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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 March 31, 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
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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 May 14, 1996, there were 4,225,000 shares of the Registrant's common
stock (par value $ .01 per share) outstanding.
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GSE SYSTEMS, INC.
QUARTERLY REPORT ON FORM 10-Q
INDEX
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets as of
March 31, 1996 and December 31, 1995 3
Consolidated Statements of Operations
for the Three Months Ended
March 31, 1996 and 1995 4
Consolidated Statements of Cash Flows
for the Three Month Periods Ended
March 31, 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
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GSE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
ASSETS
December 31, March 31,
1995 1996
-------------- ---------------
(Unaudited)
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . $ 9,016 $ 7,343
Contract receivables . . . . . . . . . . . . . . . . . . . . . . . . . . 26,912 26,399
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,293 2,430
Prepaid expenses and other current assets . . . . . . . . . . . . . . . 2,877 2,697
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . 409 327
-------- --------
Total current assets . . . . . . . . . . . . . . . . . . . . . . . 41,507 39,196
Property and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . 3,468 3,390
Software development costs, net . . . . . . . . . . . . . . . . . . . . . . . 1,921 3,057
Goodwill and other intangible assets, net . . . . . . . . . . . . . . . . . . 2,348 2,302
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,856 1,486
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 260 62
-------- --------
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 51,360 $ 49,493
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,830 $ 4,462
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,984 3,742
Obligations under capital lease . . . . . . . . . . . . . . . . . . . . 75 77
Billings in excess of revenue earned . . . . . . . . . . . . . . . . . . 10,239 10,395
Accrued contract reserves . . . . . . . . . . . . . . . . . . . . . . . 641 538
Accrued warranty reserves . . . . . . . . . . . . . . . . . . . . . . . 2,119 2,217
Other current liabilities . . . . . . . . . . . . . . . . . . . . . . . 1,061 1,066
Income taxes payable . . . . . . . . . . . . . . . . . . . . . . . . . . 1,012 916
-------- --------
Total current liabilities . . . . . . . . . . . . . . . . . . . . . 24,961 23,413
Obligations under capital lease . . . . . . . . . . . . . . . . . . . . . . . 171 151
Billings in excess of revenues earned . . . . . . . . . . . . . . . . . . . . 2,485 1,423
Accrued contract and warranty reserves . . . . . . . . . . . . . . . . . . . 1,495 1,629
Accrued facility costs . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,103 1,021
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 529 468
-------- --------
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . 30,744 28,105
-------- --------
Stockholders' equity:
Common stock $.01 par value, 8,000,000 shares authorized,
4,225,000 shares issued and outstanding . . . . . . . . . . . . . . . 42 42
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . 21,121 21,121
Retained earnings (deficit) - at formation . . . . . . . . . . . . . . . (5,112) (5,112)
Retained earnings - since formation . . . . . . . . . . . . . . . . . . 4,413 5,273
Pension liability adjustment . . . . . . . . . . . . . . . . . . . . . . (102) (100)
Cumulative translation adjustment . . . . . . . . . . . . . . . . . . . 254 164
-------- --------
Total stockholders' equity . . . . . . . . . . . . . . . . . . . . 20,616 21,388
-------- --------
Total liabilities & stockholders' equity . . . . . . . . . . . . . $ 51,360 $ 49,493
======== ========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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GSE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
Three Months Three Months
Ended Ended
March 31, March 31,
1995 1996
-------------- ---------------
Contract revenue . . . . . . . . . . . . . . . . . . . . . . . . . $ 19,016 $ 18,545
Cost of revenue . . . . . . . . . . . . . . . . . . . . . . . . . . 13,201 12,176
------- -------
