UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 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
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(State of Incorporation) (I.R.S. Employer Identification No.)
777 Westchester Avenue, White Plains, NY 10604
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (914) 249-9700
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of each exchange on which registered:
Common Stock, $.01 Par Value New York Stock Exchange, Inc.
Securities registered pursuant to Section 12(g) of the Act: None
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
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. / /
Indicate by check mark whether the registrant is an accelerated filer.
Yes No X
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The aggregate market value of the outstanding shares of the Registrant's Common
Stock, par value $.01 per share and Class B Capital Stock, par value $.01 per
share held by non-affiliates as of June 28, 2002 was approximately $60,129,448,
and $1,540,313, respectively, based on the closing price of the Common Stock on
the New York Stock Exchange on June 28, 2002.
The number of shares outstanding of each of the Registrant's Common Stock and
Class B Stock as of March 19, 2003:
Class Outstanding at March 19, 2003
Common Stock, par value $.01 per share 15,401,566 shares
Class B Capital Stock, par value $.01 per share 1,200,000 shares
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive Proxy Statement for its 2003 Annual
Meeting of Stockholders are incorporated herein by reference into Part III
hereof.
TABLE OF CONTENTS
Page
PART I
Item 1. Business 1
Item 2. Properties 16
Item 3. Legal Proceedings 17
Item 4. Submission of Matters to a Vote of
Security Holders 18
PART II
Item 5. Market for the Registrant's Common
Equity and Related Stockholder Matters 19
Item 6. Selected Financial Data 21
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations 22
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 35
Item 8. Financial Statements and Supplementary Data 36
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 87
PART III
Item 10. Directors and Executive Officers of the Registrant 88
Item 11. Executive Compensation 88
Item 12. Security Ownership of Certain
Beneficial Owners and Management 88
Item 13. Certain Relationships and Related Transactions 88
Item 14. Controls and Procedures 88
PART IV
Item 15. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K 89
Cautionary Statement Regarding Forward-Looking Statements
This report contains certain forward-looking statements which reflect
the Company's 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 the Company, including, but
not limited to those risks and uncertainties detailed in the Company's periodic
reports and registration statements filed with the Securities and Exchange
Commission.
PART I
ITEM 1. BUSINESS
General Development of Business
GP Strategies Corporation (the "Company"), a global workforce
development company, which provides training, e-Learning solutions, management
consulting and engineering services, was incorporated in Delaware in 1959. The
Company is a New York Stock Exchange listed company traded under the symbol GPX.
The Company's principal operating subsidiary is General Physics Corporation
("General Physics"). The Company has three operating business segments. Two of
these segments, the Manufacturing & Process Segment and the Information
Technology Segment, are managed through the Company's principal operating
subsidiary General Physics. The third segment is the Optical Plastics Segment,
comprised of the Company's subsidiary MXL Industries, Inc. ("MXL").
General Physics is a workforce development company that improves the
effectiveness of organizations by providing training, management consulting,
e-Learning solutions and engineering services that are customized 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 companies, and other
commercial and governmental customers. Additional information about General
Physics may be found at www.gpworldwide.com.
MXL is a specialist in the manufacture of polycarbonate parts requiring
strict adherence to optical quality specifications, and in the application of
abrasion and fog resistant coatings to those parts. Products include shields,
face masks and non-optical plastic products.
In addition, the Company holds a number of investments in publicly held
companies, including Millennium Cell Inc., Five Star Products, Inc. and GSE
Systems, Inc., and an investment in a private company, Hydro Med Sciences, Inc.,
and also owns certain real estate.
The Company's annual report on Form 10-K, quarterly reports on Form
10-Q, current reports on Form 8-K, and all amendments to those reports will be
made available free of charge through the Investor/Shareholder section of the
Company's internet website (http://www.gpstrategies.com/) as soon as practicable
after such material is electronically filed with, or furnished to, the
Securities and Exchange Commission.
Recent Developments
In July 2002, the Company announced that it was actively considering a
spin-off of certain of its non-core assets into a separate corporation to be
named National Patent Development Corporation ("NPDC"). On November 14, 2002,
the Company filed a ruling request with the Internal Revenue Service (the
"IRS"), which if approved, would enable the Company to do a tax-free spin-off of
certain non-core assets, including MXL. Each holder of the Company's common
stock would receive one share of NPDC common stock for each share of the
Company's common stock held and each holder of the Company's class B capital
stock would receive one share of NPDC common stock for each share of Class B
capital stock held. On March 21, 2003, the IRS issued a favorable tax ruling,
however, the spin-off is still subject to certain conditions, including the
consent of the Company's lenders and certain SEC filings.
After the spin-off, the Company's business would be its training and
workforce development business operated by General Physics. NPDC would be a
stand- alone public company holding all of the stock of MXL, which would operate
the optical plastics business and hold certain of the other non-core assets.
GENERAL PHYSICS CORPORATION
Organization and Operations
General Physics, with 1,343 employees in offices worldwide, provides
performance improvement services and products to multinational companies in
manufacturing and process industries, electric power utilities, and other
commercial and governmental customers.
General Physics believes it is a global leader in performance
improvement, with over three decades of experience in providing solutions to
optimize work force performance. Since 1966, General Physics has provided
clients with the products and services they need to successfully integrate their
people, processes and technology, the elements most critical to the successful
realization of any organization's goal to improve its effectiveness.
