-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, LeI0kX9Zh7uOw/7r3khCgKoieZ1uPJiFyfoyFQv1P5bEQuThw9BcDWoRbEB3MFOL J0A+lgCO5WeSKnKugC3IyQ== 0000950133-96-001467.txt : 19960812 0000950133-96-001467.hdr.sgml : 19960812 ACCESSION NUMBER: 0000950133-96-001467 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19960630 FILED AS OF DATE: 19960809 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: GSE SYSTEMS INC CENTRAL INDEX KEY: 0000944480 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 521868008 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-26494 FILM NUMBER: 96607287 BUSINESS ADDRESS: STREET 1: 8930 STANFORD BLVD CITY: COLUMBIA STATE: MD ZIP: 21045 BUSINESS PHONE: 4103123500 MAIL ADDRESS: STREET 1: 8930 STANFORD BLVD CITY: COLUMBIA STATE: MD ZIP: 21045 10-Q 1 GSE SYSTEMS, INC. FORM 10-Q (JUNE 30, 1996). 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. 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 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)
ASSETS JUNE 30, DECEMBER 31, 1996 1995 ----------- ------------- 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 ======== ========
The accompanying notes are an integral part of these condensed consolidated financial statements. 3 4 GSE SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) (UNAUDITED)
THREE MONTHS THREE MONTHS SIX MONTHS SIX MONTHS ENDED ENDED ENDED ENDED JUNE 30, JUNE 30, JUNE 30, JUNE 30, 1996 1995 1996 1995 ------------ ------------- ---------- ---------- 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 ========== ========== ========== ==========
The accompanying notes are an integral part of these condensed consolidated financial statements. 4 5 GSE SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED)
SIX MONTHS ENDED SIX MONTHS ENDED JUNE 30, 1996 JUNE 30, 1995 ------------- ------------- 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 ======== ========
The accompanying notes are an integral part of these condensed consolidated financial statements. 5 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 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:
JUNE 30, DECEMBER 31, 1996 1995 ----------- ------------ (IN THOUSANDS) Raw materials . . . . . . . . . $ 1,743 $ 1,524 Service parts . . . . . . . . . 834 769 ------ ------ Total . . . . . . . . . $ 2,577 $ 2,293 ====== ======
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 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):
JUNE 30, DECEMBER 31, 1996 1995 --------- --------- 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 ======= =======
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 9 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.
THREE MONTHS THREE MONTHS SIX MONTHS SIX MONTHS ENDED ENDED ENDED ENDED JUNE 30, JUNE 30, JUNE 30, JUNE 30, 1996 1995 1996 1995 ---------- ---------- ---------- ---------- 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% ====== ====== ====== =====
- ------------------------------- 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 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 10 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. 11 12 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:
Votes Broker Proposal For Against Abstain Withheld Non-Votes -------- --- ------- ------- -------- --------- 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 - -
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 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 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 EX-11.1 2 COMPUTATION. 1 EXHIBIT 11.1 GSE SYSTEMS, INC. AND SUBSIDIARIES (IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENT REGARDING COMPUTATION OF EARNINGS PER SHARE
THREE MONTHS THREE MONTHS SIX MONTHS SIX MONTHS ENDED ENDED ENDED ENDED JUNE 30, 1996 JUNE 30, 1995 JUNE 30, 1996 JUNE 30, 1995 ------------- ------------- ------------- ------------- 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 ===== ====== ====== ======
15 EX-27 3 FINANCIAL DATA SCHEDULE.
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM GSE SYSTEMS, INC. - 10Q JUNE 30, 1996. 1,000 6-MOS DEC-31-1996 JAN-01-1996 JUN-30-1996 2,750 0 29,180 587 2,577 37,368 4,178 0 49,257 22,944 0 0 0 50 22,089 49,257 48,471 48,471 32,597 32,597 13,545 (30) 254 2,352 835 1,517 0 0 0 1,517 0.30 0.30
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