumed liabilities, is greater than, or less than approximately $2.2 million, then the purchase price will be increased or decreased by that positive or negative difference (the "Closing Net Book Value Adjustment"), respectively. With the proceeds from the Sale of the Erudite, the Company reduced its outstanding bank debt by approximately $3.8 million, and will use the remainder of the proceeds to pay for transaction expenses and for general corporate purposes. The foregoing description of the Asset Purchase Agreement is qualified in its entirety by the full text of the Asset Purchase Agreement, which is included as Exhibit 2.3 to this report and is incorporated herein by reference. The Company expects to report a pre-tax gain on the sale of Erudite in excess of $5.0 million in the second quarter of 1998. Pro Forma Financial Statements - ------------------------------ The following unaudited Pro Forma Balance Sheet as of March 31, 1998 and the unaudited Pro Forma Statements of Operations for the three months ended March 31, 1998 and the year ended December 31, 1997, are presented to give effect to the sale of Erudite. 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 Form 10-Q herein for the period ended March 31, 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 made in the unaudited Pro Forma Balance Sheet assume that the Sale of the Erudite was consummated on March 31, 1998, and do not reflect the impact of Erudite's operating results or changes in balance sheet amounts subsequent to March 31, 1998. The pro forma adjustments to the unaudited Pro Forma Statements of Operations assume that the Sale of Erudite was consummated on January 1, 1998 and January 1, 1997 in the unaudited Pro Forma Statements of Operations for the three months ended March 31, 1998 and for the year ended December 31, 1997, respectively. The Pro Forma Balance Sheet and 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.
GSE SYSTEMS, INC. PRO FORMA CONSOLIDATED BALANCE SHEET As of March 31, 1998 (In thousands, unaudited) Less: Erudite net Pro forma Historical assets sold adjustments Pro Forma ---------- ----------- ----------- --------- Assets: Cash and cash equivalents $ 754 4,105(A)$ 4,859 Contract receivables 22,944 (2,456) 20,488 Inventories 2,898 2,898 Prepaid expenses and other current assets 2,161 (705) 1,456 Deferred income taxes 2,570 (2,505)(C) 65 ------ ------ ------ ------ Total current assets 31,327 (3,161) 1,600 29,766 ------ ------ ------ ------ Property and equipment, net 3,290 (1,195) 2,095 Investment in joint venture 188 188 Software development costs, net 7,638 (815)(D) 6,823 Goodwill and other intangible assets, net 2,888 2,888 Deferred income taxes 1,730 (27)(C) 1,703 Other assets 322 (35) 1,000 (B) 1,287 ------ ------ ------ ------ Total assets $47,383 $(4,391) $1,758 $44,750 ====== ====== ===== ====== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Lines of credit $ 8,939 $(3,800)(E) 5,139 Accounts payable 7,755 $ (705) 7,050 Accrued expenses 4,686 (762) 3,924 Obligations under capital lease 67 67 Accrued severence costs 60 60 Billing in excess of revenue earned 7,223 (586) 6,637 Accrued contract reserves 155 155 Accrued warranty reserves 675 675 Other current liabilities 211 (50) 161 Income taxes payable 305 305 ------ ----- ------- ------ Total current liabilities 30,076 (2,103) (3,800) 24,173 ------ ----- ------- ------ Notes payable to related parties 181 181 Obligations under capital lease 183 (88) 95 Accrued contract and warranty reserves 649 649 Other liabilities 1,270 1,270 ------ ----- ------- ------ Total liabilities 32,359 (2,191) (3,800) 26,368 ------ ----- ------- ------ Total stockholders' equity15,024 (2,200) 5,558 (F) 18,382 ------ ----- ------- ------ Total liabilities & stockholders' equity $47,383 $(4,391) $ 1,758 44,750 ====== ===== ======= ======
GSE SYSTEMS, INC. PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS For the three months ended March 31, 1998 (In thousand, except per share data) (Unaudited)
Less Pro forma Historical Erudite adjustments Pro Forma ---------- ------- ----------- --------- Contract revenue $ 17,454 $ 4,032 $ 13,422 Cost of revenue 12,243 2,731 9,512 ------- ------- ------- ------- Gross profit 5,211 1,301 3,910 ------- ------- ------- ------- Operating expenses: Selling, general and administrative 5,327 937 4,390 Depreciation and amortization 561 122 439 ------- ------- ------- ------- Total operating expenses 5,888 1,059 4,829 ------- ------- ------- ------- Operating (loss) income (677) 242 (919) Interest expense, net 165 $ (65) (G) 100 Other (income) expense (428) - (428) ------- ------- ------- ------- (Loss) income before income taxes (414) 242 65 (591) (Benefit from) provision for income taxes 40 40 ------- ------- ------- ------- Net (loss) income $ (454) $ 242 $ 65 $ (631) ======= ======= ======= ======= Basic and diluted (loss) per common share $ (0.09) $ 0.04 $ 0.01 $ (0.12)
