0000944480-01-500062.txt : 20011030
0000944480-01-500062.hdr.sgml : 20011030
ACCESSION NUMBER: 0000944480-01-500062
CONFORMED SUBMISSION TYPE: S-1/A
PUBLIC DOCUMENT COUNT: 4
FILED AS OF DATE: 20011025
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: S-1/A
SEC ACT: 1933 Act
SEC FILE NUMBER: 333-69424
FILM NUMBER: 1766544
BUSINESS ADDRESS:
STREET 1: 9189 RED BRANCH ROAD
CITY: COLUMBIA
STATE: MD
ZIP: 21045
BUSINESS PHONE: 4107723500
MAIL ADDRESS:
STREET 1: 9189 RED BRANCH ROAD
STREET 2: 9189 RED BRANCH ROAD
CITY: COLUMBIA
STATE: MD
ZIP: 21045
S-1/A
1
fs1a_102401.txt
UPDATED S1DOC_102401
As filed with the Securities and Exchange Commission on October 25, 2001
Registration No. 333-69424
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
PRE-EFFECTIVE AMENDMENT NO.1 TO
FORM S-1
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
GSE SYSTEMS, INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware 7372 52-1868008
(State or Other (Primary Standard (IRS Employer
Jurisdiction of Incorporation Classification Code Indentification No.)
or Organization) Number)
___________________________
9189 Red Branch Road
Columbia, Maryland 21045
(410) 772-3500
(Address, Including Zip Code, and Telephone Number, Including Area Code, of
Registrant's Principal Executive Offices)
Richard Luebke, Esq.
GSE Systems, Inc.
9189 Red Branch Road
Columbia, Maryland 21045
(410) 772-3500
(Name, Address, Including Zip Code, and Telephone Number, Including Area Code,
of Agent for Service)
________________________________
Copies to:
Thomas D. Washburne, Jr., Esq.
Michael W. Conron, Esq.
Venable, Baetjer and Howard, LLP
Suite 1800, 2 Hopkins Plaza
Baltimore, Maryland 21201-2978
(410) 244-7400
_________________________________
Approximate date of commencement of proposed sale to the public: As soon as
practicable after this Registration Statement is effective.
If any of the securities being registered on this form is to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. ___ [ X ]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ].
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE
OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
Subject to Completion
Prospectus
GSE Systems, Inc.
Rights Offering
of 2,219,701 Shares of Common Stock
at $2.53 per Share
If you held our common stock on October 26, 2001, GSE Systems has granted you
rights to purchase additional shares of common stock for a subscription price of
$2.53 per share. You have been granted 0.711 rights for every share of common
stock you held of record on that date. Each whole right entitles you to purchase
one share of common stock for $2.53. This is your "basic subscription
privilege".
We will not issue fractional rights or fractional shares. If the number of
shares of common stock you held of record on the record date would result in
your receipt of fractional rights, the number of rights issued to you is being
rounded up to the nearest whole right.
Our common stock is traded on the American Stock Exchange under the symbol
"GVP". On October 23, 2001, the last reported sale price for the common stock
was $2.25 per share. Since the market price of our common stock fluctuates, we
urge you to consider prevailing market conditions in deciding whether to
exercise your subscription rights.
The rights expire on December 14, 2001, at 5 p.m., Eastern Time. We have the
option of extending the expiration date.
If you fully exercise your rights and other stockholders do not fully exercise
their rights, you may elect to purchase additional shares on a pro rata basis.
This is your "oversubscription privilege".
You may transfer your rights to your immediate family members or entities wholly
owned or controlled by you. Otherwise, the rights are non-transferable.
We will use all net cash proceeds from this offering for repayment of a $1
million loan from ManTech International Corporation, working capital, strategic
acquisitions, capital expenditures and general corporate purposes.
GP Strategies Corporation (including its subsidiaries SGLG, Inc. and General
Physics Corporation) and ManTech have advised us that each waives its right to
receive rights to purchase additional shares of common stock in this offering
and will not exercise its basic subscription privilege or oversubscription
privilege. Accordingly, we have excluded the rights that GP Strategies,
including its subsidiaries, and ManTech would otherwise be granted from this
offering and common stock that would otherwise underlie rights granted to GP
Strategies, including its subsidiaries, and ManTech will not be included in the
shares available for the oversubscription privilege.
Investing in our common stock involves certain risks. See "Risk Factors"
beginning on page 13.
Price to Public Underwriting Discounts Proceeds to Company (1)
and Commissions
Per Share Total $2.53 None $2.53
Total $5,615,844 None $5,615,844
(1) Before deducting expenses payable by us that are estimated at $200,000.
Continental Stock Transfer & Trust Company
Subscription Agent
The date of this Prospectus is October 25, 2001
The information in this Prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This Prospectus is not an offer
to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of this Prospectus. Any representation to the contrary is a
criminal offense. The rights offering is not being made, nor will GSE Systems,
Inc. accept subscriptions for common shares from any person, in any jurisdiction
in which the rights offering or the acceptance thereof would not be in
compliance with the securities or "blue sky" laws of such jurisdiction.
Table of Contents
Page Page
Prospectus Summary.............................. 3 Business............................................ 54
Risk Factors.................................... 13 Management.......................................... 70
The Rights Offering............................. 21 Certain Transactions................................ 81
Use of Proceeds................................. 31 Description of Capital Stock........................ 83
Determination of Subscription Price............. 32 Certain Federal Income Tax Considerations........... 86
Capitalization.................................. 34 Plan of Distribution................................ 87
Selected Financial Data......................... 35 Legal Matters....................................... 88
Management's Discussion and..................... Experts............................................. 88
Analysis of Financial Condition Where You Can Find More Information................. 88
and Results of Operations.................. 38 Index to Consolidated Financial Statements.......... F-1
Changes in and Disagreements with
Accountants on Accounting and
Financial Disclosures.................. 52
Quantitative and Qualitative Disclosures
about Market Risk.......................... 53
Important Information about this Prospectus
This Prospectus incorporates important business and financial information about
us that is not included or delivered with this Prospectus, including exhibits to
the registration statement of which this Prospectus is a part. We will provide
promptly without charge to you, upon written or oral request, a copy of any
document incorporated by reference in this Prospectus, other than exhibits to
such documents unless such exhibits are specifically incorporated by reference
in such documents. Requests should be directed as follows:
GSE Systems, Inc.
9189 Red Branch Road
Columbia, Maryland 21045
(410) 772-3500
Attention: Corporate Secretary
You should request any such information at least five days in advance of the
date on which you expect to make your decision with respect to this offer. In
any event, you must request such information on or prior to December 7, 2001.
D/3(R), D/3 DCS(R), SABL(R), TotalVision(R) and RETACT(R) are registered
trademarks and GFLOW+TM, GLOGIC+TM, GCONTROL+TM, GPower+TM, SimSuite PowerTM,
SimSuite ProTM, SimExecTM, eXtreme I/STM, RACSTM, PEGASUS Plant Surveillance and
Diagnosis SystemTM, SIMONTM, Vista PINTM, VPTVTM, Java Applications &
Development Environment (JADE)TM and VPbatchTM are trademarks of GSE Systems,
Inc. All other trademarks used in this document are the property of their
respective owners.
Prospectus Summary
This summary highlights some of the information in this Prospectus.
The summary is not complete and may not provide all information you should
consider before deciding whether or not to exercise the rights. Therefore, we
urge you to read the entire prospectus carefully.
Questions and Answers about the Rights Offering
What is a right?
Rights give our stockholders the privilege to purchase additional
shares of our common stock for $2.53 per share. On October 23, 2001, the last
reported sales price for our common stock on the American Stock Exchange was
$2.25 per share.
We have granted our stockholders as of 5:00 p.m. on October 26,
2001, 0.711 rights for every share of common stock owned at that time. Each
whole right entitles you to purchase one share of common stock for $2.53. For
example, if you were the record holder of 1,000 shares on the record date, you
would have the right to purchase 711 shares of common stock for $2.53 per share.
What is the record date?
The record date is October 26, 2001 at 5:00 p.m. (Eastern Time).
Only our stockholders of record as of the record date will receive rights to
subscribe for new shares of common stock.
Will I receive fractional rights or shares?
We are not issuing fractional rights or shares. If the number of
shares of common stock you held of record on the record date would result in
your receipt of fractional rights, the number of rights issued to you is being
rounded up to the nearest whole right. If you were the record holder of less
than one share of common stock, you are receiving one whole right.
Why is GSE Systems offering the rights?
We are offering the rights to raise equity capital. We have determined
that, given current market conditions, this rights offering is the most
appropriate means of raising equity capital because it affords our existing
stockholders an opportunity to subscribe for the new shares of
common stock and to maintain their proportionate interest in GSE Systems. We
will use the net proceeds of this offering for repayment of a $1 million loan
from ManTech, working capital, strategic acquisitions, capital expenditures and
general corporate purposes.
How many shares is GSE Systems offering in the rights offering?
We are offering 2,219,701 shares of common stock to be issued upon
exercise of the rights.
How much money will GSE Systems receive from the rights offering?
Our gross proceeds from the rights offering depends on the number of
shares that are purchased. If we sell all shares which may be purchased upon
exercise of the rights offered by this Prospectus, then we will receive proceeds
of $5,615,844, before deducting expenses payable by us, estimated to be
$200,000. We will use the net proceeds of this offering for the repayment of a
recent $1 million loan from ManTech, working capital, strategic acquisitions,
capital expenditures and general corporate purposes.
Has the board of directors made a recommendation regarding this offering?
Our board of directors makes no recommendation to you about whether
you should exercise any rights. Stockholders who do exercise rights risk
investment loss on new money invested. We cannot assure you that the
subscription price will be below any trading price for our common stock during
or after the rights offering. For more information regarding some of the risks
inherent in this rights offering, see "Risk Factors."
Is exercising my subscription rights risky?
The exercise of your subscription rights involves certain risks.
Exercising your subscription rights means buying additional shares of our common
stock, and should be carefully considered as you would view other equity
investments. Among other things, you should carefully consider the risks
described under the heading "Risk Factors" in this Prospectus.
How soon must I, as a stockholder, act?
The rights expire on December 14, 2001, at 5:00 p.m., Eastern Time.
The subscription agent must actually receive all required documents and payments
before that date and time. Although we have the option of extending the
expiration date, we currently do not intend to do so. We also reserve the right
to withdraw, terminate or amend the rights offering at any time for any reason.
In the event that the offering is withdrawn or terminated, or any submitted
subscriptions no longer comply with the amended terms of the offering, we will
return all funds received from such subscriptions (without interest).
May I transfer my rights?
Generally, no. The rights may be exercised only by the person to
whom they are granted. However, you may transfer your subscription rights to
immediate family members or to entities wholly owned or controlled by you. For
information on the persons to whom you can transfer your rights, as well as how
the rights can be transferred, see "The Rights Offering -- Transferability of
Rights."
What is the basic subscription privilege?
By exercising the rights, you may purchase 711 newly-issued shares
of common stock for every 1,000 shares owned by you on October 26, 2001 at the
subscription price of $2.53 per share. This is your "basic subscription
privilege."
What is the oversubscription privilege?
If you fully exercise your basic subscription privilege, the
oversubscription privilege entitles you to subscribe to additional shares of our
common stock at the same subscription price of $2.53 per share that applies to
your basic subscription privilege.
What are the limitations on the oversubscription privilege?
We will be able to satisfy your exercise of the oversubscription
privilege only if our other stockholders do not elect to purchase all of the
shares offered under their basic subscription privilege. We will honor
oversubscription requests in full to the extent sufficient shares are available
following the exercise of rights under the basic subscription privilege. If
oversubscription requests exceed shares available, we will allocate the
available shares pro rata among those who oversubscribed.
Have any stockholders indicated their intentions with respect to participation
in the offering?
GP Strategies (including its subsidiaries SGLG, Inc. and General
Physics Corporation) and ManTech have each waived its right to receive rights to
purchase additional shares of common stock in this offering and will not
exercise its basic subscription privilege or oversubscription privilege.
Accordingly, we have excluded the rights that GP Strategies, including its
subsidiaries, and ManTech would otherwise be granted from this offering and
common stock that would otherwise underlie rights granted to GP Strategies,
including its subsidiaries, and ManTech will not be included in the shares
available for the oversubscription privilege.
Am I required to subscribe in the rights offering?
No. You are not required to exercise any rights, purchase any new
shares, or otherwise take any action in response to this rights offering.
What will happen if I do not exercise my rights?
You will retain your current number of shares of our common stock even
if you do not exercise your subscription rights. However, if other stockholders
exercise their subscription rights and you do not, the percentage of GSE Systems
that you own may diminish, and your relative voting rights may be diluted. In
addition, because the prevailing market price of our common stock may be greater
than the subscription price for part of the offering period, if you choose not
to exercise your subscription rights you could experience dilution of your
economic interest.
May I change or cancel my exercise of rights after I send in the required forms?
No. Once you send in your subscription warrant and payment, you cannot
revoke the exercise of your subscription rights, even if you later learn
information about us that you consider to be unfavorable. You should not
exercise your subscription rights unless you are certain that you wish to
purchase additional shares of common stock at the subscription price.
Will my money be returned if the rights offering is cancelled?
We can cancel or terminate the rights offering at any time. If we
terminate or cancel this offering, we will return your subscription price, but
without any payment of interest.
Are there tax consequences to me as a result of the offering?
For United States federal income tax purposes, we believe that a
stockholder will not recognize taxable income upon the receipt or exercise of
rights. See "Certain Federal Income Tax Considerations." Each stockholder should
consult its own tax adviser concerning the tax consequences of this offering
under the holder's own tax situation. This Prospectus does not summarize tax
consequences arising under state tax laws, non-U.S. tax laws, or any tax laws
relating to special tax circumstances or particular types of taxpayers.
What should I do if I want to participate in the rights offering, but my shares
are held in the name of my broker, dealer or other nominee?
If you hold your shares of our stock through a broker, dealer or
other nominee (for example, through a custodian bank), then your broker, dealer
or other nominee is the record holder of the shares you own. This record holder
must exercise the rights on your behalf for shares you wish to purchase.
Therefore, you will need to have your broker, dealer or other nominee act for
you.
If you wish to participate in the rights offering and purchase new
shares, please promptly contact the record holder of your shares. We will ask
your broker, dealer or other nominee to notify you of the rights offering. To
indicate your decision with respect to your rights, you should complete and
return to your record holder the form entitled "Beneficial Owner Election Form."
You should receive this form from your record holder with the other rights
offering materials.
What fees or charges apply if I purchase shares?
We are not charging any fee or sales commission to issue rights to
you or to issue shares to you if you exercise rights. If you exercise rights
through a record holder of your shares, you are responsible for paying any fees
that person may charge.
How do I exercise my rights? What forms and payment are required to purchase
shares?
As a record holder of our common stock on October 26, 2001, you are
receiving this Prospectus, a subscription warrant and instructions on how to
purchase shares. If you wish to participate in this rights offering, then before
your rights expire, you must:
o deliver the subscription price by wire transfer, or certified or
cashier's check drawn on a U.S. bank, or personal check that clears
before expiration of the rights; and
o deliver a properly completed subscription warrant.
The instructions also describe an alternate procedure called "Notice of
Guaranteed Delivery," which allows an extra three days to deliver the
subscription warrant if full payment is received before the expiration date and
a securities broker or qualified financial institution signs the form to
guaranty that the subscription warrant will be timely delivered.
To whom should I send forms and payment?
You may send subscription documents to Continental Stock Transfer &
Trust Company by mail, hand delivery or overnight courier:
Continental Stock Transfer & Trust Company
Attn: Reorganization Department
2 Broadway
New York, New York 10004
Your subscription payment should also be sent to Continental Stock
Transfer & Trust Company. For instructions on how this payment should be made,
see "The Rights Offering -- Required Forms of Payment of Subscription Price."
Securities brokers and other qualified financial institutions can
use an alternate procedure called "Notice of Guaranteed Delivery." See "The
Rights Offering -- Special Procedure under "Notice of Guaranteed Delivery"
Form."
What should I do if I have other questions?
If you have questions, need additional copies of offering documents
or otherwise need assistance, please contact:
Gill Grady
Sr. Vice President, Investor Relations
GSE Systems, Inc.
9189 Red Branch Road
Columbia, MD 21045
Phone 1-800-638-7912 or (410) 772-3500
Fax: (410) 772-3599
Email: investor@gses.com
To ask other questions or to receive copies of our recent SEC
filings, you can also contact us by mail or telephone, or refer to the other
sources described under "Where You Can Find More Information."
Our Company
We are a world leader in the design, development and supply of high
fidelity real-time process automation, simulation software, systems and services
for the energy and manufacturing industries. We operate through two business
segments, Power Simulation and Process Automation.
Power Simulation
Our Power Simulation products utilize proprietary high fidelity
real-time software and third party hardware to replicate all or a portion of the
process functions of a power or industrial plant. Our simulators provide an
invaluable tool to train plant personnel, as well as to optimize and validate
plant designs and test process modifications. We have a significant market
presence in nuclear power plant simulation, and we are seeking to increase our
market presence in the fossil fuel plant simulation market.
Our substantial investment in simulation technology has facilitated the
development of proprietary software tools, which significantly reduce the cost
and time required to design and develop simulation software. We believe that
these tools provide us with a competitive advantage in the simulation field. In
addition, our development of signal analysis tools provides a complementary
suite of plant optimization and asset management capabilities to improve power
plant performance.
Our strategy is to build upon our leading market position in Power
Simulation to take advantage of new market opportunities. Specifically, we
intend to:
o Continue serving our traditional customer base and be prepared to
meet increased demand if traditional simulation use grows in relation to
increased electric capacity in the United States.
o Market our existing and upgraded simulation products and our newly
developed signal analysis products as plant optimization, asset management
and condition monitoring tools.
o Provide plant information systems that protect our customer's
investment in legacy software while providing seamless real-time
information across a diverse multi-national enterprise.
o Leverage our existing engineering staff to provide additional
services to domestic and international clients.
In addition, we have grown through acquisitions and we will continue to
pursue acquisitions and investment opportunities that will create value and
enhance cash flow. We target acquisitions and investments that provide us:
o Cost saving opportunities
o Enhanced positioning in existing markets
o Entry into new geographic and industry markets
o Turnaround opportunities for under-performing businesses
We have provided approximately 200 simulation systems to an installed
base of over 75 customers worldwide. In 2000, approximately 73% of our Power
Simulation revenue was generated from end users outside the United States. Our
Power Simulation customers include: Ameren, Arizona Public Service, Carolina
Power and Light Company, Commonwealth Edison Company, Eskom South Africa,
Karnaraft Sakerhet & Utbildning AB, Korean Electric Power Company, Nationalina
Elecktrischecka Kompania, Orgrez SC, Battelle's Pacific Northwest National
Laboratory, Taiwan Power Company, and West Bengal Development Corp. For the year
ended December 31, 2000, one Power Simulation customer (Battelle's Pacific
Northwest National Laboratory) accounted for approximately 22% of our
consolidated revenues. The Pacific Northwest National Laboratory is the
purchasing agent for the Department of Energy and the numerous projects we
perform in Eastern and Central Europe.
Process Automation
Our Process Automation products utilize high fidelity real-time
software and hardware to manage a plant's process systems by monitoring,
measuring, and automatically controlling variables such as temperature,
pressure, flow, liquid level and chemical composition. These products are also
used to acquire, store and manage information for regulatory compliance, asset
management and other purposes. We believe that our investment in process control
technology and recipe and batch management software provides us with a
competitive advantage in batch applications in the process industries. Our
Process Automation products and services are targeted at the following
industries in which our personnel have substantial experience:
o Specialty chemicals o Pharmaceutical
o Food and beverage o Metals
Our flagship product in our Process Automation business is the D/3 DCS,
a distributed control system product that is highly flexible and designed to
meet open standards. D/3 DCS is a real-time system, which uses multiple process
control modules to monitor, measure, and automatically control variables in both
continuous and complex batch processes. D/3 DCS also forms the platform for
plant-wide information for operators, engineers and management.
Our goal is to expand our leading position as a provider of process
automation solutions and services to our target markets of batch and hybrid
control for the specialty chemical, food and beverage, and pharmaceutical
industries. Specifically, we intend to:
o Improve our technology to improve processing speed and decrease
manufacturing cost.
o Expand our expertise beyond the specialty chemical, food and
beverage, pharmaceutical, and metals industries.
o Leverage our expertise through the sale of engineering consulting
services.
We have provided over 300 process control systems to an installed base
of over 125 customers worldwide. In 2000, approximately 10% of our worldwide
Process Automation revenue was generated from end users outside the United
States. Our customers include, among others, Archer Daniels Midland Company,
Aristech, Bethlehem Steel Corporation, Cargill Incorporated, Eastman Chemical
Company, Formosa Plastics Company, GE Plastics, Merck & Co., Inc., Miller
Brewing Company, and Westinghouse Savannah River Company. For the year ended
December 31, 2000, one Process Automation customer (Westinghouse Savannah River
Company) accounted for approximately 11% of our consolidated revenues.
Avantium
We have helped to found Avantium International B.V., a
Netherlands-based technology company which uses high speed screening and
simulation technology to reduce the product development cycle for the chemical,
pharmaceutical and energy industries. Other participants in the creation of
Avantium are such well-respected companies as Shell Chemical, Glaxo Smith-Kline,
Akzo Nobel, Pfizer, W.R. Grace and others. We currently own over 19% of
Avantium. However, Avantium currently requires a significant amount of
additional capital to continue its business operations. They recently advised us
that, under the terms of this additional financing, our ownership interest will
be diluted to approximately 6.3%. We are currently in negotiations with Avantium
about this situation. However, there can be no assurances that our ownership
interest will not be diluted to 6.3% at this time, or that we will not face
additional dilution in the future. Avantium is using our process control, batch
management and simulation technologies as part of their informatics system. We
see several benefits from this relationship, including the potential access to
market, the sharing of technology development, and the financial ownership in a
growing company in a large and expanding market space. We intend to continue
working with Avantium in product development and marketing so that common
clients will be able to use Avantium's VirtualPlant technology to develop
scalable products that will fit together at the manufacturing level with our
process control and simulation products. We hope this relationship will
accelerate introduction of new products and reduce our research and development
costs.
Competitive Strengths
We believe that we are in a strong position to compete in both the
Power Simulation and Process Automation markets based upon the following
strengths:
o We have an experienced management and engineering team and as a
company we have more than 30 years of experience producing high
fidelity real-time simulators and over 25 years of experience
producing fully integrated computerized process control systems.
o We have developed a library of proprietary software tools that
substantially facilitate and expedite the design, production and
integration, testing and modification of software and systems used in
both our power simulation and process control products.
o Our software products and tools are executed on standard operating
systems with third-party off-the-shelf hardware permitting our
customers to acquire less expensive hardware and operating systems.
o We have a multinational sales force with offices located in
Nykoping, Sweden, and Tokyo, Japan and agents and representatives in
22 other countries. To capitalize on international opportunities and
penetrate foreign markets, we have established strategic alliances and
partnerships with several foreign entities.
Risk Factors
Exercising your rights delivered in this offering and purchasing our
common stock involves a high degree of risk. You should carefully read and
consider the information set forth under "Risk Factors" and the other
information contained in this Prospectus.
State and Date of Incorporation and Address
We were incorporated in Delaware on March 30, 1994. Our principal
executive offices are at 9189 Red Branch Road, Columbia, Maryland 21045. Our
telephone number is (410) 772-3500.
Summary Consolidated Financial Data
Six Months Ended Years Ended
(in thousands, June 30, December 31,
except per share data) 2001 2000 2000 1999 1998 1997 1996
Operating Data:
Contract revenue $ 24,323 $ 28,424 $ 55,715 $ 66,699 $ 73,818 $ 79,711 $ 96,033
Gross profit 6,254 8,987 14,893 25,070 24,004 21,385 32,354
Operating expenses 5,999 9,264 19,548 24,326 22,113 30,812 27,509
Operating income (loss) 255 (277) (4,655) 744 1,891 (9,427) 4,845
Gain (loss) on sales of assets 3,273 - (990) - 550 - -
Interest expense, net (452) (320) (687) (450) (350) (765) (387)
Other income (expense), net 133 21 55 40 326 (1,228) 394
Provision (benefit) for income taxes 1,027 (210) 2,537 233 1,020 (2,717) 709
Net income (loss) $ 2,182 $ (366) (8,814) $ 101 $ 1,397 $ (8,703) $ 4,143
Per Share Data:
Basic earnings (loss) per common share $ 0.42 $ 0.07 $(1.70) $ 0.02 $ 0.28 $(1.72) $ 0.82
Diluted earnings (loss) per common share $ 0.42 $ 0.07 $(1.70) $ 0.02 $ 0.27 $(1.72) $ 0.82
Common stock shares outstanding 5,194 5,193 5,182 5,066 5,066 5,066 5,066
As of June 30, As of December 31,
Financial Condition Data: 2001 2000 2000 1999 1998 1997 1996
Working capital $ 3,855 $ 7,588 $ 5,522 $ 8,665 $ 4,058 $ 1,646 $ 13,867
Total assets 36,846 42,772 35,949 43,027 48,743 48,362 51,006
Long-term liablilities 11,154 9,737 12,390 9,083 3,350 2,369 2,580
Stockholders' equity 10,850 17,204 8,713 17,170 17,089 15,924 24,693
Our operating results in 2000 include $2.9 million contract revenues
and related profit from the licensing of software to Avantium International B.V.
in exchange for 251,501 shares of Avantium preferred stock and 352,102 shares of
Avantium common stock. In addition, the following significant charges were
incurred in 2000: a $710,000 provision to write-down Process Automation
inventory, a $990,000 loss on the sale of our Belgium subsidiary, and a $4.3
million income tax charge to increase our deferred tax asset valuation
allowance.
Net income for the six months ended June 30, 2001 includes a $3.3
million pre-tax gain on the sale of our VirtualPlant business technology and
assets to Avantium International B.V.
Risk Factors
Warning as to our use of forward-looking statements.
This document contains certain forward-looking statements concerning
GSE Systems. These forward-looking statements are based on the beliefs of our
management, as well as on assumptions made by and information currently
available to us at the time such statements are made. The discussion of our
business strategy is not based on historical facts but is comprised of forward
looking statements based upon numerous assumptions about future conditions,
which may ultimately prove to be inaccurate. When we use words such as
"anticipate," "believe," "estimate," "intend" and similar expressions in this
Prospectus, we intend to identify forward-looking statements. Actual results
could differ materially from those projected in the forward-looking statements
as a result of the risk factors set forth below, the matters set forth or
incorporated in this document generally and economic and business factors, some
of which are beyond our control. In analyzing our company, you should carefully
consider, along with other matters referred to in this document, the risk
factors detailed in this Risk Factors section and throughout this document and
future reports issued by our company.
Risks related to this offering.
Stock Market Risks.
The subscription price in this rights offering represents a 10%
premium to the market price of our common stock on June 15, 2001, which was the
date selected by our board of directors for calculating the subscription price.
On October 23, 2001, the last reported sale price for the common stock was $2.25
per share. We cannot assure you that the subscription price will be below any
trading price for our common stock for all or part of the offering period or
that its trading price will be above the subscription price at any time after
the rights offering. We urge you to consider prevailing market conditions in
deciding whether to exercise your subscription rights. The trading price of our
common stock may be below the subscription price for all or a part of the
offering period and following the offering period.
Future prices of our stock may be affected positively or negatively
by our future revenues and earnings, changes in estimates by analysts, our
ability to meet analysts' estimates, speculation in the trade or business press
about our company, and overall conditions affecting our businesses, economic
trends and the securities markets.
Although our common stock is listed on the American Stock Exchange,
it is thinly traded. Our stock price may fluctuate more than the stock market as
a whole.
As a result of the thin trading market for our stock, its market
price may fluctuate significantly more than the stock market as a whole or the
stock prices of our peer companies. Of the 5,193,527 shares of our outstanding
common stock, only about 1,713,864, or approximately 33%, are owned by persons
other than our officers, directors and four largest stockholders. Without a
larger float, our common stock will be less liquid than the stock of companies
with broader public ownership, and, as a result, the trading prices for our
common stock may be more volatile. Among other things, trading of a relatively
small volume of our common stock may have a greater impact on the trading price
for our stock than would be the case if our public float were larger.
In addition, sales of a substantial amount of common stock in the
public market, or the perception that these sales may occur, could adversely
affect the market price of our common stock prevailing from time to time.
Possible or actual sale of any of these shares, particularly by our officers,
directors and large stockholders, may decrease the price of shares of our common
stock.
The subscription price is not necessarily an indication of the value
of our company.
We have established the subscription price at $2.53 per share, a 10%
premium above the market price of the common stock as of June 15, 2001. The
market price on that date also represented the average market price of the
common stock for the preceding 30 days. On October 23, 2001, the last reported
sale price for the common stock was $2.25 per share. We set the subscription
price after considering a variety of factors, including our desire to encourage
maximum stockholder participation in this rights offering, and thereby raise
capital without diluting the interests of current stockholders. The subscription
price does not necessarily bear any relationship to the book value of our
assets, past operations, cash flows, losses, financial condition or any other
established criteria for value. You should not consider the subscription price
as an indication of our present or future value. We have neither sought nor
obtained a valuation opinion from an outside financial consultant or investment
banker.
Once you send in your subscription forms and payment, you cannot
revoke the exercise of your subscription rights.
Once you send in your subscription forms and payment, you cannot
revoke the exercise of your subscription rights, even if you later learn
information about us that you consider to be unfavorable. You should not
exercise your subscription rights unless you are certain that you wish to
purchase additional shares of common stock at the subscription price. If we
cancel the rights offering, we are obligated only to refund payments actually
received, without interest.
If you do not exercise your rights, your relative ownership interest
may be diluted.
If you choose not to exercise your subscription rights, your
relative ownership interest may be diluted depending on the number of shares
subscribed by other stockholders. In addition, because the prevailing market
price of our common stock may be greater than the subscription price for part of
the offering period, if you choose not to exercise your subscription rights you
could experience dilution of your economic interest.
There are significant restrictions on transfers of the rights.
Generally, only our stockholders of record as of the record date may
exercise the rights. You may not sell, give away, or otherwise transfer your
subscription rights, except to your immediate family members, to entities wholly
owned or controlled by you, or to other similar affiliates. For information on
how your rights can be transferred, see "The Rights Offering - Transferability
of Rights."
Need to act promptly and follow subscription instructions.
If you desire to purchase shares in the rights offering or to
transfer or sell your rights, you must act promptly to ensure that all required
forms and payments are actually received by the subscription agent, Continental
Stock Transfer & Trust Company, prior to the expiration date. If you fail to
complete and sign the required subscription forms, send an incorrect payment
amount, or otherwise fail to follow the subscription procedures that apply to
your desired transaction, the subscription agent may, depending on the
circumstances, reject your subscription or accept it to the extent of the
payment received. Neither GSE Systems nor the subscription agent undertakes to
contact you concerning, or to attempt to correct, an incomplete or incorrect
subscription form. GSE Systems has the sole discretion to determine whether a
subscription exercise properly follows the subscription procedures.
Personal checks may not clear in time for you to exercise your
subscription right.
Any personal check used to pay for shares must clear prior to the
expiration date, and the clearing process may require five or more business
days.
You may be able to purchase shares of our common stock on the open
market at a price that is lower than the exercise price of the rights in this
offering.
We have established the subscription price at $2.53 per share, a 10%
premium above the market price of the common stock as of June 15, 2001. The
market price on that date also represented the average market price of the
common stock for the preceding 30 days. On October 23, 2001, the last reported
sale price for the common stock was $2.25 per share. Since the market price of
our common stock fluctuates, we urge you to consider prevailing market
conditions in deciding whether to exercise your subscription rights. You may
have committed to buy shares of common stock at a price above the prevailing
market price and you may have an immediate unrealized loss. Moreover, we cannot
assure you that following the exercise of subscription rights you will be able
to sell your shares of common stock at a price equal to or greater than the
subscription price. Until certificates are delivered upon expiration of the
rights offering, you may not be able to sell the shares of our common stock that
you purchase in the rights offering. Certificates representing shares of our
common stock purchased will be delivered as soon as practicable after expiration
of the rights offering. We will not pay you interest on funds delivered to the
subscription agent pursuant to the exercise of rights.
Risks related to our business.
Our expense levels are based upon our expectations as to future
revenues, so we may be unable to adjust spending to compensate for a revenue
shortfall. Accordingly, any revenue shortfall would likely have a
disproportionate adverse effect on our operating results.
Our operating results have fluctuated in the past and may fluctuate in
the future as a result of a variety of factors, including purchasing patterns,
timing of new products and enhancements by us and our competitors and
fluctuating foreign economic conditions. Since our expense levels are based in
part on expectations as to future revenues, we may be unable to adjust spending
in a timely manner to compensate for any revenue shortfall and such revenue
shortfalls would likely have a disproportionate adverse effect on our operating
results. We believe that these factors may cause the market price for our common
stock to fluctuate, perhaps significantly. In addition, in recent years the
stock market in general, and the shares of technology companies in particular,
have experienced extreme price fluctuations.
Risk of International Sales and Operations.
Sales of products and the provision of services to end users outside
the United States accounted for approximately 52% of our consolidated revenues
in 2000. We anticipate that international sales and services will continue to
account for a significant portion of our revenues in the foreseeable future. As
a result, we may be subject to certain risks, including risks associated with
the application and imposition of protective legislation and regulations
relating to import or export (including export of high technology products) or
otherwise resulting from trade or foreign policy and risks associated with
exchange rate fluctuations. Additional risks include potential difficulties
involving our strategic alliances and managing foreign sales agents or
representatives and potential difficulties in accounts receivable collection. We
currently sell products and provide services to customers in emerging market
economies such as Russia, Ukraine, Bulgaria, and the Czech Republic. We have
taken steps designed to reduce the additional risks associated with doing
business in these countries, but we believe that such risks still exist and
include, among others, general political and economic instability, as well as
uncertainty with respect to the efficacy of applicable legal systems. We cannot
be sure that these and other factors will not have a material adverse effect on
our business, financial condition or results of operations.
We rely for a substantial portion of our revenues on two customers.
Loss of either of these customers would have a material adverse effect upon our
revenues and results of operations.
For the year ended December 31, 2000, one Power Simulation customer
(Battelle's Pacific Northwest National Laboratory) accounted for approximately
22% of our consolidated revenues. The Pacific Northwest National Laboratory is
the purchasing agent for the Department of Energy and the numerous projects we
perform in Eastern and Central Europe. For the year ended December 31, 2000, one
Process Automation customer (Westinghouse Savannah River Company) accounted for
approximately 11% of our consolidated revenues. If we lost either of these
customers, our revenue and results of operations would be materially and
adversely affected.
Our business is substantially dependent on sales to certain industries.
Any disruption in these industries would have a material adverse effect upon our
revenues.
