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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
September 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 November 13, 1996, there were 5,065,688 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 September 30, 1996
and December 31, 1995 3
Consolidated Statements of Operations for the Three and
Nine Months Ended September 30, 1996 and 1995 4
Consolidated Statements of Cash Flows for the Nine Months
Ended September 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 10
PART II. OTHER INFORMATION 13
Item 6. Exhibit and Reports on Form 8-K 13
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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)
(UNAUDITED)
ASSETS
SEPTEMBER 30, DECEMBER 31,
1996 1995
---------------- ---------------
Current assets:
Cash and cash equivalents .................................... $ 2,307 $ 9,016
Contract receivables ......................................... 25,906 29,508
Inventories .................................................. 2,952 2,293
Prepaid expenses and other current assets .................... 2,914 2,889
Deferred income taxes ........................................ 616 472
-------------- ------------
Total current assets ...................................... 34,695 44,178
Property and equipment, net ...................................... 4,738 4,115
Software development costs, net ................................. 4,149 1,921
Goodwill and other intangible assets, net ....................... 2,213 2,348
Deferred income taxes ........................................... 1,760 1,856
Other assets .................................................... 234 270
-------------- ------------
Total assets .............................................. $ 47,789 $ 54,688
============== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ............................................. $ 6,979 $ 7,560
Accrued expenses ............................................. 3,589 4,435
Notes payable to banks ........................................ - 212
Notes payable to related parties .............................. - 190
Obligations under capital lease .............................. 79 103
Billings in excess of revenues earned ........................ 5,503 10,609
Accrued contract reserve ..................................... 188 641
Accrued warranty reserve ..................................... 1,925 2,119
Other current liabilities .................................... 1,267 1,061
Income taxes payable ......................................... 2,073 1,171
-------------- ------------
Total current Liabilities ................................. 21,603 28,101
Notes payable to related parties ................................. 206 216
Obligations under capital lease ................................. 247 227
Billings in excess of revenues earned ........................... 736 2,485
Accrued contract and warranty reserves .......................... 1,111 1,495
Accrued facility costs .......................................... - 1,103
Other liabilities ............................................... 518 529
-------------- ------------
Total liabilities ......................................... 24,421 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 .......................... 7,012 4,329
Pension liability adjustment ................................. - (102)
Cumulative translation adjustment ............................ 130 254
-------------- ------------
Total stockholders' equity ................................ 23,368 20,532
-------------- ------------
Total liabilities & stockholders' equity .................. $ 47,789 $ 54,688
============== ============
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 NINE MONTHS NINE MONTHS
ENDED ENDED ENDED ENDED
SEPT 30, SEPT 30, SEPT 30, SEPT 30,
1996 1995 1996 1995
---- ---- ---- ----
Contract revenue.......................... $ 23,500 $ 24,149 $ 71,971 $ 70,081
Cost of revenue........................... 15,874 16,179 48,471 48,091
--------- --------- --------- ---------
Gross profit........................ 7,626 7,970 23,500 21,990
Operating expenses:
Selling, general and administrative.... 5,188 5,491 16,638 15,622
Depreciation and amortization.......... 571 571 1,561 1,655
Business combination costs............. - - 1,105 -
--------- --------- --------- ---------
Total operating expenses............... 5,759 6,062 19,304 17,277
--------- --------- --------- ---------
Operating income.................... 1,867 1,908 4,196 4,713
Interest expense.......................... 92 178 346 785
Other expense (income).................... 2 (216) (275) (178)
--------- --------- --------- ---------
Income before income taxes.......... 1,773 1,946 4,125 4,106
Provision for income taxes................ 607 747 1,442 1,479
--------- --------- --------- ---------
Net income.......................... $ 1,166 $ 1,199 $ 2,683 $ 2,627
========= ========= ========= =========
Earnings per common share................. $ 0.23 $ 0.27 $ 0.53 $ 0.70
========= ========= ========= =========
Weighted average common shares outstanding 5,066,000 4,470,000 5,077,000 3,727,000
========= ========= ========= =========
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)
NINE MONTHS NINE MONTHS
ENDED ENDED
SEPT. 30, SEPT. 30,
1996 1995
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................................................. $ 2,683 $ 2,627
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Depreciation and amortization.......................................................... 2,042 2,008
Accrued facility costs ................................................................ (1,103) -
Non-cash stock compensation ........................................................... 175 -
Deferred income taxes ................................................................. (48) 558
Changes in assets and liabilities:
Contract receivables ............................................................... 3,602 (77)
Inventories ........................................................................ (659) 232
Prepaid expenses and other current assets .......................................... (25) (1,292)
Other assets ....................................................................... 36 2
Accounts payable and accrued expenses .............................................. (1,428) 27
