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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the Quarterly Period Ended June 30, 2002.
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the Transition Period
from ______________to _______________.
Commission File Number: 0-26494
GSE SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
Delaware 52-1868008
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
9189 Red Branch Road, Columbia Maryland, 21045
(Address of principal executive office and zip code)
Registrant's telephone number, including area code: (410) 772-3500
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No ___
As of July 31, 2002, there were 5,869,138 shares of the Registrant's common
stock outstanding.
GSE SYSTEMS, INC.
QUARTERLY REPORT ON FORM 10-Q
INDEX
PAGE
PART I. FINANCIAL INFORMATION 3
Item 1. Financial Statements:
Consolidated Balance Sheets as of June 30, 2002 and 3
December 31, 2001
Consolidated Statements of Income for the Three and Six Months 4
Ended June 30, 2002 and June 30, 2001
Consolidated Statements of Comprehensive Income for the 5
Three and Six Months Ended 5 June 30, 2002 and June 30, 2001
Consolidated Statements of Cash Flows for the Six Months 6
Ended June 30, 2002 and June 30, 2001
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Results of Operations 13
and Financial Condition
Item 3. Quantitative and Qualitative Disclosure About Market Risk 21
PART II. OTHER INFORMATION 22
Item 1. Legal Proceedings 22
Item 2. Changes in Securities and Use of Proceeds 22
Item 3. Defaults Upon Senior Securities 22
Item 4. Submission of Matters to a Vote of Security Holders 22
Item 5. Other Information 22
Item 6. Exhibits and Reports on Form 8-K 22
SIGNATURES 23
CERTIFICATIONS 24
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
GSE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
Unaudited
June 30, 2002 December 31, 2001
-------------------- --------------------
ASSETS
Current assets:
Cash and cash equivalents $ 1,041 $ 2,040
Restricted cash 314 164
Contract receivables 9,963 11,608
Proceeds of rights offering held by escrow agent - 1,322
Inventories 1,532 1,566
Prepaid expenses and other current assets 2,743 2,335
Deferred income taxes 587 587
______________ ____________
Total current assets 16,180 19,622
Investment in Avantium International B.V. 2,898 2,898
Property and equipment, net 1,938 1,762
Software development costs, net 4,426 3,806
Goodwill, net 2,386 2,386
Deferred income taxes 1,013 1,013
Restricted cash 340 340
Other assets 3,247 1,847
______________ ____________
Total assets $ 32,428 $ 33,674
______________ ____________
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 5,716 $ 2,284
Accounts payable 2,316 2,163
Accrued expenses 830 1,217
Accrued compensation and payroll taxes 1,215 1,676
Billings in excess of revenue earned 3,279 4,659
Accrued contract and warranty reserves 437 415
Income taxes payable 510 103
Other current liabilities 25 87
______________ ____________
Total current liabilities 14,328 12,604
Long-term debt 2,885 6,690
Accrued warranty reserves 523 528
______________ ____________
Total liabilities 17,736 19,822
______________ ____________
Commitments and contingencies
Stockholders' equity:
Common stock $.01 par value, 18,000,000 shares authorized, shares issued
and outstanding 5,869,138 and 5,741,138 in 2002 and 2001, respectively 59 57
Series A Convertible preferred stock $.01 par value, 2,000,000 shares authorized,
shares issued and outstanding 39,000 in 2002 and 2001 - -
Additional paid-in capital 27,841 27,535
Accumulated deficit - at formation (5,112) (5,112)
Accumulated deficit - since formation (6,874) (7,313)
Accumulated other comprehensive loss (1,222) (1,315)
______________ ____________
Total stockholders' equity 14,692 13,852
______________ ____________
Total liabilities and stockholders' equity $ 32,428 $ 33,674
______________ ____________
The accompanying notes are an integral part of these consolidated financial statements.
GSE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
(Unaudited)
Three months Six months
ended June 30, ended June 30,
____________________________ ___________________________
2002 2001 2002 2001
------------ ------------ ------------- ------------
Contract revenue $ 12,131 $ 11,845 $ 23,405 $ 24,323
Cost of revenue 8,382 8,563 16,173 18,069
------------ ------------ ------------- ------------
Gross profit 3,749 3,282 7,232 6,254
------------ ------------ ------------- ------------
Operating expenses:
Selling, general and administrative 3,427 2,478 6,045 5,298
Depreciation and amortization 102 340 242 701
------------ ------------ ------------- ------------
Total operating expenses 3,529 2,818 6,287 5,999
------------ ------------ ------------- ------------
Operating income 220 464 945 255
Gain on sale of assets - - - 3,273
Interest expense, net (63) (220) (135) (452)
Other income, net 43 109 90 133
------------ ------------ ------------- ------------
Income before income taxes 200 353 900 3,209
Provision (benefit) for income taxes 77 (115) 345 1,027
------------ ------------ ------------- ------------
Net income $ 123 $ 468 $ 555 $ 2,182
============ ============ ============= ============
Basic earnings per common share $0.01 $ 0.09 $ 0.07 $ 0.42
============ ============ ============= ============
Diluted earnings per common share $0.01 $ 0.09 $ 0.07 $ 0.42
============ ============ ============= ============
The accompanying notes are an integral part of these consolidated financial statements.
