UNITED STATES
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 quarter ended June 30, 2002
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: 1-7234
GP STRATEGIES CORPORATION
(Exact Name of Registrant as Specified in its Charter)
Delaware 13-1926739
- -------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
9 West 57th Street, New York, NY 10019
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(Address of principal executive offices) (Zip code)
(212) 826-8500
- -------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 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
-------- ---------
Number of shares outstanding of each of issuer's classes of common stock as of
August 12, 2002:
Common Stock 15,173,504 shares
Class B Capital 1,200,000 shares
TABLE OF CONTENTS
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Page No.
Part I. Financial Information
Consolidated Condensed Balance Sheets -
June 30, 2002 and December 31, 2001 1
Consolidated Condensed Statements of Operations -
Three Months and Six Months Ended June 30,
2002 and 2001 3
Consolidated Condensed Statements of Cash Flows -
Six Months Ended June 30, 2002 and 2001 4
Notes to Consolidated Condensed Financial
Statements 6
Management's Discussion and Analysis of Financial
Condition and Results of Operations 19
Part II. Other Information 25
Signatures 26
PART I. FINANCIAL INFORMATION
GP STRATEGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(in thousands)
June 30, December 31,
2002 2001
--------- -----------
ASSETS (unaudited) *
Current assets
- --------------
Cash and cash equivalents $ 2,270 $ 1,705
Accounts and other receivables 36,330 41,610
Inventories 1,516 1,734
Costs and estimated earnings
in excess of billings on uncompleted contracts 11,609 8,579
Prepaid expenses and other current assets 4,733 3,780
--------- ---------
Total current assets 56,458 57,408
--------- ---------
Investments, advances and marketable securities 19,713 30,400
--------- ---------
Property, plant and equipment, net 8,083 8,718
--------- ---------
Intangible assets, net of accumulated amortization
of $35,096 and $35,031 57,257 56,846
--------- ---------
Deferred tax asset 7,703 4,289
--------- ---------
Other assets 5,900 6,230
--------- ---------
$155,114 $163,891
======== ========
* The Consolidated Condensed Balance Sheet as of December 31, 2001 has been
summarized from the Company's audited Consolidated Balance Sheet as of that
date. Certain amounts in the Balance Sheet as of December 31, 2001 and notes
thereto, have been reclassified to conform to 2002 classifications.
See accompanying notes to the consolidated condensed financial statements.
GP STRATEGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS (Continued)
(in thousands)
June 30, December 31,
2002 2001
--------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY (unaudited) *
Current liabilities:
Current maturities of long-term debt $ 3,223 $ 637
Short-term borrowings 24,125 32,338
Accounts payable and accrued expenses 16,254 17,089
Billings in excess of costs and estimated
earnings on uncompleted contracts 6,822 10,094
--------- --------
Total current liabilities 50,424 60,158
-------- ---------
Long-term debt less current maturities 3,291 6,226
--------- ---------
Other non-current liabilities 1,196 1,564
--------- ---------
Stockholders' equity
Common stock 152 128
Class B capital stock 12 9
Additional paid in capital 189,756 180,078
Accumulated deficit (87,671) (87,939)
Accumulated other comprehensive income 2,651 8,364
Note receivable from stockholder (4,095) (4,095)
Treasury stock, at cost (602) (602)
----------- ------------
Total stockholders' equity 100,203 95,943
--------- ----------
$155,114 $163,891
======== ========
* The Consolidated Condensed Balance Sheet as of December 31, 2001 has been
summarized from the Company's audited Consolidated Balance sheet as of that
date. Certain amounts in the Balance Sheet as of December 31, 2001 and notes
thereto, have been reclassified to conform to 2002 classifications.
See accompanying notes to the consolidated condensed financial statements.
GP STRATEGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except per share data)
Three months Six months
ended June 30, ended June 30,
---------------- ------------------------
2002 2001 2002 2001
------- ------ ------- ---------
Sales $ 39,242 $ 50,347 $ 79,468 $ 99,461
Cost of sales 34,337 43,373 69,115 86,128
-------- -------- ------- ---------
Gross margin 4,905 6,974 10,353 13,333
Selling, general & administrative expenses (4,737) (6,997) (9,277) (11,469)
Interest expense (675) (1,155) (1,429) (2,555)
Investment and other (loss) income, net (303) 291 (738) 781
Gain on marketable securities 846 2,203 1,286 427
Restructuring charge reversal 140 354 373
--------- ------------- --------- ----------
Income before income taxes 176 1,316 549 890
Income tax expense (113) (582) (281) (400)
---------- ---------- --------- ---------
Net income $ 63 $ 734 $ 268 $ 490
=========== ========== ========= =========
Net (loss) income per share:
Basic and diluted $ (.01) $ .06 $ - $ .04
========= =========== ============ ==========
Dividends per share none none none none
========== =========== ========== =============
See accompanying notes to the consolidated condensed financial statements.