In 2000, 54.6% of our revenue was from customers in the nuclear power
industry. We will continue to derive a significant portion of our revenues from
customers in the nuclear power industry for the foreseeable future. Our ability
to supply nuclear power plant simulators and related products and services is
dependent on the continued operation of nuclear power plants and, to a lesser
extent, on the construction of new nuclear power plants. A wide range of factors
affects the continued operation and construction of nuclear power plants,
including the political and regulatory environment, the availability and cost of
alternative means of power generation, the occurrence of future nuclear
incidents, and general economic conditions.
In 2000, 26.1% of our revenue was from customers in the chemicals
industry. Accordingly, our future performance is dependent to a certain extent
upon the demand for our products by customers in the chemicals industry. Our
revenues may be subject to period-to-period fluctuations as a consequence of
industry cycles, as well as general domestic and foreign economic conditions and
other factors affecting spending by companies in our target process industries.
Our substantial indebtedness could adversely affect our financial
condition.
We have substantial indebtedness and will continue to have substantial
indebtedness after the completion of the rights offering. In addition, we may
increase our indebtedness in the future. The following are important statistics
about us and our indebtedness:
o On June 30, 2001, we had total long-term debt of $10.7 million,
representing 49.7% of our total capitalization.
o At June 30, 2001, our available borrowing base under our bank line
of credit was approximately $6.4 million, of which we have borrowed
approximately $5.3 million.
Our level of indebtedness could have important consequences to our
stockholders. For example, it could:
o Make us more vulnerable to economic downturns.
o Potentially limit our ability to withstand competitive
pressures.
o Impair our ability to obtain additional financing in the
future for working capital, capital expenditures, acquisitions or
general corporate purposes.
o Make us more susceptible to the above risks because
borrowings under our credit facility will bear interest at fluctuating
rates.
If we are unable to generate sufficient cash flow from operations in
the future we may be unable to repay or refinance all or a portion of our then
existing debt or to obtain additional financing. We cannot be sure that any such
refinancing would be possible or that any additional financing could be obtained
on terms that are acceptable to us.
Our debt agreements impose significant operating and financial
restrictions, which may prevent us from capitalizing on business opportunities.
Our debt agreements impose significant operating and financial
restrictions on us. These restrictions affect, and in certain cases limit, among
other things, our ability to:
o incur additional indebtedness and liens
o make capital expenditures
o make investments and acquisitions and sell assets
o consolidate, merge or sell all or substantially all of our assets
There can be no assurance that these restrictions will not adversely
affect our ability to finance our future operations or capital needs or to
engage in other business activities that may be in the interest of stockholders.
Our business is dependent on product innovation and research and
development, which costs are incurred prior to revenues for new products and
improvements.
We believe that our success will depend in large part on our ability to
maintain and enhance our current product line, develop new products, maintain
technological competitiveness and meet an expanding range of customer needs. Our
product development activities are aimed at the development and expansion of our
library of software modeling tools, the improvement of our display systems and
process control technologies, the addition of applications aimed at increasing
customer productivity, and expanding the capabilities of our products to take
advantage of the Internet. The life cycles for software modeling tools, display
system software, process control and simulation technologies are variable and
are largely determined by competitive pressures. Consequently, we will need to
continue to make significant investments in research and development to enhance
and expand our capabilities in these areas and to maintain our competitive
advantage.
We rely upon our intellectual property rights for the success of our
business; however, the steps we have taken to protect our intellectual property
may be inadequate.
Although we believe that factors such as the technological and creative
skills of our personnel, new product developments, frequent product enhancements
and reliable product maintenance are important to establishing and maintaining a
technological leadership position, our business depends, in part, on our
intellectual property rights in our proprietary technology and information. We
rely upon a combination of trade secret, copyright, patent and trademark law,
contractual arrangements and technical means to protect our intellectual
property rights. We enter into confidentiality agreements with our employees,
consultants, joint venture and alliance partners, customers and other third
parties that are granted access to our proprietary information, and limit access
to and distribution of our proprietary information. We cannot be sure, however,
that we have protected or will be able to protect our proprietary technology and
information adequately, that the unauthorized disclosure or use of our
proprietary information will be prevented, that others have not or will not
develop similar technology or information independently, or, to the extent we
own patents, that others have not or will not be able to design around those
patents. Furthermore, the laws of certain countries in which our products are
sold do not protect our products and intellectual property rights to the same
extent as the laws of the United States.
The industries in which we operate are highly competitive. This
competition may prevent us from raising prices at the same pace as our costs
increase.
Our businesses operate in highly competitive environments with both
domestic and foreign competitors, many of whom have substantially greater
financial, marketing and other resources than us. The principal factors
affecting competition include price, technological proficiency, ease of system
configuration, product reliability, applications expertise, engineering support,
local presence and financial stability. We believe that competition in the
simulation and process automation fields may further intensify in the future as
a result of advances in technology, consolidations and/or strategic alliances
among competitors, increased costs required to develop new technology and the
increasing importance of software content in systems and products. Due to this
level of competition, raising prices has been difficult over the past several
years and will likely continue to be so in the near future. As our business has
a significant international component, changes in the value of the dollar can
adversely affect our ability to compete internationally.
We will continue to pursue new acquisitions and joint ventures, and any
of these transactions could adversely affect our operating results or result in
increased costs or other problems.
We intend to continue to pursue new acquisitions and joint ventures, a
pursuit which will consume substantial time and resources. Identifying
appropriate acquisition candidates and negotiating and consummating acquisitions
can be a lengthy and costly process. We may also encounter substantial
unanticipated costs or other problems associated with the acquired businesses.
The risks inherent in our strategy could have an adverse impact on our results
of operation or financial condition.
The chemicals and nuclear power industries, two of our largest customer
groups, are associated with a number of hazards which could create significant
liabilities for us.
Our business could expose us to third party claims with respect to
product, environmental and other similar liabilities in the chemicals, nuclear
power or other industries to which we market our products. Although we have
sought to protect ourselves from these potential liabilities through a variety
of legal and contractual provisions as well as through liability insurance, the
effectiveness of such protections has not been fully tested. The failure or
malfunction of one of our systems or devices could create potential liability
for substantial monetary damages and environmental cleanup costs. Such damages
or claims could exceed the applicable coverage of our insurance. Although we
have no material liability claims against us to date, such potential future
claims could have a material adverse effect on our business or financial
condition. Certain of our products and services are used by the nuclear power
industry primarily in operator training. Although our contracts for such
products and services typically contain provisions designed to protect us from
potential liabilities associated with such use, there can be no assurance that
we would not be materially adversely affected by claims or actions which may
potentially arise.
We are controlled by our principal stockholders, whose interests may
not be aligned with those of our other stockholders.
As of June 30, 2001, ManTech, GP Strategies, our directors and our
executive officers beneficially own approximately 49% of our outstanding common
stock. In addition, we intend to issue 39,000 shares of Series A preferred stock
to ManTech in full payment of our existing $3.9 million promissory note to
ManTech. The Series A preferred stock converts into an aggregate of 1,474,480
shares of common stock. If fully converted by ManTech and if no shares are
subscribed in this offering, ManTech will beneficially own approximately 35.8%
of our outstanding common stock, and GP Strategies will beneficially own
approximately 17.4% of our outstanding common stock. ManTech and GP Strategies
disclaim beneficial ownership of all shares, including those subject to option,
that are owned by affiliated individuals. ManTech has advised us that it intends
to grant GP Strategies an option to acquire 19,500 shares of the Series A
preferred stock from ManTech. If ManTech exercises its option to convert the
Series A preferred stock to common stock, and GP Strategies exercises its option
to acquire 50% of the Series A preferred stock held by ManTech and also converts
those shares to common stock, and if no shares are subscribed in this offering,
ManTech will beneficially own approximately 24.8%, and GP Strategies will
beneficially own approximately 28.4%, of our outstanding common stock. If these
stockholders vote together as a group, they will be able to control our business
and affairs, including the election of individuals to our board of directors,
and the outcome of actions that require stockholder approval including mergers,
sales of assets, and to prevent, or to cause, a change of control of our
company.
The Rights Offering
The Rights
As soon as practicable after the date of this Prospectus, we are
distributing, at no charge, to the record holders of our common stock at 5:00
p.m. (Eastern Time) on the record date of October 26, 2001, 0.711 subscription
rights for every share of common stock held at that time to purchase additional
shares of common stock. Each whole right entitles you to purchase one share of
our common stock for the subscription price.
We will not issue fractional rights. If the number of shares of
common stock you held of record on the record date would have resulted in your
receipt of fractional rights, the number of rights issued to you will be rounded
up to the nearest whole right. So, for example, if you were the record holder of
less than one share, you will receive one right.
Subscription Price
The subscription price is $2.53 per share, payable in cash. This
price applies to the exercise of the basic subscription privilege and the
oversubscription privilege. All payments must be cleared on or before the
expiration date.
Basic and Oversubscription Privileges
Basic Subscription Privilege. You are entitled to purchase one
share of common stock at the subscription price for every one right exercised.
Oversubscription Privilege. If you exercise your basic subscription
privilege in full, you may also subscribe for additional shares that other
stockholders have not purchased under their basic subscription privilege. If
there are not enough shares available to fill all subscriptions for additional
shares, the available shares will be allocated pro rata based on the number of
shares each subscriber for additional shares has purchased under the basic
subscription privilege. We will not allocate to you more than the number of
shares you have actually subscribed and paid for.
You are not entitled to exercise the oversubscription privilege
unless you have fully exercised your basic subscription privilege. For this
purpose, you would only count the shares you own in your own name, and not other
shares that might, for example, be jointly held with a spouse, held as a
custodian for someone else, or held in an individual retirement account.
You can elect to exercise the oversubscription privilege only at the
same time you exercise your basic subscription privilege in full.
In exercising the oversubscription privilege, you must pay the full
subscription price for all the shares you are electing to purchase. If we do not
allocate to you all shares you have subscribed for under the oversubscription
privilege, we will refund by mail to you any payment you have made for shares
which are not available to issue to you, as soon as practicable after completion
of the rights offering. Interest will not be payable on amounts refunded.
Banks, brokers and other nominees who exercise the oversubscription
privilege on behalf of beneficial owners of shares must report certain
information to the subscription agent, Continental Stock Transfer & Trust
Company, and GSE Systems and record certain other information received from each
beneficial owner exercising rights. Generally, banks, brokers and other nominees
must report (1) the number of shares held on the record date on behalf of each
beneficial owner, (2) the number of rights as to which the basic subscription
privilege has been exercised on behalf of each beneficial owner, (3) that each
beneficial owner's basic subscription privilege held in the same capacity has
been exercised in full, and (4) the number of shares subscribed for under the
oversubscription privilege by each beneficial owner.
If you complete the portion of the subscription warrant to exercise
the oversubscription privilege, you will be representing and certifying that you
have fully exercised your basic subscription privilege as described above. You
must exercise your oversubscription privilege at the same time you exercise your
basic subscription privilege.
Reasons for the Rights Offering
We are offering the rights to raise equity capital. We will use the net
proceeds of this offering for repayment of a $1 million loan from ManTech
International Corporation, working capital, strategic acquisitions, capital
expenditures and general corporate purposes. See "Use of Proceeds."
We have determined that, given current market conditions, this
rights offering is the most appropriate means of raising equity capital because
it affords our existing stockholders the opportunity to subscribe for the new
shares of common stock and to maintain their proportionate interest in GSE
Systems. Some of the factors considered by our board of directors in approving
the rights offering include:
o our need for capital;
o the alternative methods available to us for raising capital;
o the pro rata nature of a rights offering to our stockholders;
o the market price of our common stock; and
o general conditions in the securities markets.
No Board Investment Recommendation to Stockholders
Our board of directors does not make any recommendation to you about
whether you should exercise any rights. In making the decision to exercise or
not exercise your rights, you must consider your own best interests.
If you choose not to exercise your subscription rights in full, your
relative ownership interest may be diluted depending on whether other
stockholders exercise their rights. If you exercise rights, you risk investment
loss on new money invested. We have established the subscription price at $2.53
per share, a 10% premium above the market price of the common stock as of June
15, 2001. On October 23, 2001, the last reported sale price for the common stock
was $2.25 per share. We cannot assure you that the subscription price will be
below any trading price for our common stock for all or part of the offering
period or that its trading price will be above the subscription price at any
time after the rights offering. We urge you to consider prevailing market
conditions in deciding whether to exercise your subscription rights. For a
summary of some of the risks a new investment would entail, see "Risk Factors."
Expiration Time and Date
The rights expire on December 14, 2001, at 5:00 p.m., Eastern Time.
We have the option of extending the expiration date for any reason, although
currently we do not intend to do so. Rights not exercised by the expiration date
will be null and void.
In order to exercise rights in a timely manner, you must assure that
the subscription agent, Continental Stock Transfer & Trust Company, actually
receives, prior to expiration of the rights, the properly executed and completed
subscription warrant (or form of "Notice of Guaranteed Delivery"), together with
full payment for all shares you wish to purchase.
No Revocation
You are not allowed to revoke or change your exercise of rights
after you send in your subscription forms and payment.
Extension, Withdrawal and Amendment
We have the option of extending the rights offering and the period
for exercising your rights, although we currently do not intend to do so.
We also reserve the right to withdraw or terminate the rights
offering at any time for any reason. In the event that the offering is withdrawn
or terminated, all funds received from such subscriptions will be returned.
Interest will not be payable on any returned funds.
We reserve the right to amend the terms of the rights offering. If
we make an amendment that we consider significant, we will (1) mail notice of
the amendment to all stockholders of record as of the record date, (2) extend
the expiration date by at least ten days and (3) offer all subscribers no less
than ten days to revoke any subscription already submitted. The extension of the
expiration date will not, in and of itself, be treated as a significant
amendment for these purposes.
Waiver of Rights by Our Largest Stockholders
GP Strategies, including its subsidiaries, beneficially owns a total
of 1,158,700 shares of common stock, representing 22.3% of our outstanding
common stock. ManTech beneficially owns a total of 914,784 shares of common
stock, representing 17.6% of our outstanding common stock. These numbers exclude
any shares directly owned by any individual affiliates of either GP Strategies
or ManTech.
GP Strategies and ManTech have advised us that each waives its right to
receive rights to purchase additional shares of common stock in this offering
and will not exercise its basic subscription privilege or oversubscription
privilege. Accordingly, we have excluded the rights that GP Strategies,
including its subsidiaries, and ManTech would otherwise be granted from this
offering and common stock that would otherwise underlie such rights will not be
included in the shares available for the oversubscription privilege.
Shares of Common Stock Outstanding after the Rights Offering
Assuming we issue all of the shares of common stock offered in the
rights offering, approximately 7,413,228 shares of common stock will be issued
and outstanding. This would represent a 42.7% increase in the number of
outstanding shares of common stock. If you do not exercise your basic
subscription rights, the percentage of common stock that you hold will decrease
if shares are purchased in the rights offering.
Mailing of Warrants and Record Holders
We are sending a subscription warrant to each record holder along
with this Prospectus and related instructions to evidence the rights. In order
to exercise rights, you must fill out and sign the subscription warrant and
timely deliver it with full payment for the shares to be purchased. Only holders
of record of common stock at the close of business on the record date may
exercise rights. You are a record holder for this purpose only if your name is
registered as a stockholder with our transfer agent, Continental Stock Transfer
& Trust Company, as of the record date.
A depository bank, trust company or securities broker or dealer
which is a record holder for more than one beneficial owner of shares may divide
or consolidate subscription warrants to represent shares held on the record date
by their beneficial owners, upon proper showing to the subscription agent.
If you own shares held in a brokerage, bank or other custodial or
nominee account, you should promptly send the proper instruction form to the
person holding your shares in order to exercise rights. Your broker, dealer,
depository or custodian bank or other person holding your shares is the record
holder of your shares and will have to act on your behalf in order for you to
exercise rights. We have asked your broker, dealer or other nominee holders of
our stock to contact the beneficial owners to obtain instructions concerning
rights the beneficial owners are entitled to exercise.
Foreign and Unknown Addresses
We are not mailing subscription warrants to stockholders whose
addresses are outside the United States or who have an APO or FPO address. In
those cases, the subscription warrants will be held by the subscription agent
for those stockholders. To exercise their rights, these stockholders must notify
the subscription agent, Continental Stock Transfer & Trust Company, prior to
11:00 a.m., Eastern Time, on the third business day prior to the expiration
date.
Right To Block Exercise Due To Regulatory Issues
We reserve the right to refuse the exercise of rights by any holder
of rights who would, in our opinion, be required to obtain prior clearance or
approval from any state, federal or foreign regulatory authorities for the
exercise of rights or ownership of additional shares if, at the expiration date,
this clearance or approval has not been obtained. We are not undertaking to pay
any expenses incurred in seeking that clearance or approval.
We are not offering or selling, or soliciting any purchase of,
rights or underlying shares in any state or other jurisdiction in which this
rights offering is not permitted. We reserve the right to delay the commencement
of the rights offering in certain states or other jurisdictions if necessary to
comply with local laws. However, we may elect not to offer rights to residents
of any state or other jurisdiction whose law would require a change in the
rights offering in order to carry out the rights offering in that state or
jurisdiction.
Procedures to Exercise Rights
Please do not send subscription warrants or related forms to us.
Please send the properly completed and executed form of subscription warrant
with full payment to the subscription agent, Continental Stock Transfer & Trust
Company.
You should read carefully the forms of subscription warrant and
related instructions and forms which accompany this Prospectus. You should call
Gill Grady, our Senior Vice President, Investor Relations at 1-800-638-7912 or
(410) 772-3500 promptly with any questions you may have.
You may exercise your rights by delivering to Continental Stock
Transfer & Trust Company, Attn: Reorganization Department, at 2 Broadway, New
York, New York 10004, at or prior to the expiration date:
o Properly completed and executed subscription warrant(s) which
evidence your rights. See " -- Delivery of Subscription Warrant" below for
instructions on where to send these.
o Payment in full of the subscription price for each share you wish
to purchase under the basic subscription privilege and the oversubscription
privilege. See " -- Required Forms of Payment of Subscription Price" below
for payment instructions.
Required Forms of Payment of Subscription Price
The subscription price is $2.53 per share subscribed for, payable in
cash. All payments must be cleared on or before the expiration date.
If you exercise any rights, you must deliver full payment in the
form of:
o a check or bank draft drawn upon a U.S. bank, or U.S. postal
money order, payable to Continental Stock Transfer & Trust Company,
Subscription Agent; or
o by wire transfer of funds to the account maintained by the
subscription agent, Continental Stock Transfer & Trust Company, for this
rights offering at:
JP Morgan Chase Bank, New York, NY
ABA No. 021 000 021
Acct. No. 475-500717
FBO: GSE Systems, Inc.
Attention: Continental Stock Transfer & Trust Company
as agent for GSE Systems, Inc.
In order for you to timely exercise your rights, the subscription
agent, Continental Stock Transfer & Trust Company, must actually receive the
subscription price before the expiration date in the form of:
o a personal check, which must have timely cleared payment;
o a certified or cashier's check or bank draft drawn upon a U.S.
bank or a U.S. postal money order; or
o collected funds in Continental Stock Transfer & Trust Company 's account
designated above.
Funds paid by uncertified personal check may take at least five business days to
clear. Accordingly, if you pay the subscription price by means of uncertified
personal check, you should make payment sufficiently in advance of the
expiration time to ensure that your check actually clears and the payment is
received before that time. We are not responsible for any delay in payment by
you and suggest that you consider payment by means of certified or cashier's
check, money order or wire transfer of funds.
Delivery of Subscription Warrant
All subscription warrants, payments of the subscription price,
nominee holder certifications, notices of guaranteed delivery, and DTC
participant oversubscription exercise forms, to the extent applicable to your
exercise of rights, must be delivered to the subscription agent, Continental
Stock Transfer & Trust Company, by mail, hand delivery or overnight courier as
follows:
Continental Stock Transfer & Trust Company
Attn: Reorganization Department
2 Broadway
New York, New York 10004
Telephone: (212) 509-4000, extension 535
Fax: (212) 616-7610
Eligible institutions may also deliver documents by facsimile
transmission. The subscription agent's facsimile number is (212) 616-7610. You
should confirm receipt of all facsimile transmissions by calling (212) 509-4000,
extension 535.
Special Procedure Under "Notice Of Guaranteed Delivery" Form
If you wish to exercise rights but cannot ensure that the
subscription agent will actually receive the executed subscription warrant
before the expiration date, you may alternatively exercise rights by causing all
of the following to occur within the time prescribed:
o Full payment must be received by the subscription agent,
Continental Stock Transfer & Trust Company, prior to the expiration date
for all shares you desire to purchase pursuant to the basic subscription
privilege and the oversubscription privilege.
o A properly executed "Notice of Guaranteed Delivery" substantially
in the form distributed by GSE Systems with your subscription warrant must
be received by the subscription agent at or prior to the expiration date.
o The "Notice of Guaranteed Delivery" must be executed by both you
and one of the following: (1) a member firm of a registered national
securities exchange, (2) a member of the National Association of Securities
Dealers, Inc. (NASD), (3) a commercial bank or trust company having an
office or correspondent in the United States, or (4) other eligible
guarantor institution qualified under a guarantee program acceptable to the
subscription agent. The co-signing institution must guarantee in the Notice
of Guaranteed Delivery that the subscription warrant will be delivered to
the subscription agent within three AMEX trading days after the date of the
form. You must also provide in that form other relevant details concerning
the intended exercise of rights.
o The properly completed subscription warrant(s) with any required
signature guarantee must be received by the subscription agent within three
AMEX trading days following the date of the related Notice of Guaranteed
Delivery.
o If you are a nominee holder of rights, the "Nominee Holder
Certification" must also accompany the Notice of Guaranteed Delivery.
A Notice of Guaranteed Delivery may be delivered to the subscription
agent in the same manner as subscription warrants at the address set forth above
under "The Rights Offering -- The Subscription Agent" or may be delivered by
telegram or facsimile transmission (facsimile no. (212) 616-7610). To confirm
facsimile transmissions, please call (212) 509-4000, extension 535.
Additional copies of the form of Notice of Guaranteed Delivery are
available upon request from the subscription agent, whose address and telephone
numbers are set forth above.
Incomplete Forms; Insufficient Payment
If you do not indicate the number of rights being exercised, or do
not forward sufficient payment for the number of rights that you indicate are
being exercised, then we will accept the subscription forms and payment only for
the maximum number of rights that may be exercised based on the actual payment
delivered. We will make this determination as follows: (1) you will be deemed to
have exercised the basic subscription privilege to the full extent of the
payment received, and (2) if any funds remain, you will be deemed to have
exercised the oversubscription privilege to the extent of the remaining funds.
GSE Systems will return any payment not applied to the purchase of shares under
the rights offering procedures to those who made these payments as soon as
practicable by mail. Interest will not be payable on amounts refunded.
Prohibition on Fractional Shares
Each whole right entitles you to purchase one share of common stock
at the subscription price per share. We will accept any inadvertent subscription
indicating a purchase of fractional shares by rounding down to the nearest whole
share and refunding without interest any payment received for a fractional share
as soon as practicable.
Instructions to Nominee Holders
If you are a broker, trustee or depository for securities or other
nominee holder of common stock for beneficial owners of the stock, we are
requesting you to contact the beneficial owners as soon as possible to obtain
instructions and related certifications concerning their rights. Our request to
you is further explained in the suggested form of letter of instructions from
nominee holders to beneficial owners accompanying this Prospectus.
To the extent so instructed, nominee holders should complete
appropriate subscription warrants on behalf of beneficial owners and, in the
case of any exercise of the oversubscription privilege, the related form of
"Nominee Holder Certification," and submit them on a timely basis to the
subscription agent, Continental Stock Transfer & Trust Company, with the proper
payment.
Risk of Loss on Delivery of Subscription Warrant Forms and Payments
Each holder of rights bears all risk of the method of delivery to
Continental Stock Transfer & Trust Company of subscription warrants and payments
of the subscription price.
If subscription warrants and payments are sent by mail, you are urged to send
these by registered mail, properly insured, with return receipt requested, and
to allow a sufficient number of days to ensure delivery to the subscription
agent and clearance of payment prior to the expiration time.
Because uncertified personal checks may take at least five business days to
clear, you are strongly urged to pay, or arrange for payment, by means of
certified or cashier's check, money order or wire transfer of funds.
Procedures For DTC Participants
We expect that your exercise of your basic subscription privilege
(but not your oversubscription privilege) may be made through the facilities of
The Depository Trust Company (commonly known as DTC). If your rights are
exercised as part of the basic subscription privilege through DTC, we refer to
them as "DTC Exercised Rights." If you hold DTC Exercised Rights, you may
exercise your oversubscription privilege by properly executing and delivering to
the subscription agent, at or prior to the time the rights expire, a DTC
participant oversubscription exercise form and a nominee holder certification
and making payment of the appropriate subscription price for the number of
shares of common stock for which your oversubscription privilege is to be
exercised. Please call the subscription agent, Continental Stock Transfer &
Trust Company, at (212) 509-4000, extension 535 to obtain copies of the DTC
oversubscription exercise form and the nominee holder certification.
Transferability of Rights
Permitted Transfers. In general, the rights are not transferable and
may be exercised only by the persons to whom they are issued (each, a "holder").
Rights may, however, be transferred by the holder to the following persons (the
"permitted transferees"):
o To the holder's immediate relatives, i.e., spouse, children and parents;
o To entities wholly owned or controlled by the holder;
o If the holder is a corporation or partnership owned or controlled
by one person or entity, to the person or entity that owns or controls the
holder;
o If the holder is a trust, to the settlors, grantors, trustees or
beneficiaries of the trust or immediate relatives or entities wholly owned
or controlled by such settlors, grantors, trustees or beneficiaries; and
o By operation of law in the event of death or dissolution of the
holder.
In any transfer, we will rely on your certification that the transferee is a
permitted transferee. We may, at our option, request proper showing of your
relationship to the transferee, and, if we are not satisfied, we have the option
of not acknowledging or giving effect to the purported transfer.
Method of Transfer. You may transfer rights in whole by endorsing
the subscription warrant for the transfer. Please follow the instructions for
transfer included in the information sent to you with your subscription warrant.
You may not transfer less than a whole right. If you transfer only a portion of
the rights (but not fractional rights), you should deliver your properly
endorsed subscription warrant to the subscription agent, Continental Stock
Transfer & Trust Company. With your subscription warrant, you should include
instructions to register such portion of the rights evidenced thereby in the
name of the transferee (and to issue a new subscription warrant to the
transferee for such transferred rights). If there is sufficient time before the
expiration of the right offering, the subscription agent will send you a new
subscription warrant evidencing the balance of the rights issued to you but not
transferred.
You should also allow two to seven business days for your transferee
to exercise the rights evidenced by the new subscription warrant. The amount of
time needed by your transferee to exercise its rights depends upon the method by
which the transferee delivers the subscription warrant and the method of payment
made by the transferee. Neither GSE Systems nor the subscription agent will be
liable to the transferor or transferee of rights if the subscription warrant or
other required documents are not received in time for exercise prior to the
expiration date.
You will receive a new subscription warrant upon a partial exercise
only if the subscription agent receives your properly endorsed subscription
warrants no later than 5:00 p.m., Eastern Time, five business days before the
expiration date. The subscription agent will not issue a new subscription
warrant if your subscription warrant is received after the expiration date. If
your instructions and the subscription warrants are not received by the
subscription agent by the expiration date, you will lose your power to exercise
your remaining rights.
Unless you make other arrangements with the subscription agent, a
new subscription warrant issued to you after 5:00 p.m., Eastern Time, five
business days before the expiration date will be held for pick-up by you at the
subscription agent's address provided herein. You bear the responsibility for
all newly-issued subscription warrants; if you request a reissuance of a
subscription warrant, the delivery of that document will be at your risk.
Signature Guarantee. If you are not a broker, bank or other eligible
institution, you must obtain a signature guarantee on the subscription warrant
from a broker, bank or other institution eligible to guarantee signatures in
order to transfer the subscription warrant in whole or to transfer a portion of
your rights.
How Procedural and other Questions are Resolved
We are entitled to resolve all questions concerning the timeliness,
validity, form and eligibility of any exercise of rights. Our determination of
such questions will be final and binding. We, in our sole discretion, may waive
any defect or irregularity, or permit a defect or irregularity to be corrected
within such time as we may determine, or reject the purported exercise of any
right because of any defect or irregularity.
Subscription warrants will not be considered received or accepted
until all irregularities have been waived or cured within such time as we
determine, in our sole discretion. Neither GSE Systems nor the subscription
agent has any duty to give notification of any defect or irregularity in
connection with the submission of subscription warrants or any other required
document. They will not incur any liability for failure to give such
notification.
We reserve the right to reject any exercise of rights if the
exercise does not comply with the terms of this rights offering or is not in
proper form or if the exercise of rights would be unlawful or materially
burdensome.
Issuance of Stock Certificates
Stock certificates for shares purchased in the rights offering will
be issued as soon as practicable after the expiration date. The subscription
agent will deliver subscription payments to us only after consummation of the
rights offering and the issuance of stock certificates to those exercising
rights. Unless otherwise instructed in your subscription warrant form, shares
purchased by the exercise of rights will be registered in the name of the person
exercising the rights.
Questions and Assistance Concerning the Rights
You should direct any questions, requests for assistance concerning
the rights or requests for additional copies of this Prospectus, forms of
instructions or the Notice of Guaranteed Delivery to:
Gill Grady
Sr. Vice President, Investor Relations
GSE Systems, Inc.
9189 Red Branch Road
Columbia, MD 21045
Phone 1-800-638-7912 or (410) 772-3500
Fax: (410) 772-3599
Email: investor@gses.com
To ask other questions or to receive copies of our recent SEC
filings, you can also contact us by mail or telephone, or refer to the other
sources described under "Where You Can Find More Information."
Use of Proceeds
If all shares being offered pursuant to this rights offering are sold,
we estimate that the proceeds to GSE Systems will be approximately $5,615,844
before the fees and expenses related to this offering.
The principal purposes of the offering are for repayment of a $1
million loan from ManTech International Corporation, working capital, strategic
acquisitions, capital expenditures and general corporate purposes.
The $1 million promissory note was issued on June 25, 2001 at an
interest rate of prime plus 1% per annum to ManTech. This note must be repaid
with the proceeds of this offering or subsequent offerings of stock to our
stockholders. In the event insufficient funds are raised through this offering
or any subsequent offering to our stockholders, payments of accrued interest
only shall be payable commencing on January 1, 2002 and continuing through April
1, 2006 and payments of principal shall be payable in equal installments
commencing on April 1, 2004 and continuing through final payment of the note on
April 1, 2006.
The foregoing uses are based upon our current estimates and may be
modified to the extent attractive business opportunities arise.
Determination of Subscription Price
We have established the subscription price at $2.53 per share, a 10%
premium above the market price of the common stock as of June 15, 2001. The
market price on that date also represented the average market price of the
common stock for the preceding 30 days. On October 23, 2001, the last reported
sale price for the common stock was $2.25 per share. The subscription price of
the rights was determined without any independent valuation or appraisal of the
value of our common stock. The subscription price is not necessarily related to
the assets, book value or net worth of GSE Systems or any other established
criteria of value and may not be indicative of the fair value of the securities
offered. In determining the subscription price, we considered, among other
things, the historic and current market price of the common stock on the
American Stock Exchange ($2.25 per share at October 23, 2001), our earnings and
prospects, the general conditions in the securities markets, our need for
capital and our desire to encourage maximum stockholder participation in this
rights offering.
Price Range of Common Stock and Dividend Policy
The following table sets forth, for the periods indicated, the high and
low sale prices for our common stock reported by the American Stock Exchange:
2001
Quarter High Low
($) ($)
First 1.79 1.21
Second 2.55 1.05
2000
Quarter High Low
($) ($)
First 9 3
Second 8 2/3 3
Third 4 5/8 2
Fourth 3 3/8 1 1/15
1999
Quarter High Low
($) ($)
First 5 2 1/2
Second 6 3/4 4 1/8
Third 6 1/4 3 3/4
Fourth 4 1/4 3
In January 1999, our common stock was approved for listing on the
American Stock Exchange, where it now trades under the symbol "GVP." Previously,
our common stock traded on the Nasdaq National Market under the symbol "GSES."
As of October 23, 2001, the closing price per share of our common stock was
$2.25. There were approximately 35 holders of record of the common stock as of
June 15, 2001 and we believe there are approximately 700 beneficial holders of
the common stock.
We currently intend to issue 39,000 shares of Series A preferred stock
to ManTech. Holders of our Series A preferred stock will be entitled to receive
cumulative dividends at the annual rate of six percent of the $100 liquidation
value per share plus interest on accrued and undeclared dividends. These
dividends will be cumulative and must be paid before any dividends can be paid
on our common stock. Our bank line of credit requires us to comply with certain
financial ratios and precludes us from paying dividends without the bank's
consent.
We have never declared or paid a cash dividend on our common stock and
we currently intend to retain future earnings to finance the growth and
development of our business and, therefore, we do not anticipate paying any cash
dividends in the foreseeable future.
Capitalization
The following table sets forth our short-term debt and capitalization
as of June 30, 2001. We have also adjusted the data to give effect to our sale
of 2,219,701 shares of common stock at the subscription price and the
application of the net proceeds therefrom as described under "Use of Proceeds"
and the conversion of $3.9 million subordinated debt payable to ManTech
International Corporation to preferred stock as described under "Certain
Transactions".
June 30, 2001
Actual As Adjusted
Current portion of long-term debt ................ $ 1,967 $ 1,967
Long-term debt (1) ............................... $ 10,739 $ 1,223
Preferred stock $.01 par value, 2,000,000 shares -- --
authorized, none outstanding; as adjusted
--- 2,000,000 shares authorized,
39,000 outstanding (2)
Common stock $.01 par value, 8,000,000 shares
authorized, shares issued and
outstanding 5,193,527; as adjusted-- 18,000,000
shares authorized, 7,413,228 shares issued
and outstanding (2) .......................... 52 74
Additional paid-in capital ....................... 22,424 31,918
Retained earnings (deficit)- at formation ........ (5,112) (5,112)
Retained earnings (deficit)- since formation ..... (5,373) (5,373)
Accumulated other comprehensive loss ............. (1,141) (1,141)
Total stockholder's equity .................. 10,850 20,366
Total capitalization ........................ $ 21,589 $ 21,589
(1)- Pending the use of proceeds as described in "Use of Proceeds", we will pay
down our bank debt.
(2)- The authorized capital stock of GSE Systems was previously 10 million
shares consisting of eight million shares of common stock, par value $.01 per
share, and two million shares of preferred stock, par value $.01 per share. At a
special shareholders' meeting on August 2, 2001, the shareholders approved an
amendment to the charter to increase the authorized stock. An amendment to our
charter was filed and became effective on September 6, 2001. As a result, the
authorized capital stock of GSE Systems is now 18 million shares of common
stock, par value $.01 per share, and two million shares of preferred stock, par
value $.01 per share.