General Physics provides a broad range of services and products on a
global scale that are oriented toward improving the performance of individuals
and organizations throughout their productive lives. General Physics'
instruction delivery capabilities include traditional classroom, structured
on-the-job training (OJT), just-in-time methods, electronic performance support
systems (EPSS), and the full spectrum of e-learning technologies. For
businesses, government agencies and other organizations, General Physics offers
services and products spanning the entire lifecycle of production facilities;
plant equipment and process launch assistance from both workforce training and
engineering perspectives; operations and maintenance practice training and
consulting services; curriculum development and delivery; facility and
enterprise change and configuration management; lean enterprise consulting;
plant and process engineering review and re-design; learning resource
management; e-learning consulting and systems implementation; and development
and delivery of information technology (IT) training on an enterprise-wide
scale. General Physics' personnel bring a wide variety of professional,
technical and military backgrounds together to create cost-effective solutions
for modern business and governmental challenges.
General Physics was incorporated in 1966 to provide technical
consulting services in the field of nuclear science and engineering services to
nuclear power companies and government agencies. General Physics expanded its
operations in the late 1960's to provide, among other things, training and
technical support services to the commercial nuclear power industry. General
Physics expanded its markets even further in the late 1980's to provide training
and technical support services to United States Government nuclear weapons
production and waste processing facilities, and environmental services to
governmental and commercial clients.
In 1994, General Physics further expanded it range of capabilities, as
well as its clients, by acquiring the design engineering, seismic engineering,
systems engineering, materials management and safety analysis businesses of
Cygna Energy Services, and by acquiring the management and technical training
and engineering consulting businesses of GPS Technologies, Inc.
During 1998, General Physics embarked upon a strategy to expand
globally, further diversify its clientele, and acquire additional performance
improvement capabilities through acquisitions. General Physics acquired
businesses operated by United Training Services, Inc., a provider of training
and consulting services to the U.S. automotive industry and to other commercial
customers; Specialized Technical Services Limited, a provider of technical
training services and language services to commercial and governmental customers
in the United Kingdom; SHL Learning Technologies, a computer technology training
and consulting organization with a network of offices and training facilities in
Canada and the United Kingdom; and the Deltapoint Corporation, a management
consulting firm focused on large systems change and lean enterprise, with
primarily Fortune 500 clients operating in the aerospace, pharmaceutical,
manufacturing, healthcare and telecommunications industries.
In 1999 General Physics refocused its international strategy to
leverage its success with multinational clients by following those clients into
new venues, then expand its client base to include local suppliers and related
parties. Proposed locations were evaluated for political stability and potential
receptiveness to General Physics' products and services. General Physics has
applied this strategy to Canada, the United Kingdom, Mexico and Brazil.
During 1999, General Physics adopted restructuring plans, primarily
related to its IT business, to change the focus of the IT Segment from open
enrollment IT training courses to project oriented work. In connection with the
restructuring, General Physics closed, downsized, or consolidated offices in the
United States, Canada and in the United Kingdom (UK), and terminated the
employment of approximately 160 employees. General Physics believed at that time
that the strategic initiatives and cost cutting moves taken in 1999 and the
first quarter of 2000 would enable the IT Segment to return to profitability in
the last six months of 2000. However, in July 2000, as a result of the continued
operating losses incurred by its IT Segment, General Physics determined that it
could not bring the IT Segment to profitability unless it closed its open
enrollment IT business in the UK and Canada. During the third quarter of 2000,
the open enrollment IT business was closed and substantially all of the open
enrollment facilities in the UK and Canada were surrendered in connection with
negotiated lease terminations, subleased or turned over to brokers for
disposition. General Physics terminated the employment of substantially all of
the remaining employees associated with the IT open enrollment business in the
UK and Canada. Subsequent to the changes, the IT project work returned to
profitability in 2001.
Also in 2000, General Physics began an upgrade to its financial,
accounting and human resources systems by contracting with an application
service provider for the use of an Enterprise Resource Planning software package
to better integrate those functions and streamline support for its business
operations. The system became operational in the first quarter of 2002.
During the second half of 2001, the Company's operations were
negatively impacted by the downturn in the economy, in particular the
manufacturing sectors. This resulted in decreased revenue that was offset by
cost cutting efforts, including a reduction in the use of consultants, a program
to reduce indirect expenses, and a reduction in employees.
Effective September 4, 2002, John C. McAuliffe resigned as President of
General Physics and Douglas Sharp was appointed President of General Physics.
Mr. McAuliffe and General Physics entered into a Separation Agreement pursuant
to which, inter alia, he agreed to remain available to General Physics as a
consultant for a six-month period (see Note 15, Restructuring and other Charges
in the Notes to the Consolidated Financial Statements for a discussion of Mr.
McAuliffe's Separation Agreement).
The decrease in revenue that began in 2001 continued in 2002 and was
primarily attributable to the continued downturn in the economy and included
reductions in sales from automotive, e-Learning and certain high technology
clients. During 2002, General Physics continued its efforts to reduce costs,
including terminating facility leases, subleasing facilities, reducing the
number of employees and taking other steps to bring its costs more in line with
its reduced revenues.