GSE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
(Unaudited)
Three months Six months
ended June 30, ended June 30,
--------------------------- -------------------------
2002 2001 2002 2001
------------- ------------ ------------ -----------
Net income $ 123 $ 468 $ 555 $ 2,182
Foreign currency translation adjustment 120 (97) 93 (239)
------------- ------------ ------------ -----------
Comprehensive income $ 243 $ 371 $ 648 $ 1,943
============= ============ ============ ===========
The accompanying notes are an integral part of these consolidated financial statements.
GSE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
Six months
ended June 30,
--------------------------
2002 2001
------------ ------------
Cash flows from operating activities:
Net income $ 555 $ 2,182
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Depreciation and amortization 1,146 1,778
Gain on sale of assets - (3,273)
Deferred income taxes - (400)
Changes in assets and liabilities:
Contract receivables (944) 639
Inventories, prepaid expenses and other assets 268 59
Accounts payable, accrued compensation and accrued expenses (698) (2,117)
Billings in excess of revenues earned (1,380) 871
Accrued warranty reserves 17 35
Other liabilities 351 495
------------ ------------
Net cash (used in) provided by operating activities (685) 269
------------ ------------
Cash flows from investing activities:
Capital expenditures (406) (187)
Capitalized software development costs (1,525) (302)
------------ ------------
Net cash used in investing activities (1,931) (489)
------------ ------------
Cash flows from financing activities:
Proceeds from issuance of notes payable to related party - 3,350
Repayment of note payable to related party (300) -
(Restrictions) releases of cash as collateral under line of credit (150) 30
Decrease in borrowings under line of credit (1,884) (4,005)
Proceeds from assignments of sales-type leases 2,589 -
Proceeds from issuance of common stock, net of costs 1,583 -
Other financing activities, net (227) 3
------------ ------------
Net cash provided by (used in) financing activities 1,611 (622)
------------ ------------
Effect of exchange rate changes on cash 6 (16)
------------ ------------
Net decrease in cash and cash equivalents (999) (858)
Cash and cash equivalents at beginning of period 2,040 1,465
------------ ------------
Cash and cash equivalents at end of period $ 1,041 $ 607
============ ============
The accompanying notes are an integral part of these consolidated financial statements.
GSE SYSTEMS, INC. AND SUBSIDIARIES
FORM 10-Q
For the Three and Six Months ended June 30, 2002 and 2001
1. Basis of Presentation
The consolidated financial statements included herein have been prepared by
GSE Systems, Inc. (the "Company") without independent audit. In the opinion of
the Company's management, all adjustments and reclassifications of a normal and
recurring nature necessary to present fairly the financial position, results of
operations and cash flows for the periods presented have been made. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with accounting principles generally accepted in the
United States have been condensed or omitted. These consolidated financial
statements should be read in conjunction with the consolidated financial
statements and notes thereto included in the Company's Annual Report on Form
10-K for the year ended December 31, 2001 filed with the Securities and Exchange
Commission on March 29, 2002.
2. Basic and Diluted Earnings Per Common Share
Basic earnings per share is based on the weighted average number of
outstanding common shares for the period. Diluted earnings per share adjusts the
weighted average shares outstanding for the potential dilution that could occur
if stock options, warrants, or convertible preferred stock were exercised or
converted into common stock. The number of common shares and common share
equivalents used in the determination of basic and diluted earnings per share
were as follows:
Three months Six months
ended June 30, ended June 30,
------------------------------- -------------------------------
2002 2001 2002 2001
-------------- -------------- -------------- ---------------
Weighted average shares outstanding - Basic 5,869,138 5,193,527 5,857,030 5,193,527
============== ============== ============== ===============
Weighted average shares outstanding - Diluted 6,285,441 5,252,527 6,259,665 5,221,215
============== ============== ============== ===============
The difference between the basic and diluted number of weighted average
shares outstanding for the three and six months ended June 30, 2002 and 2001
represents dilutive stock options, warrants and convertible preferred stock to
purchase shares of common stock computed under the treasury stock method, using
the average market price during the period. The net income for the three and six
month period ended June 30, 2002 was decreased by preferred stock dividends of
$58,000 and $116,000, respectively, in calculating the per share amounts. For
the three and six months ended June 30, 2001, there were no preferred stock
dividends.
