Conformed
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 0-26494
GSE Systems, Inc.
(Exact name of registrant as specified in its charter)
Delaware 52-1868008
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(State of incorporation) (I.R.S. Employer Identification Number)
9189 Red Branch Road, Columbia, Maryland 21045
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (410) 772-3500
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Common Stock, $.01 par value
(Title of each class)
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of Common Stock held by non-affiliates as of
March 15, 2001 was $7,322,873 based on closing price of such stock on that date.
Number of shares of Common Stock outstanding as of March 15, 2001: 5,193,527
DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates certain information by reference from the
Registrant's definitive proxy statement to be filed for its 2001 Annual Meeting
of Shareholders.
GSE SYSTEMS, INC.
FORM 10-K
For the Year Ended December 31, 2000
Cautionary Statement Regarding Forward-Looking Statements.
This Form 10-K contains certain "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended, which are subject to the
safe harbors created by those Acts. These statements include the plans and
objectives of management for future operations, including plans and objectives
relating to the development of the Company's business in the domestic and
international marketplace. All forward-looking statements involve risks and
uncertainties, including, without limitation, risks relating to the Company's
ability to enhance existing software products and to introduce new products in a
timely and cost-effective manner, reduced development of nuclear power plants
that may utilize the Company's products, a long pay-back cycle from the
investment in software development, uncertainties regarding the ability of the
Company to grow its revenues and successfully integrate operations through
expansion of its existing business and strategic acquisitions, the ability of
the Company to respond adequately to rapid technological changes in the markets
for process control and simulation software and systems, significant
quarter-to-quarter volatility in revenues and earnings as a result of customer
purchasing cycles and other factors, dependence upon key personnel, the ability
of the Company to meet bank financial covenants and manage cash needs, and
general market conditions and competition. See "Risk Factors," in Part I. The
forward-looking statements included herein are based on current expectations
that involve numerous risks and uncertainties as set forth herein, the failure
of any one of which could materially adversely affect the operations of the
Company. The Company's plans and objectives are also based on the assumptions
that market conditions and competitive conditions within the Company's business
areas will not change materially or adversely and that there will be no material
adverse change in the Company's operations or business. Assumptions relating to
the foregoing involve judgments with respect to, among other things, future
economic, competitive and market conditions and future business decisions, all
of which are difficult or impossible to predict accurately and many of which are
beyond the control of the Company. Although the Company believes that the
assumptions underlying the forward-looking statements are reasonable, any of the
assumptions could be inaccurate and there can, therefore, be no assurance that
the forward-looking statements included in this Form 10-K will prove to be
accurate. In light of the significant uncertainties inherent in the
forward-looking statements included herein, the inclusion of such information
should not be regarded as a representation by the Company or any other person
that the objectives and plans of the Company will be achieved.
TABLE OF CONTENTS
PART I Page
Item 1. Business 3
Item 2. Properties.....................................................13
Item 3. Legal Proceedings..............................................13
Item 4. Submission of Matters to a Vote of Security Holders...........13
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters..........................................14
Item 6. Selected Financial Data........................................15
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations....................................16
Item 7A Quantitative and Qualitative Disclosures About Market Risk.....23
Item 8. Financial Statements and Supplementary Data....................24
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure.......................25
PART III
Item 10. Directors and Executive Officers of the Company*...............26
Item 11. Executive Compensation*........................................26
Item 12. Security Ownership of Certain Beneficial Owners
and Management*..............................................26
Item 13. Certain Relationships and Related Transactions*................26
PART IV
Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K..........................................27
SIGNATURES.....................................................28
Exhibits Index.................................................29
* to be incorporated by reference from the Proxy Statement for the
registrant's 2001 Annual Meeting of Shareholders.
PART I
ITEM 1. BUSINESS.
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GSE Systems, Inc. ("GSE Systems", "GSE" or the "Company") develops and
delivers business and technology solutions by applying process control,
simulation software, systems and services to the energy, process and
manufacturing industries worldwide. The Company's solutions and services assist
customers in improving quality, safety and throughput; reducing operating
expenses; and enhancing overall productivity.
The Company's products are used in over 700 applications, representing
over 250 customers in 44 countries, in the following industries: specialty
chemical, food & beverage, pharmaceutical, and fossil and nuclear power
generation.
Recent Developments.
Power Simulation Business
The Company's Power Simulation Business Unit continued to show profitable
performance during the year, as the Company maintained its dominant market
position in the nuclear power simulation industry. Utilizing its technical and
project management strengths, the business unit expanded its focus to include
the fossil power market and an emphasis was placed on developing the tools
necessary to exploit the fossil simulation marketplace. As a result, the Company
was successful in several competitive bids for fossil simulators, including a
multi-million dollar order for a full scope fossil simulator in India. The
Company sees this as a growing market segment for the power business. In
addition, the deregulation of the electric power industry has increased the
importance of efficient and reliable operations of power stations. The use of
simulation to address these issues has resulted in new opportunities for GSE to
improve the simulation fidelity of existing simulators and the supply of new
simulators around the world. While GSE simulators are primarily utilized for
power plant operator training, the uses are expanding to include engineering,
plant modification studies, and operating efficiency improvements for both
nuclear and fossil utilities.
Process Control Business
GSE's Process Control business experienced sluggish performance during
the first half of the year. After spending extensively in 1998 and the first
half of 1999 on upgrading their process control systems to deal with the Y2K
date issue concerns, customer spending on additional investments in their
process control systems remained depressed in the first half of 2000. The entire
process control industry was affected by this trend, as well as other economic
factors in the Chemical Industry which reduced overall capital spending on
process control systems. Accordingly, the Company implemented a restructuring
plan to bring the operating costs in line with lower revenue projections.
Actions taken included personnel reductions, the outsourcing of Process'
manufacturing and assembly operations, and the sale of Process' unprofitable
European operations based in Belgium to Newton Integrated Services, B.V. of
Bergen Op Zoom, Netherlands. As part of the sale, Newton, which is an
engineering company that focuses on electrical, mechanical and control system
services, entered into a marketing agreement with Process to be the European
distributor of the D/3 product line. The Process Business Unit (net of its
VirtualPlant(TM) activities) saw an improvement to operating income in the third
and fourth quarters of the year as a result of the restructuring.
VirtualPlant Strategy
During 2000, the Company continued to develop and invest extensively in
its VirtualPlant business and marketing strategy that was introduced in 1999.
VirtualPlant combined the benefits of real-time simulation with control systems
to create a real-time representation of an operating plant. VirtualPlant also
allowed a customer to create an environment for simulation-enhanced
experimentation, thereby reducing the amount of physical experimentation
necessary to achieve an optimal design result for a new process product.
A significant step in implementing the VirtualPlant strategy was the
Company's participation in the February 2000 founding of Avantium International
B.V. ("Avantium"), a Netherlands-based high technology company that employs
high-speed experimentation and simulation technologies in contract research and
development in the area of new product development and process chemistry. GSE
licensed certain of its simulation software products to Avantium in exchange for
Avantium preferred and common stock. At December 31, 2000 the Company held
approximately 10.4% of Avantium's outstanding preferred and common stock. GSE
was to provide the basis for the informatics system that would automate and
maximize Avantium's lab environment, and utilize its core simulation
technologies to assist in the optimization of experimentation as well as
analysis of the resulting data.
In addition, the Company received a $2.9 million contract from Avantium
to make certain improvements and enhancements to the software licensed to
Avantium. In the fourth quarter, GSE delivered Virtual Laboratory workstations
to Avantium's Laboratory in the Netherlands and to the Technical University in
Delft. These Virtual Labs use GSE's D/3 Control System(TM), VPBatch(TM)
recipe/experiment management software, BatchCAD and SimSuite Pro(TM) simulation
software in combination with high-speed experimentation robotic equipment to
accomplish high throughput catalyst development.
