10Q-A ESA Contract
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-Q/A
(Amendment
No. 1)
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[X]
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Quarterly
Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of
1934 for the Quarterly Period Ended March 31,
2006.
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or
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[X]
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Transition
Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of
1934 for the Transition Period from__________ to
__________ .
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Commission
File Number: 0-26494
GSE
SYSTEMS, INC.
(Exact
name of registrant as specified in its charter)
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Delaware
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52-1868008
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|
(State
of incorporation)
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(I.R.S.
Employer Identification No.)
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7133
Rutherford Rd., Suite 200, Baltimore, MD 21244
(Address
of principal executive office and zip code)
Registrant's
telephone number, including area code: (410)
277-3740
Indicate
by check mark whether the registrant (1) has filed all reports required to
be
filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during
the
preceding 12 months (or for such shorter period that the Registrant was required
to file such reports), and (2) has been subject to such filing requirements
for
the past 90 days. Yes [ X ] No [ ]
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.
(Check one):
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Large
accelerated filer [ ]
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Accelerated
filer [ ]
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Non-accelerated
filer [X]
|
Indicate
by check mark whether the registrant is a shell company (as defined in rule
12(b)-2 of the Exchange Act). Yes [ ] No [X]
The
number of shares outstanding of each of the registrant’s Common Stock and Series
A Cumulative Convertible Preferred Stock as of March 15, 2006:
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Common
Stock, par value $.01 per share
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8,999,706
shares
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|
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Series
A Cumulative Convertible Preferred Stock, par value $.01 per share
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42,500
shares
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GSE
SYSTEMS, INC.
QUARTERLY
REPORT ON FORM 10-Q
EXPLANATORY
NOTE
This
Amendment No. 1 to the Form 10-Q for the quarter ended March 31, 2006 is filed
to expand the disclosures made in Item 2. Management’s Discussion and Analysis
of Results of Operations and Financial Condition under the caption “General
Business Environment” regarding the relationship between GSE Systems, Inc. (the
“Company” or “GSE”) and the Emirates Simulation Academy, LLC (“ESA”) and the
award by ESA of a $15.1 million contract to the Company’s wholly-owned
subsidiary, GSE Power Systems, Inc. (“GSE Power”) on January 5, 2006. In
addition, three additional exhibits are being filed with this Amendment No.
1 to
the Form 10-Q for the quarter ended March 31, 2006 as follows: (1) the
Memorandum of Association of Limited Liability Company dated November 8, 2005
by
and between Al Qudra Holding PJSC, Centre of Excellence for Applied Research
and
Training, and GSE, (2) a $15.1 million Supply Agreement Contract dated January
3, 2006 by and between ESA and GSE Power and (3) the License and Technology
Transfer Agreement for Emirates Simulation Academy which is an attachment to
the
Supply Agreement Contract.
INDEX
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PAGE
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Item
2.
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Management's
Discussion and Analysis of Results of Operations and Financial
Condition
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3
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Item
6.
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Exhibits
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5
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SIGNATURES
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5
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Item
2. Management’s Discussion and Analysis of Results of Operations and Financial
Condition
General
Business Environment
The
Company believes it is positioned to take advantage of emerging trends in the
power industry including a global nuclear power renaissance driven by the high
cost of oil coupled with environmental concerns caused by fossil fuels. In
the
U.S. alone, the operating licenses for 32 nuclear power plants will expire
over
the next several years. Many of these plants are planning significant upgrades
to the physical equipment and control room technology in conjunction with the
license extensions. Both will result in the need to modify or replace the
existing plant control room simulators. The Company, having what it believes
is
the largest installed base of existing simulators, over 65%, is well positioned
to capture a large portion of this business, although no assurance can be given
that it will be successful in doing so.
The
Company continues its focus on the fossil power segment of the power industry.
In the first quarter 2006, the Company logged fossil power orders of
approximately $1.0 million. The Company expects continued growth in this market
segment and is focusing on second time simulation buyers that now demand the
more sophisticated and realistic simulation models offered by the
Company.
