Conformed
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the Quarterly Period Ended March 31, 2005.
or
[] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the Transition Period from _________to __________.
Commission File Number: 0-26494
GSE SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
Delaware 52-1868008
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
9189 Red Branch Road, Columbia Maryland, 21045
(Address of principal executive office and zip code)
Registrant's telephone number, including area code: (410) 772-3500
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [ X ] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [ X ]
As of May 2, 2005, there were 8,999,706 shares of the Registrant's common stock
outstanding.
GSE SYSTEMS, INC.
QUARTERLY REPORT ON FORM 10-Q
INDEX
PAGE
PART I. FINANCIAL INFORMATION 3
Item 1. Financial Statements:
Consolidated Balance Sheets as of March 31, 2005 and
December 31, 2004
Consolidated Statements of Operations for the Three Months Ended
March 31, 2005 and March 31, 2004 4
Consolidated Statements of Comprehensive Income (Loss)
for the Three Months Ended March 31, 2005 and March 31, 2004 5
Consolidated Statements of Cash Flows for the Three Months Ended
March 31, 2005 and March 31, 2004 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition 14
Item 3. Quantitative and Qualitative Disclosures About Market Risk 22
Item 4. Controls and Procedures 22
PART II. OTHER INFORMATION 23
Item 1. Legal Proceedings 23
Item 2. Changes in Securities and Use of Proceeds 23
Item 3. Defaults Upon Senior Securities 23
Item 4. Submission of Matters to a Vote of Security Holders 23
Item 5. Other Information 23
Item 6. Exhibits 23
SIGNATURES 24
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
GSE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
Unaudited
March 31, 2005 December 31, 2004
-------------- -----------------
ASSETS
Current assets:
Cash and cash equivalents $ 94 $ 868
Restricted cash 29 29
Contract receivables 8,574 8,723
Prepaid expenses and other current assets 916 819
---------- ----------
Total current assets 9,613 10,439
Equipment and leasehold improvements, net 578 596
Software development costs, net 885 909
Goodwill, net 1,739 1,739
Other assets 529 545
---------- ----------
Total assets $ 13,344 $ 14,228
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 703 $ 9
Accounts payable 3,108 2,998
Due to GP Strategies Corporation 571 291
Accrued expenses 1,355 1,608
Accrued compensation and payroll taxes 1,491 1,523
Billings in excess of revenue earned 578 1,079
Other current liabilities 187 273
---------- --------
Total current liabilities 7,993 7,781
Accrued warranty reserves 488 483
Other liabilities 17 19
---------- --------
Total liabilities 8,498 8,283
---------- ---------
Commitments and contingencies
Stockholders' equity:
Series A convertible preferred stock $.01 par value, 2,000,000 shares authorized,
no shares issued and outstanding - -
Common stock $.01 par value, 18,000,000 shares authorized, shares issued
and outstanding 8,999,706 and 8,949,706 in 2005 and 2004, respectively 90 89
Additional paid-in capital 30,915 30,815
Accumulated deficit - at formation (5,112) (5,112)
Accumulated deficit - since formation (20,086) (19,044)
Accumulated other comprehensive loss (961) (803)
---------- --------
Total stockholders' equity 4,846 5,945
---------- --------
Total liabilities and stockholders' equity $ 13,344 $ 14,228
========== ========
The accompanying notes are an integral part of these consolidated financial statements.
GSE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(Unaudited)
Three months ended
March 31,
------------------------
2005 2004
------------------------
Contract revenue $ 6,293 $ 7,561
Cost of revenue 5,238 5,784
---------- ----------
Gross profit 1,055 1,777
---------- ----------
Operating expenses:
Selling, general and administrative 1,830 1,238
Administrative charges from GP Strategies 171 246
Depreciation and amortization 77 69
---------- -----------
Total operating expenses 2,078 1,553
---------- -----------
Operating income (loss) (1,023) 224
Interest expense, net (17) (143)
Other expense, net (51) -
---------- -----------
Income (loss) before income taxes (1,091) 81
Provision (benefit) for income taxes (49) 17
----------- -----------
Net income (loss) $(1,042) $ 64
=========== ===========
Basic earnings (loss) per common share: $ (0.12) $ 0.01
=========== ===========
Diluted earnings (loss) per common share: $ (0.12) $ 0.01
=========== ===========
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)
(Unaudited)
Three months ended
March 31,
---------------------------
2005 2004
--------- ----------
Net income (loss) $ (1,042) $ 64
Foreign currency translation adjustment (158) (41)
--------- ----------
Comprehensive income (loss) $ (1,200) $ 23
========= ==========
The accompanying notes are an integral part of these consolidated financial statements.
GSE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
Three months ended
March 31,
-------------------------------
2005 2004
------------ --------------
Cash flows from operating activities:
Net income (loss) $ (1,042) $ 64
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization 192 154
Changes in assets and liabilities:
Contract receivables 149 248
Prepaid expenses and other assets (97) 203
Accounts payable, accrued compensation and accrued expenses (320) (217)
Due to GP Strategies Corporation 280 347
Billings in excess of revenues earned (520) (980)
Accrued warranty reserves 8 51
Other liabilities (43) (28)
------------- ---------------
Net cash used in operating activities (1,393) (158)
------------- ---------------
Cash flows from investing activities:
Capital expenditures (67) (16)
Capitalized software development costs (91) (97)
Releases of cash as collateral under letters of credit - (39)
------------- ---------------
Net cash used in investing activities (158) (152)
------------- ---------------
Cash flows from financing activities:
Borrowings under line of credit 700 -
Proceeds from issuance of common stock 100 -
Other financing activities, net (6) (8)
------------- ----------------
Net cash provided by (used in) financing activities 794 (8)
------------- ----------------
Effect of exchange rate changes on cash (17) (8)
------------- ----------------
Net decrease in cash and cash equivalents (774) (326)
Cash and cash equivalents at beginning of year 868 1,388
------------- ----------------
Cash and cash equivalents at end of period $ 94 $ 1,062
============= ================
The accompanying notes are an integral part of these consolidated financial statements.
