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, 2001
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
(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 8, 2002 was $21,422,354 based on closing price of such stock on that date.
Number of shares of Common Stock outstanding as of March 8, 2002: 5,869,138
DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates certain information by reference from the
Registrant's definitive proxy statement to be filed for its 2002 Annual Meeting
of Shareholders.
GSE SYSTEMS, INC.
FORM 10-K
For the Year Ended December 31, 2001
TABLE OF CONTENTS
PART I Page
Item 1. Business 3
Item 2. Properties.....................................................25
Item 3. Legal Proceedings..............................................25
Item 4. Submission of Matters to a Vote of Security Holders.......... 25
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters..........................................26
Item 6. Selected Financial Data........................................27
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations....................................28
Item 7A Quantitative and Qualitative Disclosures About Market Risk.... 40
Item 8. Financial Statements and Supplementary Data....................41
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure........................42
PART III
Item 10. Directors and Executive Officers of the Company*...............43
Item 11. Executive Compensation*........................................43
Item 12. Security Ownership of Certain Beneficial Owners
and Management*..............................................43
Item 13. Certain Relationships and Related Transactions*................43
PART IV
Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K..........................................44
SIGNATURES.....................................................45
Exhibits Index............................................... 46
* to be incorporated by reference from the Proxy Statement for the
registrant's 2002 Annual Meeting of Shareholders.
D/3(R), D/3 DCS(R), SABL(R), TotalVision(R) and RETACT(R) are registered
trademarks and GFLOW+TM, GLOGIC+TM, GCONTROL+TM, GPower+TM, SimSuite PowerTM,
SimSuite ProTM, SimExecTM, eXtreme I/STM, RACSTM, PEGASUS Plant Surveillance and
Diagnosis SystemTM, SIMONTM, Vista PINTM, VPTVTM, Java Applications &
Development Environment (JADE)TM and VPbatchTM are trademarks of GSE Systems,
Inc. All other trademarks used in this document are the property of their
respective owners.
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.
PART I
ITEM 1. BUSINESS.
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GSE Systems, Inc. ("GSE Systems", "GSE" or the "Company") is a world
leader in real-time power plant simulation and process automation and control.
The Company provides simulation solutions and services to the nuclear and fossil
electric utility industry, as well as process industries such as the chemical
and petrochemical industries. In addition, the Company provides plant
optimization and safety improvement software primarily to the power industry.
The Company's process automation products optimize batch and hybrid plant
control for the specialty chemical, food and beverage, and pharmaceutical
industries. The Company operates through two business segments, Power Simulation
and Process Automation.
In addition to these two core businesses, GSE has invested in the use of
simulation and control technologies to reduce the product development cycle for
the pharmaceutical and chemical industries through its participation in the
Netherlands-based company Avantium International BV.
Recent Developments.
Power Simulation Business
The Company's Power Simulation Business Unit ("Power") continued its
efforts to expand its leadership in nuclear simulation technology to the fossil
simulation marketplace. In 2000, GSE released its "G-Suite" software tools which
target fossil simulation applications. These tools elevate the level of
simulation beyond traditional training to allow the operator to optimize plant
performance. In 2001, GSE was awarded $3.1 million of new orders for fossil
simulators in the United States, including an award from American Electric Power
in March 2001 for two full-scope fossil training simulators, bringing GSE's
total fossil orders in the last two years to $9.6 million. In 2001, 21.7% of
Power's worldwide revenue was generated by fossil projects.
The deregulation of the electric power industry and the 2001 California
energy crisis underscored 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 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.
President Bush's National Energy Policy encourages the improvement of
nuclear plant operating performance from 90%, the current level, to 92%. In the
second quarter of 2001, GSE released several products using advanced signal
analysis techniques to help nuclear plants achieve this increase in operating
performance. GSE's Pegasus Plant Surveillance and Diagnosis System help
improve plant availability, safety and economy. Pegasus is a software package
for semi-automatic plant surveillance and diagnostics and enables site engineers
to perform detailed analysis for specified component faults, allowing the
identification of degraded performance and replacement of components before they
fail. SensBase provides comprehensive sensor test services, thus ensuring
that changes in transmitters and other instruments do not jeopardize the
function of the nuclear plant protection systems. BRUS, a noise analysis
program package, is a collection of signal analysis tools which allow users to
detect developing abnormalities in the plant.
In the latter part of 2001, the Company entered into two strategic
marketing alliances which are expected to help expand the Power business. The
first alliance is with General Physics Corporation, the leading supplier of
operator instructional training programs for the Power industry. Whereas GSE is
the leading manufacturer of operating training simulators for the Power
industry, the alliance with General Physics Corporation will allow a more
encompassing solution to both companies' client base and strengthen their
respective product lines. In addition to cooperating in marketing of individual
products, the companies will combine some of General Physics' extensive training
materials and programs with GSE's power plant simulation models to provide truly
interactive and adaptive total training solutions. GSE will also help sell
and distribute General Physics' GFE product to GSE's customer base.
The second alliance is with PowerGen's Simulator Training Systems Group, a
premier supplier of simulation systems and technology for Combined Cycle Gas
Turbine (CCGT) power plants. The Simulator Training Systems Group has developed
a range of distributed control system emulation tools necessary to effectively
simulate the control systems for fossil and nuclear power plants. GSE has the
extensive knowledge, models and tools necessary to simulate the functionality of
power plant systems. By combining the tool sets and jointly marketing this
capability worldwide, the companies believe they can both significantly expand
their offering and provide greater value to users in the nuclear, fossil and
CCGT power industry.
Process Automation Business
In order to return the Company's Process Control Business Unit ("Process")
to profitability, the Company implemented a restructuring plan in 2000 that
included personnel reductions, the outsourcing of Process' manufacturing and
assembly operations, and the November 2000 sale of Process' unprofitable
European operations based in Belgium. The restructuring was completed in the
first quarter 2001 with the sale of the Business Unit's VirtualPlant technology
and assets to Avantium International B.V. ("Avantium") in exchange for Avantium
stock.
To expand within its traditional customer base and gain new customers,
Process embarked upon a program to develop a lower-cost, next generation process
controller using the latest microprocessor technology. This new controller will
be part of the second quarter 2002 D/3 product release which will also include
enhanced alarming and improved security features. This new version of the D/3
product will allow the Company to bridge the cost gap between programmable logic
controllers (PLCs) and the distributed control systems while providing the
increased performance of a full-function distributed control system. This more
cost effective solution will enable existing customers to apply automation to
areas of their plants that could not previously afford the benefits of a full
distributed control system. The Company has initiated a campaign to find
expanded distribution channels for its new products, particularly in smaller,
batch applications where previously the power of the D/3 could not be cost
effectively applied.
Plant Security Business
In light of recent security concerns at nuclear plants and other sensitive
locations, the Company has begun marketing the technology it acquired several
years ago for plant access control and intrusion detection. The Company has
implemented its system at several nuclear power plants in the US and is pursuing
applications at other facilities. The system is a command and control center
that integrates information card readers, retinal scanners, closed circuit TV
and other field devices used for intrusion detection and personnel access
control. The Company has recently hired a manager to develop a business plan for
the expansion of this security business. The Company is also teaming with
ManTech Security Technologies Company, a subsidiary of one of its principle
shareholders, to provide turnkey capabilities to the nuclear industry. Services
include threat and vulnerability assessments, risk mitigation plans,
cost/benefit analysis, security system design, implementation, testing and
training.
The Company also believes it is uniquely qualified to apply its plant
design and operations knowledge as well as simulation technology to help
customers analyze security threats and develop strategies to test plant recovery
strategies in the event of an incident.
VirtualPlant Strategy
During 1999 and 2000, the Company created and implemented its VirtualPlant
business and marketing strategy. VirtualPlant combined simulation with control
systems to create a real-time representation of an operating manufacturing
plant. VirtualPlant would allow a customer to create an environment for
simulation-enhanced experimentation, thereby reducing the amount of physical
experimentation necessary to achieve an optimal design for a new process
product.
In February 2000, while implementing the VirtualPlant strategy, the
Company participated in the founding of Avantium International B.V. Avantium, a
Netherlands-based high technology company, employs high-speed experimentation
and simulation technologies in contract research and development in the area of
new product development and process chemistry. In connection with Avantium's
founding, the Company licensed certain of its simulation software and automation
system products in exchange for 251,501 shares of Avantium preferred stock and
352,102 shares of Avantium common stock, thus giving the Company a 10% equity
interest in Avantium. GSE was subsequently hired by Avantium to provide software
to automate and maximize Avantium's lab environment. Avantium also hired the
Company to make certain improvements and enhancements to the software it
licensed to Avantium.
In early 2000, GSE determined that outside investment was required to
support its VirtualPlant business, however, the Company was unsuccessful in
attracting the needed capital on acceptable terms. Accordingly, the Company sold
its VirtualPlant assets and technology to Avantium in March 2001. Avantium
purchased certain fixed assets and intellectual property (including the
Company's BatchCAD and BatchWizard software products) and employed certain of
the Company's personnel in the U.S. and the UK. GSE received 200,000 shares of
Avantium preferred stock and 280,000 shares of Avantium common stock, which
increased its equity interest in Avantium to approximately 19% and the carrying
value of its investment to $7.5 million. The Company licensed its process
control and simulation software exclusively to Avantium solely for the research
and development market. The Company received a royalty-free license to use and
produce upgrades of the BatchWizard Software owned by Avantium in the
manufacturing market.
On February 7, 2002 Avantium completed a private placement round of
financing which resulted in 20 million Euros in new capital and the conversion
of 11 million Euros of convertible debt. The equity issuance and debt conversion
diluted GSE's ownership in Avantium to 6.1%. The estimated fair market value of
Avantium following the financing was $47.4 million. Accordingly the Company
concluded that this transaction was evidence of "an other than temporary
decline" in the fair value of its investment in Avantium. Thus, in the fourth
quarter 2001, the Company wrote down its investment in Avantium to $2.9 million
and recognized a $4.6 million pre-tax charge.
Research and Development
Throughout the year, GSE continued to invest in its core products of D/3
Distributed Control System and Power simulation technology. As mentioned above,
the Company enhanced the capabilities of the D/3 through significant investment
in a lower-cost, next generation process controller using the latest
microprocessor technology. This new controller will be part of the second
quarter 2002 D/3 product release which will also include enhanced alarming
improved security features. GSE also invested in the development of a Windows
2000 version of its FlexBatch Recipe and Process Management software.
The Company has made significant progress in applying Java Technology on
its Power Simulation tools in 2001. The first release of the Java Instructor
Station has been implemented on two on-going full scope fossil simulators.
Additional tools are expected to be released in the third and fourth quarters of
2002.
Background.
GSE Systems was formed on March 30, 1994 to consolidate the simulation and
related businesses of S3 Technologies, General Physics International Engineering
& Simulation and EuroSim, each separately owned and operated by ManTech
International Corporation, GP Strategies Corporation and Vattenfall AB,
respectively. 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 facilitated 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 service 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 Simulation and Process Automation. 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.
In April 1999, the Company acquired certain assets and employed the
associates of BatchCAD Limited. The BatchCAD product was a key element in the
Company's VirtualPlant business and marketing strategy.
In early 2000, while implementing the VirtualPlant strategy, the Company
participated in the founding of Avantium International B.V. Avantium, a
Netherlands-based high technology company, employs high-speed experimentation
and simulation technologies in contract research and development in the area of
new product development and process chemistry. In connection with Avantium's
founding, the Company licensed certain of its simulation software and automation
system products in exchange for Avantium preferred and common stock. GSE was
subsequently hired by Avantium to provide software to automate and maximize
Avantium's lab environment. Avantium also hired the Company to make certain
improvements and enhancements to the software it licensed to Avantium.
In March 2001, the Company sold its VirtualPlant business to Avantium in
order to maximize its investment in the VirtualPlant strategy.
Power Simulation Business.
Industry
The real-time simulation industry grew from the need to train people on
complex and potentially dangerous operations, without placing life or capital
assets at risk. Real-time simulation has been used for the training of plant
operators for the power industry, including both nuclear power plants and
conventional fossil fuel power plants (i.e., coal, oil, and natural gas), since
the early 1970s. Real-time simulation usage has traditionally centered on
initial training of operators and follow-on training of operators in emergency
conditions that can best be achieved through simulation replicating actual plant
operations.
In the nuclear power industry, use of a simulator that accurately reflects
the current actual plant design is mandated by the U.S. Nuclear Regulatory
Commission. This mandate resulted from the investigation of the accident at the
Three Mile Island nuclear plant in 1979, which was attributed, at least in part,
to operator error. The NRC requires nuclear plant operators to earn their
licenses through simulator testing. Each nuclear plant simulator must pass a
certification program to ensure that the initial plant design and all subsequent
changes made to the actual plant control room or plant operations are accurately
reflected in the simulator. Plant operating licenses are tied to simulator
certification.
Full scope power plant simulators are a physical representation of the
entire plant control room. The control panels are connected to an input/output
(I/O) system, which converts analog electrical signals to digital signals
understood by the simulation computer. The simulation computer houses the
mathematical models, which simulate the physical performance of the power
plant's systems such as the reactor core, steam boiler, cooling water, steam
turbine, electrical generator, plant system controls and electrical distribution
systems. Partial scope simulators can be viewed as a subset of a full scope
simulator. Instead of simulating the entire performance of the power plant, a
partial scope simulator might represent one or two critical systems such as the
steam turbine and/or electrical generator operation.
In the past, training simulators had to strike a delicate balance between
providing an accurate engineering representation of the plant, while still
operating in "real-time" in order to provide effective training. As computing
power has increased, so too has the capacity of simulators to provide more
accurate plant representations in real-time based upon simulation models
developed from engineering design codes.
Simulation also is used to validate proposed plant equipment changes to
confirm the results of such changes, prior to making the change in the plant,
which can save time and money, as well as reduce the risk of unsafe designs, for
the utility.
Demand for new simulators in the nuclear power industry shifted to the
international market in the 1990s, as the domestic market was limited to
upgrades and replacement of existing simulators. However, the Company believes
that the new National Energy Policy's emphasis on the importance of nuclear
power to the U.S. energy supply may result in the extension of the useful lives
of U.S. nuclear power plants. Any service life extension of a nuclear power
plant is likely to require major upgrades to the plant's equipment and
technology, including its simulator.
Fossil fuel plant simulators are not required by law or regulation, but
are justified as a cost-effective approach to train operators on new digital
control systems being implemented at many fossil fuel power plants. The size,
complexity and price of a fossil plant simulator are much lower than for
simulators used for nuclear plants. Fossil plant simulators have traditionally
used lower fidelity (less sophisticated) mathematical models to provide an
approximate representation of plant performance. The demand for highly accurate
models did not exist in the early market for fossil simulators since the main
use of the simulator was to train operators on the functionality of distributed
control systems for plant start-up activities.
The deregulation of the power industry has forced utilities to view their
assets differently. Power plants must now be profit centers, and gaining the
maximum efficiency from the plant to become, or remain, competitive is a
paramount issue. The mindset of the operator has shifted, as plant operators now
must perform within narrower and narrower performance margins while still
maintaining safe operations. GSE now sees its fossil fuel plant customers
recognizing the benefits of high fidelity simulation models that provide highly
accurate representations of plant operations to help plant operators and
management determine optimal performance conditions.