Shown below is the impact on our earnings per share for the year ended
December 31, 2000 and for the six months ended June 30, 2001 assuming that our
sale of 2,219,701 shares of common stock at the subscription price had occurred
on January 1, 2000 and that the proceeds were used to pay down our debt. Our
interest expense would have been reduced by approximately $524,000 for the year
ended December 31, 2000 and by approximately $235,000 for the six months ended
June 30, 2001, thus resulting in a pro forma net loss of $8.1 million for the
year ended December 31, 2000 and net income of $2.3 million for the six months
ended June 30, 2001.
Year Ended Six Months Ended
December 31, 2000 June 30, 2001
Actual Pro forma Actual Pro forma
Net income (loss) ($8,814) ($8,077) $2,182 $2,342
Per Share Data:
Basic earnings (loss) per common share ($1.70) ($1.09) $0.42 $0.32
Diluted earnings (loss) per common share ($1.70) ($1.09) $0.42 $0.31
Selected Financial Data
The following table summarizes our selected consolidated financial
information and other financial data. The selected balance sheet and statement
of operations data, insofar as they relate to the years ended December 31, 2000,
1999, 1998, 1997 and 1996 are derived from our consolidated financial
statements. We disposed of substantially all of the assets of our subsidiary,
GSE Erudite Software, Inc., as of April 30, 1998. Effective as of October 30,
1998, we completed the sale of certain assets related to activities of our Oil &
Gas business unit. Effective December 1, 1997, we acquired J.L. Ryan, Inc. The
statement of operations data for the year ended December 31, 1997 includes the
activity of Ryan from the date of its acquisition. Effective March 6, 2001, we
completed the sale of certain assets related to our VirtualPlant business.
KPMG LLP audited our consolidated financial statements for the year
ended December 31, 2000, and PricewaterhouseCoopers LLP audited our consolidated
financial statements for the years ended December 31, 1999, 1998, 1997, and
1996. The selected consolidated financial data for the six-month periods ended
June 30, 2001 and 2000 are derived from unaudited consolidated financial
statements. In our opinion, all adjustments, consisting solely of normal
recurring adjustments, necessary for a fair presentation of results as of and
for the six-month periods ended June 30, 2001 and 2000 have been included. This
information should be read together with "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and our consolidated financial
statements and the related notes included elsewhere in this Prospectus. Results
for past periods are not necessarily indicative of results that may be expected
for any future period, and results of the six-month period ended June 30, 2001
are not necessarily indicative of results that may be expected for the full year
ending December 31, 2001.
Summary Consolidated Financial Data
Six Months Ended Years Ended
(in thousands, June 30, December 31,
except per share data) 2001 2000 2000 1999 1998 1997 1996
Operating Data:
Contract revenue $ 24,323 $ 28,424 $ 55,715 $ 66,699 $ 73,818 $ 79,711 $ 96,033
Gross profit 6,254 8,987 14,893 25,070 24,004 21,385 32,354
Operating expenses 5,999 9,264 19,548 24,326 22,113 30,812 27,509
Operating income (loss) 255 (277) (4,655) 744 1,891 (9,427) 4,845
Gain (loss) on sales of assets 3,273 -- (990) -- 550 -- --
Interest expense, net (452) (320) (687) (450) (350) (765) (387)
Other income (expense), net 133 21 55 40 326 (1,228) 394
Provision (benefit) for income taxes 1,027 (210) 2,537 233 1,020 (2,717) 709
Net income (loss) 2,182 (366) (8,814) 101 1,397 (8,703) 4,143
Per Share Data:
Basic earnings (loss) per common share $ 0.42 $ 0.07 $ (1.70) $ 0.02 $ 0.28 $ (1.72) $ 0.82
Diluted earnings (loss) per common share $ 0.42 $ 0.07 $ (1.70) $ 0.02 $ 0.27 $ (1.72) $ 0.82
Common stock shares outstanding 5,194 5,193 5,182 5,066 5,066 5,066 5,066
As of June 30, As of December 31,
Financial Condition Data: 2001 2000 2000 1999 1998 1997 1996
Working capital $ 3,855 $ 7,588 $ 5,522 $ 8,665 $ 4,058 $ 1,646 $ 13,867
Total assets 36,846 42,772 35,949 43,027 48,743 48,362 51,006
Long-term liablilities 11,154 9,737 12,390 9,083 3,350 2,369 2,580
Stockholders' equity 10,850 17,204 8,713 17,170 17,089 15,924 24,693
Our operating results in 2000 include $2.9 million contract revenues
and related profit from the licensing of software to Avantium International B.V.
in exchange for 251,501 shares of Avantium preferred stock and 352,102 shares of
Avantium common stock. In addition, the following significant charges were
incurred in 2000: a $710,000 provision to write-down Process Automation
inventory, a $990,000 loss on the sale of our Belgium subsidiary, and a $4.3
million income tax charge to increase our deferred tax asset valuation
allowance.
Net income for the six months ended June 30, 2001 includes a $3.3
million pre-tax gain on the sale of our VirtualPlant business technology and
assets to Avantium International B.V.
Supplementary Financial Information (unaudited)
Our quarterly financial information has not been audited, but in our
opinion includes all adjustments necessary for a fair presentation.
(in thousands, except per share data)
2001 2000
First Second First Second Third Fourth
- Quarter Quarter Quarter Quarter Quarter Quarter
Contract revenue $ 12,478 $ 11,845 $ 15,124 $ 13,300 $ 13,694 $ 13,597
Operating income (loss) (209) 464 1,135 (1,411) (1,249) (3,130)
Net income (loss) 1,714 468 537 (902) (869) (7,580)
Per Share Data:
Basic earnings (loss) per common share $ 0.33 $ 0.09 $0.10 ($ 0.17) ($ 0.17) ($ 1.46)
Diluted earnings (loss)per common share $ 0.33 $ 0.09 $0.09 ($ 0.17) ($ 0.17) ($ 1.45)
1999
First Second Third Fourth
Quarter Quarter Quarter Quarter
Contract revenue $ 17,578 $ 17,987 $ 15,587 $ 15,547
Operating income (loss) 1,469 1,197 (1,011) (911)
Net income (loss) 860 743 (727) (775)
Net income (loss) per common share:
Basic $0.17 $ 0.15 ($ 0.14) ($ 0.16)
Diluted $0.17 $ 0.14 ($ 0.14) ($ 0.15)
The first quarter 2000 includes $2.9 million contract revenues and
related profit from the licensing of software to Avantium International B.V. in
exchange for 251,501 shares of Avantium preferred stock and 352,102 shares of
Avantium common stock.
The fourth quarter 2000 net loss includes the following significant
charges: a $710,000 provision to write-down Process Automation inventory, a
$990,000 loss on the sale of our Belgium subsidiary, and a $4.3 million income
tax charge to increase our deferred tax asset valuation allowance.
The first quarter 2001 net income includes a $3.3 million pre-tax gain
on the sale of our VirtualPlant business technology and assets to Avantium
International B.V.
Management's Discussion and Analysis of Financial Condition and Results of
Operations
You should read the following discussion and analysis in conjunction
with our consolidated financial statements and related notes included elsewhere
in this Prospectus.
Overview
We develop and deliver business and technology solutions by applying
process control, simulation software, systems and services to the energy,
process and manufacturing industries worldwide. Our solutions and services
assist customers in improving quality, safety and throughput, reducing operating
expenses, and enhancing overall productivity.
Power Simulation business
Our Power Simulation business is a leader in the development, marketing
and support of high fidelity, real-time, dynamic simulation software for the
electric utility industry. In addition to operator training, our products and
services permit plant owners and operators to simulate the effects of changes in
plant configuration and performance conditions to optimize plant operation.
These features allow our customers to understand the cost implications of
replacing a piece of equipment, installing new technology or holding
out-of-service assets. We have also developed a suite of tools based on
sophisticated signal analysis and simulation techniques to help our customers
manage their assets by determining equipment degradation before it severely
impacts plant performance. During plant construction, our simulators can be used
to test control strategies and ensure on-time start-up. After commissioning, the
same tools can be used to increase plant availability and optimize plant
performance for the life of the facility. Our products also improve plant
security and plant design.
In 2000, we introduced our "G-Suite" software tools which target fossil
simulation applications. With our G-Suite products, we have moved forward with
our strategy to expand our experience with nuclear power to the fossil power
industry. As a result of this strategy, we have been awarded over $9 million of
new orders for six fossil simulators in the United States and India in the last
twelve months, including a recent award from American Electric Power for two
full-scope fossil training simulators.
Process Automation business
Our Process Automation business designs, develops and delivers process
control, data acquisition, client/server and business software, systems and
services. These products permit our customers to maximize the use of plant
assets by making real time process information more easily available, thereby
enabling faster and better informed operating decisions.
We released the latest version, 10.2, of our D/3 DCS Distributed
Control Systems software in December 2000. This new release furthers our
strategy of providing an open system that is able to seamlessly communicate with
a variety of third-party hardware and software. By allowing maximum flexibility
in selection of input-output systems, customers can take advantage of the latest
control technology without the costly replacement of their plant hardware.
In order to improve the operating results of our Process Automation
business, we implemented a restructuring plan in 2000 that included personnel
reductions, outsourcing of manufacturing and assembly operations, and sale of
our unprofitable European operations based in Belgium. The restructuring was
completed in the first quarter 2001. During the first quarter of 2001, we also
sold our VirtualPlant technology and assets to Avantium International B.V. in
exchange for Avantium stock. See "Business--Avantium." We intend to continue
working with Avantium in the marketplace and in product development so that
common clients can use Avantium's VirtualPlant technology to develop scalable
products that are expected to be compatible at the manufacturing level with our
process control and simulation products, which we expect will speed up market
introduction and reduce overall life cycle costs.
Results of Operations
The following table sets forth the results of operations for the
periods presented expressed in thousands of dollars and as a percentage of
revenues:
Six months ended June 30,
2001 % 2000 %
Contract revenue $ 24,323 100.0% $ 28,424 100.0%
Cost of revenue 18,069 74.3% 19,437 68.4%
Gross profit 6,254 25.7% 8,987 31.6%
Operating expenses:
Selling, general and administrative 5,298 21.8% 8,395 29.5%
Depreciation and amortization 701 2.9% 869 3.1%
Total operating expenses 5,999 24.7% 9,264 32.6%
Operating income (loss) 255 1.0% (277) (1.0)%
Gain (loss) on sales of assets 3,273 13.5% -- 0.0%
Interest expense, net (452) (1.8)% (320) (1.1)%
Other income, net 133 0.5% 21 0.1%
Income (loss) before income taxes 3,209 13.2% (576) (2.0)%
Provision (benefit) for income taxes 1,027 4.2% (210) (0.7)%
Net income (loss) $2,182 9.0% $ (366) (1.3)%
Years ended December 31,
2000 % 1999 % 1998 %
Contract revenue $ 55,715 100.0% $ 66,699 100.0% $ 73,818 100.0%
Cost of revenue 40,822 73.3% 41,629 62.4% 49,814 67.4%
Gross profit 14,893 26.7% 25,070 37.6% 24,004 32.6%
Operating expenses:
Selling, general and administrative 17,853 32.1% 22,646 34.0% 20,345 27.6%
Depreciation and amortization 1,695 3.0% 1,680 2.5% 1,768 2.4%
Total operating expenses 19,548 35.1% 24,326 36.5% 22,113 30.0%
Operating income (loss) (4,655) (8.4)% 744 1.1% 1,891 2.6%
Gain (loss) on sales of assets (990) (1.8)% -- -- 550 0.7%
Interest expense, net (687) (1.2)% (450) (0.7)% (350) (0.5)%
Other income, net 55 0.1% 40 0.1% 326 0.5%
Income (loss) before income taxes (6,277) (11.3)% 334 0.5% 2,417 3.3%
Provision (benefit) for income taxes 2,537 4.5% 233 0.3% 1,020 1.4%
Net income (loss) $ (8,814) (15.8)% $ 101 0.2% $ 1,397 1.9%
Comparison of Results for the Six Months Ended June 30, 2001 and 2000
Contract Revenue. Revenue for the six months ended June 30, 2001
amounted to $24.3 million, as compared with revenue of $28.4 million for the six
months ended June 30, 2000.
The Process Automation business revenue was $9.5 million and $13.2
million for the six months ended June 30, 2001 and 2000, respectively. We sold
our unprofitable Belgium subsidiary, GSE Process Solutions Belgium N.V., on
November 30, 2000 to Newton Integrated Services B.V. of the Netherlands, and
sold our VirtualPlant technology and assets on March 6, 2001 to Avantium.
Included in the Process Automation revenues was $507,000 for the six months
ended June 30, 2001 and $5.1 million for the six months ended June 30, 2000 for
these two divested businesses. Included in the 2000 revenues was $2.9 million
from the sale of licenses for five of our software products to Avantium in
exchange for an equity interest in Avantium (see Note 5, Investment in Avantium
International B.V. in the Notes to Consolidated Financial Statements). Excluding
the revenues for these divested businesses, Process Automation revenues
increased $900,000, or 11.1%, for the six months ended June 30, 2001 as compared
to the same period in the prior year.
The Power Simulation business revenues decreased 2.6% in the six months
ended June 30, 2001 as compared to the same period in the prior year, from $15.2
million in 2000 to $14.8 million in 2001.
Gross Profit. For the six months ended June 30, 2001 and 2000, gross
profit decreased from $9.0 million (31.6%) in 2000 to $6.3 million (25.7%) in
2001. The gross profit and gross profit margins for 2000 reflect the
software licenses sold to Avantium in the first quarter 2000. Excluding the
gross profit from the sale of these software licenses to Avantium, the gross
profit margin for 2000 was 23.9%.
Selling, General and Administrative Expenses. Selling, general and
administrative ("SG&A") expenses totaled $5.3 million in the six months ended
June 30, 2001, a 36.9% decrease from the $8.4 million for the same period in
2000. The decreases in SG&A reflect reduced sales, marketing and corporate
administration headcount, and lower net research and product development
expenditures ("R&D"), as discussed below.
Gross R&D totaled $709,000 in the six months ended 2001, as compared
with $2.2 million in the same period of 2000. Capitalized software development
costs totaled $302,000 and $1.0 million for the six months ended June 30, 2001
and 2000, respectively. Accordingly, net R&D expensed and included in SG&A was
$407,000 in 2001 versus $1.2 million in 2000. Our R&D expenditures were reduced
significantly in 2001 due to the completion of three major development projects:
VPbatch(TM), the Windows NT version of our FlexBatch Recipe and Process
Management software; initiatives to improve product ease of use of SimSuite
Pro(TM), our process simulation product; and the release of version 10.2 of the
D/3 Distributed Control System in December 2000. R&D expenditures in 2001 are
mainly related to improvements in the process control module for our D/3 system.
Depreciation and Amortization. For the six months ended June 30, 2001
and 2000, depreciation expense was $365,000 and $613,000, respectively. The
decrease in depreciation in 2001 is primarily due to disposals of fixed assets
as we restructured operations and divested certain businesses.
Amortization of goodwill was $366,000 and $256,000 during the six
months ended June 30, 2001 and 2000, respectively. The increase in amortization
in 2001 reflects the increase in goodwill due to payments made for contingent
consideration for prior year acquisitions.
Operating Income (Loss). For the six months ended June 30, 2001 and
June 30, 2000, operating income (loss) was $255,000 or 1.0% of revenue and
$(277,000) or (1.0)% of revenue, respectively.
Excluding the operating results of the divested businesses, our
operating income for the six months ended June 30, 2001 was $1.0 million
compared with $710,000 for the six months ended June 30, 2000. We attribute our
business restructuring initiatives for the improvement in operating income of
our remaining businesses.
Gain (loss) on Sales of Assets. On March 6, 2001, we sold our
VirtualPlant business technology and assets to Avantium. We received 8% of
Avantium's stock, thus increasing our holdings in Avantium to approximately 19%,
and recognized a gain on the sale of $3.3 million, before income taxes. This
gain was determined based on the estimated fair market value of the Avantium
stock received, based on an independent appraisal, less the book value of the
assets sold, approximately $700,000 in severance costs payable to certain former
employees of VirtualPlant that were not hired by Avantium (these amounts will be
paid during the balance of 2001), and other transaction expenses.
Interest Expense, Net. Net interest expense increased to $452,000 for
the six months ended June 30, 2001, from $320,000 for the same period in 2000.
This increase is primarily attributable to an increase in our average debt
outstanding during the 2001 period in order to fund working capital
requirements.
Other Income, Net. For the six months ended June 30, 2001, other
income, net mainly reflects the receipt of $147,000 equity distribution from our
liquidated joint venture in China (this investment was written off in a prior
year) offset by net foreign currency transaction losses.
Provision for Income Taxes. Our effective tax rate is based on the best
current estimate of our expected annual effective tax rate. The difference
between the statutory U.S. tax rate and our effective tax rate for the six
months ended June 30, 2001 and 2000 is primarily due to the effects of foreign
operations being taxed at different rates, state income taxes and in 2001 the
impact of deferred tax assets expected to be realized in the current year which
previously had not been recognized as a result of a valuation allowance. As of
June 30, 2001, the aggregate deferred tax assets are recorded net of valuation
allowances of approximately $5.0 million. For the six months ended June 30,
2001, we reduced our valuation allowance by approximately $400,000. We continue
to evaluate the likelihood of realizing our remaining deferred tax assets.
Comparison of Years Ended December 31, 2000 and 1999
Revenue. Revenue for the years ended December 31, 2000 and 1999 totaled
$55.7 million and $66.7 million, respectively. Our Process Automation revenues
decreased by $9.4 million, or 27.2%, to $25.2 million in 2000 from $34.6 million
in 1999. Beginning in the second half of 1999, our Process Automation business
experienced an order slowdown as customers postponed additional investments in
their process control systems, pending the resolution of Y2K date issue
concerns. This order slowdown continued into 2000 as customers either spent
their capital funding on other projects (since so much money was spent on
upgrading the process control systems in 1998-1999) or were faced with tougher
economic conditions in 2000 (especially customers in the chemicals industry)
which forced them to cut back on their overall capital spending. Partially
offsetting the decrease in revenue due to this slowdown was the inclusion in
2000 revenue of $2.9 million from the sale of licenses for five of our software
products to Avantium in exchange for an equity interest in Avantium (see Note 5,
Investment in Avantium International B.V. in the Notes to Consolidated Financial
Statements). Our Power Simulation revenue decreased by $1.6 million, or 5.0%, to
$30.5 million in 2000 from $32.1 million in 1999, primarily due to lower nuclear
simulation upgrade orders from Japanese and Eastern European customers.
Gross Profit. In large part due to the lower revenues in 2000, gross
profit declined to $14.9 million in 2000 (26.7% of revenue) from $25.1 million
in 1999 (37.6% of revenue). The decrease in gross profit as a percentage of
revenue is primarily due to the following:
o In 1999, our Process Automation business benefited from customer
concerns about the Y2K issue and their efforts to upgrade their D/3 systems
to Y2K compliant versions. Upgrade projects typically have less hardware
and instrumentation components (lower margined items as these are typically
"pass-through" purchases) and more license fees and application engineering
work which have higher margins. In 2000, a higher percentage of the
revenues were generated through maintenance, time and material, spares and
training which have lower margins than the upgrade projects.
o Capitalized software amortization increased from $1.8 million in
1999 to $2.2 million in 2000 due to the completion in 1999 of the NT
platform conversion of the D/3 Distributed Control System, the release of
version 10.1 of the D/3 product in July 2000, and the completion of several
upgrades to the SimSuite Pro Software in July 2000 and the initiation of
the amortization of the related capitalized costs.
o A $710,000 provision was recorded in December 2000 for certain
Process Automation inventory to adjust its carrying value to net
realizable value.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses totaled $17.9 million in 2000 (32.1% of revenues), a
20.8% decrease from 1999 expenses of $22.6 million (34.0% of revenues). Other
than changes in research and developments costs, which decreased $1.2 million
and are discussed below, the decrease in SG&A is attributable to:
o Fewer sales and marketing personnel and travel costs in the
Process Automation business due to our restructuring of this business.
o Lower sales commissions due to lower Process Automation business
orders.
o A reduction in corporate personnel.
o The completion in 1999 of our internal Y2K compliance program for
which an outside consultant was utilized as project manager.
o A reduction in recruiting and relocation costs of newly hired
personnel.
o The completion in 1999 of the amortization of the cost of the
warrants issued to ManTech and GP Strategies in 1998 in consideration of
guarantees issued by these companies for our credit facility.
These reductions were somewhat offset by the initiation of a marketing program
in 2000 which was designed to promote the benefits of VirtualPlant, and the
products and services associated with our relationship with Avantium, to major
customers around the world.
Gross research and product development expenditures were $3.6 million
(6.5% of revenue) and $5.4 million (8.1% of revenue) for the years ended
December 31, 2000 and 1999, respectively. Of these expenditures, $1.9 million in
2000 and $2.5 million in 1999 were capitalized. Thus, net research and
development costs included in SG&A expenses were $1.7 million and $2.9 million
during the years ended December 31, 2000 and 1999, respectively. The reduction
in R&D spending reflects the completion of the conversion of the D/3 Distributed
Control System to the Microsoft Windows NT platform (Version 10.0, which
introduced the new platform, was released in October 1999) and a reduction in
personnel as part of the Process Automation business restructuring. In 2000, we
completed the development of our VPbatch product, which is the Windows NT
version of our FlexBatch Recipe and Process Management software, and completed
the development of version 10.2 (released in December) of our D/3 Distributed
Control System. In addition, we continued development initiatives to improve the
ease of use of our process simulation products and to create a set of software
simulation tools for fossil power utilities.
Depreciation and Amortization. Depreciation expense was $1.2 million
and $1.3 million during the years ended December 31, 2000 and 1999,
respectively. Amortization of goodwill was $528,000 and $388,000 during the
years ended December 31, 2000 and 1999, respectively. The increase in
amortization reflects the increase in goodwill due to payments made for
contingent consideration for prior year acquisitions.
Operating Income (Loss). We incurred an operating loss of $4.7 million
(8.4% of revenue) for the year ended December 31, 2000, compared with operating
income totaling $744,000 (1.1% of revenue) for the year ended December 31, 1999.
The decrease in operating income (loss) reflects the lower revenues in 2000
coupled with the reduction in our Process Automation business' gross margin due
to our product mix, as discussed above, the increase in capitalized software
amortization in 2000, the provision for write-down of Process Automation
inventory and our investment in developing the VirtualPlant marketing and
business strategy.
Loss on Sales of Assets. On November 30, 2000, we completed the sale
of our Belgium subsidiary, GSE Process Solutions Belgium N.V., to Newton
Integrated Services B.V., pursuant to a stock purchase agreement, whereby Newton
acquired all of the assets and assumed all of the liabilities of the Belgium
subsidiary. The aggregate purchase price was $1. We recognized a loss before
income taxes on this transaction of $990,000.
Interest Expense, net. Interest expense increased to $687,000 in 2000
from $450,000 in 1999. This increase is attributable primarily to an increase in
our borrowings under our line of credit used to fund working capital
requirements.
Other Income, net. Other income amounted to $55,000 in 2000 versus
$40,000 in 1999, resulting from recognized foreign currency transaction gains.
Provision for Income Taxes. Despite incurring a loss before income
taxes in 2000, we have recorded a tax provision of $2.5 million. This provision
is primarily the result of an increase in the valuation reserve against our
deferred income tax assets. The reserve was increased to reduce the total
deferred tax asset to an amount that we believe will more likely than not be
realized. The difference between the statutory U.S. tax rate and our effective
rate for 2000 is primarily due to the change in the deferred tax asset valuation
reserve and foreign taxes. The difference between the statutory U.S. tax rate
and our effective tax rate for 1999 was primarily the effect of foreign
operations taxed at different rates, state taxes, and adjustments to the prior
year tax provision based on the final 1998 tax returns.
Comparison of Years Ended December 31, 1999 and 1998
Revenue. Revenue was $66.7 million and $73.8 million for the years
ended December 31, 1999 and 1998, respectively. During 1998, we disposed of
substantially all of the assets of our Erudite subsidiary and Oil & Gas
business. Included in 1998 revenue was $5.3 million from Erudite and $1.1
million from the Oil & Gas business. After excluding these revenues from 1998
results, total revenues decreased $0.7 million from 1998, or 1.0%. Our Power
Simulation business increased revenue by $1.2 million, or 3.9%, to $32.1 million
in 1999 from $30.9 million in 1998, primarily due to higher domestic simulator
upgrade projects and service contracts. Our Process Automation business revenue
decreased by $1.9 million, or 5.2%, to $34.6 million in 1999 from $36.5 million
in 1998. During the second half of 1999, our Process Automation business
experienced an order slowdown as customers postponed additional investments in
their process control systems, pending the resolution of Y2K date issue
concerns.
Gross Profit. Despite lower revenues in 1999, gross profit increased to
$25.1 million in 1999 (37.6% of revenue) from $24.0 million in 1998 (32.6% of
revenue). The increase in gross profit as a percentage of revenues reflects a
higher component of upgrade projects in the Process Automation business in 1999
than in 1998, mainly due to customer concerns about Y2K date calculations in
their existing process control software. Such upgrades typically have fewer
hardware and instrumentation components and more license fees and application
engineering work, which tend to generate higher margins. In addition, the 1998
margins were impacted slightly by low margins on revenues generated by Erudite
and the Oil & Gas business unit prior to the divestiture of their assets.
Excluding the margins on the revenues of these divested businesses, 1998 gross
profit as a percentage of revenue would have been 33.1%.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses totaled $22.6 million in 1999 (34.0% of revenues), an
11.3% increase from 1998 expenses of $20.3 million (27.6% of revenues). The
increase reflects additional sales and marketing personnel in the Process
Automation business, increased advertising and promotions related to our
VirtualPlant suite of products and services, higher legal fees related to our
credit facility, internal Y2K compliance programs, and higher net research and
product development expenditures as discussed below.
Gross research and product development expenditures were $5.4 million
(8.1% of revenue) and $4.3 million (5.8% of revenue) for the years ended
December 31, 1999 and 1998, respectively. Of these expenditures, $2.5 million in
1999 and $2.3 million in 1998 were capitalized. Thus, net research and
development costs included in selling, general and administrative expenses were
$2.9 million and $2.0 million during the years ended December 31, 1999 and 1998,
respectively. We continued to invest in the conversion of our D/3 Distributed
Control System (Version 10.0 was released in October, 1999), VPbatch(TM), and
SimSuite Pro(TM) products to the Microsoft Windows NT platform.
Depreciation and Amortization. Depreciation expense amounted to $1.3
million and $1.2 million during the years ended December 31, 1999 and 1998,
respectively. Amortization of goodwill was $388,000 and $365,000 during the
years ended December 31, 1999 and 1998, respectively.
Operating Income (Loss). Operating income amounted to $744,000 (1.1% of
revenue) and $1.9 million (2.6% of revenue), for the years ended December 31,
1999 and 1998, respectively. The decrease in operating income was due mainly to
higher selling, general and administrative costs, as discussed above.
Gain (Loss) on Sales of Assets. The gain on sales of assets in 1998
reflects the net pre-tax gain realized on the disposition of the Erudite and the
Oil & Gas business assets.
In May, 1998, we completed the sale of substantially all of the assets
of GSE Erudite Software, Inc. to Keane, Inc. The aggregate purchase price for
the Erudite assets was approximately $9.6 million (consisting of $8.9 million in
cash and $731,000 in the form of an uncollateralized promissory note due on
April 30, 1999). In connection with the transaction, Keane purchased certain
assets with a book value of $4.4 million and assumed certain operating
liabilities totaling approximately $2.2 million. We recognized a gain before
income taxes on this transaction of $5.6 million. In connection with the sale of
these assets, we wrote off approximately $800,000 in capitalized software
development costs, as well as $321,000 of purchased software, since all
operations that would support the recoverability of these costs were sold.
The write-off of these costs is reflected in the calculation of the gain on the
sale.
In November, 1998, we completed the sale of certain assets related to
activities of our Oil and Gas business unit to Valmet Automation (USA), Inc. We
recognized a loss before income taxes on this transaction of $5.0 million,
including the write-off of approximately $2.9 million in capitalized software
development costs, since all operations that would support the recoverability of
these capitalized costs were sold. We received approximately $742,000 in cash,
subject to certain adjustments, and Valmet assumed certain identified
liabilities.
Interest Expense, net. Interest expense increased to $450,000 in 1999
from $350,000 in 1998. This increase is attributable primarily to an increase in
our borrowings under our lines of credit made to fund working capital
requirements.
Other Income, net. Other income amounted to $40,000 in 1999 versus
$326,000 in 1998, resulting from recognized foreign currency transaction gains.
Provision for Income Taxes. Our effective tax rate was 69.8% in 1999
versus 42.2% in 1998. The difference between the statutory U.S. tax rate and our
effective tax rate for 1999 is primarily the effect of foreign operations taxed
at different rates, state taxes and adjustments to the prior year tax provision
based on the final 1998 tax returns.
Liquidity and Capital Resources
Changes in Cash for the Six Months Ended June 30, 2001 and June 30, 2000
As of June 30, 2001, our cash and cash equivalents are $607,000,
compared to $2,454,000 at June 30, 2000. The decrease in cash from June 30,
2000 to June 30, 2001 was mainly attributable to cash used in financing
activities and investing activities as partially offset by cash provided by
operating activities.
Cash from operating activities. Net cash provided by (used in)
operating activities was $269,000 and $(854,000) for the six months ended June
30, 2001 and 2000, respectively. The gain on the sale of our VirtualPlant
technology and assets to Avantium International B.V. in March 2001 ($3.3
million) was a non-monetary exchange that had no impact on our operating cash
flow in 2001. Likewise, our $2.9 million in revenues for licensing of software
to Avantium in the first quarter 2000 in exchange for an equity stake in
Avantium was also a non-monetary transaction. Significant changes in our assets
and liabilities in 2001 included a reduction in contract receivables of
$639,000, a reduction in unbilled receivables of $871,000 and a $2.1 million
reduction in accounts payable and accrued expenses.
Cash used in investing activities. Net cash used in investing
activities for the first six months of 2001 was $489,000, including $302,000 of
capitalized software development costs and $187,000 for capital expenditures.
For the comparable period of 2000, net cash used in investing activities was
$1,237,000, comprised of $1,017,000 of capitalized software development costs
and $220,000 of capital expenditures. The decrease in capitalized software costs
was due to the completion of several development projects.
Cash used in financing activities. Cash used in financing activities
was $622,000 in the six month period ended June 30, 2001 as compared to cash
generated from financing activities of $1,895,000 in the six month period ended
June 30, 2000. In 2000, we generated $500,000 from the sale of stock to ManTech
International Corporation and an additional $42,000 from the exercise of
employee stock options. We reduced our borrowings under our bank line of credit
in 2001 by $4.0 million to a total of $5.3 million (versus an increase in our
bank line of credit of $1.8 million in 2000), but increased our borrowings from
ManTech by $3.4 million to a total of $4.9 million.
Changes in Cash for the Years Ended December 31, 2000 and 1999
As of December 31, 2000, our cash and cash equivalents were $1.5
million, compared to $2.7 million at December 31, 1999. The decrease in cash
from December 31, 1999 to December 31, 2000 was mainly attributable to cash used
in operating and investing activities as partially offset by cash provided by
financing activities.
Cash from operating activities. Net cash provided by (used in)
operating activities was $(4.5) million and $2.6 million for the year ended
December 31, 2000 and 1999, respectively. Our $2.9 million in revenues for
licensing of software to Avantium in the first quarter 2000 in exchange for an
equity stake in Avantium was a non-monetary transaction. Significant changes in
our assets and liabilities in 2000 included:
o A $1.9 million reduction in contract receivables which was mainly
related to the decline in overall revenues.
o A $1.6 million reduction in inventories. In 1999, the process
stockroom inventory increased approximately $650,000 due to purchases
of large supplies of various PC boards that are extremely expensive to
purchase in small quantities and for which we had forecasted
significant usage, plus the return of some material from customers.
In 2000, this inventory decreased approximately $800,000 as we made a
concerted effort to reduce on-hand inventory. The balance of the
decrease is due to a provision for excess and slow moving inventory.
o A $1.6 million reduction in billings in excess of revenues earned due
to the lower business volume in 2000.
Changes in our assets and liabilities in 1999 included a $4.4 million
reduction in contract receivables partially due to improvements in internal
collection processes; a $1.9 million reduction in accounts payable and accrued
expenses; and a $3.3 million reduction in billings in excess of revenues.
Cash used in investing activities. Net cash used in investing
activities for the year ended December 31, 2000 was $3.3 million, including $1.9
million of capitalized software development costs, $472,000 of capital
expenditures, $658,000 in cash payments for acquired businesses ($598,000 of
contingent considerations for prior year acquisitions and $60,000 for notes
payable related to a prior year acquisition), and $261,000 in connection with
the disposition of our Belgium subsidiary.
For the comparable period of 1999, net cash used in investing
activities was $4.1 million, comprised of $2.5 million of capitalized software
development costs, $1.4 million of capital expenditures, and $930,000 in cash
payments for acquired businesses ($300,000 for the Mitech acquisition in 1999,
$530,000 for contingent considerations for prior year acquisitions, and $100,000
for notes payable related to a prior year acquisition) partially offset by the
receipt of $731,000 from Keane, Inc. as final payment on the 1998 Erudite sale.
The decrease in capitalized software costs reflects the completion of the
conversion of the Process Automation business' D/3 Distributed Control System to
the Microsoft Windows NT Platform. Included in the 1999 capital expenditures was
$503,000 of assets purchased from BatchCAD Limited, a United Kingdom-based
supplier of batch process development and design consulting services and
simulation software tools.
Cash used in financing activities. Cash provided by financing
activities was $6.6 million in the year ended December 31, 2000 versus $2.0
million in the year ended December 31, 1999. We increased our borrowings under
our bank line of credit in 2000 by $3.0 million to a total of $9.3 as compared
to a $513,000 decrease in the bank line of credit in 1999. In 2000, we
issued a demand promissory note to ManTech that allowed us to borrow up to $1.8
million at an interest rate of prime plus one percent; at December 31, 2000 we
had borrowed $1.6 million. In both 1999 and 2000, we entered into two
contracts each year with a customer for the lease of certain hardware and
software under 36-month leases. We assigned the payments due under these
sales-type leases to a third party financing company and received proceeds of
$1.1 million in 2000 and $3.4 million in 1999. In 2000, we generated $500,000
from the sale of stock to ManTech International Corporation and an additional
$42,000 from the conversion of employee stock options. In 1999, we had to cash
collateralize letters of credit totaling $735,000; in 2000, $202,000 of the
letters of credit expired and the cash collateral was released.
Changes in Cash for the Years Ended December 31, 1999 and 1998
As of December 31, 1999, our cash and cash equivalents were $2.7
million, compared to $2.2 million at December 31, 1998. The increase in cash
from December 31, 1998 to December 31, 1999 was mainly attributable to cash
provided by investing activities as partially offset by cash used in operating
and financing activities.