GSE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Three Months ended March 31, 2005 and 2004
(Unaudited)
1. Basis of Presentation and Revenue Recognition
The consolidated financial statements included herein have been prepared by
GSE Systems, Inc. (the "Company" or "GSE") without independent audit. In the
opinion of the Company's management, all adjustments and reclassifications of a
normal and recurring nature necessary to present fairly the financial position,
results of operations and cash flows for the periods presented have been made.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with U.S. generally accepted accounting
principles have been condensed or omitted. These consolidated financial
statements should be read in conjunction with the consolidated financial
statements and notes thereto included in the Company's Annual Report on Form
10-K for the period ended December 31, 2004 filed with the Securities and
Exchange Commission on March 17, 2005.
The Company has only one reportable segment. The Company has a wide range
of knowledge of simulation systems and the processes those systems are intended
to control and model. The Company's knowledge is concentrated heavily in
simulation technology and model development. The Company is primarily engaged in
simulation for the power generation industry, the process industries, and the US
Government. The Company has a commanding competitive position in the nuclear
power industry with an installed capacity over two times all other competitors
combined. Contracts typically range from 18 months to three years. At March 31,
2005 GP Strategies Corporation ("GP Strategies") owned 57% of the Company's
common stock.
In the first quarter 2005, the Company incurred a significant operating
loss. The Company's revenue and profitability were impacted by the lower volume
of orders logged in 2004 coupled with the delay of two large international
simulator orders in the first quarter 2005. In addition, the Company has
continued to spend heavily on business development activities in order to expand
the Company's simulation business into new sectors, such as the US military and
homeland security markets. Accordingly, the Company's cash position has weakened
during the quarter, with total cash decreasing from $868,000 at December 31,
2004 to $94,000 at March 31, 2005. The Company has utilized $700,000 of its $1.5
million credit facility at March 31, 2005 and expects to increase the
utilization of its credit facility in the second quarter 2005. In order to help
improve the Company's liquidity and operating results, management terminated a
number of employees at the end of the first quarter 2005.
On March 9, 2005, General Physics received a waiver to loan GSE ("GSE
Loan") up to a maximum of $1.0 million that will be due and payable by no later
than June 9, 2006 and will be on such other terms and conditions as agreed upon
by General Physics and GSE. The GSE Loan would be reduced by any amounts owed by
GSE to GP Strategies and General Physics, primarily in connection with the
Management Services Agreement, which aggregated approximately $570,000 as of
March 31, 2005. Therefore, the availability under the GSE Loan would be
approximately $430,000. GSE is seeking additional debt and/or equity financing,
although there can be no assurance that such debt or equity financing will be
available. The Company has received assurances that GP Strategies expects to
support the Company with its short-term capital requirements as disclosed.
Additional financial support from GP Strategies would require Board of Director
and bank approval. The Company believes its financial resources and additional
financing availability is sufficient to meet its liquidity needs.
The Company's credit facility requires GSE to comply with certain financial
ratios. At March 31, 2005, GSE was not in compliance with its debt service
coverage ratio. The Company obtained a letter dated May 9, 2005 in which the
lender has agreed to forebear from exercising its rights under the credit
agreement against GSE with respect to this event of default by GSE until the
earlier to occur of (a) delivery of the quarterly financial statements for the
period ending June 30, 2005 or (b) August 15, 2005.
The majority of the Company's revenue is derived through the sale of
uniquely designed systems containing hardware, software and other materials
under fixed-price contracts. In accordance with Statement of Position 81-1
Accounting for Performance of Construction-Type and Certain Production-Type
Contracts, the revenue under these fixed-price contracts is accounted for on the
percentage-of-completion method. This methodology recognizes income as work
progresses on the contract and is based on an estimate of the income earned to
date, less income recognized in earlier periods. The Company bases its estimate
of the degree of completion of the contract by reviewing the relationship of
costs incurred to date to the expected total costs that will be incurred on the
project. 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 identified. Estimated losses are charged
against earnings in the period such losses
are identified.
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. The Company's long-term contracts
generally provide for a one-year warranty on parts, labor and any bug fixes as
it relates to software embedded in the systems.
The Company's system design contracts do not provide for "post customer
support service" (PCS) in terms of software upgrades, software enhancements or
telephone support. In order to obtain PCS, the customers must purchase a
separate contract. Such PCS arrangements are generally for a one-year period
renewable annually and include customer support, unspecified software upgrades,
and maintenance releases. The Company recognizes revenue from these contracts
ratably over the life of the agreements in accordance with Statement of Position
97-2 "Software Revenue Recognition".
Revenue from the sale of software licenses which do not require significant
modifications or customization for the Company's modeling tools are recognized
when the license agreement is signed, the license fee is fixed and determinable,
delivery has occurred and collection is considered probable.
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.
Contract receivables unbilled of $5.9 million and $4.3 million as of March
31, 2005 and December 31, 2004, respectively, are typically billed within sixty
days. In April, the Company billed $1.8 million of the unbilled amounts.
2. Basic and Diluted Earnings (Loss) Per Common Share
Basic earnings (loss) per share is based on the weighted average number of
outstanding common shares for the period. Diluted earnings (loss) per share
adjusts the weighted average shares outstanding for the potential dilution that
could occur if stock options, warrants or convertible preferred stock were
exercised or converted into common stock. The number of common shares and common
share equivalents used in the determination of basic and diluted earnings (loss)
per share were as follows:
(in thousands, except per share data)
Three months ended
March 31,
----------------------------
2005 2004
Numerator:
Net income (loss) $ (1,042) $ 64
========== ==========
Denominator:
Weighted-average shares outstanding for basic
earnings per share 8,996,373 8,949,706
Effect of dilutive securities:
Employee stock options, warrants and
options outside the plan - 67,399
---------- -----------
Adjusted weighted-average shares outstanding
and assumed conversions for diluted
earnings per share 8,996,373 9,017,105
========== ===========
Shares related to dilutive securities excluded
because inclusion would be anti-dilutive 1,361,338 1,728,276
========== ===========
The difference between the basic and diluted number of weighted average
shares outstanding for the three months ended March 31, 2004 represents dilutive
stock options and warrants to purchase shares of common stock computed under the
treasury stock method, using the average market price during the period.