In the second half of 2002, General Physics formed a multi-disciplinary
team to focus on providing fully integrated solutions for governmental agencies
and commercial clients to combat potential terrorist threats in the area of
homeland security. General Physics has over 20 years of experience in meeting
the challenges caused by the threat of terrorism, including projects for the
Departments of Defense, Energy, Justice and the American Red Cross. The
Company's homeland security services will help organizations assess their
vulnerability and risks, prevent or deter occurrences, plan for incidents,
respond adequately to an event and mitigate the short and long term consequences
caused by terrorism incidents.
In February 2003 General Physics transferred a portion of its business
into SkillRight, Inc., a wholly-owned subsidiary whose principal purpose is to
provide services to organized labor, both by contracting directly with labor
unions and by contracting with companies whose workforces are represented by
labor unions.
General Physics' performance is significantly affected by the timing of
performance on contracts. Results of operations for the first three quarters of
the year are generally not seasonal, since contracts are performed throughout
the year, however, the fourth quarter results may be negatively impacted by
plant shutdowns and fewer workdays as a result of holidays. In addition, demand
for services may fluctuate with and can be related to general levels of economic
activity and employment in the United States, Canada and the UK. A significant
economic downturn or recession in either the United States or the UK could have
a material adverse effect on General Physics' business, financial condition and
results of operations, as was the case in the latter half of 2001 and continuing
into 2002.
Customers
General Physics currently provides services to more than 500 customers.
Significant customers include multinational automotive manufacturers, such as
General Motors Corporation, Ford Motor Company, Mercedes-Benz and Daimler
Chrysler Corporation; commercial electric power utilities, such as Consolidated
Edison Company of New York, Public Service Electric & Gas Company, Entergy
Operations, Inc., Alliant Energy Corporation, Midwest Generation, New Brunswick
Power, and First Energy; governmental agencies, such as the U.S. Departments of
Defense, Energy and Treasury, the U.S. Postal Service, and various Canadian
governments; U.S. government prime contractors, such as Northrop-Grumman,
Lockheed Martin, Westinghouse Savannah River Company and The Johns Hopkins
University Applied Physics Laboratory; pharmaceutical companies, such as Pfizer,
Inc., Merck & Co., Pharmacia-Upjohn and Eli Lily; communications companies, such
as SBC Communications; computer, electronics, and semiconductor companies, such
as IBM Corporation and Applied Materials; food and beverage companies, such as
Anheuser-Busch Company and The Coca-Cola Company; petro-chemical companies, such
as ExxonMobil and Lyondell-Citgo; steel producers, such as USX Corporation,
Ameristeel Corporation and Dofasco Steel; and other large multinational
companies, such as Fluor Daniel, General Electric Company and Computer Sciences
Corporation.
Revenue from the United States Government accounted for approximately
32% of General Physics' revenue for the year ended December 31, 2002. Revenue
was derived from many separate contracts and subcontracts with a variety of
Government agencies and contractors that are regarded by General Physics as
separate customers. In 2002, revenue from the Department of the Army, which is
included in United States Government revenue accounted for approximately 17% of
General Physics' revenue and General Motors Corporation accounted for
approximately 5% of General Physics' revenue. No other customers accounted for
10% or more of General Physics' revenue.
General Physics' Operating Segments
General Physics provides services and sells products within a structure
that is integrated both vertically and horizontally. Vertically, General Physics
is organized into Strategic Business Units (SBUs), Business Units (BUs), and
Groups focused on providing a wide range of products and services to clients and
prospective clients predominantly within targeted markets. Horizontally, General
Physics is organized across SBUs, BUs and Groups to integrate similar service
lines, technology, information, work products, client management and other
resources. As a result, General Physics has evolved into a matrixed organization
in which resources can be coordinated to meet the needs of General Physics'
clients or to respond quickly and mobilize resources for new opportunities.
Communications and market research, accounting, finance, legal, human resources
and other administrative services are organized at the corporate level. Business
development and sales resources are aligned with operating units to support
existing customer accounts and new customer development. General Physics manages
its business in two business segments: Manufacturing & Process and Information
Technology.
Manufacturing & Process
The Manufacturing & Process Segment 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, and focuses
on developing long-term relationships with Fortune 500 companies, their
suppliers and agencies of the government. General Physics builds these
relationships by gaining a thorough understanding of a client's competitive
strategies and business objectives, analyzing their human, technical, and
organization issues and recommending viable human performance and learning
resource management solutions to clients to help them improve performance,
increase efficiency and reduce risk. Through this segment General Physics
provides training, Learning Resource Management (LRM) training outsourcing,
engineering and technical support services to clients, whether involving
workforce development, product, process and plant launch, modification of
existing facilities and systems or regulatory compliance. The company then works
with its customers in implementing the recommended solutions, moving the
organization toward achieving business objectives and improving competitive
advantage. This segment frequently supports the introduction of new work
practices associated with lean manufacturing, self-directed work teams and
engineering. Adult learning delivery capabilities include traditional classroom,
structured on-the-job training (OJT), just in time methods, electronic
performance support systems (EPSS), and the full spectrum of e-Learning
technologies. In addition, with over thirty years of training, applied
engineering and management experience in helping clients improve performance,
increase efficiency and reduce risk, General Physics is called upon to help its
clients meet global competitive challenges, especially when that challenge
requires significant capital investment in plants and facilities and presents a
potential risk to the workplace and the environment. Included are e-Learning
services, which function as a single-source e-learning solution provider through
its integration services, the development and provisioning of proprietary
content and the aggregation and distribution of third party content.
