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 September 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
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(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
November 11, 2002:
Common Stock 15,280,731 shares
Class B Capital 1,200,000 shares
GP STRATEGIES CORPORATION AND SUBSIDIARIES
TABLE OF CONTENTS
Page No.
Part I. Financial Information
Consolidated Condensed Balance Sheets -
September 30, 2002 and December 31, 2001 1
Consolidated Condensed Statements of Operations -
Three Months and Nine Months Ended September 30,
2002 and 2001 3
Consolidated Condensed Statements of Cash Flows -
Nine Months Ended September 30, 2002 and 2001 4
Notes to Consolidated Condensed Financial
Statements 6
Management's Discussion and Analysis of Financial
Condition and Results of Operations 18
Part II. Other Information 23
Signatures 24
Certification of Chief Executive Officer 25
Certification of Chief Financial Officer 27
PART I. FINANCIAL INFORMATION
GP STRATEGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(in thousands)
September 30, December 31,
2002 2001
-------------- -----------
ASSETS (unaudited) *
Current assets
Cash and cash equivalents $ 1,355 $ 1,705
Accounts and other receivables, and costs
and estimated earnings in excess of billings
on uncompleted contracts 44,723 50,189
Inventories 1,611 1,734
Prepaid expenses and other current assets 4,675 3,780
---------- ----------
Total current assets 52,364 57,408
--------- ---------
Investments, advances and marketable securities 16,387 30,400
--------- ---------
Property, plant and equipment, net 8,602 8,718
---------- ----------
Intangible assets, net of accumulated amortization
of $35,111 and $35,031 58,020 56,846
--------- ----------
Deferred tax asset 8,999 4,289
---------- -----------
Other assets 5,870 6,230
---------- -----------
$150,242 $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)
September 30, December 31,
2002 2001
------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY (unaudited) *
Current liabilities:
Current maturities of long-term debt $ 3,186 $ 637
Short-term borrowings 23,625 32,338
Accounts payable and accrued expenses 17,603 17,089
Billings in excess of costs and estimated
earnings on uncompleted contracts 6,589 10,094
--------- --------
Total current liabilities 51,003 60,158
-------- ---------
Long-term debt less current maturities 3,901 6,226
--------- ---------
Other non-current liabilities 999 1,564
---------- ---------
Stockholders' equity
Common stock 152 128
Class B capital stock 12 9
Additional paid in capital 189,845 180,078
Accumulated deficit (91,558) (87,939)
Accumulated other comprehensive income 585 8,364
Note receivable from stockholder (4,095) (4,095)
Treasury stock, at cost (602) (602)
---------- ----------
Total stockholders' equity 94,339 95,943
---------- ---------
$150,242 $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 Nine months
ended September 30, ended September 30,
--------------------- ---------------------
2002 2001 2002 2001
------- ------ ------- -----------
Sales $ 36,616 $ 44,713 $116,084 $144,174
Cost of sales 33,190 40,030 102,305 126,158
-------- -------- -------- ---------
Gross margin 3,426 4,683 13,779 18,016
Selling, general & administrative expenses (6,927) (3,576) (16,204) (15,072)
Interest expense (654) (1,111) (2,083) (3,666)
Investment and other income (loss), net 169 342 (569) 1,123
Loss on investments (153) (153)
Gain on marketable securities 391 1,049 1,677 1,476
Restructuring charge reversal 9 206 363 606
------------ --------- --------- ---------
(Loss) income before income taxes (3,739) 1,593 (3,190) 2,483
Income tax expense (148) (746) (429) (1,146)
--------- -------- --------- ---------
Net (loss) income $ (3,887) $ 847 $ (3,619) $ 1,337
======== ======== ======== ========
Net (loss) income per share:
Basic and diluted $ (.25) $ .06 $ (.24) $ .10
========= ========= ========= ==========
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)
Nine months
ended September 30,
2002 2001
-------- ------
Cash flows from operations:
Net (loss) income $ (3,619) $ 1,337
Adjustments to reconcile net (loss) income to net cash
(used in) provided by operating activities:
Depreciation and amortization 2,238 4,516
Gain on marketable securities (1,677) (1,476)
Loss on investments 153
Issuance of stock for profit incentive plan 594 1,141
Loss (income) on equity investments 1,112 (309)