Conversion of the stock options and warrants was not assumed for the three
months ended March 31, 2005 because the impact was anti-dilutive.
3. Software Development Costs
Certain computer software development costs are capitalized in the
accompanying consolidated balance sheets. Capitalization of computer software
development costs begins upon the establishment of technological feasibility.
Capitalization ceases and amortization of capitalized costs begins when the
software product is commercially available for general release to customers.
Amortization of capitalized computer software development costs is included in
cost of revenue and is determined using the straight-line method over the
remaining estimated economic life of the product, not to exceed five years.
Software development costs capitalized were $91,000 and $97,000 for the
quarters ended March 31, 2005 and 2004, respectively. Total amortization expense
was $115,000 and $86,000 for the quarters ended March 31, 2005 and 2004,
respectively.
4. Stock-Based Compensation
The Company applies the intrinsic-value-based method of accounting
prescribed by Accounting Principles Board (APB) Opinion No. 25, Accounting for
Stock issued to Employees, and related interpretations including FASB
Interpretation No. 44, Accounting for Certain Transactions involving Stock
Compensation, and interpretation of APB Opinion No. 25, issued in March 2000, to
account for its fixed-plan stock options. Under this method, compensation
expense is recorded on the date of grant only if the current market price of the
underlying stock exceeds the exercise price. SFAS No. 123, Accounting for
Stock-Based Compensation, established accounting and disclosure requirements
using a fair-value-based method of accounting for stock based employee
compensation plans. As allowed by SFAS No. 123, the Company has elected to
continue to apply the intrinsic-value-based method of accounting described
above, and has adopted only the disclosure requirements of SFAS No. 123.
If the computed values of all the Company's stock based awards were
calculated and expensed (over the vesting period of the awards) using the fair
value method specified under SFAS 123, net income (loss) would have been as
follows:
(in thousands, except per share data) Three months ended
March 31,
---------------------
2005 2004
----------- ---------
Net income (loss), as reported $ (1,042) $ 64
Add stock-based employee compensation expense
included in reported net income (loss) - -
Deduct total stock-based employee compensation
expense determined under fair-value-method
for all awards (672) (15)
---------- ----------
Pro forma net income (loss) $ (1,714) $ 49
========== ==========
Net income (loss) per share, as reported:
Basic $ (0.12) $ 0.01
Diluted $ (0.12) $ 0.01
Net income (loss) per share, proforma:
Basic $ (0.19) $ 0.01
Diluted $ (0.19) $ 0.01
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:
Three months ended
March 31,
--------------------
2005 2004
-------- --------
Risk- free interest rates 4.04% 2.40%
Dividend yield 0% 0%
Expected life 4.43 4.54
Volatility 74.57% 83.72%
Options with an average exercise price of $1.85 covering a total of 600,000
shares of common stock were granted to 47 employees in the first quarter 2005,
all of which immediately vested. No employee stock options were issued in the
first three months of 2004.
5. Long-term Debt
The Company's long-term debt consists of the following:
(in thousands) March 31, December 31,
2005 2004
------------- ------------------
Line of credit with bank $ 700 $ -
Note payable 3 9
------------- ------------------
Current portion of long-term debt $ 703 $ 9
============= ==================
Line of Credit
General Physics Corporation ("General Physics") is a wholly owned
subsidiary of GP Strategies. On March 30, 2004, the Company was added as an
additional borrower under the Financing and Security Agreement between General
Physics Corporation and a financial institution. Under the terms of the
agreement, $1.5 million of General Physics' available credit facility has been
carved out for use by GSE. The line is collateralized by substantially all of
the Company's assets and provides for borrowings up to 80% of eligible accounts
receivable and 80% of eligible unbilled receivables. The interest rate on this
line of credit is based upon the LIBOR Market Index Rate plus 3% (5.85% as of
March 31, 2005), with interest only payments due monthly. At March 31, 2005, the
Company's available borrowing base was $1.5 million, of which $700,000 had been
utilized. The credit facility expires on August 12, 2006.
The credit facility requires the Company to comply with certain financial
ratios. At March 31, 2005, the Company was not in compliance with its debt
service coverage ratio. The Company obtained a letter dated May 9, 2005 in
which the lender has agreed to forebear from exercising its rights under the
credit agreement against GSE with respect to this event of default by GSE until
the earlier to occur of (a) delivery of the quarterly financial statements for
the period ending June 30, 2005 or (b) August 15, 2005.
Note Payable, other
The Company has an unsecured promissory note payable to a former employee
with a remaining balance of $3,000 at March 31, 2005. The final payment on the
note was made in April 2005.
6. Series A Convertible Preferred Stock
The Series A convertible preferred stock had no voting rights and required
dividends at the rate of 6% per annum payable quarterly. Dividends accumulated
if not paid quarterly and compounded interest accrued on any unpaid dividends.
On October 23, 2003, ManTech International Corp. elected to convert all of its
39,000 shares of preferred stock to common stock in conjunction with the sale of
its ownership in the Company to GP Strategies. Thus, as of March 31, 2005 and
December 31, 2004, there are no shares of preferred stock outstanding. The
Company had accrued dividends payable of $366,000 as of March 31, 2005 and
December 31, 2004. Such amount accrues interest at the rate of 6% until paid.
7. Letters of Credit and Performance Bonds.
As of March 31, 2005, the Company was contingently liable for one letter of
credit totaling approximately $29,000. This letter of credit represents a
payment bond on a contract and has been cash collateralized and is classified as
restricted cash in the consolidated balance sheet. In addition, the Company was
contingently liable at March 31, 2005 for approximately $33,000 under a
performance bond on one contract which was secured by a cash-collateralized bank
guarantee of the Company's foreign subsidiary.
8. Income Taxes
The Company's effective tax rate was 4% and 21.0% for the three months
ended March 31, 2005 and March 31, 2004, respectively. The decrease in the
effective tax rate is attributable primarily to lower taxable income in Sweden.
