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GSE Systems targets $4.5 billion market


In 1993, S3 Technologies was a mess.

Its parent company was in Chapter 11 bankruptcy proceedings. Many of its best and brightest had jumped ship to a new firm. S3's own business -- making software for nuclear power plant simulators -- was bleeding red ink and the company itself was ripe for a foreign takeover.

What a difference two years makes.

Now, S3's successor, GSE Systems Inc., based in Columbia, is mapping out a strategy for expansion.

Shored up by an initial public offering in July that raised about $20 million, GSE is nearly debt-free, is making a profit and is moving into what it sees as a potential $4.5 billion market. It has a work force of about 545, with 220 in Columbia, 180 in Hunt Valley and the rest scattered among locations in Sweden, the United States and the rest of the world.

"It was truly an effort of a number of others who believed in our vision," said William E. Kuhlmann, GSE's chairman and chief executive officer, sitting in the company's imposing 155,000-square-foot brick and glass building in a Columbia business park. "One reason I'm here is to fulfill that vision."

The saga of GSE started in 1988 when S3's parent, the 140-year-old Singer Co., a defense contractor that had sold off its famous sewing machine operation in 1986, succumbed to a hostile takeover by Paul A. Bilzerian, a 37-year-old Tampa, Fla., corporate raider who planned to make a profit by selling off the company piecemeal.

S3, part of Singer's Link simulator division, specialized in making the software for multimillion-dollar replicas of nuclear power plant control rooms. These control systems, which stretch for 60 to 90 feet and cost from $6 million to $19 million, are not connected to reactors but to computers that simulate them.

But Mr. Bilzerian's plans went awry, and the company, renamed Bicoastal Corp., filed for Chapter 11 bankruptcy in 1989. Mr. Bilzerian was convicted of securities fraud in other deals not connected to Singer.

Unhappy with developments, some of S3's key employees bailed out to set up a competitor, GP International Engineering & Simulation at General Physics Corp., another Columbia company that provides professional services to utilities and government agencies.

And S3, now contending in a tougher international market, started cutting its bids -- to the detriment of its bottom line. At the same time, potential customers shied away because of the )) financial problems of its parent company. By 1993, S3 was ripe for picking by a foreign competitor.

Then ManTech International Corp. and Mr. Kuhlmann stepped into the picture.

ManTech, a privately held consulting and technical company in Fairfax, Va., with annual sales of about $300 million, was looking to expand its simulator business, then limited to desktop models. It retained Mr. Kuhlmann, 52, to give S3 the once-over, and he came away impressed.

ManTech went ahead with the deal, buying S3 for $5 million and installing Mr. Kuhlmann, a former consultant and chief executive of General Physics, as chairman and chief executive.

Critical to the deal was a state guarantee of $2 million worth of loans and its help getting financing from the Export-Import Bank of the United States.

"We probably couldn't have done it without the help of the state," Mr. Kuhlmann said.

ManTech then brought in the parent of General Physics, National Patent Development Corp., and EuroSim AB, a subsidiary of the Swedish government-owned utility Vattenfall AB, as partners in the newly named GSE Systems, with ManTech and National Patent each holding 45 percent and EuroSim 10 percent of the company's stock.

Rolf M. G. Falkenberg, the former president of engineering and executive vice president of Vattenfall AB, was installed as president and chief operating officer.

Strategic acquisition

Secure in its new ownership, GSE, mindful of the nuclear power industry's cloudy prospects, set its sights on building simulators for other industrial operations, ranging from oil pipelines to steel making.

To crack these markets, GSE acquired the process solutions division of Texas Instruments Corp. in December for $8.8 million.

Based in Hunt Valley, this division makes software for the control panels of industrial operations -- known as process controls. Now, the division will be able to offer software for both real and simulated operations -- something that is offered by few of its competitors, Mr. Kuhlmann said.

The acquisition also nearly doubled GSE's revenues to $41.8 million for the first six months of the year, compared with sales of $23 million for the same period a year ago.

With cost cutting -- including laying off 30 to 40 workers -- and the completion of money-losing contracts, the combined operations went from a pro forma loss of $7 million in 1993 to a profit of $1.6 million last year.

The company's balance sheet, however, still showed the effects of years of losses, with a corporate net worth, or stockholders' equity, of minus $3.5 million.

But the company's prospects of expanding its process control business while selling more simulators to industrial customers -- a market it estimates at a potential $4.5 billion -- enabled GSE to issue 1.5 million shares at the relatively high price of $14 a share.

The July 27 initial public offering of the GSE stock raised about $20 million and pushed the company's net worth up to $14.8 million, though it reduced ManTech's and National Patent's stakes to 28 percent each and EuroSim's to 6.3 percent. The stock closed yesterday at $14.

The investment banking firm that took GSE public, Prime Charter Ltd. in New York, expects the company to dominate the nuclear simulator business now that the main players are combined.

"They were knocking each other's heads off bidding on the same contracts in the utility industry," said Sylvan Schefler, chairman of Prime Charter. "And they were bidding it stupidly."

Alan H. Dorsey, director for research at Value Investing Partners Inc. in Westport, Conn., noted that GSE's predecessor firms built 114 of the 170 nuclear simulators in service. And he added that there are another 255 nuclear plants in the world still without simulators.

"Even though it sounds like an ugly business, it's a great business," said Mr. Dorsey, whose firm participated in the selling group that handled the stock offering.

"The core business has done well and should do well in the next couple of years," he said.

Eastern European prospects

Indeed, GSE is looking to Russia and the former Soviet bloc countries as new markets for nuclear simulators. And both Mr. Kuhlmann and Mr. Falkenberg believe the nuclear industry will be revived as power plants turn away from fossil-fuel plants that generate carbon dioxide.

Nuclear simulators are "our cash cow," Mr. Falkenberg said.

GSE also is banking on its process solutions division to break into the industrial market -- something S3 tried unsuccessfully a few years ago.

"It gives us instant access to a customer base," Mr. Kuhlmann said. "Our customers are very excited about it."

The need for more industrial simulators is being fueled by the increasing complexity of the controls and the enormous expense of shutdowns caused by inexperienced operators. The $200,000 $5 million it costs for an industrial simulator can be made up by fewer breakdowns, Mr. Kuhlmann said.

Mr. Dorsey said outside forces ranging from the Environmental Protection Agency to insurance companies also are adding to the pressures on companies to use simulators.

Yet while the markets seem right and the company is poised to cash in, it still is up to management to make it work, Mr. Dorsey said. "They've got to put up the numbers in the next 18 months."

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