3. Inventories
Inventories are stated at the lower of cost, as determined by the average
cost method, or market. Obsolete or unsaleable inventory is reflected at its
estimated net realizable value. Inventories consist of the following:
(in thousands) June 30, December 31,
2002 2001
------------- --------------
Raw materials $ 1,139 $ 1,143
Service parts 393 423
------------- --------------
Total inventories $ 1,532 $ 1,566
============= ==============
4. Software Development Costs
Certain computer software development costs are capitalized in the
accompanying consolidated balance sheets. Capitalization of computer software
development costs begins upon the establishment of technological feasibility.
Capitalization ceases and amortization of capitalized costs begins when the
software product is commercially available for general release to customers.
Amortization of capitalized computer software development costs is included in
cost of revenue and is determined using the straight-line method over the
remaining estimated economic life of the product, not to exceed five years.
Software development costs capitalized were $1.0 million and $150,000 for
the three months ended June 30, 2002 and 2001, respectively. Total amortization
expense was $455,000 and $551,000 for the three months ended June 30, 2002 and
2001, respectively.
For the six months ended June 30, 2002 and 2001, software development costs
capitalized were $1.5 million and $302,000, respectively. Total amortization
expense was $904,000 and $1.1 million for the six months ended June 30, 2002 and
2001, respectively.
The increase in the Company's R&D expenditures was related to:
- The development of Version 11.0 of its D/3 Process Automation System.
The major enhancements to the system include improved alarm handling and
advanced system diagnostics. In addition, the Company will introduce two
new more cost effective process controllers based on the use of modern PCI
back plane technology and improved diagnostics.
- The development of the Process D/3 Compact, a smaller, redesigned
version of the D/3 distributed control system which is aimed at smaller
automation applications. This entry level offering will combine the low
cost found in Programmable Logic Controllers (PLC) solutions with the high
functionality of a distributed control system.
- The replacement of the Graphic User Interfaces (GUI) for our Power
GSuite and Topmeret tools with a Java based GUI, which will provide
platform independence and internet enabling.
5. 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 and 352,102 shares of Avantium common
stock, valued at $2.8 million. 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.
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.
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 approximately $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.
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.
6. Long-term Debt
The Company's long-term debt consists of the following notes payable and
other financing arrangements:
(in thousands) June 30, December 31,
2002 2001
-------------- --------------
Line of credit with bank $ 3,104 $ 4,988
Obligations under financing leases 4,682 2,645
Notes payable to related parties 787 1,100
Notes payable, other 28 241
-------------- --------------
Total notes payable and financing arrangements 8,601 8,974
Less amounts payable within one year 5,716 2,284
-------------- --------------
Long-term portion $ 2,885 $ 6,690
============== ==============
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 June 30, 2002), with interest only payments due
monthly. At June 30, 2002, the Company's available borrowing base was
approximately $4.6 million of which approximately $3.1 million had been
utilized. The credit facility expires on March 23, 2003. Accordingly, the
Company has classified the borrowings under the line of credit as current as of
June 30, 2002.
The credit facility requires the Company to comply with certain financial
ratios on a monthly basis and precludes the Company from paying dividends and
making acquisitions beyond certain limits without the bank's consent. As of
April 30, 2002 and May 31, 2002, the Company was not in compliance with one of
its financial ratio covenants. The Company has received a written waiver from
the bank for its April and May noncompliance. At June 30, 2002, the Company was
in compliance with all of the covenants.
Obligations under financing leases
As of June 30, 2002, the Company has seven 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 approximately $2.6 million for the six months
ended June 30, 2002 and $2.2 million for the year ended December 31, 2001.
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) June 30, December 31,
2002 2001
------------- -------------
Net investment in sales-type leases:
Prepaid expense and other assets $ 1,855 $ 1,016
Other assets 2,827 1,629
------------- -------------
Total net investment $ 4,682 $ 2,645
============= =============
Obligation under financing leases:
Current portion of long-term debt $ 1,855 $ 1,016
Long-term debt 2,827 1,629
------------- -------------
Total obligations $ 4,682 $ 2,645
============= =============
Notes Payable to Related Parties
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. As of June 30, 2002, the Company
has $700,000 due to ManTech. The Company has an additional unsecured promissory
note to a former employee for $87,000 which expires April 14, 2005.
7. Series A 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 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. In December 2004, the Series A convertible preferred
stock automatically converts into GSE common stock. As of June 30, 2002, the
Company had paid all dividends due except for $58,000 for the second quarter
2002 which will be paid in the third quarter.
8. Letters of Credit
As of June 30, 2002, the Company was contingently liable for approximately
$654,000 under five letters of credit used as payment bonds on contracts, all of
which were secured by cash deposits classified as restricted cash in the
consolidated balance sheet.