Industry deregulation has also resulted in the consolidation and
redistribution of assets on a global basis. U.S. utilities are purchasing
generating assets around the world, and foreign utilities are investing in U.S.
assets, creating the need for real-time integration of plant information from a
variety of sources and a variety of legacy information systems in a
cost-effective manner. Dataquest estimated that the annual spending on
information technology for U.S. utilities in 2001 totaled $15.4 billion
(including $3.3 billion on software and $6.5 billion on services); such spending
is forecasted to increase to $22.5 billion in 2002. The Company is considering
either developing or acquiring technology that will enhance the ability of
disparate databases to communicate and provide rapid and customized information
across the plant.
According to the National Energy Policy, "To meet projected demand over
the next two decades, America must have in place between 1,300 and 1,900 new
electric plants. Much of this new generation will be fueled by natural gas.
However, existing and new technologies offer us the opportunity to expand
nuclear generation as well." More power plants will require new plant operators.
New plant operators will require more training programs. The Company believes
that more training programs will require more training tools, which will result
in more demand for power plant simulators and related products and services.
Therefore, the Company believes that these projections, if they come to fruition
in whole or even in part, represent a market opportunity for its real-time
simulation, plant optimization, asset management and condition monitoring
products and services.
GSE's solution
The Company's Power Simulation business is a leader in the development,
marketing and support of high fidelity, real-time, dynamic simulation software
for the electric utility industry. The Company has built or modified about 65 of
the approximately 75 full-scope simulators serving about 103 operating nuclear
power plants in the United States. Outside the United States, GSE has built or
modified about 73 of the approximately 167 full-scope simulators serving
approximately 329 operating nuclear power plants.
In addition to operator training, the Company's simulation products and
services permit plant owners and operators to simulate the effects of changes in
plant configuration and performance conditions to optimize plant operation.
These features allow the Company's customers to understand the cost implications
of replacing a piece of equipment, installing new technology or holding
out-of-service assets. GSE has also developed a suite of tools based on
sophisticated signal analysis and simulation techniques to help its customers
manage their assets by determining equipment degradation before it severely
impacts plant performance.
The Company has also focused on upgrading older technology used in power
plants to the Microsoft Windows NT platform and has successfully deployed such
new technology upgrades for plant process computers, safety parameter display
systems, and plant access security systems. As nuclear plants in the U.S.
continue to age, the Company will seek more business in this upgrade market.
GSE provides both turnkey solutions, including simulated hardware and
proprietary software, to match a specific plant, and discrete simulation
technology for specific uses throughout a plant. Its substantial investment in
simulation technology has led to the development of proprietary software tools.
These tools significantly reduce the cost and time to implement simulation
solutions and support long-term maintenance. The Company's high fidelity,
real-time simulation technology for power plant fluid, logic and control,
electrical systems and associated real time support software, "SimSuite Power",
is available for UNIX and Windows NT computer platforms. This technology is
specifically designed to provide user friendly graphic interfaces to the
Company's high fidelity simulator.
In addition to the simulator market, the Company offers products aimed at
improving performance of existing plants by reducing the number of unplanned
outages due to equipment failure. Using advanced signal analysis techniques, the
Company's tools can predict when certain plant equipment needs to be replaced.
Replacement of critical equipment prior to failure permits effective planning
and efficient use of maintenance time during scheduled off-line periods. In the
future, the Company will apply this technology to its process control systems to
help customers better manage plant assets.
Other products of the Power Simulation business include:
Java Applications & Development Environment (JADE), a Java-based
application that provides a window into the simulation instructor station
and takes advantage of the web capabilities of Java, allowing customers to
access the simulator and run simulation scenarios from anywhere they have
access to the web.
SimExec, a Windows NT-based real-time simulation executive system that
controls all real-time simulation activities and allows for an off-line
software development environment in parallel with the training environment.
eXtreme I/S, a Windows NT-based Instructor Station that allows the use
of Microsoft Word and PowerPoint to control the real-time simulation
environment. eXtreme I/S is a user-friendly tool for classroom training and
electronic report generation. It provides real-time plant performance
directly from the simulator during classroom training, which drastically
increases learning efficiency.
Pegasus Surveillance and Diagnosis System, a software package for
semi-automatic plant surveillance and diagnostics, incorporates
sophisticated signal processing and simulation techniques to help operators
evaluate the condition and performance of plant components. Pegasus permits
plant management to identify degraded performance and replace components
before they fail.
SIMON, a computer workstation system used for monitoring stability of
boiling water reactor plants. SIMON assists the operator in determining
potential instability events, enabling corrective action to be taken to
prevent unnecessary plant shutdowns.
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 Power Simulation business also provides consulting and engineering
services to help users plan, design, implement, and manage/support simulation
and control systems. Services include application engineering, project
management, training, site services, maintenance contracts and repair.
Strategy
The goal of the Power Simulation business is to expand its business on
three fronts. First, it intends to continue serving its traditional customer
base and to be prepared to meet increased demand if traditional simulation use
grows in relation to increased electric capacity in the United States. Second,
it intends to market its existing and upgraded simulation products and its newly
developed signal analysis products as plant optimization, asset management and
condition monitoring tools. And, third, it intends to leverage its existing
engineering staff to provide additional services to domestic and international
clients.
Traditional Simulation Market. The National Energy Policy considers
nuclear power a key component of the power supply in the United States. Nuclear
power currently accounts for about 20% of the electrical power grid capacity in
the United States and the NEP indicates that this percentage will likely remain
the same even as total capacity increases. Any new nuclear power plants will
likely be of the advanced reactor designs created by Westinghouse, General
Electric and ABB, or the new pebble-bed gas cooled reactor under construction by
a consortium of companies. These new designs require new simulators and training
programs, as they are different from the nuclear power plant designs currently
in operation. In addition to new power plants, if any, under the NEP, existing
nuclear power plants will likely be required to remain on-line for a longer
period than originally expected. In order to stay in operation, many plants will
require life extension modifications. Since all existing nuclear power plants
went on-line before 1979, their designs and technology can also benefit from the
substantial advances in plant design and technology developed over the past 20
years. For example, several of the Company's U.S. utility customers are
considering replacing their existing hard panel control rooms with modern
distributed control systems as are common in fossil fuel plants, and which have
been implemented in Europe for several years. Significant changes to control
room instrumentation generally require modification or replacement of the plant
simulator. With the largest installed base of nuclear plant simulators in the
world, the Company believes it is uniquely positioned to serve this market
segment with new simulation products and services.
Another component of the National Energy Policy is to "up-rate" the
existing capacity to increase electrical yield without building new power
plants. By changing the capacity of certain equipment in a plant, the utility
can gain upwards of a 10% increase in output. Again, any such changes must be
reflected in the control room simulator, and operators must be trained on the
new equipment before implementation.
In addition to the new demand for power in the United States, several
emerging regions of the world are expanding their electrical capacity with both
nuclear and fossil fuel power plants. The Company believes this expansion
includes the need for integrated simulation and training programs and has
developed products that will enable it to exploit the fossil fuel simulation
marketplace. GSE is increasing its marketing efforts in this area. It has
increased the number of bids submitted for fossil simulators over the past
eighteen months and has increased the number of orders obtained, including a
multi-million dollar order for a full-scope fossil plant simulator in India in
2000.
Simulation Beyond Training. The Company believes that the deregulation of
the electric power industry has increased the importance of efficient and
reliable operation of power plants. In addition to operator training, the
Company's simulation products can meet this increased need for efficiency by
assisting plant operators in understanding the cost implications of replacing
equipment, installing new technology and maintaining out-of-service assets. In
order to exploit this potential, the Company has increased the fidelity of its
simulation products and is marketing its services to increase the fidelity of
simulators that are already in operation.
As computing power and networking technologies improve, several of the
Company's customers have started to migrate simulation technology from the
training organization to the engineering organization. The same full scope
simulation software that drives the simulated control room panels in a simulator
can be used with graphical representations of the panels so engineers can test
design changes and see how the balance of the plant will react to such changes.
GSE has developed a Java-based application to allow customers easier access to,
and use of, the simulation capabilities across the organization through network
communication.
Optimize Existing Engineering Resources. GSE's Power domestic service
organization focuses on simulator upgrades and retrofits. This group employs
over 20 engineers, and the Company employs over 60 engineers in the United
States capable of servicing the upgrade/retrofit market. In addition to domestic
resources, GSE has developed a network of trained engineers in Russia, Ukraine,
Czech Republic, Bulgaria, India and China. These foreign resources provide low
cost engineering and software development capabilities and are readily available
to supplement the United States engineering staff as necessary.
In addition, the Power Simulation business has grown through acquisitions
and will continue to pursue acquisitions and investment opportunities that will
create value and enhance cash flow. The Company targets acquisitions and
investments that provide:
Cost saving opportunities
Enhanced positioning in existing markets
Entry into new geographic and industry markets
Turnaround opportunities for under-performing businesses
Strategic Alliances
Power's strategic alliances have enabled the Company to penetrate regions
outside the United States by combining the Company's technological expertise
with the regional presence and knowledge of local market participants. These
strategic alliances have also permitted the reduction of research and
development and marketing costs by sharing such costs with other companies.
In recent years, an increasing amount of the Company's international
business has come from contracts in Eastern Europe, including the republics of
the former Soviet Union, the Pacific Rim and India. In order to acquire and
perform these contracts, 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 the Institute for
Information Industry (Taiwan).
In addition to traditional partners, GSE has developed a marketing
cooperation arrangement with the Power Technology group of PowerGen, the UK's
largest power company. PowerGen may be purchased by E.ON, the world's largest
investor-owned utility. This relationship gives GSE access to the European
fossil simulation market, as well as the tools necessary to simulate the Siemens
Teleperm control system, one of the more popular control systems being offered
to U.S. nuclear power plants.
Competition
The Power Simulation business encounters intense competition. In the
nuclear simulation market, GSE competes directly with larger firms primarily
from Canada, Germany and France, such as Canadian Aerospace & Electronics (CAE),
STN Atlas and CSF Thomson. The fossil simulation market is represented by
smaller companies in the U.S. and overseas. Several of the Company's competitors
have greater capital and other resources than it has, including, among other
advantages, more personnel and greater marketing, financial, technical and
research and development capabilities. Customer purchasing decisions are
generally based upon price, the quality of the technology, experience in related
projects, and the financial stability of the supplier.
Customers
The Power Simulation business has provided approximately 200 simulation
systems to an installed base of over 75 customers worldwide. In 2001,
approximately 71% of the Power Simulation revenue was generated from end users
outside the United States. Customers include, among others, Ameren, Arizona
Public Service, Carolina Power and Light Company, Commonwealth Edison Company,
Eskom South Africa, Karnaraft Sakerhet & Utbildning AB, Korean Electric Power
Company, Nationalina Elecktrischecka Kompania, Orgrez SC, Battelle's Pacific
Northwest National Laboratory, Taiwan Power Company, and West Bengal Development
Corp.
For the years ended December 31, 2001, 2000, and 1999 one Power Simulation
customer (Battelle's Pacific Northwest National Laboratory) accounted for
approximately 17%, 22%, and 13%, respectively, of GSE's consolidated revenues.
The Pacific Northwest National Laboratory is the purchasing agent for the
Department of Energy and the numerous projects GSE performs in Eastern and
Central Europe.
Sales and Marketing
The Company markets its Power Simulation products and services through a
network of direct sales staff, agents and representatives, systems integrators
and strategic alliance partners. A direct sales force is employed in the
continental United States. Market-oriented business and customer development
teams define and implement specific campaigns to pursue opportunities in the
power marketplace.
The Company's ability to support its multi-facility, international and/or
multinational Power Simulation clients is facilitated by its network of offices
and strategic partners in the U.S. and overseas. Power Simulation offices are
maintained in Maryland and Georgia, and outside the U.S., in Sweden and Japan.
In addition to the offices located overseas, the Company's ability to conduct
international business is enhanced by its multilingual and multicultural work
force. GSE has strategic relationships with systems integrators and agents
representing its interests in:
Russia South Africa
Germany Mexico
Switzerland Brazil
Bulgaria Taiwan
Spain Korea
Czech Republic Japan
India People's Republic of China
Process Automation Business.
Industry
Process control systems automate manufacturing and other processes,
thereby reducing labor and other production costs and maximizing production
efficiency. According to the Automation Research Council, worldwide revenues for
process automation systems totaled over $7.8 billion in 2000 and are projected
to be $9.5 billion in 2005. The sales of process control systems have been
driven by customer desires to improve production efficiency and reliability. The
capital-intensive and competitive nature of manufacturing requires companies to
focus on designing, monitoring, and modifying the production processes in the
most efficient and profitable manner. Process control systems consist of rugged
microprocessor-based hardware, which is physically distributed throughout a
plant and linked by digital communications to control centers. These systems
allow users to monitor and control various functions. The graphic information
and control displays utilized by these systems enhance the customer's strategic
production and emergency decision-making capabilities.
Two parts of the industry, the batch and hybrid controls markets, are of
particular interest to GSE. The batch controls market focuses on products made
in batches versus a continuous process. The Company believes the need for
traceability and increased government requirements (e.g., EPA, FDA) is fueling
the growth of batch control systems in the United States. The hybrid controls
market focuses on the integration of manufacturing automation and business
systems. The Company believes that the growth in e-business and the need to
optimize performance of supply chains are increasing the need for real-time
plant and production information that can be met by hybrid control systems.
GSE's solution
The Process Automation business designs, develops and delivers process
control, data acquisition, client/server and business software, systems and
services. These products permit the Company's customers to maximize the use of
plant assets by making real-time process information more easily available,
thereby enabling faster and better informed operating decisions.
Process Automation products and services are targeted at the following
industries in which the Company's personnel have substantial experience:
Specialty chemicals Pharmaceutical
Food and beverage Metals
The flagship product in the Process Automation business is the D/3 DCS, a
distributed control system product that is highly flexible and designed to meet
open standards. D/3 DCS is a real-time system, which uses multiple process
control modules to monitor, measure, and automatically control variables in both
continuous and complex batch processes. D/3 DCS also forms the platform for
plant-wide information for operators, engineers and management.
Other products of the Process Automation business include the following:
FlexBatch, a flexible batch manufacturing system used to facilitate
the rapid creation of various batch production processes.
TotalVision, a graphical system that provides a client/server-based
human-machine interface for real-time process and plant information.
VPTV, a web-enabled version of the TotalVision package.
SABL, a sophisticated batch and sequential manufacturing software language
that permits the scheduling and tracking of raw materials and finished products,
data collection and emergency shutdown procedures.
The Process Automation offerings also include real-time dynamic simulation
tools and products that are used to develop high fidelity simulations for
chemical processing and other industrial plants. The most prominent set of
simulation products and tools is called SimSuite Pro. SimSuite Pro facilitates
design verification, process optimization and operator training in various types
of manufacturing operations.
Strategy
The goal of the Process Automation business is to expand its leading
position as a provider of process automation solutions and services to its
target markets of batch and hybrid control for the specialty chemical, food and
beverage, and pharmaceutical industries. GSE's strategy has the following key
elements:
Improving technology. The D/3 DCS distributed control system is
designed as an open standard that can work with a customer's existing
software. In 2000, the Company expanded its open system software to
permit communication with third-party I/O and implemented additional
Microsoft technology such as Windows 2000 and Microsoft's OLE for process
control to permit layering of third-party applications on its system. In
addition, the Company implemented graphical utilities to increase the
ease of use of this powerful system. These new tools and interfaces allow
customers to use their existing equipment when they wish to upgrade their
process automation technology. In 2002, the Company will finish modifying
its process control module (PCM) to increase its operating speed and
reduce its manufacturing costs. The Company expects that this will allow
it to bridge the cost gap between programmable logic controllers (PLCs)
and the distributed control systems while providing the increased
performance of a full-function distributed control system. The Company
will continue to provide value-added differentiation through plant
optimization and asset management technologies ported from the Company's
power simulation market applications.