Billings in excess of revenue earned ............................................... (6,855) 385
Accrued contract and warranty reserves ............................................. (1,031) (2,029)
Other current liabilities .......................................................... 206 379
Income taxes payable................................................................ 902 307
Other liabilities .................................................................. 91 (453)
-------- -------
Net cash (used in) provided by operating activities ....................................... (1,412) 2,674
-------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures .................................................................. (2,039) (816)
Capitalization of software development costs .......................................... (2,719) (721)
Purchase of short-term investments..................................................... - (3,225)
-------- -------
Net cash used in investing activities ..................................................... (4,758) (4,762)
-------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment under lines of credit with bank ............................................. (163) (4,236)
Repayment to Vattenfall................................................................ - (1,412)
Repayments under capital lease obligations ............................................ (56) (51)
Principal payments under term-note .................................................... - (7,519)
(Decrease) increase in notes payable to related parties .............................. (196) 196
Payments to shareholder at formation .................................................. - (64)
Net proceeds from sale of common stock................................................. - 21,204
Redemption of preferred stock ......................................................... - (2,400)
Net repayment of amounts due from stockholders ........................................ - 2,452
-------- -------
Net cash (used in) provided by financing activities ....................................... (415) 8,170
Effect of exchange rate changes on cash ................................................... (124) 41
-------- -------
Net (decrease) increase in cash and cash equivalents ...................................... (6,709) 6,123
Cash and cash equivalents at beginning of period .......................................... 9,016 4,352
-------- -------
Cash and cash equivalents at end of period ................................................ $ 2,307 $10,475
======== =======
Supplemental information:
Interest paid ......................................................................... $ 248 $ 576
======== =======
Income taxes paid ..................................................................... $ 607 $ 630
======== =======
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
SEPTEMBER 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 September
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 supplier of cost-effective client/server
technology 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 150
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 under 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
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owners of Erudite Software pursuant to Stock Transfer Agreements,
amounted to approximately $1,105,000 and were charged to operating
expenses in the second quarter of 1996.
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 are stated at the lower of cost, as determined by the
average cost method, or market. Obsolete or unsaleable inventory is
reflected at its estimated net realizable value. As a result of
inventory turnover and consumption of life time buy inventory items, the
reserve for slow moving or obsolete items was reduced
by $507,000 for the three month period ending September 30, 1996.
Inventories, net, consist of the following at:
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------- ---------------
(IN THOUSANDS)
Raw materials . . . . . . . . . . . . . . . . . . . . $ 1,916 $ 1,524
Service parts . . . . . . . . . . . . . . . . . . . . 1,036 769
------ ------
Total . . . . . . . . . . . . . . . . . . $ 2,952 $ 2,293
====== ======
5. SOFTWARE DEVELOPMENT COSTS
In accordance 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 $723,000, and $721,000 in the three months ended September 30, 1996
and 1995, respectively, and $2,719,000 and $721,000 in the nine months
ended September 30, 1996 and 1995, respectively. Total amortization
expense charged to operations was $166,000 and $118,000 in the three
month periods ended September 30, 1996
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and 1995, respectively, and $481,000 and $353,000 in the nine months
ended September 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, subject to
earlier termination upon the expiration of the EXIM Bank guaranty
(currently effective through January 31, 1997). The Company is
currently in the process of renewing the EXIM Bank guaranty through July
1, 1997.
At September 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 $1,709,000.
7. CONTRACT RECEIVABLES
The components of contract receivables are as follows (in thousands):
SEPTEMBER 30, DECEMBER 31,
1996 1995
--------------- ------------
Billed receivables . . . . . . . . . . . . . . . . . . . . . . . . . $ 16,242 $ 18,804
Recoverable costs and accrued profit not billed . . . . . . . . . . . 10,016 11,643
Allowance for doubtful accounts . . . . . . . . . . . . . . . . . . . (352) (939)
------ -------
Total contract receivables . . . . . . . . . . . . . . . . . . . . . $ 25,906 $ 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 $423,000 and $213,000 during the three months ended
September 30, 1996 and 1995 and $2,161,000 and $762,000 during the nine
months ended September 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 equaled estimated
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future costs, of $1,200,000. During the three months ended September 30,
1996 additional claims revenue and costs for one of these international
contracts increased by $424,000. During the three months and nine months
ended September 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 $660,000 of
contract revenues.