Cash from operating activities. Net cash provided by (used in)
operating activities was $2.6 million and $(772,000) for the year ended December
31, 1999 and 1998, respectively. Changes in our assets and liabilities in 1999
included a $4.4 million reduction in contract receivables partially due to
improvements in internal collection processes; a $1.9 million reduction in
accounts payable and accrued expenses; and a $3.3 million reduction in billings
in excess of revenues.
Cash used in investing activities. Net cash used in investing
activities for the year ended December 31, 1999 was $4.1 million, comprised of
$2.5 million of capitalized software development costs, $1.4 million of capital
expenditures, and $930,000 in cash payments for acquired businesses ($300,000
for the Mitech acquisition in 1999, $530,000 for contingent considerations for
prior year acquisitions, and $100,000 for notes payable related to a prior year
acquisition) partially offset by the receipt of $731,000 from Keane, Inc. as
final payment on the 1998 Erudite sale.
For the year ended December 31, 1998, our investing activities provided
$5.3 million cash. We received $8.9 million from the sale of the assets of GSE
Erudite Software Inc. to Keane, Inc. in May 1998; and we received $742,000 for
the sale of certain assets related to activities of our Oil and Gas business
unit to Valmet Automation (USA), Inc. in November 1998. These cash inflows were
partially offset by $2.3 million of capitalized software development costs and
$2.1 million of capital expenditures.
Cash used in financing activities. In the year ended December 31, 1999,
$2.0 million was provided by financing activities; in the year ended December
31, 1998 we used $2.6 million in financing activities. We decreased our bank
line of credit by $513,000 in 1999 compared to a $2.3 million decrease in the
bank line in 1998. In 1999, we entered into two contracts with a customer
for the lease of certain hardware and software under 36-month leases. We
assigned the payments due under these sales-type leases to a third party
financing company and received proceeds of $3.4 million. In 1999, we had to cash
collateralize letters of credit totaling $735,000.
Other
We have a $10.0 million bank line of credit with a bank. Our credit
facility provides for borrowings to support working capital needs and foreign
letters of credit ($2.0 million sublimit). The credit facility is collateralized
by substantially all of our assets and provides for borrowings up to 85% of
eligible accounts receivable, 50% of eligible unbilled receivables and 40% of
eligible inventory (up to a maximum of $1.2 million). GP Strategies Corporation,
a major stockholder, has provided a limited guarantee totaling $1.8 million. The
interest rate on this line of credit is based on the bank's prime rate plus
0.75% (7.5% as of June 30, 2001), with interest only payments due monthly. At
June 30, 2001, our available borrowing base was approximately $6.4 million, of
which we had borrowed approximately $5.3 million.
The bank line of credit requires us to comply with certain financial
ratios and precludes us from paying dividends and making acquisitions beyond
certain limits without the bank's consent. At December 31, 2000, we were not in
compliance with our minimum EBITDA (earnings before interest, taxes,
depreciation and amortization) covenant, our minimum working capital covenant,
our tangible net worth covenant, or our total liabilities to tangible net worth
covenant. The bank has provided a written waiver of the financial covenant
violations as well as certain covenant modifications to help position us for
future compliance. Effective with the execution of the waiver, the bank
increased the interest rate on outstanding borrowings under the bank line of
credit to the bank's prime rate plus .75%. At June 30, 2001, we were in
compliance with the modified bank covenants.
In the fourth quarter of 2000, we issued a demand promissory note to
ManTech that allowed us to borrow up to $1.8 million at an interest rate of
prime plus one percent. The promissory note was secured by our equity interest
in Avantium, but such security interest was subordinate to the first lien
thereon by our bank. In the first quarter of 2001, we borrowed an additional
$550,000 from ManTech and the promissory note was amended to increase the
principal amount to $2.1 million. Subsequently, in the first quarter of 2001,
and with ManTech's approval, we issued a replacement promissory note in the
amount of $2.1 million to ManTech under which our obligations to ManTech became
unsecured. The principal on this replacement promissory note is payable over a
two year period, in equal installments, commencing April 1, 2004, and interest
payments commenced monthly on July 1, 2001. The note permits ManTech to convert
the principal into our convertible preferred stock at a conversion rate of $100
per share. The replacement promissory note is subordinate to our bank line of
credit.
In 2000, ManTech provided $1.8 million in standby letters of credit to
the bank as additional collateral for our bank line of credit. On April 6, 2001,
ManTech agreed to allow our bank to draw upon ManTech's $1.8 million letter of
credit which supported our bank line of credit, thus paying down a portion of
our bank debt in exchange for additional subordinated debt. Accordingly, we
amended our promissory note to ManTech to increase the amount to $3.9 million.
On June 25, 2001, we issued an additional unsecured promissory note to
ManTech that allowed us to borrow up to $1.0 million at an interest rate of
prime plus one percent and used the loan proceeds for working capital purposes.
The note is subordinated to our credit facility and must be repaid with the
proceeds of this offering or subsequent offerings of stock to our stockholders.
In the event insufficient funds are raised through this offering or any
subsequent offering to our stockholders, payments of accrued interest only shall
be payable commencing on January 1, 2002 and continuing through April 1, 2006
and payments of principal shall be payable in equal installments commencing on
April 1, 2004 and continuing through final payment of the note on April 1, 2006.
On August 2, 2001, our stockholders approved an amendment to our
certificate of incorporation to increase the number of authorized shares of
common stock from 8 million shares to 18 million shares in order, among other
purposes, to permit ManTech to convert its $3.9 million promissory note into
Series A preferred stock. ManTech has indicated that it intends to convert the
$3.9 million promissory note into Series A preferred stock upon approval of the
listing of the 1,474,480 shares of common stock underlying such shares on the
American Stock Exchange, which was received on October 1, 2001. As a result, we
intend to issue 39,000 shares of Series A preferred stock to ManTech in full
payment of the $3.9 million promissory note. We have determined that the
conversion of this debt into preferred stock does not constitute a beneficial
conversion. The Series A preferred stock has no voting rights and is subject to
a holding period of one year from the date of issuance. In the event of
liquidation or dissolution of GSE Systems, payment of available funds shall be
made on the Series A preferred stock (including payment in satisfaction of
dividend obligations) prior and in preference to common stock. The Series A
preferred stock is convertible at the option of the holder at any time after
issuance and prior to the third anniversary of issuance into common stock at a
rate equal to its $100 liquidation value per share divided by a conversion price
of $2.645 per share. The Series A preferred stock converts into an aggregate of
1,474,480 shares of common stock. The Series A preferred stock will bear
dividends at the rate of 6% per annum on its $100 liquidation value per share
payable quarterly. Dividends will accumulate if not paid quarterly and compound
interest will accrue on any unpaid dividends. Upon conversion, accrued and
unpaid dividends on shares of Series A preferred stock convert into a debt to
the last holder of the such shares of Series A preferred stock. In connection
with the issuance of the Series A preferred stock to ManTech, ManTech has
advised us that it will grant GP Strategies an option to acquire 19,500 shares
of the Series A preferred stock from ManTech at a price of $100 per share, or an
aggregate of $1,950,000, plus any accrued and unpaid dividends. The independent
members of our board of directors have approved the issuance of Series A
preferred stock to ManTech.
As of July 31, 2001, our total outstanding obligations to ManTech were
$5,580,964, broken down as follows: two promissory notes totaling $4.9 million
bearing interest at prime plus 1% per annum, $521,689 under a purchasing
arrangement (described herein), and accrued interest since October 2000 of
$159,275.
We have undertaken a number of initiatives during 2000 and 2001 to
improve operating results and cash flows. We believe the initiatives undertaken
will enable us to maintain compliance with the bank's financial covenants as
well as provide sufficient cash flow to meet our obligations as they become due.
However, if the initiatives are not successful or if there are unforeseen
decreases in demand for our products or increases in working capital needs, then
we may be unable to meet the revised bank financial covenants and/or to generate
sufficient cash flows from operations. In such case, we will be required to
obtain additional covenant modifications and additional sources of funding.
There can be no assurance that such covenant modifications or funding, if
needed, will be available.
Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure
On October 19, 1999, we notified our independent accountants,
PricewaterhouseCoopers LLP, that they would not be reappointed as our
independent accountants for the fiscal year ending December 31, 2000. The
reports of PricewaterhouseCoopers LLP on our financial statements for 1998 and
1999 contained no adverse opinions or disclaimers of opinion and were not
qualified or modified as to uncertainty, audit scope or accounting principles.
In connection with the audits for our fiscal years 1998 and 1999 and with
respect to the interim period from January 1, 1999 through September 30, 1999,
there were no disagreements between us and PricewaterhouseCoopers LLP on any
matter of accounting principles or practices, financial statement disclosure, or
auditing scope or procedure, which disagreements, if not resolved to the
satisfaction of PricewaterhouseCoopers LLP, would have caused them to make
reference thereto in their reports for such fiscal years. During 1998 and 1999,
there were no reportable events as defined in Regulation S-K, Item 304(a)(1)(v).
The decision to change accountants was recommended by the executive committee,
and approved by the board of directors. On March 17, 2000, the board of
directors selected KPMG LLP as our independent accountants for the fiscal year
ending December 31, 2000. At the annual meeting on May 30, 2001, KPMG LLP was
reappointed to serve as our independent accountants for the fiscal year ending
December 31, 2001.
Quantitative and Qualitative Disclosures about Market Risk
Our market risk is principally confined to changes in foreign currency
exchange rates and potentially adverse effects of differing tax structures. Our
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. We are 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. When necessary, we enter into forward exchange contracts, options
and swaps as hedges against certain foreign currency commitments. We also enter
into letters of credit and performance guarantees in the ordinary course of
business as required by certain contracts and proposal requirements. We do not
hold any derivative financial instruments for trading purposes. Gains and losses
on foreign exchange contracts and swaps are recognized as part of the cost of
the underlying transactions being hedged in the period in which the exchange
rates changed. Foreign exchange contracts have an element of risk that the
counterparty may not be able to meet the terms of the agreement. However, we
minimize such risk exposure by limiting counterparties to nationally recognized
financial institutions. Foreign exchange options contracts permit but do not
require us to exchange foreign currencies at a future date with counterparties
at a contracted exchange rate. Costs associated with such contracts are
amortized over the life of the contract matching the underlying receipts.
We are also subject to market risk related to the interest rates on our
existing line of credit. As of June 30, 2001, such interest rates are based on
the prime rate plus 75 basis-points.
As of June 30, 2001, $10.2 million of our debt was subject to variable
interest rates. A 100 basis-point change in such rates during the six month
period ended June 30, 2001 would have changed our interest expense by
approximately $54,000.
Business
We are a world leader in real-time power plant simulation and process
automation and control. We provide simulation solutions and services to the
nuclear and fossil electric utility industry, along with plant optimization and
safety improvement software. Our process automation products optimize batch and
hybrid plant control for the specialty chemical, food and beverage, and
pharmaceutical industries. In addition to these two core businesses, we have
invested in the use of simulation and control technologies to reduce the product
development cycle for the pharmaceutical and chemical industries through our
participation in the Netherlands-based company Avantium.
General
GSE Systems was formed on March 30, 1994, to consolidate the simulation
and related businesses of S3 Technologies, General Physics International
Engineering & Simulation and EuroSim, each separately owned and operated by
ManTech International Corporation, GP Strategies Corporation and Vattenfall AB,
respectively. In late 1994, we expanded into the process automation and supply
chain management consulting industry through our acquisition of the process
systems division of Texas Instruments Incorporated.
In 1996, we aligned our operating groups into three strategic business
units to better serve our then primary vertical markets - Power, Process and Oil
& Gas.
In 1996, we acquired Erudite Software & Consulting, Inc., a regional
provider of client/server technology, custom application software development,
training services, hardware/software sales, and network design and
implementation services. This acquisition facilitated our efforts to enter the
client/server information technology solutions market. Erudite was subsequently
combined with our pre-existing consulting group.
In late 1997, we acquired J.L. Ryan, Inc., a provider of engineering
modifications and upgrade services to the power plant simulation market. The
combination of our pre-existing technology with the technical staff of Ryan made
us more competitive for modifications and upgrade services projects in the
nuclear power plant simulation market.
After incurring substantial losses in 1997, we decided to divest our
unprofitable business units and concentrate our resources on our core
businesses, Power Simulation and Process Automation. Accordingly, in 1998, we
sold substantially all of the assets of Erudite to Keane, Inc., and in late 1998
we divested certain assets of the Oil & Gas business unit to Valmet Automation
(USA), Inc.
In mid-1999, we acquired certain assets and employed the associates of
BatchCAD Limited. The BatchCAD product was a key element in our VirtualPlant
business and marketing strategy.
In early 2000, while implementing our VirtualPlant strategy, we
participated in the founding of Avantium International B.V. Avantium, a
Netherlands-based high technology company, employs high-speed experimentation
and simulation technologies in contract research and development in the area of
new product development and process chemistry. In connection with Avantium's
founding, we licensed certain of our simulation software and automation system
products in exchange for Avantium preferred and common stock. We were
subsequently hired by Avantium to provide software to automate and maximize
Avantium's lab environment. Avantium also hired us to make certain improvements
and enhancements to the software we licensed to Avantium.
In early 2001, we sold our VirtualPlant business to Avantium in order
to maximize our investment in the VirtualPlant strategy. We now own
approximately 19% of Avantium. However, Avantium currently requires a
significant amount of additional capital to continue its business operations.
They recently advised us that, under the terms of this additional financing, our
ownership interest will be diluted to approximately 6.3%. We are currently in
negotiations with Avantium about this situation. However, there can be no
assurances that our ownership interest will not be diluted to 6.3% at this time,
or that we will not face additional dilution in the future.
Real-Time Power Plant Simulation and Real-Time Plant Information Business
Industry
The real-time simulation industry grew from the need to train people on
complex and potentially dangerous operations, without placing life or capital
assets at risk. Real-time simulation has been used for the training of plant
operators for the power industry, including both nuclear power plants and
conventional fossil fuel power plants (i.e., coal, oil, natural gas), since the
early 1970s. Real-time simulation usage has traditionally centered on initial
training of operators, and follow-on training of operators in emergency
conditions that can best be achieved through simulation replicating actual plant
operations.
In the nuclear power industry, use of a simulator which accurately
reflects the current actual plant design is mandated by the U.S. Nuclear
Regulatory Commission. This mandate resulted from the investigation of the
accident at the Three Mile Island nuclear plant in 1979, which was attributed,
at least in part, to operator error. The NRC requires nuclear plant operators to
earn their licenses through simulator testing. Each nuclear plant simulator must
pass a certification program to ensure that the initial plant design and all
subsequent changes made to the actual plant control room or plant operations are
accurately reflected in the simulator. Plant operating licenses are tied to
simulator certification.
Full scope power plant simulators are a physical representation of the
entire plant control room. The control panels are connected to an input/output
(I/O) system, which converts analog electrical signals to digital signals
understood by the simulation computer. The simulation computer houses the
mathematical models, which simulate the physical performance of the power
plant's systems such as the reactor core, steam boiler, cooling water, steam
turbine, electrical generator, plant system controls and electrical distribution
systems. Partial scope simulators can be viewed as a subset of a full scope
simulator. Instead of simulating the entire performance of the power plant, a
partial scope simulator might represent one or two critical systems such as the
steam turbine and/or electrical generator operation.
In the past, training simulators had to strike a delicate balance
between providing an accurate engineering representation of the plant, while
still operating in "real-time" in order to provide effective training. As
computing power has increased, so too has the capacity of simulators to provide
more accurate plant representations in real-time based upon simulation models
developed from engineering design codes.
Simulation also is used to validate proposed plant equipment changes to
confirm the results of such changes, prior to making the change in the plant,
which can save time and money, as well as reduce the risk of unsafe designs, for
the utility. Through the Internet and the introduction of more efficient
communication protocols, simulator use has grown past traditional training
boundaries, and is now used in plant engineering as information gathering and
design validation tools.
Demand for new simulators in the nuclear power industry shifted to the
international market in the 1990s, as the domestic market was limited to
upgrades and replacement of existing simulators. However, we believe that the
new National Energy Policy's emphasis on the importance of nuclear power to the
U.S. energy supply may result in the extension of the useful lives of U.S.
nuclear power plants. Any service life extension of a nuclear power plant is
likely to require major upgrades to the plant's equipment and technology,
including its simulator.
Fossil fuel plant simulators are not required by law or regulation, but
are justified as a cost effective approach to train operators on new digital
control systems being implemented at many fossil fuel power plants. The size,
complexity and price of a fossil plant simulator is much lower than simulators
used for nuclear plants. Fossil plant simulators have traditionally used lower
fidelity (less sophisticated) mathematical models to provide an approximate
representation of plant performance. The demand for highly accurate models did
not exist in the early market for fossil simulators since the main use of the
simulator was to train operators on the functionality of distributed control
systems for plant start-up activities.
The deregulation of the power industry has forced utilities to view
their assets differently. Power plants must now be profit centers, and gaining
the maximum efficiency from the plant to become, or remain, competitive is a
paramount issue. The mindset of the operator has shifted as plant operators now
must perform within narrower and narrower performance margins while still
maintaining safe operations. We now see our fossil fuel plant customers
recognizing the benefits of high fidelity simulation models that provide highly
accurate representations of plant operations to help plant operators and
management determine optimal performance conditions.
Industry deregulation has also resulted in the consolidation and
redistribution of assets on a global basis. U.S. utilities are purchasing
generating assets around the world, and foreign utilities are investing in U.S.
assets, creating the need for real-time integration of plant information from a
variety of sources and a variety of legacy information systems in a
cost-effective manner. Dataquest estimates the annual spending on information
technology for U.S. utilities in 2001 will be $15.4 billion, expanding to $22.5
billion in 2002. Of the 2001 amount, $3.3 billion will be spent on software and
$6.5 billion on services. According to the National Energy Policy, "To meet
projected demand over the next two decades, America must have in place between
1,300 and 1,900 new electric plants. Much of this new generation will be fueled
by natural gas. However, existing and new technologies offer us the opportunity
to expand nuclear generation as well." More power plants will require new plant
operators. New plant operators will require more training programs. We believe
that more training programs will require more training tools, which will result
in more demand for power plant simulators and related products and services.
Therefore, we believe that these projections, if they come to fruition in whole
or even in part, represent a market opportunity for our real-time simulation,
plant optimization, asset management and condition monitoring products and
services.
Our solution
Our Power Simulation business is a leader in the development, marketing
and support of high fidelity, real-time, dynamic simulation software for the
electric utility industry. We have built or modified about 65 of the
approximately 75 full-scope simulators serving about 103 operating nuclear power
plants in the United States. Outside the United States, we have built or
modified about 73 of the approximately 167 full-scope simulators serving
approximately 329 operating nuclear power plants.
In addition to operator training, our simulation products and services
permit plant owners and operators to simulate the effects of changes in plant
configuration and performance conditions to optimize plant operation. These
features allow our customers to understand the cost implications of replacing a
piece of equipment, installing new technology or holding out-of-service assets.
We have also developed a suite of tools based on sophisticated signal analysis
and simulation techniques to help our customers manage their assets by
determining equipment degradation before it severely impacts plant performance.
We have also focused on upgrading older technology used in power plants
to the Microsoft Windows NT platform. We have successfully deployed such new
technology upgrades for plant process computers, safety parameter display
systems, and plant access security systems. As nuclear plants in the U.S.
continue to age, we will seek more business in this upgrade market.
We provide both turnkey solutions, including simulated hardware and
proprietary software, to match a specific plant, and discrete simulation
technology for specific uses throughout a plant. Our substantial investment in
simulation technology has led to the development of proprietary software tools.
These tools significantly reduce the cost and time to implement simulation
solutions and support long-term maintenance. Our high fidelity, real-time
simulation technology for power plant fluid, logic and control, electrical
systems and associated real time support software, "SimSuite PowerTM", is
available for UNIX and Windows NT computer platforms. This technology is
specifically designed to provide user friendly graphic interfaces to our high
fidelity simulator.
In addition to the simulator market, we offer products aimed at
improving performance of existing plants by reducing the number of unplanned
outages due to equipment failure. Using advanced signal analysis techniques, our
tools can predict when certain plant equipment needs to be replaced. Replacement
of critical equipment prior to failure permits effective planning and efficient
use of maintenance time during scheduled off-line periods.
Other products of our Power Simulation business include:
o Java Applications & Development Environment (JADE), a Java-based
application that provides a window into the simulation instructor station
and takes advantage of the web capabilities of Java, allowing customers to
access the simulator and run simulation scenarios from anywhere they have
access to the web.
o SimExec, a Windows NT-based real-time simulation executive system
that controls all real-time simulation activities and allows for an
off-line software development environment in parallel with the training
environment.
o eXtreme I/S, a Windows NT-based Instructor Station that allows the
use of Microsoft Word and Powerpoint to control the real-time simulation
environment. eXtreme I/S is a user-friendly tool for classroom training and
electronic report generation. It provides real-time plant performance
directly from the simulator during classroom training which drastically
increases learning efficiency.
o RACS, a fully integrated personnel access control and intrusion
detection system designed for nuclear power plant security applications and
other large, multi-access facilities.
o Pegasus Surveillance and Diagnosis System, a software package for
semi-automatic plant surveillance and diagnostics, incorporates
sophisticated signal processing and simulation techniques to help operators
evaluate the condition and performance of plant components. Pegasus permits
plant management to identify degraded performance and replace components
before they fail.
o SIMON, a computer workstation system used for monitoring stability
of boiling water reactor plants. SIMON assists the operator in determining
potential instability events, enabling corrective action to be taken to
prevent unnecessary plant shutdowns.
o Vista PIN, a PC-based plant information system, provides
unparalleled flexibility usefulness and ease of maintenance while
decreasing the cost of ownership. Vista PIN provides real-time display of
process parameters, trends, alarm status, and historical data archiving
with on-line retrieval.
Our Power Simulation business also provides consulting and engineering
services to help users plan, design, implement, and manage/support simulation
and control systems. Services include application engineering, project
management, training, site services, maintenance contracts and repair.
Strategy
Our goal is to expand our business on four fronts. First, we intend to
continue serving our traditional customer base and be prepared to meet increased
demand if traditional simulation use grows in relation to increased electric
capacity in the United States. Second, we intend to market our existing and
upgraded simulation products and our newly developed signal analysis products as
plant optimization, asset management and condition monitoring tools. Third, we
intend to provide plant information systems that protect our customer's
investment in legacy software while providing seamless real-time information
across a diverse multi-national enterprise. And, fourth, we intend to leverage
our existing engineering staff to provide additional services to domestic and
international clients.
Traditional Simulation Market. The National Energy Policy considers
nuclear power a key component of the power supply in the United States. Nuclear
power currently accounts for about 20% of the electrical power grid capacity in
the United States and the NEP indicates that this percentage will likely remain
the same even as total capacity increases. Any new nuclear power plants will
likely be of the advanced reactor designs created by Westinghouse, General
Electric and ABB, or the new pebble-bed gas cooled reactor under construction by
a consortium of companies. These new designs require new simulators and training
programs as they are different from the nuclear power plant designs currently in
operation. In addition to new power plants, if any, under the NEP, existing
nuclear power plants will likely be required to remain on-line for a longer
period than originally expected. In order to stay in operation, many plants will
require life extension modifications. Since all existing nuclear power plants
went on-line before 1979, their designs and technology can also benefit from the
substantial advances in plant design and technology developed over the past 20
years. For example, several of our U.S. utility customers are considering
replacing their existing hard panel control rooms with modern distributed
control systems as are common in fossil fuel plants, and which have been
implemented in Europe for several years. Significant changes to control room
instrumentation generally require modification or replacement of the plant
simulator.
Another component of the National Energy Policy is to "up-rate" the
existing capacity to increase electrical yield without building new power
plants. By changing the capacity of certain equipment in a plant, the utility
can gain upwards of a 10% increase in output. Again, any such changes must be
reflected in the control room simulator, and operators must be trained on the
new equipment before implementation.
In addition to the new demand for power in the United States, several
emerging regions of the world are expanding their electrical capacity with both
nuclear and fossil fuel power plants. We believe this expansion includes the
need of integrated simulation and training programs. We have developed products
that we believe will enable us to exploit the fossil fuel simulation marketplace
and are in the process of increasing our marketing efforts in this area. We have
increased the number of bids we submit for fossil simulators over the past year
and have increased the number of orders we have obtained, including a
multi-million dollar order for a full-scope fossil plant simulator in India.
Simulation Beyond Training. We believe that the deregulation of the
electric power industry has increased the importance of efficient and reliable
operation of power plants. In addition to operator training, we believe that our
simulation products can meet this increased need for efficiency by assisting
plant operators in understanding the cost implications of replacing equipment,
installing new technology and maintaining out-of-service assets. In order to
exploit this potential, we have increased the fidelity of our simulation
products and are marketing our services to increase the fidelity of simulators
that are already in operation.
As computing power and networking technologies improve, several of our
customers have started to migrate simulation technology from the training
organization to the engineering organization. The same full scope simulation
software that drives the simulated control room panels in a simulator can be
used with graphical representations of the panels so engineers can test design
changes and see how the balance of the plant will react to such changes. We have
developed a Java-based application to allow customers easier access to, and use
of, the simulation capabilities across the organization through network
communication.
Real-Time Plant Information. To respond to the emerging needs for
better real-time information both within a plant and across disparate assets
being purchased during industry consolidation, we are developing products to
facilitate the integration of existing legacy system data. Use of legacy system
data can reduce our clients' operating costs while providing desktop access to
data regarding global assets for real-time decision making. We intend to either
make small acquisitions of technology necessary to exploit this market, or
develop the technology internally. The technology will focus on applications
that give our clients unique views of the operating history across various
assets to gain a better understanding of how to improve performance. These new
tools will be bundled with our condition monitoring tools to form a suite of
tools aimed at plant optimization.
Optimize Existing Engineering Resources. Our domestic service
organization focuses on simulator upgrades and retrofits. This group employs
over 20 engineers, and we employ over 60 engineers in the United States capable
of servicing the upgrade/retrofit market. In addition to domestic resources, we
have developed a network of trained engineers in Russia, Ukraine, Czech
Republic, Bulgaria, India and China. These foreign resources provide low cost
engineering and software development capabilities and are readily available to
supplement our United States engineering staff as necessary.
In addition, we have grown through acquisitions and we will continue to
pursue acquisitions and investment opportunities that will create value and
enhance cash flow. We target acquisitions and investments that provide us:
o Cost saving opportunities
o Enhanced positioning in existing markets
o Entry into new geographic and industry markets
o Turnaround opportunities for under-performing businesses
Strategic Alliances
Our strategic alliances have enabled us to penetrate regions outside
the United States by combining our technological expertise with the regional
presence and knowledge of local market participants. These strategic alliances
have also permitted us to reduce our research and development and marketing
costs by sharing such costs with other companies.
In recent years, an increasing amount of our international business has
come from contracts in Eastern Europe, including the republics of the former
Soviet Union, the Pacific Rim and India. In order to acquire and perform these
contracts, we entered into strategic alliances or partnerships with various
entities including Automation Systems Co. Inc., a subsidiary of Beijing Jihang
Automation (China); All Russian Research Institute for Nuclear Power Plant
Operation (Russia); Kurchatov Institute (Russia); Macmet Ltd. (India); PowerGen
(England); Risk Engineering Ltd. (Bulgaria); Samsung Electronics (Korea); Toyo
Engineering Corporation (Japan); and the Institute for Information Industry
(Taiwan).
In addition to traditional partners, we have developed a marketing
cooperation arrangement with the Power Technology group of Powergen, the UK's
largest power company. Powergen may be purchased by E.ON, the world's largest
investor-owned utility. This relationship gives us access to the European fossil
simulation market, as well as the tools necessary to simulate the Siemens
Teleperm control system, one of the more popular control systems being offered
to U.S. nuclear power plants.
Competition
We encounter intense competition in our Power Simulation business. In
the nuclear simulation market, we compete directly with larger firms primarily
from Canada, Germany and France, such as Canadian Aerospace & Electronics (CAE),
STN Atlas and CSF Thomson. The fossil simulation market is represented by
smaller companies in the U.S. and overseas. Several of our competitors have
greater capital and other resources than we have, including, among other
advantages, more personnel and greater marketing, financial, technical and
research and development capabilities. Customer purchasing decisions are
generally based upon price, the quality of the technology, experience in related
projects, and the financial stability of the supplier.
Customers
We have provided approximately 200 simulation systems to an installed
base of over 75 customers worldwide. In 2000, approximately 73% of our Power
Simulation revenue was generated from end users outside the United States. Our
customers include, among others, Ameren, Arizona Public Service, Carolina Power
and Light Company, Commonwealth Edison Company, Eskom South Africa, Karnaraft
Sakerhet & Utbildning AB, Korean Electric Power Company, Nationalina
Elecktrischecka Kompania, Orgrez SC, Battelle's Pacific Northwest National
Laboratory, Taiwan Power Company, and West Bengal Development Corp. For the year
ended December 31, 2000, one Power Simulation customer (Battelle's Pacific
Northwest National Laboratory) accounted for approximately 22% of our
consolidated revenues. The Pacific Northwest National Laboratory is the
purchasing agent for the Department of Energy and the numerous projects we
perform in Eastern and Central Europe.
Sales and Marketing
We market our Power Simulation products and services through a network
of direct sales staff, agents and representatives, systems integrators and
strategic alliance partners. We employ a direct sales force in the continental
United States. Market-oriented business and customer development teams define
and implement specific campaigns to pursue opportunities in the power
marketplace.
Our ability to support our multi-facility, international and/or
multinational Power Simulation clients is facilitated by our network of offices
and strategic partners in the U.S. and overseas. We maintain U.S. offices in
Maryland and Georgia, and outside the U.S. we have offices in Sweden and Japan.
In addition to our offices located overseas, our ability to conduct
international business is enhanced by our multilingual and multicultural work
force. We have strategic relationships with systems integrators and agents
representing our interests in:
o Russia o South Africa
o Germany o Mexico
o Switzerland o Argentina
o Bulgaria o Taiwan
o Spain o Korea
o Czech Republic o Japan
o India o People's Republic of China
Process Automation Business
Industry
Process control systems automate manufacturing and other processes,
thereby reducing labor and other production costs and maximizing production
efficiency. According to the Automation Research Council, worldwide revenues for
process automation systems totaled over $7.8 billion in 2000 and are projected
to be $9.5 billion in 2005. The sales of process control systems have been
driven by customer desires to improve production efficiency and reliability. The
capital-intensive and competitive nature of manufacturing requires companies to
focus on designing, monitoring, and modifying the production processes in the
most efficient and profitable manner. Process control systems consist of rugged
microprocessor-based hardware, which is physically distributed throughout a
plant and linked by digital communications to control centers. These systems
allow users to monitor and control various functions. The graphic information
and control displays utilized by these systems enhance the customer's strategic
production and emergency decision-making capabilities.
Two parts of the industry, the batch and hybrid controls markets, are
of particular interest to us. The batch controls market focuses on products made
in batches versus a continuous process. We believe the need for traceability and
increased government requirements (e.g., EPA, FDA) is fueling the growth of
batch control systems in the United States. The hybrid controls market focuses
on the integration of manufacturing automation and business systems. We believe
that the growth in e-business and the need to optimize performance of supply
chains are increasing the need for real-time plant and production information
that can be met by hybrid control systems.
Our solution
Our Process Automation business designs, develops and delivers process
control, data acquisition, client/server and business software, systems and
services. These products permit our customers to maximize the use of plant
assets by making real-time process information more easily available, thereby
enabling faster and better informed operating decisions.
Our Process Automation products and services are targeted at the
following industries in which our personnel have substantial experience:
o Specialty chemicals o Pharmaceutical
o Food and beverage o Metals
Our flagship product in our Process Automation business is the D/3 DCS,
a distributed control system product that is highly flexible and designed to
meet open standards. D/3 DCS is a real-time system, which uses multiple process
control modules to monitor, measure, and automatically control variables in both
continuous and complex batch processes. D/3 DCS also forms the platform for
plant-wide information for operators, engineers and management.
Other products of our Process Automation business include the
following:
o VPbatch, a flexible batch manufacturing system used to facilitate the
rapid creation of various batch production processes.
o TotalVision, a graphical system that provides a
client/server-based human-machine interface for real-time process and plant
information.
o VPTV, a web-enabled version of the TotalVision package.
o SABL, a sophisticated batch and sequential manufacturing software
language that permits the scheduling and tracking of raw materials and
finished products, data collection and emergency shutdown procedures.
Our offerings also include real-time dynamic simulation tools and
products that are used to develop high fidelity simulations for chemical
processing and other industrial plants. Our most prominent set of simulation
products and tools is called SimSuite Pro. SimSuite Pro facilitates design
verification, process optimization and operator training in various types of
manufacturing operations.
Strategy
Our goal is to expand our leading position as a provider of process
automation solutions and services to our target markets of batch and hybrid
control for the specialty chemical, food and beverage, and pharmaceutical
industries. Our strategy has the following key elements:
o Improving technology. Our D/3 DCS distributed control system is
designed as an open standard that can work with a customer's existing
software. In 2000, we expanded our open system software to permit
communication with third-party I/O and implemented additional
Microsoft technology such as Windows 2000 and Microsoft's OLE for
process control to permit layering of third-party applications on our
system. In addition, we implemented graphical utilities to increase
the ease of use of this powerful system. These new tools and
interfaces allow customers to use their existing equipment when they
wish to upgrade their process automation technology. In 2001, we are
modifying our process control module (PCM) to increase its operating
speed and reduce its manufacturing costs. We expect that this will
allow us to bridge the cost gap between programmable logic controllers
(PLCs) and the distributed control systems while providing the
increased performance of a full-function distributed control system.
o Expand our expertise to new industries. We have experience in the
specialty chemical, food and beverage, pharmaceutical, and metals
industries. We will continue to focus our efforts on these industries,
but we will seek to apply the technical expertise that we have
developed to other industries.
o Leverage our expertise through sale of engineering consulting
services. Our Process Automation group has developed a significant
amount of expertise in manufacturing processes. In the past, we have
provided field service to customers of our products pursuant to our
warranty or an extended service plan. We are currently expanding these
services to provide applications, hardware and systems engineering
consulting services to our customers to improve the integration and
performance of their process automation technology.
Competition
The process automation industry is a highly competitive environment
that has undergone considerable consolidation over the past few years. The
industry is populated with numerous large process control vendors, many of which
have substantially greater financial, marketing and other resources than we
have. Examples include such companies as Foxboro, Siemens, Honeywell and
Emerson. The principal factors affecting competition include price, technology,
ease of use, reliability, application experience and support programs, and the
financial stability of the supplier. We compete by ensuring that our new product
development protects our customers' previous investments in applications
software and process I/O, thereby significantly increasing barriers to change.
Customers
We have provided over 300 process control systems to an installed base
of over 125 customers worldwide. In 2000, approximately 10% of our worldwide
Process Automation revenue was generated from end users outside the United
States. Our customers include, among others, Archer Daniels Midland Company,
Aristech, Bethlehem Steel Corporation, Cargill Incorporated, Eastman Chemical
Company, Formosa Plastics Company, GE Plastics, Merck & Co., Inc., Miller
Brewing Company, and Westinghouse Savannah River Company. For the year ended
December 31, 2000, one process automation customer (Westinghouse Savannah River
Company) accounted for approximately 11% of our consolidated revenues.