For 2005 the Company's combined U.S. federal and state effective tax rate is
projected to be 24% and the Swedish effective tax rate is projected to be 33%.
The Company has an $8.7 million valuation allowance for all of the deferred tax
assets that are not related to its Swedish subsidary.
9. Administrative Charges from GP Strategies and Other Related Party
Transactions
On January 1, 2004, the Company entered into a Management Services
Agreement with GP Strategies Corporation in which GP Strategies agreed to
provide corporate support services to GSE, including accounting, finance, human
resources, legal, network support and tax. In addition, GSE uses the financial
system of General Physics, a subsidiary of GP Strategies. In 2004, GSE was
charged $685,000 ($171,250 per quarter) for GP Strategies' services. The
agreement has been extended through December 31, 2005 without an increase in the
fee. The agreement can be renewed for successive one-year terms.
In December 2003, GSE's Board of Directors elected John Moran, a GP
Strategies executive with experience in the power industry and simulation
technology, as Chief Executive Officer. Mr. Moran continued as a GP Strategies
employee throughout most of 2004, however, Mr. Moran devoted 100% of his time to
the performance of his duties as CEO of GSE. On December 16, 2004, Mr. Moran
became an employee of GSE. For the quarter ended March 31, 2004, GSE was charged
$75,000 by GP Strategies for Mr. Moran's compensation and benefits.
10. Commitments and Contingencies
In conjunction with the move of its Process Automation business to its
Columbia, Maryland facility in May 2003, the Company subleased most of its
vacated facility in Baltimore, Maryland to Alpharma USPD Inc. for a five-year
period, although Alpharma could terminate the lease at the end of the second
year provided a six-month notice was given. In October, 2004, Alpharma notified
the Company that they will terminate the sublease on April 30, 2005. The
Company's broker is actively seeking another subtenant, and management believes
that a subtenant will be found. However, if a subtenant is not found or the
terms of a new subtenant lease arrangement are not consistent with those of the
Alpharma lease, the Company may be required to record an additional charge
related to the lease for the vacated facility. The Company's lease expires in
July 2008; the annual rent is approximately $550,000, of which the Company
currently has a loss accrual of $165,000.
11. New Accounting Standards
In December 2004, the FASB issued SFAS No. 123 - Revised (SFAS No. 123R),
"Share-Based Payment", which revises SFAS No. 123, "Accounting for Stock-Based
Compensation", and supercedes APB No. 25, "Accounting for Stock Issued to
Employees." Currently, the Company does not record compensation expense for
certain stock-based compensation. Under SFAS No. 123R, the Company will measure
the cost of employee services received in exchange for stock, based on the
grant-date fair value (with limited exceptions) of the stock award. Such cost
will be recognized over the period during which the employee is required to
provide service in exchange for the stock award (usually the vesting period).
The fair value of the stock award will be estimated using an option-pricing
model, with excess tax benefits, as defined in SFAS No. 123R, being recognized
as an addition to paid in capital. SFAS No. 123R was to be effective as of July
1, 2005. However, on April 14, 2005, the Securities and Exchange Commission
announced that the effective date of SFAS 123R will be postponed until January
1, 2006, for calendar year companies. The Company is currently in the process of
evaluating the impact of SFAS No. 123R on its consolidated financial statements.
GSE SYSTEMS, INC. AND SUBSIDIARIES
FORM 10-Q
For the Three Months ended March 31, 2005 and 2004
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
GSE Systems, Inc. ("GSE Systems", "GSE" or the "Company") is a world leader
in real-time high fidelity simulation technology and model development. The
Company provides simulation solutions and services to the power generation
industry, the process industries, and the US Government. In addition, the
Company provides plant monitoring and signal analysis monitoring and
optimization software primarily to the power industry, and develops specialized
software applications for emerging technologies. The Company has only one
reportable segment. At March 31, 2005 GP Strategies Corporation ("GP
Strategies") owned 57% of the Company's common stock.
In the first quarter 2005, the Company incurred a significant operating
loss. The Company's revenue and profitability were impacted by the lower volume
of orders logged in 2004 coupled with the delay of two large international
simulator orders in the first quarter 2005. In addition, the Company has
continued to spend heavily on business development activities in order to expand
the Company's simulation business into new sectors, such as the US military and
homeland security markets. Accordingly, the Company's cash position has weakened
during the quarter, with total cash decreasing from $868,000 at December 31,
2004 to $94,000 at March 31, 2005. The Company has utilized $700,000 of its $1.5
million credit facility at March 31, 2005 and expects to increase the
utilization of its credit facility in the second quarter 2005. In order to help
improve the Company's liquidity and operating results, management terminated a
number of employees at the end of the first quarter 2005.
On March 30, 2004, the Company was added as an additional borrower under
the Financing and Security Agreement between General Physics Corporation and a
financial institution. Under the term of the agreement, $1.5 million of General
Physics' available credit facility has been carved out for use by GSE.
On March 9, 2005, General Physics received a waiver to loan GSE ("GSE
Loan") up to a maximum of $1.0 million that will be due and payable by no later
than June 9, 2006 and will be on such other terms and conditions as agreed upon
by General Physics and GSE. The GSE Loan would be reduced by any amounts owed by
GSE to GP Strategies and General Physics, primarily in connection with the
Management Services Agreement, which aggregated approximately $570,000 as of
March 31, 2005. Therefore, the availability under the GSE Loan would be
approximately $430,000. GSE is seeking additional debt and/or equity financing,
although there can be no assurance that such debt or equity financing will be
available. The Company has received assurances that GP Strategies expects to
support the Company with its short-term capital requirements as disclosed.
Additional financial support from GP Strategies would require Board of Director
and bank approval. The Company believes its financial resources and additional
financing availability is sufficient to meet its liquidity needs.
The Company's credit facility requires GSE to comply with certain financial
ratios. At March 31, 2005, GSE was not in compliance with its debt service
coverage ratio. The Company obtained a letter dated May 9, 2005 in which the
lender has agreed to forebear from exercising its rights under the credit
agreement against GSE with respect to this event of default by GSE until the
earlier to occur of (a) delivery of the quarterly financial statements for the
period ending June 30, 2005 or (b) August 15, 2005.