GP STRATEGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
Six months
ended June 30,
2002 2001
------- -------
Cash flows from operations:
Net income $ 268 $ 490
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Depreciation and amortization 1,320 3,042
Issuance of stock for profit incentive plan 394 607
Non-cash compensation and consultant fees 240 523
Loss (income) on equity investments 1,086 (296)
Restructuring charge reversal (354) (373)
Gain on marketable securities (1,286) (427)
Changes in other operating items (2,142) (2,806)
-------- --------
Net cash (used in) provided by operating activities (474) 760
-------- ---------
Cash flows from investing activities:
Proceeds from sale of marketable securities 1,883 9,395
Additions to property, plant & equipment (344) (1,077)
(Increase) reduction of investments and other assets, net (880) 416
--------- ---------
Net cash provided by investing activities 659 8,734
-------- --------
Cash flows from financing activities:
Net proceeds from sale of Common Stock 7,950
Net proceeds from sale of Class B Stock 1,260
Proceeds from MXL mortgage 1,680
Repayment of short-term borrowings (8,213) (6,069)
Repayment of long-term debt (349) (5,682)
-------- --------
Net cash provided by (used in) financing activities 648 (10,071)
-------- -------
Effect of exchange rate changes on
cash and cash equivalents (268) 243
--------- ---------
GP STRATEGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Continued)
(Unaudited)
(in thousands)
Six months
ended June 30,
----------------------
2002 2001
--------- ---------
Net increase (decrease) in cash and cash equivalents $ 565 $ (334)
Cash and cash equivalents at the beginning of the period 1,705 2,487
-------- --------
Cash and cash equivalents at the end of the period $ 2,270 $ 2,153
======== ========
Cash paid during the periods for:
Interest $ 1,066 $ 2,172
======== ========
Income taxes $ 228 $ 212
========= =========
See accompanying notes to the consolidated condensed financial statements.
GP STRATEGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
1. Earnings per share
Income per share (EPS) for the three and six month periods ended June
30, 2002 and 2001 are as follows (in thousands, except per share amounts):
Three months Six months
ended June 30, ended June 30,
-------------------------- ---------------------------
2002 2001 2002 2001
---- ---- ---- ----
Basic and Diluted EPS
Net income $ 63 $ 734 $ 268 $ 490
Weighted average shares
outstanding basic 15,035 13,089 14,444 13,046
Weighted average shares
outstanding diluted 15,189 13,141 14,599 13,098
Basic and diluted net (loss)
income per share $ (.01) $ .06 $ - $ .04
Basic and diluted earnings per share are based upon the weighted average number
of common shares outstanding, including Class B common shares, during the
period. Class B common stockholders have the same rights to share in profits and
losses and liquidation values as common stockholders.
At June 30, 2002, the Company had a put option obligation of $495,000. This
amount has been recorded in additional paid in capital in the Consolidated
Condensed Balance Sheets. The addition to the liability of $225,000 and $255,000
in the three and six months ended June 30, 2002, respectively, are deemed to be
a dividend for purposes of the basic and diluted (loss) income per share
calculation.
GP STRATEGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
(Unaudited)
2. Long-term debt
Long-term debt consists of the following (in thousands):
June 30, December 31,
2002 2001
--------- ----------
Mortgage on MXL Pennsylvania facility $ 1,555 $ 1,605
Mortgage on MXL Illinois facility 1,225 1,237
Senior subordinated debentures 563 641
Subordinated convertible note 2,640 2,640
Other 531 740
--------- ---------
6,514 6,863
Less current maturities (3,223) (637)
--------- --------
$ 3,291 $ 6,226
======== ========
On March 8, 2001, MXL Industries, Inc. ("MXL"), a wholly owned subsidiary of the
Company entered into a loan secured by a mortgage covering the real estate and
fixtures on its property in Pennsylvania in the amount of $1,680,000. The loan
requires monthly repayments of $8,333 plus interest at 2.5% above the one month
LIBOR rate and matures on March 8, 2011. The loan is guaranteed by the Company.
The proceeds of the loan were used to repay a portion of the Company's
short-term borrowings pursuant to its amended agreement described below in Note
4.
On July 3, 2001, MXL entered into a loan in the amount of $1,250,000, secured by
a mortgage covering the real estate and fixtures on its property in Illinois.
The loan requires monthly payments of principal and interest of $11,046 with
interest at a fixed rate of 8.75% per annum, and matures on June 26, 2006, when
the remaining amount outstanding of approximately $1,100,000 is due in full. The
loan is guaranteed by the Company. The proceeds of the loan were used to repay a
portion of the Company's term loan pursuant to its Amended Agreement described
in Note 4.