Non-cash compensation and consultant fees 240 (2,547)
Restructuring charge reversal (363) (606)
Changes in other operating items (499) (1,978)
-------- ---------
Net cash (used in) provided by operating activities (1,821) 78
-------- -----------
Cash flows from investing activities:
Proceeds from sale of marketable securities 2,687 10,827
Additions to property, plant & equipment (1,504) (1,221)
Reduction in investments and other assets, net 188 91
-------- -----------
Net cash provided by investing activities 1,371 9,697
-------- ---------
GP STRATEGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Continued)
(Unaudited)
(in thousands)
Nine months
ended September 30,
2002 2001
----------- ----------------
Cash flows from financing activities:
Net proceeds from sale of Class B Stock 1,260
Net proceeds from sale of Common Stock 7,850
Repayment of short-term borrowings (8,713) (3,685)
Proceeds from MXL mortgage 2,930
Proceeds (repayment) of long-term debt 224 (7,763)
--------- -------
Net cash provided by (used in) financing activities 621 (8,518)
--------- -------
Effect of exchange rate changes on
cash and cash equivalents (521) 114
--------- --------
Net (decrease) increase in cash and cash equivalents (350) 1,371
Cash and cash equivalents at the beginning of the periods 1,705 2,487
-------- --------
Cash and cash equivalents at the end of the periods $ 1,355 $ 3,858
======== ========
Cash paid during the periods for:
Interest $ 1,563 $ 3,118
======== ========
Income taxes $ 431 $ 289
========= =========
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 (loss) per share (EPS) for the periods ended September 30, 2002 and 2001
are as follows (in thousands, except per share amounts):
Three months Nine months
ended September 30, ended September 30,
----------------------- -------------------------
2002 2001 2002 2001
---- ---- ---- ----
Basic and Diluted EPS
Net (loss) income $ (3,887) $ 847 $ (3,619) $ 1,337
Weighted average shares
outstanding basic 15,618 13,169 15,030 13,087
Weighted average shares
outstanding, diluted 15,618 13,193 15,030 13,111
Basic and diluted net (loss)
income per share $ (.25) $ .06 $ (.24) $ .10
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. The calculation of the
diluted net loss per share excludes 734,267 stock options outstanding for the
three and nine months ended September 30, 2002 as the effect of including such
stock options would be anti-dilutive.
2. Accounts and other receivables, and costs and estimated earnings in excess
of billings on uncompleted contracts
Accounts and other receivables, and costs and estimated earnings in excess of
billings on uncompleted contracts consists of the following (in thousands):
September 30, December 31,
2002 2001
---------- ----------
Accounts and other receivables $ 30,881 $ 41,610
Costs and estimated earnings in excess
of billings on uncompleted contracts 13,842 8,579
--------- ---------
$ 44,723 $ 50,189
======== ========
GP STRATEGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
(Unaudited)
3. Long-term debt
Long-term debt consists of the following (in thousands):
September 30, December 31,
2002 2001
--------- ----------
Mortgage on MXL Pennsylvania facility $ 1,557 $ 1,605
Mortgage on MXL Illinois facility 1,219 1,237
Senior subordinated debentures 535 641
Subordinated convertible note 2,640 2,640
Other 1,136 740
--------- ---------
7,087 6,863
Less current maturities (3,186) (637)
--------- --------
$ 3,901 $ 6,226
======== ========
4. Comprehensive (loss) income
The following are the components of comprehensive (loss) income (in thousands):
Three months ended Nine months ended
September 30, September 30,
--------------------------------------------------------
2002 2001 2002 2001
-------- --------- -------- ------------
Net (loss) income $ (3,887) $ 847 $ (3,619) $ 1,337
--------- --------- --------- --------
Other comprehensive loss before tax:
Net unrealized loss on
available-for-sale-securities (2,955) (34,374) (11,859) (34,183)
Foreign currency translation adjustment (253) (129) (521) 114
----------- --------- ---------- ---------
Other comprehensive loss
before tax (3,208) (34,503) (12,380) (34,069)
Income tax benefit relating to
items of other comprehensive loss 1,142 13,351 4,601 13,220
---------- -------- --------- --------
Comprehensive loss,
net of tax $ (5,953) $ (20,305) $ (11,398) $ (19,512)
========= ========= ========= =========
GP STRATEGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
(Unaudited)
