<PAGE> 1
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, 1996.
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)
8930 Stanford Boulevard, Columbia, Maryland, 21045
(Address of principal executive office and zip code)
Registrant's telephone number,
including area code: (410) 312-3700
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 August 9, 1996, there were 5,065,688 shares of the Registrant's common
stock (par value $ .01 per share) outstanding.
<PAGE> 2
GSE SYSTEMS, INC.
QUARTERLY REPORT ON FORM 10-Q
INDEX
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets as of June 30, 1996
and December 31, 1995 3
Consolidated Statements of Operations for the Three and
Six Months Ended June 30, 1996 and 1995 4
Consolidated Statements of Cash Flows for the Six Months
Ended June 30, 1996 and 1995 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition 9
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 12
Item 6. Exhibits and Reports on Form 8-K 12
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GSE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
ASSETS
JUNE 30, DECEMBER 31,
1996 1995
----------- -------------
<S> <C> <C>
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . $ 2,750 $ 9,016
Contract receivables . . . . . . . . . . . . . . . . . . 28,593 29,508
Inventories . . . . . . . . . . . . . . . . . . . . . . . 2,577 2,293
Prepaid expenses and other current assets . . . . . . . . 3,230 2,889
Deferred income taxes . . . . . . . . . . . . . . . . . . 218 472
-------- --------
Total current assets . . . . . . . . . . . . . . . . . 37,368 44,178
Property and equipment, net . . . . . . . . . . . . . . . . . 4,178 4,115
Software development costs, net . . . . . . . . . . . . . . . 3,593 1,921
Goodwill and other intangible assets, net . . . . . . . . . . 2,257 2,348
Deferred income taxes . . . . . . . . . . . . . . . . . . . . 1,838 1,856
Other assets . . . . . . . . . . . . . . . . . . . . . . . . 23 270
-------- --------
Total assets . . . . . . . . . . . . . . . . . . . . . $ 49,257 $ 54,688
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable . . . . . . . . . . . . . . . . . . . . $ 6,143 $ 7,560
Accrued expenses . . . . . . . . . . . . . . . . . . . . 4,979 4,435
Notes payable to banks . . . . . . . . . . . . . . . . . -- 212
Notes payable to related parties . . . . . . . . . . . . -- 190
Obligations under capital lease . . . . . . . . . . . . . 128 103
Billings in excess of revenue earned . . . . . . . . . . 6,996 10,609
Accrued contract reserves . . . . . . . . . . . . . . . . 466 641
Accrued warranty reserves . . . . . . . . . . . . . . . . 2,015 2,119
Other current liabilities . . . . . . . . . . . . . . . . 882 1,061
Income taxes payable . . . . . . . . . . . . . . . . . . 1,335 1,171
-------- --------
Total current liabilities . . . . . . . . . . . . . . 22,944 28,101
Notes payable to related parties . . . . . . . . . . . . . . 210 216
Obligations under capital lease . . . . . . . . . . . . . . . 231 227
Billings in excess of revenues earned . . . . . . . . . . . . 886 2,485
Accrued contract and warranty reserves . . . . . . . . . . . 1,450 1,495
Accrued facility costs . . . . . . . . . . . . . . . . . . . 940 1,103
Other liabilities . . . . . . . . . . . . . . . . . . . . . . 457 529
-------- -------
Total liabilities . . . . . . . . . . . . . . . . . . 27,118 34,156
-------- -------
Stockholders' equity:
Common stock $.01 par value, 8,000,000 shares authorized,
5,065,688 shares issued and outstanding . . . . . . . . 50 50
Additional paid-in capital . . . . . . . . . . . . . . . 21,288 21,113
Retained earnings (deficit) - at formation . . . . . . . (5,112) (5,112)
Retained earnings - since formation . . . . . . . . . . . 5,846 4,329
Pension liability adjustment . . . . . . . . . . . . . . (100) (102)
Cumulative translation adjustment . . . . . . . . . . . . 167 254
-------- --------
Total stockholders' equity . . . . . . . . . . . . . . 22,139 20,532
-------- --------
Total liabilities & stockholders' equity . . . . . . . $ 49,257 $ 54,688