GP STRATEGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
(Unaudited)
3. Comprehensive (loss) income
The following are the components of comprehensive (loss) income (in thousands):
Three months ended Six months ended
June 30, June 30,
------------------------ -----------------------
2002 2001 2002 2001
------- -------- ------- ---------
Net income $ 63 $ 734 $ 268 $ 490
--------- -------- --------- --------
Other comprehensive (loss) income before tax:
Net unrealized (loss ) gain on
available-for-sale-securities (3,900) 14,406 (8,904) 191
Foreign currency translation adjustment (415) 50 (268) 243
---------- ---------- ---------- --------
Other comprehensive (loss) income,
before tax (4,315) 14,456 (9,172) 434
--------- --------- --------- --------
Income tax benefit (expense) relating to
items of other comprehensive income 1,524 (5,663) 3,459 (131)
--------- --------- --------- ---------
Comprehensive (loss) income,
net of tax $ (2,728) $ 9,527 $ (5,445) $ 793
======== ======== ======== ========
The components of accumulated other comprehensive income (loss) are as follows:
June 30, December 31,
2002 2001
--------- ---------
Net unrealized gain on
available-for-sale-securities $ 5,906 $14,810
Foreign currency translation adjustment (925) (657)
------- --------
Accumulated other comprehensive income
before tax 4,981 14,153
Accumulated income tax expense related to
items of other comprehensive income (2,330) (5,789)
------- ---------
Accumulated other comprehensive income,
net of tax $ 2,651 $ 8,364
======= =======
GP STRATEGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
(Unaudited)
4. Short-term borrowings
The Company and certain of its wholly owned subsidiaries entered into an Amended
and Restated secured $40,000,000 Revolving Credit Agreement (the "Amended
Agreement") with various banks on December 14, 2001 which amended in its
entirety the Company's former credit facility as discussed below. The Amended
Agreement reduced the commitment pursuant to the revolving facility to
$40,000,000 (subject to borrowing base limitations specified in the Amended
Agreement). The interest rates on the revolving credit facility are currently at
prime plus 1.50% and Eurodollar plus 3.00%, at the Company's option. Based upon
the financial performance of the Company, the interest rates can be reduced. The
Amended Agreement is secured by all of the receivables and inventory of the
Company as well as the common stock of the Company's material domestic
subsidiaries and 65% of the common stock of the Company's foreign subsidiaries.
The Amended Agreement also provides for additional security consisting of
certain real property, personal property and substantially all marketable
securities owned by the Company and its subsidiaries. The Amended Agreement
contains revised minimum consolidated net worth, fixed charge coverage, leverage
ratio and interest coverage ratio. The Amended Agreement also contains certain
restrictive covenants, including the prohibition on future acquisitions, and
provides for mandatory prepayment upon the occurrence of certain events. At June
30, 2002, the amount outstanding under the revolving credit facility is
$24,125,000 and is included in short-term borrowings in the Consolidated
Condensed Balance Sheet. At June 30, 2002, the Company had $10,635,000 available
to be borrowed under the Credit Agreement and was in compliance with all
financial covenants.
5. Business segments
Effective January 1, 2002, the operations of the Company consist of three
business segments, by which the Company is managed.
The Company's principal operating subsidiary is General Physics Corporation
(GP). GP is a workforce development company that improves the effectiveness of
organizations by providing training, management systems and engineering services
to meet the specific needs of clients. Programs have been developed for service
managers and executives, engineers, sales associates, plant operators, the
maintenance and purchasing workforces and information technology professionals
in the public and private sectors in North and South America, Europe and Asia.
Clients include Fortune 500 companies, manufacturing, process and energy
industries, and other commercial and government customers. GP operates in two
business segments.
GP STRATEGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
(Unaudited)
5. Business segments (continued)
The Manufacturing & Process Group provides technology based training,
engineering, consulting and technical services to leading companies in the
automotive, steel, power, oil and gas, chemical, energy, pharmaceutical and food
and beverage industries, as well as to the government sector. The Information
Technology Group provides IT training programs and solutions, including
Enterprise Solutions and comprehensive career training and transition programs.
The Optical Plastics Group, which consists of MXL, manufactures and distributes
coated and molded plastic products.
The Hydro Med Group consisted of Hydro Med Sciences (HMS), a drug delivery
company, which is engaged in Phase III clinical trials for the treatment of
prostrate cancer. As part of a private placement transaction of preferred stock
that was completed on December 27, 2001, the Company no longer has financial and
operational control of HMS. Therefore, for the year ended December 31, 2001 the
operating results of HMS were consolidated within the Consolidated Condensed
Statement of Operations. However, effective January 1, 2002 and as a result of
this private placement transaction, the Hydro Med Group no longer exists as a
business segment of the Company. Effective December 27, 2001, the Company
accounts for its investment in HMS under the equity method.