In early 2000, GSE's Board of Directors acknowledged that outside
investment was required to support the development of the VirtualPlant business
since the Company's cash flow was insufficient by itself. After the Company was
unsuccessful in attracting the needed capital with terms acceptable to the
Board, the Board made the decision to sell the VirtualPlant assets to Avantium
in exchange for Avantium stock, thus eliminating the cash burden on the Company.
The asset sale closed on March 6, 2001 and included certain fixed assets
of the Company, intellectual property (including BatchCAD and BatchWizard
software products), and the employment of certain personnel in both the US and
the UK. GSE received 8% of Avantium's stock, thus increasing its holdings in
Avantium to approximately 18%. GSE retains one seat on the supervisory board of
Avantium. Also, the Company licensed their process control and simulation
software ("GSE Process Software") exclusively to Avantium for the R&D market.
This licensing arrangement includes free updates to the GSE Process Software. In
return, GSE received a royalty-free license to use any upgrades of the GSE
Process Software produced by Avantium in the manufacturing market. GSE also
received a royalty-free license to use and produce upgrades of the BatchWizard
Software owned by Avantium in the manufacturing market. 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 GSE's
process control and simulation products, thus speeding up market introduction
and reducing the overall life cycle costs.
Continued Research and Development
Throughout the year, GSE continued to invest in its core products of D/3
Distributed Control System and Power Simulation technology. The Company enhanced
the capabilities of the D/3 to communicate with more I/O families, by adding a
connection to the Allen Bradley ControlNet data highway, and continued the
development of the next release of the D/3, version 10.2. GSE also expanded the
features of Microsoft Windows NT(R) within the products, completing the
development of its VPbatch product, which is the Windows NT version of its
FlexBatch Recipe and Process management software.
Continuing its history of bringing leading edge technology to the
simulation market, the Company has also started converting its Power Simulation
tools to be able to use Java technology to take better advantage of the internet
to provide remote training to customers.
Background.
GSE Systems was formed on April 13, 1994, by ManTech International
Corporation ("ManTech"), GP Strategies Corporation ("GP Strategies") and its
affiliates, General Physics Corporation and SGLG, Inc., and Vattenfall AB to
consolidate the simulation and related businesses of their affiliates, GSE Power
Systems, Inc. ("Power Systems" and formerly known as "Simulation, Systems &
Services Technologies Company" or "S3 Technologies"), GP International
Engineering & Simulation, Inc. ("GPI") and GSE Power Systems AB ("Power Systems
AB" and formerly known as "EuroSim AB"). On December 30, 1994, GSE Systems
expanded into the process control automation and supply chain management
consulting industry through its acquisition of the process systems division of
Texas Instruments Incorporated, which the Company operates as GSE Process
Solutions, Inc. ("Process Solutions").
In April 1996, the Company aligned its operating groups into three
strategic business units to better serve its then primary vertical markets -
Power, Process and Oil & Gas. The realignment allowed the Company to focus on
providing all of its technologies to these markets, while addressing the
specific needs of each market and delivering industry specific solutions.
In May 1996, the Company acquired Erudite Software & Consulting, Inc.
("Erudite"), a regional provider of client/server technology, custom application
software development,training services, hardware/software sales,
and network design and implementation services. The acquisition was made to
facilitate the Company's efforts to enter the client/server information
technology solutions market. Erudite was subsequently combined with a small
pre-existing consulting group within the Company to form the Company's Business
Systems business unit.
In December 1997, the Company acquired 100% of the outstanding common
stock of J.L. Ryan, Inc. ("Ryan"), a provider of engineering modifications and
upgrade services to the power plant simulation market. The combination of the
Company's pre-existing technology with the technical staff of the acquired Ryan
business positioned the Company to be more competitive for modifications and
upgrade services projects within the nuclear simulation market.
After incurring substantial losses in 1997, management decided to divest
the Company's unprofitable business units and concentrate its resources on its
core businesses, Power Systems and Process Solutions. Accordingly, in April
1998, the Company sold substantially all of the assets of Erudite to Keane, Inc.
and in November 1998, the Company divested certain assets of the Oil & Gas
business unit to Valmet Automation (USA), Inc. See Note 3, Acquisitions and
dispositions, in the " Notes to the Consolidated Financial Statements" for a
discussion of these transactions.
In April 1999, the Company acquired certain assets and employed the
associates of BatchCAD Limited. With this acquisition, the Company gained a
presence in the United Kingdom, with an office in Hexham, England, that was to
provide the baseline for future expansion in the region. In addition, the
BatchCAD product was a key element in the Company's VirtualPlant business and
marketing strategy.
See the prior section "Recent Developments" for a discussion of GSE's
development of its VirtualPlant strategy in 2000 and the sale of the
VirtualPlant business to Avantium International B.V. in March 2001.
Business Strategy.
GSE Systems combines real-time control automation, real-time simulation
and application engineering for true problem solving techniques and solutions.
The Company believes this provides a technological advantage which, when
combined with its focused efforts on targeted industry markets and defined
application solution approach, allows its staff to assess, define, develop, and
apply innovative solutions that meet the current and future industry-specific
needs of its customers.
Low cost, high quality products is the mantra of the
manufacturing business. GSE believes deregulation in the energy sector will
result in the same mantra for the power industry, thus resulting in an increase
in the use of high fidelity simulation in the fossil power market. In the past,
that market segment was characterized by simplified simulation solutions used
mainly to teach operators the use of new distributed control systems. With
deregulation, the power companies are realizing that sophisticated simulation
models will help teach the operators how to improve plant efficiency, avoid
unscheduled outages and maximize production in a competitive power market.
The strategy of combining simulation and control technology to help
customers optimize plant performance in the manufacturing space is a
viable strategy. The Company proved its value in the R&D market space through
its VirtualPlant business. The Company will work on exploiting the strategy in
the manufacturing market space. The combination of our technologies will provide
a virtual representation of our customers' ideal or existing plant that can be
used for model reference control and assist management of the business with
determining the optimal approach to operating the plant. In the energy sector we
will provide energy managers with the ability to reduce operating costs by
gaining more productivity through training, plant information, asset management,
security and plant design and optimization.
The Company will also continue to use our process control and batch and
recipe management systems to optimize production in the chemical, pharmaceutical
and food & beverage industries by improving process chemistry in correlation
with process flow throughout the plant. These tools assist in "brand" transition
to quickly meet market demands, and technology transfer between locations. The
tools help the customer understand and manage scheduling and equipment
utilization to optimize plant throughput.
The Company believes that GSE Systems can partner with customers to help
provide them with cost-effective solutions for problems associated with
simulation and control, which would allow its customers to focus their resources
on their strengths.
Services and Products.
GSE Systems has developed its knowledge and expertise in process control
and simulation systems that are utilized to improve, control and model
processes. This expertise is concentrated heavily in the process industries,
including the chemicals, food & beverage, and pharmaceuticals fields, as well as
in the power generation industry, where the Company is a world leader in nuclear
power plant simulation.
As the Microsoft Windows NT(R) operating environment continues to evolve,
the Company has continued the migration of its products to this platform in such
a way as to assure current customers' legacy applications will function properly
while at the same time offering the advantages of the new technology. Although
the Company uses open standards for its products, the Company's standard system
configurations are based on the proprietary technology and know-how necessary to
meet the requirements of its customers in the controls and simulation markets.
The Company's business model is based on software licensing and
value-added services, as well as hardware sales. Because this model is based
primarily on software and value-added services, the Company believes it can
maintain its business model in an environment of rapidly decreasing hardware
costs.
In the Process Business Unit, the flagship product is a Distributed
Control System ("DCS") product, known as the D/3 DCS(TM) that is highly flexible
and open. This product 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, as well as form the platform for
plant-wide information for use by operators, engineers and management.
Other products include the following:
o VPbatch(TM) (formerly FlexBatch(R)) , a flexible batch manufacturing system
used to facilitate the rapid creation of various batch production
processes;
o TotalVision(TM), which is a graphical system that provides a
client/server-based human-machine interface for real-time process and plant
information;
o VPtv(TM), a webenabled version of the TotalVision package; and
o SABL(TM), which is 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.