8. ACCRUED FACILITY COSTS
In connection with the purchase accounting for ManTech
International's acquisition of S3 Technologies in August of 1993,
an idle facility accrual was set up for $1,455,000 related to
excess space in the Columbia, Maryland facility. In August 1996,
the Company decided to consolidate the Hunt Valley, Maryland
facilities with the Columbia facility and, the prior excess space
will be fully utilized before year end. Accordingly the
remaining $1,103,000 accrual for excess facilities has been
credited against selling, general and administrative expenses in
the three month period ending September 30, 1996.
9. SELLING, GENERAL AND ADMINISTRATIVE EXPENSE
Included in selling, general and administrative expenses for the three
month and nine month periods ending September 30, 1996 is a one-time
charge for severance and other employee obligations of $325,000 as a
result of eliminating certain duplicate functions following the recent
realignment into strategic business units, and the Company's acquisition
of GSE Erudite Software.
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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.
THREE MONTHS THREE MONTHS NINE MONTHS NINE MONTHS
ENDED ENDED ENDED ENDED
SEPT 30, SEPT 30, SEPT 30, SEPT 30,
1996 1995 1996 1995
---- ---- ---- ----
Contract revenue.......................... 100.0% 100.0% 100.0% 100.0%
Cost of revenue........................... 67.5 67.0 67.3 68.6
------ ------ ------ ------
Gross profit................... 32.5 33.0 32.7 31.4
Operating expenses:
Selling, general and administrative... 22.1 22.7 23.1 22.3
Depreciation and amortization......... 2.4 2.4 2.2 2.4
Business combination costs............ 0.0 0.0 1.5 0.0
------ ------ ------ ------
Total operating expenses.............. 24.5 25.1 26.8 24.7
Operating income............... 8.0 7.9 5.9 6.7
Interest expense.......................... 0.4 0.7 0.5 1.1
Other income.............................. 0.0 -0.9 -0.4 -0.3
------ ------ ------ ------
Income before income taxes..... 7.6 8.1 5.8 5.9
Provision for income taxes................ 2.6 3.1 2.0 2.1
------ ------- ------- -------
Net income..................... 5.0% 5.0% 3.8% 3.8%
======= ======= ======= =======
- ----------------------
Revenues. Revenues for the three months ended September 30, 1996 decreased to
$23.5 million from $24.1 million in the three months ended September 30, 1995.
Revenues for the nine months ended September 30, 1996 increased to $71.9
million from $70.0 million in the nine months ended September 30, 1995. The
decrease in revenues during the quarter is a result of a reduction in
simulation project revenues by $2.7 million, due in part to delays in new awards
and a stoppage on a large Eastern European project due to lack of customer
funding. As previously reported in the Company's Annual Report Form 10-K filed
with the SEC, the Company is becoming less dependent on high-priced application
systems, such as full scope nuclear power plant simulators, and is moving
towards high fidelity application development tools, as well as upgrades and
modification services. Partially offsetting the lower simulation revenues was
a $2.2 million, or 72%, increase in revenue from GSE Erudite Software's
client/server related projects. The increase in revenues for the nine months
ending September 30, 1996 is primarily the result of significant growth
achieved by the client/server business, which increased revenues by $7.6
million or 108%, over the comparable period in 1995. This increase was
partially offset by lower revenues from the simulation and Supervisory Control
and Data Acquisiton (SCADA) business.
Gross Profit. Gross profit decreased to $7.6 million, a gross margin of
32.5%, in the three months ended September 30, 1996 from $7.9 million, a gross
margin of 33%, in the corresponding period of 1995. Gross profit increased to
$23.5 million, a gross margin of 32.7%, in the nine months ended September 30,
1996 from $21.9 million, a gross margin of 31.4%, in the corresponding period
of 1995. The decreased gross margin for the quarter is primarily attributable
to lower volume of revenue.