The management of the Company does not allocate the following items by segment:
Investment and other income, net, interest expense, selling, general and
administrative expenses, depreciation and amortization expense, income tax
expense, significant non-cash items and long-lived assets.
There are deminimis inter-segment sales. The reconciliation of gross margin to
net income is consistent with the presentation on the Consolidated Condensed
Statements of Operations.
GP STRATEGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
(Unaudited)
5. Business segments (continued)
The following tables set forth the sales and gross margin of each of the
Company's operating segments (in thousands):
Three months ended Six months ended
June 30, June 30,
--------------------- ----------------------
2002 2001 2002 2001
------- -------- ------- -------
Sales
Manufacturing and Process $34,401 $44,496 $69,566 $87,333
Information Technology 2,127 2,888 4,432 6,106
Optical Plastics 2,714 2,962 5,470 6,019
Hydro Med 1 3
------------ ---------- ------------ -----------
$39,242 $50,347 $79,468 $99,461
------- ------- ------- -------
Gross margin
Manufacturing and Process $ 4,259 $ 5,848 $ 8,849 $11,206
Information Technology (54) 449 258 768
Optical Plastics 700 822 1,246 1,660
Hydro Med (145) (301)
----------- ---------- ----------- ----------
$ 4,905 $ 6,974 $10,353 $13,333
------- ------- ------- -------
Information about the Company's sales in different geographic regions, which are
attributed to countries based on location of customers, is as follows (in
thousands):
Three months ended Six months ended
June 30, June 30,
------------------------ ---------------------
2002 2001 2002 2001
------- --------- -------- -------
United States $36,367 $46,740 $73,946 $92,125
Canada 432 890 731 1,956
United Kingdom 1,845 1,641 3,618 3,400
Latin America 598 1,076 1,173 1,980
--------- --------- ------- ----------
$39,242 $50,347 $79,468 $99,641
------- ------- ------- -------
GP STRATEGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
(Unaudited)
5. Business segments (Continued)
Information about the Company's identifiable assets in different geographic
regions, is as follows (in thousands):
June 30, December 31,
2002 2001
------------ -----------
United States $145,795 $154,844
Canada 3,869 3,653
United Kingdom 3,208 2,821
Latin America and other 2,242 2,573
---------- --------
$155,114 $163,891
-------- --------
6. Restructuring charges
During 1999 and 2000, the Company adopted restructuring plans, primarily related
to its IT business segment. During the six month period ended June 30, 2002 the
Company utilized $863,000 of the restructuring reserve and reversed $354,000. Of
the remaining total restructuring reserve balance of $1,509,000 at June 30, 2002
and $2,726,000 at December 31, 2001, $313,000 and $1,162,000, respectively, were
included in accounts payable and accrued expenses and $1,196,000 and $1,564,000,
respectively, were included in other non-current liabilities in the Consolidated
Condensed Balance Sheet.
The components of the restructuring charge reserve are as follows (in
thousands):
Lease and
related Contractual
obligations obligations Total
- -------------------------------------------------------------------------------
Balance December 31, 2001 $ 2,374 $ 352 $ 2,726
- -------------------------------------------------------------------------------
Utilization (511) (352) (863)
Reversal of restructuring
charges (354) (354)
- -------------------------------------------------------------------------------
Balance June 30, 2002 $ 1,509 $ $ 1,509
- -------------------------------------------------------------------------------
Lease obligations are presented at their present value, net of assumed sublets.
GP STRATEGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
(Unaudited)
7. Recently adopted accounting standards
Effective January 1, 2002, the Company adopted FASB Statement No. 141, Business
Combinations, and Statement No. 142, Goodwill and Other Intangible Assets.
Statement No. 141 requires that the purchase method of accounting be used for
all business combinations initiated after June 30, 2001 as well as all purchase
method business combinations completed after June 30, 2001. Statement No. 141
also specifies criteria intangible assets acquired in a purchase method business
combination must meet to be recognized and reported apart from goodwill, noting
that any purchase price allocable to an assembled workforce may not be accounted
for separately. Statement No. 142 requires that goodwill and intangible assets
with indefinite useful lives no longer be amortized but instead tested for
impairment at least annually in accordance with the provisions of Statement No.
142. Statement No. 142 also requires that intangible assets with definite useful
lives be amortized over their respective estimated useful lives to their
estimated residual values, and reviewed for impairment in accordance with SFAS
No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of. The Company had unamortized goodwill in the amount of
$56,000,000. The Company did not recognize any impairment as a result of the
adoption of this statement.