======== ========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
<PAGE> 4
GSE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS SIX MONTHS SIX MONTHS
ENDED ENDED ENDED ENDED
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
1996 1995 1996 1995
------------ ------------- ---------- ----------
<S> <C> <C> <C> <C>
Contract revenue . . . . . . . . . . . . . . . . $ 26,168 $ 24,794 $ 48,471 $ 45,932
Cost of revenue . . . . . . . . . . . . . . . . . 17,898 17,075 32,597 31,912
-------- -------- --------- ---------
Gross profit . . . . . . . . . . . . . 8,270 7,719 15,874 14,020
Operating expenses:
Selling, general and administrative . . . . 5,986 5,555 11,450 10,131
Depreciation and amortization . . . . . . . 511 553 990 1,084
Business combination costs . . . . . . . . . 1,105 -- 1,105 --
-------- -------- --------- ---------
Total operating expenses . . . . . . . . . . 7,602 6,108 13,545 11,215
-------- -------- --------- ---------
Operating income . . . . . . . . . . . 668 1,611 2,329 2,805
Interest expense . . . . . . . . . . . . . . . . 115 315 254 607
Other expense/(income) . . . . . . . . . . . . . (103) 95 (277) 38
-------- -------- --------- ---------
Income before income taxes . . . . . . 656 1,201 2,352 2,160
Provision for income taxes . . . . . . . . . . . 230 380 835 732
-------- -------- --------- ---------
Net income . . . . . . . . . . . . . . $ 426 $ 821 $ 1,517 $ 1,428
======== ======== ========= =========
Earnings per common share . . . . . . . . . . . . $ 0.08 $ 0.25 $ 0.30 $ 0.43
======== ======== ========= =========
Weighted average common shares outstanding . . . 5,087,000 3,341,000 5,082,000 3,341,000
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
<PAGE> 5
GSE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 1996 JUNE 30, 1995
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,517 $ 1,428
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization . . . . . . . . . . . . . . . . . . 1,313 1,320
Non-cash stock compensation . . . . . . . . . . . . . . . . . . . 175 --
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . 272 148
Changes in assets and liabilities:
Contract receivables . . . . . . . . . . . . . . . . . . . . . 858 1,308
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . (285) 46
Prepaid expenses and other current assets . . . . . . . . . . (94) (1,390)
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . (81) 46
Accounts payable and accrued expenses . . . . . . . . . . . . (871) (1,478)
Billings in excess of revenue earned . . . . . . . . . . . . . (5,207) 2,359
Accrued contract and warranty reserves . . . . . . . . . . . . (322) (1,659)
Other current liabilities . . . . . . . . . . . . . . . . . . (174) 939
Income taxes payable . . . . . . . . . . . . . . . . . . . . . 164 322
Accrued facility costs . . . . . . . . . . . . . . . . . . . . (163) (174)
Other liabilities . . . . . . . . . . . . . . . . . . . . . . (72) (36)
--------- --------
Net cash (used in) provided by operating activities . . . . . . . . . . (2,970) 3,179
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . (883) (611)
Capitalization of software development costs . . . . . . . . . . . (1,995) --
-------- --------
Net cash used for investing activities . . . . . . . . . . . . . . . . (2,878) (611)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
(Repayment) borrowings under lines of credit with bank . . . . . . (212) 1,389
Repayment to Vattenfall . . . . . . . . . . . . . . . . . . . . . -- (1,412)
Borrowing (repayments) under capital lease obligations . . . . . . 29 (37)
Principal payments under term-note . . . . . . . . . . . . . . . . -- (2,000)
Decrease in notes payable to related parties . . . . . . . . . . . (196) (11)
Payment to shareholder at formation . . . . . . . . . . . . . . . -- (64)
Redemption of preferred stock . . . . . . . . . . . . . . . . . . -- (2,400)
Net repayment of amounts due from stockholder . . . . . . . . . . -- 2,450
-------- --------