Sales and Marketing
We market our products and services through a network of direct sales
staff, agents and representatives, systems integrators and strategic alliance
partners. We employ a direct sales force in the continental United States that
is regionally based, market focused and trained on its product and service
offerings. Market-oriented business and customer development teams define and
implement specific campaigns to pursue opportunities in the power, process and
manufacturing marketplaces. This effort is supported by a regional support
organization focused on the current customer installed base.
Our ability to support our multi-facility, international and/or
multinational clients is facilitated by our network of offices in the U.S. and
overseas. We maintain U.S. offices in:
o Louisiana o Pennsylvania
o Maryland o South Carolina
o Minnesota o Texas
o North Carolina
In addition to our domestic offices, our ability to conduct
international business is enhanced by our multilingual and multicultural work
force. We have strategic relationships with systems integrators and agents
representing our interests in:
o Belgium o Taiwan
o Korea o People's Republic of China
o Netherlands
Competitive Advantage
We believe that we are in a strong position to compete in both the
Power Simulation and Process Automation markets based upon the following
strengths:
o Technical and Applications Expertise. We are a leading innovator and
developer of real-time software with more than 30 years of experience
producing high fidelity real-time simulators and over 25 years in
producing fully integrated computerized process control systems in
more than 25 countries. As a result, we have acquired substantial
applications expertise in the energy and industrial process
industries. We employ a highly educated and experienced multinational
workforce of more than 250 employees, including approximately 180
engineers and scientists. Approximately half of our engineers and
scientists have advanced science and technical degrees in fields such
as chemical, mechanical and electrical engineering, applied
mathematics and computer sciences.
o Proprietary Software Tools. We have developed a library of proprietary
software tools including auto-code generators and system models that
substantially facilitate and expedite the design, production and
integration, testing and modification of software and systems. These
tools are used to automatically generate the computer code and systems
models required for specific functions commonly used in simulation and
process control applications, thereby enabling us or our customers to
develop high fidelity real-time software quickly, accurately and at
lower costs.
o Open System Architecture. Our software products and tools are executed
on standard operating systems with third-party off-the-shelf hardware.
The hardware and operating system independence of our software
enhances the value of our products by permitting customers to acquire
less expensive hardware and operating systems. Our products work in
the increasing popular Microsoft operating environment, allowing full
utilization and integration of numerous off-the-shelf products for
improved performance.
o International Strengths. Approximately half of our 2000 revenue was
derived from international sales of our products and services. We have
a multinational sales force with offices located in Nykoping, Sweden,
and Tokyo, Japan and agents and representatives in 22 other countries.
To capitalize on international opportunities and penetrate foreign
markets, we have established strategic alliances and partnerships with
several foreign entities.
Avantium
During 1999 and 2000, we created and implemented our VirtualPlant
business and marketing strategy. VirtualPlant combines simulation with control
systems to create a real-time representation of an operating manufacturing
plant. VirtualPlant allows a customer to create an environment for
simulation-enhanced experimentation, thereby reducing the amount of physical
experimentation necessary to achieve an optimal design for a new process
product.
In early 2000, we determined that outside investment was required to
support our VirtualPlant business. Since we were unsuccessful in attracting the
needed capital on acceptable terms, we decided to sell the VirtualPlant assets
to Avantium in exchange for Avantium stock. The sale was completed in March 2001
and included certain of our fixed assets and intellectual property (including
BatchCAD and BatchWizard software products), and the transfer of certain of our
personnel in the U.S. and the UK to Avantium.
In exchange for these assets, we received eight percent of Avantium's
stock, thus increasing our equity interest in Avantium to approximately 19%.
However, Avantium currently requires a significant amount of additional capital
to continue its business operations. They recently advised us that, under the
terms of this additional financing, our ownership interest will be diluted to
approximately 6.3%. We are currently in negotiations with Avantium about this
situation. However, there can be no assurances that our ownership interest will
not be diluted to 6.3% at this time, or that we will not face additional
dilution in the future. We also retain one seat on the supervisory board of
Avantium. We have licensed our process control and simulation software
exclusively to Avantium solely for the research and development market. This
licensing arrangement includes free updates to the software. In return, we
received a royalty-free license to use any upgrades of the software produced by
Avantium in the manufacturing market. We also received a royalty-free license to
use and produce upgrades of the BatchWizard Software owned by Avantium in the
manufacturing market. We intend to continue our relationship with Avantium in
product development and marketing so that common clients will be able to use
Avantium's VirtualPlant technology to develop scalable products that will fit
together at the manufacturing level with our process control and simulation
products. We hope this relationship will accelerate introduction of new products
and reduce our research and development costs.
Avantium is a leading research and development (R&D) solutions provider
in process development for the pharmaceuticals, chemicals, and energy
industries. Avantium uses high throughput experimentation and simulations
technology to investigate and screen tens to hundreds of new product
formulations and process parameters simultaneously. Avantium provides added
value by discovering catalysts and optimizing chemical processes to reduce
manufacturing costs through the use of more efficient processes and by
developing alternatives to the current multi-step synthetic pathways that are
energy and capital intensive. According to Avantium's market research, companies
are actively seeking outsourcing partners to accelerate the time to market of
new products as well as to improve operating margins on existing products
without the costly burden of developing in-house solutions.
Avantium possesses a hybrid business model that enables it to benefit
from the nature of contract R&D services while also offering upside potential
for royalties through internal discovery. The three components of their business
model are: (1) providing contract R&D services to the pharmaceuticals, chemical
and energy industries which may give Avantium a steady stream of revenues; (2)
investing in its discovery program for novel catalysts and chemical processes
both internally and in collaboration with three Dutch universities; and (3)
selling and licensing high throughput enabling technology to chemical and other
industrial companies for their own use in development of chemical processes.
Research and Development and Capitalized Software Development Costs
We expend significant amounts on the development and maintenance of our
suite of simulation and process automation products, as well as on new product
research and development. For the years ended December 31, 2000, 1999 and 1998,
gross research and product development expenditures were $3.6 million, $5.4
million, and $4.3 million, respectively. Capitalized software development costs
totaled $1.9 million, $2.5 million, and $2.3 million for the years ended
December 31, 2000, 1999 and 1998. See Note 2, Summary of significant accounting
policies, in the "Notes to Consolidated Financial Statements" for a discussion
of our policy regarding capitalization of software development costs.
Our development activities have historically involved adding new
capabilities to our family of simulation and process automation products,
improving ease of use or converting our products for use on new computer
platforms. In 2000, we completed the development of our VPbatch product, which
is the Windows NT version of our FlexBatch Recipe and Process Management
software, and we completed the development of version 10.2 (released in December
2000) of our D/3 Distributed Control System. We are also developing simulation
code generation tools applicable to the fossil power industry. These tools are
designed to combine high fidelity modeling with easy to use graphic interfaces
to quickly build models for fossil plant simulators.
Contract Backlog
We do not reflect an order in backlog until we have received a
contract that specifies the terms and milestone delivery dates. As of June 30,
2001, our aggregate contract backlog totaled approximately $23.9 million, with
$17.4 million in contract backlog for our Power Simulation business and $6.5
million in contract backlog for our Process Automation business. Of this $23.9
million backlog, we estimate that we may be able to convert up to $21.3 million
to revenue by June 30, 2002. As of June 30, 2000, the contract backlog totaled
$28.7 million, made up of $22.3 million for our Power Simulation business and
$6.4 million for our Process Automation business.
Segment Information and Information about Geographic Areas
See Note 18, Segment information, in the "Notes to Consolidated
Financial Statements" for a discussion of our business segments.
Intellectual Property Rights
We regard our software as proprietary and rely on a combination of
trade secret, copyright and trademark laws, license agreements, nondisclosure
and other contractual provisions, and technical measures to protect our
proprietary right in our products. We distribute our software products under
software license agreements that grant customers nonexclusive licenses for the
use of our products, which are nontransferable. Use of the licensed software is
restricted to designated computers at specified sites, unless the customer
obtains a site license for its use of the software. Software and hardware
security measures are also employed to prevent unauthorized use of our software,
and the licensed software is subject to terms and conditions prohibiting
unauthorized reproduction of the software.
Our registered trademarks include D/3, D/3 DCS, SABL, TotalVision, and
RETACT. Registration is pending or is being considered for other relevant
trademarks, including GFLOW+, GLOGIC+, GCONTROL+, and GPower+. Some of our
trademarks have also been registered in foreign countries. We also claim
trademark rights to SimSuite Power, SimSuite Pro, Java Applications &
Development Environment (JADE), SimExec, eXtreme I/S, RACS, PEGASUS Plant
Surveillance and Diagnosis System, SIMON, Vista PIN, VPTV, and VPbatch.
In addition, we maintain federal statutory copyright protection with
respect to our software programs and products, have registered copyrights for
some of the documentation and manuals related to these programs, and maintain
trade secret protection on our software products.
Legal Proceedings
We are from time to time involved in legal proceedings incidental to
the conduct of our business. We currently are not a party to any legal
proceedings, which, in the opinion of management, are likely to have a material
adverse effect on our business, financial condition or results of operations.
Employees
As of December 31, 2000, we had 303 employees, a 26% decrease from
December 1999. The reductions were primarily associated with our restructuring
of our Process Automation business. As of June 30, 2001, our census was 265
employees. These further reductions are primarily associated with the sale of
the VirtualPlant business to Avantium, further restructuring of our Process
Automation business, and normal attrition.
Properties
Our Power Simulation business is located at our facility in Columbia,
Maryland (approximately 53,000 square feet) which also houses our corporate
headquarters offices and support functions. Our Process Automation business is
located in our Baltimore, Maryland facility (34,000 square feet). The leases for
both of these facilities expire in 2008. In addition, we lease office space
domestically in Georgia, Louisiana, Texas, Pennsylvania, North and South
Carolina, and internationally in Japan and Sweden. We lease these facilities for
terms ending between 2001 and 2002. In March 2001, our lease for our UK
operations was transferred to Avantium as part of the VirtualPlant asset sale.
Management
Our directors and executive officers are as follows:
Name Age Principal Positions
Chin-Our Jerry Jen 52 Chief Operating Officer,
President and Director, term expires 2002
Gill R. Grady 43 Senior Vice President
Harold D. Paris 46 Senior Vice President, Power Simulation
Jeffery G. Hough 46 Senior Vice President, Chief Financial
Officer, Secretary and Treasurer
Sheldon L. Glashow, Ph.D. (3) 68 Director, term expires 2002
Scott N. Greenberg 44 Director, term expires 2003
Joseph W. Lewis (3) 66 Director, term expires 2003
John A. Moore, Jr. (2) 48 Director, term expires 2004
Jerome I. Feldman (1), (2) 72 Chairman of the Board and Director, term
expires 2004
George J. Pedersen (1), (2) 65 Director, term expires 2004
Roger L. Hagengruber, Ph.D. (3) 59 Director, term expires 2002
(1) Member of the Executive Committee.
(2) Member of the Compensation Committee.
(3) Member of the Audit Committee.
Chin-Our Jerry Jen has served as our President and a Director since
March 2001. Since 2000, Mr. Jen has served as our Chief Operating Officer with
responsibility for both our Power Simulation and Process Automation businesses.
From 1997 to his appointment as President in 2001, Mr. Jen served as Senior Vice
President of our Power Simulation business. Mr. Jen has served in various
engineering and senior management positions with our company and its
predecessors since 1980.
Gill R. Grady has served as our Senior Vice President since 1999 and is
currently responsible for business development and certain administrative
functions such as investor relations, human resources, contract administration
and information technology. From 1999 to 2000, he served as Senior Vice
President of Operations for our Process Automation business. From 1997 to 1999,
he served as Vice President of Business Development for our Power Simulation
business. Mr. Grady has served in various management positions in business
operations, business development, marketing and project management with our
company and its predecessors since 1980. Mr. Grady also serves as our liaison
with the Department of Energy and with Congress for funding related to our
Eastern European activities.
Harold D. Paris has served as Senior Vice President in charge of our
Power Simulation business since May 2001. Previously, Mr. Paris served as Vice
President of Sales and Marketing for the Power Simulation business, and has
served in various marketing and operations management positions with our company
and its predecessors since 1980.
Jeffery G. Hough has served as our Senior Vice President, Chief
Financial Officer, Secretary and Treasurer since 1999. From 1995 to 1998, Mr.
Hough served as Chief Financial Officer and Treasurer of Yokogawa Industrial
Automation America, Inc., a supplier of process control equipment. From 1982
through 1995, he held various financial management positions with two other
suppliers of process control equipment, ABB Process Automation and Leeds &
Northrop. Mr. Hough was an auditor for Price Waterhouse from 1977 to 1982.
Sheldon L. Glashow, Ph.D. has served as a Director since 1995. Dr.
Glashow is the Higgins Professor of Physics Emeritus at Harvard University, and
a University Professor and the Arthur G.B. Metcalf Professor of Mathematics &
the Sciences at Boston University since July 2000, and previously taught physics
at other major universities in Massachusetts, Texas, California and France. In
1979, Dr. Glashow received the Nobel Prize in Physics. Dr. Glashow has been a
director of GP Strategies since 1997; a director of General Physics Corporation,
an industrial and government training and services company, since 1987; a
director from 1985 to 1995 of GTS Duratek, Inc., an environmental technology and
consulting company; and a director of Interferon Sciences, Inc., a
pharmaceuticals company, since 1991. Dr. Glashow is a foreign member of the
Russian Academy of Sciences.
Scott N. Greenberg has served as a Director since 1999 and had
previously served as a Director from 1994 to 1995. Mr. Greenberg has served on
the board of directors of GP Strategies since 1987. Mr. Greenberg is the
President of GP Strategies and has served as its Chief Financial Officer since
1989. Mr. Greenberg has served as Vice President and a director of SGLG, Inc.,
an industrial and government training and consulting company, since 1991. Mr.
Greenberg has also served as a director since 1987 of General Physics
Corporation. From 1991 to January 1995, Mr. Greenberg was a director of GTS
Duratek, Inc.
Joseph W. Lewis has served as a Director since 2000. In 1998, Mr.
Lewis retired from Johnson Controls, Inc. after 39 years of service, including
his tenure from 1986 to 1998 as Executive Vice President with responsibilities
for its Controls Group. Mr. Lewis is Chairman of the Board of DryKor Ltd of
Israel. He has served as a director of Wheaton Franciscan Services, Inc., a
multi-system health care provider, since 1991 and has served as its Treasurer
since 1993. He also served as a director of Entek IRD International until its
sale to Allen Bradley, a division of Rockwell International Corporation.
John A. Moore, Jr. has served as a Director since 1997. Mr. Moore has
served as Executive Vice President and Chief Financial Officer of ManTech since
1993. Mr. Moore also serves as a director and in an executive capacity for a
number of ManTech subsidiaries. Prior to joining ManTech in 1982, he was a
supervisory auditor for the Defense Contract Audit Agency.
Jerome I. Feldman has served as a Director since 1994 and as Chairman
of the Board since 1997. Mr. Feldman co-founded GP Strategies in 1959 and has
served as its Chairman of the Board and Chief Executive Officer since its
founding. Mr. Feldman has been a director of Five Star Products, a wholesale
distributor of home decorating, hardware and finishing products, since 1994. Mr.
Feldman is Chairman of the New England Colleges Fund and Trustee of the Northern
Westchester Hospital.
George J. Pedersen has served as a Director since 1994 and as Chairman
of our Executive Committee since 1997. Mr. Pedersen co-founded ManTech in 1968
beginning as Vice President and Secretary/Treasurer. He has served as its
Secretary since 1968 and was elected Chairman of its board of directors in 1979.
In 1995, Mr. Pedersen was elected to the additional positions of President and
Chief Executive Officer of ManTech. Mr. Pedersen has served as President and/or
Chairman of the Board of a number of ManTech subsidiaries. On June 12, 2001, Mr.
Pedersen became a director of GP Strategies. Mr. Pedersen also serves as a
director, Vice President and a member of the Executive Committee of the
Professional Services Council; a Trustee and a member of the Executive Committee
of the National Security Industrial Association; a Trustee of the Naval Undersea
Museum Foundation; and as a director of the Ivymount School. Mr. Pedersen
currently serves as Chairman of the Board of MARE, Inc., Chairman of the Board
of the Institute of Software Research and Chairman of the Board of Praxa
Limited, an information technology systems integrator headquartered in
Melbourne, Australia.
Roger L. Hagengruber, Ph.D. has served as a Director since June 2001.
Dr. Hagengruber is the Senior Vice President for National Security at Sandia
National Laboratories where he has served as an officer for over 15 years. In
his current position, he oversees activities in arms control, satellite and
sensor systems, security, and international programs that include an extensive
set of projects within the states of the former Soviet Union. He holds B.S.,
M.S. and Ph.D. degrees from the University of Wisconsin with his doctorate in
nuclear physics. He is also a graduate of the Industrial College of the Armed
Forces.
Board Committees
Executive Committee. The Executive Committee consists of George J.
Pedersen (Chairman) and Jerome I. Feldman. The Executive Committee has the
authority to exercise all powers of the board, except for actions that must be
taken by the full board under the Delaware General Corporation Law.
Audit Committee. The Audit Committee consists of Dr. Sheldon L.
Glashow, Joseph W. Lewis and Dr. Roger L. Hagengruber. The Audit Committee makes
recommendations concerning the engagement of independent public accountants,
reviews with the independent public accountants the plans and results of the
audit engagement, approves professional services provided by the independent
public accountants, reviews the independence of the independent public
accountants and reviews the adequacy of our internal accounting controls.
Nominating Committee. The Nominating Committee consists of Jerome I.
Feldman and George J. Pedersen. The Nominating Committee selects and recommends
nominees for election as members of the board of directors.
Compensation Committee. The Compensation Committee consists of Jerome
I. Feldman, John A. Moore, Jr. and George J. Pedersen (Chairman). The
Compensation Committee is responsible for determining compensation for our
executive officers and for administering and granting awards under our Long-Term
Incentive Plan.
Director Compensation
We pay our Directors who are not employees of GSE Systems,
non-management Directors, an annual fee of $5,000 for their service and $1,500
for each board meeting that they attend. Officers who are full-time employees
and are also Directors do not receive any fee or remuneration for services as
members of the board of directors or any board committee.
At the discretion of the board, each person who becomes a
non-management Director may receive an initial grant of options under the GSE
Systems 1995 Long-Term Incentive Plan to purchase shares of common stock having
an exercise price per share equal to the fair market value of the common stock
on the date such person first becomes a Non-Management Director. Also at the
discretion of the board, under the plan, each non-management Director serving as
a Director on December 31 of each calendar year may receive options to purchase
shares of common stock with an exercise price per share equal to the fair market
value of the common stock on that date. Usually, options granted under the plan
to non-management Directors become exercisable in three installments with 40%
vesting on the first anniversary of the date of grant and 30% vesting on each of
the second and third anniversaries of the date of grant, subject to acceleration
under certain circumstances such as a change of control.
In 2000, Messrs. Glashow, Lewis and Schefler (former Director) were
each granted options to purchase 10,000 shares of common stock at an exercise
price of $7.50. Messrs. Carnavos and Southern (each a former Director) were each
granted options to purchase 100,000 shares of common stock at an exercise price
of $4.75.
In 1999, we entered into agreements with Messrs. Feldman, Greenberg,
Pedersen and Moore to serve as executive employees, providing strategic planning
in acquisitions and divestitures, management of financing arrangements, and
customer and other business development activities. Salaries paid under these
agreements in 2000 were $120,000 each to Messrs. Feldman and Pedersen and
$60,000 each to Messrs. Greenberg and Moore.
In 1999, as a management employee incentive, Messrs. Feldman and
Pedersen were each granted options to purchase 100,000 shares of common stock at
an exercise price of $3.3125; Messrs. Greenberg and Moore were each granted
options to purchase 50,000 shares of common stock at an exercise price of
$3.3125. These options have a target stock value and vest immediately following
a 30-day trading-day period in which the target stock value has been met or
exceeded (target stock value of $8.00, 35% vested; target stock value of $10.00,
100% vested), or vest at 100% on the fifth anniversary of the date of grant.
Executive Compensation
The following table sets forth information as to the compensation paid
our principal executive officer and our four other most highly compensated
executive officers for the fiscal years ended December 31, 2000, 1999, and 1998.
Summary Compensation Table
Annual Long-Term
Compensation Compensation Awards
Securities
Underlying All Other
Name and Principal Position Year Salary Bonus Options (#) Compensation
Christopher M. Carnavos(9) 2000 $223,600 $5,000 (1) 100,000 $3,295 (2)
President & CEO 1999 221,618 50,000 100,000 57,013
1998 206,923 25,000 40,000 28,978
Brian K. Southern(9) 2000 $180,654 $10,000 (1) 100,000 $3,573 (3)
Sr. Vice President 1999 166,000 25,000 50,000 37,732
1998 118,042 15,000 30,000 35,030
Bruce E. Manthey(9) 2000 $175,673 $91,427 (4) -0- $2,701 (5)
Sr. Vice President 1999 -0- -0- 55,000 (6) -0-
1998 -0- -0- -0- -0-
Jeffery G. Hough 2000 $160,615 $15,000 (1) -0- $3,602 (7)
Sr. Vice President & CFO 1999 137,308 10,000 75,000 49,125
1998 -0- -0- -0- -0-
Chin-Our Jerry Jen 2000 $152,385 $15,000 (1) -0- $3,057 (8)
Sr. Vice President & COO 1999 140,000 25,000 50,000 4,008
1998 120,202 -0- 10,000 2,997
----------------------------
(1) Bonus paid for 1999 performance of GSE Systems.
(2) Consists of $2,303 for GSE Systems retirement plan matching and $992 for
executive group term life insurance premiums. (3) Consists of $3,102 for GSE
Systems retirement plan matching and $471 for executive group term life
insurance premiums. (4) Hiring bonus paid in 2000 plus performance bonuses paid
for 1st, 2nd and 3rd quarters of 2000. (5) Consists of $1,390 for GSE Systems
retirement plan matching and $1,311 for executive group term life insurance
premiums. (6) Options granted upon hiring in late December 1999.
(7) Consists of $2,889 for GSE Systems retirement plan matching and $713 for
executive group term life insurance premiums. (8) Consists of $2,045 for GSE
Systems retirement plan matching and $1,012 for executive group term life
insurance premiums. (9) In 2000, the GSE Systems had severance agreements with
Messrs. Carnavos, Southern and Manthey requiring payments for each which would
amount to more than $100,000. Such agreements became effective in 2001 with the
resignation of Mr. Carnavos and the termination of Messrs. Southern and Manthey
as employees of GSE Systems.
Stock Options
The following table provides information on stock options granted to
the named executive officers during 2000. Only non-statutory stock options were
granted under the Plan.
Option Grants In Last Fiscal Year
Potential Realizable Value at
Name Number of Percent of Assumed Annual Rates of Stock Price
Securities Total Options Appreciation for Option Term (3)
Underlying Granted to Exercise or
Options Employees in Base Price Expiration
Granted (#) Fiscal Year (2) ($/share) Date 0% 5% 10%
_______________________ ____________ _______________ __________ ________ _________________________________
Christopher M. Carnavos 100,000 (1) 33.9% $4.750 02/07/07 $0 $193,373 $450,641
Brian K. Southern 100,000 (1) 33.9% $4.750 02/07/07 $0 $193,373 $450,641
Bruce E. Manthey 0
Jeffery G. Hough 0
Chin-Our Jerry Jen 0
___________________________
(1) These options immediately vested.
(2) In addition to the option grants to the executive officers reported in
the table, options with an average exercise price of $5.76 covering a
total of 95,000 shares of common stock were granted to seven (7) other
employees during 2000.
(3) No gain to the optionees is possible without an increase in stock
price, which will benefit all stockholders commensurately. A 0%
increase in stock price will result in $0 gain for the optionees. The
potential realizable amounts shown illustrate the values that might be
realized upon exercise immediately prior to the expiration of their
term using 5% and 10% appreciation rates set by the SEC, compounded
annually and, therefore, are not intended to forecast possible future
appreciation, if any, of our stock price.
Options Exercises and Holdings
The following table summarizes the value of all outstanding
options for the executive officers named in the Summary Compensation Table as of
December 31, 2000.
Fiscal Year-End Option Values
Number of
Securities Underlying Value of Unexercised
Unexercised In-the-Money
Options at Options at
December 31, 2000 December 31, 2000
Name Exercisable/Unexercisable (1) Exercisable/Unexercisable
Christopher M. Carnavos 181,000/89,000 0/0
Brian K. Southern 121,000/59,000 0/0
Bruce E. Manthey 24,000/33,000 0/0
Jeffery G. Hough 10,000/65,000 0/0
Chin-Our Jerry Jen 37,000/48,000 0/0
-----------------------------
(1) Pursuant to the severance agreements in 2001 for Messrs. Carnavos and
Manthey, all unvested options became immediately vested and are currently
exercisable. Pursuant to the severance agreement in 2001 for Mr. Southern, the
unexercisable options (53,000 shares) lapsed upon his termination of employment.
Employment Agreements
On March 10, 2000, we entered into change of control agreements with
Mr. Jen and Mr. Hough. Under these agreements, in the event of a termination
of the executive's employment following a change of ownership structure, the
executive is entitled to continuation of salary and bonus and all benefits for
up to 12 months following termination of employment. The executive is also
entitled to a bonus of 35% of base pay.
Executive Compensation Plan
On May 3, 2001, we established an Executive Compensation Plan for
Jerry Jen, who was appointed President on March 27, 2001. This plan is in effect
for fiscal year 2001 and provides for a performance bonus of up to $50,000 and
immediate vesting of up to all of the stock options issued to Mr. Jen during
2001 upon achievement of certain performance milestones. Mr. Jen has been issued
25,000 stock options during 2001.
Beneficial Ownership of Common Stock
The following table sets forth information regarding beneficial
ownership of our common stock, as of June 15, 2001, by: (i) each stockholder who
is known by us to own beneficially more than five percent of the outstanding
common stock, (ii) each of our current directors, (iii) each of our current
executive officers named in the Summary Compensation Table, and (iv) all of our
current directors and executive officers as a group. Except as otherwise
indicated below, we believe that the beneficial owners of the common stock
listed below have sole investment and voting power with respect to such shares,
subject to community property laws where applicable.
In preparing the following table, we have relied on the information
contained in the Statements on Schedule 13G previously filed by ManTech and GP
Strategies, and Schedule 13G/A filed for 2000 by Benson & Associates LLC and
Hathaway & Associates, Ltd. Certain of the shares reported in the following
table may be deemed to be beneficially owned by more than one person and
therefore may be included in more than one table entry.
Number of Percent of
Common Stock Outstanding
Shares Beneficially Owned Common Stock
Name of Beneficial Owner
Certain Beneficial Owners
GP Strategies Corporation(1).............................1,325,250 24.7%
9 West 57th Street
New York, NY 10019
ManTech International Corporation (2) ...................1,224,265 22.8%
12015 Lee Jackson Highway
Fairfax, VA 22033
SGLG, Inc. ...............................................875,000 16.8%
9 West 57th Street
New York, NY 10019
Benson Associates, LLC(3) .................................542,703 10.4%
111 S.W. Fifth Avenue, Suite 2130
Portland, OR 97204
Hathaway & Associates, Ltd.................................366,600 7.1%
119 Rowayton Avenue
Rowayton, CT 06853
Directors and Executive Officers (4)
Jerome I. Feldman(5) ....................................1,325,250 24.7%
Scott N. Greenberg(6) ...................................1,308,700 24.5%
John A. Moore, Jr.(7) ...................................1,151,465 21.5%
George J. Pedersen (8)...................................1,137,584 21.2%
Chin-Our Jerry Jen(9) .....................................35,800 *
Sheldon L. Glashow (10)....................................18,908 *
Jeffery G. Hough (11) .....................................17,500 *
Gill R. Grady (12) ........................................11,600 *
Joseph W. Lewis (13) ........................................4,000 *
Roger L. Hagengruber...........................................-0- *
Directors and Executive Officers as a group
(10 persons) .........................................2,564,523 49.4%
______________________________
* Indicates less than one percent.
(1) Includes 16,550 shares subject to option owned directly by Mr. Feldman (see
Note 5 below), 875,000 shares owned by SGLG, Inc. (SGLG), 250,000 shares owned
by General Physics Corporation (GPC) and 33,700 shares owned by GP Strategies.
Also includes 150,000 shares issuable to GP Strategies upon the exercise of
warrants which are currently exercisable. GP Strategies, a company in which Mr.
Feldman has a controlling interest, owns GPC as well as a controlling interest
in SGLG. GP Strategies disclaims beneficial ownership of all shares, including
those subject to option, owned directly by Mr. Feldman.
(2) Includes 72,800 shares and shares subject to option owned directly by Mr.
Pedersen (see Note 8 below), 86,681 shares and shares subject to option owned
directly by John A. Moore, Jr. (see Note 7 below), and 914,784 shares owned by
ManTech. Also includes 150,000 shares issuable to ManTech upon the exercise of
warrants which are currently exercisable. ManTech disclaims beneficial ownership
of all shares owned directly by Messrs. Pedersen and Moore.
(3) Persons other than Benson Associates, LLC have the right to receive
dividends from, or the proceeds of, the sale of such common stock. No such right
to receive proceeds or dividends relates to more than 5 percent of the class.
(4) The address of all Directors and Executive Officers is in care of GSE
Systems, Inc., 9189 Red Branch Road, Columbia, MD 21045.
(5) Includes 33,700 shares owned by GP Strategies, 875,000 shares owned by SGLG
and 250,000 shares owned by GPC, and 150,000 warrants which are owned by GP
Strategies and are currently exercisable (see Note 1 above). Mr. Feldman
disclaims beneficial ownership of all the shares owned by GP Strategies, SGLG
and GPC. Also includes 16,550 shares issuable upon the exercise of options which
are currently exercisable.
(6) Includes 33,700 shares owned by GP Strategies, 875,000 shares owned by SGLG
and 250,000 shares owned by GPC, and 150,000 warrants which are owned by GP
Strategies and are currently exercisable (see Note 1 above). Mr. Greenberg is
the President, Chief Financial Officer and a director of GP Strategies and
disclaims beneficial ownership of all the shares owned by GP Strategies, SGLG
and GPC.
(7) Includes 83,925 shares owned directly by Mr. Moore and 914,784 shares owned
by ManTech, and 150,000 warrants which are owned by ManTech and are currently
exercisable (see Note 2 above). Mr. Moore is a stockholder of ManTech and serves
as its Chief Financial Officer. Mr. Moore disclaims beneficial ownership of the
shares owned by ManTech. Also includes 2,756 shares issuable upon the exercise
of options which are currently exercisable.
(8) Includes 56,250 shares owned directly by Mr. Pedersen and 914,784 shares
owned by ManTech, and 150,000 warrants which are owned by ManTech and are
currently exercisable (see Note 2 above). Mr. Pedersen is a controlling
stockholder of ManTech and serves as its Chairman, President and Chief Executive
Officer. Mr. Pedersen disclaims beneficial ownership of the shares owned by
ManTech. Also includes 16,550 shares issuable upon the exercise of options which
are currently exercisable.
(9) Includes 3,800 shares owned directly by Mr. Jen and 32,000 shares issuable
upon the exercise of options which are currently exercisable. Mr. Jen was
appointed President and Director on March 27, 2001.
(10) Includes 8,129 shares owned directly by Dr. Glashow and 10,779 shares
issuable upon the exercise of options which are currently exercisable.
(11) Includes 17,500 shares issuable upon the exercise of options which are
currently exercisable.
(12) Includes 11,600 shares issuable upon the exercise of options which are
currently exercisable.
(13) Includes 4,000 shares issuable upon the exercise of options which are
currently exercisable. Mr. Lewis was elected to the board on March 10, 2000.
Certain Transactions
On August 17, 1998, we entered into warrant agreements with ManTech and
GP Strategies in consideration for their respective guarantees/support services
in connection with our credit facilities. Each warrant agreement is exercisable
for 150,000 shares of our common stock at an exercise price of $2.375 per share
and with a term ending on August 16, 2003.
On January 27, 2000, we issued 116,959 shares of our common stock to
ManTech for $500,000. The proceeds of the stock issuance were used for working
capital.
On March 23, 2000, we entered into a loan and security agreement with a
bank for a new credit facility with a maturity date of March 23, 2003. In
connection with the new credit facility, ManTech provided a one-year $900,000
standby letter of credit to the bank as additional collateral for the facility.
In addition, GP Strategies provided a limited guarantee totaling $1,800,000 and
ManTech provided a limited guarantee totaling $900,000. In July 2000, ManTech's
guarantee was converted into a second one-year $900,000 standby letter of credit
to the bank, which was also used as additional collateral for our credit
facility. We are allowed to borrow up to 100% of the value of these two letters
of credit.
Due to our cash situation at the end of 2000, we experienced some
difficulties in procuring supplies from our vendors for business operations. At
our request, ManTech orally agreed to purchase supplies on our behalf starting
in late January 2001. ManTech deals directly with the vendor, orders the
supplies that we need, and has the products shipped per our instructions.
ManTech pays the vendor directly. They have provided this service throughout
most of 2001, as required. The products purchased by ManTech under this
arrangement include third party hardware and software. ManTech provides this
service at cost plus 3% to cover their administrative purchasing functions. As
of July 31, 2001, we owed ManTech approximately $521,689 under this arrangement.
This arrangement can be terminated by ManTech at any time. There is currently no
requirement to pay interest on the amount due under this oral agreement.
In the fourth quarter of 2000, we issued a demand promissory note to
ManTech that allows us to borrow up to $1.8 million at an interest rate of prime
plus one percent. As of December 31, 2000, we had borrowed $1.6 million, which
was used for working capital. The promissory note was secured by our pledge of
our equity interest in Avantium International B.V., but such security interest
was subordinate to the lien thereon held by our bank. In the first quarter of
2001, the promissory note was amended to increase the principal amount to $2.1
million. Subsequently, in the first quarter of 2001, and with ManTech's
approval, we issued a replacement promissory note in the amount of $2.1 million
to ManTech pursuant to which our obligations to ManTech became unsecured. The
principal is payable over a two year period, in equal installments, commencing
April 1, 2004, with interest payments to commence monthly on July 1, 2001. The
note permits ManTech to convert the principal into GSE preferred stock at a
conversion rate of $100 per share. ManTech has agreed to subordinate the note to
our credit facility.
On April 4, 2001, ManTech allowed our bank to draw upon the two
outstanding letters of credit which were being used as additional collateral for
our credit facility, thus paying down $1.8 million of our borrowings under the
credit facility. On April 6, 2001, we amended the subordinated promissory note
to ManTech, increasing the amount by $1.8 million to a total of $3.9 million. On
June 25, 2001, we issued an additional promissory note in the amount of $1
million at an interest rate of prime plus 1% per annum to ManTech and used the
loan proceeds for working capital purposes. This note is subordinated to our
credit facility. This note must be repaid with the proceeds of this offering or
subsequent offerings of stock to our stockholders. In the event insufficient
funds are raised through this offering or any subsequent offering to our
stockholders, payments of accrued interest only shall be payable commencing on
January 1, 2002 and continuing through April 1, 2006 and payments of principal
shall be payable in equal installments commencing on April 1, 2004 and
continuing through final payment of the note on April 1, 2006.