Expand its expertise to new industries. GSE has experience in the
specialty chemical, food and beverage, pharmaceutical, and metals
industries. The Company will continue to focus its efforts on these
industries, but will seek to apply the technical expertise that it has
developed to other industries.
Leverage its expertise through sale of engineering consulting services.
The Process Automation group has developed a significant amount of
expertise in manufacturing processes. In the past, it has provided field
service to customers of its products pursuant to its warranty or an
extended service plan. The Company is currently expanding these services
to provide applications, hardware and systems engineering consulting
services to its customers to improve the integration and performance of
their process automation technology.
Competition
The process automation industry is a highly competitive environment that
has undergone considerable consolidation over the past few years. The industry
is populated with numerous large process control vendors, many of which have
substantially greater financial, marketing and other resources than GSE has.
Examples include such companies as Foxboro, Siemens, Honeywell and Emerson. The
principal factors affecting competition include price, technology, ease of use,
reliability, application experience and support programs, and the financial
stability of the supplier. The Company competes by employing a "focus" strategy
that ensures its new product development protects its customers' previous
investments in applications software and process I/O, thereby maintaining or
significantly increasing barriers to change.
Customers
The Company has provided over 300 process control systems to an installed
base of over 125 customers worldwide. In 2001, approximately 8% of worldwide
Process Automation revenue was generated from end users outside the United
States. The Company's customers include, among others, Archer Daniels Midland
Company, Aristech, Bethlehem Steel Corporation, Cargill Incorporated, Eastman
Chemical Company, Formosa Plastics Company, GE Plastics, Merck & Co., Inc.,
Miller Brewing Company, and Westinghouse Savannah River Company. For the years
ended December 31, 2001, 2000 and 1999 one Process Automation customer
(Westinghouse Savannah River Company) accounted for approximately 24%, 11%, and
5%, respectively, of the Company's consolidated revenues.
Sales and Marketing
Process Automation markets its products and services through a network of
direct sales staff, agents and representatives, systems integrators and
strategic alliance partners. It 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 a
regional 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 in the U.S. and
overseas. Process maintains U.S. offices in:
Louisiana Ohio
Maryland Pennsylvania
Minnesota South Carolina
New Jersey Texas
North Carolina
Process Automation has strategic relationships with systems integrators
and agents representing its interests in:
Belgium Taiwan
Korea People's Republic of China
Netherlands
Competitive Advantages.
The Company believes that it is in a strong position to compete in both
the Power Simulation and Process Automation markets based upon the following
strengths:
Technical and Applications Expertise. GSE is a leading innovator and
developer of real-time software with more than 30 years of experience
producing high fidelity real-time simulators and over 25 years in producing
fully integrated computerized process control systems in more than 25
counties. As a result, the Company has acquired substantial applications
expertise in the energy and industrial process industries. The company
employs a highly educated and experienced multinational workforce of more
than 250 employees, including approximately 180 engineers and scientists.
Approximately half of these engineers and scientists have advanced science
and technical degrees in fields such as chemical, mechanical and electrical
engineering, applied mathematics and computer sciences.
Proprietary Software Tools. GSE has developed a library of proprietary
software tools including auto-code generators and system models that
substantially facilitate and expedite the design, production and
integration, testing and modification of software and systems. These tools
are used to automatically generate the computer code and systems models
required for specific functions commonly used in simulation and process
control applications, thereby enabling it or its customers to develop high
fidelity real-time software quickly, accurately and at lower costs.
Open System Architecture. GSE's software products and tools are executed on
standard operating systems with third-party off-the-shelf hardware. The
hardware and operating system independence of its software enhances the
value of its products by permitting customers to acquire less expensive
hardware and operating systems. The Company's products work in the
increasingly popular Microsoft operating environment, allowing full
utilization and integration of numerous off-the-shelf products for improved
performance.
International Strengths. Approximately 40% of the Company's 2001 revenue
was derived from international sales of its products and services. GSE has
a multinational sales force with offices located in Nykoping, Sweden, and
Tokyo, Japan and agents and representatives in 22 other countries. To
capitalize on international opportunities and penetrate foreign markets,
the Company has established strategic alliances and partnerships with
several foreign entities.
Plant Security Systems
Industry
Prior to the events of September 11, 2001, the nuclear power plant
security industry was focused on upgrading existing security systems to new
computing technology. Each plant has an access control and intrusion detection
system in compliance with regulations promulgated by the Nuclear Regulatory
Commission (NRC). The market was focused on upgrading existing control systems
with newer computing hardware and more powerful database systems. The
requirements included the ability to interface to new field sensing devices such
as CCTV, microwave sensors, and more sophisticated biometric devices such as
hand geometry and retinal scanners. The market is very diverse, serviced by a
number of vendors without clear dominance.
After the events of September 11, 2001, concern over the vulnerability
of nuclear plants to terrorist attacks has heightened. The NRC has issued new
directives to increase plant security, and the industry is formulating its
strategy and response. Of significance is the NRC and industry re-evaluation of
the "design basis threat" for nuclear plants. New terrorist capabilities and
strategies must now be factored into plant protection, addressing both external
threats and potential internal threats.
In addition to nuclear power reactors, there are numerous research
reactors and nuclear waste storage and processing facilities throughout the
country. Concern also centers on reactors in Eastern Europe, and the Department
of Energy is currently developing its strategy regarding nuclear plant security
as it relates to US policy and national security.
In addition to nuclear power, the domestic chemical industry is evaluating
its vulnerability to terrorist threats. The American Chemistry Council is
recommending that manufacturers of chemical products step up their role in
protecting America's homeland. There are over 15,000 chemical plants in the U.S.
that have large quantities of extremely toxic or volatile chemicals. Unlike the
nuclear power industry, there are no common standards of security across plants
in the chemical industry.
GSE's Solution
GSE's Plant Access Security System, named Pass, provides access control
and intrusion detection for large industrial applications such as nuclear power
plants that require personnel tracking. This system is redundant, stable, and
includes such standard features as: access control and intrusion detection, CCTV
integration, biometrics and on-line personnel photos, dynamic map displays,
advanced event processing, security communications, and systems integration.
GSE had three installations of its Plant Access Security System in
operation at nuclear facilities in the United States prior to September 11,
2001. GSE sees significant growth potential in the nuclear security market and
has hired technical and marketing staff to analyze this potential and develop a
business plan for the Company's real-time security system business.
In addition to plant access control systems, the Company believes the plant
design and operations knowledge it has gained through simulation give it the
expertise to help utilities uncover and assess plant vulnerabilities. The
Company's simulation capability can be used to assist the industry in testing
threat scenarios and response time frames.
Strategy
The Company plans to differentiate itself through offering services beyond
just the access control system implementation. The Company is teaming with
ManTech Security Technologies Company to provide turnkey capabilities to the
nuclear industry. Services range from threat and vulnerability assessments, risk
mitigation plans, cost/benefit analysis, security system design to
implementation, testing and training.
Competition and Competitive Advantage
The nuclear plant access control and intrusion detection system market is
not dominated by any vendor. The Company believes that it is in a strong
position to compete due to its superior technology and ability to provide a
broader scope of services through its strategic partners. The Company's
experience and reputation as a reliable supplier to the nuclear industry and as
a systems integrator of complex real-time nuclear plant computer systems
(Simulators, Security Systems, Plant Process and Control Computers) gives the
Company unique access to the industry.
Sales and Marketing
The Company has provided plant access security systems to three nuclear
power plants in the US. Customers include Carolina Power and Light and
Connecticut Yankee Atomic Power Company. The Company will market its plant
access control systems in the nuclear power and chemical markets through its
direct sales channel, sales agents and strategic alliance partners.
Intellectual Property.
The Company depends upon its intellectual property rights in its
proprietary technology and information. GSE maintains a portfolio of patents,
trademarks (both registered and unregistered), copyrights (both registered and
unregistered), and licenses. While such patents, trademarks, copyrights and
licenses as a group are of material importance to the Company, it does not
consider any one patent, trademark, copyright, or license to be of such
importance that the loss or expiration thereof would materially effect any
segment or the Company as a whole. The Company relies upon a combination of
trade secrets, copyright, patent and trademark law, contractual arrangements and
technical means to protect its intellectual property rights. GSE distributes its
software products under software license agreements that grant customers
nonexclusive licenses for the use of its products, which are nontransferable.
Use of the licensed software is restricted to designated computers at specified
sites, unless the customer obtains a site license of its use of the software.
Software and hardware security measures are also employed to prevent
unauthorized use of the Company's software, and the licensed software is subject
to terms and conditions prohibiting unauthorized reproduction of the software.
The Company has several U.S. patents that were issued in the 1996
timeframe, none of which (individually or collectively) have a significant role
in the Company's current business operations. In accordance with Title 35 U.S.
Code Section 154, these patents have a duration of 20 years from the filing date
of the application, subject to any statutory extension, provided they are
properly maintained. The Company believes that all of the Company's trademarks
(especially those that use the phrase "GSE Systems") are valid and will have an
unlimited duration as long as they are adequately protected and sufficiently
used. The Company's licenses are perpetual in nature and will have an unlimited
duration as long as they are adequately protected and the parties adhere to the
material terms and conditions.
GSE's registered trademarks include D/3, D/3 DCS, SABL, TotalVision, and
RETACT. Registration is pending or is being considered for other relevant
trademarks, including GFLOW+, GLOGIC+, GCONTROL+, and GPower+. Some of these
trademarks have also been registered in foreign countries. The Company also
claims trademark rights to SimSuite Power, SimSuite Pro, Java Applications &
Development Environment (JADE), SimExec, eXtreme I/S, RACS, PEGASUS Plant
Surveillance and Diagnosis System, SIMON, Vista PIN, VPTV, and VPbatch.
In addition, the Company maintains federal statutory copyright protection
with respect to its software programs and products, has registered copyrights
for some of the documentation and manuals related to these programs, and
maintains trade secret protection on its software products.
Despite these protections, the Company cannot be sure that it has protected
or will be able to protect its intellectual property adequately, that the
unauthorized disclosure or use of its intellectual property will be prevented,
that others have not or will not develop similar technology independently, or,
to the extent it 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 its products and intellectual
property rights to the same extent as the laws of the United States.
Industries Served.
The following chart illustrates the approximate percentage of the Company's
2001, 2000, and 1999 revenues, attributable to each of the Company's reporting
segments:
Industries served
2001 2000 1999
------------- ---------- -----------
Process 50% 45% 52%
Power 50% 55% 48%
------------- ---------- -----------
Total 100% 100% 100%
============= ========== ===========
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, 2001, the Company's aggregate contract backlog totaled approximately $21.5
million, with $10.8 million in contract backlog for the Power Simulation
business and $10.7 million in contract backlog for the Process Automation
business. The entire backlog is expected to be converted to revenue by December
31, 2002. As of December 31, 2000, the Company's aggregate contract backlog
totaled approximately $22.9 million, made up of $14.3 million for the Power
Simulation business and $8.6 million for the Process Automation business.
Employees.
As of December 31, 2001, the Company had 256 employees, a 16% decrease from
December 2000. The reductions were primarily associated with the sale of the
VirtualPlant assets and technology and the transfer of certain of the Company's
personnel in the U.S. and the UK to Avantium.
Segment Information.
See Note 19, Segment information, in the "Notes to Consolidated Financial
Statements" for a discussion of the Company's business segments.
RISK FACTORS.
The Company's expense levels are based upon its expectations as to future
revenues, so it may be unable to adjust spending to compensate for a revenue
shortfall. Accordingly, any revenue shortfall would likely have a
disproportionate effect on the Company's 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.
Risk of International Sales and Operations.
Sales of products and the provision of services to end users outside the
United States accounted for approximately 40% of the Company's consolidated
revenues in 2001. 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.
The Company relies on two customers for a substantial portion of its revenues.
The loss of either of these customers would have a material adverse effect upon
the Company's revenues and results of operations.
For the years ended December 31, 2001, 2000, and 1999, one Power Simulation
customer (Battelle's Pacific Northwest National Laboratory) accounted for
approximately 17%, 22%, and 13%, respectively, of the Company's consolidated
revenues. The Pacific Northwest National Laboratory is the purchasing agent for
the Department of Energy and the numerous projects the Company performs in
Eastern and Central Europe. For the years ended December 31, 2001, 2000 and
1999, one Process Automation customer (Westinghouse Savannah River Company)
accounted for approximately 24%, 11%, and 5%, respectively, of our consolidated
revenues. If the Company lost either of these customers, the Company's revenue
and results of operations would be materially and adversely affected.
The Company's business is substantially dependent on sales to certain
industries. Any disruption in these industries would have a material adverse
effect upon the Company's revenues.
In 2001, 38% of GSE's revenue was from customers in the nuclear power
industry. The Company will continue to derive a significant portion of its
revenues from customers in the 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, and general economic conditions.
In 2001, 37% of the Company's revenue was from customers 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.
The Company's substantial indebtedness could adversely affect its financial
condition.
The Company has substantial indebtedness. In addition, it may increase its
indebtedness in the future. The following are important statistics about the
Company and its indebtedness:
On December 31, 2001, the Company had total long-term debt of $6.7 million,
representing 33% of its total capitalization.
At December 31, 2001, the Company's available borrowing base was $5.8
million, of which approximately $5.0 million had been utilized.
The Company's level of indebtedness could have important consequences to
the stockholders. For example, it could:
Make the Company more vulnerable to economic downturns.
Potentially limit the Company's ability to withstand competitive pressures.
Impair the Company's ability to obtain additional financing in the future
for working capital, capital expenditures, acquisitions or general
corporate purposes.
Make the Company more susceptible to the above risks because borrowings
under the Company's credit facility will bear interest at fluctuating
rates.
If GSE is unable to generate sufficient cash flows from operations in the
future the Company may be unable to repay or refinance all or a portion of its
then existing debt or to obtain additional financing. The Company cannot be sure
that any such refinancing would be possible or that any additional financing
could be obtained on acceptable terms.
The Company's debt agreements impose significant operating and financial
restrictions, which may prevent it from capitalizing on business opportunities.
GSE's debt agreements impose significant operating and financial
restrictions. These restrictions affect, and in certain cases limit, among other
things, the Company's ability to:
- incur additional indebtedness and liens;
- make capital expenditures;
- make investments and acquisitions and sell assets;
- consolidate, merge or sell all or substantially all of its assets.
There can be no assurance that these restrictions will not adversely affect
the Company's ability to finance its future operations or capital needs or to
engage in other business activities that may be in the interest of stockholders.
The Company is dependent on product innovation and research and development,
which costs are incurred prior to revenues for new products and improvements.
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 relies upon its intellectual property rights for the success of its
business; however, the steps it has taken to protect its intellectual property
may be inadequate.
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 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 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.
The industries in which GSE operates are highly competitive. This competition
may prevent the Company from raising prices at the same pace as its costs
increase.
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.
GSE will continue to pursue new acquisitions and joint ventures, and any of
these transactions could adversely affect its operating results or result in
increased costs or other problems.