4. Comprehensive (loss) income (Continued)
The components of accumulated other comprehensive income are as follows:
September 30, December 31,
2002 2001
-------- ---------
Net unrealized gain on
available-for-sale-securities $ 2,951 $ 14,810
Foreign currency translation adjustment (1,178) (657)
--------- --------
Accumulated other comprehensive income
before tax 1,773 14,153
Accumulated income taxes related to
items of other comprehensive income (1,188) (5,789)
--------- --------
Accumulated other comprehensive income,
net of tax $ 585 $ 8,364
========= ========
5. 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 commitment has been reduced to $35 million as a result of asset
sales by the Company, but will not be below $35 million as a result of any
additional asset sales. 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.
GP STRATEGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
(Unaudited)
5. Short-term borrowings (Continued)
At September 30, 2002, the amount outstanding under the revolving credit
facility is $23,625,000 and is included in short-term borrowings in the
Consolidated Condensed Balance Sheet. At September 30, 2002, the Company had
$8,545,000 available to be borrowed under the Credit Agreement and was in
compliance with all financial covenants.
6. 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 1000 companies, manufacturing, process and energy
industries, and other commercial and government customers. GP operates in two
business segments.
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.
GP STRATEGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
(Unaudited)
6. Business segments (Continued)
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
prostate 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 (loss) income is consistent with the presentation on the Consolidated
Condensed Statements of Operations.
The following tables set forth the sales and gross margin of each of the
Company's operating segments (in thousands):
Three months ended Nine months ended
September 30, September 30,
---------------------- -------------------------
2002 2001 2002 2001
------- -------- ------- -------
Sales
Manufacturing and Process $ 32,543 $39,458 $102,109 $126,791
Information Technology 1,852 2,495 6,284 8,601
Optical Plastics 2,221 2,758 7,691 8,777
Hydro Med 2 5
------------ ------------ ------------- -------------
$ 36,616 $ 44,713 $116,084 $144,174
-------- -------- -------- --------
Gross margin
Manufacturing and Process $ 3,024 $ 3,682 $ 11,873 $ 14,888
Information Technology (43) 535 215 1,303
Optical Plastics 445 608 1,691 2,268
Hydro Med (142) (443)
------------- --------- ------------ ----------
$ 3,426 $ 4,683 $ 13,779 $ 18,016
--------- -------- -------- --------
GP STRATEGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
(Unaudited)
6. Business segments (Continued)
Information about the Company's net sales in different geographic regions, which
are attributed to countries based on location of customers, is as follows (in
thousands):
Three months ended Nine months ended
September 30, September 30,
------------------------- -----------------------
2002 2001 2002 2001
--------- --------- --------- -------
United States $ 34,037 $ 41,293 $107,983 $133,418
Canada 265 506 996 2,462
United Kingdom 1,787 1,739 5,405 5,139
Latin America and Other 527 1,175 1,700 3,155
--------- ---------- --------- ----------
$ 36,616 $ 44,713 $116,084 $144,174
-------- -------- -------- --------
Information about the Company's identifiable assets in different geographic
regions, is as follows (in thousands):
September 30, December 31,
2002 2001
--------- -----------
United States $142,556 $154,844
Canada 3,170 3,653
United Kingdom 3,055 2,821
Latin America and Other 1,786 2,573
-------- ----------
$150,567 $163,891
-------- --------
7. Restructuring and other charges
During 1999 and 2000, the Company adopted restructuring plans, primarily related
to its IT business segment. During the nine month period ended September 30,
2002 the Company utilized $1,214,000 of the restructuring reserve and reversed
$363,000. Of the remaining total restructuring reserve balance of $1,149,000 at
September 30, 2002 and $2,726,000 at December 31, 2001, $128,000 and $1,162,000,
respectively, were included in accounts payable and accrued expenses and
$1,021,000 and $1,564,000, respectively, were included in other non-current
liabilities in the Consolidated Condensed Balance Sheet.