While
GSE
simulators are primarily utilized for power plant operator training, the uses
are expanding to include engineering analysis, plant modification studies,
and
operation efficiency improvements for both nuclear and fossil utilities. During
plant construction, simulators are used to test control strategies and ensure
on-time start-up. After commissioning, the same tools can be used to increase
plant availability and optimize plant performance for the life of the facility.
In partnership with an industry leading optimization company, GSE will be
participating in DOE grant programs to utilize simulation and optimization
for
DOE’s clean coal power initiative.
Over
the
course of 2006, the Company will continue to develop its concept of integrating
simulation with broader training programs and educational initiatives giving
customers a turnkey alternative to operator and maintenance training. The
Company believes that this offering is unique.
To
increase its market share and expand the Company’s global presence, the Company
has made significant efforts to develop new markets. The importance of emerging
markets to the Company and its ability to compete in the power industry is
reflected in our new joint venture in Abu Dhabi, United Arab Emirates (“UAE”).
The Emirates Simulation Academy, LLC (“ESA”), headquartered in Abu Dhabi, UAE
was formed on November 8, 2005 pursuant to the terms of a Memorandum of
Association of Limited Liability Company (“MOA”) between and among (1) Al Qudra
Holding PJSC of the United Arab Emirates (“Al Qudra”), (2) The Centre of
Excellence for Applied Research and Training of the United Arab Emirates
(the
“Centre”) and (3) GSE (each a “Partner” and collectively “Partners” as
defined in the MOA) for the purpose of building and operating simulation
training academies in the Persian Gulf Region including but not limited to
the
UAE, Qatar, Saudi Arabia, and Kuwait. The initial focus of ESA will be on
the
training and certification of plant operators, maintenance personnel and
engineers at power plants, desalination plants, and oil refineries and
platforms.
The
initial paid in capital of ESA is AED1,000,000 (one million
dirhams) and its authorized capital stock consists of 1,000 shares with
each share valued at AED1,000. The dirham is the unit of currency in the
UAE and had an exchange rate of $.2723 at the date of ESA’s formation. The
founding members of ESA and their respective ownership percentages and paid
in
capital are as follows: (1) Al Qudra, a UAE public joint stock company holding
six hundred shares representing sixty percent (60%) of ESA’s issued and
authorized shares valued at AED600,000; (2) the Centre, a UAE public
joint stock company holding three hundred shares representing thirty
percent (30%) of ESA’s issued and authorized shares valued at AED300,000; and
GSE, a Delaware corporation holding one hundred shares representing ten
percent (10%) of ESA’s issued and authorized shares valued at AED100,000.
In
accordance with UAE law, UAE Partners must hold not less than fifty-one percent
(51%) of the UAE company’s share capital. Pursuant to the terms of the MOA, no
Partner may mortgage or encumber its ESA shares and, to the extent unpaid,
ESA
shall have a lien on a Partner’s shares. Similarly, no Partner may sell or
transfer its ESA shares without first notifying ESA’s Manager and giving the
other Partners a thirty day opportunity in which to acquire its ESA shares.
In the event the remaining Partners both wish to acquire the offered shares,
the
shares must be distributed in a manner which results in not less than 51%
of all
shares being held by the UAE Partners and there must be at least two UAE
Partners at any time. ESA’s board of directors (the “ESA Board”) consists of
three directors with each Partner having the right to appoint one director
and each director serves for a three-year term commencing on the date of
ESA’s
registration. Pursuant to the terms of the MOA, the chairman of the ESA Board
is
Al Qudra’s representative and the ESA Board shall meet at least once every
quarter. All decisions of the ESA Board must be unanimous. ESA must hold an
annual General Assembly and all Partners must be present to constitute a
quorum
of the General Assembly. If all Partners are not present, the General Assembly
must be reconvened twenty-one days later, and holders of at least seventy
five percent (75%) of the ESA ownership interests must be present. The MOA
also
provides that the daily operations of ESA will be conducted by its General
Manager appointed by the ESA Board. As a non-UAE entity and minority owner,
GSE
is not involved in the day-to-day operations of ESA.