7. Recently adopted accounting standards (continued)
The changes in the carrying amount of acquired intangible assets for the
six-month period ended June 30, 2002 are as follows:
Manufacturing & Information Optical
Process Technology Plastics Corporate Total
- ------------------------------------------------------------------------------------------------------------
Intangible assets:
Balance as of:
December 31, 2001 $25,411 $ 7,471 $ 394 $35,358 $68,634
Additions 306 306
Other 207 207
- ------------------------------------------------------------------------------------------------------------
June 30, 2002 $25,717 $ 7,678 $ 394 $35,358 $69,147
- ------------------------------------------------------------------------------------------------------------
Manufacturing & Information Optical
Process Technology Plastics Corporate Total
- ------------------------------------------------------------------------------------------------------------
Accumulated Amortization:
Balance as of:
December 31, 2001 $ 6,219 $ 1,337 $ 207 $ 4,025 $11,788
Amortization expense 42 5 9 56
Other 46 46
- ------------------------------------------------------------------------------------------------------------
June 30, 2002 $ 6,261 $ 1,383 $ 212 $ 4,034 $11,890
- ------------------------------------------------------------------------------------------------------------
Balance as of
June 30, 2002 $19,456 $ 6,295 $ 182 $31,324 $57,257
============================================================================================================
GP STRATEGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
(Unaudited)
7. Recently adopted accounting standards (continued)
The components of acquired intangible assets as of June 30, 2002 are as
follows:
Manufacturing & Information
Process Technology Optical Plastics Corporate
Gross Gross Gross Gross Gross
Carrying Accumulated Carrying Accumulated Carrying Accumulated Carrying Accumulated
Amount Amortization Amount Amortization Amount Amortization Amount Amortization
- -----------------------------------------------------------------------------------------------------------------------------------
Goodwill $24,527 $ 5,846 $7,678 $1,383 $394 $212 $35,200 $3,903
Other $ 1,190 $ 415 158 131
- -----------------------------------------------------------------------------------------------------------------------------------
Balance as of
June 30, 2002 $25,717 $6,261 $7,678 $1,383 $394 $212 $35,358 $4,034
===================================================================================================================================
GP STRATEGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
(Unaudited)
7. Recently Adopted Accounting Standards (Continued)
Summarized below is pro forma net income and earnings per share for the three
and six months ended June 30, 2001 as adjusted for amortization expense that is
no longer recorded in accordance with Statement No. 142 and net of the related
income tax effect is as follows:
Three Months Six Months
ended June 30, 2001 ended June 30, 2001
------------------------------ ------------------------------
Net Basic & Diluted Net Basic & Diluted
Income EPS Income EPS
------------ --------------- -------------- ---------------
Reported $ 734 $0.06 $ 490 $0.04
Add: amortization
adjustment $ 360 $0.02 $ 710 $0.05
------- ----- ------- -----
Adjusted $1,094 $0.08 $1,200 $0.09
====== ===== ====== =====
8. Litigation
On January 3, 2001, the Company commenced an action alleging that MCI
Communications Corporation ("MCI"), Systemhouse, and Electronic Data Systems
Corporation, as successor to Systemhouse, committed fraud in connection with the
Company's 1998 acquisition of Learning Technologies from the defendants for
$24.3 million. The Company seeks actual damages in the amount of $117.9 million
plus interest, punitive damages in an amount to be determined at trial and
costs.
The complaint, which is pending in the New York State Supreme Court, alleges
that the defendants created a doctored budget to conceal the poor performance of
the United Kingdom operation of Learning Technologies. The complaint also
alleges that the defendants represented that Learning Technologies would
continue to receive business from Systemhouse even though defendants knew that
the sale of Systemhouse to EDS was imminent and that such business would cease
after such sale. In February 2001, the defendants filed answers denying
liability. No counterclaims against the plaintiffs have been asserted. Although,
discovery has not yet been completed, defendants have made a motion for summary
judgment, which was submitted on April 15, 2002. The motion is under judicial
consideration.
GP STRATEGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
(Unaudited)
8. Litigation (Continued)
One of the defendants, MCI, filed for bankruptcy protection in July 2002. As a
result, the action is stayed as to MCI. The other defendants have made an
application to the Court to stay the action until a later-commenced arbitration
is concluded. The motion, which the Company has opposed, has not yet been
submitted to the Court.
9. Stockholders' equity
During the second quarter ended June 30, 2002, the Company received an aggregate
of $9.3 million from the sale of Common and Class B Stock Shares as summarized
below.
The Company sold 1,200,000 shares of Common Stock for $4,200,000 to Bedford Oak
in a private placement transaction.
The Company sold 100,000 shares of Common Stock for $350,000 to Marshall Geller,
a director of the Company, in a private placement transaction.