The Company's proprietary technology also includes real-time dynamic
simulation tools and products that are used to develop high fidelity simulations
for use in petroleum refineries, chemical processing plants and other industrial
plants. The most prominent set of products and tools is known as SimSuite
Pro(TM), which facilitates design verification, process optimization and
operator training.
The Power Business Unit focuses on developing high fidelity, real-time,
dynamic simulators for nuclear and fossil power plants for use in both operator
training and plant optimization. GSE's SimSuite Power(TM) set of auto-code
generators provides state of the art simulation of flow processes, logic and
control systems and electrical distribution systems within a power plant. This
technology is both licensed by the Company to its customers as well as used by
the Company to develop simulators for its customers.
In addition, other products include:
o SimExec(TM), a Windows NT(R) based real-time simulation executive system
that controls all simulation activities and allows for an off-line software
development environment in parallel with the training environment.
o Extreme I/S, a Windows NT(R) based Instructor Station that allows the use
of Microsoft Word and Powerpoint to control the real time simulation
environment. It is an extremely user friendly tool for classroom training
and electronic report generation.
o RACS, a fully integrated Access Control and Intrusion Detection System
ideally suited for nuclear power plant security applications and other
large, multi-access facilities.
o SIMON(TM), 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.
The Company also provides value-added 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.
Customers.
The Company has provided over 500 simulation and process control systems
to an installed base of over 250 customers worldwide. In 2000, approximately 52%
of the Company's worldwide revenue was generated from end users outside the
United States.
The Company's customers include, among others, Archer Daniels Midland
Company, Ameron, Arizona Public Service, Bethlehem Steel Corporation, Cargill
Incorporated, Carolina Power and Light Company, Commonwealth Edison Company,
Eastman Company, Eskom South Africa, Formosa Plastics Company, Karnaraft
Sakerhet & Utbildning AB, Korean Electric Power Company, Merck & Co., Inc.,
Miller Brewing Company, Nationalina Elecktrischecka Kompania, Orgrez SC, Pacific
Northwest National Laboratory, Taiwan Power Company, West Bengal Development
Corp. and Westinghouse Savannah River Company.
For the year ended December 31, 2000, one Process customer accounted for
approximately 11% of the Company's revenues, and one Power customer accounted
for approximately 22% of the Company's revenues.
Strategic Alliances.
In conjunction with the sale of the Company's Belgian subsidiary in 2000,
the Company has entered into an International Business Associate, Market and
Sales Channel Agreement with Newton Integrated Services B.V. of the Netherlands
to promote and implement process control solutions in Europe. The Company has
often employed strategic partners and systems integrators for its Power
Simulation business, and is now exploiting more of this strategy in the process
control market.
In recent years, a high portion of the Company's international business
has come from major 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, the Company 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 Institute for
Information Industry (Taiwan). These alliances have enabled the Company to
penetrate these regions by combining its technological expertise with the
regional or local presence and knowledge of its partners.
Also, the Company continues to believe that it must have strong solutions
partners as well as strong technology partners in order to address the myriad
system needs of its customers in the various geographical areas in which they do
business.
Sales and Marketing.
The Company markets its products and services through a network of direct
sales staff, agents and representatives, systems integrators and strategic
alliance partners. The Company also employs personnel that support corporate
advertising, literature development and exhibit/conference participation.
GSE Systems employs 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 an extensive,
regionally-based support organization focused on the current customer installed
base. The Company's ability to support its multi-facility, international and/or
multinational clients is facilitated by its network of offices throughout the
U.S. and overseas. Within the U.S., the Company maintains offices in Alabama,
Georgia, Louisiana, Maryland, North and South Carolina, Pennsylvania and Texas.
Outside the U.S., the Company has offices in Sweden, Japan, and Taiwan. In
addition to its offices located overseas, the Company's ability to conduct
international business is enhanced by its multilingual and multicultural work
force.
Strategic alliance partners, systems integrators and agents represent
the Company's interests in Russia, Germany, Switzerland, Bulgaria, Belgium,
Netherlands, Spain, the Czech Republic, India, South Africa, Mexico, Argentina,
Taiwan, Korea, Japan and the People's Republic of China.
Product Development.
In 2000, the Company completed the development of its VPbatch product
which is the Windows NT version of its FlexBatch Recipe and Process Management
software, and completed the development of version 10.2 (released in December)
of the Company's D/3 Distributed Control System. In addition, the Company
continued development initiatives to improve the product ease of use of its
process simulation products. For the years ended December 31, 2000, 1999 and
1998, gross research and product development expenditures for the Company 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 the Company's policy regarding capitalization of software
development costs.
The Company also continued to develop simulation code generation tools
applicable to the growing fossil power industry. These tools bring the high
fidelity modeling with easy to use graphical interfaces to quickly build models
for fossil plant simulators. This reduces the cost of production to allow the
Company to be price competitive in the industry.
Industries Served.
The following chart illustrates the approximate percentage of the
Company's 2000, 1999, and 1998 revenues, respectively, attributable to each of
the major industries served by the Company:
2000 1999 1998
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Process 45% 52% 49%
Power 55% 48% 42%
Other - - 9%
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Total 100% 100% 100%
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Contract Backlog.
The Company does not reflect an order in backlog until it has received a
contract that specifies the terms and milestone delivery dates. As of December
31, 2000, the Company's aggregate contract backlog totaled approximately $23
million.
Employees.
As of December 31, 2000, the Company had 303 employees, a 26% decrease
from December 1999. The reductions were primarily associated with the Process
Controls Business Unit restructuring as discussed in the "Recent Developments"
section, above.
Segment Information.
See Note 18, Segment information, in the "Notes to Consolidated Financial
Statements" for a discussion of the Company's business segments.
RISK FACTORS.
Fluctuations in Quarterly Operating Results.
The Company's operating results have fluctuated in the past and may
fluctuate significantly in the future as a result of a variety of factors,
including purchasing patterns, timing of new products and enhancements by the
Company and its competitors, and fluctuating foreign economic conditions. Since
the Company's expense levels are based in part on its expectations as to future
revenues, the Company 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 operating results. The Company
believes that these factors may cause the market price for its 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. The Company's common stock has also
experienced a relatively low trading volume, making it further susceptible to
extreme price fluctuations.
International Sales and Operations.
Sales of products and the provision of services to end users outside the
United States accounted for approximately 52 % of the Company's consolidated
revenues in 2000. The Company anticipates that international sales and services
will continue to account for a significant portion of its revenues in the
foreseeable future. As a result, the Company 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
potentially adverse tax consequences, tariffs, quotas and other barriers,
potential difficulties involving the Company's strategic alliances and managing
foreign sales agents or representatives and potential difficulties in accounts
receivable collection. The Company currently sells products and provides
services to customers in emerging market economies such as Russia, Ukraine,
Bulgaria, and the Czech Republic. The Company has taken steps designed to reduce
the additional risks associated with doing business in these countries, but the
Company believes that such risks may still exist and include, among others,
general political and economic instability, lack of currency convertibility, as
well as uncertainty with respect to the efficacy of applicable legal systems.
There can be no assurance that these and other factors will not have a material
adverse effect on the Company's business, financial condition or results of
operations. Furthermore, the Company's ability to expand its business into
certain emerging international markets is dependent, in part, on the ability of
its customers to obtain financing.
Revenues in the Nuclear Power Industry.
The Company will continue to derive a significant portion of its revenues
from customers in the nuclear power industry, particularly the international
nuclear power industry, for the foreseeable future. The Company's 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
affect 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, general economic conditions and the ability of customers to obtain
adequate financing.
Revenues in the Chemicals Industry.
The Company derives a portion of its revenues from companies in the
chemicals industry. Accordingly, the Company's future performance is dependent
to a certain extent upon the demand for the Company's products by customers in
the chemical industry. The Company's 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 the Company's target process industries. There can be no assurance
that such factors will not have a material adverse effect on the Company's
business, operating results and financial condition.
Product Development and Technological Change.