9. Income Taxes
The Company's effective tax rate is based on the best current estimate of
its expected annual effective tax rate. The difference between the statutory
U.S. tax rate and the Company's effective tax rate for the quarters ended June
30, 2002 and 2001 is primarily due to the effects of foreign operations being
taxed at different rates and state income taxes. As of June 30, 2002 and
December 31, 2001, the aggregate deferred tax assets are recorded net of a
valuation allowance of $4.9 million.
10. Segment Information
The Company's two reportable segments are its core business units Process
and Power. (The Company's VirtualPlant business, which was sold in March 2001,
is reported under the Process segment.) 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 corporate expenses.
The table below presents information about the reportable segments:
(in thousands) Three months ended June 30, 2002 Six months ended June 30, 2002
------------------------------------------------ -------------------------------------------------
Process Power Consolidated Process Power Consolidated
Contract revenue $ 6,916 $ 5,215 $ 12,131 $ 13,617 $ 9,788 $ 23,405
============ =============== =============== =============== =============== ===============
Business unit contribution $ 1,125 $ 40 $ 1,165 $ 2,777 $ (80) $ 2,697
============ =============== =============== =============== =============== ===============
Three months ended June 30, 2001 Six months ended June 30, 2001
------------------------------------------------ -------------------------------------------------
Process Power Consolidated Process Power Consolidated
Contract revenue $ 4,162 $ 7,683 $ 11,845 $ 9,476 $ 14,847 $ 24,323
============== =============== =============== =============== =============== ===============
Business unit contribution $ 432 $ 915 $ 1,347 $ 275 $ 1,941 $ 2,216
============== =============== =============== =============== =============== ===============
Contract revenue for the Process segment includes revenue for the
VirtualPlant business of $507,000 for the six months ended June 30, 2001. The
Company sold its VirtualPlant technology and assets in March 2001 (see Note 5,
Investment in Avantium International B.V.). Business unit contribution for the
Process segment includes a loss for VirtualPlant of $471,000 prior to its sale.
A reconciliation of segment business unit contribution to consolidated
income before taxes is as follows:
(in thousands) Three months Six months
ended June 30, ended June 30,
-------------------------------- --------------------------------
2002 2001 2002 2001
--------------- --------------- --------------- ---------------
Segment business unit contribution $ 1,165 $ 1,347 $ 2,697 $ 2,216
Corporate expenses (902) (774) (1,662) (1,828)
Gain on sale of assets - - - 3,273
Interest expense, net (63) (220) (135) (452)
--------------- --------------- --------------- ---------------
Income before income taxes $ 200 $ 353 $ 900 $ 3,209
=============== =============== =============== ===============
11. Goodwill
On January 1, 2002, the Company adopted Statement of Financial Accounting
Standards No. 142 "Goodwill and Other Intangible Assets" ("SFAS No. 142"). SFAS
No. 142 requires that goodwill and intangible assets with indefinite useful
lives no longer be amortized, but instead tested for impairment at least
annually. During the second quarter of 2002, the Company completed its
transitional impairment test and determined the fair value of each of its
reporting units' net assets exceeded their carrying value, and therefore there
was no impairment of goodwill.
Net income and net income per share for the three and six months ended June
30, 2001, adjusted to eliminate historical amortization of goodwill and related
tax effects, are as follows:
(in thousands, except for per share amounts)
Three months Six months
ended June 30, 2001 ended June 30, 2001
Net income, as reported $ 468 $ 2,182
Add: goodwill amortization, net of tax 126 275
----------------------- -----------------------
Net income, as adjusted $594 $ 2,457
======================= =======================
Net income per share, as reported:
Basic $ 0.09 $ 0.42
Diluted $ 0.09 $ 0.42
Net income per share, as adjusted:
Basic $ 0.11 $ 0.47
Diluted $ 0.11 $ 0.47
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
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.
Critical Accounting Policies and Estimates
In preparing the Company's consolidated 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 Statement of Financial Accounting Standards (SFAS)No. 86 "Accounting for
the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed", the
Company capitalizes computer software development costs incurred after
technological feasibility has been established, but prior to the release of the
software product for sale to customers. Once the product is available to be
sold, the Company begins to amortize the costs over the estimated useful life of
the product, which normally ranges from three to five years. At June 30, 2002,
the Company has net capitalized software development costs of $4.4 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 impairment with respect to the
capitalized software that is reported on the Company's consolidated balance
sheet.
Deferred Income Tax Valuation Allowance. Deferred income taxes arise
from temporary differences between the tax bases of assets and liabilities and
their reported amounts in the financial statements. As required by SFAS No. 109
"Accounting for Income Taxes", management makes 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 net
realizable value. At June 30, 2002, 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 future taxable income is less than management's estimates,
the amount of the net deferred tax assets on the Company's consolidated balance
sheet will require an additional valuation allowance. Additionally, if the
Company is able to realize higher taxable income the valuation allowance could
be reduced.