The Company sold to Equity Group Investments, L.L.C ("EGI") in a private
placement transaction 1,000,000 shares of Common Stock (the "EGI Common Shares")
for $3,500,000 and 300,000 shares of Class B Stock (the "EGI Class B Shares")
for $1,260,000.
Upon the disposition of any of the EGI Class B Shares (other than to an
affiliate of EGI or to a transferee approved by the Board who in each case
agrees to be bound by the provisions of the EGI Agreement), EGI is required to
exercise the right to convert all of its EGI Class B Shares into an equal number
of shares of Common Stock (the "EGI Underlying Shares"). Until May 3, 2003, the
Company has the right to purchase all, but not less than all, of the EGI Class B
Shares then owned by EGI at a price per share equal to the greater of (i) the 90
day trailing average of the closing prices of the Common Stock and (ii) $5.25.
If the Company exercises such right, EGI has the right to sell to the Company
all or part of the EGI Common Shares then owned by EGI at a price per share of
$3.50. If EGI exercises such right and the Company does not then have adequate
liquidity, the repurchase of the EGI Common Shares may take place over a period
of 21 months.
GP STRATEGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
(Unaudited)
9. Stockholders' equity (Continued)
The Company and EGI have entered into an advisory services agreement providing
that, to the extent requested by the Company and deemed appropriate by EGI, EGI
shall assist the Company in developing, identifying, evaluating, negotiating,
and structuring financings and business acquisitions. The Company has agreed to
pay EGI a transaction fee equal to 1% of the proceeds received by the Company in
a financing, or of the consideration paid by the Company in a business
acquisition, in respect of which EGI has provided material services.
10. Subsequent event
On August 2, 2002, upon approval from its lenders, the Company converted
$500,000 of its $5,000,000 senior unsecured 8% note due from Five Star Products,
Inc. ("Five Star") into 2,272,727 shares of common stock of Five Star. Five Star
has executed a new promissory note to the Company in the amount of $4,500,000.
Terms of the promissory note remain unchanged. This conversion increases the
Company's ownership in Five Star to approximately 45% from 37% of the
outstanding shares of common stock of Five Star.
GP STRATEGIES CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations
Overview
The Company has three operating business segments. Two of these segments, the
Manufacturing & Process Group and the IT Group, are managed through the
Company's principal operating subsidiary General Physics and the third through
its operating subsidiary MXL Industries. In addition, the Company holds a number
of investments in publicly held companies, including publicly traded stock in
Millennium Cell Inc. and an equity interest in HMS.
While the Company currently owns 100% of the Common Stock of HMS, as a result of
a private placement transaction of preferred stock that was completed on
December 27, 2001, the Company no longer has financial and operational control
of HMS. Therefore, for the year ended December 31, 2001, the operating results
of HMS were consolidated within the Consolidated Condensed Statement of
Operations. However, as a result of this private placement transaction,
effective January 1, 2002 the Hydro Med Group no longer exists as a business
segment. The Company currently accounts for its investment in HMS under the
equity method.
GP is a workforce development company that improves the effectiveness of
organizations by providing training, management systems and engineering services
to meet the specific needs of clients. Programs have been developed for service
managers and executives, engineers, sales associates, plant operators, the
maintenance and purchasing workforces and information technology professionals
in the public and private sectors in North and South America, Europe and Asia.
Clients include Fortune 500 companies, manufacturing, process and energy
industries, and other commercial and government customers.
For the quarter ended June 30, 2002, the Company had income before income taxes
of $176,000 compared to $1,316,000 for the quarter ended June 30, 2001. The
income in the second quarter of 2002 included a $846,000 gain from the sale
shares of Millennium Cell, Inc. and a non-cash credit of $311,000 relating to
the Company's Millennium Cell Deferred Compensation Plan, offset by a non-cash
equity loss of $596,000 on HMS. Additionally, effective January 1, 2002, and for
the quarter ended June 30, 2002, the Company no longer amortizes goodwill in
accordance with SFAS No. 142 Goodwill and Other Intangible Assets. The income
for the second quarter of 2001 was primarily attributable to a $2,203,000 gain
from the sale of securities of Millennium Cell, Inc., offset by a non-cash
expense of $872,000 relating to the Company's Millennium Cell Deferred
Compensation Plan. The Company's three operating business segments had decreased
profits in the quarter ended June 30, 2002, compared to the quarter ended June
30, 2001 due to the Company's decreased sales and gross margin percentage.
For the six months ended June 30, 2002, the Company had income before income
taxes of $549,000 compared to $890,000 for the six months ended June 30, 2001.