The Company believes that its success will depend in large part on its
ability to maintain and enhance its current product line, develop new products,
maintain technological competitiveness and meet an expanding range of customer
needs. The Company's product development activities are aimed at the development
and expansion of its library of software modeling tools, the improvement of its
display systems and workstation technologies, and the advancement and upgrading
of its simulation and process control technologies. The life cycles for software
modeling tools, display system software, process control and simulation
technologies are variable and largely determined by competitive pressures.
Consequently, the Company will need to continue to make significant investments
in research and development to enhance and expand its capabilities in these
areas and to maintain its competitive advantage.
The Company's products are offered in markets affected by technological
change and emerging standards that are influenced by customer preferences. The
Company has expended significant resources in developing versions of its core
products that operate in the increasingly popular Windows NT(R) environment;
however, there can be no assurance of customer acceptance of these Windows
NT(R)-based products or that these products will be competitive with products
offered by the Company's competitors. Although the Company believes that no
significant trends to migrate to other operating platforms currently affect the
markets for the Company's products, there can be no assurance that customers
will not require compatibility with such other operating platforms in the
future.
Intellectual Property Rights.
Although the Company believes that factors such as the technological and
creative skills of its personnel, new product developments, frequent product
enhancements and reliable product maintenance are important to establishing and
maintaining a technological leadership position, the Company's business depends,
in part, on its intellectual property rights in its proprietary technology and
information. The Company relies upon a combination of trade secret, copyright,
patent and trademark law, contractual arrangements and technical means to
protect its intellectual property rights. The Company generally enters into
confidentiality agreements with its employees, consultants, joint venture and
alliance partners, customers and other third parties that are granted access to
its proprietary information, and generally limits access to and distribution of
its proprietary information. There can be no assurance, however, that the
Company has protected or will be able to protect its proprietary technology and
information adequately, that the unauthorized disclosure or use of the Company's
proprietary information will be prevented, that others have not or will not
develop similar technology or information independently, or, to the extent the
Company owns patents, that others have not or will not be able to design around
those patents. Furthermore, the laws of certain countries in which the Company's
products are sold do not protect the Company's products and intellectual
property rights to the same extent as the laws of the United States.
Competition.
The Company's businesses operate in highly competitive environments with
both domestic and foreign competitors, many of whom have substantially greater
financial, marketing and other resources than the Company. The principal factors
affecting competition include price, technological proficiency, ease of system
configuration, product reliability, applications expertise, engineering support,
local presence and financial stability. The Company believes 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. The Company
believes that its technology leadership, experience, ability to provide a wide
variety of solutions, product support and related services, open architecture
and international alliances will allow it to compete effectively in these
markets. As the Company's business has a significant international component,
changes in the value of the dollar could adversely affect the Company's ability
to compete internationally.
Additionally, GSE Systems' operations are dependent on the efforts of its
technical personnel and its senior management. Thus, recruiting and retaining
capable personnel, particularly engineers, computer scientists and other
personnel with expertise in computer software and hardware, as well as
particular customer processes, are critical to the future performance of the
Company. Competition for qualified technical and management personnel is
substantial.
Legal Liability.
The Company's business could expose it to third party claims with respect
to product, environmental and other similar liabilities. Although the Company
has sought to protect itself 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 the Company's 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 the Company's
insurance. Although management has no knowledge of material liability claims
against the Company to date, such potential future claims could have a material
adverse effect on the business or financial condition of the Company. Certain of
the Company's products and services are used by the nuclear power industry. The
Company believes that it does not have significant liability exposure associated
with such use, as nearly all such products and services relate to training.
Although the Company's contracts for such products and services typically
contain provisions designed to protect the Company from potential liabilities
associated with such use, there can be no assurance that the Company would not
be materially adversely affected by claims or actions which may potentially
arise.
Influence of Affiliate Stockholders.
As of the date of this report, certain directors, executive officers and
other parties that are affiliates of the Company beneficially own approximately
43% of the common stock of the Company. If these stockholders vote together as a
group, they will be able to exert significant influence on the business and
affairs of the Company, including the election of individuals to the Company's
Board of Directors, and the outcome of actions that require stockholder
approval.
ITEM 2. PROPERTIES.
The Company's Power business unit is headquartered in a facility in
Columbia, Maryland (approximately 53,000 square feet) which also houses the
Company's corporate headquarters offices and support functions. The Process
business unit is located in a 34,000 square foot facility in Baltimore,
Maryland. The leases for both of these facilities expire in 2008.
In addition, the Company leases office space domestically in Alabama,
Georgia, Louisiana, Texas, Pennsylvania, North and South Carolina, and
internationally in Japan, Sweden, and Taiwan. The Company leases these
facilities for terms ending between 2001 and 2002. During 1999, as part of the
wind down of the Oil & Gas business unit, the Company's facilities in Singapore
and Korea were closed. In 2000, the Company's lease for its Belgian operations
was transferred in the sale of its Belgian subsidiary, and the leases for its UK
operations were transferred to Avantium as part of the VirtualPlant asset sale
in March, 2001.
ITEM 3. LEGAL PROCEEDINGS.
-----------------
The Company is from time to time involved in legal proceedings incidental
to the conduct of its business. The Company currently is not a party to legal
proceedings which, in the opinion of management, are likely to have a material
adverse effect on the Company's business, financial condition or results of
operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
---------------------------------------------------
No matter was submitted to a vote of security holders during the quarter
ended December 31, 2000.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
---------------------------------------------------------------------
The following table sets forth, for the periods indicated, the high and
low sale prices for the Company's common stock reported by the American Stock
Exchange:
2000
- ---------------------------------------------------------
Quarter High Low
- --------------------------------------------------------
First $ 9 $ 3
Second $ 8 2/3 $ 3
Third $ 4 5/8 $ 2
Fourth $ 3 3/8 $ 1 1/5
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, the Company's common stock was approved for listing on
the American Stock Exchange, where it now trades under the symbol "GVP".
Previously, the Company's common stock had traded on the NASDAQ National Market
System under the symbol "GSES".
There were approximately 35 holders of record of the common stock as of
March 15, 2001. Based upon information available to it, the Company believes
there are approximately 700 beneficial holders of the common stock. The Company
has never declared or paid a cash dividend on its common stock. The Company
currently intends to retain future earnings to finance the growth and
development of its business and, therefore, does not anticipate paying any cash
dividends in the foreseeable future.
The Company believes factors such as quarterly fluctuations in results of
operations and announcements of new products by the Company or by its
competitors may cause the market price of the 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. The Company's common stock has also experienced a relatively low
trading volume, making it further susceptible to extreme price fluctuations.
These factors may adversely affect the market price of the Company's common
stock.
ITEM 6. SELECTED FINANCIAL DATA.
Historical consolidated results of operations and balance sheet data
presented below, have been derived from the historical financial statements of
the Company. The Company disposed of substantially all of the assets of its
subsidiary, GSE Erudite Software, Inc., as of April 30, 1998. Effective as of
October 30, 1998, the Company completed the sale of certain assets related to
activities of its Oil & Gas business unit ("O&G"). Effective December 1, 1997,
the Company 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.
For information and disclosures regarding the Company's business
segments, see Note 18, Segment information, in the "Notes to Consolidated
Financial Statements".