On January 1, 2004, the Company entered into a Management Services
Agreement with GP Strategies Corporation in which GP Strategies agreed to
provide corporate support services to GSE, including accounting, finance, human
resources, legal, network support and tax. In addition, GSE uses the financial
system of General Physics, a subsidiary of GP Strategies. In 2004, GSE was
charged $685,000 ($171,250 per quarter) for GP Strategies' services. The
agreement has been extended through December 31, 2005 without an increase in the
fee. The agreement can be renewed for successive one-year terms.
In conjunction with the move of its Process Automation business to its
Columbia, Maryland facility in May 2003, the Company subleased most of its
vacated facility in Baltimore, Maryland to Alpharma USPD Inc. for a five-year
period, although Alpharma could terminate the lease at the end of the second
year provided a six-month notice was given. In October, 2004, Alpharma notified
the Company that they will terminate the sublease on April 30, 2005. The
Company's broker is actively seeking another subtenant, and management believes
that a subtenant will be found. However, if a subtenant is not found or the
terms of a new subtenant lease arrangement are not consistent with those of the
Alpharma lease, the Company may be required to record an additional charge
related to the lease for the vacated facility. The Company's lease expires in
July 2008; the annual rent is approximately $550,000, of which the Company
currently has a loss accrual of $165,000.
Cautionary Statement Regarding Forward-Looking Statements
This report contains certain forward-looking statements. Any statements
contained herein that are not statements of historical facts may be deemed
forward-looking statements. These statements are based on management's current
beliefs and expectations and are subject to numerous risks and uncertainties and
changes in circumstances. Actual results may differ materially from these
forward-looking statements due to changes in global, economic, business,
governmental, technical, competitive, market and regulatory factors.
General Business Environment
The Company is positioned to take advantage of emerging trends in the power
industry. The operating licenses for numerous nuclear power plants will expire
over the next several years. Thirty plants received license extensions before
the end of 2004 and eighteen more have applications under review. Many plants
are also planning significant upgrades to the physical equipment and control
room technology in conjunction with the license extensions. Both will result in
the need to modify or replace the existing plant control room simulators. The
Company, having the largest installed base of existing simulators, is well
positioned to capture the majority of this business.
In the first quarter 2005, the Company completed an agreement with
Westinghouse Electric Company LLC to become their preferred vendor for the
development of simulators for the AP1000 reactor design. As a result of this
agreement, GSE will work closely with Westinghouse to finalize the verification
and validation of the AP1000 Reactor Human-Machine Interface for the Main
Control Room. GSE expects to spend $250,000 in 2005 on developing simulation
models for the AP1000 Reactor. In turn, Westinghouse and GSE will collaborate on
new opportunities both internationally and domestically.
In 2004, the Company developed strategic relationships with two companies
in China to better position itself to take advantage of the opportunities in
nuclear power in this region of the world. Over the next ten years, China
expects to build 20 new nuclear power plants utilizing Western technology. Most
of these new plants will require a stand alone simulator for which the Company
is best qualified to supply.
The Company continues to focus on the fossil power segment of the power
industry. In the first quarter 2005, the Company logged new fossil orders of
approximately $1.0 million. The Company expects continued growth in this market
segment and is focusing on second time simulation buyers that now demand the
more sophisticated and realistic simulation models offered by the Company.
While GSE simulators are primarily utilized for power plant operator
training, the uses are expanding to include engineering analysis, plant
modification studies, and operation efficiency improvements for both nuclear and
fossil utilities. During plant construction, simulators are used to test control
strategies and ensure on-time start-up. After commissioning, the same tools can
be used to increase plant availability and optimize plant performance for the
life of the facility. In partnership with an industry leading optimization
company, GSE will be participating in DOE grant programs to utilize simulation
and optimization for DOE's clean coal power initiative.
The Company continues to invest heavily in developing business with the US
government and in particular its military component. There are two areas of
emphasis in this market - Homeland Security and Military Defense simulation. In
Homeland Security, the Company has turned its attention to opportunities for
simulation in disaster recovery and terrorist threat response. In the first
quarter 2005, the Company continued development of its REMITS product used to
simulate the operation of Emergency Operations Centers (EOC) run by municipal
and state governments. REMITS is a Real-time Emergency Management Interactive
Training System designed to simulate emergency situations and enable EOC staffs
to train without requiring human participation in the field. REMITS enables the
EOC staff to stay current with the technology and enables instructors to
introduce new problems and challenges during the exercise to test the EOC staff
response to changing situations. As the Federal Government spends billions in
first responder training, the Company believes its REMITS product will find a
large market in the developing field of training for disaster recovery and
terrorist threat response. The Company is currently installing REMITS with the
State of Nevada EOC as a Beta site. There is no certainty that REMITS will have
a materially positive impact upon the Company's future performance.
With regard to military defense simulation, the Company continues to
execute its plan to capitalize on what is clearly recognized as the biggest
simulation spender in the world, the US Military. In the first quarter 2005, the
Company executed over $500,000 in simulation work for the US Navy on their
nuclear propulsion program. The Navy selected GSE's technology for this program
which is expected to extend through the year 2025.
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:
(in thousands) Three months ended March, 31
2005 % 2004 %
------- ------ ------- -------
Contract revenue $ 6,293 100.0 % $ 7,561 100.0 %
Cost of revenue 5,238 83.2 % 5,784 76.5 %
------- ------ ------- -------
Gross profit 1,055 16.8 % 1,777 23.5 %
------- ------ ------- -------
Operating expenses:
Selling, general and administrative 1,830 29.2 % 1,238 16.4 %
Administrative charges from GP Strategies 171 2.7 % 246 3.2 %
Depreciation and amortization 77 1.2 % 69 0.9 %
------- ------ ------- -------
Total operating expenses 2,078 33.1 % 1,553 20.5 %
------- ------ ------- --------
Operating income (loss) (1,023) (16.3)% 224 3.0 %
Interest expense, net (17) (0.2)% (143) (1.9)%
Other expense, net (51) (0.8)% - 0.0 %
------- ------ ------- --------
Income (loss) before income taxes (1,091) (17.3)% 81 1.1 %
Provision (benefit) for income taxes (49) (0.7)% 17 0.3 %
------- ------ ------- -------
Net income (loss) $(1,042) (16.6)% $ 64 0.8 %
======= ====== ======= =========
Critical Accounting Policies and Estimates
In preparing the Company's financial statements, management makes several
estimates and assumptions that affect the Company's reported amounts of assets,
liabilities, revenue and expenses. Those accounting estimates that have the most
significant impact on the Company's operating results and place the most
significant demands on management's judgment are discussed below. For all of
these policies, management cautions that future events rarely develop exactly as
forecast, and the best estimates may require adjustment.