Net cash used in financing activities . . . . . . . . . . . . . . . . . (379) (2,085)
Effect of exchange rate on cash . . . . . . . . . . . . . . . . . . . . (39) 12
-------- --------
Net (decrease) increase in cash and cash equivalents . . . . . . . . . (6,266) 495
Cash and cash equivalents at beginning of period . . . . . . . . . . . 9,016 4,352
-------- --------
Cash and cash equivalents at end of period . . . . . . . . . . . . . . $ 2,750 $ 4,847
======== ========
Supplemental information:
Interest paid . . . . . . . . . . . . . . . . . . . . . . . . . . $ 113 $ 451
======== ========
Income taxes paid . . . . . . . . . . . . . . . . . . . . . . . . $ 603 $ 388
======== ========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
<PAGE> 6
GSE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1996
(Unaudited)
1. BASIS OF PRESENTATION
The condensed consolidated financial statements included herein have been
prepared by the Company without independent audit. In the opinion of the
Company's management, all adjustments 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 generally accepted accounting
principles have been condensed or omitted. It is suggested that these
condensed consolidated financial statements be read in conjunction with the
consolidated financial statements and notes thereto included in the
Company's Annual Report on Form 10-K for the period ended December 31, 1995
filed with Securities and Exchange Commission on March 22, 1996. The
results of operations for the period ended June 30, 1996 are not
necessarily indicative of what the operating results for the full year will
be.
2. POOLING OF INTERESTS
On May 22, 1996, the Company acquired all of the outstanding shares of
capital stock of Erudite Software & Consulting, Inc. ("Erudite Software"),
a leading provider of cost-effective client/server technology through
providing consulting services, custom applications, software development,
training services, and hardware-software sales.
Erudite Software is headquartered in Salt Lake City, Utah, with a primary
development facility in Provo, Utah, and has approximately 144 employees.
This acquisition was accomplished through a merger of Erudite Software into
a wholly owned subsidiary of the Company in which approximately 840,700
shares of the Company's Common Stock were exchanged for all outstanding
shares of capital stock of Erudite Software. The acquisition has been
accounted for using the pooling-of-interests method of accounting.
The accompanying consolidated financial statements of the Company have been
prepared to give retroactive effect to the acquisition of Erudite Software
on May 22, 1996. All prior period historical consolidated financial
statements presented herein have been restated to include the financial
position, results of operations, and cash flows of Erudite Software.
Costs related to the acquisition, which consist primarily of investment
bank fees, legal and accounting expenses, and compensation expense for the
shares issued to employees by the owners of Erudite Software pursuant to
Stock Transfer Agreements, amounted to approximately $1,105,000 and have
been charged to operating expenses in the second quarter of 1996.
6
<PAGE> 7
3. EARNINGS PER SHARE
Net income per common share is based on the weighted average number of
shares of Common Stock outstanding during the period and the assumed
issuance of approximately 840,700 shares of Common Stock, at the beginning
of each period presented, in connection with the acquisition of Erudite
Software. The difference between primary and fully-diluted per share
amounts is insignificant.
4. INVENTORIES
Inventories consist of the following at:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1996 1995
----------- ------------
(IN THOUSANDS)
<S> <C> <C>
Raw materials . . . . . . . . . $ 1,743 $ 1,524
Service parts . . . . . . . . . 834 769
------ ------
Total . . . . . . . . . $ 2,577 $ 2,293
====== ======
</TABLE>
5. SOFTWARE DEVELOPMENT COSTS
In compliance with Statement of Financial Accounting Standards (SFAS) No.