A representative list of General Physics' customers falling within this
segment and allowing disclosure includes: General Motors Corporation, Ford Motor
Company, Lockheed Martin, USX, Ameristeel Corporation, Nalco Chemical Co.,
Anheuser-Busch, Pepsi-Cola, CN Rail, SBC Communications, Applied Materials, the
U.S. Postal Service, Royal Mail Consignia, the U.S. Army, Navy and Air Force,
Merck & Co., ExxonMobil, Omnitrans, Pharmacia-Upjohn, General Electric,
Pennsylvania Power & Light, Consolidated Edison, Commonwealth Edison, Fluor
Daniel and New Brunswick Power.
Information Technology
The Information Technology Segment provides information technology (IT)
training programs and solutions, including Enterprise Solution and comprehensive
career training and transition programs. Specific services include software
applications training, change management, and courseware development. This
segment has operations in the United States and Canada. A representative list of
customers includes: Pfizer, Eli Lilly and Company, Department of Defense,
Anheuser-Busch, Fluor Daniel, CN Rail, Accu-Sort Systems, Inc., and Computer
Sciences Corporation. As a result of the continued operating losses incurred by
the IT Segment in 1999 and 2000, General Physics closed its open enrollment IT
business in the UK and Canada during the third quarter of 2000. Subsequent to
these changes, the IT business returned to profitability in 2001, but
experienced declining revenue as a result of the downturn of the economy that
continued in 2002 resulting in inconsistent quarterly profitability. However, as
a result of recent contract awards, the Company believes that the operating
results of the IT Segment should return to profitability in 2003.
International
General Physics conducts its business outside the United States and
Canada primarily through its wholly-owned subsidiaries General Physics (UK)
Ltd., General Physics Corporation Mexico, S.A. de C.V., General Physics
(Malaysia) Sdn Bhd and GP Strategies do Brasil Ltda. Through these companies,
General Physics is capable of providing substantially the same services and
products as are available to clients in the United States, although modified as
appropriate to address the language, business practices and cultural factors
unique to each client and country. In combination with its subsidiaries, General
Physics is able to coordinate the delivery to multi-national clients of services
and products that achieve consistency on a global, enterprise-wide basis.
General Physics Products and Services
Training. Each of General Physics' segments provides training services and
products to support existing, as well as the launch of new plants, products,
equipment, technologies and processes. The range of services includes
fundamental analysis of a client's training needs, curriculum design,
instructional material development (in hard copy, electronic/software or other
format), information technology service support, and delivery of training using
an instructor-led, on-the-job, computer-based, web-based, video-based or other
technology-based method. General Physics focuses on developing long-term
relationships with its customers. It builds these relationships by gaining a
thorough understanding of a customer's competitive strategies and business
objectives and analyzing their human performance and learning resource
management solutions. General Physics then works with its customers in
implementing the recommended solutions, moving the organization toward achieving
business objectives and improving competitive advantage. General Physics has
available an existing curriculum of business and technical courses and also is
involved in the management of the training business operations at several of its
customers. Training products include instructor and student training manuals,
instructional material on CD-ROM and PC-based simulators. Training services
include the following:
o General Physics has contracts to provide Learning Resource
Management services, including training administration,
development and delivery, to multinational companies headquartered
in the United States and Canada.
o General Physics provides management and training services to Ford
Motor Company's North American Training and Development
Organization.
o General Physics operates the United States Army's chemical weapons
demilitarization program training center in Edgewood, Maryland for
personnel who operate and maintain demilitarization plants in the
United States.
o In support of the Clara Barton Center(TM) for Domestic
Preparedness at Pine Bluff Arsenal, Pine Bluff, Arkansas, General
Physics developed a curriculum of courses dealing with issues that
the Red Cross will encounter in their support of a disaster
involving weapons of mass destruction, as well as staffing and
operating the Clara Barton Center(TM) since it became operational
in mid-2001.
o Through its iLearning Portal, General Physics offers a web-based
curriculum of training courses to hundreds of power plants
worldwide, along with web-based training administration.
Consulting. Consulting services are available from General Physics and include
not only training-related consulting services, but also more traditional
business management, engineering and other disciplines. General Physics is able
to provide high-level lean enterprise consulting services, as well as training
in the concept, methods and application of lean enterprise and other quality
practices, organizational development and change management. General Physics
also provides engineering consulting services to support regulatory and
environmental compliance, modification of facilities and processes,
reliability-centered maintenance practices, and plant start-up activities.
Consulting products include copyrighted training and reference materials.
Consulting projects have included:
o Assisting a medical device manufacturer to reduce
raw-material-to-shipment manufacturing time from 32 days to 2
days.
o Reducing the delay between receipt of customer request to order
confirmation from 21 days to 1 day for a metals industry
manufacturer.
o Streamlining procedures, developing work standards and creating an
implementation process to consolidate 105 separate customer
support centers into 1 for a national telecommunications company,
saving $15 million of implementation cost.
o Evaluating training administration processes and making
recommendations for improved efficiencies and cost-savings for a
global pharmaceutical company.
Technical Support and Engineering. General Physics is staffed and equipped to
provide engineering and technical support services and products to clients.