The Company intends to continue to pursue new acquisitions and joint
ventures, a pursuit which will consume substantial time and resources.
Identifying appropriate acquisition candidates and negotiating and consummating
acquisitions can be a lengthy and costly process. The Company may also encounter
substantial unanticipated costs or other problems associated with the acquired
businesses. The risks inherent in this strategy could have an adverse impact on
the Company's results of operation or financial condition.
The chemicals and nuclear power industries, two of the Company's largest
customer groups, are associated with a number of hazards which could create
significant liabilities for the Company.
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
primarily in operator 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.
The Company is controlled by the Company's principal stockholders, whose
interests may not be aligned with those of the Company's other stockholders.
As of March 8, 2002 ManTech, GP Strategies, the Company's directors and
executive officers beneficially own approximately 47% of GSE's outstanding
common stock. In addition ManTech owns 39,000 shares of Series A preferred
stock, which convert into an aggregate of 1,474,480 shares of common stock. If
fully converted by ManTech, ManTech will beneficially own approximately 35% of
GSE's outstanding common stock, and GP Strategies will beneficially own
approximately 17% of GSE's outstanding common stock. ManTech and GP Strategies
disclaim beneficial ownership of all shares, including those subject to option,
that are owned by affiliated individuals. ManTech has granted GP Strategies an
option to acquire 19,500 shares of the Series A preferred stock from ManTech. If
ManTech exercises its option to convert the Series A preferred stock to common
stock, and GP Strategies exercises its option to acquire 50% of the Series A
preferred stock held by ManTech and also converts those shares to common stock,
ManTech will beneficially own approximately 25% and GP Strategies will
beneficially own approximately 26%, of GSE's outstanding common stock. If these
stockholders vote together as a group, they will be able to control the
Company's business and affairs, including the election of individuals to the
board of directors, and the outcome of actions that require stockholder approval
including mergers, sales of assets, and to prevent, or to cause, a change of
control of the Company.
ITEM 2. PROPERTIES.
----------
The Company's Power Simulation 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
Automation 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 Georgia,
Louisiana, Texas, Pennsylvania, North and South Carolina, and internationally in
Japan, and Sweden. The Company leases these facilities for terms ending between
2002 and 2004. In March 2001, the lease for the Company's UK operations was
transferred to Avantium as part of the VirtualPlant asset sale.
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 that, 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, 2001.
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:
2001
- --------------------------------------------------------
Quarter High Low
- ----------------
First $ 1 4/5 $ 1 1/5
Second $ 2 5/9 $ 1
Third $ 2 5/9 $ 1 3/5
Fourth $ 3 1/9 $ 1 5/8
2000
- --------------------------------------------------------
Quarter High Low
- ----------------
First $ 9 $ 3
Second $ 8 2/3 $ 3
Third $ 4 5/8 $ 2
Fourth $ 3 3/8 $ 1 1/5
The Company's common stock is listed on the American Stock Exchange, where
it trades under the symbol "GVP".
There were approximately 35 holders of record of the common stock as of
March 8, 2002. 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 on its common stock. The Company has issued
39,000 shares of convertible preferred stock which accrue dividends at an annual
rate of 6% payable quarterly. The Company expects to declare and pay such
dividends when due provided such payment is not otherwise restricted.
<
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. For information and disclosures regarding the Company's business
segments, see Note 19, Segment information, in the "Notes to Consolidated
Financial Statements".
Years ended December 31,
-------------------------------------------------------------------
(in thousands, except per share data) 2001 2000 1999 1998 1997
----------- ------------ ------------ ------------ ------------
Contract revenue $ 50,331 $ 55,715 $ 66,699 $ 73,818 $ 79,711
Cost of revenue 36,381 40,822 41,629 49,814 58,326
----------- ------------ ------------ ------------ ------------
Gross profit 13,950 14,893 25,070 24,004 21,385
----------- ------------ ------------ ------------ ------------
Operating expenses:
Selling, general and administrative 10,857 17,853 22,646 20,345 27,320
Depreciation and amortization 1,375 1,695 1,680 1,768 2,368
Employee severance and termination costs - - - - 1,124
----------- ------------ ------------ ------------ ------------
Total operating expenses 12,232 19,548 24,326 22,113 30,812
----------- ------------ ------------ ------------ ------------
Operating income (loss) 1,718 (4,655) 744 1,891 (9,427)
Gain (loss) on sales of assets 3,273 (990) - 550 -
Write-down of investment
in Avantium Technologies B.V. (4,605) - - - -
Interest expense, net (886) (687) (450) (350) (765)
Other income (expense), net 406 55 40 326 (1,228)
----------- ------------ ------------ ------------ ------------
Income (loss) before income taxes (94) (6,277) 334 2,417 (11,420)
(Benefit from) provision for income taxes (353) 2,537 233 1,020 (2,717)
----------- ------------ ------------ ------------ ------------
Net income (loss) $ 259 $(8,814) $ 101 $1,397 $(8,703)
=========== ============ ============ ============ ============
Earnings (loss) per common share: -Basic $ 0.05 $(1.70) $ 0.02 $ 0.28 $(1.72)
=========== ============ ============ ============ ============
-Diluted $ 0.05 $(1.70) $ 0.02 $ 0.27 $(1.72)
=========== ============ ============ ============ ============
Weighted average common shares outstanding:
-Basic 5,217 5,182 5,066 5,066 5,066
=========== ============ ============ ============ ============
-Diluted 5,259 5,182 5,351 5,107 5,066
=========== ============ ============ ============ ============
As of December 31,
-------------------------------------------------------------------
2001 2000 1999 1998 1997
------------------------- ------------ ------------ ------------
Working capital $7,018 $5,522 $8,665 $4,058 $1,646
Total assets 33,674 35,949 43,027 48,743 48,362
Long-term liabilities 7,218 12,390 9,083 3,350 2,369
Stockholders' equity 13,852 8,713 17,170 17,089 15,924
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
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,
-------------------------------------------------------------------------------------
2001 % 2000 % 1999 %
------------- ----------- ------------- ------------ ------------- ----------
Contract revenue $ 50,331 100.0 % $ 55,715 100.0 % $66,699 100.0 %
Cost of revenue 36,381 72.3 % 40,822 73.3 % 41,629 62.4 %
------------- ----------- ------------- ------------ ------------- ----------
Gross profit 13,950 27.7 % 14,893 26.7 % 25,070 37.6 %
------------- ----------- ------------- ------------ ------------- ----------
Operating expenses:
Selling, general and administrative 10,857 21.6 % 17,853 32.1 % 22,646 34.0 %
Depreciation and amortization 1,375 2.7 % 1,695 3.0 % 1,680 2.5 %
------------- ----------- ------------- ------------ ------------- ----------
Total operating expenses 12,232 24.3 % 19,548 35.1 % 24,326 36.5 %
------------- ----------- ------------- ------------ ------------- ----------
Operating income (loss) 1,718 3.4 % (4,655) (8.4)% 744 1.1 %
Gain (loss) on sales of assets 3,273 6.5 % (990) (1.8)% - 0.0 %
Write-down of investment
in Avantium Technologies B.V. (4,605) (9.1)% - 0.0 % - 0.0 %
Interest expense, net (886) (1.8)% (687) (1.2)% (450) (0.7)%
Other income, net 406 0.8 % 55 0.1 % 40 0.1 %
------------- ----------- ------------- ------------ ------------- ----------
Income (loss) before income taxes (94) (0.2)% (6,277) (11.3)% 334 0.5 %
(Benefit from) provision for income taxes (353) (0.7)% 2,537 4.5 % 233 0.3 %
------------- ----------- ------------- ------------ ------------- ----------
Net income (loss) $ 259 0.5 % $ (8,814) (15.8)% $ 101 0.2 %
============= =========== ============= ============ ============= ==========
Critical Accounting Policies and Estimates.
As further discussed in Note 2 to the consolidated financial statements, in
preparing the Company's financial statements, management makes several estimates
and assumptions that affect the Company's reported amounts of assets,
liabilities, revenues 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 as the project progresses. Management reviews the status of each
project periodically 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
SFAS 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 December 31, 2001, the Company has net capitalized software
development costs of $3.8 million. On an annual basis, 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 income. Significant changes in the sales projections could result
in an overstatement of the net realizable value of 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 109
"Accounting for Income Taxes", management makes an annual 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 assets to its
realizable value. At December 31, 2001, the Company's deferred tax assets
related primarily to a U.S. net operating loss carryforward of $13.5 million
which can be utilized over the next twenty years. Management believes it is more
likely than not that the Company will generate sufficient taxable income to
recover $1.6 million of its deferred tax asset. The recovery of the remaining
net deferred tax asset is significantly less certain and, accordingly, the
Company has established a valuation allowance for the balance of its deferred
tax assets of $4.9 million. If management's estimates of future taxable income
are overstated, the amount of the net deferred tax assets on the Company's
balance sheet could be overstated. Additionally, if the Company is able to
realize higher taxable income the valuation allowance could be reduced.
Comparison of 2001 to 2000.
Contract Revenue. Total contract revenue was $50.3 million and $55.7
million for the years ended December 31, 2001 and 2000, respectively.
The Process business unit's revenue was $25.0 million in 2001 compared with
$25.2 million in 2000. Although the decrease was only .8%, the overall
composition of the revenues changed significantly. The Company sold its
unprofitable Belgian subsidiary, GSE Process Solutions N.V., on November 30,
2000 to Newton Beheer B.V. of the Netherlands, and sold its VirtualPlant
technology and assets on March 6, 2001 to Avantium International B.V.
("Avantium"). For the years ended December 31, 2001 and 2000, Process revenues
included $507,000 and $7.6 million, respectively, for these two divested
businesses. Included in the 2000 Process revenue was $2.9 million from the sale
of licenses for five of GSE's software products to Avantium in February,
including the object and source codes, in exchange for an equity interest in
Avantium. In addition, the Company recorded revenue of $1.3 million for time and
material work completed for Avantium. Excluding the revenue for these divested
businesses, the Process business unit's revenue increased $6.9 million, or 39%,
in 2001 as compared to 2000. The increase in Process' continuing business
revenue is mainly attributable to several significant orders received from
Westinghouse Savannah River Corporation. In 2001, revenues generated from work
performed for Westinghouse Savannah River Corporation totaled 48% of total
Process revenues, versus 25% in 2000.
The Power business unit revenue decreased 16.9% in 2001, from $30.5 million
in 2000 to $25.3 million in 2001. The decrease in revenue is attributable to the
completion of several large international projects in 2001 and fewer upgrades
for simulators in the United States in 2001 as compared to 2000.
Gross Profit. Gross profit totaled $14.0 million (27.7% of revenue) for the
year ended December 31, 2001, as compared with $14.9 million (26.7% of revenue)
for the year ended December 31, 2000. The gross profit and gross profit margins
for 2000 reflect the software licenses sold to Avantium in the first quarter
2000. Excluding the gross profit from the sale of software licenses to Avantium,
the gross profit margin for 2000 was 22.7%. This increase in gross profit margin
in 2001 was due to the following:
- The restructuring of the Process business unit in 2000 and 2001,
including the sale of the Company's Belgian subsidiary in late 2000 and
the VirtualPlant assets and technology in the first quarter 2001,
- The outsourcing of the Process manufacturing/assembly operation, and
- Personnel reductions.
In December 2000, a $710,000 provision was recorded 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 $10.9 million in 2001 (21.6% of
revenue), a 39.1% decrease from the $17.9 million (32.0% of revenue) for 2000.
The decrease in SG&A reflects reduced sales, marketing and corporate
administration headcount, and lower net research and product development
expenditures ("R&D"), as discussed below.
Gross R&D totaled $1.6 million in 2001 versus $3.5 million in 2000;
capitalized software development costs totaled $809,000 in 2001 versus $1.9
million in 2000; and net R&D, expensed and included in SG&A, was $827,000 in
2001 versus $1.7 million in 2000. The Company's R&D expenditures were reduced
significantly in 2001 due to the sale of the VirtualPlant business in March 2001
($1.0 million was spent on VirtualPlant R&D in 2000) and the completion of three
major development projects: VPbatch, the Windows NT version of its FlexBatch
Recipe and Process Management software; initiatives to improve product ease of
use of SimSuite Pro(TM), its process simulation product; and the release of
version 10.2 of the D/3 Distributed Control System in December 2000. R&D
expenditures in 2001 were mainly related to improvements in the process control
module for the Process D/3 system and the development of a high availability
server system.
Depreciation and Amortization. Depreciation expense amounted to $706,000
and $1.2 million during the years ended December 31, 2001 and 2000,
respectively. The decrease in depreciation in 2001 is primarily due to disposals
of fixed assets as the Company restructured its operations and divested certain
businesses.
Amortization of goodwill was $669,000 and $528,000 during the years ended
December 31, 2001 and 2000, respectively. The increase in amortization in 2001
reflects the increase in goodwill due to payments made for contingent
consideration for prior year acquisitions.
Operating Income (Loss). The Company had operating income of $1.7 million
(3.4% of revenue) for the year ended December 31, 2001, as compared with an
operating loss of $4.7 million (8.4% of revenue) for the year ended December 31,
2000.
Excluding the operating results of the divested businesses, the Company's
operating income for the year ended December 31, 2001 was $2.2 million compared
with a loss of $988,000 for the year ended December 31, 2000. The Company
attributes its business restructuring initiatives for the improvement in
operating income of its remaining businesses.
Gain (loss) on Sales of Assets. On March 6, 2001, the Company sold its
VirtualPlant business technology and assets to Avantium. GSE received 8% of
Avantium's stock, thus increasing its holdings in Avantium to approximately 19%,
and recognized a gain on the sale of $3.3 million, before income taxes. This
gain was determined based on the estimated fair market value of the Avantium
stock received, based on an independent appraisal, less the book value of the
assets sold, approximately $700,000 in severance costs payable to certain former
employees of VirtualPlant that were not hired by Avantium, and other transaction
expenses.
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. This sale and related loss is described more fully under Note 18,
Acquisitions and dispositions, in the "Notes to Consolidated Financial
Statements".
Write-down of Investment in Avantium International B.V. On February 7,
2002, Avantium completed a private placement round of financing which resulted
in 20 million Euros in new capital and the conversion of 11 million Euros of
convertible debt. The equity issuance and debt conversion diluted GSE's
ownership in Avantium to 6.1%. The estimated fair market value of Avantium
following the financing was $47.4 million. Accordingly the Company concluded
that this transaction was evidence of "an other than temporary decline" in the
fair value of its investment in Avantium. Thus, in the fourth quarter 2001, the
Company wrote down its investment in Avantium to $2.9 million and recognized a
$4.6 million pre-tax charge.
Interest Expense, Net. Net interest expense increased to $886,000 for the
year ended December 31, 2001, from $687,000 in 2000. A reduction in the
Company's bank debt interest expense due to the reduction in interest rates in
2001 (the Company's interest rate was 9.5% in December 2000 versus 5.5% in
December 2001) and a reduction in the average bank debt outstanding ($7.3
million average for the twelve months ended December 31, 2000 versus $5.3
million average for the twelve months ended December 30, 2001) was more than
offset by an increase in the interest expense incurred on the Company's
subordinated debt due to ManTech. The average subordinated debt outstanding
increased from $250,000 in 2000 to $3.5 million in 2001. In addition, interest
income earned by the Company's Swedish subsidiary decreased from $219,000 in
2000 to $78,000 in 2001.