86, "Accounting for the Costs of Computer Software to be Sold, Leased or
Otherwise Marketed", 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
revenues and is provided at the greater of the amount computed using (a)
the ratio of current gross revenues for a product to the total of current
and anticipated future gross revenues or (b) the straight-line method over
the remaining estimated economic life of the product, not to exceed five
years. The amount of software development costs capitalized was $697,000,
and $0 in the three months ended June 30, 1996 and 1995, respectively, and
$1,995,000 and $0 in the six months ended June 30, 1996 and 1995,
respectively. Total amortization expense charged to operations was $161,000
and $118,000 in the three month periods ended June 30, 1996 and 1995,
respectively, and $323,000 and $236,000 in the six months ended June 30,
1996 and 1995, respectively.
6. FINANCING ARRANGEMENTS
The Company maintains, through it subsidiaries, two lines of credit that
provide for borrowings up to $14.0 million to support foreign letters of
credit, margin requirements on foreign exchange contracts and working
capital needs. The lines of credit expire January 1, 1998,
7
<PAGE> 8
subject to earlier termination upon the expiration of the EXIM Bank
guaranty (currently effective through September 30, 1996). The Company is
currently in the process of renewing the EXIM Bank guaranty through July 1,
1997.
At June 30, 1996, there were no borrowings under the lines of credit, and
letters of credit issued in the ordinary course of business amounted to
approximately $1,464,000.
7. CONTRACT RECEIVABLES
The components of contract receivables are as follows (in thousands):
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1996 1995
--------- ---------
<S> <C> <C>
Billed receivables . . . . . . . . . . . . . . . . . . . . . . . . . $ 16,187 $ 18,804
Recoverable costs and accrued profit--not billed . . . . . . . . . . 12,993 11,643
Allowance for doubtful accounts . . . . . . . . . . . . . . . . . . . (587) (939)
--------- ---------
Total contract receivables . . . . . . . . . . . . . . . . . . . . . $ 28,593 $ 29,508
======= =======
</TABLE>
Recoverable costs and accrued profit--not billed represent costs incurred
and profit accrued on contracts that will become billable upon future
milestones or completion of contracts.
Revenue under long-term, 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. Revisions in estimated contract costs
at completion are reflected in the period during which facts and
circumstances necessitating such a change first become known. The effect of
changes in estimates of contract profits was to increase gross profit by
$1,100,000 and $325,000 during the three months ended June 30, 1996 and
1995 and $1,324,000 and $549,000 during the six months ended June 30, 1996
and 1995, respectively, from that which would have been reported had the
revised estimates been used as the basis of recognition of contract profits
in the preceding periods.
As reported in the Company's Annual Report on Form 10-K filed with the
Securities and Exchange Commission, at December 31, 1995, the total
estimated contract revenues and costs at completion for two international
contracts included claims revenue, which equalled estimated future costs,
of $1,200,000. During the three months and six months ended June 30, 1996,
the Company has received contract modifications of $0 and $964,000,
respectively, relating to these claims. The Company has valid claims for
the remaining $236,000 of contract revenues.
8
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
RESULTS OF OPERATIONS
The following table sets forth the results of operations for the periods
presented expressed as a percentage of revenues.