GP STRATEGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
(Unaudited)
7. Restructuring and other charges (Continued)
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 (862) (352) (1,214)
Reversal of restructuring charges (363) (363)
- ------------------------------------------------------------------------------
Balance September 30, 2002 $ 1,149 $ $ 1,149
- ------------------------------------------------------------------------------
Lease obligations are presented at their present value, net of assumed sublets.
Effective September 4, 2002, John C. McAuliffe resigned as President of GP. Mr.
McAuliffe and GP entered into a Separation Agreement (the "Agreement") pursuant
to which Mr. McAuliffe will be a consultant to GP for a six-month period. In
consideration for such services, GP agreed to pay Mr. McAuliffe the sum of
$350,000, $300,000 in equal installments over the course of the consultancy
period and $50,000 in September 2005. In addition, GP agreed to pay Mr.
McAuliffe severance of $1,200,000 payable in equal installments on the following
dates (i) September 2002, (ii) March 2003, and (iii) January 2, 2004. The
Company recorded an expense of approximately $1,440,000, including $125,000 of
related legal fees, which is recorded in selling, general and administrative
expense in the Consolidated Statements of Operations for the three and nine
months ended September 30, 2002.
8. Related party transactions
In 2002, the Company and Redstorm Scientific, Inc. ("RSS") entered into an
agreement pursuant to which the Company agreed to provide general business and
administrative support to RSS. RSS is a privately held computational drug design
company focused on utilizing bio-informatics and computer aided molecular design
to assist pharmaceutical and biotechnology companies. The Company performed and
completed all necessary services for RSS during the third quarter of 2002. In
consideration for such services, RSS agreed to grant the Company a five-year
option to purchase shares of RSS common stock. The Company also has an option to
purchase additional equity in RSS upon the occurrence of certain events. Michael
Feldman is the Chief Executive Officer of RSS and owns approximately 25.5% of
the outstanding common stock of RSS. Michael Feldman is the son of Jerome
Feldman, the Chief Executive Officer of the Company. In addition, Roald Hoffman,
a director of the Company, is a director of RSS and has options to purchase
shares of RSS Common Stock.
GP STRATEGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
(Unaudited)
9. Investments
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 47% from 37% of the
outstanding shares of common stock of Five Star.
10. 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. 144, Accounting for the Impairment or Disposed of Long-Lived Assets. The
Company had unamortized goodwill in the amount of $57,200,000. The Company did
not recognize any impairment as a result of the adoption of this statement.