GSE SYSTEMS, INC. PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS For the year ended December 31, 1997 (In thousands, except per share data) (unaudited)
Less Pro forma Historical Erudite adjustments Pro Forma ---------- ------- ----------- --------- Contract revenue $ 79,711 $ 17,999 $ 61,712 Cost of revenue 58,326 15,148 43,178 -------- -------- ---------- -------- Gross profit 21,385 2,851 18,534 -------- -------- ---------- -------- Operating expenses: Selling, general and administrative 27,320 5,199 22,121 Depreciation and amortization 2,368 334 2,034 Employee severance and termination costs 1,124 1,124 -------- -------- ---------- -------- Total operating expenses 30,812 5,533 25,279 -------- -------- ---------- -------- Operating (loss) (9,427) (2,682) (6,745) Interest expense, net 765 $ (290)(G) 475 Other (income) expense 1,228 (23) 1,251 -------- -------- ---------- -------- (Loss) income before income taxes (11,420) (2,659) 290 (8,471) (Benefit from) provision for income taxes (2,717) (1,272) (1,445) -------- -------- ---------- -------- Net (loss) $(8,703) $(1,387) $ 290 $ (7,026) ======== ======== ========== ======== Basic and diluted (loss) per common share $ (1.72) $ 0.27 $ 0.01 $ (1.44)
GSE SYSTEMS, INC. NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. Historical ---------- The historical balances represent the financial position as of March 31, 1998 and the results of operations for the three months ended March 31, 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 Net Assets of Erudite --------------------------------- The Company has sold substantially all the net assets of Erudite. The Company acquired Erudite on May 22, 1996 in a transaction accounted for under the pooling-of-interests method. The net assets of Erudite sold to Keane, as set forth in this column, have been excluded from the historical consolidated balance sheet of the Company in the unaudited pro forma consolidated balance sheet as of March 31, 1998. The operations of Erudite, 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 three months ended March 31, 1998 and the year ended December 31, 1997, respectively. The following pro forma adjustments for the sale of the net assets of Erudite are reflected as of March 31, 1998 in the case of the pro forma consolidated balance sheet, or as of January 1, 1998 or January 1, 1997, respectively, in the case of the pro forma consolidated statements of operations for the three months ended March 31, 1998 and for the year ended December 31, 1997, respectively. (A) Net cash proceeds to be received in connection with the sale of the net assets of Erudite, including transaction costs, is estimated at $4,105 and is determined as follows:
Gross proceeds from sale $8,855 Estimated expenses related to sale (950) Net proceeds 7,905 Less: required paydown of line of credit (3,800) ------ Net increase in cash $4,105 ======
(B) Amount represents an unsecured promissory note issued to the Company in connection with the sale of the net assets of Erudite. The promissory note is receivable April 30, 1999. (C) Amount represents reduction of deferred taxes resulting from estimated income tax liability related to the gain on the sale of the net assets of Erudite. The Company's existing net operating loss carryforwards will be used to offset the taxable gain on this transaction. (D) Amount represents the write-off of capitalized software development costs that were not acquired by Keane. Since all operations that would support the recoverability of these costs have been sold to Keane, the write-off of the costs is reflected in the calculation of the expected gain on the sale. (E) Amount represents paydown of the line of credit using proceeds from the sale of the net assets of Erudite. Such paydown was required pursuant to the Company's negotiations for extension of its lines of credit. (F) The net change in stockholders' equity is determined as follows:
Gross proceeds from sale $8,855 Estimated expenses related to sale (950) ------ Net proceeds 7,905 Add: Promissory note receivable (B) 1,000 Less: Write-off of assets acquired costs (D) ( 815) Estimated income taxes (C) (2,532) ------ Net increase in stockholders' equity $5,558 ======
(G) Amount represents the reduction of interest expense incurred by the Company during the three months ended March 31, 1998 and the year ended December 31, 1997 attributable to the borrowings under the bank line of credit that were repaid with the proceeds from the sale of the net assets of Erudite. 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. 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 15, 1998 GSE SYSTEMS, INC. /S/ Christopher M. Carnavos ---------------------------- Christopher M. Carnavos President and Director (Principal Executive Officer) /S/ Robert W. Stroup --------------------- Robert W. Stroup Executive Vice President and Treasurer -----END PRIVACY-ENHANCED MESSAGE-----