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS SIX MONTHS SIX MONTHS
ENDED ENDED ENDED ENDED
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
1996 1995 1996 1995
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Contract revenue . . . . . . . . . . . . . . . . 100.0% 100.0% 100.0% 100.0%
Cost of revenue . . . . . . . . . . . . . . . . . 68.4 68.9 67.3 69.5
------ ------ ------ ------
Gross profit . . . . . . . . . . . . 31.6 31.1 32.7 30.5
Operating expenses:
Selling, general and administrative . . . . 22.9 22.4 23.6 22.0
Depreciation and amortization . . . . . . . 2.0 2.2 2.0 2.4
Business combination costs . . . . . . . . 4.2 0.0 2.3 0.0
------ ------ ------ -----
Total operating expenses . . . . . . . . . 29.1 24.6 27.9 24.4
------ ------ ------ -----
Operating income . . . . . . . . . . 2.5 6.5 4.8 6.1
Interest expense . . . . . . . . . . . . . . . . 0.4 1.3 0.5 1.3
Other income . . . . . . . . . . . . . . . . . . (0.4) 0.4 (0.6) 0.1
------ ------ ------ -----
Income before income taxes . . . . . 2.5 4.8 4.9 4.7
Provision for income taxes . . . . . . . . . . . 0.9 1.5 1.7 1.6
------ ------ ------ -----
Net income . . . . . . . . . . . . . 1.6% 3.3% 3.2% 3.1%
====== ====== ====== =====
</TABLE>
- -------------------------------
Revenues. Revenues for the three and six months ended June 30, 1996
increased to $26.2 million and $48.5 million, respectively, from $24.8 million
and $45.9 million in the three and six months ended June 30, 1995,
respectively. This increase resulted primarily from significant growth achieved
by Erudite Software. Revenue contributions from Erudite Software for the three
and six months ended June 30, 1996 amounted to $5.8 million and $9.6 million,
respectively, an increase of 194% and 133% over the comparable periods in 1995.
The above increase in revenues was partially offset by decreased revenues from
sales of Supervisory Control and Data Acquisition (SCADA) Systems.
Gross Profit. Gross profit increased to $8.3 million, a gross margin of
31.6%, in the three months ended June 30, 1996 from $7.7 million, a gross
margin of 31.1%, in the corresponding period of 1995. Gross profit increased to
$15.9 million, a gross margin of 32.7%, in the six months ended June 30, 1996
from $14.0 million, a gross margin of 30.5%, in the corresponding period of
1995. This increase in gross profit is primarily attributable to higher margins
on contracts and continued cost control initiatives.
9
<PAGE> 10
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased to $6.0 million, or 22.9% of revenues, during
the three months ended June 30, 1996 from $5.6 million, or 22.4% of revenues,
during the corresponding period in 1995. Selling, general and administrative
expenses increased to $11.5 million, or 23.6% of revenues, during the six
months ended June 30, 1996 from $10.1 million, or 22.0% of revenues, during the
corresponding period in 1995. The increase in selling, general and
administrative expenses is primarily attributable to increased sales force, bid
and proposal activities, and business expansion efforts.
Gross research and product development expenditures were $1.1 million and $1.2
million during the three months ended June 30, 1996 and 1995, respectively, and
$2.7 million and $2.1 million during the six months ended June 30, 1996 and
1995, respectively. Capitalized software development costs totaled $697,000 and
$0, during the quarters ended June 30, 1996 and 1995 and $2.0 million and $0
during the six months ended June 30, 1996 and 1995, respectively. Net research
and development costs expensed and included within selling, general and
administrative expenses were $429,000 and $1.2 million during the quarters
ended June 30, 1996 and 1995, respectively and $680,000 and $2.1 million during
the six months ended June 30, 1996 and 1995, respectively. The Company
continued investing in its FlexBatch recipe and process management system,
conversion of SCADA System to Windows NT platform and productization of
SimSuite software tools.
Depreciation and Amortization. Depreciation expense amounted to $465,000
and $361,000 during the three months ended June 30, 1996 and 1995,
respectively. Depreciation expense amounted to $901,000 and $707,000 during the
six months ended June 30, 1996 and 1995, respectively. This increase was
attributable to higher levels of capital expenditure in 1995.
Amortization of goodwill and intangibles was $46,000 and $192,000 during the
three months ended June 30, 1996 and 1995, respectively, and $89,000 and
$377,000 during the six months ended June 30, 1996 and 1995, respectively.