GP STRATEGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
(Unaudited)
10. Recently adopted accounting standards (Continued)
The changes in the carrying amount of acquired intangible assets for the
nine-month period ended September 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 1,134 20 1,154
Other 116 116
- ------------------------------------------------------------------------------------------------------------
September 30, 2002 $26,545 $ 7,587 $ 414 $35,358 $69,904
- ------------------------------------------------------------------------------------------------------------
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 58 5 17 80
Other 16 16
- ------------------------------------------------------------------------------------------------------------
September 30, 2002 $ 6,277 $ 1,353 $ 212 $ 4,042 $11,884
- ------------------------------------------------------------------------------------------------------------
Balance as of
September 30, 2002 $20,268 $ 6,234 $ 202 $31,316 $58,020
- ------------------------------------------------------------------------------------------------------------
15
GP STRATEGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
(Unaudited)
10. Recently adopted accounting standards (Continued)
The components of acquired intangible assets as of September 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 $25,355 $ 5,846 $7,587 $1,353 $414 $212 $35,200 $3,903
Other $ 1,190 $ 431 158 139
- -----------------------------------------------------------------------------------------------------------------------------------
Balance as of
September 30, 2002 $26,545 $6,277 $7,587 $1,353 $414 $212 $35,358 $4,042
===================================================================================================================================
GP STRATEGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
(Unaudited)
10. Recently Adopted Accounting Standards (Continued)
Summarized below is pro forma net income and earnings per share for the three
and nine months ended September 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 Nine Months
ended September 30, 2001 ended September 30, 2001
--------------------------------- -----------------------------------
Net Basic & Diluted Net Basic & Diluted
Income EPS Income EPS
------------ ------------- -------------- ----------
Reported $ 847 $ .06 $1,337 $ .10
Add: amortization adjustment $ 340 $ .03 $1,041 $ .08
------- ------ ------ ------
Adjusted $1,187 $ .09 $2,378 $ .18
====== ====== ====== ======
11. 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 in April 2002. The motion was denied by the court
due to the MCI bankruptcy (described below), but with leave granted to the other
defendants to renew.
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,
alleging breach of the acquisition agreement, is concluded. The motion, which
the Company has opposed, is under judicial consideration.
GP STRATEGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
(Unaudited)
12. 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.
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.
13. Commitments
Effective September 1, 2002, GP entered into an occupancy lease agreement for
its facilities with aggregate minimum lease payments of $6,862,000 through
January 31, 2013.
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 September 30, 2002, the Company had a loss before income
taxes of $3,739,000 compared to income before income taxes of $1,593,000 for the
quarter ended September 30, 2001. The loss in the third quarter 2002 included
severance and related expenses of $1,944,000, offset by a $391,000 gain from the
sale of shares of Millennium Cell Inc. and a non-cash credit of $348,000
relating to the Company's Millennium Cell Deferred Compensation Plan.
Additionally, effective January 1, 2002, the Company no longer amortizes
goodwill in accordance with SFAS No. 142, Goodwill and Other Intangible Assets.
The income for the third quarter 2001 was primarily attributable to a $1,049,000
gain from the sale of shares of Millennium Cell Inc. and a non-cash credit of
$2,774,000 relating to the Company's Millennium Cell Inc. Deferred Compensation
Plan, offset by approximately $550,000 relating to fees and options granted to a
financial consultant and expenses of $884,000 from HMS. The Company's three
operating business segments had decreased profits for the quarter ended
September 30, 2002, compared to the quarter ended September 30, 2001 due to the
Company's decreased sales and gross margin percentage.
For the nine months ended September 30, 2002, the Company had a loss before
income taxes of $3,190,000 compared to income before income taxes of $2,483,000
for the nine months ended September 30, 2001. The loss for the nine months ended
September 30, 2002 included severance and related expenses of $1,944,000 and a
non-cash equity loss of $1,401,000 on HMS, offset by a $1,677,000 gain from the
sale of shares of Millennium Cell Inc., and a non-cash credit of $1,216,000
relating to the Company's Deferred Compensation Plan. Additionally, effective
January 1, 2002, the Company no longer amortizes goodwill in accordance with
SFAS No. 142, Goodwill and Other Intangible Assets. The income for the nine
months ended September 30, 2001 included a $1,476,000 gain from the sale of
securities and a non-cash credit of $3,047,000 relating to the Company's
Millennium Cell Inc. Deferred Compensation Plan offset by expenses of
approximately $2,500,000 relating to HMS.