Years ended December 31,
- ---------------------------------------------------------------------------------------------------------------------------
(in thousands, except per share data) 2000 1999 1998 1997 1996
Contract revenue $ 55,715 $ 66,699 $ 73,818 $ 79,711 $ 96,033
Cost of revenue 40,822 41,629 49,814 58,326 63,679
Gross profit 14,893 25,070 24,004 21,385 32,354
Operating expenses:
Selling, general and administrative 17,853 22,646 20,345 27,320 24,192
Depreciation and amortization 1,695 1,680 1,768 2,368 2,111
Business combination costs - - - - 1,206
Employee severance and termination costs - - - 1,124 -
Total operating expenses 19,548 24,326 22,113 30,812 27,509
Operating income (loss) (4,655) 744 1,891 (9,427) 4,845
Gain (loss) on sales of assets (990) - 550 - -
Interest expense, net (687) (450) (350) (765) (387)
Other income (expense), net 55 40 326 (1,228) 394
Income (loss) before income taxes (6,277) 334 2,417 (11,420) 4,852
Provision for (benefit from) income taxes 2,537 233 1,020 (2,717) 709
Net income (loss) $ (8,814) $ 101 $ 1,397 $ (8,703) $ 4,143
============--============--===========--============--============
Earnings (loss) per common share: -Basic $ (1.70) $ 0.02 $ 0.28 $ (1.72) $ 0.82
============--============--===========--============--============
-Diluted $ (1.70) $ 0.02 $ 0.27 $ (1.72) $ 0.82
============--============--===========--============--============
Weighted average common shares outstanding:
-Basic 5,182 5,066 5,066 5,066 5,066
============--============--===========--============--============
-Diluted 5,182 5,351 5,107 5,066 5,073
============--============--===========--============--============
As of December 31,
2000 1999 1998 1997 1996
------------------------------------------------------------------
Working capital $ 5,522 $ 8,665 $ 4,058 $ 1,646 $ 13,867
Total assets 35,949 43,027 48,743 48,362 51,006
Long-term liabilities 12,390 9,083 3,350 2,369 2,580
Stockholders' equity 8,713 17,170 17,089 15,924 24,693
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
During the year ended December 31, 2000, the Company incurred significant
operating losses which resulted in non-compliance with certain financial
covenants included in the Company's bank credit facility. The Company has
obtained a waiver of the financial covenant defaults as well as certain covenant
modifications to help position the Company for future compliance. Nevertheless,
future compliance will depend upon achieving significantly improved operating
results during 2001 and beyond.
Management has undertaken a number of initiatives during 2000 and 2001 to
improve operating results and cash flows including:
(i) The restructuring of the Process business unit to reduce operating costs.
Actions taken in 2000 included (a) personnel reductions; (b) the
outsourcing of Process' manufacturing and assembly operations; and (c) the
sale of Process' unprofitable Belgian 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 N.V.
(ii) The sale of the Company's VirtualPlant business to Avantium International
B.V. ("Avantium"). The asset sale closed on March 6, 2001 and included
certain fixed assets of the Company, intellectual property, and the
employment of certain personnel in both the US and UK by Avantium. GSE
received 8% of Avantium's stock, thus increasing its holdings in Avantium
to approximately 18%. For the year ended December 31, 2000, the Company's
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 ("Mantech") has agreed to allow the
Company's bank to draw upon ManTech's $1.8 million letter of credit which
supports the Company's credit facility, thus paying down a portion of the
Company's bank debt, in exchange for additional subordinated debt in the
Company. (See Note 16, Related party transations, in the "Notes to
Consolidated Financial Statements.")
Management believes the initiatives undertaken will enable the Company to
maintain compliance with the revised bank financial covenants as well as provide
sufficient cash flow to meet the Company's obligations as they become due.
However, if the initiatives are not successful or if there are unforeseen
decreases in demand for the Company's products or increases in working capital
needs the Company may be unable to meet the revised bank financial covenants
and/or to generate sufficient cash flows from operations. In such case, the
Company 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.
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.
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 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 2000 to 1999.
Contract Revenue. Total contract revenue was $55.7 million and $66.7
million for the years ended December 31, 2000 and 1999, respectively.
The Process business unit's 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, the Process business unit 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 chemical industry) which forced them to cut back on their
overall capital spending. Included in the 2000 Process revenue was $2.9 million
from the sale of licenses for five of GSE's software products to Avantium
International B.V. ("Avantium") in February, including the object and source
codes, in exchange for an equity interest in Avantium. See Note 4, Investment in
Avantium International B.V., in the "Notes to Consolidated Financial Statements"
for a discussion of this transaction.
The Power business unit 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 due to the following:
o In 1999, the Process business was benefiting 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
inventory to adjust its carrying value to net realizable value.
Selling, General and Administrative Expenses. Selling, general and
administrative ("SG&A") 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
business unit due to the restructuring of this business.
o Lower sales commissions due to lower Process business unit orders.
o A reduction in corporate personnel.
o The completion in 1999 of the Company's 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 GSE's 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 the Company's affiliation 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 ("R&D") costs included in selling, general and administrative
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 Process' 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 business restructuring.
In 2000, the Company completed the development of its VPbatch product,
which is the Windows NT version of its FlexBatch Recipe and Process Management
software, and completed the development of version 10.2 (released in December)
of the Company's D/3 Distributed Control System. In addition, the Company
continued development initiatives to improve the product ease of use of its
process simulation products and to create a set of software simulation tools for
fossil power utilities.
Depreciation and Amortization. Depreciation expense amounted to $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). The Company 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) in 1999. The decrease in
operating income (loss) reflects the lower revenues in 2000 coupled with the
reduction in Process gross margin percent due to product mix as discussed above,
the increase in capitalized software amortization in 2000, the provision for
write-down of Process inventory and the investments made by the Company in
developing its VirtualPlant marketing and business strategy.
Loss on Sale of Assets. The loss on sale of assets in 2000 reflects the
net pre-tax loss realized on the disposition of GSE Process Solutions NV, the
Company's Belgian subsidiary in the fourth quarter. This sale and related loss
is described more fully under Note 3, Acquisitions and dispositions, in the
"Notes to Consolidated Financial Statements".
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 the
Company's borrowings under its line of credit made during the period 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, the Company has recorded a tax provision of $2.5 million. This provision
is mainly the result of an increase in the valuation reserve against the
Company's deferred income tax assets. The reserve was increased to reduce the
total deferred tax asset to an amount that management believes will more likely
than not be realized. The difference between the statutory U.S. tax rate and the
Company's 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 the Company's effective 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 1999 to 1998.
Contract Revenue. Total contract revenue was $66.7 million and $73.8
million for the years ended December 31, 1999 and 1998, respectively. During
1998, the Company disposed of substantially all of the assets of its Erudite
subsidiary and Oil & Gas business unit. Included in 1998 revenue was $5.3
million from Erudite and $1.1 million from the Oil & Gas business unit. After
excluding these contract revenues from 1998 results, total revenues decreased
$0.7 million from 1998, or 1.0%.
The Power business unit 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. The Process business
unit's revenues 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, the Process Business
Unit 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 the 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 business unit 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). Other
than changes in research and development costs which increased $900,000 and are
discussed below, the increase reflects additional sales and marketing personnel
in the Process business unit, increased advertising and promotions related to
the Company's VirtualPlant suite of products and services, higher legal fees
related to the Company's new credit facility, and internal Y2K compliance
programs.
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.
The Company continued to invest in the conversion of its D/3 Distributed Control
System (TM) (Version 10.0 was released in October, 1999), VPBatch(TM), and
SimSuitePro(TM) products to the Microsoft Windows NT(R) 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 unit assets. During the second quarter of 1998, the Company
recorded a gain of $5.6 million on the sale of the Erudite assets. In the third
quarter of 1998, the Company recognized a ($5.0) million pre-tax loss on the
disposition of the Oil & Gas business unit assets. These sales and related gains
and losses are described more fully under Note 3, Acquisitions and dispositions,
in the "Notes to Consolidated Financial Statements".
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 the
Company's borrowings under its lines of credit made during the period 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. The Company's effective tax rate was 69.8% in
1999 versus 42.2% in 1998. The difference between the statutory U.S. tax rate
and the Company's effective 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.
Operating Activities. The Company used $4.5 million in its operating
activities during 2000. The Company's $2.9 million revenue from licensing
software in exchange for stock of Avantium International B.V. was a non-monetary
transaction and had no impact on the Company's operating cash flow. Significant
changes in the Company's assets and liabilities included:
o A $1.9 million reduction in contract receivables which is 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 the Company had forecasted significant
usage, plus the return of some material from customers. In 2000, this
inventory decreased approximately $800,000 as the Company made a concerted
effort to reduce on-hand inventory. The balance of the decrease is due to
the write-down of 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.