Other Income (Expense), Net. For the year ended December 31, 2001, other
income (expense), net includes the receipt of a $147,000 equity distribution
from the Company's liquidated Joint Venture in China (this investment was
written off in a prior year) and foreign currency gains.
For the year ended December 31, 2000, the Company incurred $55,000 of
foreign currency gains.
Provision for Income Taxes. The Company recorded an income tax benefit of
$353,000 in 2001. This benefit is mainly the result of a decrease in the
valuation allowance for the Company's deferred income tax assets. The allowance
was decreased to adjust the net 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 2001 was primarily
due to the change in the deferred tax asset valuation reserve and foreign taxes.
The Company recorded a tax provision of $2.5 million in 2000. This
provision is mainly the result of an increase in the valuation allowance for the
Company's deferred income tax assets. The allowance was increased to reduce the
total deferred tax asset to an amount that management believed was more likely
than not to be realized. The difference between the statutory U.S. tax rate and
the Company's effective rate for 2000 was primarily due to the change in the
deferred tax asset valuation reserve and foreign taxes.
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
and 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 3, 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:
In 1999, the Process business benefited from customer concerns about the
Y2K issue and their efforts to upgrade their D/3 systems to Y2K compliant
versions. Upgrade projects typically have less hardware and instrumentation
components (lower margined items as these are typically "pass-through"
purchases) and more license fees and application engineering work which have
higher margins. In 2000, a higher percentage of the revenues were generated
through maintenance, time and material, spares and training which have lower
margins than the upgrade projects. 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. 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:
Fewer sales and marketing personnel and travel costs in the Process
business unit due to the restructuring of this business.
Lower sales commissions due to lower Process business unit orders.
A reduction in corporate personnel.
The completion in 1999 of the Company's internal Y2K compliance program for
which an outside consultant was utilized as project manager.
A reduction in recruiting and relocation costs of newly hired personnel.
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. The Company's R&D spending continued to be reduced in 2001 due to
the sale of the VirtualPlant business in March 2001 ($1.0 million was spent on
VirtualPlant R&D in 2000) and the restructuring of the Process business unit.
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
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.
Gain (Loss) on Sales of Assets. The loss on sales 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 18, 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 was $55,000 in 2000 versus $40,000 in 1999,
resulting from recognized currency transaction gains.
Provision for Income Taxes. In 2000, the Company recorded a tax provision
of $2.5 million. This provision is mainly the result of an increase in the
valuation allowance for the Company's deferred tax assets. The reserve was
increased to reduce the total deferred tax asset to an amount that management
believed was more likely than not to 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 allowance 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.
Liquidity and Capital Resources.
As of December 31, 2001, GSE had cash and cash equivalents of $2.0 million
versus $1.5 million at December 31, 2000 and $2.7 million at December 31, 1999.
Cash from operating activities. Net cash provided by operating activities
was $1.9 million for the year ended December 31, 2001. In 2001, the $4.6 million
pre-tax loss on the write-down of the Company's investment in Avantium was a
non-monetary transaction as was the $3.3 million gain on the sale of the
VirtualPlant technology and assets. Significant changes in the assets and
liabilities of the Company in 2001 included:
A $3.3 million increase in billings in excess of revenues earned. The
increase reflects significant orders received from two Process customers in
the third quarter 2001 that allowed GSE to invoice the customer in full
prior to the work being completed.
A $5.1 million reduction in accounts payable, accrued compensation and
accrued expenses. Due to the Company's improved operating cash flow in 2001
and additional subordinated borrowings from ManTech, the Company was able
to reduce its outstanding payables and was current with its vendors at
December 31, 2001.
Net cash used in operating activities for the year ended December 31, 2000
was $4.5 million. The $2.9 million revenue from the licensing of software to
Avantium in the first quarter 2000 in exchange for an equity stake in Avantium
was a non-monetary transaction. Significant changes in the Company's assets and
liabilities in 2000 included:
A $1.9 million reduction in contract receivables which was mainly related
to the decline in overall revenues.
A $1.6 million reduction in inventories. In 1999, the Process stockroom
inventory increased approximately $650,000 principally due to purchases of
large supplies of various PC boards. 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 a $710,000
provision for excess and slow moving inventory.
A $1.6 million reduction in billings in excess of revenues earned due to
the lower business volume in 2000.
For the year ended December 31, 1999, net cash provided by operating
activities was $2.6 million. Significant changes in the Company's assets and
liabilities in 1999 included a $4.4 million reduction in contract receivables
partially due to improvements in internal collection processes; a $1.9 million
reduction in accounts payable and accrued expenses; and a $3.3 million reduction
in billings in excess of revenues earned.
Cash used in investing activities. Net cash used in investing activities
for the year ended December 31, 2001 was $2.4 million, including $1.1 million in
cash payments for acquired businesses ($599,000 of contingent consideration for
a prior year acquisition and $491,000 for notes payable related to two prior
year acquisitions), $477,000 of capital expenditures, and $809,000 of
capitalized software development costs.
For 2000, net cash used in investing activities was $3.3 million, including
$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), $472,000 of capital expenditures, $1.9
million of capitalized software development costs, and $261,000 in connection
with the disposition of the Company's Belgium subsidiary.
For 1999, net cash used in investing activities was $4.1 million, comprised
of $2.5 million of capitalized software development costs, $1.4 million of
capital expenditures, and $930,000 in cash payments for acquired businesses
($300,000 for the Mitech acquisition in 1999, $530,000 for contingent
considerations for prior year acquisitions, and $100,000 for notes payable
related to a prior year acquisition) partially offset by the receipt of $731,000
from Keane, Inc. as final payment on the 1998 Erudite sale. The decrease in
capitalized software costs reflects the completion of the conversion of the
Process Automation business' D/3 Distributed Control System to the Microsoft
Windows NT Platform. Included in the 1999 capital expenditures was $503,000 of
assets purchased from BatchCAD Limited, a United Kingdom-based supplier of batch
process development and design consulting services and simulation software
tools.
Cash provided by financing activities. Cash provided by financing
activities was $1.1 million for the year ended December 31, 2001. GSE reduced
its borrowings under its bank line of credit in 2001 by $4.3 million to a total
of $5.0 million. However, in 2001 the Company amended its $1.8 million
subordinated promissory note to ManTech to increase the amount to $3.9 million,
and issued a second subordinated promissory note to ManTech for $1.0 million.
Accordingly, the Company increased its subordinated borrowings from ManTech by
$3.4 million in 2001 to a total of $4.9 million. In December 2001 ManTech
elected to covert the $3.9 million subordinated promissory note into Series A
preferred stock, as permitted by the note. In 2001, the Company entered into
three contracts with a customer for the lease of certain hardware and software
under 36-month leases and assigned the payments due under these sales-type
leases to a third party financing company, receiving proceeds of $2.2 million.
The Company also generated $33,000 from the conversion of employee stock
options. In 2001, $29,000 of cash collateralized letters of credit expired, and
the cash collateral was released.
Cash provided by financing activities was $6.6 million in the year ended
December 31, 2000. The Company increased its borrowings under its bank line of
credit in 2000 by $3.0 million to a total of $9.3 million. In addition, the
Company issued a subordinated promissory note to ManTech that allowed it to
borrow up to $1.8 million at an interest rate of prime plus one percent; at
December 31, 2000 the Company had borrowed $1.6 million. The Company entered
into two contracts with a customer for the lease of certain hardware and
software under 36-month leases; the Company received $1.1 million upon
assignment of the payments to a third party financing company. The Company also
generated $500,000 from the sale of stock to ManTech and an additional $42,000
from the exercise of employee stock options. In 2000, $202,000 of cash
collateralized letters of credit expired and the cash collateral was released.
Cash provided by financing activities was $2.0 million in the year ended
December 31, 1999. 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.
Credit Facilities.
The Company has a $10.0 million credit facility with a bank which matures
on March 23, 2003. 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, 2001, the Company's available borrowing base was $5.8 million, of
which approximately $5.0 million had been utilized. The credit facility 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, 2001, the Company was in compliance with the
bank covenants. See Note 10, Long-term debt, in the "Notes to Consolidated
Financial Statements" for additional details about this line of credit.
In 2000, the Company issued a demand promissory note to ManTech that
allowed the Company to borrow up to $1.8 million at an interest rate of prime
plus one percent. In addition, ManTech provided $1.8 million in standby letters
of credit to the Company's bank as additional collateral for the Company's
credit facility. In April 2001, ManTech agreed to allow the Company's bank to
draw upon ManTech's $1.8 million letter of credit which supported 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. Accordingly, the
Company's promissory note to ManTech was amended to increase the amount to $3.9
million. The amended note permitted ManTech to convert the principle amount of
the note into GSE Series A convertible preferred stock at a conversion rate of
$100 per share. The Company determined that the conversion of this debt did not
constitute a beneficial conversion.
ManTech elected to convert its subordinated debt on December 5, 2001. The
Series A convertible preferred stock has no voting rights and bears dividends at
the rate of 6% per annum payable quarterly. Dividends will accumulate if not
paid quarterly and compounded interest will accrue on any unpaid dividends.
ManTech at its discretion has the right to convert each share of Series A
convertible preferred stock into GSE common stock at a purchase price of $2.645
per share at any time after a one-year holding period from the date of issuance.
At the end of the third year from the date of issuance, the Series A convertible
preferred stock automatically converts into GSE common stock. Prior to ManTech's
conversion of the Series A convertible stock to common stock, GP Strategies has
the option to acquire 50% of the Series A convertible preferred stock for
$1,950,000 from ManTech.
At a special shareholder's meeting on August 2, 2001, the Company's
shareholders approved an amendment to the Certificate of Incorporation
increasing GSE's authorized common stock by 10 million shares to a total of 18
million shares. With this new authorization of common stock, the Company intends
to reserve 1,474,480 shares for the conversion of the ManTech convertible
preferred stock discussed above. In addition, the Company issued 522,611 shares
on December 21, 2001 in conjunction with a fixed price rights offering described
below.
On June 25, 2001, the Company issued an additional unsecured promissory
note to ManTech that allowed the Company to borrow up to $1.0 million at an
interest rate of prime plus one percent. The Company used the loan proceeds for
working capital purposes. The note is subordinated to the Company's credit
facility. In January 2002, the Company repaid ManTech $250,000, plus $36,000 of
interest and expects to pay the balance of the loan before the end of the second
quarter 2002.
On October 25, 2001, the Company filed a final registration statement with
the SEC for a fixed price rights offering which became effective on October 29,
2001. In early November, the Company distributed to non-affiliated holders of
its common stock, based on an October 26, 2001 record date, subscription rights
to purchase additional shares of common stock at a subscription price of $2.53
per share. Each non-affiliated holder of its common stock received .711
subscription right for each share held as of the record date. Shareholders had
until the expiration date of December 21, 2001 to subscribe to the offering. Of
the total 2,219,701 shares available, 522,611 shares were subscribed. The
proceeds to GSE totaled $1.3 million prior to fees and expenses related to the
offering of approximately $139,000. The Company received the cash proceeds from
its escrow agent in January 2002. The proceeds were used for a partial repayment
of the $1 million loan from ManTech discussed above and working capital
requirements.
Other. The following summarizes the Company's contractual cash obligations
at December 31, 2001, and the effect these obligations are expected to have on
its liquidity and cash flow in future periods:
-
Payments Due by Period
(in thousands)
------------------------------------------------------------------------------------------
Contractual Cash Total Less than 1-3 Years 4-5 Years After 5
Obligations 1 year Years
------------------------------------------------------------------------------------------
Long Term Debt $ 4,988 - $ 4,988 - -
------------------------------------------------------------------------------------------
Related Party Debt $ 1,100 $1,027 $ 37 $ 36 -
------------------------------------------------------------------------------------------
Operating Leases $ 8,671 $1,593 $ 2,600 $2,568 $1,910
------------------------------------------------------------------------------------------
Other Long Term $ 240 $ 240 - - -
Obligations
------------------------------------------------------------------------------------------
Total Contractual $14,999 $2,860 $ 7,625 $2,604 $1,910
Cash Obligations
------------------------------------------------------------------------------------------
As of December 31, 2001, the Company was contingently liable for four
letters of credit totaling $504,000. All of these letters of credit represent
payment bonds on contracts and have been cash collateralized.
Due to the Company's cash situation at the end of 2000, GSE experienced
some difficulties in procuring supplies from its vendors for business
operations. In January 2001, the Company entered into a purchasing arrangement
with ManTech whereby ManTech dealt directly with some of the Company's vendors,
ordered the supplies needed and had the products shipped per the Company's
instructions. Purchases under this agreement totaled $843,000 for the year ended
December 31, 2001. This purchasing arrangement terminated in June 2001, and the
Company has no outstanding obligations to ManTech, in connection with this
purchasing arrangement as of December 31, 2001.
The Company has undertaken a number of initiatives during 2000 and 2001 to
improve operating results and cash flows. Management believes the initiatives
undertaken will enable the Company to maintain compliance with the bank
financial covenants as well as provide sufficient cash flow to meet the
Company's obligations as they become due. However, the Company's liquidity can
be affected by any of the following significant risk factors:
The Company's business is substantially dependent on sales to the nuclear
power industry (38% of revenue in 2001) and the chemicals industry (37% of
revenue in 2001). Spending by companies in these targeted industries is
subject to period-to-period fluctuations as a consequence of industry
cycles, economic conditions , political and regulatory environments and
other factors.
The Company relies on two customers, Battelle's Pacific Northwest National
Laboratory (17% of revenue in 2001) and Westinghouse Savannah River Company
(24% of revenue in 2001), for a substantial portion of its revenues. The
loss of either of these customers would have a material adverse effect upon
the Company' liquidity.
Sales of products and the provision of services to end users outside the
United States accounted for approximately 40% of the Company's revenue in
2001. Thus, the Company is subject to risks associated with the application
and imposition of protective legislation and regulations relating to import
or export or otherwise resulting from trade or foreign policy.
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 enters into forward exchange
contracts, options and swap as hedges against certain foreign currency
commitments to hedge its foreign currency risk.
New Accounting Standards.
Effective January 1, 2001, the Company adopted Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities," and No. 138 "Accounting for Certain Derivative Instruments and
Certain Hedging Activities." These statements required that an entity recognize
all derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. The adoption of these
standards, including the valuation of derivative instruments outstanding on the
effective date, did not have a material impact on the Company's consolidated
financial statements.
On July 20, 2001 the FASB issued Statement No. 141, "Business
Combinations," and Statement No. 142, "Goodwill and Other Intangible Assets."
Statement 141 requires that all business combinations be accounted for under a
single method -- the purchase method. Use of the pooling-of-interests method no
longer is permitted. Statement 141 requires that the purchase method be used for
business combinations initiated after June 30, 2001. Statement 142 requires that
goodwill no longer be amortized to earnings, but instead be reviewed for
impairment at least annually. The amortization of goodwill ceases upon adoption
of the Statement by the Company on January 1, 2002.
In October 2001, the FASB issued Statement No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." The provisions of this statement
are effective for fiscal years beginning after December 14, 2001. The Company
does not expect the adoption of this standard to 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. During the year ended December 31, 2001, 2% and 3% of
the Company's revenues were from contracts which permitted payments in a
currency other than U.S. Dollars, principally Swedish Krona and Japanese Yen,
respectively. In addition, during the year ended December 31, 2001, 5% of the
Company's expenses were incurred in Swedish Krona. 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 29, 2002, such interest rates are
based on the prime rate plus 75 basis- points.