On August 2, 2001, our stockholders approved an amendment to our
certificate of incorporation to increase the number of authorized shares of
common stock from 8 million shares to 18 million shares in order, among other
purposes, to permit ManTech to convert its $3.9 million promissory note into
Series A preferred stock. ManTech has indicated that it intends to convert the
$3.9 million promissory note into Series A preferred stock upon approval of the
listing of the 1,474,480 shares of common stock underlying such shares on the
American Stock Exchange, which was received on October 1, 2001. As a result, we
intend to issue 39,000 shares of Series A preferred stock to ManTech in full
payment of the $3.9 million promissory note. The Series A preferred stock has no
voting rights and is subject to a holding period of one year from the date of
issuance. In the event of liquidation or dissolution of GSE Systems, payment of
available funds shall be made on the Series A preferred stock (including payment
in satisfaction of dividend obligations) prior and in preference to common
stock. The Series A preferred stock is convertible at the option of the holder
at any time after issuance and prior to the third anniversary of issuance into
common stock at a rate equal to its $100 liquidation value per share divided by
a conversion price of $2.645 per share. The Series A preferred stock converts
into an aggregate of 1,474,480 shares of common stock. The Series A preferred
stock will bear dividends at the rate of 6% per annum on its $100 liquidation
value per share payable quarterly. Dividends will accumulate if not paid
quarterly and compound interest will accrue on any unpaid dividends. Upon
conversion, accrued and unpaid dividends on shares of Series A preferred stock
convert into a debt to the last holder of the such shares of Series A preferred
stock. In connection with the issuance of the Series A preferred stock to
ManTech, ManTech has advised us that it will grant GP Strategies an option to
acquire 19,500 shares of the Series A preferred stock from ManTech at a price of
$100 per share, or an aggregate of $1,950,000, plus any accrued and unpaid
dividends. The independent members of our board of directors have approved the
issuance of Series A preferred stock to ManTech.
As of July 31, 2001, our total outstanding obligations to ManTech were
$5,580,964, broken out as follows: two promissory notes totaling $4.9 million
bearing interest at prime plus 1% per annum, $521,689 under a purchasing
arrangement (described herein), and accrued interest since October 2000 of
$159,275.
Description of Capital Stock
The authorized capital stock of GSE Systems is 20 million shares
consisting of 18 million shares of common stock, par value $0.01 per share, and
2 million shares of preferred stock, par value $0.01 per share. As of June 15,
2001 there were 5,193,527 shares of common stock and no shares of preferred
stock outstanding.
Common Stock
Subject to such preferential rights as may be granted by the board of
directors in connection with the issuance of preferred stock, holders of common
stock are entitled to one vote per share on all matters to be voted on by
stockholders. Distributions may be paid to the holders of common stock if and
when declared by the board of directors out of funds legally available therefor.
We do not intend to pay dividends on our common stock in the foreseeable future.
Holders of common stock have no preemptive or other rights to subscribe
for additional shares of common stock. Upon liquidation, dissolution or winding
up, the holders of the common stock are entitled to share ratably in all assets
that are legally available for distribution after payment of all debts and other
liabilities and subject to any prior rights of holders of preferred stock, if
any, then outstanding.
Series A Preferred Stock
We intend to issue 39,000 shares of Series A preferred stock to
ManTech to convert its $3.9 million promissory note into equity. We have
determined that the conversion of this debt into preferred stock does not
constitute a beneficial conversion. The Series A preferred stock will have no
voting rights and is subject to a holding period of one year from the date of
issuance. In the event of liquidation or dissolution of GSE Systems, payment of
available funds shall be made on the Series A preferred stock (including payment
in satisfaction of dividend obligations) prior and in preference to common
stock. The Series A preferred stock is convertible at the option of the holder
at any time after issuance and prior to the third anniversary of issuance into
common stock at a rate equal to its $100 liquidation value per share divided by
a conversion price of $2.645 per share. The Series A preferred stock converts
into an aggregate of 1,474,480 shares of common stock. The Series A preferred
stock will bear dividends at the rate of 6% per annum on its $100 liquidation
value per share payable quarterly. Dividends will accumulate if not paid
quarterly and compound interest will accrue on any unpaid dividends. Upon
conversion, accrued and unpaid dividends on shares of Series A preferred stock
convert into a debt to the last holder of the such shares of Series A preferred
stock. In connection with the issuance of the Series A preferred stock to
ManTech, ManTech has advised us that it will grant GP Strategies an option to
acquire 19,500 shares of the Series A preferred stock from ManTech at a price of
$100 per share, or an aggregate of $1,950,000, plus any accrued and unpaid
dividends. The independent members of our board of directors have approved the
issuance of Series A preferred stock to ManTech.
Preferred Stock
Our board of directors is authorized to establish one or more
additional classes of preferred stock and to determine, with respect to any
class of preferred stock, the preferences, rights and other terms of such class.
The authorized shares of preferred stock, as well as authorized but unissued
shares of common stock, will be available for issuance without further action by
our stockholders unless the stockholder action is required by applicable law or
the rules of any stock exchange or automated quotation system on which our
securities may be listed or traded. Although the board of directors has no
present intention of doing so, it could issue a class of preferred stock that
could, depending on the terms of such class, impede a merger, tender offer or
other transaction that some, or a majority, of our stockholders might believe to
be in their best interests or in which stockholders might receive a premium for
their stock over the then current market price of such stock.
Warrants
On August 17, 1998, we entered into warrant agreements with ManTech and
GP Strategies in consideration for their respective guarantees/support services
in connection with our credit facilities. Each warrant agreement is exercisable
for 150,000 shares of our common stock at an exercise price of $2.375 per share
and with a term ending on August 16, 2003.
Certain Provisions of the Certificate of Incorporation and Bylaws
The Certificate of Incorporation, as amended, and the Bylaws, as
amended, of GSE Systems contain certain provisions that could make more
difficult the acquisition of GSE Systems by means of a tender offer, a proxy
contest or otherwise. These provisions are expected to discourage certain types
of coercive takeover practices and inadequate takeover bids and to encourage
persons seeking to acquire control of GSE Systems to negotiate first with the
board of directors. We believe that the benefits of these provisions outweigh
the potential disadvantages of discouraging such proposals because, among other
things, negotiation of such proposals might result in an improvement of their
terms.
Staggered Board of Directors. The Certificate of Incorporation and the
Bylaws provide that the board of directors is divided into three classes with
each class constituting approximately one-third of the total number of directors
and the classes serving staggered three-year terms.
Amendment of Certificate of Incorporation and Bylaws. The Certificate
of Incorporation provides that the provisions therein relating to the staggered
board of directors, the number of directors and vacancies on the board of
directors may be amended, altered, changed or repealed only by the affirmative
vote of the holders of at least two-thirds of the voting power of all the shares
of capital stock then entitled to vote, voting as a single class. The
Certificate of Incorporation also provides that the Bylaws may be adopted,
amended, altered, changed or repealed by the affirmative vote of a majority of
the members of the board of directors. Any action taken by the stockholders with
respect to adopting, amending, altering, changing or repealing any Bylaws may be
taken only by the affirmative vote of the holders of at least two-thirds of the
voting power of all of the shares of capital stock then entitled to vote, voting
as a single class.
Number of Directors; Removal; Filling Vacancies. The Certificate of
Incorporation provides that the number of directors will be fixed by the Bylaws.
The Bylaws provide that the number of directors will be fixed by the board of
directors. The board of directors has fixed the current authorized number of
directors at nine. In addition, the Bylaws provide that the number of directors
shall not be increased by 50% or more in any 12-month period without the
approval of at least two-thirds of the directors then in office. The Certificate
of Incorporation provides that any vacancies will be filled by the affirmative
vote of a majority of the remaining directors, even if less than a quorum.
Accordingly, the board of directors could temporarily prevent any stockholder
from enlarging the board of directors and filling the new directorships with
that stockholder's own nominees. The Certificate of Incorporation also provides
that directors may only be removed by the stockholders for cause by the vote of
the holders of at least a majority of the common stock or with or without cause
by the vote of a majority of the directors then in office.
No Stockholder Action by Written Consent. The Certificate of
Incorporation and the Bylaws provide that stockholder action can be taken only
at an annual or special meeting of stockholders. They also prohibit stockholder
action by written consent in lieu of a meeting. These provisions may have the
effect of delaying consideration of a stockholder proposal until the next annual
meeting.
Advance Notice Provisions for Stockholder Nominations and Proposals.
The Bylaws establish an advance notice procedure for stockholders to make
nominations of candidates for election as directors or to bring other business
before an annual meeting of stockholders. This procedure provides that (i) only
persons who are nominated by, or at the direction of, the board of directors, or
by a stockholder who has given timely written notice containing specified
information to the Secretary prior to the meeting at which directors are to be
elected, will be eligible for election as directors and (ii) at an annual
meeting only such business may be conducted as has been brought before the
meeting by, or at the direction of, the board of directors or by a stockholder
who has given timely written notice to the Secretary of such stockholder's
intention to bring such business before the meeting. Except for stockholder
proposals submitted in accordance with the federal proxy rules as to which the
requirement specified therein shall control, notice of stockholder nominations
or business to be conducted at a meeting must be received not less than 60 days
nor more than 90 days prior to the first anniversary of the previous year's
annual meeting if the notice is to be submitted at an annual meeting, or not
later than 10 days following the day on which notice of the date of a special
meeting was given if the notice is to be submitted at a special meeting.
Certain Federal Income Tax Considerations
The following is a summary of material United States income tax
consequences of the offering to the holders of the common stock upon the
distribution of rights and to the holders of the rights upon their exercise.
This summary is based on provisions of the Internal Revenue Code of
1986, as amended (the "Code"), existing and proposed Treasury regulations
promulgated thereunder and administrative and judicial interpretations thereof,
all as of the date hereof and all of which are subject to change, possibly on a
retroactive basis.
This summary is limited to those who have held the common stock, and
will hold the rights and any shares acquired upon the exercise of rights, as
"capital assets" within the meaning of section 1221 of the Code. This summary
does not address all of the tax consequences that may be relevant to particular
holders in light of their personal circumstances, or to holders who are subject
to special rules (such as banks and other financial institutions,
broker-dealers, real estate investment trusts, regulated investment companies,
insurance companies, tax-exempt organizations and foreign taxpayers). In
addition, this summary does not include any description of the tax laws of any
state, local or non-U.S. government that may be applicable to a particular
holder.
Holders are urged to consult their own tax advisors with respect to
the particular U.S. federal income tax consequences to them of this offering, as
well as the tax consequences under state, local, non-U.S. and other tax laws and
the possible effects of changes in tax laws.
Distribution of Rights. Holders of our common stock will not
recognize taxable income for federal income tax purposes upon distribution of
the rights.
Stockholder Basis and Holding Period of the Rights. Except as
provided in the following sentence, the basis of the rights received by a
stockholder as a distribution with respect to such stockholder's common stock
will be zero. If, however, either (i) the fair market value of the rights on
their date of issuance is 15% or more of the fair market value (on the date of
issuance) of the common stock with respect to which they are received or (ii)
the stockholder properly elects, in his or her federal income tax return for the
taxable year in which the rights are received, to allocate part of the basis of
such common stock to the rights, then upon exercise or transfer of the rights,
the stockholder's basis in such common stock will be allocated between the
common stock and the rights in proportion to the fair market values of each on
the date of issuance of the rights.
The holding period of a stockholder with respect to the rights
received as a distribution on such stockholder's common stock will include the
stockholder's holding period for the common stock with respect to which the
rights were distributed.
In the case of a purchaser of rights, the tax basis of such rights
will be equal to the purchase price paid, and the holding period for such rights
will commence on the day following the date of the purchase. For information on
the persons to whom the rights can be transferred, as well as information on how
the rights can be transferred, see "The Rights Offering -- Transferability of
Rights."
Transfer of the Rights. A holder who sells rights generally will
recognize gain or loss in an amount equal to the difference between the amount
realized and the tax basis, if any, of such rights. Unless (i) the board of
directors extends the expiration date of the rights, and (ii) the holder sells
his rights after holding them for more than one year, the holder's gain on the
sale of rights will be short-term capital gain. (See "The Rights Offering --
Transferability of Rights").
Lapse of the Rights. Holders who allow the rights received by them
in this offering to lapse will not recognize any gain or loss, and no adjustment
will be made to the basis of the common stock, if any, they own. Purchasers of
the rights will recognize a loss equal to the tax basis of their rights, if such
rights expire unexercised. Any loss recognized on the expiration of the rights
acquired by a purchaser will generally be a capital loss. (See "The Rights
Offering --Transferability of Rights").
Exercise of the Rights; Basis and Holding Period of the Common
Stock. Holders will not recognize any gain or loss upon the exercise of rights.
The basis of the shares acquired through exercise of the rights will be equal to
the sum of the subscription price for the rights and the holder's basis in such
rights, if any. The holding period for the shares acquired through exercise of
the rights will begin on the date the rights are exercised.
Sale of Shares. The sale of shares will result in the recognition of
gain or loss to the stockholder in an amount equal to the difference between the
amount realized and the stockholder's basis in the shares. Gain or loss upon the
sale of the shares will generally be long-term capital gain or loss if the
holding period for the shares is more than one year.
Plan of Distribution
We are offering shares of our common stock directly to you pursuant
to this subscription rights offering. We have not employed any brokers, dealers
or underwriters in connection with the solicitation or exercise of subscription
privileges in this subscription rights offering and no commissions, fees or
discounts will be paid in connection with it. Certain of our officers and other
employees may solicit responses from you, but such officers and other employees
will not receive any commissions or compensation for such services other than
their normal employment compensation.
We will pay the fees and expenses of Continental Stock Transfer &
Trust Company, as subscription agent, and we have also agreed to indemnify the
subscription agent from any liability it may incur in connection with the rights
offering.
On or about November 2, 2001, we will distribute the rights and
copies of this Prospectus to individuals who owned shares of our common stock on
the record date. If you wish to exercise your rights and subscribe for new
shares of common stock, you should follow the procedures described under "The
Rights Offering -- Procedure to Exercise Rights." The subscription rights
generally are non-transferable; there are substantial restrictions on the
transfer of the rights, as described under "The Rights Offering -- Restrictions
on Transferability of Rights."
Shares of GSE Systems common stock received through the exercise of
subscription rights will be traded on the AMEX under the symbol "GVP," as our
currently outstanding shares of common stock now trade.
Legal Matters
The validity of the issuance of the securities offered in this
offering will be passed upon for us by Richard J. Luebke, Esq., our corporate
general counsel.
Experts
The consolidated financial statements of GSE Systems, Inc. and
subsidiaries as of December 31, 2000, and for the year then ended, have been
included herein and in the registration statement in reliance upon the report of
KPMG LLP, independent certified public accountants, appearing elsewhere herein,
and upon the authority of said firm as experts in accounting and auditing.
The consolidated financial statements of GSE Systems, Inc. and its
subsidiaries as of December 31, 1999, and for each of the two years in the
period ended December 31, 1999 included in this registration statement, have
been so included in reliance on the report of PricewaterhouseCoopers LLP,
independent accountants, given on the authority of said firm as experts in
auditing and accounting.
Where You Can Find More Information
We have filed a registration statement on Form S-1 to register with
the SEC the rights and the shares of our common stock to be issued upon the
exercise of the rights. This prospectus is part of that registration statement.
As allowed by the SEC's rules, this Prospectus does not contain all of the
information you can find in the registration statement or the exhibits to the
registration statement.
We file annual, quarterly and other information with the SEC. You
may read and copy any reports, statements and other information we file at the
SEC's public reference room at 450 Fifth Street, N.W., Washington, D.C. 20549.
Please call 1 (800) SEC-0330 for further information on the operation of the
public reference rooms. Our filings will also be available to the public from
commercial document retrieval services and at the web site maintained by the SEC
at http://www.sec.gov.
GSE SYSTEMS, INC. AND SUBSIDIARIES
Index to Consolidated Financial Statements
Annual Consolidated Financial Statements:
----------------------------------------
Independent Auditors' Report .............................................F-2
Report of Independent Accountants.........................................F-3
Consolidated Balance Sheets as of December 31, 2000 and 1999 .............F-4
Consolidated Statements of Operations for the years ended
December 31, 2000, 1999 and 1998...................................... F-5
Consolidated Statements of Comprehensive Income (Loss) for the years
ended December 31, 2000, 1999 and 1998.................................F-6
Consolidated Statements of Changes in Stockholders' Equity for the years
ended December 31, 2000, 1999, and 1998................................F-7
Consolidated Statements of Cash Flows for the years ended
December 31, 2000, 1999 and 1998.......................................F-8
Notes to Consolidated Financial Statements................................F-9
Unaudited Consolidated Financial Statements:
Consolidated Balance Sheet as of June 30, 2001 (unaudited)...............F-28
Consolidated Statements of Operations for the six months ended
June 30, 2001 and June 30, 2000 (unaudited)...........................F-29
Consolidated Statements of Comprehensive Income for the six months
ended June 30,2001 and June 30, 2000 (unaudited)......................F-30
Consolidated Statements of Cash Flows for the six months ended
June 30, 2001 and June 30, 2000 (unaudited)...........................F-31
Notes to Consolidated Financial Statements...............................F-32
Independent Auditors' Report
The Board of Directors and Stockholders
GSE Systems, Inc.:
We have audited the accompanying consolidated balance sheet of GSE Systems, Inc.
and subsidiaries as of December 31, 2000, and the related consolidated
statements of operations, comprehensive income (loss), changes in stockholders'
equity and cash flows for the year then ended. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of GSE Systems, Inc.
and subsidiaries as of December 31, 2000, and the results of their operations
and their cash flows for the year then ended, in conformity with accounting
principles generally accepted in the United States of America.
/s/KPMG LLP
Baltimore, Maryland
March 30, 2001
Report of Independent Accountants
To The Board of Directors
and Stockholders of GSE Systems, Inc.:
In our opinion, the consolidated balance sheet as of December 31, 1999, and the
related consolidated statements of operations, of comprehensive income (loss),
of changes in stockholders' equity and of cash flows for each of the two years
in the period ended December 31, 1999 present fairly, in all material respects,
the financial position, results of operations and cash flows of GSE Systems,
Inc. and its subsidiaries at December 31, 1999, and for each of the two years in
the period ended December 31, 1999, in conformity with accounting principles
generally accepted in the United States of America. These financial statements
are the responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States of America, which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion. We have
not audited the consolidated financial statements of GSE Systems, Inc. for any
period subsequent to December 31, 1999.
/s/ PricewaterhouseCoopers LLP
McLean, Virginia
February 29, 2000
GSE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
December 31,
2000 1999
ASSETS
Current assets:
Cash and cash equivalents $ 1,465 $ 2,695
Restricted cash 30 255
Contract receivables 14,489 16,881
Inventories 1,587 3,255
Prepaid expenses and other current assets 2,520 2,207
Deferred income taxes 277 146
Total current assets 20,368 25,439
Investment in Avantium Technologies B.V 2,895 --
Property and equipment, net 2,299 3,094
Software development costs, net 5,067 5,395
Goodwill, net 2,996 2,949
Deferred income taxes 847 3,251
Restricted cash 503 480
Other assets 974 2,419
Total assets $ 35,949 $ 43,027
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 2,347 $ 1,938
Accounts payable 5,669 5,024
Accrued expenses 2,115 3,965
Accrued compensation and payroll taxes 1,940 1,539
Billings in excess of revenue earned 1,366 3,077
Accrued warranty reserves 462 620
Income taxes payable 171 30
Other current liabilities 776 581
Total current liabilities 14,846 16,774
Long-term debt 11,840 8,403
Accrued warranty reserves 550 680
Total liabilities 27,236 25,857
Commitments and contingencies
Stockholders' equity
Common stock $.01 par value, 8,000,000 shares authorized, shares issued and
outstanding 5,193,527 in 2000 and 5,065,688 in 1999 52 50
Additional paid-in capital 22,230 21,691
Retained earnings (deficit) - at formation (5,112) (5,112)
Retained earnings (deficit) - since formation (7,555) 1,259
Accumulated other comprehensive loss (902) (718)
Total stockholders' equity 8,713 17,170
Total liabilities and stockholders' equity $ 35,949 $ 43,027
The accompanying notes are an integral part of these consolidated financial statements
GSE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
Years ended December 31,
2000 1999 1998
Contract revenue $ 55,715 $ 66,699 $ 73,818
Cost of revenue 40,822 41,629 49,814
Gross profit 14,893 25,070 24,004
Operating expenses
Selling, general and administrative 17,853 22,646 20,345
Depreciation and amortization 1,695 1,680 1,768
Total operating expenses 19,548 24,326 22,113
Operating income (loss) (4,655) 744 1,891
Gain (loss) on sales of assets (990) -- 550
Interest expense, net (687) (450) (350)
Other income, net 55 40 326
Income (loss) before income taxes (6,277) 334 2,417
Provision for income taxes 2,537 233 1,020
Net income (loss) $ (8,814) $ 101 $ 1,397
Basic earnings (loss) per common share $ (1.70) $ 0.02 $ 0.28
Diluted earnings (loss) per common share $ (1.70) $ 0.02 $ 0.27
The accompanying notes are an integral part of these consolidated financial statements.
GSE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands)
Years ended December 31,
2000 1999 1998
Net income (loss) .................................... $(8,814) $ 101 $ 1,397
Foreign currency translation adjustment .............. (184) (33) (532)
Comprehensive income (loss) ........................... $(8,998) $ 68 $ 865
The accompanying notes are an integral part of these consolidated financial statements.
GSE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(in thousands)
Retained Earnings Accumulated
Common Additional (Deficit) Other
Stock Paid-in At Since Comprehensive
Shares Amount Capital Formation Formation Loss Total
Balance, January 1, 1998 5,066 $ 50 $ 21,378 $ (5,112) $ (239) $ (153) $15,924
Foreign currency translation adjustment - - - - - (532) (532)
Fair value of warrants issued to non-employees - - 300 - - - 300
Net income - - - - 1,397 - 1,397
Balance, December 31, 1998 5,066 50 21,678 (5,112) 1,158 (685) 17,089
Foreign currency translation adjustment - - - - - (33) (33)
Fair value of warrants issued to non-employees - - 13 - - - 13
Net income - - - - 101 - 101
Balance, December 31, 1999 5,066 50 21,691 (5,112) 1,259 (718) 17,170
Common stock issued for options exercised 11 - 40 - - - 40
Common stock issued to ManTech Intl. Corp. 117 2 499 - - - 501
Foreign currency translation adjustment - - - - - (184) 184)
Net loss - - - - (8,814) - (8,814)
Balance, December 31, 2000 5,194 $ 52 $ 22,230 $ (5,112) $(7,555) $ (902) $ 8,713
The accompanying notes are an integral part of these consolidated financial statements.
GSE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Years ended December 31,
2000 1999 1998
Cash flows from operating activities:
Net income (loss) $ (8,814) $ 101 $ 1,397
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 3,882 3,481 3,492
Foreign currency transaction gain (255) (40) (326)
Fair value of warrants issued to non-employees - 133 180
Non-monetary consideration received for software licensed to
Avantium Technologies B.V. (2,895) - -
Deferred income taxes 2,273 119 301
(Gain) loss on sales of assets 990 - (550)
Changes in assets and liabilities:
Contract receivables 1,939 4,382 (2,599)
Inventories 1,554 (363) (185)
Prepaid expenses and other assets (164) (563) (1,381)
Accounts payable, accrued compensation and accrued expenses (690) (1,888) (2,600)
Billings in excess of revenues earned (1,599) (3,282) 83
Accrued warranty reserves (288) (142) 102
Other liabilities (561) 744 1,428
Income taxes payable 141 (121) (114)
Net cash provided by (used in) operating activities (4,487) 2,561 (772)
Cash flows from investing activities:
Proceeds from sale of assets - 731 9,697
Net cash paid for acquisition of businesses (658) (930) -
Net cash sold in disposition of business (261) - -
Capital expenditures (472) (1,398) (2,061)
Capitalized software development costs (1,868) (2,460) (2,304)
Net cash provided by (used in) investing activities (3,259) (4,057) 5,332
Cash flows from financing activities:
Proceeds from issuance of common stock 542 - -
Proceeds from issuance of note payable to related party 1,550 - -
Proceeds from issuance of notes payable 458 - -
(Restrictions) releases of cash as collateral under line of credit, net 202 (735) -
Increase (decrease) in borrowings under lines of credit 3,044 (513) (2,287)
Proceeds from assignments of sales-type leases 1,141 3,432 -
Other financing repayments (346) (160) (277)
Net cash provided by (used in) financing activities 6,591 2,024 (2,564)
Effect of exchange rate changes on cash (75) (73) (90)
Net increase (decrease) in cash and cash equivalents (1,230) 455 1,906
Cash and cash equivalents at beginning of year 2,695 2,240 334
Cash and cash equivalents at end of year $ 1,465 $ 2,695 $ 2,240
The accompanying notes are an integral part of these consolidated financial statements.
-
GSE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000, 1999, and 1998
1. Business and liquidity
We develop and deliver business and technology solutions by applying
process control, simulation software, systems and services to the energy,
process and manufacturing industries worldwide. Our solutions and services
assist customers in improving quality, safety and throughput; reducing operating
expenses; and enhancing overall productivity.
Our operations are subject to certain risks and uncertainties including,
among others, rapid technological changes, success of our product development,
marketing and distribution strategies, the need to manage growth, the need to
retain key personnel and protect intellectual property, and the availability of
additional financing on terms acceptable to us.
During the year ended December 31, 2000, we incurred significant
operating losses which resulted in non-compliance with certain financial
covenants included in our bank credit facility. We obtained a waiver of the
financial covenant defaults as well as certain covenant modifications to help
position us for future compliance. Nevertheless, future compliance will depend
upon achieving significantly improved operating results during 2001 and beyond.
We have undertaken a number of initiatives during 2000 and 2001 to
improve operating results and cash flows including:
(i) The restructuring of the Process Automation business to reduce
operating costs. Actions taken in 2000 included (a) personnel
reductions; (b) the outsourcing of the manufacturing and assembly
operations; and (c) the sale of our unprofitable Belgium subsidiary to
Newton Integrated Services, B.V. of the Netherlands. Included in
operating results for the year ended December 31, 2000 are revenues of
$1.5 million and operating losses, before allocation of corporate
expenses, of $308,000 attributable to GSE Process Solutions Belgium
N.V.
(ii) The sale of our VirtualPlant business to Avantium International B.V.
The asset sale closed on March 6, 2001 and included certain fixed
assets, intellectual property, and the employment of certain personnel
in both the US and UK by Avantium. We received 8% of Avantium's stock,
thus increasing our holdings in Avantium to approximately 19% (which
will be diluted as explained herein). For the year ended December 31,
2000, our VirtualPlant business had revenues of $6.1 million and an
operating loss before allocation of corporate expenses of $3.4
million.
(iii) ManTech International Corporation agreed to allow our bank to draw
upon ManTech's $1.8 million letter of credit which supported our
credit facility, thus paying down a portion of our bank debt, in
exchange for additional subordinated debt (see Note 16, Related party
transactions).
We believe the initiatives undertaken will enable us to maintain
compliance with the revised bank financial covenants as well as provide
sufficient cash flow to meet our obligations as they become due. However, if the
initiatives are not successful or if there are unforeseen decreases in demand
for our products or increases in working capital needs, then we may be unable to
meet the revised bank financial covenants and/or to generate sufficient cash
flows from operations. In such case, we will be required to obtain additional
covenant modifications and additional sources of funding. There can be no
assurance that such covenant modifications or funding, if needed, will be
available.
2. Summary of significant accounting policies
Principles of consolidation
The accompanying consolidated financial statements include the accounts
of our wholly-owned subsidiaries. All intercompany balances and transactions
have been eliminated.
Accounting estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires us to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Revenue recognition
Revenue under 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. Estimated contract earnings are reviewed and
revised periodically as the work progresses, and the cumulative effect of any
change is recognized in the period in which the change is determined. Estimated
losses are charged against earnings in the period such losses are identified.
The effect of changes in estimates of contract earnings was to increase gross
profit by approximately $353,000 during the year ended December 31, 1999. Such
changes were not material during the years ended December 31, 1998 and 2000.
Revenues from certain consulting or training contracts are recognized on a
time-and-material basis. For time-and-material type contracts, revenue is
recognized based on hours incurred at a contracted labor rate plus expenses.
Cash and cash equivalents
Cash and cash equivalents consist of cash on hand and highly liquid
investments with maturities of three months or less at the date of purchase.
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. Inventory costs include raw materials and
purchased parts.
Property and equipment
Property and equipment are recorded at cost and depreciated using the
straight-line method with estimated useful lives ranging from three to ten
years. Leasehold improvements are amortized over the life of the lease or the
estimated useful life, whichever is shorter, using the straight-line method.
Upon sale or retirement, the cost and related amortization are eliminated from
the respective accounts and any resulting gain or loss is included in
operations. Maintenance and repairs are charged to expense as incurred.
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 revenue and is provided using the straight-line method over the
remaining estimated economic life of the product, not to exceed five years.
Research and development
Development expenditures incurred to meet customer specifications under
contracts accounted for under the percentage of completion method are charged to
contract costs. Our company-sponsored research and development expenditures are
charged to operations as incurred and are included in selling, general and
administrative expenses. The amounts incurred for our research and development
activities relating to the development of new products and services or the
improvement of existing products and services, exclusive of amounts capitalized,
were approximately $1,679,000, $2,915,000, and $2,051,000, for the years ended
December 31, 2000, 1999, and 1998, respectively.
Asset impairment
We periodically evaluate the recoverability of our long-lived assets by
comparing the carrying value of the intangible with the assets' expected future
cash flows, undiscounted and without interest costs. Estimates of expected
future cash flows represent our best estimate based on reasonable and
supportable assumptions and projections. Impairments are recognized in operating
results to the extent that the carrying value exceeds fair value. No impairment
losses were recognized in 2000, 1999, or 1998.
Goodwill
Goodwill represents the excess of purchase price for acquired businesses
over the fair value of net tangible and intangible assets acquired. These
amounts are amortized on a straight-line basis over periods ranging from seven
to fifteen years. We assess the recovery of goodwill by determining whether
amortization of goodwill over its remaining life can be recovered through
undiscounted cash flows of the acquired operations. Goodwill impairment, if any,
is measured by determining the amount by which the carrying value of goodwill
exceeds its fair value based upon discounting of future cash flows.
Foreign currency translation
Balance sheet accounts for foreign operations are translated at the
exchange rate at the balance sheet date, and income statement accounts are
translated at the average exchange rate for the period. The resulting
translation adjustments are included in accumulated other comprehensive income
(loss) in stockholders' equity. Transaction gains and losses, resulting from
changes in exchange rates, are included in other income (expense) in the
Consolidated Statements of Operations in the period in which they occur. For the
years ended December 31, 2000, 1999, and 1998, foreign currency transaction
gains were approximately $55,000, $40,000, and $326,000, respectively.
Warranties
As we recognize revenue under the percentage-of-completion method, it
provides an accrual for estimated future warranty costs based on historical and
projected claims experience.
Income taxes
Deferred income taxes are provided under the asset and liability method.
Under this method, deferred income taxes are determined based on the differences
between the financial statement and tax bases of assets and liabilities using
enacted tax rates in effect for the year in which the differences are expected
to reverse. Valuation allowances are established when necessary to reduce
deferred tax assets to the amounts expected to be realized. Provision is made
for our current liability for federal, state and foreign income taxes and the
change in our deferred income tax assets and liabilities. No provision has been
made for the undistributed earnings of our foreign subsidiaries as they are
considered permanently invested. Amounts of undistributed earnings are not
material to the overall consolidated financial statements.
Earnings (loss) per share
Basic earnings per share is computed based on the weighted average number
of outstanding common shares for the period. Diluted earnings per share adjusts
such 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 year ended December 31, 2000 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:
<
Years ended December 31,
2000 1999 1998
Weighted average shares outstanding - Basic 5,181,972 5,065,688 5,065,688
Weighted average shares outstanding - Diluted 5,181,972 5,351,474 5,107,428
The difference between the amounts in 1999 and 1998 represents dilutive
options and warrants to purchase shares of common stock computed under the
treasury stock method, using the average market price during the related
periods.
Concentration of credit risk
We are subject to concentration of credit risk with respect to contract
receivables. Credit risk on contract receivables is mitigated by the nature of
our worldwide customer base and our credit policies. Our customers are not
concentrated in any specific geographic region, but are concentrated in the
energy and manufacturing industries. For the years ended December 31, 2000 and
1999, one customer accounted for approximately 22% and 13%, respectively, of our
revenues. At December 31, 2000, the contracts receivable balance related to this
significant customer was approximately $2.4 million, or 16.5% of that asset
category, of which $1 million was unbilled at year-end. In 2000, another
customer accounted for approximately 11% of our revenues. No single customer
accounted for a significant (greater than 10%) amount of our revenue during the
year ended December 31, 1998.
Fair values of financial instruments
The carrying amounts of current assets, current liabilities, and
long-term debt reported in the Consolidated Balance Sheets approximate fair
value.
Off balance sheet risk and foreign exchange contracts
When necessary, we enter into forward exchange contracts, options and
swaps as hedges against certain foreign currency commitments. We also enter into
letters of credit and performance guarantees in the ordinary course of business
as required by certain contracts and proposal requirements. We do not hold any
derivative financial instruments for trading purposes. Gains and losses on
foreign exchange contracts and swaps are recognized as part of the cost of the
underlying transactions being hedged in the period in which the exchange rates
changed. Foreign exchange contracts have an element of risk that the
counterparty may not be able to meet the terms of the agreement. However, we
minimize such risk exposure by limiting counterparties to nationally recognized
financial institutions. Foreign exchange options contracts permit but do not
require us to exchange foreign currencies at a future date with counterparties
at a contracted exchange rate. Costs associated with such contracts are
amortized over the life of the contract matching the underlying receipts.
Reclassifications
Certain reclassifications have been made to prior year amounts to conform
with the current year presentation.
New Accounting Standards
Effective January 1, 2001, we adopted Financial Accounting Standards No.
133, "Accounting for Derivative Instruments and Hedging Activities" and No. 138
"Accounting for Certain Derivative Investments and Certain Hedging Activities."
These statements require 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 adoption of these standards, including the
valuation of derivative instruments outstanding on the effective date, will not
have a material impact on our consolidated financial statements.