Net cash provided by operating activities was $2.6 million during 1999.
Significant changes in the Company's assets and liabilities 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 earned.
In 1998, the Company's operating activities used cash totaling $772,000.
Investing Activities. Net cash used in investing activities totaled $3.3
million in 2000, including $472,000 of capital expenditures, $1.9 million of
capitalized software development costs, $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 the Company's Belgium subsidiary.
In 1999, the Company used $4.1 million for investing activities,
consisting primarily of $1.4 million of capital expenditures, $2.5 million of
capitalized software development costs, 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.) The Company received $731,000 from
Keane, Inc. as final payment on the 1998 Erudite sale.
In 1998, the Company's investing activities generated $5.3 million,
consisting primarily of $9.7 million from the sale of assets (see Note 3,
Acquisitions and dispositions, in the "Notes to Consolidated Financial
Statements"), partially offset by $2.1 million used for capital expenditures and
$2.3 million for capitalized software development costs
Financing Activities. In 2000, the Company obtained $6.6 million net cash
from the following financing activities:
o The Company increased its borrowings under its bank line of credit by $3.0
million.
o In January 2000, the Company issued 116,959 shares of its common stock to
ManTech International Corporation for $500,000.
o The assignment of two long-term customer sales-type lease contracts to a
finance company generated $1.1 million.
o In the fourth quarter 2000, the Company issued a demand promissory note to
ManTech International Corporation, which allows the Company to borrow up to
$1.8 million. At December 31, 2000, the Company had borrowed a total of
$1.6 million. This note is subordinated to the Company's bank credit
facility. See additional discussion of this promissory note in the "Credit
Facilities" section below.
o Cash used to collateralize outstanding letters of credit was reduced by
$202,000 due to the reduction in the value of outstanding letters of credit
in 2000.
In 1999, the Company generated $2.0 million net cash from financing
activities. The assignment of two long-term customer sales-type lease contracts
to a finance company generated $3.4 million cash, which was partially offset by
the paydown of the Company's credit lines ($.5 million), repayments under
capital lease obligations ($143,000) and the deposit of $735,000 into a bank
account for which the balance was used to collateralize two of the Company's
outstanding letters of credit.
In 1998, the Company's financing activities used cash of approximately
$2.6 million, consisting primarily of $2.3 million in repayments under the
Company's lines of credit.
Credit Facilities.
On March 23, 2000, the Company entered into a new loan and security
agreement with a bank for a new credit facility with a maturity date of March
23, 2003. Borrowings from this facility were used to repay the existing debt
under the Company's previous credit facility. The line of credit (the "Credit
Facility") provides for borrowings up to a total of $10.0 million to support
working capital needs and foreign letters of credit. At December 31, 2000, the
Company's available borrowing base was $10.0 million, of which approximately
$9.3 million had been utilized. See Note 11, Long-term debt, in the "Notes to
Consolidated Financial Statements" for additional details about this line of
credit. When the Credit Facility was first entered into, ManTech International
Corp. provided a one-year $900,000 standby letter of credit to the bank as
additional collateral for the Company's Credit Facility and 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 the Company's Credit Facility. GSE was allowed to
borrow up to 100% of the value of these two letters of credit.
The loan and security agreement requires the Company to comply with certain
financial ratios. At December 31, 2000, the Company was not in compliance with
its minimum EBITDA (earnings before interest, taxes, depreciation and
amortization) covenant, its minimum working capital covenant, its tangible net
worth covenant, or its 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 the Company 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% (8.75% at March 31, 2001).
In the fourth quarter of 2000, the Company issued a demand promissory note
to ManTech International Corporation that allowed the Company to borrow up to
$1.8 million at an interest rate of prime plus one percent. As of December 31,
2000, the Company had borrowed $1.6 million, which was used for working capital.
The promissory note was secured by the Company's pledge of its equity interest
in Avantium International B.V., but such security interest was subordinate to
the first lien thereon by the Company's 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,
the Company issued a replacement promissory note in the amount of $2.1 million
to ManTech pursuant to which the Company's obligations to ManTech became
unsecured, and the principal is payable ver 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 convertible preferred stock at a conversion rate of $100 per share, pending
shareholder approval. ManTech has agreed to subordinate the note to the
Company's Credit Facility.
Other. As of December 31, 2000, the Company was contingently liable for
five letters of credit totaling $533,000. All of these letters of credit
represent payment bonds on contracts and have been cash collateralized.
Foreign Exchange.
A portion of the Company's international sales revenue has been and may
be received in a currency other than the currency in which the expenses relating
to such revenue are paid. When necessary, the Company manages its foreign
currency exposure primarily by entering into foreign currency exchange
agreements and purchasing foreign currency options.
New Accounting Standards.
Effective January 1, 2001, the Company will adopt 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 the Company's consolidated
financial statements.
Other Matters.
To date, management believes inflation has not had a material impact on
the Company's operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company's market risk is principally confined to changes in foreign
currency exchange rates and potentially adverse effects of differing tax
structures. The Company's exposure to foreign exchange rate fluctuations arises
in part from inter-company accounts in which costs incurred in one entity are
charged to other entities in different foreign jurisdictions. The Company is
also exposed to foreign exchange rate fluctuations as the financial results of
all foreign subsidiaries are translated into U.S. dollars in consolidation. As
exchange rates vary, those results when translated may vary from expectations
and adversely impact overall expected profitability.
The Company is also subject to market risk related to the interest rates
on its existing line of credit. As of March 31, 2001, such interest rates are
based on the prime rate plus three-quarters point.
As of December 31, 2000, $10.8 million of the Company's debt was subject
to variable interest rates. A 100 basis-point change in such rates during the
year ended December 31, 2000 would have increased the Company's interest expense
by approximately $78,000.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEX TO FINANCIAL STATEMENTS
Page
GSE Systems, Inc. and Subsidiaries
Independent Auditors' Report ..............................................F-1
Report of Independent Accountants..........................................F-2
Consolidated Balance Sheets as of December 31, 2000 and 1999...............F-3
Consolidated Statements of Operations for the years ended
December 31, 2000, 1999, and 1998.......................................F-4
Consolidated Statements of Comprehensive Income (Loss) for the years ended
December 31, 2000, 1999, and 1998.......................................F-5
Consolidated Statements of Changes in Stockholders' Equity for the years
ended December 31, 2000, 1999, and 1998.................................F-6
Consolidated Statements of Cash Flows for the years ended
December 31, 2000, 1999, and 1998.......................................F-7
Notes to Consolidated Financial Statements.................................F-8
INDEPENDENT AUDITORS' REPORT
To The Board of Directors and Stockholders
GSE Systems, Inc:
We have audited the accompanying consolidated balance sheet of GSE Systems, Inc.
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 statments of operations, of comprehensive income (loss), of
changes in stockholders' equity and cash flows for each of the two years in the
period ended December 31, 1999 (appearing on pages F3 through F27 of the GSE
Systems, Inc. 2000 Annual Report on this Form 10-K) 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
- --------------------------------------------------------------------------------------------------------------------------
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
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
GSE Systems, Inc. ("GSE Systems", "GSE" or the "Company") develops and
delivers business and technology solutions by applying process control,
simulation software, systems and services to the energy, process and
manufacturing industries worldwide. The Company's solutions and services assist
customers in improving quality, safety and throughput; reducing operating
expenses; and enhancing overall productivity.
The Company's operations are subject to certain risks and uncertainties
including, among others, rapid technological changes, success of the Company's
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 the Company.
During the year ended December 31, 2000, the Company incurred significant
operating losses which resulted in non-compliance with certain financial
covenants included in the Company's bank credit facility. The Company has
obtained a waiver of the financial covenant defaults as well as certain covenant
modifications to help position the Company for future compliance. Nevertheless,
future compliance will depend upon achieving significantly improved operating
results during 2001 and beyond.