General Business Environment
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. 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.
Power Simulation Business.
The Company's Power Simulation Business Unit ("Power") is continuing
its efforts to expand its leadership in nuclear simulation technology to the
fossil simulation marketplace. The Company is web-enabling its simulation
products to provide cost effective solutions for fossil simulation. In addition,
the deregulation of the electric power industry has increased the importance of
efficient and reliable operations of power stations. The use of simulation to
address these issues has resulted in new opportunities for GSE to improve the
simulation fidelity of existing simulators and the supply of new simulators
around the world. While GSE simulators are primarily utilized for power plant
operator training, the uses are expanding to include engineering, plant
modification studies, and 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.
The Company recently announced an agreement with RedStorm Scientific
LLC for the use of GSE software in the drug discovery process. RedStorm
Scientific LLC is a privately held computational drug design company. RedStorm
Scientific LLC converted to a Delaware corporation, Red Storm Scientific Inc.,
in April 2002. 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. Under the terms of the agreement, GSE will utilize its
eSMART simulation software and graphical user interface to enable scientists to
easily access and use the Fyrestar technology, graphically displaying results as
the calculations take place. This will enable scientists to adjust their
assumptions in real time, and further improve results.
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 U.S. and is
pursuing applications at other facilities. The Company has signed a contract
with Progress Energy to provide our security system for one of its nuclear power
plants, and licenses to extend the technology to each of the nuclear plants
operated by Progress Energy. 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 Corporation, a subsidiary of one of its major
shareholders, MECX and Protection Strategies Inc. to provide turnkey
capabilities to both the nuclear and chemical industries. The chemical industry
is embarking on a self regulated program to assess vulnerability to physical and
cyber security at chemical plants, and implement the necessary security
enhancements. Services offered by the Company's team 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 accident.
Process Control Business
To expand within its traditional customer base and gain new customers,
Process has embarked upon a program to develop a lower-cost, next generation
process controller using the latest microprocessor technology. This new
controller was introduced in June at Process' Annual Users Conference and
includes enhanced alarming and improved security features. This new version of
the D/3 product, called D/3 Compact, 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 fully distributed control system. The Company's expansion of
distribution channels for Process has begun with agreements with five new sales
representative organizations. The new sales organizations, along with Process'
existing direct sales organization, are expected to find expanded distribution
channels for Process' new products, particularly in smaller batch applications
where previously the power of the D/3 could not be applied on a cost effective
basis.
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
contract revenue:
Three months ended June 30, Six months ended June 30,
----------------------------------------------------- -------------------------------------------------
2002 % 2001 % 2002 % 2001 %
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Contract revenue $ 12,131 100.0 % $ 11,845 100.0 % $ 23,405 100.0 % $ 24,323 100.0 %
Cost of revenue 8,382 69.1 % 8,563 72.3 % 16,173 69.1 % 18,069 74.3 %
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Gross profit 3,749 30.9 % 3,282 27.7 % 7,232 30.9 % 6,254 25.7 %
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Operating expenses:
Selling, general and
administrative 3,427 28.2 % 2,478 20.9 % 6,045 25.8 % 5,298 21.8 %
Depreciation and
amortization 102 0.8 % 340 2.9 % 242 1.0 % 701 2.9 %
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Total operating 3,529 29.0 % 2,818 23.8 % 6,287 26.8 % 5,999 24.7 %
expenses ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------
Operating income 220 1.9 % 464 3.9 % 945 4.1 % 255 1.0 %
Gain on sale of assets - 0.0 % - 0.0 % - 0.0 % 3,273 13.5 %
Interest expense, net (63) (0.5)% (220) (1.9)% (135) (0.6)% (452) (1.9)%
Other income, net 43 0.4 % 109 0.9 % 90 0.4 % 133 0.5 %
---------- ---------- ---------- ---------- ------------ ------------ ---------- -------
Income before income 200 1.8% 353 3.0 % 900 3.9 % 3,209 13.2 %
taxes
Provision (benefit) for 77 0.6 % (115) (1.0)% 345 1.5 % 1,027 4.2 %
income taxes ---------- ---------- ---------- ---------- ---------- ---------- --------- -------
Net income $ 123 1.2 % $ 468 4.0 % $ 555 2.4 % $ 2,182 9.0 %
=========== =========== =========== =========== ============ ============ ============ =======
Contract Revenue. Total contract revenue for the three and six months
ended June 30, 2002 totaled $12.1 million and $23.4 million, respectively, as
compared with total contract revenue of $11.9 million and $24.3 million for the
three and six months ended June 30, 2001, respectively.