Revenue Recognition on Long-Term Contracts. The Company uses the
percentage-of-completion revenue recognition methodology to record revenue under
its long-term fixed-price contracts in accordance with the AICPA Statement of
Position 81-1, Accounting for Performance of Construction-Type and Certain
Production-Type Contracts. This methodology recognizes income as work progresses
on the contract and is based on an estimate of the income earned to date, less
income recognized in earlier periods. The Company bases its estimate of the
degree of completion of the contract by reviewing the relationship of costs
incurred to date to the expected total costs that will be incurred on the
project. The Company's project managers are responsible for estimating the costs
to be incurred at the beginning of each project and are responsible for updating
the estimate monthly as the project progresses. Management reviews the status of
each project monthly with the project managers and determines whether the cost
estimates are reasonable. If changes in the estimated costs to complete the
projects are required, the cumulative impact on the percentage of completion
revenue calculation is recognized in the period identified. Whenever evidence
indicates that the estimated total cost of a contract will exceed its total
contract value, the Company's operating results are charged for the full amount
of the estimated losses immediately. Uncertainties inherent in the performance
of contracts include labor availability and productivity, material costs, change
order scope and pricing, software modification issues and customer acceptance
issues. The reliability of these cost estimates is critical to the Company's
revenue recognition as a significant change in the estimates can cause the
Company's revenue and related margins to change significantly from the amounts
estimated in the early stages of the project.
Capitalization of Computer Software Development Costs. In accordance with
Statement of Financial Accounting Standards (SFAS) No. 86 Accounting for the
Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed, the
Company capitalizes computer software development costs incurred after
technological feasibility has been established, but prior to the release of the
software product for sale to customers. Once the product is available to be
sold, the Company begins to amortize the costs over the estimated useful life of
the product, which normally ranges from three to five years. At March 31, 2005,
the Company has net capitalized software development costs of $885,000. On an
annual basis, and more frequently as conditions indicate, the Company assesses
the recovery of the unamortized software computer costs by estimating the net
undiscounted cash flows expected to be generated by the sale of the product. If
the undiscounted cash flows are not sufficient to recover the unamortized
software costs the Company will write-down the investment to its estimated fair
value based on future discounted cash flows. The excess of any unamortized
computer software costs over the related net realizable value is written down
and charged to operations. Significant changes in the sales projections could
result in an impairment with respect to the capitalized software that is
reported on the Company's balance sheet.
Deferred Income Tax Valuation Allowance. Deferred income taxes arise from
temporary differences between the tax bases of assets and liabilities and their
reported amounts in the financial statements. As required by SFAS No. 109
Accounting for Income Taxes, management makes a regular assessment of the
realizability of the Company's deferred tax assets. In making this assessment,
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 taxable income of the Company in making this assessment. A valuation
allowance is recorded to reduce the total deferred income tax asset to its
realizable value. At March 31, 2005, the Company's largest deferred tax asset
related to a U.S. net operating loss carryforward of $16.1 million which expires
in various amounts over the next twenty years. The amount of loss carryforward
which can be used by the Company may be limited to approximately $500,000
annually. Other than the net deferred tax assets that are related to the
Company's Swedish subsidiary, the recovery of the net deferred tax asset could
not be substantiated by currently available objective evidence. Accordingly, the
Company has established an $8.7 million valuation allowance for the deferred tax
assets that are not related to the Swedish subsidiary. The valuation allowance
will be reduced if the Company's US operations are able to realize taxable
income in the future.
Results of Operations - Three Months ended March 31, 2005 versus Three Months
ended March 31, 2004.
Contract Revenue. Total contract revenue for the quarter ended March 31,
2005 totaled $6.3 million, which was 16.8% lower than the $7.6 million total
revenue for the quarter ended March 31, 2004. The decrease reflects the lower
order volume logged in 2004. At March 31, 2005, the Company's backlog was $16.3
million of which approximately $9.4 million is expected to be recognized as
revenue in the next nine months.
Gross Profit. Gross profit totaled $1.1 million for the quarter ended March
31, 2005 versus $1.8 million for the same quarter in 2004. As a percentage of
revenue, gross profit decreased from 23.5% for the three months ended March 31,
2004 to 16.8 % for the three months ended March 31, 2005. The decrease in gross
profit is mainly attributable to the lower revenue base to recover the Company's
relatively fixed overhead costs.
Selling, General and Administrative Expenses. Selling, general and
administrative ("SG&A") expenses totaled $1.8 million in the quarter ended March
31, 2005, a 47.8% increase from the $1.2 million for the same period in 2004.
Business development costs increased from $572,000 in the first quarter 2004 to
$939,000 in the first quarter 2005. The Company continued to expand its business
development organization throughout 2004 and into the first quarter of 2005,
adding an additional five employees between the first quarter 2004 and the first
quarter 2005. In addition, the Company incurred higher bidding and proposal
costs in the pursuit of new orders. The Company's corporate and G&A expenses
totaled $737,000 in the first quarter 2005, which was essentially the same as in
the first quarter 2004. Gross spending on software product development
("development") totaled $144,000 in the quarter ended March 31, 2005 as compared
to $94,000 in the same period of 2004. The Company anticipates that its gross
development spending in 2005 will approximate the same level as 2004.
The Company capitalized $91,000 of development expenditures in the three
months ended March 31, 2005 as compared to $97,000 in the same period of 2004.