As of December 31, 2001, $6.0 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, 2001 would have changed the Company's interest expense by
approximately $72,000.
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, 2001 and 2000...............F-3
Consolidated Statements of Operations for the years ended
December 31, 2001, 2000, and 1999...................................... F-4
Consolidated Statements of Comprehensive Income (Loss) for the years ended
December 31, 2001, 2000, and 1999.......................................F-5
Consolidated Statements of Changes in Stockholders' Equity for the years ended
December 31, 2001, 2000, and 1999.......................................F-6
Consolidated Statements of Cash Flows for the years ended
December 31, 2001, 2000, and 1999.......................................F-7
Notes to Consolidated Financial Statements.................................F-8
Independent Auditors' Report
The Board of Directors and Stockholders
GSE Systems, Inc.:
We have audited the accompanying consolidated balance sheets of GSE Systems,
Inc. and subsidiaries as of December 31, 2001 and 2000, and the related
consolidated statements of operations, comprehensive income (loss), changes in
stockholders' equity and cash flows for the years 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 audits 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 audits provide 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, 2001 and 2000, and the results of their
operations and their cash flows for the years then ended in conformity with
accounting principles generally accepted in the United States of America.
/s/KPMG LLP
Baltimore, Maryland
March 15, 2002
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Stockholders of GSE Systems, Inc.:
In our opinion, the consolidated statements of operations, of comprehensive
income (loss), of changes in stockholders' equity and of cash flows for the year
ended December 31, 1999 (appearing on pages F-3 through F-30 of the GSE Systems,
Inc. 2001 Annual Report on this Form 10-K) present fairly, in all material
respects, the results of operations and cash flows of GSE Systems, Inc. and its
subsidiaries for the year 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 audit. We conducted our audit 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 audit provides 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,
---------------------------
2001 2000
------------ -------------
ASSETS
Current assets:
Cash and cash equivalents $ 2,040 $ 1,465
Restricted cash 164 30
Contract receivables 11,608 14,489
Proceeds of rights offering held by escrow agent 1,322 -
Inventories 1,566 1,587
Prepaid expenses and other current assets 2,335 2,520
Deferred income taxes 587 277
------------ -------------
Total current assets 19,622 20,368
Investment in Avantium International B.V. 2,898 2,895
Property and equipment, net 1,762 2,299
Software development costs, net 3,806 5,067
Goodwill, net 2,386 2,996
Deferred income taxes 1,013 847
Restricted cash 340 503
Other assets 1,847 974
------------ -------------
Total assets $ 33,674 $ 35,949
============ =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 2,284 $ 2,347
Accounts payable 2,163 5,669
Accrued expenses 1,217 2,115
Accrued compensation and payroll taxes 1,676 1,940
Billings in excess of revenue earned 4,659 1,366
Accrued warranty reserves 415 462
Income taxes payable 103 171
Other current liabilities 87 776
------------ -------------
Total current liabilities 12,604 14,846
Long-term debt 6,690 11,840
Accrued warranty reserves 528 550
------------ -------------
Total liabilities 19,822 27,236
------------ -------------
Commitments and contingencies
Stockholders' equity:
Common stock $.01 par value, 18,000,000 shares authorized, shares issued and
outstanding 5,741,138 in 2001 and 8,000,000 shares authorized, shares
issued and outstanding 5,193,527 in 2000 57 52
Series A convertible preferred stock $.01 par value, 2,000,000 shares authorized,
shares issued and outstanding 39,000 in 2001 - -
Additional paid-in capital 27,535 22,230
Retained earnings (deficit) - at formation (5,112) (5,112)
Retained earnings (deficit) - since formation (7,313) (7,555)
Accumulated other comprehensive loss (1,315) (902)
------------ -------------
Total stockholders' equity 13,852 8,713
------------ -------------
Total liabilities and stockholders' equity $ 33,674 $ 35,949
============ =============
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,
2001 2000 1999
------------ ------------- -------------
Contract revenue $ 50,331 $ 55,715 $ 66,699
Cost of revenue 36,381 40,822 41,629
------------ ------------- -------------
Gross profit 13,950 14,893 25,070
------------ ------------- -------------
Operating expenses
Selling, general and administrative 10,857 17,853 22,646
Depreciation and amortization 1,375 1,695 1,680
------------ ------------- -------------
Total operating expenses 12,232 19,548 24,326
------------ ------------- -------------
Operating income (loss) 1,718 (4,655) 744
Gain (loss) on sales of assets 3,273 (990) -
Write-down of investment
in Avantium International B.V. (4,605) - -
Interest expense, net (886) (687) (450)
Other income, net 406 55 40
------------ ------------- -------------
Income (loss) before income taxes (94) (6,277) 334
(Benefit from) provision for income taxes (353) 2,537 233
------------ ------------- -------------
Net income (loss) $ 259 $ (8,814) $ 101
============ ============= =============
Basic earnings (loss) per common share $ 0.05 $ (1.70) $ 0.02
============ ============= =============
Diluted earnings (loss) per common share $ 0.05 $ (1.70) $ 0.02
============ ============= =============
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,
2001 2000 1999
------------ ------------- -------------
Net income (loss) $ 259 $ (8,814) $ 101
Foreign currency translation adjustment (413) (184) (33)
------------ ------------- -------------
Comprehensive income (loss) $ (154) $ (8,998) $ 68
============ ============= =============
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 Preferred Additional (Deficit) Other
Stock Stock Paid-in At Since Comprehensive
Shares Amount Shares Amount Capital Formation Formation Loss Total
-------- -------- ---------- --------- -------- -------- -------- ----
Balance, January 1, 1999 ................. 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
Fair value of options/warrants issued
to non-employees .................... -- -- -- -- 194 -- -- -- 194
Options exercised ........................ 25 -- -- -- 33 -- -- -- 33
Conversion of subordinated
debt to preferred stock ............. -- -- 39 -- 3,900 -- -- -- 3,900
Proceeds from rights offering ............ 523 5 -- -- 1,178 -- -- -- 1,183
Preferred stock dividends
declared and payable ................ -- -- -- -- -- -- (17) -- (17)
Foreign currency translation adjustment .. -- -- -- -- -- -- -- (413) (413)
Net income ............................... -- -- -- -- -- -- 259 -- 259
------- ------- ------- --- ------- ------ ------- ------- -------
Balance, December 31, 2001 ............... 5,742 $ 57 39 $-- $27,535 $ (5,112) $7,313 $ (1,315) $13,852
======= ======= ======= === ======= ====== ======= ======= =======
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,
2001 2000 1999
------------ ------------- -------------
Cash flows from operating activities:
Net income (loss) $ 259 $ (8,814) $ 101
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 3,394 3,882 3,481
Foreign currency transaction gain (253) (255) (40)
Fair value of options/warrants issued to non-employees - - 133
(Gain) loss on sales of assets (3,273) 990 -
Write-down of investment in Avantium International B.V. 4,605 - -
Non-monetary consideration received for software licensed to
Avantium International B.V. - (2,895) -
Deferred income taxes (476) 2,273 119
Changes in assets and liabilities:
Contract receivables 683 1,939 4,382
Inventories 21 1,554 (363)
Prepaid expenses and other assets (363) (164) (563)
Accounts payable, accrued compensation and accrued expenses (5,154) (690) (1,888)
Billings in excess of revenues earned 3,293 (1,599) (3,282)
Accrued warranty reserves (69) (288) (142)
Other liabilities (689) (561) 744
Income taxes payable (68) 141 (121)
------------ ------------- -------------
Net cash provided by (used in) operating activities 1,910 (4,487) 2,561
------------ ------------- -------------
Cash flows from investing activities:
Proceeds from sale of assets - - 731
Cash paid for acquisition of businesses (1,090) (658) (930)
Cash sold in disposition of business - (261) -
Capital expenditures (477) (472) (1,398)
Capitalized software development costs (809) (1,868) (2,460)
------------ ------------- -------------
Net cash used in investing activities (2,376) (3,259) (4,057)
------------ ------------- -------------
Cash flows from financing activities:
Proceeds from issuance of common stock 33 542 -
Proceeds from issuance of notes payable to related party 3,350 1,550 -
Proceeds from issuance of notes payable - 458 -
(Restrictions) releases of cash as collateral under line of credit, net 29 202 (735)
Increase (decrease) in borrowings under lines of credit (4,289) 3,044 (513)
Proceeds from assignments of sales-type leases 2,198 1,141 3,432
Other financing repayments (269) (346) (160)
------------ ------------- -------------
Net cash provided by financing activities 1,052 6,591 2,024
------------ ------------- -------------
Effect of exchange rate changes on cash (11) (75) (73)
------------ ------------- -------------
Net increase (decrease) in cash and cash equivalents 575 (1,230) 455
Cash and cash equivalents at beginning of year 1,465 2,695 2,240
------------ ------------- -------------
Cash and cash equivalents at end of year $ 2,040 $ 1,465 $ 2,695
============ ============= =============
The accompanying notes are an integral part of these consolidated financial statements.
GSE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001, 2000, and 1999
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.
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 accounting
principles generally accepted in the United States of America 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 identified. 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, 2000 and 2001.
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. Slow moving 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 $827,000, $1,679,000, and $2,915,000, for the
years ended December 31, 2001, 2000, and 1999, respectively.
Asset impairment
The Company periodically evaluates the recoverability of its long-lived
assets by comparing the carrying value of the asset to management's best
estimate of the expected future cash flows to be generated by the asset,
undiscounted and without interest costs. Impairments are recognized in operating
results to the extent that the carrying value exceeds fair value. No impairment
losses were recognized in 2001, 2000, or 1999.
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, 2001, 2000, and 1999, foreign currency transaction
gains were approximately $253,000, $55,000, and $40,000, 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 net income for 2001 was decreased by preferred stock
dividends of $17,000 in calculating the per share amounts.
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,
--------------------------------------------
2001 2000 1999
------------- ------------ --------------
Weighted average shares outstanding - Basic 5,217,453 5,181,972 5,065,688
============= ============ ==============
Weighted average shares outstanding - Diluted 5,259,016 5,181,972 5,351,474
============= ============ ==============
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, 2001, 2000 and 1999, one customer accounted for approximately 17%,
22% and 13%, respectively, of the Company's revenues. At December 31, 2001, the
contracts receivable balance related to this significant customer was
approximately $1.2 million, or 10.4% of contract receivables, of which all was
unbilled at year-end. In 2001 and 2000, another customer accounted for
approximately 24%, and 11%, respectively, of the Company's revenues. At December
31, 2001, the contracts receivable balance related to this significant customer
was approximately $1.6 million, or 13.8% of the balance, of which $484,000 was
unbilled at year-end.
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
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
criteria the Company uses for designating an instrument as a hedge include the
instrument's effectiveness in risk reduction and one-to-one matching of
derivative instruments to underlying transactions. The Company monitors its
foreign currency exposures to maximize the overall effectiveness of its foreign
currency hedge 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.
Effective January 1, 2001, the Company adopted Statements of Financial
Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and
Hedging Activities," as amended by SFAS No. 138 which establishes accounting and
reporting standards for derivative instruments. The adoption of Statement No.
133 resulted in no cumulative adjustment to income or other comprehensive income
at January 1, 2001. All derivatives, whether designated as hedging relationships
or not, are required to be recorded on the balance sheet at fair value. If the
derivative is designated as a fair value hedge, the changes in the fair value of
the derivative and of the hedged item attributable to the hedged risk are
recognized in earnings. If the derivative is designated as a cash flow hedge,
the change in the fair value of the derivative and of the hedged item are
recognized as an element of other comprehensive income. The Company utilizes
forward exchange contracts, options and swaps, as defined by Statement No. 133,
to hedge certain foreign currency balance sheet exposures.
At December 31, 2001, the Company had contracts for the sale of
approximately $866,000 and $52,000 of Japanese Yen and Euros, respectively, at
fixed rates. The contracts expire on various dates through November 2002. The
Company has not designated the contracts as hedges and accordingly has recorded
the estimated fair value of the contracts of $95,000 at December 31, 2001 as
other assets in the consolidated balance sheet and other income (expense) in the
consolidated statement of operations.
Reclassifications
Certain reclassifications have been made to prior year amounts to conform
with the current year presentation.
New Accounting Standards
On July 20, 2001, the FASB issued Statement No. 141, "Business
Combinations," and Statement No. 142, "Goodwill and Other Intangible Assets."
Statement 141 requires that all business combinations be accounted for using the
purchase method. Statement 142 requires that goodwill no longer be amortized to
earnings, but instead be reviewed for impairment at least annually. The
amortization of goodwill ceases upon adoption of the Statement, which for the
Company will be January 1, 2002.
In October 2001, the FASB issued Statement No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." The provisions of this statement
are effective for fiscal years beginning after December 15, 2001. The Company
does not expect the adoption of this standard to have a material impact on the
Company's consolidated financial statements.
3. Investment in Avantium International B.V.
On February 24, 2000, the Company licensed certain of its simulation
software products to Avantium International 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.
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, Akzo Nobel, three major
European universities and various 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 accounted for its investment in Avantium using the cost method of
accounting based on management's conclusion that the Company did 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 were
comparable to those the Company earns performing services for its other
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, on March
6, 2001, the Company sold its VirtualPlant business to Avantium. Avantium
purchased certain fixed assets and intellectual property (including BatchCAD and
BatchWizard software products), obtained perpetual licenses to certain GSE
Process software products, and employed certain personnel in both the U.S. and
the UK. GSE received 200,000 shares of Avantium preferred stock and 280,000
shares of Avantium common stock, which increased its equity interest in Avantium
to approximately 19% and the carrying value of its investment to $7.5 million.
The Company recognized a gain on the sale of its VirtualPlant business of $3.3
million, before income taxes. This gain was determined based on the estimated
fair value of the Avantium stock received, based on an independent appraisal,
net of the book value of the assets sold and the estimated costs to settle
severance with employees terminated from GSE and other transaction expenses.
Although the Company retained one seat on the supervisory board of Avantium,
management concluded that such seat did not provide the Company with significant
influence. Accordingly, the Company continued to account for its investment in
Avantium using the cost method. The cost method requires that if a decline in
fair value below cost is judged by management to be other than temporary, the
cost basis must be written down to fair value as a new cost basis, and the
amount of the write-down is included in earnings as a realized loss. Any new
cost basis derived in this manner is not changed for subsequent recoveries in
fair value.
On February 7, 2002, Avantium completed a private placement round of
financing which resulted in 20 million Euros in new capital and the conversion
of 11 million Euros of convertible debt. The equity issuance and debt conversion
diluted GSE's ownership in Avantium to 6.1%. The estimated fair market value of
Avantium following the financing was $47.4 million. Accordingly, the Company
concluded that this transaction was evidence of "an other than temporary
decline" in the fair value of its investment in Avantium. Thus, in the fourth
quarter 2001, the Company wrote down its investment in Avantium to $2.9 million
and recognized a $4.6 million pre-tax charge.