Technical support services include procedure writing and configuration control
for capital intensive facilities, plant start-up assistance, logistics support
(e.g., inventory management and control), implementation and engineering
assistance for facility or process modifications, facility management for high
technology training environments, staff augmentation, and help-desk support for
standard and customized client desktop applications. Technical support products
include EtaPro(TM) and PDMS(TM) General Physics software applications. General
Physics has provided:
o Engineering and construction management services to support the
construction or modification of liquefied natural gas (LNG) and
compressed natural gas (CNG) refueling stations.
o Help-desk support for standard and proprietary desktop software
applications.
o Design, analysis, inspection and test services for rocket engine
systems and equipment.
o Its proprietary EtaPro(TM) software tool to enable electric power
producers to monitor and improve the performance of power
generating equipment.
Contracts
General Physics is currently performing under time-and-materials,
fixed-price and cost-reimbursable contracts. General Physics' subcontracts with
the United States Government have predominantly been cost-reimbursable contracts
and fixed-price contracts. General Physics is required to comply with the
Federal Acquisition Regulations and the Government Cost Accounting Standards
with respect to services provided to the United States Government and agencies
thereof. These Regulations and Standards govern the procurement of goods and
services by the United States Government and the nature of costs that can be
charged with respect to such goods and services. All such contracts are subject
to audit by a designated government audit agency, which in most cases is the
Defense Contract Audit Agency (the "DCAA"). The DCAA has audited General
Physics' contracts through 1999 without any material disallowances.
The following table illustrates the percentage of total revenue of
General Physics attributable to each type of contract for the year ended
December 31, 2002:
Fixed-Price...............................67%
Time and Materials........................19
Cost-Reimbursable.........................14
--
Total Revenue.......................100%
====
General Physics' fixed-price contracts provide for payment to General
Physics of pre-determined amounts as compensation for the delivery of specific
products or services, without regard to the actual cost incurred by General
Physics. General Physics bears the risk that increased or unexpected costs
required to perform the specified services may reduce General Physics' profit or
cause General Physics to sustain a loss, but General Physics has the opportunity
to derive increased profit if the costs required to perform the specified
services are less than expected. Fixed-price contracts generally permit the
client to terminate the contract on written notice; in the event of such
termination, General Physics would typically, at a minimum, be paid a
proportionate amount of the fixed price. No significant terminations of General
Physics' fixed-price contracts have occurred over the last five years.
General Physics' time-and-materials contracts generally provide for
billing of services based upon the hourly billing rates of the employees
performing the services and the actual expenses incurred multiplied by a
specified mark-up factor up to a certain aggregate dollar amount. General
Physics' time-and-materials contracts include certain contracts under which
General Physics has agreed to provide training, engineering and technical
services at fixed hourly rates (subject to adjustment for labor costs).
Time-and-materials contracts generally permit the client to control the amount,
type and timing of the services to be performed by General Physics and to
terminate the contract on written notice. If a contract is terminated, General
Physics typically is paid for the services provided by it through the date of
termination. While General Physics' clients often modify the nature and timing
of services to be performed, no significant terminations of General Physics'
time-and-materials contracts have occurred over the last five years.
General Physics' cost-reimbursable contracts provide for General
Physics to be reimbursed for its actual costs plus a specified fee. These
contracts also are generally subject to termination at the convenience of the
client. If a contract is terminated, General Physics typically would be
reimbursed for its costs to the date of termination, plus the cost of an orderly
termination, and paid a proportionate amount of the fee. No significant
terminations of General Physics' cost-reimbursable contracts have occurred over
the last five years.
Competition
General Physics' services and products face a highly competitive
environment. The principal competitive factors are the experience and capability
of service personnel, performance, quality and functionality of products,
reputation and price. Consulting services such as those provided by General
Physics are performed by many of the customers themselves, large architectural
and engineering firms that have expanded their range of services beyond design
and construction activities, large consulting firms, major suppliers of
equipment and independent service companies similar to General Physics. A
significant factor determining the business available to General Physics and its
competitors is the ability of customers to use their own personnel to perform
services provided by General Physics and its competitors. Another factor
affecting the competitive environment is the existence of small, specialty
companies located at or near particular customer facilities and dedicated solely
to servicing the needs of those particular facilities.
The training industry is highly fragmented and competitive, with low
barriers to entry and no single competitor accounting for a significant market
share. The Company's competitors include several large publicly traded and
privately held companies, vocational and technical training schools, information
technology companies, degree-granting colleges and universities, continuing
education programs and thousands of small privately held training providers and
individuals. In addition, many of General Physics' clients maintain internal
training departments. Some of General Physics' competitors offer services and
products that are similar to those of General Physics at lower prices, and some
competitors have significantly greater financial, managerial, technical,
marketing and other resources than does General Physics. Moreover, General
Physics expects that it will face additional competition from new entrants in
the training and performance improvement market due, in part, to the evolving
nature of the market and the relatively low barriers to entry. There can be no
assurance that General Physics will be successful against such competition.
Personnel
General Physics' principal resource is its personnel. General Physics'
future success depends to a significant degree upon its ability to continue to
attract, retain and integrate into its operations instructors, technical
personnel and consultants who possess the skills and experience required to meet
the needs of its clients. In order to initiate and develop client relationships
and execute its growth strategy, General Physics also must retain and continue
to hire qualified salespeople. As of December 31, 2002, General Physics employed
1,343 employees and over 200 adjunct instructors.