3. Acquisitions and dispositions
Acquisitions
In April 1999, we completed two acquisitions for the Process Automation
business using the purchase method of accounting. We purchased certain assets
and employed the associates of BatchCAD Limited, a United Kingdom-based supplier
of batch process development and design consulting services and simulation
software tools. The purchase price was approximately $548,000 payable in cash in
three equal installments on January 1, 2000, 2001 and 2002 and was allocated as
follows (in thousands):
Purchased software (property and equipmentP $ 481
Trade receivables 45
Property and equipment 22
------------
Total purchase price $ 548
============
We also acquired all proprietary technology and software assets from,
and assumed substantially all customer contracts of, Mitech Corporation, a
Massachusetts-based supplier of neural network and artificial intelligence
software. The purchase price was $350,000 and was allocated 100% to property and
equipment as purchased software.
In December 1997, we acquired 100% of the outstanding common stock of
J.L. Ryan, Inc. for an initial purchase price of $1,000,000 and contingent
consideration based on the performance of the business from 1998 to 2002. A
minimum of $250,000 of such earnings payments for each of 1998 and 1999 was
guaranteed by us. We paid $600,000 in cash upon the closing of the transaction
and entered into a promissory note payable in four annual installments of
$100,000 each beginning on January 2, 1999. This acquisition was accounted for
under the purchase method. For the years ended December 31, 2000, 1999, and
1998, the contingent consideration in excess of the minimum guaranteed amount
was approximately $549,000, $411,000, and $166,000, respectively, which we have
recorded as additions to goodwill.
Dispositions
On November 30, 2000, we completed the sale of our GSE Process Solutions
Belgium N.V. subsidiary to Newton Integrated Services B.V., pursuant to a stock
purchase agreement, whereby Newton Integrated Services B.V. acquired all of the
assets and assumed all of the liabilities of such entity. The aggregate purchase
price for GSE Belgium was $1. We recognized a loss before income taxes on this
transaction of $990,000. Included in the Consolidated Statement of Operations
for the year ended December 31, 2000, are revenues of $1.5 million and operating
losses of $346,000 attributable to GSE Belgium prior to the sale to Newton
Integrated Services B.V.
In November 1998, we completed the sale of certain assets related to
activities of our Oil & Gas business unit to Valmet Automation (USA), Inc.,
pursuant to an asset purchase agreement, effective as of October 30, 1998. We
recognized a loss before income taxes on this transaction of $5.0 million,
including the write-off of approximately $2.9 million in capitalized software
development costs, since all operations that would support the recoverability of
these capitalized costs were sold. We received approximately $742,000 in cash,
subject to certain adjustments, and Valmet assumed certain identified
liabilities. Included in the Consolidated Statement of Operations for the year
ended December 31, 1998, are revenues of $1.1 million and operating losses of
$721,000 attributable to this business prior to the sale to Valmet. See Note 18,
Segment information, for historical revenues and business unit contribution
provided by this business during 1998.
In May 1998, we completed the sale of substantially all of the assets of
GSE Erudite Software, Inc. to Keane, Inc. pursuant to an asset purchase
agreement dated as of April 30, 1998. The aggregate purchase price for the
Erudite assets was approximately $9.6 million (consisting of $8.9 million in
cash and $731,000 in the form of an uncollateralized promissory note due on
April 30, 1999). In connection with the transaction, Keane purchased certain
assets with a book value of $4.4 million and assumed certain operating
liabilities totaling approximately $2.2 million. We recognized a gain before
income taxes on this transaction of $5.6 million. In connection with the sale of
these assets, we wrote off approximately $800,000 in capitalized software
development costs, as well as $321,000 of purchased software, since all
operations that would support the recoverability of these costs were sold. The
write-off of these costs is reflected in the calculation of the gain on the
sale. Included in the Consolidated Statement of Operations for the year ended
December 31, 1998, are revenues of $5.3 million and operating losses of $64,000
attributable to Erudite prior to the sale to Keane. See Note 18, Segment
information, for historical revenues and business unit contribution provided by
Erudite during 1998.
4. Investment in Avantium International B.V.
On February 24, 2000, we licensed certain of our simulation software and
automation system products to Avantium International B.V. in exchange for
251,501 shares of Avantium preferred stock, valued at $2.5 million, and 352,102
shares of Avantium common stock, valued at $349,000. The software license, which
is perpetual in nature, gives Avantium the right to use the software in the
development of new software products. Each share of preferred stock is
convertible into common stock. Subject to certain restrictions, in the event
that Avantium has not conducted an initial public offering (or been purchased)
within five years, we and certain other holders of preferred shares may, at our
option, have our shares redeemed by Avantium, for the greater of (i) the
original purchase price plus 8% interest compounded annually plus any accrued
and unpaid dividends whether or not declared, or (ii) the fair market value of
the shares on an as-if-converted-into-common-shares-basis plus any accrued and
unpaid dividends.
Avantium was formed to develop high-speed experimentation and simulation
technologies for application in new product and process development in
pharmaceutical, petrochemical, fine chemical, biotechnology and polymers
industries. Avantium expects to develop technologies through in-house
development and contract research at leading universities, hardware developers
and informatics companies. Avantium has various investors, including Shell
International Chemical, SmithKline Beecham, W.R. Grace, three major European
universities and two venture capital firms.
During the year ended December 31, 2000, we recognized
software-licensing revenue of $2.9 million based on the fair value of the
consideration received from Avantium. The fair value was established based on
cash paid by other investors for their respective preferred and common stock
interests in Avantium. We have delivered all elements of the software and have
no other obligations to Avantium. We will account for our investment in Avantium
using the cost method of accounting based on our conclusion that we do not have
significant influence with respect to the operations of Avantium. During the
year ended December 31, 2000, we also received an additional $2.9 million
contract from Avantium to make certain improvements and enhancements to the
software on a best efforts basis. The rates and margins in the contract are
comparable to those we earn performing services for our existing customers.
As a result of the experience with Avantium in 2000, we concluded that a
combination of the relevant interests of the two companies would significantly
increase the potential of both organizations. In addition, focusing the
technical and marketing resources of Avantium and our VirtualPlant team would
produce significant cost savings. Accordingly, in November 2000, we signed a
letter of intent to sell our VirtualPlant business to Avantium. See Note 21,
Subsequent events for the details of the sale which was finalized in 2001.
5. Contract receivables
Contract receivables represent balances due from a broad base of both
domestic and internationalcustomers. All contract receivables are considered to
be collectible within twelve months. Recoverable costs and accrued profit not
billed represent costs incurred and associated profit accrued on contracts that
will become billable upon future milestones or completion of contracts. The
components of contract receivables are as follows:
(in thousands) December 31,
2000 1999
Billed receivables $ 9,265 $ 9,797
Recoverable costs and accrued profit not billed 5,548 7,593
Allowance for doubtful accounts (324) (509)
Total contract receivables $ 14,489 $ 16,881
6. Inventories
Inventories consist of the following:
(in thousands) December 31,
2000 1999
Raw materials $1,084 $2,536
Service parts 503 719
Total inventories $1,587 $3,255
7. Prepaid expenses and other current assets
Prepaid expenses and other current assets consist of the following:
(in thousands) December 31,
2000 1999
Investment in sales-type lease - current portion $1,617 $1,137
Prepaid expenses 459 641
Employee advances 66 98
Other current assets 378 331
Total $2,520 $2,207
8. Property and equipment
Property and equipment consist of the following:
(in thousands) December 31,
2000 1999
Computer equipment $ 5,106 $ 7,820
Leasehold improvements 847 817
Furniture and fixtures 2,065 2,944
8,018 11,581
Accumulated depreciation and amortization (5,719) (8,487)
Property and equipment, net $ 2,299 $ 3,094
Depreciation and amortization expense was approximately $1,163,000,
$1,292,000, and $1,218,000 for the years ended December 31, 2000, 1999, and
1998, respectively.
We have assets held under capital lease totaling approximately $380,000
and $404,000 as of December 31, 2000 and 1999, respectively. Accumulated
amortization on these assets, included in accumulated depreciation and
amortization, was approximately $380,000 and $386,000 as of December 31, 2000
and 1999, respectively.
9. Software development costs
Software development costs, net, consist of the following:
(in thousands) December 31,
2000 1999
Capitalized software development costs $9,419 $9,888
Accumulated amortization (4,352) (4,493)
Software development costs, net $5,067 $5,395
Software development costs capitalized were approximately $1,869,000,
$2,460,000, and $2,304,000 for the years ended December 31, 2000, 1999, and
1998, respectively. Amortization of software development costs capitalized,
excluding write-offs in connection with asset dispositions and retirements, was
approximately $2,202,000, $1,801,000, and $1,909,000 for the years ended
December 31, 2000, 1999, and 1998, respectively, and were included in cost of
revenue.
10. Goodwill
Goodwill consists of the following:
(in thousands) December 31,
2000 1999
Goodwill, at cost $4,796 $4,287
Accumulated amortization (1,800) (1,338)
Goodwill, net $2,996 $2,949
Amortization expense for goodwill was approximately $528,000, $388,000,
and $365,000 for the years ended December 31, 2000, 1999, and 1998,
respectively.
11. Long-term Debt
Our long-term debt consists of the following notes payable and other
financing arrangements:
(in thousands) December 31,
2000 1999
Line of credit with bank $ 9,277 $ 6,233
Obligations under financing leases 2,261 2,465
Notes payable to related parties (see Note 16) 1,674 149
Notes payable, acquisitions 489 1,148
Notes payable, other 486 336
Other - 10
Total notes payable and financing arrangements 14,187 10,341
Less amounts payable within one year 2,347 1,938
Long-term portion $11,840 $ 8,403
Line of Credit
We have a $10.0 million bank line of credit under which the Company and
its subsidiaries, GSE Process Solutions, Inc. and GSE Power Systems, Inc., are
jointly and severally liable as co-borrowers. This credit facility provides for
borrowings to support working capital needs and foreign letters of credit ($2.0
million sublimit). The line is collateralized by substantially all of our assets
and provides for borrowings up to 85% of eligible accounts receivable, 50% of
eligible unbilled receivables and 40% of eligible inventory (up to a maximum of
$1.2 million). In addition, ManTech International Corp. provided $1.8 million in
standby letters of credit to the bank as additional collateral for our credit
facility. We are allowed to borrow up to 100% of the letter of credit value. GP
Strategies Corporation has provided a limited guarantee totaling $1.8 million.
The interest rate on this line of credit is based on the bank's prime rate (9.5%
as of December 31, 2000), with interest only payments due monthly. At December
31, 2000, our available borrowing base was approximately $10 million, of which
approximately $9.3 million had been utilized.
The loan and security agreement requires us to comply with certain
financial ratios and precludes us from paying dividends and making acquisitions
beyond certain limits without the bank's consent. At December 31, 2000, we were
not in compliance with our minimum EBITDA (earnings before interest, taxes,
depreciation and amortization) covenant, our minimum working capital covenant,
our tangible net worth covenant, or our total liabilities to tangible net worth
covenant. The bank has provided a written waiver of the financial covenant
violations as well as certain covenant modifications to help position us for
future compliance. Effective with the execution of the waiver, the bank
increased the interest rate on outstanding borrowings under the credit facility
to the bank's prime rate plus .75%.
Obligations under financing leases
In December 1998, March 1999, October 2000 and November 2000, we entered
into four separate contracts with a customer for the lease of certain hardware
and software under 36-month leases. We accounted for the leases as sales-type
leases. We assigned the payments due under the sales-type leases to a
third-party financing company and received proceeds of $1,141,000 in 2000 and
$3,432,000 in 1999. Since we remain contingently liable for amounts due to the
third-party financing company, the remaining investment in and obligation under
the financing leases are reflected in our balance sheets as follows:
(in thousands) December 31,
2000 1999
Net investment in sales-type leases:
Prepaid expense and other assets $1,617 $1,137
Other assets 644 1,328
Total net investment $2,261 $2,465
Obligation under financing leases:
Current portion of long-term debt $1,617 $1,137
Long-term debt 644 1,328
Total obligations $2,261 $2,465
Minimum rentals receivable under these leases at December 31, 2000
amount to $1,783,000 in 2001, $456,000 in 2002, and $342,000 in 2003. As of
December 31, 2000, the components of the net investment in the sales-type leases
are total minimum rentals receivable of $2,581,000, less unearned interest
income of $320,000.
Debt maturities
Aggregate maturities of debt outstanding at December 31, 2000 are as
follows:
(in thousands)
2001 $ 2,347
2002 2,179
2003 9,597
2004 18
2005 18
2006 and thereafter 28
Total $ 14,187
12. Income taxes
The consolidated income (loss) before income taxes, by domestic and
foreign sources, is as follows:
(in thousands) Years ended December 31,
2000 1999 1998
Domestic $(6,295) $(1,386) $ 1,379
Foreign 18 1,720 1,038
Total $(6,277) $ 334 $ 2,417
The provision for (benefit from) income taxes is as follows:
(in thousands) Years ended December 31,
2000 1999 1998
Current:
Federal $ (177) $ -- $ --
State 75 30 157
Foreign 366 84 257
Subtotal 264 114 414
Deferred:
Federal 2,543 (88) 556
State -- -- --
Foreign (270) 207 50
Subtotal 2,273 119 606
Total $ 2,537 $ 233 $ 1,020
The provision for income taxes varies from the amount of income tax
determined by applying the applicable U.S. statutory rate to pre-tax (loss)
income as a result of the following:
Effective tax rate percentage (%)
Years ended December 31,
2000 1999 1998
Statutory U.S. tax rate (34.0)% 34.0 % 34.0 %
State income tax, net of federal tax benefit 0.8 2.7 2.7
Effect of foreign operations 1.5 7.1 (2.2)
Gain on debt forgiveness of foreign entities -- (115.4) --
Change in valuation allowance 68.4 -- (0.8)
Adjustments to prior year provision based
on actual 1998 tax return amounts -- 97.6 - -
Other, principally permanent differences 3.7 43.8 8.5
Effective tax rate 40.4 % 69.8 % 42.2 %
Deferred income taxes arise from temporary differences between the tax
bases of assets and liabilities and their reported amounts in the financial
statements. A summary of the tax effect of the significant components of the
deferred income tax assets (liabilities) is as follows:
(in thousands) December 31,
2000 1999
Net operating loss carryforwards $ 6,240 $ 4,563
Software development costs (1,860) (1,980)
Expenses not currently deductible for tax purposes 1,344 1,165
Foreign tax credits 339 362
Property and equipment 240 326
Swedish tax deferral (270) (299)
Accrued expenses 267 109
Cash to accrual adjustment -- (29)
Other 174 238
Subtotal 6,474 4,455
Valuation allowance (5,350) (1,058)
Total $ 1,124 $ 3,397
At December 31, 2000, we had available $15,497,000 and $2,068,000 of
domestic and foreign net operating loss carryforwards, respectively, which
expire between 2007 and 2020. In addition, we had $339,000 of foreign tax credit
carryforwards, which expire between 2000 and 2004. These carryforwards will be
utilized to reduce taxable income in subsequent years. A portion of the net
operating losses were generated by certain of our predecessors prior to our
formation and, as a result, there are limitations on the amounts that can be
utilized to offset taxable income in a given year.
In assessing the realizability of deferred tax assets, we consider
whether it is more likely than not that some or all of the deferred tax assets
will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. We consider the scheduled
reversal of deferred tax liabilities and projected future income in making this
assessment. Based upon the level of historical taxable income generated by our
business units and projections for taxable income in fiscal 2001, we believe it
is more likely than not that we will realize the benefits of these deductible
differences, net of the valuation allowance at December 21, 2000.
13. Capital stock
As of December 31, 2000, we had 10,000,000 total shares of capital stock
authorized, of which 8,000,000 are designated as common stock and 2,000,000 are
designated as preferred stock. As of December 31, 2000 and 1999, there are no
shares of preferred stock outstanding. The board of directors has the authority
to establish one or more classes of preferred stock and to determine, within any
class of preferred stock, the preferences, rights and other terms of such class.
In 1998, in connection with our then existing credit facility, we
arranged for certain guarantees to be provided on our behalf by GP Strategies
and ManTech. In consideration for these guarantees, we granted each of ManTech
and GP Strategies warrants to purchase shares of our common stock; each of such
warrants provides the right to purchase 150,000 shares of our common stock at
$2.375 per share for a term ending on August 16, 2003. In 1998, we recorded
$300,000 as the estimated fair value of such warrants in the consolidated
financial statements and amortized such value over the life of the initial
guarantee, which expired in June 1999. During 1999 and 1998, we recognized
expense related to these warrants totaling $120,000 and $180,000, respectively.
14. Stock options
Long-term incentive plan
During 1995, we established the 1995 Long-Term Incentive Stock Option
Plan, which includes all officers, key employees and non-employee members of our
board of directors. All options to purchase shares of our common stock under the
Plan expire seven years from the date of grant and generally become exercisable
in three installments with 40% vesting on the first anniversary of the grant
date and 30% vesting on each of the second and third anniversaries of the grant
date, subject to acceleration under certain circumstances. We had reserved
1,875,000 shares of common stock for issuance of stock options under the terms
of the Plan. At December 31, 2000, the Company had 427,015 shares of common
stock reserved for the future grants under the Plan.
Stock option activity under the Plan is as follows:
2000 1999 1998
Weighted Weighted Weighted
Average Average Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
Options outstanding, beginning of period 1,167,605 $ 4.93 535,206 $ 5.93 595,015 $ 6.89
Options exercised (10,880) (3.56) -- -- -- --
Options canceled (14,620) (3.73) (45,601) (5.62) (246,009) (4.77)
Options granted 295,000 5.07 678,000 4.07 186,200 2.79
Options outstanding, end of period 1,437,105 $ 4.81 1,167,605 $ 4.93 535,206 $ 5.93
The following table summarizes information relating to currently
outstanding and exercisable options at December 31, 2000:
Options Outstanding Options Exercisable
Weighted
Average
Remaining Weighted Weighted
Range of Options Contract Average Options Average
Exercise Prices Outstanding Life in Years Exercise Price Exercisable Exercise Price
$1.48 - $2.95 162,550 5.2 $ 2.67 100,290 $ 2.68
$2.96 - $4.43 846,114 5.7 3.70 256,214 3.78
$4.44 - $5.90 254,500 6.1 4.87 208,000 4.79
$5.91 - $7.38 17,500 6.2 6.19 - -
$7.39 - $8.85 30,000 4.3 7.50 10,000 7.50
$8.86 - $11.80 200 5.6 11.25 200 11.25
$11.81 - $14.75 126,241 4.7 14.11 126,241 14.11
Total 1,437,105 5.6 $ 4.81 700,945 $ 5.84
We account for grants under the Plan in accordance with Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and
related interpretations. Accordingly, no compensation expense has been
recognized as all options granted under the Plan have been granted at an
exercise price equal to the fair value of the underlying common stock on the
date of grant. Had compensation expense been determined based on the fair value
at the grant dates for awards under the Plan consistent with the fair value
method of FAS No. 123, "Accounting for Stock Based Compensation," our pro forma
net income (loss), and basic and diluted earnings (loss) per common share would
have been approximately ($11.1 million) and ($2.14), respectively, in 2000;
($615,000) and ($.12), respectively, in 1999; and $900,000 and $.18,
respectively, in 1998.
The fair value of each option is estimated on the date of grant using a
Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants during the years ended December 31, 2000, 1999, and
1998: expected volatility of 110%, 82%, and 61%; dividend yield of 0%; risk-free
interest rates ranging from 5.2% to 6.6%; and expected terms ranging from 3 to 7
years. The weighted-average fair value of options granted during 2000, 1999, and
1998 was $3.93 per share, $2.82 per share, and $2.79 per share, respectively.
15. Commitments and contingencies
Leases
We are obligated under certain noncancelable operating leases for office
facilities and equipment. Future minimum lease payments under noncancelable
operating leases as of December 31, 2000 are as follows:
(in thousands)
2001 $ 1,639
2002 1,406
2003 1,274
2004 1,287
2005 1,321
Thereafter 3,146
Total $ 10,073
Total rent expense under operating leases for the years ended December
31, 2000, 1999, and 1998 was approximately $2,101,000, $2,013,000, and
$2,134,000, respectively.
Letters of credit and performance bonds
As of December 31, 2000, we were contingently liable for approximately
$533,000 under five letters of credit used as payment bonds on contracts, all of
which were secured by cash deposits classified as restricted cash in the
consolidated balance sheet.
During 1998, we placed approximately $332,000 in escrow as a performance
bond deposit in connection with a simulator contract in Taiwan. Of this amount,
approximately $221,000 was held in escrow until April 2000, and approximately
$111,000 will be held in escrow until April 30, 2003. These deposits are
classified as other assets in the Consolidated Balance Sheets at December 31,
2000 and 1999.
Contingencies
Various actions and proceedings are presently pending to which we are a
party. In our opinion, the aggregate liabilities, if any, arising from such
actions are not expected to have a material adverse effect on our financial
position, results of operations or cash flows.
16. Related party transactions
In the fourth quarter of 2000, we issued a demand promissory note to
ManTech International Corporation that allowed us to borrow up to $1.8 million
at an interest rate of prime plus one percent. As of December 31, 2000, we had
borrowed $1.6 million, which was used for working capital. The promissory note
was secured by the pledge of our equity interest in Avantium International B.V.,
but such security interest was subordinate to the first lien thereon by our
bank. In the first quarter of 2001, the promissory note was amended to increase
the maximum principal amount to $2.1 million. Subsequently in the first quarter
of 2001, and with ManTech's approval, we issued a replacement promissory note in
the amount of $2.1 million to ManTech pursuant to which our obligations to
ManTech became unsecured and the principal is payable over a two year period, in
equal installments, commencing April 1, 2004, with interest payments to commence
monthly on July 1, 2001. The note permits ManTech to convert the principal into
convertible preferred stock at a conversion rate of $100 per share. ManTech has
agreed to subordinate the note to our credit facility.
In January 2000, we issued 116,959 shares of our common stock to ManTech
for $500,000. The proceeds of the stock issuance were used for working capital.
On August 17, 1998, we issued warrant agreements to ManTech and GP
Strategies in consideration for their respective guarantees/support services in
connection with our credit facilities. Each warrant agreement provides for
150,000 shares of our common stock at an exercise price of $2.375 per share,
with a term ending on August 16, 2003.
17. Employee benefits
We have a qualified defined contribution plan that covers substantially
all U.S. employees under Section 401(k) of the Internal Revenue Code. Under this
plan, our stipulated basic contribution matches a portion of the participants'
contributions based upon a defined schedule. Contributions are invested by an
independent investment company in one or more of several investment
alternatives. The choice of investment alternatives is at the election of each
participating employee. Our contributions to the plan were approximately
$340,000, $359,000, and $468,000 for the years ended December 31, 2000, 1999,
and 1998, respectively.
18. Segment information
Our two reportable segments are our core business units Process
Automation and Power Simulation. (Our VirtualPlant business is reported under
the Process Automation segment.) The accounting policies of the segments are the
same as those described in Note 2, Summary of significant accounting policies.
We are primarily organized on the basis of these two business units. We have a
wide range of knowledge of control and simulation systems and the processes
those systems are intended to improve, control and model. Our knowledge is
concentrated heavily in the process industries, which include the chemicals,
food & beverage, and pharmaceuticals fields, as well as in the power generation
industry. Our Process Automation business is primarily engaged in process
control and simulation in a variety of commercial industries. Contracts
typically range from three to nine months. Our Power Simulation business 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.
We evaluate the performance of our business units utilizing "Business
Unit Contribution", which is substantially equivalent to earnings before
interest and taxes before allocating any corporate expenses. The segment
information regarding the divested businesses is also included below (see Note
3, Acquisitions and dispositions, and Note 4, Investment in Avantium
International B.V.).
The table below presents information about the reportable segments:
(in thousands) Year ended December 31, 2000
Process Power Total
Contract revenue $ 25,208 $ 30,507 $ 55,715
Business unit contribution $ (4,053) $ 4,549 $ 496
Year ended December 31, 1999
Process Power Total
Contract revenue $ 34,638 $ 32,061 $ 66,699
Business unit contribution $ 1,026 $ 5,093 $ 6,119
Year ended December 31, 1998
Process Power Total
Contract revenue $ 36,484 $ 30,930 $ 67,414
Business unit contribution $ 3,444 $ 4,535 $ 7,979
Contract revenue for the Process Automation segment includes revenues for
our VirtualPlant and Belgium businesses of $7.6 million for the year ended
December 31, 2000. Business unit contribution for the Process Automation segment
includes losses for VirtualPlant and Belgium of $3.7 million for the year ended
December 31, 2000.
A reconciliation of segment revenue to consolidated revenue and segment
business unit contribution to consolidated income before taxes for the years
ended December 31, 2000, 1999, and 1998 is as follows:
(in thousands) Years ended December 31,
2000 1999 1998
Total segment contract revenue $ 55,715 $ 66,699 $ 67,414
Erudite -- -- 5,267
Oil & Gas -- -- 1,137
Contract revenue $ 55,715 $ 66,699 $ 73,818
Segment business unit contribution $ 496 $ 6,119 $ 7,979
Corporate expenses (5,096) (5,335) (5,271)
Gain (loss) on disposition of assets (990) -- 550
Erudite and Oil & Gas business unit losses -- -- (491)
Interest expense, net (687) (450) (350)
Income (loss) before income taxes $ (6,277) $ 334 $ 2,417
We design, develop and deliver business and technology solutions to the
energy, process and manufacturing industries worldwide. Revenue, operating
income (loss) and identifiable assets for our United States, European, and Asian
operations are as follows:
(in thousands) Year Ended December 31, 2000
United States Europe Asia Eliminations Consolidated
Contract revenue $ 44,441 $ 11,274 $ -- $ -- $ 55,715
Transfers between geographic locations 490 610 -- (1,100) --
Total contract revenue $ 44,931 $ 11,884 $ -- $ (1,100) $ 55,715
Operating income (loss) $ (263) $ (4,326) $ (66) $ -- $ (4,655)
Identifiable assets, at December 31 $ 44,688 $ 2,912 $ 199 $(11,850) $ 35,949
Year Ended December 31, 1999
United States Europe Asia Eliminations Consolidated
Contract revenue $ 60,150 $ 6,549 $ -- $ -- $ 66,699
Transfers between geographic locations 832 223 -- ( 1,055) --
Total contract revenue $ 60,982 $ 6,772 $ -- $ (1,055) $ 66,699
Operating income (loss) $ 1,690 $ (946) $ -- $ -- $ 744
Identifiable assets, at December 31 $ 47,001 $ 4,568 $ 414 $ (8,956) $ 43,027
Year Ended December 31, 1998
United States Europe Asia Eliminations Consolidated
Contract revenue $ 62,689 $ 8,241 $ 2,888 $ -- $ 73,818
Transfers between geographic locations 1,761 423 -- (2,184) --
Total contract revenue $ 64,450 $ 8,664 $ 2,888 $ (2,184) $ 73,818
Operating income (loss) $ 1,571 $ 592 $ (272) $ -- $ 1,891
Identifiable assets, at December 31 $ 50,904 $ 5,836 $ 953 $ (8,950) $ 48,743
19. Supplemental disclosure of cash flow information
(in thousands) Years ended December 31,
2000 1999 1998
Non-cash investing & financing activities:
Obligations under capital leases $ -- $ -- $ 58
Asset acquisitions financed with debt to seller (see
Note 3):
Notes payable issued $ -- $ 598 $ 250
Software product license sold in exchange for
stock of buyer (see Note 4):
Value of asset acquired $2,895 $ -- $ --
Cash paid:
Interest $ 889 $ 481 $ 580
Income taxes $ 271 $ 683 $ 426
20. Quarterly financial data (unaudited)
Our quarterly financial information has not been audited, but in our
opinion includes all adjustments necessary for a fair presentation.
(in thousands, except per share data) Year ended December 31, 2000 Quarterly Data
First Second Third Fourth
Quarter Quarter Quarter Quarter
Contract revenues $ 15,124 $ 13,300 $ 13,694 $ 13,597
Operating income (loss) 1,135 (1,411) (1,249) (3,130)
Net income (loss) 537 (902) (869) (7,580)
Earnings (loss) per common share:
Basic $ 0.10 $ (0.17) $ (0.17) $ (1.46)
Diluted $ 0.09 $ (0.17) $ (0.17) $ (1.45)
Year ended December 31, 1999 Quarterly Data
First Second Third Fourth
Quarter Quarter Quarter Quarter
Contract revenues $ 17,578 $ 17,987 $ 15,587 $ 15,547
Operating income (loss) 1,469 1,197 (1,011) (911)
Net income (loss) 860 743 (727) (775)
Earnings (loss) per common share:
Basic $ 0.17 $ 0.15 $ (0.14) $ (0.16)
Diluted $ 0.17 $ 0.14 $ (0.14) $ (0.15)
The first quarter 2000 includes contract revenues and related profit from
the licensing of software to Avantium, as described in Note 4, Investment in
Avantium International B.V.
The fourth quarter 2000 net loss includes the following significant
charges: a $710,000 provision to write-down Process Automation inventory, a
$990,000 loss on the sale of our Belgium subsidiary (see Note 3, Acquisitions
and dispositions), and a $4.3 million income tax charge to increase the deferred
tax asset valuation allowance (see Note 12, Income taxes).
21. Subsequent events
Sale of VirtualPlant business
On March 6, 2001, we sold our VirtualPlant business to Avantium
International B.V. Avantium purchased certain fixed assets and intellectual
property (including our BatchCAD and BatchWizard software products), and
employed certain personnel in both the US and the UK. We received 8% of
Avantium's stock, thus increasing our holdings in Avantium to approximately 19%.
However, Avantium currently requires a significant amount of additional capital
to continue its business operations. They recently advised us that, under the
terms of this additional financing, our ownership interest will be diluted to
approximately 6.3%. We are currently in negotiations with Avantium about this
situation. However, there can be no assurances that our ownership interest will
not be diluted to 6.3% at this time, or that we will not face additional
dilution in the future. We retained one seat on the supervisory board of
Avantium. Also, we licensed our process control and simulation software
exclusively to Avantium for the R&D market. This licensing arrangement includes
free updates to the licensed software. In return, we received a royalty-free
license to use any upgrades of the licensed software produced by Avantium in the
manufacturing market. We also received a royalty-free license to use and produce
upgrades of the BatchWizard software in the manufacturing market. The parties
will continue to work together in the marketplace and in product development so
that common clients will be able to use Avantium's VirtualPlant technology to
develop scalable products that will fit together at the manufacturing level with
our process control and simulation products.
GSE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(in thousands, except share data)
(unaudited)
June 30, 2001
Current assets:
Cash and cash equivalents $ 607
Restricted cash 163
Contract receivables 13,850
Inventories 1,537
Prepaid expenses and other current assets 1,863
Deferred income taxes 677
Total current assets 18,697
Investment in Avantium Technologies B.V. 7,503
Property and equipment, net 1,797
Software development costs, net 4,241
Goodwill, net 2,718
Deferred income taxes 847
Restricted cash 340
Other assets 703
Total assets $ 36,846
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 1,967
Accounts payable 4,733
Accrued expenses 1,837
Accrued compensation and payroll taxes 1,939
Billings in excess of revenue earned 2,237
Accrued warranty reserves 632
Other current liabilities 1,497
Total current liabilities 14,842
Long-term debt 10,739
Accrued warranty reserves 415
Total liabilities 25,996
Stockholders' equity:
Common stock $.01 par value, 8,000,000 shares authorized, shares issued
and outstanding 5,193,527 in 2001 52
Additional paid-in capital 22,424
Retained earnings (deficit) - at formation (5,112)
Retained earnings (deficit) - since formation (5,373)
Accumulated other comprehensive loss (1,141)
Total stockholders' equity 10,850
Total liabilities and stockholders' equity $ 36,846
The accompanying notes are an integral part of these consolidated financial statements.
GSE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(Unaudited)
Six months
ended June 30,
2001 2000
Contract revenue $ 24,323 $ 28,424
Cost of revenue 18,069 19,437
Gross profit 6,254 8,987
Operating expenses
Selling, general and administrative 5,298 8,395
Depreciation and amortization 701 869
Total operating expenses 5,999 9,264
Operating income (loss) 255 (277)
Gain on sale of assets 3,273 -
Interest expense, net (452) (320)
Other income, net 133 21
Income (loss) before income taxes 3,209 (576)
Provision (benefit) for income taxes 1,027 (210)
Net income (loss) $ 2,182 $ (366)
Basic earnings (loss) per common share $ 0.42 $ (0.07)
Diluted earnings (loss) per common share $ 0.42 $ (0.07)
The accompanying notes are an integral part of these consolidated financial statements.
GSE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
(Unaudited)
Six months
ended June 30,
2001 2000
Net income (loss) $ 2,182 $ (366)
Foreign currency translation adjustment (239) 141
Comprehensive income (loss) $ 1,943 $ (225)
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)
Six months
ended June 30,
2001 2000
Cash flows from operating activities:
Net income (loss) $ 2,182 $ (366)
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,778 1,949
Gain on sale of assets (3,273) -
Non-monetary consideration received for software licensed to
Avantium Technologies B.V. - (2,895)
Deferred income taxes (400) (288)
Changes in assets and liabilities:
Contract receivables 639 1,648
Inventories, prepaid expenses and other assets 59 716
Accounts payable, accrued compensation and accrued expenses (2,117) (828)
Billings in excess of revenues earned 871 (178)
Accrued warranty reserves 35 49
Other liabilities 495 (661)
Net cash provided by (used in) operating activities 269 (854)
Cash flows from investing activities:
Capital expenditures (187) (220)
Capitalized software development costs (302) (1,017)
Net cash used in investing activities (489) (1,237)
Cash flows from financing activities:
Proceeds from issuance of note payable to stockholder 3,350 -
(Restrictions) releases of cash as collateral under line of credit, net 30 -
Increase (decrease) in borrowings under lines of credit (4,005) 1,754
Proceeds from issuance of common stock - 541
Other financing activities, net 3 (400)
Net cash provided by (used in) financing activities (622) 1,895
Effect of exchange rate changes on cash (16) (45)
Net decrease in cash and cash equivalents (858) (241)
Cash and cash equivalents at beginning of period 1,465 2,695
Cash and cash equivalents at end of period $ 607 $ 2,454
The accompanying notes are an integral part of these consolidated financial statements.
GSE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Six Months ended June 30, 2001 and 2000
(Unaudited)
1. Basis of Presentation
The consolidated financial statements included herein have been
prepared by us without independent audit. In our opinion, 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 accounting
principles generally accepted in the United States of America have been
condensed or omitted. These consolidated financial statements should 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 year ended December
31, 2000 filed with the Securities and Exchange Commission on April 2, 2001.
2. Basic and Diluted Earnings (Loss) Per Common Share
Basic earnings (loss) per share is based on the weighted average number
of outstanding common shares for the period. Diluted earnings (loss) per share
adjusts the weighted average shares outstanding for the potential dilution that
could occur if stock options or warrants were exercised or converted into common
stock. The number of common shares and common share equivalents used in the
determination of basic and diluted earnings (loss) per share were as follows:
Six months
ended June 30,
2001 2000
Weighted average shares outstanding-Basic 5,193,527 5,188,534
Weighted average shares outstanding-Diluted 5,221,215 5,188,534
The difference between the basic and diluted number of weighted average
shares outstanding for the six months ended June 30, 2001 and June 30, 2000
represents dilutive stock options and warrants to purchase shares of common
stock computed under the treasury stock method, using the average market price
during the period. Common stock equivalents are not considered if their effect
is dilutive.