4. 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,
---------------------------
2001 2000
------------ -------------
Billed receivables $ 6,640 $ 9,265
Recoverable costs and accrued profit not billed 5,009 5,548
Allowance for doubtful accounts (41) (324)
------------ -------------
Total contract receivables $ 11,608 $ 14,489
============ =============
5. Inventories
Inventories consist of the following:
(in thousands) December 31,
---------------------------
2001 2000
------------ ------------
Raw materials $ 1,143 $ 1,084
Service parts 423 503
------------ ------------
Total inventories $ 1,566 $ 1,587
============ ============
6. Prepaid expenses and other current assets
Prepaid expenses and other current assets consist of the following:
(in thousands) December 31,
---------------------------
2001 2000
------------- -------------
Investment in sales-type lease - current portion $ 1,016 $ 1,617
Prepaid expenses 742 459
Employee advances 84 66
Other current assets 493 378
------------- -------------
Total $ 2,335 $ 2,520
============= =============
7. Property and equipment
Property and equipment consist of the following:
(in thousands) December 31,
---------------------------
2001 2000
------------- ------------
Computer equipment $ 4,730 $ 5,106
Leasehold improvements 878 847
Furniture and fixtures 2,051 2,065
------------- ------------
7,659 8,018
Accumulated depreciation and amortization (5,897) (5,719)
------------- ------------
Property and equipment, net $ 1,762 $ 2,299
============= ============
Depreciation and amortization expense was approximately $706,000,
$1,163,000, and $1,292,000, for the years ended December 31, 2001, 2000, and
1999, respectively.
8. Software development costs
Software development costs, net, consist of the following:
(in thousands) December 31,
---------------------------
2001 2000
------------- ------------
Capitalized software development costs $7,725 $9,419
Accumulated amortization (3,919) (4,352)
------------- ------------
Software development costs, net $ 3,806 $ 5,067
============= ============
Software development costs capitalized were approximately $809,000, $1,869,000,
and $2,460,000 for the years ended December 31, 2001, 2000, and 1999,
respectively. Amortization of software development costs capitalized was
approximately $2,019,000, $2,202,000, and $1,801,000 for the years ended
December 31, 2001, 2000, and 1999, respectively, and were included in cost of
revenue.
9. Goodwill
Goodwill consists of the following:
(in thousands) December 31,
---------------------------
2001 2000
------------- ------------
Goodwill, at cost $ 4,855 $ 4,796
Accumulated amortization (2,469) (1,800)
------------- ------------
Goodwill, net $ 2,386 $ 2,996
============= ============
Amortization expense for goodwill was approximately $669,000, $528,000,
and $388,000 for the years ended December 31, 2001, 2000, and 1999,
respectively.
10. Long-term Debt
The Company's long-term debt consists of the following notes payable and
other financing arrangements:
(in thousands) December 31,
---------------------------
2001 2000
------------ ------------
Line of credit with bank $ 4,988 $ 9,277
Notes payable to related parties (see Note 16) 1,100 1,674
Obligations under financing leases 2,645 2,261
Notes payable, acquisitions - 489
Notes payable, other 241 486
------------ ------------
Total notes payable and financing arrangements 8,974 14,187
Less amounts payable within one year 2,284 2,347
------------ ------------
Long-term portion $ 6,690 $ 11,840
============ ============
Line of Credit
The Company has a $10.0 million bank line of credit under which the
Company and its subsidiaries, GSE Process Solutions, Inc. and GSE Power Systems,
Inc., are jointly and severally liable as co-borrowers. 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). GP Strategies Corporation, one of
the Company's major stockholders, has provided a limited guarantee totaling $1.8
million. The interest rate on this line of credit is based on the bank's prime
rate plus 0.75% (5.50% as of December 31, 2001), with interest only payments due
monthly. At December 31, 2001, the Company's available borrowing base was
approximately $5.8 million, of which approximately $5.0 million had been
utilized. The credit facility expires on March 23, 2003.
The credit facility 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, 2001, the
Company was in compliance with the covenants.
Notes Payable to Related Parties
In 2000, the Company issued a demand promissory note to ManTech that
allowed the Company to borrow up to $1.8 million at an interest rate of prime
plus one percent. In addition, ManTech provided $1.8 million in standby letters
of credit to the Company's bank as additional collateral for the Company's
credit facility. In April 2001, ManTech agreed to allow the Company's bank to
draw upon ManTech's $1.8 million letter of credit which supported 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. Accordingly, the
Company's promissory note to ManTech was amended to increase the amount to $3.9
million. The amended note permitted ManTech to convert the principle amount of
the note into GSE Series A convertible preferred stock at a conversion rate of
$100 per share. The Company determined that the conversion of this debt did not
constitute a beneficial conversion.
ManTech elected to convert its subordinated debt into equity on December
5, 2001. The Series A convertible preferred stock has no voting rights and bears
dividends at the rate of 6% per annum payable quarterly. Dividends will
accumulate if not paid quarterly and compounded interest will accrue on any
unpaid dividends. ManTech at its discretion has the right to convert each share
of Series A convertible preferred stock into GSE common stock at a purchase
price of $2.645 per share at any time after a one-year holding period from the
date of issuance. At the end of the third year from the date of issuance, the
Series A convertible preferred stock automatically converts into GSE common
stock. Prior to ManTech's conversion of the Series A convertible stock to common
stock, GP Strategies has the option to acquire 50% of the Series A convertible
preferred stock for $1,950,000 from ManTech.
On June 25, 2001, the Company issued an additional unsecured promissory
note to ManTech for $1.0 million at an interest rate of prime plus one percent.
The Company used the loan proceeds for working capital purposes. The note is
subordinated to the Company's credit facility. In January 2002, the Company
repaid ManTech $250,000, plus $36,000 of interest and expects to pay the balance
of the loan before the end of the second quarter 2002.
Obligations under financing leases
During 1999, 2000, and 2001 the Company entered into five 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 $2,198,000 in 2001 and
$1,141,000 in 2000. 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,
---------------------------
2001 2000
------------ ------------
Net investment in sales-type leases:
Prepaid expense and other assets $ 1,016 $ 1,617
Other assets - non current 1,629 644
------------ ------------
Total net investment $ 2,645 $ 2,261
============ ============
Obligation under financing leases:
Current portion of long-term debts $ 1,016 $ 1,617
Long-term debts 1,629 644
------------ ------------
Total obligations $ 2,645 $ 2,261
============ ============
Minimum rentals receivable under these leases at December 31, 2001
amount to $1,335,000 in 2002, $1,221,000 in 2003, and $625,000 in 2004. As of
December 31, 2000, the components of the net investment in the sales-type leases
are total minimum rentals receivable of $3,181,000, less unearned interest
income of $536,000.
Debt maturities
Aggregate maturities of debt outstanding at December 31, 2001 are as follows:
(in thousands)
2002 $ 2,284
2003 6,064
2004 590
2005 18
2006 18
------------
Total $ 8,974
============
11. Income taxes
The consolidated income (loss) before income taxes, by domestic and foreign
sources, is as follows:
(in thousands) Years ended December 31,
-------------------------------------------
2001 2000 1999
------------- ------------- -------------
Domestic $ (135) $ (6,295) $ (1,386)
Foreign 41 18 1,720
------------- ------------- -------------
Total $ (94) $ (6,277) $ 334
============= ============= =============
The (benefit from) provision for income taxes is as follows:
(in thousands) Years ended December 31,
-------------------------------------------
2001 2000 1999
------------- ------------- -------------
Current:
Federal $ 54 $ (177) $ -
State 26 75 30
Foreign 43 366 84
------------- ------------- -------------
Subtotal 123 264 114
------------- ------------- -------------
Deferred:
Federal and State (448) 2,543 110
Foreign (28) (270) 9
------------- ------------- -------------
Subtotal (476) 2,273 119
------------- ------------- -------------
Total $ (353) $ 2,537 $ 233
============= ============= =============
The (benefit from) 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,
---------------------------------------------
2001 2000 1999
------------- ------------- -------------
Statutory U.S. tax rate (34.0)% (34.0)% 34.0 %
State income tax, net of federal tax benefit 31.0 0.8 2.7
Effect of foreign operations 6.2 1.5 6.9
Change in valuation allowance (447.2) 68.4 -
Adjustments to prior year provision based
on actual 1998 tax return amounts - - (14.5)
Other 68.9 3.7 40.7
------------- ------------- -------------
Effective tax rate (375.1)% 40.4 % 69.8 %
============= ============= =============
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,
----------------------------
2001 2000
------------- -------------
Net operating loss carryforwards $ 5,589 $ 6,240
Software development costs (1,263) (1,860)
Expenses not currently deductible for tax purposes 974 1,344
Foreign tax credits 379 339
Property and equipment (27) 240
Swedish tax deferral (175) (270)
Accrued expenses 269 267
Other 784 174
------------- -------------
Subtotal 6,530 6,474
Valuation allowance (4,930) (5,350)
------------- -------------
Total $ 1,600 $ 1,124
============= =============
At December 31, 2001, the Company had available $13,456,000 and $2,384,000
of domestic and foreign net operating loss carryforwards, respectively, which
expire between 2012 and 2020. In addition, the Company had $379,000 of foreign
tax credit carryforwards, which expire between 2003 and 2005. These
carryforwards will be utilized to reduce taxable income in subsequent years.
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 of
future taxable income in fiscal 2002 and 2003, management has established a
valuation allowance of $4,930,000 and $5,350,000 at December 31, 2001 and 2000,
respectively. During 2001, the Company decreased its valuation allowance by
$420,000. During 2000, the Company increased its valuation allowance by $4.3
million.
12. Capital stock
At a special shareholder's meeting on August 2, 2001, the Company's
shareholders approved an amendment to the Certificate of Incorporation
increasing GSE's authorized common stock by eight million shares. As of December
31, 2001, the Company had 20,000,000 total shares of capital stock authorized,
of which 18,000,000 are designated as common stock and 2,000,000 are designated
as preferred stock. 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.
On March 6, 2001, with the completion of the sale of VirtualPlant to
Avantium (see Note 3), the Company granted warrants to purchase shares of the
Company's common stock to two non-employees. The warrants provide the right to
purchase 37,500 shares of the Company's common stock at $1.00 per share. In
2001, the Company recognized expense related to the warrants of $115,000.
On March 9, 2001, with the completion of the sale of VirtualPlant to
Avantium (see Note 3), the Company arranged a consulting agreement with a
terminated employee. In consideration of consulting services, the Company
granted fully vested options to purchase 53,000 shares of the Company's common
stock at $1.70 per share. In 2001, the Company recognized expense related to
these options based on their estimated fair value of $79,000.
As of December 21, 2001, the Company completed a rights offering granting
rights to shareholders to purchase additional shares of common stock for a
subscription price of $2.53 per share. The rights granted 0.711 for every share
of common stock held of record as of October 26, 2001. Each whole right entitled
the shareholder to purchase one share of common stock for $2.53 per share. As of
December 31, 2001, the Company had a rights offering receivable of $1.3 million
due from its escrow agent and accrued $139,000 of costs associated with the
completion of the rights offering. The Company received the cash proceeds from
its escrow agent in January 2002. The proceeds were used for a partial repayment
of a $1 million loan from ManTech and working capital requirements.
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 and
amortized such value over the life of the initial guarantee, which expired in
June 1999. During 1999, the Company recognized expense related to these warrants
of $120,000.
As of December 31, 2001, the Company has reserved 3,732,635 shares of
common stock for issuance upon exercise of stock options and warrants and the
conversion of preferred stock.
13. Series A Convertible Preferred Stock
On December 5, 2001, ManTech elected to convert $3.9 million of
subordinated debt into Series A convertible preferred stock at a conversion rate
of $100 per share. The Company has determined that the conversion of this debt
into preferred stock did not constitute a beneficial conversion. The Series A
convertible preferred stock has no voting rights and bears dividends at the rate
of 6% per annum payable quarterly. Dividends will accumulate if not paid
quarterly and compounded interest will accrue on any unpaid dividends. As of
December 31, 2001, the Company had accrued dividends payable of $17,000.
In the event of liquidation or dissolution of the Company, payment of
available funds shall be made on the Series A convertible preferred stock
(including payment in satisfaction of dividend obligations) prior and in
preference to the common stock. ManTech at its discretion has the right to
convert each share of Series A convertible preferred stock into GSE common stock
at a purchase price of $2.645 per share at any time after a one-year holding
period from the date of issuance. At the end of the third year from the date of
issuance, the Series A convertible preferred stock automatically converts into
1,474,480 shares of GSE common stock. Prior to ManTech's conversion of the
Series A convertible stock to common stock, GP Strategies has the option to
acquire 50% of the Series A convertible preferred stock for $1,950,000.
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. At December 31, 2001, the Company had
604,965 shares of common stock reserved for the future grants under the Plan.
Stock option activity under the Plan is as follows:
2001 2000 1999
--------------------------- ------------------------------ -----------------------------
Weighted Weighted Weighted
Average Average Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
----------- -------------- -------------- -------------- ------------- --------------
Options outstanding, beginning of period 1,437,105 $ 4.81 1,167,605 $ 4.93 535,206 $ 5.93
Options exercised (25,000) (1.33) (10,880) (3.56) - -
Options canceled (99,950) (4.59) (14,620) (3.73) (45,601) (5.62)
Options granted 547,000 1.95 295,000 5.07 678,000 4.07
----------- -------------- -------------
Options outstanding, end of period 1,859,155 $ 4.03 1,437,105 $ 4.81 1,167,605 $ 4.93
============= ============== =============
The following table summarizes information relating to currently outstanding and
exercisable options at December 31, 2001:
:
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 - $2.95 681,100 5.9 $ 2.14 229,600 $ 2.34
$2.96 - $4.43 796,114 4.7 3.67 394,164 3.83
$4.44 - $5.90 212,500 4.8 4.82 212,500 4.82
$5.91 - $7.38 13,000 4.1 6.27 13,000 6.27
$7.39 - $8.85 30,000 3.5 7.50 18,000 7.50
$8.86 - $11.80 200 4.6 11.25 200 11.25
$11.81 - $14.75 126,241 3.7 14.11 126,241 14.11
---------------- ---------------
Total 1,859,155 5.1 $ 4.03 993,705 $ 5.10
================ ===============
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 for options granted to employees and directors as these
options 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 SFAS No. 123, "Accounting for Stock
Based Compensation," the Company's pro forma net loss, and basic and diluted
loss per common share would have been approximately $972,000 and $.19,
respectively, in 2001; $11.1 million and $2.14, respectively, in 2000; $615,000
and $.12, respectively, in 1999.
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, 2001, 2000, and
1999: expected volatility of 110%, 110%, and 82%; dividend yield of 0%;
risk-free interest rates ranging from 3.6% to 6.2%; and expected terms ranging
from 1 to 7 years. The weighted-average fair value of options granted during
2001, 2000, and 1999 was $1.55 per share, $3.93 per share, $2.82 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, 2001 are as follows:
(in thousands)
2002 $ 1,595
2003 1,333
2004 1,339
2005 1,326
2006 1,242
Thereafter 1,910
-------------
Total $ 8,745
=============
Total rent expense under operating leases for the years ended December 31,
2001, 2000, and 1999 was approximately $1,924,000, $2,101,000, and $2,013,000,
respectively.
Letters of credit and performance bonds
As of December 31, 2001, the Company was contingently liable for
approximately $504,000 under four letters of credit used as payment bonds on
contracts, all of which were secured by cash deposits classified as restricted
cash in the consolidated balance sheet. As of December 31, 2001, the Company was
contingently liable for approximately $262,000 under three performance bonds on
contracts, all of which were secured by letters of credit of the Company's
foreign subsidiary. In addition, the Company has $111,000 in escrow until April
30, 2003 as a performance bond deposit in connection with a simulator contract
in Taiwan. This deposit is classified as an other asset in the consolidated
balance sheets at December 31, 2001 and 2000.