General Physics' personnel have backgrounds and industry experience in
mechanical, electrical, chemical, civil, nuclear and human factors engineering;
in technical education and training; in power plant design, operation and
maintenance; in weapons systems design, operation and maintenance; in
organizational change management; in instructional technology and e-learning
technologies; in enterprise-wide resource planning and software training; and in
toxicology, industrial hygiene, health physics, chemistry, microbiology, ecology
and mathematical modeling. Many of General Physics' employees perform multiple
functions depending upon changes in the mix of demand for the services provided
by General Physics.
General Physics utilizes a variety of methods to attract and retain
personnel. General Physics believes that the compensation and benefits offered
to its employees are competitive with the compensation and benefits available
from other organizations with which it competes for personnel. In addition,
General Physics maintains and continuously improves the professional development
of its employees, both internally via General Physics University (the Company's
internal training organization) and through third parties, and also offers
tuition reimbursement for job-related educational costs. General Physics
encourages its employees to further their education, continuously update their
marketable skills and deliver services and products that equal or exceed client
expectations. General Physics recognizes and rewards business success and
outstanding individual performance.
Competition for qualified personnel can be intense, and General Physics
competes for personnel with its clients as well as its competitors. There can be
no assurance that qualified personnel will continue to be available to General
Physics in sufficient numbers. Any failure to attract or retain qualified
instructors, technical personnel, consultants and salespeople in sufficient
numbers could have a material adverse effect on General Physics' business,
financial condition, and results of operations.
As of December 31, 2002, none of General Physics' employees was
represented by a labor union. However, SkillRight, Inc., a wholly-owned
subsidiary of General Physics, in 2003 recognized the United Auto Workers union
as the representative of a portion of its workforce. General Physics generally
has not entered into employment agreements with its employees, but has entered
into employment agreements with certain executive officers and other employees.
General Physics believes its relations with its employees are good.
Marketing
General Physics has approximately 41 employees dedicated primarily to
marketing its services and products through Business Development initiatives at
both the Group and Business Unit levels. Group level marketing is directed at
long-term strategic business development with specific customers and with
multinational businesses. General Physics markets its services to existing
customers primarily through its technical personnel who have regular direct
client contact, sales personnel and by using senior management to aid in the
planning of marketing strategies and evaluating current and long-term marketing
opportunities and business directions. General Physics uses attendance at trade
shows, presentations of technical papers at industry and trade association
conferences, press releases, public courses and workshops given by General
Physics personnel to serve an important marketing function. General Physics also
does selective advertising and sends a variety of sales literature, including a
catalog of course listings, to current and prospective clients whose names are
maintained in a computerized database that is updated periodically.
The goal of General Physics' marketing process is to obtain awards of
new contracts and expansion of existing contracts. By staying in contact with
clients and looking for opportunities to provide further services, General
Physics sometimes obtains contract awards or extensions without having to
undergo competitive bidding. In other cases, clients request General Physics to
bid competitively. In both cases, General Physics submits proposals to the
client for evaluation. The period between submissions of a proposal to final
award can range from 30 days or less (generally for non-competitive, short-term
contracts), to a year or more (generally for large, competitive multi-year
contracts with governmental clients).
General Physics maintains a site on the World Wide Web located at
http://www.gpworldwide.com from which prospective customers can obtain
additional information about General Physics and find out how to contact General
Physics to discuss employment or business opportunities.
Backlog
General Physics' backlog for services under signed contracts and
subcontracts as of December 31, 2002 was approximately $72,500,000, compared to
$90,637,000 as of December 31, 2001.
General Physics anticipates that most of its backlog as of December 31,
2002 will be recognized as revenue during fiscal year 2003, however, the rate at
which services are performed under certain contracts, and thus the rate at which
backlog will be recognized, is at the discretion of the client, and most
contracts are, as mentioned above, subject to termination by the client upon
written notice.
Insurance
By providing services to the commercial electric power industry, in the
area of alternative fuel construction management and to the United States Armed
Forces, General Physics is engaged in industries in which there are substantial
risks of potential liability. General Physics' insurance is combined with the
Company's insurance in a consolidated insurance program (including general
liability coverage). However, certain liabilities associated with General
Physics' business are not covered by these insurance policies. In addition, such
liabilities may not be covered by Federal legislation providing a liability
protection system for licensees of the Nuclear Regulatory Commission (typically
utilities) for certain damages caused by nuclear incidents, since General
Physics is not such a licensee. Finally, few of General Physics' contracts with
clients contain a waiver or limitation of liability. Thus, to the extent a risk
is neither insured nor indemnified against nor limited by an enforceable waiver
or limitation of liability, General Physics could be materially adversely
affected by a nuclear incident. Certain other environmental risks, such as
liability under the Comprehensive Environmental Response, Compensation and
Liability Act, as amended (Superfund), also may not be covered by General
Physics' insurance.
Environmental Statutes and Regulations
General Physics provides environmental engineering services to its
clients, including the development and management of site environmental
remediation plans. Due to the increasingly strict requirements imposed by
Federal, state and local environmental laws and regulations (including, without
limitation, the Clean Water Act, the Clean Air Act, Superfund, the Resource
Conservation and Recovery Act and the Occupational Safety and Health Act),
General Physics' opportunities to provide such services may increase.