Management has undertaken a number of initiatives during 2000 and 2001 to
improve operating results and cash flows including:
(i) The restructuring of the Process business unit to reduce operating
costs. Actions taken in 2000 included (a) personnel reductions; (b)
the outsourcing of Process' manufacturing and assembly operations; and
(c) the sale of Process' unprofitable Belgian 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 N.V.
(ii) The sale of the Company's VirtualPlant business to Avantium
International B.V.("Avantium"). The asset sale closed on March 6, 2001
and included certain fixed assets of the Company, intellectual
property, and the employment of certain personnel in both the US and
UK by Avantium. GSE received 8% of Avantium's stock, thus increasing
its holdings in Avantium to approximately 18%. For the year ended
December 31, 2000, the Company's 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 ("ManTech")has agreed to allow the
Company's bank to draw upon ManTech's $1.8 million letter of credit
which supports the Company's credit facility, thus paying down a
portion of the Company's bank debt, in exchange for additional
subordinated debt in the Company.(See Note 16, Related party
transations, in the "Notes to Consolidated Financial Statements.)
Management believes the initiatives undertaken will enable the Company to
maintain compliance with the revised bank financial covenants as well as provide
sufficient cash flow to meet the Company's obligations as they become due.
However, if the initiatives are not successful or if there are unforeseen
decreases in demand for the Company's products or increases in working capital
needs the Company may be unable to meet the revised bank financial covenants
and/or to generate sufficient cash flows from operations. In such case, the
Company 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 the Company and its 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 management 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. 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 Company sponsored 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
The Company periodically evaluates the recoverability of its 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 management's 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. The Company assesses 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 the Company recognizes 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 the Company's current liability for federal, state and foreign income taxes
and the change in the Company's deferred income tax assets and liabilities. No
provision has been made for the undistributed earnings of the Company's 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
The Company is subject to concentration of credit risk with respect to
contract receivables. Credit risk on contract receivables is mitigated by the
nature of the Company's worldwide customer base and its credit policies. The
Company's 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 the Company's 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 the Company's revenues. No single customer accounted for a significant
(greater than 10%) amount of the Company's 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, the Company enters into forward exchange contracts,
options and swaps as hedges against certain foreign currency commitments. The
Company also enters into letters of credit and performance guarantees in the
ordinary course of business as required by certain contracts and proposal
requirements. The Company does 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, the Company minimizes such risk exposure by limiting
counterparties to nationally recognized financial institutions. Foreign exchange
options contracts permit but do not require the Company 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, the Company will adopt 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 the Company's consolidated
financial statements.
3. Acquisitions and dispositions
Acquisitions
In April 1999, the Company completed two acquisitions for the Process
business unit using the purchase method of accounting. The Company 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 equipment) $ 481
Trade receivables 45
Property and equipment 22
------------
Total purchase price $ 548
============
The Company 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, the Company acquired 100% of the outstanding common
stock of J.L. Ryan, Inc. ("Ryan") 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 the Company. The Company 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 the Company has recorded as additions to goodwill.
Dispositions
On November 30, 2000, the Company completed the sale of its GSE Process
Solutions N.V. subsidiary ("GSE Belgium") 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 GSE Belgium.
The aggregate purchase price for GSE Belgium was $1. The Company 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, the Company completed the sale of certain assets
related to activities of its Oil & Gas business unit ("O&G"), to Valmet
Automation (USA), Inc. ("Valmet"), pursuant to an Asset Purchase Agreement,
effective as of October 30, 1998, by and between the Company and Valmet. The
Company 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. The Company 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 O&G prior to the sale to
Valmet. See Note 18, Segment information, for historical revenues and business
unit contributionprovided by O&G during 1998.
In May 1998, the Company completed the sale of substantially all of the
assets of GSE Erudite Software, Inc. ("Erudite") to Keane, Inc. ("Keane"),
pursuant to an Asset Purchase Agreement, dated as of April 30, 1998, by and
among the Company, Erudite and Keane. The aggregate purchase price for the
Erudite assets was approximately $9.6 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. The Company recognized a gain
before income taxes on this transaction of $5.6 million. In connection with the
sale of these assets, the Company 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, the Company licensed certain of its simulation
software products to Avantium Technologies B.V. ("Avantium") 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, the Company and certain other holders of preferred shares
may, at their option, have their 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
("HSE&S") technologies for application in new product and process development in
pharmaceutical, petrochemical, fine chemical, biotechnology and polymers
industries. Avantium expects to develop HSE&S 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, the Company 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. The Company has delivered all elements of the software
and has no other obligations to Avantium, other than standard warranty. The
Company will account for its investment in Avantium using the cost method of
accounting based on management's conclusion that the Company does not have
significant influence with respect to the operations of Avantium. During the
year ended December 31, 2000, the Company 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 the Company earns performing services for its existing
customers.
As a result of the experience with Avantium in 2000, the Company 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 the GSE
VirtualPlant team would produce significant cost savings. Accordingly, in
November 2000, the Company signed a letter of intent to sell its VirtualPlant
business to Avantium. See Note 21, Subsequent events, for the details of the
sale which was sale which was finalized in 2001.
5. Contract receivables
Contract receivables represent balances due from a broad base of both
domestic and international customers. 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.
The Company has 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
The Company's 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
The Company has a $10.0 million bank line of credit (the "Credit
Facility") under which the Company and its subsidiaries, GSE Process Solutions,
Inc. and GSE Power Systems, Inc., are jointly and severally liable as
co-borrowers. The 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 the Company's 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 the Company's Credit
Facility. The Company is 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, the Company's available borrowing base was approximately $10
million, of which approximately $9.3 million had been utilized.
The loan and security agreement requires the Company to comply with certain
financial ratios and precludes the Company from paying dividends and making
acquisitions beyond certain limits without the bank's consent. At December 31,
2000, the Company was not in compliance with its minimum EBITDA (earnings before
interest, taxes, depreciation and amortization) covenant, its minimum working
capital covenant, its tangible net worth covenant or its 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 the Company 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, the
Company entered into four separate contracts with a customer for the lease of
certain hardware and software under 36-month leases. The Company has accounted
for the leases as sales-type leases. The Company 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 the Company remains
contingently liable for amounts due to the third-party financing company, the
remaining investment in and obligation under the financing leases are reflected
in the Company's 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, the Company 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, the Company 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 the Company's predecessors prior to the formation of the Company 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, management
considers 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. Management considers 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 the Company's Process and Power business units and projections for
taxable income in fiscal 2001, management believes it is more likely than not
that the Company 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, the Company 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 the Company's then existing credit facility,
the Company had arranged for certain guarantees to be provided on its behalf by
GP Strategies and ManTech. In consideration for these guarantees, the Company
granted each of ManTech and GP Strategies warrants to purchase shares of the
Company's common stock; each of such warrants provides the right to purchase
150,000 shares of the Company's common stock at $2.375 per share. In 1998, the
Company recorded $300,000 as the estimated fair value of such warrants in the
consolidated financial statements and amortized such value over the life of the
initial guarantee, which expired in June 1999. During 1999 and 1998, the Company
recognized expense related to these warrants totaling $120,000 and $180,000,
respectively.
14. Stock options
Long term incentive plan
During 1995, the Company established the 1995 Long-Term Incentive Stock
Option Plan (the "Plan"), which includes all officers, key employees and
non-employee members of the Company's Board of Directors. All options to
purchase shares of the Company's 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. The Company 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
The Company accounts 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," the Company's
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
The Company is 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, the Company was 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, the Company 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 the
Company is a party. In the opinion of management, the aggregate liabilities, if
any, arising from such actions are not expected to have a material adverse
effect on the financial position, results of operations or cash flows of the
Company.
16. Related party transactions
In the fourth quarter of 2000, the Company issued a demand promissory note
to ManTech International Corporation that allowed the Company to borrow up to
$1.8 million at an interest rate of prime plus one percent. As of December 31,
2000, the Company had borrowed $1.6 million, which was used for working capital.