In
conjunction with ESA’s development and establishment of the first training
academy of its kind in Abu Dhabi, we announced on January 5, 2006 that we
were awarded a contract worth over $15 million. We believe that the terms
of the
contract referenced below are no more or less favorable to us than the terms
that could be obtained from unaffiliated third parties.
The
Supply Agreement Contract (the “ESA Contract”) by and between ESA and GSE Power
dated January 3, 2006 provides for GSE Power to deliver, install and provide
certain goods and to enter into a software license agreement relating to
the
provision of (a) five training simulators; (b) training program design; (c)
simulator training programs for a gas turbine power plant, a desalination
plant,
a combined cycle plant, a petroleum refinery and an oil platform; and (d)
classroom instruction and online courses in exchange for which ESA shall
pay GSE
Power an aggregate amount of $15,117,906 payable in discrete tranches within
thirty days of presentation of invoices corresponding to certain
performance milestones. At its option, ESA may elect to purchase certain
hardware under the ESA Contract for an additional $1,458,000. Each party
must
provide insurance against loss while that party has custody and control over
the
Goods and the risk of loss passes with change of custody and control.
In
addition, GSE Power is responsible for all taxes, duties, tariffs, fees and
related charges and for obtaining a valid U.S. export control license and
complying with all applicable U.S. export control laws. Outside of any
applicable cure period, in the event of material breach, the non-breaching
party
may terminate the ESA Contract with written notice to the breaching party.
The
ESA Contract also contemplates our performance under the agreement as an
independent contractor. The ESA Contract also contemplates entry into a
license and technology transfer agreement and a software license agreement.
For
the
three and six months periods ended June 30, 2006, the Company recognized
$818,000 and $1.6 million, respectively, of revenue under the ESA Contract
using
the percentage-of-completion method.
In
January 2006, the Company issued a $2.1 million invoice to ESA for an advance
payment. The Company received $1.5 million of the receivable in July 2006 and
expects to receive the remaining $600,000. No bad debt reserve has been
established for the $600,000 past due amount. Under the terms of the ESA
Contract, the Company provided a $2.1 million performance bond to ESA that
will
remain outstanding until the end of the warranty period on October 31, 2008.
In
March
2006, the Company announced that it had agreed to develop a Simulation Training
and Diagnostic Center in concert with the University of Strathclyde located
in
Glasgow, Scotland. Upon finalization of project financing, GSE and Strathclyde
will collaborate to develop a simulation training center in Glasgow where
indigenous UK and international workers can be educated and trained to operate
and maintain power plants, oil refineries, petrochemical plants and other
industrial facilities and to develop a plant and equipment diagnostic center
where actual plant process points are monitored and analyzed.
Item
6.
Exhibits
10.1 Memorandum
of Association of Limited Liability Company dated November 8, 2005 by and
between Al Qudra Holding PJSC, Centre of Excellence for Applied Research and
Training, and GSE Systems, Inc.
10.2 Supply
Agreement Contract by and between Emirates Simulation Academy, LLC and GSE
Power
Systems, Inc. dated January 3, 2006.
10.3 License
and Technology Transfer Agreement by and between GSE Power Systems, Inc. and
Emirates Simulation Academy, LLC dated January 3, 2006
31.1 Certification
of the Chief Executive Officer pursuant to Section 302 of the Sarbanes- Oxley
Act of 2002.
31.2 Certification
of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
Act
of 2002.
32.1 Certification
of the Chief Executive Officer and Chief Financial Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant
has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
Date:
October 4, 2006 GSE
Systems, Inc.
/S/
John V. Moran
John
V.
Moran
Chief
Executive Officer
(Principal
Executive Officer)
/S/
Jeffery G. Hough
Jeffery
G. Hough
Senior
Vice President and Chief Financial Officer
(Principal
Financial and Accounting Officer)