Three months ended Nine months ended
September 30, September 30,
---------------------- --------------------
2002 2001 2002 2001
------- -------- ------- -------
Sales
Manufacturing and Process $ 32,543 $ 39,458 $102,109 $126,791
Information Technology 1,852 2,495 6,284 8,601
Optical Plastics 2,221 2,758 7,691 8,777
Hydro Med 2 5
-------- ----------- ---------- ------------
$ 36,616 $ 44,713 $116,084 $144,174
-------- -------- -------- --------
For the quarter and nine months ended September 30, 2002, sales decreased by
$8,097,000 to $36,616,000 from $44,713,000 and $28,090,000 to $116,084,000 from
$144,174,000, respectively, from the corresponding periods in 2001. The decrease
in sales was primarily attributable to the 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 technology clients. The
Information Technology Group's sales continue to decline as a result of the
Company's continued efforts to downsize the division. In addition, the sales
decrease in 2002 compared to 2001 was primarily due to the overall continued
downturn in the economy.
Three months ended Nine months ended
September 30, September 30,
-------------------------------------- -----------------------------------------
2002 % 2001 % 2002 % 2001 %
------- ----- -------- ----- ------- ----- ------- -----
Gross margin
Manufacturing and Process $ 3,024 9.3 $ 3,682 9.3 $11,873 11.6 $14,888 11.7
Information Technology (43) 535 21.4 215 3.4 1,303 15.1
Optical Plastics 445 20.0 608 22.0 1,691 22.0 2,268 25.8
Hydro Med (142) (443)
------------------ ----------------------------------- -------- -------
$ 3,426 9.4 $ 4,683 10.5 $13,779 11.9 $18,016 12.5
------- ----- ------- ----- ------- ---- ------- -----
Consolidated gross margin of $3,426,000, or 9.4% of sales for the third quarter
ended September 30, 2002, decreased by $1,257,000, compared to consolidated
gross margin of $4,683,000, or 10.5%, of sales for the third quarter ended
September 30, 2001. For the nine months ended September 30, 2002, consolidated
gross margin decreased by $4,237,000 from $18,016,000 to $13,779,000. The
decreased gross margin in both the quarter and nine months ended September 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 as a result of the Company's continued
efforts to monitor and control costs for the quarter and year to date and the
gross margin percentage for the Optical Plastic Group decreased due to a change
in its product mix.
Selling, general and administrative expenses
For the quarter ended September 30, 2002, selling, general and administrative
(SG&A) expenses were $6,927,000 compared to $3,576,000 in the third quarter
ended September 30, 2001. The increase in SG&A of $3,351,000 is primarily
attributable to severance and related expenses of $1,944,000, a decrease in the
non-cash credit of $2,426,000 relating to the Company's Millennium Cell Deferred
Compensation Plan, partially offset by a reduction in SG&A expenses of HMS of
$534,000 due to the deconsolidation of HMS at December 27, 2001 and goodwill
amortization expense of $640,000 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 nine months ended September 30, 2002, SG&A expenses increased by
$1,132,000 from $15,072,000 to $16,204,000 primarily as a result of severance
and related expenses of $1,944,000, a reduction in the non-cash credit of
$1,831,000 relating to the Company's Millennium Cell Deferred Compensation Plan
and financial and consulting fees and other expenses of approximately $700,000,
partially offset by a reduction in SG&A expenses of $2,171,000 due to the
deconsolidation of HMS and goodwill amortization expenses of $1,934,000 in the
prior year which is not included in the current year in accordance with SFAS No.
142, Goodwill and Intangible Assets.
Interest expense
For the quarter ended September 30, 2002, interest expense was $654,000 compared
to $1,111,000 for the quarter ended September 30, 2001. For the nine months
ended September 30, 2002, there was a decrease in interest expense of $1,583,000
from $3,666,000 to $2,083,000. 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 income (loss), net
For the three and nine months ended September 30, 2002, investment and other
income (loss) net was $169,000 and $(569,000) as compared to $342,000 and
$1,123,000 for the three and nine months ended September 30, 2001. The decrease
for the quarter ended September 30, 2002 was primarily attributable to decreased
equity income recognized on investments of 20% to 50% owned companies and other
loss (income), net on the Company's other investments. The decrease for the nine
months ended September 30, 2002, was primarily attributable to an equity loss
recognized on HMS of $1,401,000.