The promissory note was secured by the Company's pledge of its equity interest
in Avantium International B.V., but such security interest was subordinate to
the first lien thereon by the Company's 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,
the Company issued a replacement promissory note in the amount of $2.1 million
to ManTech pursuant to which the Company's 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
GSE convertible preferred stock at a conversion rate of $100 per share, pending
shareholder approval. ManTech has agreed to subordinate the note to the
Company's credit facility.
In January 2000, the Company issued 116,959 shares of its common stock,
at fair value, to ManTech for $500,000. The proceeds of the stock issuance were
used for working capital.
17. Employee benefits
The Company has a qualified defined contribution plan that covers
substantially all U.S. employees under Section 401(k) of the Internal Revenue
Code. Under this plan, the Company's 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. The Company's 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
The Company's two reportable segments are its core business units Process
and Power. The Company's VirtualPlant business is reported under the Process
segment. The accounting policies of the segments are the same as those described
in Note 2, Summary of significant accounting policies. The Company is primarily
organized on the basis of these two business units. The Company has a wide range
of knowledge of control and simulation systems and the processes those systems
are intended to improve, control and model. The Company's knowledge is
concentrated heavily in the process industries, which include the chemicals,
food & beverage, and pharmaceuticals fields, as well as in the power generation
industry. The Process business unit is primarily engaged in process control and
simulation in a variety of commercial industries. Contracts typically range from
three to nine months. The Power business unit is primarily engaged in simulation
for the power generation industry, with the vast majority of customers being in
the nuclear power industry. Contracts typically range from 18 months to three
years.
The Company evaluates the performance of its 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 revenues for the Process segment includes revenues for the
Company's VirtualPlant and Belgian businesses of $7.6 million for the year ended
December 31, 2000. Business unit contribution for the Process 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 taxes $ (6,277) $ 334 $ 2,417
The Company designs, develops and delivers business and technology
solutions to the energy, process and manufacturing industries worldwide.
Revenue, operating income (loss) and identifiable assets for the Company's
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)
The Company's quarterly financial information has not been audited but,
in management's 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 200 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 inventory, a $990,000 loss
on the sale of the Company's Belgian 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, the Company sold its VirtualPlant business to Avantium
International B.V. ("Avantium") purchased certain fixed assets and intellectual
property (including BatchCAD and BatchWizard software products) of the Company,
and employed certain personnel in both the US and the UK. GSE received 8% of
Avantium's stock, thus increasing its holdings in Avantium to approximately 18%.
GSE retains one seat on the supervisory board of Avantium. Also, the Company
licensed their process control and simulation software ("GSE Process Software")
exclusively to Avantium for the R&D market. This licensing arrangement includes
free updates to the GSE Process Software. In return, GSE received a royalty-free
license to use any upgrades of the GSE Process Software produced by Avantium in
the manufacturing market. GSE also received a royalty-free license to use and
produce upgrades of the BatchWizard software in the manufacturing market.
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 GSE's process control and simulation products.
31
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
The information required in response to Items 10, 11, 12 and 13 is hereby
incorporated by reference to the information under the captions "Election of
Directors", "Principal Executive Officers of the Company Who Are Not Also
Directors", "Executive Compensation", "Voting Securities and Principal
Stockholders", "Security Ownership of Management", and "Certain Related
Transactions" in the Proxy Statement for the Company's 2001 Annual Meeting of
Shareholders.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
----------------------------------------------------------------
(a)(1) List of Financial Statements
The following financial statements are included in Item 8:
GSE Systems, Inc. and Subsidiaries
Independent Auditors' Report
Report of Independent Accountants
Consolidated Balance Sheets as of December 31, 2000 and 1999
Consolidated Statements of Operations for the years ended December 31,
2000, 1999, and 1998
Consolidated Statements of Comprehensive Income (Loss) for the years
ended December 31, 2000, 1999, and 1998
Consolidated Statements of Changes in Stockholders' Equity for the
years ended December 31, 2000, 1999, and 1998
Consolidated Statements of Cash Flows for the years ended December 31,
2000, 1999, and 1998
Notes to Consolidated Financial Statements
(a)(2) List of Schedules
All other schedules to the consolidated financial statements are omitted
as the required information is either inapplicable or presented in the
consolidated financial statements or related notes.
(a)(3) List of Exhibits
The Exhibits which are filed with this report or which are incorporated
by reference are set forth in the Exhibit Index hereto.
(b) Reports on Form 8-K:
No current report on Form 8-K was filed by the Registrant with the
Securities and Exchange Commission during the quarter ended December 31, 2000.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
GSE Systems, Inc.
By: / S / Chin-Our Jerry Jen
-------------------------------
Chin-Our Jerry Jen
Chief Operating Officer and President
Pursuant to the requirements of the Securities Act, this report has been signed
by the following persons in the capacities and on the dates indicated.
Date: March 31, 2001 / S / Chin-Our Jerry Jen
-----------------------------------------
Chin-Our Jerry Jen, Chief Operating Officer
and President
(Principal Executive Officer)
Date: March 31, 2001 / S / JEFFERY G. HOUGH
-------------------------------------------
Jeffery G. Hough, Senior Vice President
and Chief Financial Officer
(Principal Financial and Accounting Officer)
Date: March 31, 2001
(Jerome I. Feldman, Chairman of the Board) By:/ S / JEFFERY G. HOUGH
(Dr. Sheldon L. Glashow, Director) Jeffery G. Hough
(Scott N. Greenberg, Director) Attorney-in-Fact
(Joseph W. Lewis, Director)
(John A. Moore, Jr., Director)
(George J. Pedersen, Director)
A Power of Attorney, dated March 15, 2001, authorizing Jeffery G. Hough
to sign this Annual Report on Form 10-K for the fiscal year ended December 31,
2000 on behalf of certain of the directors of the Registrant is filed as Exhibit
24 to this Annual Report.
EXHIBIT INDEX
The following exhibits are either filed herewith or have been previously filed
with the Securities and Exchange Commission and are referred to and incorporated
by reference.
Exhibit
Exhibit Description of Exhibit Number Page
- ------------- ------------------------------------------------------------------
3. Articles of Incorporation and Bylaws
a. Second Amended and Restated Certificate of Incorporation of the
Company. 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.
b. Form of 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. Instruments Defining Rights of Security Holders, including Indenture.
a. 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.
10. Material Contracts
a. 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.
b. 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. *
c. 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. *
d. 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.
Exhibit
Exhibit Description of Exhibit Number Page
- ------------- -----------------------------------------------------------------
e. 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.
f. 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.
g. $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.
h. 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.
i. 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.
j. Subscription and Shareholders' Agreement by and among Avantium
International B.V., B.V. Licht en 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.
k. Software License and Intellectual Property Agreement between GSE
Systems, Inc. and Avantium International B.V. 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.
l. $2,100,000 Replacement Promissory Note dated 10.1 X-10.1
March 30, 2001 , from GSE Systems, Inc. to
ManTech Internation Corporation
m. Subordination and Intercreditor Agreement by and 10.2 X-10.2
between National Bank of Canada and ManTech
International Corporation, dated March 30, 2001.
n. Third Modification Agreement dated March 30, 2001 10.3 X-10.3
to the Loan and Sedurity Agreement among
GSE Systems,Inc., and National Bank of
Canada, dated March 23, 2000.
16. Letter regarding change in Certified Accountant
a. Letter from PricewaterhouseCoopers, 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. Subsidiaries.
a. List of Subsidiaries of Registrant at December 31, 2000. 21.1 X-21.1-1
Exhibit
Exhibit Description of Exhibit Number Page
- ------------- ------------------------------------------------------------------
23. Consents of Experts and Counsel
a. Consent of Independent Accountants. 23.1 X-23.1-1
b. Consent of Independent Accountants. 23.2 X-23.2-1
24. Power of Attorney
a. Power of Attorney for Directors'
and Officers' Signatures on SEC Form 10-K. 24.1 X-24.1-1
99. Additional Exhibits
a. Form of Right of First Refusal Agreement. 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.
* Management contracts or compensatory plans required to be filed as
exhibits pursuant to Item 14 (c) of this report.