This decrease was attributable to the significant reduction in goodwill and
other intangible assets at December 31, 1995, as fully discussed in Note 8 of
"Notes to Consolidated Financial Statements" in the Company's Annual Report on
Form 10-K filed with the Securities and Exchange Commission.
Business Combination Costs. Business combination costs related to the
acquisition of Erudite Software, which consist primarily of investment bank
fees, legal and accounting expenses, and compensation expense for the shares
issued to employees by the owners of Erudite Software pursuant to Stock
Transfer Agreements, amounted to approximately $1.1 million and have been
charged to operating expenses in the second quarter of 1996.
Operating Income. Operating income amounted to $668,000 and $2.3 million
during the three and six months ended June 30, 1996, after deducting $1.1
million of business combination costs incurred in the second quarter of 1996 in
connection with the acquisition of Erudite Software. Excluding this
non-recurring cost, operating income increased to $1.8 million, or 6.7% of
revenues, during the three months ended June 30, 1996 from $1.6 million, or
6.5% of revenues, during the corresponding period of last year. During the six
months ended June 30, 1996, excluding the non-recurring acquisition costs,
operating income increased to $3.4 million, or 7.1% of revenues, from $2.8
million, or 6.1% of revenues during the corresponding period of 1995. This
increase in
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<PAGE> 11
operating income is attributable to higher margins on contracts, continued cost
control initiatives, and lower net research and development expenses, which
were partially offset by higher expenses relating to sales and marketing
efforts and business expansion activities.
Interest Expense. Interest expense decreased to $115,000 and $254,000
during the three and six months ended June 30, 1996, respectively, from
$315,000 and $607,000 during the three and six months ended June 30, 1995,
respectively. This decrease is attributable primarily to the repayment of a
five-year promissory note in August 1995 to finance the Process Solutions
acquisition and temporary pay-down of the working capital bank lines with the
initial public offering proceeds.
Other Expenses/(Income). Other income increased to $103,000 and $277,000
during the three and six months ended June 30, 1996, respectively, from an
expense of $95,000 and $38,000 during the corresponding periods in 1995
primarily due to interest income from short-term investments of excess cash in
1996. During the corresponding periods in 1995, other expenses included a
provision against a non-operating asset.
LIQUIDITY AND CAPITAL RESOURCES
During the six months ended June 30, 1996, the Company's operations used
approximately $3.0 million in operating activities primarily attributable to a
reduction in customer advance payments and pay-down on accounts payable and
approximately $2.9 million in capital expenditures for computer equipment and
software development. In 1995, net cash flow from operations was approximately
$3.2 million and capital expenditures totaled $611,000 during the first six
months. At June 30, 1996, the Company's cash and cash equivalents totaled
approximately $2.8 million as compared with $9.0 million at December 31, 1995.
The Company continues to maintain its lines of credit amounting to
$14.0 million with CoreStates Bank of which $9.1 million was available for
borrowings at June 30, 1996. There were no borrowings under these lines of
credit at June 30, 1996, and letters of credit issued in the ordinary course of
business amounted to $1.4 million. The Company is currently in the process of
renewing the lines of credit - see Note 6 of Notes to Condensed Consolidated
Financial Statements.