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. Other related party transactions
In January 2000, the Company issued 116,959 shares of its common stock to
ManTech for $500,000. The proceeds of the stock issuance were used for working
capital.
Due to the Company's liquidity situation at the end of 2000, GSE
experienced some difficulties in procuring supplies from its vendors for
business operations. In January 2001, the Company entered into a purchasing
arrangement with ManTech whereby ManTech dealt directly with some of the
Company's vendors, ordered the supplies needed and had the products shipped in
accordance with the Company's instructions. Purchases under this agreement
totaled $843,000 for the year ended December 31, 2001. This purchasing
arrangement terminated in June 2001, and the Company has no outstanding
obligations to ManTech, in connection with this purchasing arrangement as of
December 31, 2001. The supplies purchased through ManTech were at the same
prices at which the Company could have procured the supplies directly.
In September 2001, the Company entered into a sublease agreement with
ManTech, allowing ManTech to sublease 2,088 square feet of space at the
Company's Columbia, Maryland office through September, 2002. For the year ended
December 31, 2001, such sublease rentals amounted to $13,000.
In September, 2001, the Company entered into an alliance with General
Physics Corporation, the leading supplier of operator instructional training
programs for the Power industry. In addition to cooperating in marketing of
individual products, the companies will combine some of General Physics'
extensive training materials and programs with GSE's power plant simulation
models to provide interactive and adaptive total training solutions. GSE will
also help sell and distribute General Physics' GFE product to GSE's customer
base.
On December 7, 2001, the Company agreed to make certain cash and in-kind
contributions to RedStorm Scientific, LLC ("RedStorm") in exchange for a 10%
membership interest in RedStorm. RedStorm is a privately held computational drug
design company. Its technology (patents pending), known as Fyrestar, utilizes
bio-informatics and computer-aided molecular design to create lead compounds
that are developed into successful new drugs. It greatly reduces the significant
cost associated with screening thousands of potential compounds common in the
drug development process.
The Company paid $50,000 to RedStorm in the fourth quarter of 2001 and will
make additional cash payments of $50,000 in each of the first three quarters of
2002. GSE's in-kind contribution consists of the development of a graphical user
interface that will allow scientists to easily access and use the Fyrestar
technology and the development of additional functionality to Fyrestar, allowing
results to be graphically displayed as the calculations take place. This will
allow scientists the opportunity to adjust their assumptions in real time, and
further improve results. GSE will receive a perpetual, worldwide, royalty-free,
non-transferable exclusive license for RedStorm's software products solely in
the power and process control markets.
GSE will receive one seat on RedStorm's Board of Managers. Additionally,
two of the Company's directors are also on RedStorm's Board of Managers. The
Company will account for its investment in RedStorm using the equity method of
accounting based on management's conclusion that the Company has significant
influence with respect to the operations of RedStorm.
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 $293,000, $340,000, and $359,000 for the years ended
December 31, 2001, 2000, and 1999, respectively.
18. Acquisitions and dispositions
Acquisitions
In April 1999, the Company completed two acquisitions for the Process
business unit which were accounted for using the purchase method. 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
============
In 1999, 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, and 1999, the contingent consideration in excess of the
minimum guaranteed amount was approximately $549,000 and $411,000, respectively,
which the Company has recorded as additions to goodwill. For the year ended
December 31, 2001, there was no contingent consideration.
Dispositions
On November 30, 2000, the Company completed the sale of its GSE Process
Solutions N.V. subsidiary ("GSE Belgium") to Newton Beheer B.V., pursuant to a
stock purchase agreement, whereby Newton Beheer B.V. acquired all of the assets
and assumed all of the liabilities of GSE Belgium. The aggregate cash sales 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
Beheer B.V.
19. 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, Investment in Avantium International B.V. and Note 18, Acquisitions and
dispositions).
The table below presents information as of and for the years ended
December 31, 2001, 2000, and 1999 about the reportable segments:
(in thousands) 2001
------------------------------------------
Process Power Total
Contract revenue $ 24,999 $ 25,332 $ 50,331
============ ============ ============
Business unit contribution $ 3,745 $ 1,672 $ 5,417
============ ============ ============
Net assets $ 16,833 $ 14,861 $ 31,694
============ ============ ============
Additions to long-lived assets $ 974 $ 372 $ 1,346
============ ============ ============
2000
------------------------------------------
Process Power Total
Contract revenue $ 25,208 $ 30,507 $ 55,715
============ ============ ============
Business unit contribution $ (4,053) $ 4,549 $ 496
============ ============ ============
Net assets $ 16,831 $ 17,719 $ 34,550
============ ============ ============
Additions to long-lived assets $ 1,913 $ 921 $ 2,834
============ ============ ============
1999
------------------------------------------
Process Power Total
Contract revenue $ 34,638 $ 32,061 $ 66,699
============ ============ ============
Business unit contribution $ 1,026 $ 5,093 $ 6,119
============ ============ ============
Net assets $ 21,970 $ 18,276 $ 40,246
============ ============ ============
Additions to long-lived assets $ 3,716 $ 982 $ 4,698
============ ============ ============
Contract revenue for the Process segment includes revenue 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.
For the years ended December 31, 2001, 2000, and 1999, one Power Simulation
customer (Battelle's Pacific Northwest National Laboratory) accounted for
approximately 17%, 22%, and 13%, respectively, of the Company's consolidated
revenue. The Pacific Northwest National Laboratory is the purchasing agent for
the Department of Energy and the projects the Company performs in Eastern and
Central Europe. For the years ended December 31, 2001, 2000 and 1999, one
Process Automation customer (Westinghouse Savannah River Company) accounted for
approximately 24%, 11%, and 5%, respectively, of the Company's consolidated
revenue.
For the years ended December 31, 2001, 2000 and 1999, 37%, 26% and 31% of
the Company's consolidated revenue were from customers in the chemicals
industry, respectively, and 38%, 55% and 47% the Company's revenue were from
customers in the nuclear power industry, respectively.
A reconciliation of segment business unit contribution to consolidated
income before taxes for the years ended December 31, 2001, 2000, and 1999 is as
follows:
(in thousands) Years ended December 31,
------------------------------------------
2001 2000 1999
------------ ------------ ------------
Segment business unit contribution $ 5,417 $ 496 $ 6,119
Corporate expenses (3,293) (5,096) (5,335)
Gain (loss) on disposition of assets 3,273 (990) -
Write-down on investment of
Avantium International B.V. (4,605) - -
Interest expense, net (886) (687) (450)
------------ ------------ ------------
Income (loss) before income taxes $ (94) $ (6,277) $ 334
============ ============ ============
A reconciliation of segment total assets to total consolidated assets as of
the years ended December 31, 2001, 2000, and 1999 is as follows:
(in thousands) December 31,
------------------------------------------
2001 2000 1999
------------ ------------ ------------
Segment total assets $ 31,694 $ 34,550 $ 40,246
Other assets unallocated to segments 1,980 1,399 2,781
------------ ------------ ------------
Total consolidated assets $ 33,674 $ 35,949 $ 43,027
============ ============ ============
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 as of and for the years ended
December 31, 2001, 2000 and 1999 are as follows:
(in thousands) 2001
---------------------------------------------------------------------------
United States Europe Asia Eliminations Consolidated
---------------- ----------- ----------- -------------- ---------------
Contract revenue $ 47,004 $3,327 $ - $ - $ 50,331
Transfers between geographic locations 123 37 - (160) -
---------------- ----------- ----------- -------------- ---------------
Total contract revenue $ 47,127 $3,364 $ - $ (160) $ 50,331
================ =========== =========== ============== ===============
Operating income (loss) $ 2,294 $(647) $ 71 $ - $ 1,718
================ =========== =========== ============== ===============
Identifiable assets, at December 31 $ 40,168 $1,921 $ 101 $ (8,516) $ 33,674
================ =========== =========== ============== ===============
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
================ =========== =========== ============== ===============
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
================ =========== =========== ============== ===============
20. Supplemental disclosure of cash flow information
(in thousands) Years ended December 31,
-------------------------------------------
2001 2000 1999
Asset acquisitions financed with note payable
issued to seller (see Note 18): $ - $ - $ 598
============= ============= =============
Software product license sold in exchange for
stock of buyer (see Note 3) $ - $ 2,895 $ -
============= ============= =============
Issuance of options/warrants issued
to non-employees (see Note 12) $ 194 $ - $ -
============= ============= =============
Conversion of related party note payable to
preferred stock (see Note 16) $ 3,900 $ - $ -
============= ============= =============
Cash paid:
Interest $ 845 $ 889 $ 481
============= ============= =============
Income taxes $ 434 $ 271 $ 683
============= ============= =============
21. 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, 2001 Quarterly Data
----------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------------- ------------- ------------- -------------
Contract revenue $ 12,478 $ 11,845 $ 13,823 $ 12,185
Operating income (loss) (209) 464 1,154 309
Net income (loss) 1,714 468 601 (2,524)
Earnings (loss) per common share:
Basic $ 0.33 $ 0.09 $ 0.12 $ (0.49)
Diluted $ 0.33 $ 0.09 $ 0.11 $ (0.48)
Year ended December 31, 2000 Quarterly Data
----------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------------- ------------- ------------- -------------
Contract revenue $ 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)
The first quarter 2000 includes contract revenue and related profit from
the licensing of software to Avantium, as described in Note 3, 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 18, Acquisitions and
dispositions), and a $4.3 million income tax charge to increase the deferred tax
asset valuation allowance (see Note 11, Income taxes).
The first quarter 2001 net income includes a $3.3 million gain before
income taxes on the sale of the Company's VirtualPlant technology and assets to
Avantium. The fourth quarter 2001 net income includes a $4.6 million write down
of the Company's investment in Avantium (see Note 3 Investment in Avantium
International B. V.) and a $420,000 reduction of the Company's deferred tax
valuation allowance.
F-30
GSE SYSTEMS, INC.
FORM 10-K
For the Year Ended December 31, 2001
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
GSE SYSTEMS, INC.
FORM 10-K
For the Year Ended December 31, 2001
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 2002 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, 2001 and 2000
Consolidated Statements of Operations for the years ended December 31,
2001, 2000, and 1999
Consolidated Statements of Comprehensive Income(Loss) for the years
ended December 31, 2001, 2000, and 1999
Consolidated Statements of Changes in Stockholders' Equity for the
years ended December 31, 2001, 2000, and 1999
Consolidated Statementsof Cash Flows for the years ended
December 31, 2001, 2000, and 1999
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:
Form 8-K was filed by the Registrant with the Securities and Exchange
Commission on October 24, 2001 regarding the Third Amended and Restated
Certificate of Incorporation of the Company.
Form 8-K was filed by the Registrant with the Securities and Exchange
Commission on December 12, 2001 regarding the Preferred Stock Issuance Agreement
by and between GSE Systems, Inc. and ManTech International Corporation (dated
December 5, 2001).
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 29, 2002 / S / Chin-Our Jerry Jen
--------------------------------
Chin-Our Jerry Jen, Chief Operating
Officer and President
(Principal Executive Officer)
Date: March 29, 2002 / S / JEFFERY G. HOUGH
--------------------------------
Jeffery G. Hough, Senior Vice
President and Chief Financial
Officer
(Principal Financial and
Accounting Officer)
Date: March 29, 2002
(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
(Dr. Roger Hagengruber, Director)
(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,
2001 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
Number
Exhibit Description of Exhibit Page
- ------------- --------------------------------------------------------------------------------- ------------ -----------
3. Articles of Incorporation and Bylaws
a. Third Amended and Restated Certificate of Incorporation of the Company.
Previously filed in connection with the GSE Systems, Inc. Form 8-K as filed
with the Securities and Exchange Commission on October 24, 2001 and
incorporated herein by reference.
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. *
Exhibit
Number
Exhibit Description of Exhibit Page
- ------------- --------------------------------------------------------------------------------- ------------ -----------
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.
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. Executive Employment Agreements between GSE Systems, Inc. and Directors Jerome
I. Feldman, George J. Pedersen, Scott N. Greenberg, and John A. Moore, Jr.
(dated January 1, 1999). Previously filed in connection with the GSE Systems,
Inc. Form 8-K as filed with the Securities and Exchange Commission on August 1,
2001 and incorporated herein by reference.
g. Warrant Agreements with GP Strategies and ManTech International
Corporation (dated September 13, 1999). Previously filed in
connection with the GSE Systems, Inc. Form 8-K as filed with the
Securities and Exchange Commission on August 15, 2001 and
incorporated herein by reference.
h. Change of Control Agreements between GSE Systems, Inc. and Jerry Jen and
Jeffery G. Hough (dated March 10, 2000). Previously filed in connection with
the GSE Systems, Inc. Form 8-K as filed with the Securities and Exchange
Commission on August 1, 2001 and incorporated herein by reference.
i. 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.
Exhibit
Number
Page
Exhibit Description of Exhibit
- ------------- --------------------------------------------------------------------------------- ------------ -----------
j. $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.
k. 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.
l. 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.
m. 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.
n. Asset Sale and Purchase Agreement between GSE Systems, Inc. and Avantium
International B.V. dated March 6, 2001. Previously filed in connection with the
GSE Systems, Inc. Form 8-K as filed with the Securities and Exchange Commission
on March 21, 2001 and incorporated herein by reference.
o. $2,100,000 Replacement Promissory Note dated March 30, 2001, from GSE Systems,
Inc. to ManTech International Corporation.
p. Subordination and Intercreditor Agreement by and between National
Bank of Canada and ManTech International Corporation dated March
30, 2001.
Third Modification Agreement dated March 30, 2001 to the Loan and Security
q. Agreement among GSE Systems, Inc., GSE Process Solutions, Inc., GSE Power
Systems, Inc., and National Bank of Canada dated March 23, 2000.
Exhibit
Number
Page
Exhibit Description of Exhibit
- ------------- --------------------------------------------------------------------------------- ------------ -----------
r. Allonge and First Modification to Replacement Promissory Note between GSE
Systems, Inc. and ManTech International Corporation (dated April 6, 2001).
Previously filed in connection with the GSE Systems, Inc. Form 8-K as filed
with the Securities and Exchange Commission on August 15, 2001 and incorporated
herein by reference.
s. Executive Compensation Plan for Jerry Jen (dated May 3, 2001). Previously
filed in connection with the GSE Systems, Inc. Form 8-K as filed with the
Securities and Exchange Commission on August 1, 2001 and incorporated herein by
reference.
t. $1,000,000 promissory note dated June 25, 2001 to ManTech International
Corporation. Previously filed in connection with the GSE Systems, Inc. Form
8-K as filed with the Securities and Exchange Commission on August 1, 2001 and
incorporated herein by reference.
u. Preferred Stock Issuance Agreement by and between GSE Systems, Inc. and ManTech
International Corporation (dated December 5, 2001). Previously filed in
connection with the GSE Systems, Inc. Form 8-K as filed with the Securities and
Exchange Commission on December 12, 2001 and incorporated herein by reference.
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, 2001. 21.1 X-21.1-1
23. Consents of Experts and Counsel
a. Independent Auditors' Consent. 23.1 X-23.1-1
b. Consent of Independent Accountants. 23.2 X-23.2-1
Exhibit
Number
Page
Exhibit Description of Exhibit
- ------------- --------------------------------------------------------------------------------- ------------ -----------
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.