The Process business unit's revenue was $6.9 million for the second
quarter 2002 compared with $4.2 million in the same quarter of 2001, a 66.2%
increase; revenue for the six months ended June 30, 2002 was $13.6 million
versus $9.5 million for the same period in 2001, a 43.7% increase. The increase
in Process' revenue is mainly attributable to several significant orders
received from Westinghouse Savannah River Company. Revenue generated from work
performed for Westinghouse Savannah River Company totaled 59.4% of total Process
revenue in the second quarter 2002 versus 31.0% in the first quarter 2001, and
54.4% of total Process revenue for the six months ended June 30, 2002 versus
31.6% in the same period of 2001. Included in 2001 revenue was $507,000 related
to Process' VirtualPlant business, which was sold to Avantium International B.V.
in March 2001.
The Power business unit's revenue decreased 36.1% in the three months
ended June 30, 2002 as compared to the same period in the prior year, from $7.7
million to $5.2 million. Revenue for the six months ended June 30, 2002 was $9.8
million versus $14.8 million in the same period of 2001, a 33.8% decrease.
Although there was increased activity in the U.S. nuclear upgrade market in the
first half 2002 as compared to the prior year, international revenues have
decreased due to the completion of several large projects.
Gross Profit. Gross profit totaled $3.7 million (30.9% of revenue) for
the quarter ended June 30, 2002, as compared with $3.3 million (27.7% of
revenue) for the quarter ended June 30, 2001. For the six months ended June 30,
2002 and 2001, gross profit increased from $6.3 million (25.7% of revenue) in
2001 to $7.2 million (30.9% of revenue) in 2002. The improvement in gross profit
margins for the second quarter 2002 reflects higher Power project margins and
lower software amortization. In addition to these factors, the improvement in
the gross profit margins for the six months ended June 30, 2002 is partially due
to the sale of Process' VirtualPlant business in March 2001 (this business had
negative gross profit of $264,000 in the first quarter 2001).
Selling, General and Administrative Expenses. Selling, general and
administrative ("SG&A") expenses totaled $3.4 million in the quarter ended June
30, 2002, a 38.3% increase from the $2.5 million for the same period in 2001.
SG&A expenses for the six months ended June 30, 2002 increased 14.1% to $6.0
million as compared to the same period in the prior year. The Process business
unit hired one additional salesperson in the first quarter 2002, as well as a
new marketing manager who has been charged with developing the business unit's
marketing strategy, revitalizing the Company's marketing collateral, and
planning the product introductions for the D/3 Version 11 and the new D/3
Compact. The Power business has incurred higher bidding and proposal costs in
the pursuit of new orders and hired two marketing personnel for its security
business in the beginning of 2002. In addition, the Company incurred a
significant increase in its net research and product development expenditures
("R&D"), as discussed below.
Gross R&D totaled $1.4 million in the second quarter of 2002, as
compared with $341,000 in the same period of 2001. Capitalized software
development costs totaled $1.0 million and $150,000 for the second quarter of
2002 and 2001, respectively. Accordingly, net R&D expensed and included in SG&A
was $371,000 and $191,000 for the second quarter of 2002 and 2001, respectively.
Gross R&D spending for the six months ended June 30, 2002 and 2001
totaled $2.0 million and $709,000, respectively. Capitalized software
development costs totaled $1.5 million in the first half of 2002 versus $302,000
in the same period of 2001; and net R&D expensed and included in SG&A was
$452,000 in the first six months of 2002 versus $407,000 in 2001.
The increase in the Company's R&D expenditures was related to:
- -- The development of Version 11.0 of its D/3 Process Automation System. The
major enhancements to the system include improved alarm handling and
advanced system diagnostics. In addition, the Company will introduce two
new more cost effective process controllers based on the use of modern PCI
back plane technology and improved diagnostics.
- -- The development of the Process D/3 Compact, a smaller, redesigned version
of the D/3 distributed control system which is aimed at smaller automation
applications. This entry level offering will combine the low cost found in
Programmable Logic Controllers (PLC) solutions with the high functionality
of a distributed control system.
- -- The replacement of the Graphic User Interfaces (GUI) for our Power GSuite
and Topmeret tools with a Java based GUI, which will provide platform
independence and internet enabling.
Depreciation and Amortization. Depreciation expense totaled $102,000
and $173,000 during the quarters ended June 30, 2002 and 2001, respectively. For
the six months ended June 30, 2002 and 2001 depreciation expense totaled
$242,000 and $365,000, respectively. The decrease in depreciation in 2002 as
compared to the same periods in 2001 is due to certain assets becoming fully
depreciated.
Due to the Company's adoption of SFAS No. 142 "Goodwill and Other
Intangible Assets" on January 1, 2002, goodwill is no longer amortized, but is
subject to an annual test of impairment. Thus, the Company recognized $167,000
of goodwill amortization in the second quarter 2001 versus none in the second
quarter 2002. For the six months ended June 30, 2001, the Company recognized
$336,000 of goodwill amortization versus none for the six months ended June 30,
2002. See Footnote 10, "Goodwill" in the Notes to Consolidated Financial
Statements.