Income tax expense
For the quarter and nine months ended September 30, 2002, the Company recorded
an income tax expense of $148,000 and $429,000, which represents state and local
income taxes. In the quarter and nine months ended September 30, 2001, the
Company recorded income tax expense of $746,000 and $1,146,000, respectively,
which represents federal, state, local and foreign tax expense.
Liquidity and capital resources
At September 30, 2002, the Company had cash and cash equivalents totaling
$1,355,000. 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.
At September 30, 2002, the Company had $8,545,000 available to be borrowed under
the Credit Agreement and was in compliance with all financial covenants.
For the period ended September 30, 2002, the Company's working capital increased
by $4,111,000 to a net working capital of $1,361,000, primarily reflecting
decreases in short term borrowings and accounts and other receivables partially
offset by an increase in prepaid expenses and other current assets.
The decrease in cash and cash equivalents of $350,000 for the nine months ended
September 30, 2002 resulted from cash used in operations of $1,821,000 partially
offset by cash provided by for investing and financing activities of $1,992,000.
Cash provided by investing and financing activities consisted primarily of
proceeds from the sale of marketable securities and sales of Common and Class B
stock offset by repayments of short-term borrowings and additions to plant,
property and equipment.
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 SFAS 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 Issue Task Force ("EITF") No. 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
PART II. OTHER INFORMATION
Item 3. Quantitative and Qualitative Disclosures about Market Risk
We have no material changes to the disclosure on this matter
made in our report on Form 10-K for the fiscal year ended
December 31, 2001
Item 4. Controls and Procedures
a. Evaluation of disclosure controls and procedures. The
Company's Chief Executive Officer and Chief Financial Officer
have reviewed and evaluated the effectiveness of the Company's
disclosure controls and procedures (as defined in Exchange Act
Rules 240.13a-14(c) and 15d-14(c)) as of a date within ninety
days before the filing date of this quarterly report. Based on
that evaluation, the Chief Executive Officer and Chief
Financial Officer have concluded that the Company's current
disclosure controls and procedures are effective in timely
alerting them to material information relating to the Company
required to be included in the Company's periodic SEC filings.
b. Changes in internal controls. There have not been any
significant changes in the Company's internal controls or in
other factors that could significantly affect these controls
subsequent to the date of their evaluation. There were no
significant deficiencies or material weakness and therefore no
corrective actions were taken.
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-Oxley 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-Oxley Act of 2002.
b. Reports
Form 8-K filed on September 4, 2002 reporting event under
Item 5.
GP STRATEGIES CORPORATION AND SUBSIDIARIES
September 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: November 14, 2002 Jerome I. Feldman
Chief Executive Officer
DATE: November 14, 2002 Scott N. Greenberg
President &
Chief Financial Officer
CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO RULE 13a-14
OF THE SECURITIES EXCHANGE ACT OF 1934
I, Jerome I. Feldman, Chairman of the Board and Chief Executive Officer of
GP Strategies Corporation, certify that:
1. I have reviewed this quarterly report on Form 10-Q of GP Strategies
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data and
have identified for the registrant's auditors any material weaknesses
in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002
Jerome I. Feldman
Chairman of the Board and
Chief Executive Officer
CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO RULE 13a-14
OF THE SECURITIES EXCHANGE ACT OF 1934
I, Scott N. Greenberg, President and Chief Financial Officer of GP
Strategies Corporation, certify that:
1. I have reviewed this quarterly report on Form 10-Q of GP Strategies
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data and
have identified for the registrant's auditors any material weaknesses
in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002
Scott N. Greenberg
President and Chief Financial Officer