Gross profit . . . . . . . . . . . . . . . . . . . . . . . 5,815 6,369
Operating expenses:
Selling, general and administrative . . . . . . . . . . . . . 4,185 4,679
Depreciation and amortization . . . . . . . . . . . . . . . . 494 398
------- -------
Total operating expenses . . . . . . . . . . . . . . . . . . . 4,679 5,077
------- -------
Operating income . . . . . . . . . . . . . . . . . . . . . 1,136 1,292
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . 292 139
Other income . . . . . . . . . . . . . . . . . . . . . . . . . . . (57) (174)
------- -------
Income before income taxes . . . . . . . . . . . . . . . . 901 1,327
Provision for income taxes . . . . . . . . . . . . . . . . . . . . 330 467
------- -------
Net income . . . . . . . . . . . . . . . . . . . . . . . . $ 571 $ 860
======= =======
Earnings per common share . . . . . . . . . . . . . . . . . . . . . $ .23 $ .20
======= =======
Weighted average common shares outstanding . . . . . . . . . . . . 2,500,000 4,238,000
========== ==========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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GSE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
Three Months Ended Three Months Ended
March 31, 1995 March 31, 1996
-------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 571 $ 860
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization . . . . . . . . . . . . . . . . . . 617 558
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . (30) 452
Changes in assets and liabilities, net of effects of acquisitions:
Contract receivables . . . . . . . . . . . . . . . . . . . . . 468 472
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . (290) (81)
Prepaid expenses and other current assets . . . . . . . . . . (606) 180
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . (48) 198
Accounts payable and accrued expenses . . . . . . . . . . . . 416 (1,610)
Billings in excess of revenue earned . . . . . . . . . . . . . 123 (906)
Accrued contract and warranty reserves . . . . . . . . . . . . (456) 129
Other current liabilities . . . . . . . . . . . . . . . . . . 109 5
Income taxes payable . . . . . . . . . . . . . . . . . . . . . 89 (96)
Accrued facility costs . . . . . . . . . . . . . . . . . . . . (87) (82)
Other liabilities . . . . . . . . . . . . . . . . . . . . . . (35) (59)
------- ---------
Net cash provided by operating activities . . . . . . . . . . . . . . . 841 20
------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . (303) (272)
Capitalization of software development costs . . . . . . . . . . . -- (1,298)
------- --------
Net cash used in investing activities . . . . . . . . . . . . . . . . . (303) (1,570)
------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under lines of credit with bank . . . . . . . . . . . . 1,044 --
Repayment to Vattenfall . . . . . . . . . . . . . . . . . . . . . (933) --
Principal payments under capital lease obligations . . . . . . . . (17) (18)
Principal payments under term-note . . . . . . . . . . . . . . . . (2,000) --
Redemption of preferred stock . . . . . . . . . . . . . . . . . . (2,400) --
Repayment of amounts due from stockholder . . . . . . . . . . . . 2,400 --
------- --------
Net cash used in financing activities . . . . . . . . . . . . . . . . . (1,906) (18)
-------- --------
Effect of exchange rate on cash . . . . . . . . . . . . . . . . . . . . 10 (105)
------- --------
Net decrease in cash and cash equivalents . . . . . . . . . . . . . . . (1,358) (1,673)
Cash and cash equivalents at beginning of period . . . . . . . . . . . 4,352 9,016
------- --------
Cash and cash equivalents at end of period . . . . . . . . . . . . . . $ 2,994 $ 7,343
======= ========
Supplemental information:
Interest paid . . . . . . . . . . . . . . . . . . . . . . . . . . $ 89 $ 41
======= ========
Income taxes paid . . . . . . . . . . . . . . . . . . . . . . . . $ 272 $ 191
======= ========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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GSE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 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 March 31, 1996 are not
necessarily indicative of what the operating results for the full year
will be.
2. EARNINGS PER SHARE
Net income per common share is based on the weighted average number of
shares of Common Stock outstanding during the period. The difference
between primary and fully-diluted per share amounts is insignificant.