Operating Income. The Company had operating income of $220,000 (1.9% of
revenue) in the second quarter 2002, as compared with an operating income of
$464,000 (3.9% of revenue) for the same period in 2001. For the six months ended
June 30, 2002 and 2001, operating income was $945,000 or 4.1% of revenue and
$255,000 or 1.0% of revenue, respectively.
Gain on Sale of Assets. On March 6, 2001, the Company sold its
VirtualPlant business technology and assets to Avantium International B.V. 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. See Footnote 5, "Investment in Avantium
International B.V." in the Notes to Consolidated Financial Statements.
Interest Expense, Net. Net interest expense decreased 71.4% from
$220,000 in the quarter ended June 30, 2001 to $63,000 for the same quarter in
2002. This decrease is due to lower interest rates in the second quarter 2002
versus 2001 (5.5% average and 7.83% average, respectively), a reduction in the
average bank debt outstanding ($4.4 million average for the second quarter 2002
versus $6.0 million average for the second quarter 2001), and a reduction in the
average balance outstanding on the Company's subordinated debt to ManTech
($717,000 average for the second quarter 2002 versus $4.2 million average for
the second quarter 2001).
For the six months ended June 30, 2002 and 2001, net interest expense
totaled $135,000 and $452,000, respectively. Similar reductions in the average
interest rate and outstanding debt balances for the first six months of 2002 as
compared to the same period in the prior year accounted for the reduction in
interest expense.
Other Income, Net. Other income, net for the three and six months ended
June 30, 2002 reflects recognized foreign currency transaction gains and royalty
income. For the comparable periods in 2001, other income mainly reflects the
receipt of $147,000 equity distribution from the Company's liquidated Joint
Venture in China (this investment was written off in a prior year) offset by net
foreign currency transaction losses.
Provision (Benefit) for Income Taxes. The Company's effective tax rate
is based on the best current estimate of its expected annual effective tax rate.
The difference between the statutory U.S. tax rate and the Company's effective
tax rate for the quarters ended June 30, 2002 and 2001 is primarily due to the
effects of foreign operations being taxed at different rates and state income
taxes. As of June 30, 2002 and December 31, 2001, the aggregate deferred tax
assets are recorded net of a valuation allowance of $4.9 million.
Liquidity and Capital Resources
As of June 30, 2002, the Company's cash and cash equivalents totaled
$1.0 million compared to $2.0 million at December 31, 2001.
Cash from operating activities. Net cash used in operating activities
was $685,000 for the six months ended June 30, 2002. Significant changes in the
Company's assets and liabilities in 2002 included:
-- an increase in contract receivables of $944,000 largely related to the
Westinghouse Savannah River Company projects, and
-- a $1.4 million reduction in billings in excess of revenues earned. The
Company had received orders from two Process customers in the third
quarter 2001 that allowed GSE to invoice the customer in full prior to
the work being completed. The reduction in billings in excess of
revenues earned reflects the completion of a portion of these two
contracts in the first six months of 2002.
Net cash provided by operating activities for the six months ended June
30, 2001 was $269,000. The gain on the Company's sale of its VirtualPlant
technology and assets to Avantium International B.V. ($3.3 million) was a
non-monetary asset exchange that had no impact on the Company's operating cash
flow in 2001. Significant changes in the Company's assets and liabilities in
2001 included a reduction in contract receivables of $639,000, a reduction in
unbilled receivables of $871,000 and a $2.1 million reduction in accounts
payable and accrued expenses. Accounts receivable collections in early 2001
together with the $1.5 million received in cash from ManTech through issuance of
additional subordinated debt were used to pay down vendor liabilities.
Cash used in investing activities. Net cash used in investing
activities was $1.9 million in the first six months of 2002, comprised of $1.5
million of capitalized software development costs and $406,000 for capital
expenditures. The Company expects its spending on capitalized software
development costs and capital expenditures to decrease in the second half of
2002 as compared with the spending in the first half of 2002, with forecasted
expenditures of $600,000 and $200,000, respectively.
In the first six months of 2001, net cash used in investing activities
was $489,000, consisting of $302,000 of capitalized software development costs
and $187,000 for capital expenditures.
Cash provided by financing activities. During the six months ended June
30, 2002, the Company generated $1.6 million net cash through financing
activities. The Company received $1.3 million from its escrow agent in January
2002 from a fixed-price rights offering which was completed on December 21, 2001
and received $262,000 from the exercise of employee stock options. The Company
decreased its borrowings under its bank line of credit by $1.9 million to a
total of $3.1 million, and decreased its borrowings from ManTech International
Corporation by $300,000 to a total of $700,000. The Company entered into two
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 $2.6 million. In addition,
the Company issued a $150,000 bid bond that was cash collateralized. Bid bonds
are issued by the Company in the ordinary course of business through banks as
required by certain contracts and proposal requirements.