The six months ended June 30, 2002 included a $1,286,000 gain primarily from the
sale of shares of Millennium Cell, Inc. and a non-cash credit of $868,000
relating to the Company's Millennium Cell Deferred Compensation Plan, offset by
a non-cash equity loss of $1,331,000 on HMS. Additionally, effective January 1,
2002, and for the six months ended June 30, 2002, the Company no longer
amortizes goodwill in accordance with SFAS No. 142 Goodwill and Other Intangible
Assets. The income for the six months ended June 30, 2001 was primarily due to a
$427,000 gain from the sale of securities and a non-cash credit of $273,000
relating to the Company's Millennium Cell Deferred Compensation Plan.
Three months ended Six months ended
June 30, June 30,
--------------------- ---------------------
2002 2001 2002 2001
------- -------- ------- -------
Sales
Manufacturing and Process $34,401 $44,496 $69,566 $87,333
Information Technology 2,127 2,888 4,432 6,106
Optical Plastics 2,714 2,962 5,470 6,019
Hydro Med 1 3
------- ------- ------- -------
$39,242 $50,347 $79,468 $99,461
------- ------- ------- -------
For the quarter and six months ended June 30, 2002, sales decreased by
$11,105,000 to $39,242,000 from $50,347,000 and $19,993,000 to $79,468,000 from
$99,461,000, respectively, from the corresponding periods in 2001. The decrease
in sales was primarily attributable to a continued reduction in sales from the
automotive division and e-Learning division of the Manufacturing and Process
Group, as well as decreased sales from certain high tech clients. The
Information Technology Group's sales continue to decline primarily as a result
of the Company's efforts to downsize the division. In addition, the sales
decrease in 2002 compared to the second quarter of 2001, was primarily due to
the overall continued downturn in the economy and the sales for the second
quarter of 2001 were the strongest sales reported by the Company's manufacturing
and process group in the past two years.
Three months ended Six months ended
June 30, June 30,
------------------------------------ ----------------------------------
2002 % 2001 % 2002 % 2001 %
------- ----- -------- ------- ------ ----- --------------
Gross margin
Manufacturing and Process $ 4,259 12.4 $ 5,848 13.1 $ 8,849 12.7 $11,206 12.8
Information Technology (54) 449 15.5 258 5.8 768 12.6
Optical Plastics 700 25.8 822 27.8 1,246 22.8 1,660 27.6
Hydro Med (145) (301)
------------ ------ -------- -------------------------- ---------- ------
$ 4,905 12.5 $ 6,974 13.9 $10,353 13.0 $13,333 13.4
------- ----- ------- ----- ------- ---- ------- -----
Consolidated gross margin of $4,905,000 or 12.5% of sales for the quarter ended
June 30, 2002, decreased by $2,069,000, compared to the consolidated gross
margin of $6,974,000, or 13.9% of sales for the quarter ended June 30, 2001. For
the six months ended June 30, 2002, gross margin decreased by $2,980,000 from
$13,333,000 to $10,353,000. The decreased gross margin in both the quarter and
six months ended June 30, 2002 occurred within all segments of GP, as a result
of decreased sales for the period. However, the gross margin percentage for the
Manufacturing and Process Group remained relatively unchanged due to the
Company's continued efforts to control costs for the period.
Selling, general and administrative expenses
For the quarter ended June 30, 2002, selling, general and administrative (SG&A)
expenses were $4,737,000 compared to $6,997,000 in the second quarter of 2001.
The reduction in SG&A of $2,260,000 is primarily attributable to the non-cash
credit of $311,000 (as compared to an expense of $872,000 in 2001) relating to
the Company's Millennium Cell Deferred Compensation Plan, a reduction in SG&A
expense for HMS of $633,000 due to the deconsolidation of HMS at December 27,
2001 and goodwill amortization expense of $538,000 in the prior year which is
not recorded in the current year in accordance with SFAS No. 142 Goodwill and
Other Intangible Assets.
For the six months ended June 30, 2002, SG&A expenses were reduced by $2,192,000
from $11,469,000 to $9,277,000 primarily as a result of an increase in the
non-cash credit of $595,000 relating to the Company's Millennium Cell Deferred
Compensation Plan, a reduction in SG&A expenses for HMS of $1,034,000 due to the
deconsolidation of HMS and goodwill amortization expense of $1,294,000 in the
prior year which is not included in current year in accordance with SFAS No. 142
Goodwill and Other Intangible Assets, offset by financial consulting fees and
other expenses of approximately $700,000.
Interest expense
For the quarter ended June 30, 2002, interest expense was $675,000 compared to
$1,155,000 for the quarter ended June 30, 2001. For the six months ended June
30, 2002, there was a decrease in interest expense of $1,126,000 from $2,555,000
to $1,429,000. The decreased interest expense in 2002 was attributable to both a
decrease in the Company's outstanding indebtedness and a reduction in variable
interest rates.