General Physics' activities in connection with providing environmental
engineering services may also subject General Physics itself to such Federal,
state and local environmental laws and regulations. Although General Physics
subcontracts most remediation construction activities and all removal and
offsite disposal and treatment of hazardous substances, General Physics could
still be held liable for clean-up or violations of such laws as an "operator" or
otherwise under such Federal, state and local environmental laws and regulations
with respect to a site where it has provided environmental engineering and
support services. General Physics believes, however, that it is in compliance in
all material respects with such environmental laws and regulations.
Properties
General Physics' principal executive offices are located at 6095
Marshalee Drive, Suite 300, Elkridge, Maryland 21075, and its telephone number
is (410) 379-3600. General Physics leases approximately 27,300 square feet of an
office building at that address, and approximately 283,000 square feet of office
space at other locations in the United States, Canada, the United Kingdom,
Mexico, Brazil and Malaysia. General Physics has 47 offices worldwide. Various
locations in the United States and the United Kingdom contain classrooms or
other specialized space to support General Physics' instructor-led and
distance-learning training programs. General Physics believes that its
facilities are adequate to carry on its business as currently conducted.
Optical Plastics
MXL is a specialist in the manufacture of polycarbonate parts requiring
strict adherence to optical quality specifications, and in the application of
abrasion and fog resistant coatings to those parts at its Lancaster, Pa.
facility. Polycarbon is the most impact resistant plastic utilized in optical
quality molded parts. Products include shields, face masks and non-optical
plastic products. Additionally, at its Woodland Mold and Tool Division, located
in the Chicago area, MXL has the capability to design and construct injection
molds for a variety of applications (optical and non-optical) and to mold,
decorate, assemble and ship a wide range of products from start to finish.
As the market for optical injection molding, tooling and coating is
focused, MXL believes that the principal strengths of its business are its
state-of-the-art injection molding equipment, advanced production technology,
high quality standards, and on time deliveries. MXL believes that the
combination of its proprietary "Anti-Fog" coating, precise processing of the
"Anti-Scratch" coatings, and precise molding and proprietary grinding and
polishing methods for its injection tools will provide it with the opportunity
to expand into related products. MXL's sales and marketing effort concentrates
on industry trade shows. In addition, MXL employs one marketing and sales
executive and one sales engineer.
MXL uses only polycarbonate resin to manufacture shields, face masks
and lenses for over 50 clients in the safety, recreation and military
industries. For its manufacturing work as a subcontractor in the military
industry, MXL is required to comply with various federal regulations including
Military Specifications and Federal Acquisition Regulations for military end use
applications. At its Lancaster, Pa. facility, molding machines are housed in a
climate controlled clean environment designed and built by MXL.
MXL's largest three customers accounted for approximately 44% of MXL's
total sales in 2002 and MXL's largest customer comprised approximately 23% of
this segment's sales.
Additional information about MXL may be found at
http://www.mxl-industries.com/
Investments
Over the last several years, the Company has taken significant steps to
focus primarily on becoming a global workforce development company and has
divested many of its non-core assets. However, the Company still has investments
in the common stock of a private and certain publicly traded corporations and
also owns certain real estate (see Note 3).
Hydro Med Sciences, Inc. ("HMS") is a specialty pharmaceutical company
engaged in the development and commercialization of prescription pharmaceuticals
principally utilizing HMS' patented Hydron drug delivery technology.
Prior to June 2000, HMS operated as a division of the Company, however,
in connection with an offering of the Company's 6% Convertible Subordinated
Exchangeable Notes due 2003, (the "HMS Notes"), HMS was incorporated as a
separate company and became a wholly-owned subsidiary of the Company. The HMS
Notes, at the option of the holders, may be exchanged for 19.9% of the
outstanding common stock of HMS on a fully diluted basis or into shares of the
Company's common stock.
On December 27, 2001 HMS completed a $7 million private placement of
HMS Series A Convertible Preferred Stock (the "Preferred Stock") to certain
institutional investors. The Company currently owns 100% of HMS's common stock
but no longer has financial and operating control of HMS. As a condition of the
private placement, the Company contractually gave up operating control over HMS
through an Investors Rights Agreement. Therefore, through December 27, 2001, the
operating results of HMS were consolidated within the Consolidated Statements of
Operations. However, subsequent to that date, the Company accounts for its
investment in HMS under the equity method. Due to HMS's operating losses during
2002, the Company's investment in HMS as of December 31, 2002 was written down
to zero.
The Preferred Stock is convertible at any time at the option of holder
into approximately 41% of HMS's common stock and participates in dividends with
HMS common stock on an as converted basis. Certain of the Preferred Stock
holders hold the HMS Notes which may be exchanged for 19.9% of the outstanding
common stock of HMS common stock on a fully diluted basis. If such holders
exercise the exchange right and the Preferred Stock is converted to common stock
of HMS, the Company's ownership of HMS would then be reduced to approximately
47% (see Note 3).
Millennium Cell Inc. ("Millennium") is a development-stage company that
has created a proprietary technology to safely generate and store hydrogen or
electricity from environmentally friendly raw materials. The Company owns
approximately 8% of the outstanding common stock of Millennium as of December
31, 2002, with a market value of $5,552,000.