3. INVENTORIES
Inventories consist of the following at:
December 31, March 31,
1995 1996
---------------- ---------------
(in thousands)
Raw materials . . . . . . . . . . . . . . . . . . . . $ 1,524 $ 1,710
Service parts . . . . . . . . . . . . . . . . . . . . 769 720
------ ------
Total . . . . . . . . . . . . . . . . . . $ 2,293 $ 2,430
====== ======
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4. 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 in the
three months ended March 31, 1996 was $1,298,000, and $0 in the same
period in 1995. Total amortization expense charged to operations in
the three month periods ended March 31, 1996 and 1995 was $162,000 and
$118,000, respectively.
5. 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.
On January 30, 1996, S3 Technologies terminated each of its lines of
credit from NationsBank and established a $7,000,000 line of credit with
CoreStates Bank. EXIM Bank has guaranteed 90% of outstanding principal
amounts under this line of credit. S3 Technologies' obligations under
this line of credit are also guaranteed by the Company. The line of
credit is collateralized by S3 Technologies' contract receivables and
inventory. This line of credit expires January 1, 1998, subject to earlier
termination upon the expiration of the EXIM Bank guaranty (currently
effective through July 31, 1996).
On February 23, 1996, Process Solutions and CoreStates Bank agreed to
modifications of certain provisions of its existing $7,000,000 line of
credit in order that they conform with corresponding provisions of the
newly established S3 Technologies' line of credit. These modifications
include the release of ManTech's partial guaranty, the establishment of a
guaranty from the Company for all of Process Solutions' obligations under
the line of credit, and the reduction of the interest rate to the bank's
prime rate. The availability of this line of credit has been extended
through January 1, 1998, subject to earlier termination upon the
expiration of the EXIM Bank guaranty for the S3 Technologies' line of
credit (currently effective through July 31, 1996). The Company is
currently negotiating to extend the above lines of credit.
The aforementioned lines of credit also contain certain negative
covenants which restrict the Company from, among other things, incurring
additional indebtedness, entering into merger, consolidation or
acquisition transactions, disposing of all or substantially all of its
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assets, creating liens on assets, and creating guaranty obligations.
Further, the Company is required to comply with certain financial ratios,
including maximum levels of debt to net worth and cash flow to fixed
obligations, and is also required to provide the bank with certain
periodic financial reports.
At March 31, 1996, there were no borrowings under the lines of credit, and
letters of credit issued in the ordinary course of business amounted to
$1,423,000.
6. CONTRACT RECEIVABLES
The components of contract receivables are as follows (in thousands):
December 31, March 31,
1995 1996
--------------- ------------
Billed receivables . . . . . . . . . . . . . . . . . . . . . . . . . $ 16,205 $ 14,171
Recoverable costs and accrued profit--not billed . . . . . . . . . . 11,643 12,831
Allowance for doubtful accounts . . . . . . . . . . . . . . . . . . . (936) (603)
-------- --------
Total contract receivables . . . . . . . . . . . . . . . . . . . . . $ 26,912 $ 26,399
======== ========
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 $224,000 and $638,000 during the three months ended March 31, 1995 and
1996, respectively, from that which would have been reported had the
revised estimate 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 ended March 31, 1996,
the Company has received contract modifications of $964,000 relating to
these claims. The Company has valid claims for the remaining
$236,000 of contract revenues.
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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 in thousands of dollars and as a percentage of revenues.