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PART II - OTHER INFORMATION
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Stockholders was held on May 14, 1996. At the
meeting the following actions were taken:
<TABLE>
<CAPTION>
Votes Broker
Proposal For Against Abstain Withheld Non-Votes
-------- --- ------- ------- -------- ---------
<S> <C> <C> <C> <C> <C>
1) Election of Directors
Rolf M.G. Falkenberg 4,021,428 - - 1,000 -
Sheldon L. Glashow 4,021,428 - - 1,000 -
Lars-Goran Mejvik 4,021,428 - - 1,000 -
2) Amendment to Company's 1995
Long Term Incentive Plan 3,146,893 860,725 1,700 - 13,100
3) Ratification of Coopers & Lybrand
L.L.P. as Independent Auditors 4,019,428 1,800 1,200 - -
</TABLE>
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit Index
Exhibit 11.1 Statement Regarding Computation of Earnings
per Share
(b) Reports on Form 8-K
The Company filed reports on Form 8-K (June 5, 1996) and Form 8-K/A
(June 13, 1996) with regards to acquisition of Erudite Software &
Consulting, Inc. and the following financial statements were filed
in the report:
(a) Financial Statements of Erudite Software
Report of Independent Accountants
Balance Sheets as of December 31, 1995 and 1994
Statements of Operations for the Years Ended December 31, 1995,
1994 and 1993
Statements of Changes in Stockholders' Equity (Deficit) for the
Years Ended December 31, 1995, 1994 and 1993
Statements of Cash Flows for the Years Ended December 31, 1995,
1994 and 1993
Notes to Financial Statements
Unaudited Balance Sheets as of March 31, 1996 and 1995
12
<PAGE> 13
Unaudited Statements of Operations for the Three Months Ended
March 31, 1996 and 1995
Unaudited Statements of Cash Flows for the Three Months Ended
March 31, 1996 and 1995
Notes to Unaudited Interim Financial Statements
(b) Unaudited Pro Forma Combined Financial Information
Unaudited Pro Forma Combined Balance Sheet as of March 31, 1996
Unaudited Pro Forma Combined Statements of Operations for the
Three Months Ended March 31, 1996 and 1995 and the Years Ended
December 31, 1995, 1994 and 1993
Notes to Unaudited Pro Forma Combined Financial Statements
13
<PAGE> 14
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 9, 1996 GSE SYSTEMS, INC.
/s/ William E. Kuhlmann
-------------------------------------
William E. Kuhlmann
Chairman and Chief Executive Officer
/s/ Dev Ganesan
-------------------------------------
Dev Ganesan
Vice President - Finance and Accounting
14
<PAGE> 1
EXHIBIT 11.1
GSE SYSTEMS, INC. AND SUBSIDIARIES
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT REGARDING COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS SIX MONTHS SIX MONTHS
ENDED ENDED ENDED ENDED
JUNE 30, 1996 JUNE 30, 1995 JUNE 30, 1996 JUNE 30, 1995
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net income available to common shares . . . . . . $ 426 $ 821 $ 1,517 $ 1,428
===== ====== ====== ======
Weighted average common shares outstanding . . . 5,066 3,341 5,066 3,341
Dilutive effect of common stock equivalents
- stock options . . . . . . . . . . . . . . 21 -- 16 --
----- ------ ------ ------
Total shares used for earnings per share . . . . 5,087 3,341 5,082 3,341
===== ====== ====== ======
Earnings per share . . . . . . . . . . . . . . . $ 0.08 $ 0.25 $ 0.30 $ 0.43
===== ====== ====== ======
</TABLE>
15
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM GSE SYSTEMS,
INC. - 10Q JUNE 30, 1996.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 2,750
<SECURITIES> 0
<RECEIVABLES> 29,180
<ALLOWANCES> 587
<INVENTORY> 2,577
<CURRENT-ASSETS> 37,368
<PP&E> 4,178
<DEPRECIATION> 0
<TOTAL-ASSETS> 49,257
<CURRENT-LIABILITIES> 22,944
<BONDS> 0
0
0
<COMMON> 50
<OTHER-SE> 22,089
<TOTAL-LIABILITY-AND-EQUITY> 49,257
<SALES> 48,471
<TOTAL-REVENUES> 48,471
<CGS> 32,597
<TOTAL-COSTS> 32,597
<OTHER-EXPENSES> 13,545
<LOSS-PROVISION> (30)
<INTEREST-EXPENSE> 254
<INCOME-PRETAX> 2,352
<INCOME-TAX> 835
<INCOME-CONTINUING> 1,517
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,517
<EPS-PRIMARY> 0.30
<EPS-DILUTED> 0.30
</TABLE>