The Company's development expenditures in 2005 were related to:
*Additional enhancements to JADE (Java Applications & Development
Environment), a Java-based application that provides a window into the
simulation station and takes advantage of the web capabilities of Java,
allowing customers to access the simulator and run scenarios from anywhere
they have access to the web. JADE 3.0 was released in April 2005.
*The development of new functionality for the Company's Jtools software
modeling tools.
*The continued development of the Company's REMITS product used to simulate
the operation of Emergency Operations Centers (EOC) run by municipal and
state governments.
At the end of the first quarter 2005, the Company implemented a staff
reduction; SG&A expense reflects $100,000 of accrued severance none of which had
been paid at March 31, 2005.
Administrative Charges from GP Strategies. On January 1, 2004, the Company
entered into a Management Services Agreement with GP Strategies Corporation in
which GP Strategies agreed to provide corporate support services to GSE,
including accounting, finance, human resources, legal, network support and tax.
In addition, GSE uses the financial system of General Physics, a subsidiary of
GP Strategies. In 2004, GSE was charged $685,000 ($171,250 per quarter) for GP
Strategies' services. The agreement has been extended through December 31, 2005
without an increase in the fee. The agreement can be renewed for successive
one-year terms.
In December 2003, GSE's Board of Directors elected John Moran, a GP
Strategies executive with experience in the power industry and simulation
technology, as Chief Executive Officer. Mr. Moran continued as a GP Strategies
employee until December 15, 2004 when he became a GSE employee. In 1Q 2004, GSE
was charged $75,000 by GP Strategies for Mr. Moran's compensation and benefits.
Depreciation and Amortization. Depreciation expense totaled $77,000 and
$69,000 during the quarters ended March 31, 2005 and 2004, respectively.
Operating Income (Loss). The Company had an operating loss of $1.0 million
(16.3% of revenue) in the first quarter 2005, as compared with operating income
of $224,000 (3.0% of revenue) for the same period in 2004. The variances were
due to the factors outlined above.
Interest Expense, Net. Net interest expense decreased from $143,000 in the
quarter ended March 31, 2004 to $17,000 for the same quarter in 2005. In March
2003, GP Strategies extended their $1.8 million limited guarantee of the
Company's bank facility for a one-year period. In consideration for the
extension of the guarantee, the Company issued 150,000 shares of its common
stock to GP Strategies. The number of shares was calculated based upon a 10% fee
divided by the closing price of GSE's common shares on March 21, 2003. The cost
of the guarantee was amortized over the one-year period; GSE recognized $45,000
of interest expense in the first quarter 2004 which completed the amortization
of these costs.
The fees paid to the Company's financial institution as consideration for
the extension of the Company's credit facility for a one-year period beginning
March 23, 2003 were amortized over the one year extension. In the first quarter
2004, the Company recognized $94,000 of interest expense which completed the
amortization of these costs.
Provision (Benefit) for Income Taxes. The Company's effective tax rate was
4% and 21.0% for the three months ended March 31, 2005 and March 31, 2004,
respectively. The decrease in the effective tax rate is attributable primarily
to lower taxable income in Sweden. For 2005 the Company's combined U.S. federal
and state effective tax rate is projected to be 24% and the Swedish effective
tax rate is projected to be 33%. The Company has an $8.7 million valuation
allowance for all of its deferred tax assets that are not related to its Swedish
subsidiary.
Other Expense, Net. At March 31, 2005, the Company had foreign currency
contracts for sale of approximately $3.6 million Japanese Yen at fixed rates.
The contracts expire on various dates through May 2007. The Company has not
designated the contracts as hedges and, accordingly, has recorded the reduction
in estimated fair value of the contracts during the first quarter 2005 of
$54,000 in other expense. The estimated fair value of the contracts was $155,000
at March 31, 2005.
Liquidity and Capital Resources
As of March 31, 2005, the Company's cash and cash equivalents totaled
$94,000 compared to $868,000 at December 31, 2004.
Cash used in operating activities. For the three months ended March 31,
2005, net cash used in operating activities was $1.4 million, primarily due to
the Company's net loss. The only significant change in the Company's assets and
liabilities in 2005 was a decrease in billings in excess of revenues earned by
$520,000.
Net cash used in operating activities was $158,000 for the three months
ended March 31, 2004. The only significant change in the Company's assets and
liabilities during these three months was the decrease of billings in excess of
revenues earned by $980,000. In 2003, the Company had entered into a $6.0
million contract with a Mexican customer for a full scope simulator that allowed
the Company to invoice the customer for 20% of the contract upon the receipt of
the purchase order as an advance payment. The reduction in billings in excess of
revenues earned mainly reflects the completion of work which has reduced the
Company's liability to the customer for the advance payment.
Cash used in investing activities. Net cash used in investing activities
was $158,000 for the three months ended March 31, 2005, consisting of $91,000 of
capitalized software development costs and $67,000 of capital expenditures. The
Company expects to capitalize approximately $300,000 of software development
costs in 2005 and expects to spend approximately $200,000 on capital
expenditures.
Net cash used in investing activities was $152,000 for the quarter ended
March 31, 2004, consisting of $97,000 of capitalized software development costs,
$16,000 of capital expenditures and the reduction of a reserve against a
cash-collateralized letter of credit of $39,000. The letter of credit expired on
March 31, 2004 and the Company received the full cash collateral in April.
Cash provided by (used in) financing activities. In the three months ended
March 31, 2005, the Company generated $794,000 from financing activities. The
Company borrowed $700,000 from its bank line of credit and generated $100,000
from the conversion of employee stock options. The Company also paid down a note
payable by $6,000 during the quarter.
In the three months ended March 31, 2004, the Company used $8,000 in
financing activities related to the pay down of a note payable.
Credit Facilities
General Physics Corporation is a wholly owned subsidiary of GP Strategies.