Three Months Three Months
Ended Ended
March 31, 1995 March 31, 1996
-------------- --------------
Revenues . . . . . . . . . . . . . . . . . . . . . . $ 19,016 100.0% $ 18,545 100.0%
Cost of revenue . . . . . . . . . . . . . . . . . . . 13,201 69.4 12,176 65.7
-------- ------ ------- -----
Gross profit . . . . . . . . . . . . . . . . . 5,815 30.6 6,369 34.3
Selling, general and administrative . . . . . . . . . 4,185 22.0 4,679 25.2
Depreciation and amortization . . . . . . . . . . . . 494 2.6 398 2.1
-------- ------- ------- -----
Operating income . . . . . . . . . . . . . . . 1,136 6.0 1,292 7.0
Interest expense . . . . . . . . . . . . . . . . . . 292 1.5 139 0.7
Other income . . . . . . . . . . . . . . . . . . . . (57) (0.3) (174) (0.9)
-------- ------- ------- -----
Income before income taxes . . . . . . . . . . 901 4.8 1,327 7.2
Provision for income taxes . . . . . . . . . . . . . 330 1.7 467 2.5
-------- ------- ------- -----
Net income . . . . . . . . . . . . . . . . . . $ 571 3.1% $ 860 4.7%
======== ======= ======= =====
- ------------------------
Revenues. Revenues for the three months ended March 31, 1996 amounted to
$18.5 million as compared with revenues of $19.0 million in the three months
ended March 31, 1995. This decrease resulted primarily from sales of systems
with lower hardware content and decreased revenues from sales of
Supervisory Control and Data Acquisition (SCADA) Systems.
Gross Profit. Gross profit increased to $6.4 million, a gross margin of
34.3%, in the three months ended March 31, 1996 from $5.8 million, a gross
margin of 30.6%, in the corresponding period of 1995. This increase in gross
profit is primarily attributable to higher margins on contracts and continued
cost control initiatives.
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Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased to $4.7 million, or 25.2% of revenues, during
the three months ended March 31, 1996 from $4.2 million, or 22.0% of revenues,
during the corresponding period in 1995. The increase in selling, general and
administration expenses is primarily attributable to increased sales force, bid
and proposal activities, and business expansion efforts.
During the quarters ended March 31, 1996 and 1995, gross research and product
development expenditures were $1.5 million and $948,000, respectively.
Capitalized software development costs totaled $1.3 million and $0, during the
quarters ended March 31, 1996 and 1995. Net research and development costs
expensed and included within selling, general and administrative expenses were
$242,000 and $948,000 during the quarters ended March 31, 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 $355,000
and $309,000 during the three months ended March 31, 1996 and 1995,
respectively. This increase was attributable to higher levels of capital
expenditure in 1995.
Amortization of goodwill and intangibles was $43,000 and $185,000 during the
three months ended March 31, 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.
Operating Income. Operating income increased $156,000 to $1.3 million,
or 7.0% of revenues, during the three months ended March 31, 1996 from $1.1
million, or 6.0% of revenues, during the corresponding period of 1995. This
increase in operating income is attributable to higher margins on contracts and
continued cost control initiatives, which were partially offset by higher
expenses relating to selling and marketing efforts.
Interest Expense. Interest expense decreased to $139,000 during the three
months ended March 31, 1996, from $292,000 during the three months ended March
31, 1995. This decrease is attributable primarily to the Company's repayment of
a five-year promissory note in August 1995 that bore interest at a rate of 8%
per annum to finance the Process Solutions acquisition.
Other Income. Other income increased significantly to $174,000 during
the three months ended March 31, 1996 from $57,000 during the corresponding
period in 1995 primarily due to interest income from short-term investments of
excess cash.
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LIQUIDITY AND CAPITAL RESOURCES
During the three months ended March 31, 1996, the Company's operations
generated $20,000 of net cash, primarily resulting from net income and
reductions in contract receivables, which were offset by an increase in
payments of accounts payable and accrued expense payments and reductions in
customer advances. In 1995, net cash from operations was $841,000 during the
first quarter.
At March 31, 1996, the Company had cash and cash equivalents totaling
approximately $7.3 million.
The Company continues to maintain its lines of credit amounting to $14.0
million with CoreStates Bank. At March 31, 1996, there were no borrowings under
these lines of credit, and letters of credit issued in the ordinary course of
business amounted to $1,423,000. For further discussion, see Note 5, 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
None
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
None.
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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: May 14, 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
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