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 consist of the following:
(in thousands) June 30,
2001
Raw materials $ 1,100
Service parts 437
Total inventories $ 1,537
4. 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 revenue and is determined using the straight-line method over the
remaining estimated economic life of the product, not to exceed five years.
For the six months ended June 30, 2001 and 2000, software development
costs capitalized were $302,000 and $1,017,000, respectively. Total amortization
expense was $1,078,000 and $1,080,000 for the six months ended June 30, 2001 and
2000, respectively.
5. Investment in Avantium International B.V.
On February 24, 2000, we licensed certain of our simulation software
and automation system products to Avantium International B.V. in exchange for
251,501 shares of Avantium preferred stock, valued at $2.5 million, and 352,102
shares of Avantium common stock, valued at $349,000. The software license, which
is perpetual in nature, gave Avantium the right to use the software in the
development of new software products. Each share of preferred stock is
convertible into common stock. Subject to certain restrictions, in the event
that Avantium has not conducted an initial public offering (or been purchased)
within five years, we and certain other holders of preferred shares may, at our
option, have our shares redeemed by Avantium, for the greater of (i) the
original purchase price plus 8% interest compounded annually plus any accrued
and unpaid dividends whether or not declared, or (ii) the fair market value of
the shares on an as-if-converted-into-common-shares-basis plus any accrued and
unpaid dividends.
Avantium was formed to develop high-speed experimentation and
simulation technologies for application in new product and process development
in pharmaceutical, petrochemical, fine chemical, biotechnology and polymers
industries. Avantium expects to develop technologies through in-house
development and contract research at leading universities, hardware developers
and informatics companies. Avantium has various investors, including Shell
International Chemical, SmithKline Beecham, W.R. Grace, three major European
universities and two venture capital firms.
During the year ended December 31, 2000, we recognized
software-licensing revenue of $2.9 million based on the fair value of the
consideration received from Avantium. The fair value was established based on
cash paid by other investors for their respective preferred and common stock
interests in Avantium. We delivered all elements of the software and have no
other obligations to Avantium. We will account for our investment in Avantium
using the cost method of accounting based on management's conclusion that we do
not have significant influence with respect to the operations of Avantium.
During the year ended December 31, 2000, we also received and completed an
additional $2.9 million contract to make certain improvements and enhancements
to the software on a best efforts basis for Avantium. The rates and margins in
the contract are comparable to those that we earn performing services for our
existing customers.
As a result of the experience with Avantium in 2000, we concluded that
a combination of the relevant interests of the two companies would significantly
increase the potential of both organizations. In addition, focusing the
technical and marketing resources of Avantium and our VirtualPlant team would
produce significant cost savings. Accordingly, on March 6, 2001, we sold our
VirtualPlant business to Avantium. Avantium purchased certain fixed assets and
intellectual property (including BatchCAD and BatchWizard software products),
obtained perpetual licenses to certain of our software products, and employed
certain personnel in both the US and the UK. We received 8% of Avantium's stock,
thus increasing our holdings in Avantium to approximately 19%. However, Avantium
currently requires a significant amount of additional capital to continue its
business operations. They recently advised us that, under the terms of this
additional financing, our ownership interest will be diluted to approximately
6.3%. We are currently in negotiations with Avantium about this situation.
However, there can be no assurances that our ownership interest will not be
diluted to 6.3% at this time, or that we will not face additional dilution in
the future. Avantium and GSE will continue to work together in the marketplace
and in product development so that common clients will be able to use Avantium's
VirtualPlant technology to develop scalable products that will fit together at
the manufacturing level with our process control and simulation products.
However, we are not obligated to provide any further support to Avantium.
During the first quarter of 2001, we recognized a gain on the sale of
our VirtualPlant business of $3.3 million, before income taxes. This gain was
determined based on the estimated fair value of the Avantium stock received,
based on an independent appraisal, net of the book value of the assets sold and
the estimated costs to settle severance with employees terminated from GSE and
other transaction expenses. We retained one seat on the supervisory board of
Avantium. However, we have concluded that such seat does not provide us with
significant influence. Accordingly, we will account for our investment in
Avantium using the cost method.
If a decline in fair value below cost is judged to be other than
temporary, the cost basis will be written down to fair value as a new cost basis
and the amount of the write-down will be included in earnings as a realized
loss. Any new cost basis derived in this manner will not be changed for
subsequent recoveries in fair value.
6. Long-term Debt
We have a $10.0 million bank line of credit. This credit facility
provides for borrowings to support working capital needs and foreign letters of
credit ($2.0 million sublimit). The line is collateralized by substantially all
of our assets and provides for borrowings up to 85% of eligible accounts
receivable, 50% of eligible unbilled receivables and 40% of eligible inventory
(up to a maximum of $1.2 million). GP Strategies Corporation, one of our major
stockholders, has provided a limited guarantee totaling $1.8 million. The
interest rate on this line of credit is based on the bank's prime rate plus
0.75% (7.50% as of June 30, 2001), with interest only payments due monthly. At
June 30, 2001, our available borrowing base was approximately $6.4 million, of
which approximately $5.3 million had been utilized. The credit facility expires
on March 23, 2003.
The credit facility requires us to comply with certain financial ratios
and precludes us from paying dividends and making acquisitions beyond certain
limits without the bank's consent. At June 30, 2001, we were in compliance with
the bank covenants.
In the fourth quarter of 2000, we issued a demand promissory note to
ManTech International Corporation, one of our major stockholders, that allowed
us to borrow up to $1.8 million at an interest rate of prime plus one percent.
The promissory note was secured by the pledge of our equity interest in
Avantium, but such security interest was subordinate to the first lien thereon
by our bank. In the first quarter of 2001, we borrowed an additional $550,000
from ManTech and the promissory note was amended to increase the principal
amount to $2.1 million. Subsequently, in the first quarter of 2001, and with
ManTech's approval, we issued a replacement promissory note in the amount of
$2.1 million to ManTech pursuant to which our obligations to ManTech became
unsecured and the principal is payable over a two year period, in equal
installments, commencing April 1, 2004, with interest payments to commence
monthly on July 1, 2001. The note permits ManTech to convert the principal into
convertible preferred stock at a conversion rate of $100 per share. ManTech
agreed to subordinate the note to our credit facility.
In 2000, ManTech had provided $1.8 million in standby letters of
credit to the bank as additional collateral for our credit facility. On April 6,
2001, ManTech agreed to allow our bank to draw upon the letters of credit, thus
paying down a portion of our bank debt in exchange for additional subordinated
debt. Accordingly, our promissory note to ManTech was amended to increase the
amount to $3.9 million. As permitted by the note, ManTech elected to convert its
debt into equity in the form of convertible preferred stock at the conversion
rate of $100 per share. Thus, we will issue 39,000 shares of preferred stock to
ManTech in the fourth quarter 2001. The convertible preferred stock will have a
stated dividend rate of 6% per annum payable quarterly. Dividends will
accumulate if not paid quarterly and dividends will accrue at the stated rate on
any unpaid dividends. ManTech at its discretion shall have the right to convert
each share of convertible preferred stock into our common stock at a purchase
price of $2.645 per share at any time after a one-year holding period from the
date of issuance. At the end of the third year from the date of issuance, the
convertible preferred stock automatically converts into our common stock at the
stipulated purchase price of $2.645 per share. Prior to ManTech's conversion of
the convertible preferred stock to common stock, GP Strategies has the option to
acquire 50% of the convertible preferred stock from ManTech for $1,950,000.
On June 25, 2001, we issued an additional unsecured promissory note to
ManTech that allowed us to borrow up to $1.0 million at an interest rate of
prime plus one percent. The note is subordinated to our credit facility. The
note and accrued interest may be repaid from the cash receipts of a public
equity offering (see Note 11, Subsequent Events). If the offering is not
completed, or does not provide sufficient cash to pay off the entire promissory
note and accrued interest, the principal is payable over a two year period, in
equal installments, commencing April 1, 2004, with interest payments to commence
monthly on January 1, 2002.
7. Letters of Credit
As of June 30, 2001, we were contingently liable for approximately
$503,000 under four letters of credit used as payment bonds on contracts, all of
which were secured by cash deposits classified as restricted cash in the
consolidated balance sheet.
8. Income Taxes
Our effective tax rate is based on its best current estimate of our
expected annual effective tax rate. The difference between the statutory U.S.
tax rate and our effective tax rate for the six months ended June 30, 2001 and
2000 is primarily due to the effects of foreign operations being taxed at
different rates, state income taxes and in 2001 the impact of deferred tax
assets expected to be realized in the current year which previously had not been
recognized as a result of a valuation allowance. As of June 30, 2001, the
aggregate deferred tax assets are recorded net of valuation allowances of
approximately $5.0 million. For the six months ended June 30, 2001, we reduced
our valuation allowance by approximately $400,000. We continue to evaluate the
likelihood of realizing our remaining deferred tax assets.
9. Segment Information
Our two reportable segments are the core business units Process Automation and
Power Simulation. (The VirtualPlant business is reported under the Process
Automation segment.) We are primarily organized on the basis of these two
business units. We have a wide range of knowledge of control and simulation
systems and the processes those systems are intended to improve, control and
model. Our knowledge is concentrated heavily in the process industries, which
include the chemicals, food & beverage, and pharmaceuticals fields, as well as
in the power generation industry. Our Process Automation business is primarily
engaged in process control and simulation in a variety of commercial industries.
Contracts typically range from three to nine months. Our Power Simulation
business 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.
We evaluate the performance of our business units utilizing "Business
Unit Contribution", which is substantially equivalent to earnings before
interest and taxes before allocating any corporate expenses.
The table below presents information about the reportable segments:
(in thousands) Six months ended June 30, 2001
Process Power Consolidated
Contract revenue $ 9,476 $ 14,847 $ 24,323
Business unit contribution $ 275 $ 1,941 $ 2,216
Six months ended June 30, 2000
Process Power Consolidated
Contract revenue $ 13,205 $ 15,219 $ 28,424
Business unit contribution $ (747) $ 2,776 $ 2,029
We sold our Belgium business in November 2000 and our VirtualPlant
business in March 2001 (see Note 5, Investment in Avantium International B.V.).
For the six months ended June 30, 2001 and 2000, Process Automation revenue
included $507,000 and $5.1 million, respectively, for these two divested
businesses. The Process Automation 2000 revenue also include $2.9 million from a
software license sold to Avantium (see Note 5, Investment in Avantium
International B.V.).
Process Automation business unit contribution for the six months ended
June 30, 2000 included income of $77,000, from the two divested businesses. In
2001, the Process Automation business unit contribution included a loss for
VirtualPlant of $471,000 prior to its sale in March 2001.
A reconciliation of segment business unit contribution to consolidated income
(loss) before taxes is as follows:
(in thousands) Six months
ended June 30,
2001 2000
Segment business unit contribution $ 2,216 $ 2,029
Corporate expenses (1,828) (2,285)
Gain on disposition of assets 3,273 -
Interest expense, net (452) (320)
Income (loss) before income taxes $ 3,209 $ (576)
10. New Accounting Standards
Effective January 1, 2001, we adopted Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities," and No.
138 "Accounting for Certain Derivative Instruments and Certain Hedging
Activities." These statements require 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 adoption of these standards,
including the valuation of derivative instruments outstanding on the effective
date, did not have a material impact on our consolidated financial statements.
On July 20, 2001, the FASB issued Statement No. 141, "Business
Combinations", and Statement No. 142, "Goodwill and Other Intangible Assets".
Statement 141 requires that all business combinations be accounted for under a
single method -- the purchase method. Use of the pooling-of-interests method no
longer is permitted. Statement 141 requires that the purchase method be used for
business combinations initiated after June 30, 2001. Statement 142 requires that
goodwill no longer be amortized to earnings, but instead be reviewed for
impairment. The amortization of goodwill ceases upon adoption of the Statement,
which for calendar year-end companies, will be January 1, 2002.
11. Subsequent Events
At a special shareholders' meeting on August 2, 2001, our shareholders
approved an amendment to the Certificate of Incorporation increasing our
authorized common stock by 10 millions shares to a total of 18 million shares.
With this new allocation of common stock, we intend to issue approximately 3.7
million shares of common stock as follows: (a) 1,474,480 shares to cover the
exchange of $3.9 million of the ManTech subordinated debt into convertible
preferred stock as discussed above, and (b) 2,219,701 shares for a contemplated
rights offering to non-affiliated stockholders.
In connection with the contemplated rights offering, we have initiated
the process to prepare a registration statement (including a prospectus). On May
30, 2001, our board of directors approved the pricing for the rights offering at
10% above the market price on June 15, 2001. The market price on June 15, 2001
was $2.30 per share. A 10% premium equals a rights offering price of $2.53 per
share, 5% below the price per share of common stock issuable upon conversion of
the preferred stock to be issued to ManTech. If all shares expected to be
offered are sold, the estimated proceeds would be approximately $5.6 million
before the fees and expenses related to the offering. The principal purposes of
the offering are for repayment of a recent $1 million loan from ManTech (see
Note 6, Long-term Debt), working capital, strategic acquisitions, capital
expenditures and general corporate purposes.
II-10
Part II. Information Not Required in Prospectus
Item 13. Other Expenses of Issuance and Distribution.
We estimate that our expenses to be paid in connection with the
offering will be as follows:
SEC registration fee............................ $ 1,405
American Stock Exchange......................... $ 17,500
Printing and engraving expenses................. $ 25,000
Accounting fees and expenses.................... $ 35,000
Legal fees and expenses......................... $ 100,000
Subscription agent fee.......................... $ 10,000
Miscellaneous................................... $ 11,095
Total........................................... $ 200,000
Item 14. Indemnification of Directors and Officers.
GSE Systems is organized under the laws of the State of Delaware.
Section 145 of the Delaware General Corporation Law ("DGCL") permits, under
certain circumstances, the indemnification of any person who was or is a party
or is threatened to be made a party to any threatened, pending or completed
action, suit, or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the corporation) by
reason of the fact that the person is or was a director, officer, employee or
agent of the corporation, or is or was serving in a similar capacity for another
enterprise at the request of the corporation. To the extent that a director,
officer, employee or agent of the corporation has been successful in defending
any such proceeding, the DGCL provides that the person shall be indemnified
against expenses (including attorneys' fees) actually and reasonably incurred by
such person in connection therewith.
With respect to a proceeding by or in the right of the corporation,
such person may be indemnified against expenses (including attorneys' fees),
actually and reasonably incurred, if the person acted in good faith and in a
manner the person reasonably believed to be in or not opposed to the best
interests of the corporation. The DGCL provides, however, that indemnification
shall not be permitted in such a proceeding if such person is adjudged liable to
the corporation unless, and only to the extent that, the court, upon
application, determines that such person is entitled to indemnification under
the circumstances. With respect to proceedings other than those brought by or in
the right of the corporation, notwithstanding the outcome of such a proceeding,
such person may be indemnified against judgments, fines, and amounts paid in
settlement, as well as expenses, if the person acted in good faith and in a
manner the person reasonably believed to be in or not opposed to the best
interests of the corporation and, with respect to any criminal action, had no
reason to believe that the person's conduct was unlawful. Except with respect to
mandatory indemnification of expenses to successful defendants as described in
the preceding paragraph or pursuant to a court order, the indemnification
described in this paragraph may be made only upon a determination in each
specific case (1) by majority vote of the directors that are not parties to such
action, suit or proceeding, even though less than a quorum, or (2) by a
committee of such directors designated by majority vote of such directors, even
though less than a quorum, or (3) if there are no such directors, or if such
directors so direct, by independent legal counsel in a written opinion, or (4)
by the stockholders.
The DGCL permits a corporation to advance expenses incurred by a
proposed indemnitee in advance of final disposition of the proceeding, provided
that the indemnitee undertakes to repay such advanced expenses if it is
ultimately determined that such person is not entitled to indemnification. Also,
a corporation may purchase insurance on behalf of an indemnitee against any
liability asserted against such person and incurred by such person in any such
capacity, or arising out of such person's status as such, whether or not the
corporation would have the power to indemnify such person against such
liability.
GSE Systems has adopted provisions in its Certificate of Incorporation,
as amended, and Bylaws, as amended, that provide for indemnification of its
officers and directors to the maximum extent permitted under the DGCL.
As authorized by the DGCL, our Certificate of Incorporation limits the
liability of directors of GSE Systems for monetary damages. The effect of this
provision is to eliminate the rights of GSE Systems and its stockholders
(through stockholders' derivative suits on behalf of GSE Systems) to recover
monetary damages against a director for breach of the fiduciary duty of care as
a director (including breaches resulting from negligent or grossly negligent
behavior) except in certain limited situations. This provision does not limit or
eliminate the rights of GSE Systems or any stockholder to seek non-monetary
relief such as an injunction or rescission in the event of a breach of a
director's duty of care. This provision will not alter the liability of
directors under federal securities laws.
We have purchased an insurance policy which purports to insure the
officers and directors of GSE Systems against certain liabilities incurred by
them in the discharge of their functions as such officers and directors, except
for liabilities resulting from their own malfeasance.
The foregoing descriptions are general summaries only. Reference is
made to the full text of the Certificate of Incorporation and Bylaws
incorporated herein by reference. The purpose of these provisions is to assist
us in retaining qualified individuals to serve as our directors, officers,
employees and agents by limiting their exposure to personal liability for
serving as such.
Item 15. Recent Sales of Unregistered Securities.
During the past three (3) years, we issued the following securities
without registration under the Securities Act:
On January 27, 2000, the Company issued 116,959 shares of its common
stock to ManTech for $500,000. The proceeds of the stock issuance were used for
working capital. This transaction was exempt from registration under the
Securities Act under Section 4(2) because it did not involve a public offering.
Such transaction was completed without an underwriter.
In the first quarter of 2001, to replace an outstanding $2.1 million
promissory note to ManTech, we issued a $2.1 million demand unsecured promissory
note to ManTech that is convertible into GSE Systems preferred stock at a price
of $100 per share. This transaction was exempt from registration under the
Securities Act under Section 4(2) because it did not involve a public offering.
Such transaction was completed without an underwriter.
In April 2001, we amended our existing promissory note to ManTech to
increase the amount to $3.9 million and give ManTech the right to convert the
note to Class A preferred stock at a conversion rate of $100 per share. ManTech
has advised us that it intends to convert the promissory note to Class A
preferred stock and we expect this conversion to be completed before the end of
October 2001. The Series A preferred stock is convertible at the option of the
holder at any time after issuance and prior to the third anniversary of issuance
into common stock at a rate equal to its $100 liquidation value per share
divided by a conversion price of $2.645 per share. The Series A preferred stock
converts into an aggregate of 1,474,480 shares of common stock. This transaction
is exempt from registration under the Securities Act under Section 4(2) because
it did not involve a public offering. Such transaction will be completed without
an underwriter.
Item 16. Exhibits.
Exhibit
No. Description of Exhibit
3.1 GSE Systems Third Amended and Restated Certificate of Incorporation.
(Previously filed in connection with the GSE Systems, Inc. Form 8-K as
filed with the Securities and Exchange Commission on October 24, 2001
and incorporated herein by reference.)
3.2 Amended and Restated Bylaws of the Company. (Previously filed in
connection with Amendment No. 1 to the GSE Systems, Inc. Form S-1
Registration Statement as filed with the Securities and Exchange
Commission on June 14, 1995 and incorporated herein by reference.)
4.1 Specimen Common Stock Certificate of the Company. (Previously filed in
connection with Amendment No. 3 to the GSE Systems, Inc. Form S-1
Registration Statement as filed with the Securities and Exchange
Commission on July 24, 1995 and incorporated herein by reference.)
4.2 Form of Subscription Warrant to Subscribe for Shares of GSE Systems,
Inc. Common Stock. (Previously filed in connection with the GSE
Systems, Inc. Form S-1 Registration Statement as filed with the
Securities and Exchange Comiision on September 14, 2001 under
Registration No. 333-69424 and incorporated herein by reference.)
5.1 Opinion of Richard J. Luebke, Esq. (Filed herewith)
10.1 Agreement among ManTech International Corporation, National Patent
Development Corporation, GPS Technologies, Inc., General Physics
Corporation, Vattenfall Engineering AB and GSE Systems, Inc. (dated as
of April 13, 1994). (Previously filed in connection with the GSE
Systems, Inc. Form S-1 Registration Statement as filed with the
Securities and Exchange Commission on April 24, 1995 and incorporated
herein by reference.)
10.2 GSE Systems, Inc. 1995 Long-Term Incentive Plan, amended as of April
5, 1999. (Previously filed in connection with the GSE Systems, Inc.
Form 10-K as filed with the Securities and Exchange Commission on
March 30, 1999 and incorporated herein by reference.)
10.3 Form of Option Agreement Under the GSE Systems, Inc. 1995 Long-Term
Incentive Plan. (Previously filed in connection with the GSE Systems,
Inc. Form 10-K as filed with the Securities and Exchange Commission on
March 22, 1996 and incorporated herein by reference.)
10.4 Office Lease Agreement between Sterling Rutherford Plaza, L.L.C. and
GSE Systems, Inc. dated as of February 10, 1998. (Previously filed in
connection with the GSE Systems, Inc. Form 10-K as filed with the
Securities and Exchange Commission on March 21, 1998 and incorporated
herein by reference.)
10.5 Office Lease Agreement between Red Branch Road, L.L.C. and GSE
Systems, Inc. dated February 10, 1998. (Previously filed in connection
with the GSE Systems, Inc. Form 10-K as filed with the Securities and
Exchange Commission on March 21, 1998 and incorporated herein by
reference.)
10.6 Executive Employment Agreements between GSE Systems, Inc. and
Directors Jerome I. Feldman, George J. Pedersen, Scott N. Greenberg,
and John A. Moore, Jr. dated January 1, 1999. (Previously filed in
connection with the GSE Systems, Inc. Form 8-K as filed with the
Securities and Exchange Commission on August 1, 2001 and incorporated
herein by reference.)
10.7 Warrant Agreements with GP Strategies Corporation and ManTech
International Corporation dated September 13, 1999. (Previously filed
in connection with the GSE Systems, Inc. Form 8-K as filed with the
Securities and Exchange Commission on August 15, 2001 and incorporated
herein by reference.)
10.8 Change of Control Agreements between GSE Systems, Inc. and Jerry Jen
and Jeffery G. Hough dated March 10, 2000. (Previously filed in
connection with the GSE Systems, Inc. Form 8-K as filed with the
Securities and Exchange Commission on August 1, 2001 and incorporated
herein by reference.)
10.9 Loan and Security Agreement among GSE Systems, Inc., GSE Process
Solutions, Inc., GSE Power Systems, Inc., and National Bank of Canada,
dated March 23, 2000. (Previously filed in connection with the GSE
Systems, Inc. Form 10-K as filed with the Securities and Exchange
Commission on March 30, 2000 and incorporated herein by reference.)
10.10 $10,000,000 Promissory Note dated March 23, 2000, from GSE Systems
Inc., GSE Process Solutions, Inc., and GSE Power Systems, Inc. to
National Bank of Canada. (Previously filed in connection with the GSE
Systems, Inc. Form 10-K as filed with the Securities and Exchange
Commission on March 30, 2000 and incorporated herein by reference.)
10.11 ManTech International Corporation Guarantee to National Bank of
Canada, dated March 23, 2000. (Previously filed in connection with the
GSE Systems, Inc. Form 10-K as filed with the Securities and Exchange
Commission on March 30, 2000 and incorporated herein by reference.)
10.12 GP Strategies, Inc. Guarantee to National Bank of Canada, dated March
23, 2000. (Previously filed in connection with the GSE Systems, Inc.
Form 10-K as filed with the Securities and Exchange Commission on
March 30, 2000 and incorporated herein by reference.)
10.13 Subscription and Stockholders' Agreement by and among Avantium
International B.V., B.V. Lichten Kracht Maatschappij, SmithKline
Beecham PLC, S.R. One, Limited, GSE Systems, Inc. Delft University of
Technology, Universiteit Twente, Eindhoven University of Technology,
the Generics Group Limited, and Alpinvest Holding NV, dated February
24, 2000. (Previously filed in connection with the GSE Systems, Inc.
Form 10-K as filed with the Securities and Exchange Commission on
March 30, 2000 and incorporated herein by reference.)
10.14 Asset Sale and Purchase Agreement between GSE Systems, Inc. and
Avantium International B.V. dated March 6, 2001. (Previously filed in
connection with the GSE Systems, Inc. Form 8-K as filed with the
Securities and Exchange Commission on March 21, 2001 and incorporated
herein by reference.)
10.15 $2,100,000 Replacement Promissory Note dated March 30, 2001, from GSE
Systems, Inc. to ManTech International Corporation. (Previously filed
in connection with the GSE Systems, Inc. Form 10-K as filed with the
Securities and Exchange Commission on April 3, 2001 and incorporated
herein by reference.)
10.16 Subordination and Intercreditor Agreement by and between National Bank
of Canada and ManTech International Corporation, dated March 30, 2001.
(Previously filed in connection with the GSE Systems, Inc. Form 10-K
as filed with the Securities and Exchange Commission on April 3, 2001
and incorporated herein by reference.)
10.17 Third Modification Agreement dated March 30, 2001 to the Loan and
Security Agreement among GSE Systems, Inc., and National Bank of
Canada, dated March 23, 2000. (Previously filed in connection with the
GSE Systems, Inc. Form 10-K as filed with the Securities and Exchange
Commission on April 3,2001 and incorporated herein by reference.)
10.18 Allonge and First Modification to Replacement Promissory Note between
GSE Systems, Inc. and ManTech International Corporation dated April 6,
2001. (Previously filed in connection with the GSE Systems, Inc. Form
8-K as filed with the Securities and Exchange Commission on August 15,
2001 and incorporated herein by reference.)
10.19 Executive Compensation Plan for Jerry Jen dated May 3, 2001.
(Previously filed in connection with the GSE Systems, Inc. Form 8-K as
filed with the Securities and Exchange Commission on August 1, 2001
and incorporated herein by reference.)
10.20 $1,000,000 promissory note dated June 25, 2001 to ManTech
International Corporation. (Previously filed in connection with the
GSE Systems, Inc. Form 8-K as filed with the Securities and Exchange
Commission on August 1, 2001 and incorporated herein by reference.)
16.1 Letter from PricewaterhouseCoopers LLP, dated March 30, 2000,
regarding change in certifying accountants. (Previously filed in
connection with the GSE Systems, Inc. Form 10-K as filed with the
Securities and Exchange Commission on March 30, 2000 and incorporated
herein by reference.)
21.1 List of Subsidiaries of Registrant. (Previously filed in connection
with the GSE Systems, Inc. Form 10-K as filed with the Securities and
Exchange Commission on April 3, 2001 and incorporated herein by
reference.)
23.1 Consent of Independent Accountants. (Filed herewith.)
23.2 Consent of Independent Accountants. (Filed herewith.)
23.3 Consent of Richard J. Luebke, Esq. (Included herewith in Exhibit 5.1)
24.1 Power of Attorney. (Previously filed in connection with the GSE
Systems, Inc. Form S-1 Registration Statement as filed with the
Securities and Exchange Commission on September 14, 2001 under
Registration No. 333-69424 and incorporated herein by reference.)
99.1 Form of Subscription Agent Agreement between GSE Systems, Inc. and
Continental Stock Transfer & Trust Company. (Previously filed in
connection with the GSE Systems, Inc. Form S-1 Registration Statement
as filed with the Securities and Exchange Commission on September 14,
2001 under Registration No. 333-69424 and incorporated herein by
reference.)
99.2 Form of Instructions as to Use of Subscription Warrant. (Previously
filed in connection with the GSE Systems, Inc. Form S-1 Registration
Statement as filed with the Securities and Exchange Commission on
September 14, 2001 under Registration No. 333-69424 and incorporated
herein by reference.)
99.3 Form of Notice of Guaranteed Delivery. (Previously filed in connection
with the GSE Systems, Inc. Form S-1 Registration Statement as filed
with the Securities and Exchange Commission on September 14, 2001
under Registration No. 333-69424 and incorporated herein by
reference.)
99.4 Form of Letter to Stockholders of Record. (Previously filed in
connection with the GSE Systems, Inc. Form S-1 Registration Statement
as filed with the Securities and Exchange Commission on September 14,
2001 under Registration No. 333-69424 and incorporated herein by
reference.)
99.5 Form of Letter from Brokers or Other Nominees to Beneficial Owners of
Common Stock. (Previously filed in connection with the GSE Systems,
Inc. Form S-1 Registration Statement as filed with the Securities and
Exchange Commission on September 14, 2001 under Registration No.
333-69424 and incorporated herein by reference.)
99.6 Form of Instructions by Beneficial Owners to Brokers or Other
Nominees. (Previously filed in connection with the GSE Systems, Inc.
Form S-1 Registration Statement as filed with the Securities and
Exchange Commission on September 14, 2001 under Registration No.
333-69424 and incorporated herein by reference.)
99.7 Form of Letter to Dealers and Other Nominees. (Previously filed in
connection with the GSE Systems, Inc. Form S-1 Registration Statement
as filed with the Securities and Exchange Commission on September 14,
2001 under Registration No. 333-69424 and incorporated herein by
reference.)
Item 17. Undertakings.
The undersigned registrant hereby undertakes:
(a)
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the registration
statement. Notwithstanding the forgoing, any increase or decrease in volume of
securities offered (if the total dollar value of securities offered would not
exceed that which was registered) and any deviation from the low or high end of
the estimated maximum offering range may be reflected in the form of prospectus
filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in the volume and price represent no more than a 20% change in the
maximum aggregate offering price set forth in "Calculation of Registration Fee"
table in the effective registration statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement.
(2) That, for the purpose of determining liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination of
the offering.
(b) To supplement the prospectus and, after the expiration of the subscription
period, to set forth the results of the subscription offer.
(c) Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
of 1933 and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act of 1933 and will be governed by the final adjudication of such issue.
(d) For purposes of determining any liability under the Securities Act of 1933,
the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(e) For the purpose of determining any liability under the Securities Act of
1933, each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused the registration statement to be signed on its behalf
by the undersigned, thereunto duly authorized, in the County of Howard, state of
Maryland, on October 25, 2001.
GSE SYSTEMS, INC.
By: /S/ Chin-Our Jerry Jen
Chin-Our Jerry Jen
Chief Operating Officer,
President and Director
(Principal Executive Officer)
Pursuant to the requirements of the Securities Act, the registration statement
has been signed by the following persons in the capacities and on the dates
indicated.
Signatures Title Date
/S/ Chin-Our Jerry Jen Chief Operating Officer and October 25, 2001
Chin-Our Jerry Jen President
(Principal Executive Officer)
/S/ Jeffery G. Hough Senior Vice President and October 25, 2001
Jeffery G. Hough Chief Financial Officer
(Principal Financial Officer and
Principal Account Officer)
The Entire Board of Directors:
Chin-Our Jerry Jen John A. Moore
Sheldon L. Glashow, Ph.D. Jerome I. Feldman
Scott N. Greenberg George J. Pedersen
Joseph W. Lewis Roger L. Hagengruber, Ph.D.
By: /S/ Chin-Our Jerry Jen October 25, 2001
Chin-Our Jerry Jen
Attorney-in-Fact
EX-5
3
exh5-1_s1a.txt
EXH5.1_1SA LEGAL OPINION
Exhibit 5.1
Exhibit 23.3
Richard J. Luebke, Esq.
General Counsel
GSE Systems, Inc.
9189 Red Branch Road
Columbia, Maryland 21045
(410) 772-3500
GSE Systems, Inc.
9189 Red Branch Road
Columbia, Maryland 21045
Re: Registration Statement on Form S-1
Commission File No.: 333-69424
Ladies and Gentlemen:
I have acted as general counsel to GSE Systems, Inc. (the
"Company") in connection with the preparation and filing with the Securities and
Exchange Commission under the Securities Act of 1933, as amended (the "Act"), of
a Registration Statement on Form S-1 (File No. 333-69424) (the "Registration
Statement") relating to (i) the issuance by the Company to the holders of its
Common Stock, par value $.01 per share (the "Common Stock"), of rights to
purchase newly issued shares of Common Stock (the "Rights"), and (ii) the offer
and sale of shares of Common Stock upon the exercise of the Rights (the
"Shares"). The Rights will be issued to the holders of record of Common Stock as
of 5 p.m. Eastern Standard Time on October 26, 2001.
As general counsel for the Company, I am familiar with the Company's
Charter and Bylaws and I have reviewed the corporate action taken by the Company
that provides for the issuance of the Rights and shares of Common Stock upon
exercise of the Rights. I am also familiar with the Registration Statement
substantially in the form in which it is intended to become effective. I have
examined and relied upon such corporate records of the Company and other
documents and certificates as to factual matters as I have deemed necessary or
appropriate for the purpose of rendering the opinion expressed herein. I have
assumed, without independent verification, the genuineness of the signatures on
and the authenticity of all documents furnished to me by the Company.
Based on the foregoing, I am of the opinion that the issuance of the
Rights and the Shares has been duly authorized and when the Shares have been
duly issued upon the exercise of the Rights and the payment to the Company of
the subscription price therefor on the terms and conditions set forth in the
Registration Statement, the Shares will be validly issued, fully paid and
non-assessable.
I express no opinion as to the laws of any jurisdiction other than the
corporate laws of the State of Delaware. I consent to the filing of this opinion
as an exhibit to the Registration Statement and to the use of my name under the
heading 'Legal Matters' in the Prospectus. In giving such consent, I do not
hereby concede that I am within the category of persons whose consent is
required under Section 7 of the Act or the rules and regulations of the
Commission thereunder.
Sincerely,
Richard J. Luebke
EX-23
4
ex23-1_s1.txt
EXH23.1 KPMG CONSENT LETTER
The Board of Directors and Stockholders
GSE Systems, Inc.:
We consent to the inclusion in the registration statement on Form S-1 of GSE
Systems, Inc. and subsidiaries of our report dated March 30, 2001, with respect
to the consolidated balance sheet as of December 31, 2000 and the related
consolidated statements of operations, comprehensive income (loss), changes in
stockholders' equity and cash flows for the year then ended included in the
December 31, 2000 Annual Report on Form 10-K. We also consent to the reference
to our firm under the heading "Experts" in the Registration Statement.
KPMG LLP
Baltimore, Maryland
October 24, 2001
EX-23
5
exh23-2_s1a.txt
EX 23.2 PWC CONSENT LETTER
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Registration Statement on Form S-1 of our
report dated February 29, 2000 relating to the consolidated financial statements
of GSE Systems, Inc. as of December 31, 1999, and for each of the two years in
the period then ended, which appears in such Registration Statement. We also
consent to the references to us under the headings "Experts" and "Selected
Financial Data" in such Registration Statement.
/s/ PricewaterhouseCoopers LLP
McLean, Virginia
October 24, 2001