On March 30, 2004, the Company was added as an additional borrower under the
Financing and Security Agreement between General Physics Corporation and a
financial institution. Under the terms of the agreement, $1.5 million of General
Physics' available credit facility has been carved out for use by GSE. The line
is collateralized by substantially all of the Company's assets and provides for
borrowings up to 80% of eligible accounts receivable and 80% of eligible
unbilled receivables. The interest rate on this line of credit is based upon the
LIBOR Market Index Rate plus 3% (5.85% as of March 31, 2005), with interest only
payments due monthly. At March 31, 2005, the Company's available borrowing base
was $1.5 million, of which $700,000 had been utilized. The credit facility
expires on August 12, 2006.
On March 9, 2005, General Physics received a waiver to loan GSE ("GSE
Loan") up to a maximum of $1.0 million that will be due and payable by no later
than June 9, 2006 and will be on such other terms and conditions as agreed upon
by General Physics and GSE. The GSE Loan would be reduced by any amounts owed by
GSE to GP Strategies and General Physics, primarily in connection with the
Management Services Agreement, which aggregated approximately $570,000 as of
March 31, 2005. Therefore, the availability under the GSE Loan would be
approximately $430,000. GSE is seeking additional debt and/or equity financing,
although there can be no assurance that such debt or equity financing will be
available. The Company has received assurances that GP Strategies expects to
support the Company with its short-term capital requirements as disclosed.
Additional financial support from GP Strategies would require Board of Director
and bank approval. The Company believes its financial resources and additional
financing availability is sufficient to meet its liquidity needs.
At March 31, 2005, the Company had foreign currency contracts for sale of
approximately $3.6 million Japanese Yen at fixed rates. The contracts expire on
various dates through May 2007. The Company has not designated the contracts as
hedges and, accordingly, has recorded the reduction in estimated fair value of
the contracts during the first quarter 2005 of $54,000 in other expense. The
estimated fair value of the contracts was $155,000 at March 31, 2005.
The Company's credit facility requires GSE to comply with certain financial
ratios. At March 31, 2005, GSE was not in compliance with its debt service
coverage ratio. The Company obtained a letter dated May 9, 2005 in which the
lender has agreed to forebear from exercising its rights under the credit
agreement against GSE with respect to this event of default by GSE until the
earlier to occur of (a) delivery of the quarterly financial statements for the
period ending June 30, 2005 or (b) August 15, 2005.
New Accounting Standards
In December 2004, the FASB issued SFAS No. 123 - Revised (SFAS No. 123R),
"Share-Based Payment", which revises SFAS No. 123, "Accounting for Stock-Based
Compensation", and supercedes APB No. 25, "Accounting for Stock Issued to
Employees." Currently, the Company does not record compensation expense for
certain stock-based compensation. Under SFAS No. 123R, the Company will measure
the cost of employee services received in exchange for stock, based on the
grant-date fair value (with limited exceptions) of the stock award. Such cost
will be recognized over the period during which the employee is required to
provide service in exchange for the stock award (usually the vesting period).
The fair value of the stock award will be estimated using an option-pricing
model, with excess tax benefits, as defined in SFAS No. 123R, being recognized
as an addition to paid in capital. SFAS No. 123R was to be effective as of July
1, 2005. However, on April 14, 2005, the Securities and Exchange Commission
announced that the effective date of SFAS 123R will be postponed until January
1, 2006, for calendar year companies. The Company is currently in the process of
evaluating the impact of SFAS No. 123R on its consolidated financial statements.
Item 3. Quantitative and Qualitative Disclosure about Market Risk
The Company's most significant market risk is changes in foreign currency
exchange rates. 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 utilizes various derivative financial instruments to manage
market risks associated with the fluctuations in foreign currency exchange
rates. It is the Company's policy to use derivative financial instruments to
protect against market risk arising in the normal course of business. The
Company monitors its foreign currency exposures to maximize the overall
effectiveness of its foreign currency positions. Principal currencies
hedged include the Euro and the Japanese yen. The Company's objectives for
holding derivatives are to minimize the risks using the most effective methods
to reduce the impact of these exposures. The Company minimizes credit exposure
by limiting counterparties to nationally recognized financial institutions.
The Company is also subject to market risk related to the interest rate on
its existing line of credit. As of March 31, 2005, such interest rate is based
on the Libor Market Index Rate plus 300 basis-points. A 100 basis-point change
in such rates during the quarter ended March 31, 2005 would have changed the
Company's interest expense by approximately $1,000.
Item 4. Controls and Procedures
As of the end of the period covered by this report, GSE management,
including the Chief Executive Officer and Chief Financial Officer, conducted an
evaluation of the effectiveness of the design and operation of the Company's
disclosure controls and procedures as defined in Exchange Act Rule 13a-15(e).
Based on that evaluation, the Chief Executive Officer and Chief Financial
Officer concluded that the Company's disclosure controls and procedures were
effective as of the date of that evaluation. There have been no significant
changes in internal controls, or in factors that could significantly affect
internal controls, subsequent to the date the Chief Executive Officer and Chief
Financial Officer completed their evaluation.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
In accordance with its conduct in the ordinary course of business, certain
actions and proceedings are pending to which the Company is a party. In the
opinion of management, the aggregate liabilities, if any, arising from such
actions are not expected to have a material adverse effect on the financial
condition of the Company.
Item 2. Changes in Securities and Use of Proceeds
None
Item 3. Defaults Upon Senior Securities
The Company's credit facility requires GSE to comply with certain
financial ratios. At March 31, 2005, GSE was not in compliance with its
debt service coverage ratio. The Company obtained a letter dated May 9,
2005 in which the lender has agreed to forebear from exercising its rights
under the credit agreement against GSE with respect to this event of
default by GSE until the earlier to occur of (a) delivery of the quarterly
financial statements for the period ending June 30, 2005 or (b) August 15,
2005.
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits
31.1 Certification of the Chief Executive Officer pursuant to Section 302 of the
Sarbanes- Oxley Act of 2002.
31.2 Certification of the Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 Certification of the Chief Executive Officer and Chief Financial Officer
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: May 16, 2005 GSE SYSTEMS, INC.
/S/ JOHN V. MORAN
John V. Moran
Chief Executive Officer
(Principal Executive Officer)
/S/ JEFFERY G. HOUGH
Jeffery G. Hough
Senior Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)