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The increased gross margin for the nine month period is primarily
attributable to higher margins on contracts and continued cost control
initiatives.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased to $5.2 million, or 22.1% of revenues, during
the three months ended September 30, 1996 from $5.5 million, or 22.7% of
revenues, during the corresponding period in 1995. Selling, general and
administrative expenses increased to $16.6 million, or 23.1% of revenues,
during the nine months ended September 30, 1996 from $15.6 million, or 22.3% of
revenues, during the corresponding period in 1995. The decrease in selling,
general and administrative expenses for the quarter is attributable to a $1.0
million adjustment in connection with consolidation of duplicate facilities
(see Note 8 to the Condensed Consolidated Financial Statements). This credit
was partially off-set by a one-time charge for severance and employee related
obligations of $325,000. Excluding these specific items, selling, general and
administrative expenses would have been $5.8 million or 24.9% of revenue,
during the three months ended September 30, 1996. The increase in selling,
general and administrative expenses for the nine month period is primarily
attributable to increased sales force, bid and proposal activities, and
business expansion efforts. These expenses were offset, in part, by a
significant decrease in net research and development expenses as discussed
below and the facility adjustment discussed above.
Gross research and product development expenditures were $1.3 million for
both the three months ended September 30, 1996 and 1995, and $3.9 million and
$3.4 million during the nine months ended September 30, 1996 and 1995,
respectively. Capitalized software development costs totaled $723,000 and
$721,000, during the quarters ended September 30, 1996 and 1995 and $2.7
million and $721,000 during the nine months ended September 30, 1996 and 1995,
respectively. Net research and development costs expensed and included within
selling, general and administrative expenses were $651,000 and $603,000 during
the quarters ended September 30, 1996 and 1995, respectively and $1.2 million
and $2.7 million during the nine months ended September 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 $532,000
and $383,000 during the three months ended September 30, 1996 and 1995,
respectively. Depreciation expense amounted to $1.4 million and $1.1 million
during the nine months ended September 30, 1996 and 1995, respectively. This
increase was attributable to higher levels of capital expenditure in 1995 and
during 1996.
Amortization of goodwill and intangibles was $38,000 and $187,000 during the
three months ended September 30, 1996 and 1995, respectively, and $122,000 and
$565,000 during the nine months ended September 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.
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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 were charged to
operating expenses in the second quarter of 1996.
Operating Income. Operating income amounted to $1.8 million and $1.9 million
during the three month periods ended September 30, 1996 and 1995, respectively,
and $4.1 million after deducting $1.1 million of business combination costs and
$ 4.7 million during the nine months ended September 30, 1996 and 1995,
respectively. During the nine months ended September 30, 1996, excluding the
non-recurring acquisition costs, operating income increased to $5.3 million, or
7.4% of revenues, from $4.7 million, or 6.7% of revenues during the
corresponding period of 1995. The decrease in operating income for the quarter
is primarily due to lower volume of revenues in the simulation business due to
the Company's decision to stop work on an Eastern European contract, due to
lack of customer funding, which was partially offset by the facility
adjustment. The increase in operating income for the nine month period is
attributable to higher margins on contracts, continued cost control
initiatives, lower net research and development expenses and one-time
facility adjustment, which were partially offset by higher expenses relating to
sales and marketing efforts and business expansion activities.
Interest Expense. Interest expense decreased to $92,000 and $346,000
during the three and nine months ended September 30, 1996, respectively, from
$178,000 and $785,000 during the three and nine months ended September 30,
1995, respectively. This decrease is attributable primarily to the repayment in
August 1995 of a five year promissory note to finance the Process Solutions
acquisition and temporary pay-down of the working capital bank lines with the
initial public offering (IPO) proceeds.
Other Expenses. Other expense amounted to $2,000 during the three month
period ending September 30, 1996. During the corresponding period of 1995
$216,000 interest income was earned from short-term investments of cash
proceeds from the IPO. During the nine months ended September 30, 1996 and
1995, other income amounted to $275,000 and $178,000, respectively.
LIQUIDITY AND CAPITAL RESOURCES
During the nine months ended September 30, 1996, the Company's operations used
approximately $1.4 million in operating activities primarily attributable to
reduction in customer advance payments and the pay-down on accounts payable.
The Company also used $4.7 million in capital expenditures for computer
equipment, a financial software system, and software development activities. In
1995, net cash flow from operations was approximately $2.7 million and capital
expenditures totaled $1.5 million during the first nine months. At September
30, 1996, the Company's cash and cash equivalents totaled approximately $2.3
million as compared with $10.4 million at September 30, 1995.
The Company continues to maintain its lines of credit amounting to $14.0
million with CoreStates Bank of which $8.4 million was available for borrowings
at September 30, 1996. There were no borrowings under these lines of credit at
September 30, 1996, and letters of credit issued in the ordinary course of
business amounted to $1.7 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
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: November 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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