Investment and other (loss) income, net
For the three and six months ended June 30, 2002, investment and other (loss)
income, net was $(303,000) and $(738,000) as compared to $291,000 and $781,000
for the quarter and six months ended June 30, 2001. The decrease was primarily
attributable to an equity loss recognized on HMS of $596,000 and $1,331,000 for
the three and six months ended June 30, 2002, respectively, and other (loss)
income, net on the Company's other investments.
Income tax expense
For the quarter and six months ended June 30, 2002, the Company recorded an
income tax expense of $113,000 and $281,000, which represents the Company's
estimated effective federal, state and local, and foreign tax rate. In the
quarter and six months ended June 30, 2001, the Company recorded an income tax
expense of $582,000 and $400,000, which represents the applicable federal, state
and local, and foreign tax expense for these periods.
Liquidity and capital resources
At June 30, 2002, the Company had cash and cash equivalents totaling $2,270,000.
The Company has sufficient cash and cash equivalents, long-term investments and
borrowing availability under existing and potential lines of credit as well as
the ability to obtain additional funds from its operating subsidiaries in order
to fund its working capital requirements.
During the six months ended June 30, 2002, the Company received an aggregate of
$9,310,000 from the sale of Common Stock Class B Stock (see Note 9).
For the six months ended June 30, 2002, the Company's working capital increased
by $8,784,000 to a net working capital of $6,034,000, primarily due to proceeds
from the sale of Class B and Common Stock which was used to repay $8,200,000 of
short-term borrowings and decreases in accounts and other receivables and
accounts payable and accrued expenses, offset by an increase in prepaid expenses
and other current assets.
The increase in cash and cash equivalents of $565,000 for the six months ended
June 30, 2002 resulted primarily from cash provided by investing and financing
activities of $659,000 and $648,000, respectively, offset by cash used in
operations of $474,000. Cash provided by financing activities consisted of
proceeds from the sale of Common and Class B Stock offset by repayments of
short-term borrowings and long-term debt.
Recent accounting pronouncements
In August 2001, the FASB issued Statement No. 143, Accounting for Asset
Retirement Obligations (SFAS 143), which addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. This Statement applies to all
entities that have legal obligations associated with the retirement of
long-lived assets that result from the acquisition, construction, development or
normal use of the asset. Enterprises are required to adopt Statement No. 143 for
fiscal years beginning after June 15, 2002. The adoption of this statement is
not expected to have a material impact on the Company's financial position or
results of operation.
In July 2002, the FASB issued Statement No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" (SFAS 146") was issued. This
Statement addresses financial accounting and reporting for costs associated with
exit or disposal activities and nullifies Emerging Task Force Issue ("EITF")
94-3, "Liability Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)." The principal difference between SFAS 146 and EITF 94-3,
relates to the timing of liability recognition. Under SFAS 146, a liability for
a cost associated with an exit or disposal activity is recognized when the
liability is incurred. Under EITF 94-3, a liability for an exit cost was
recognized at the date of an entity's commitment to an exit plan. The provisions
of SFAS 146 are effective for exit or disposal activities that are initiated
after December 31, 2002. The adoption of this statement is not expected to have
a material impact on the Company's financial position or results of operation.
Forward-looking statements
The forward-looking statements contained herein reflect GP Strategies'
management's current views with respect to future events and financial
performance. These forward-looking statements are subject to certain risks and
uncertainties that could cause actual results to differ materially from those in
the forward-looking statements, all of which are difficult to predict and many
of which are beyond the control of GP Strategies, including, but not limited to
those risks and uncertainties detailed in GP Strategies' periodic reports and
registration statements filed with the Securities and Exchange Commission.
GP STRATEGIES CORPORATION AND SUBSIDIARIES
QUALIFICATION RELATING TO FINANCIAL INFORMATION
June 30, 2002
The financial information included herein is unaudited. In addition, the
financial information does not include all disclosures required under generally
accepted accounting principles because certain note information included in the
Company's Annual Report has been omitted; however, such information reflects all
adjustments (consisting solely of normal recurring adjustments) which are, in
the opinion of management, necessary for a fair statement of the results for the
interim periods. The results for the 2002 interim period are not necessarily
indicative of results to be expected for the entire year.
GP STRATEGIES CORPORATION AND SUBSIDIARIES
PART II. OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
99.1 Certification of Chief Executive Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Okley Act of 2002.
99.2 Certification of Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Okley Act of 2002.
b. Reports
None
GP STRATEGIES CORPORATION AND SUBSIDIARIES
June 30, 2002
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed in its behalf by the
undersigned thereunto duly authorized.
GP STRATEGIES CORPORATION
DATE: August 14, 2002 Scott N. Greenberg
President &
Chief Financial Officer
DATE: August 14, 2002 Jerome I. Feldman
Chief Executive Officer