In the first six months of 2001, the Company used $622,000 net cash in
financing activities. The Company decreased its borrowings under its bank line
of credit by $4.0 million, but increased its borrowings from ManTech by $3.4
million.
Credit Facilities
The Company has a $10.0 million bank line of credit with a bank which
expires on March 23, 2003. The credit facility provides for borrowings up to a
total $10.0 million to support working capital needs and foreign letters of
credit. At June 30, 2002, the Company's available borrowing base was $4.6
million, of which approximately $3.1 million had been utilized.
The credit facility requires the Company to comply with certain
financial ratios on a monthly basis and precludes the Company from paying
dividends and making acquisitions beyond certain limits without the bank's
consent. As of April 30, 2002 and May 31, 2002, the Company was not in
compliance with one of its financial ratio covenants. The Company has received a
written waiver from the bank for its April and May noncompliance. At June 30,
2002, the Company was in compliance with all of the covenants.
As of June 30, 2002, the Company has classified the borrowings under
the line of credit as current. See Note 6, "Long-term Debt", in the Notes to
Consolidated Financial Statements" for additional details about this line of
credit.
On June 25, 2001, the Company issued an 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 note is subordinated to the Company's credit
facility. In 2002, the Company repaid ManTech $300,000 of the note from the
proceeds of a fixed-price rights offering that was completed in December 2001.
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 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 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.
Item 3. Quantitative and Qualitative Disclosure about Market Risk
The Company's market risk is principally confined to changes in foreign
currency exchange rates and potentially adverse effects of differing tax
structures. The Company's exposure to foreign exchange rate fluctuations arises
in part from inter-company accounts in which costs incurred in one entity are
charged to other entities in different foreign jurisdictions. The Company is
also exposed to foreign exchange rate fluctuations as the financial results of
all foreign subsidiaries are translated into U.S. dollars in consolidation. As
exchange rates vary, those results when translated may vary from expectations
and adversely impact overall expected profitability.
The Company is also subject to market risk related to the interest
rates on its existing line of credit. As of June 30, 2002, such interest rates
are based on the bank's prime rate plus 75 basis-points.
As of June 30, 2002, $3.8 million of the Company's debt was subject to
variable interest rates. A 100 basis-point change in such rates during the
quarter ended June 30, 2002 and for the six months ended June 30, 2002 would
have changed the Company's interest expense by approximately $13,000 and
$28,000, respectively.
GSE SYSTEMS, INC. AND SUBSIDIARIES
FORM 10-Q
For the Three and Six Months ended June 30, 2002 and 2001
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
In accordance with its conduct in the ordinary course of business,
certain actions and proceedings are pending to which the Company is a party. In
the opinion of management, the aggregate liabilities, if any, arising from such
actions are not expected to have a material adverse effect on the financial
condition of the Company.
Item 2. Changes in Securities and Use of Proceeds
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
Votes
Proposal For Against Abstain Withheld
--------------------------------------- ------------- --------- ------------ ------------
1) Election of directors:
Chin-Our Jerry Jen 4,800,280 - - 100
Sheldon L. Glashow 4,800,280 - - 100
Roger L. Hagengruber 4,800,280 - - 100
2) Ratification of KPMG LLP as
the Company's independent
auditors for the current fiscal year 4,797,004 2,100 1,276 -
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: August 14, 2002 GSE SYSTEMS, INC.
/S/ CHIN-OUR JERRY JEN
Chin-Our Jerry Jen
President and Chief Operating Officer
(Principal Executive Officer)
/S/ JEFFERY G. HOUGH
Jeffery G. Hough
Senior Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
As required by 18 U.S.C. Section 1350, I, Chin-Our Jerry Jen, President
and Chief Operating Officer, hereby certify that, to the best of my knowledge:
1. this Quarterly Report on Form 10-Q for the period ended June 30,
2002 fully complies with the requirements of section 13(a) or 15(d) of the
Securities Exchange Act of 1934, and
2. the information contained in this report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.
Dated: August 14, 2002
/S/ CHIN-OUR JERRY JEN
Chin-Our Jerry Jen
President and Chief Operating Officer
(Principal Executive Officer)
As required by 18 U.S.C. Section 1350, I, Jeffery G. Hough, Senior
Vice President and Chief Financial Officer, hereby certify that, to the best of
my knowledge:
1. this Quarterly Report on Form 10-Q for the period ended June 30,
2002 fully complies with the requirements of section 13(a) or 15(d) of the
Securities Exchange Act of 1934, and
2. the information contained in this report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.
Dated: August 14, 2002
/S/ JEFFERY G. HOUGH
Jeffery G. Hough
Senior Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)