GSE Systems, Inc. ("GSES") provides simulation solutions and services
to the nuclear and fossil electric utility industry, as well as process
industries such as the chemical and petrochemical industries. At December 31,
2002, the Company's investment in GSES was approximately $1,794,000 and the
Company owned approximately 19.5% of the outstanding shares of common stock of
GSES. Additionally, pursuant to the extension of the Company's guarantee of GSES
debt in March 2003, the Company received an additional 150,000 shares of GSES
common stock.
Although the Company owns approximately 19.5% of the common stock of
GSES as of December 31, 2002, the Company has accounted for its investment in
GSES using the equity method of accounting based upon management's conclusion
that the Company has significant influence with respect to the operations of
GSES.
Five Star Products, Inc. ("FSP") is engaged in the wholesale
distribution of home decorating, hardware and finishing products. At December
31, 2002, the Company's investment in FSP was approximately $6,317,000,
including the $4,500,000 Five Star Note described below.
The Company currently owns approximately 47.3% of the outstanding
common stock of FSP and would own approximately 50% if certain stock options
beneficially owned by the Company's officers were exercised. As of December 31,
2002, three officers of the Company served on the board of FSP (out of a total
of seven directors), one of whom resigned effective March 27, 2003. However,
effective August 1998, the Company entered into a Voting Agreement which limits
its operating and financial control of FSP. Pursuant to an amendment of such
agreement, the Company agreed that until June 30, 2004, it would vote its shares
of common stock of FSP (i) such that not more than 50% of FSP's directors will
be officers or directors of the Company and (ii) in the same manner and in the
same proportion as the remaining stockholders of FSP vote on all matters
presented to a vote of stockholders, other than the election of directors.
Therefore, the Company accounts for its investment in FSP under the equity
method.
FSP is currently indebted to the Company in the amount of $4,500,000
pursuant to an 8% senior unsecured note due September 30, 2004, as amended (the
"Five Star Note"). On August 2, 2002, the Company converted $500,000 of the
original $5,000,000 Five Star Note into 2,272,727 shares of common stock of FSP
at a price of $.22 per share, which was at a premium to the open market value of
$0.17 at the time. As a result of this transaction, the Company's ownership of
FSP increased to approximately 47.3% from approximately 37%. All other terms of
the Five Star Note remain unchanged. The Five Star Note also provides that the
Company can receive quarterly payments of principal from FSP, if FSP achieves
certain financial performance benchmarks.
Employees
At December 31, 2002, the Company and its subsidiaries employed 1,427
persons, including 11 in the Company's headquarters, 1,343 at General Physics
and 73 at MXL. The Company considers its employee relations to be good.
Financial Information about the Foreign and Domestic operations and Export Sales
For financial information about the foreign and domestic operations and
export sales, see Note 12 to Notes to Consolidated Financial Statements. Foreign
operations and export sales represent less than 10% of the Company's total net
sales.
Item 2. Properties
The following information describes the material physical properties
owned or leased by the Company and its subsidiaries.
The Company leases approximately 10,000 square feet of space for its
White Plains, New York principal executive offices. General Physics leases
approximately 27,300 square feet for an office building in Elkridge, Maryland
and approximately 283,000 square feet of office space at various other locations
throughout the United States, Canada, the United Kingdom, Mexico, Brazil and
Malaysia.
MXL owns 50,200 square feet of warehouse and office space in Lancaster,
PA and 55,000 square feet of warehouse and office space in Westmont, IL, both of
which are subject to mortgages.
The facilities owned or leased by the Company are considered to be
suitable and adequate for their intended uses and are considered to be well
maintained and in good condition.
ITEM 3. LEGAL PROCEEDINGS
On January 3, 2001, the Company commenced an action alleging that MCI
Communications Corporation, 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 the
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 had not yet been completed, defendants 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 Company and General
Physics both filed timely Proofs of Claim in the United States Bankruptcy Court
against MCI and WorldCom, Inc., et al. The other defendants 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.
The parties have engaged in non-binding mediation. At the latest
mediation conference, EDS stated that it did not intend to file a motion for
summary judgment following the close of discovery on February 28, 2003, and
intended to try the case if a settlement was not reached. On March 14, 2003, the
Company filed a Note of Issue which places the case on the trial calendar.
The Company is not a party to any legal proceeding, the outcome of
which is believed by management to have a reasonable likelihood of having a
material adverse effect upon the financial condition of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
fourth quarter of the fiscal year covered by this report.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock, $.01 par value, is traded on the New York
Stock Exchange. The following table presents its high and low market prices for
the last two years. During the periods presented below, the Company has not paid
any dividends.
Quarter High Low
2002 First $4.00 $3.23
Second 5.75 3.50
Third 5.04 4.20
Fourth 5.10 3.60
Quarter High Low
2001 First $5.00 $3.50
Second 5.39 3.20
Third 5.14 3.05
Fourth 4.10 2.40
The number of shareholders of record of the Common Stock as of March
19, 2003 was 1,385 and the closing price of the Common Stock on the New York
Stock Exchange on that date was $5.12.
Equity Compensation Plan Information as of December 31, 2002
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Plan category Number of securities Weighted-average Number of securities
to be issued upon exercise price of remaining available
Non-Qualified exercise of outstanding options, for future issuance
Stock Option Plan outstanding options, warrants and rights under equity
warrants and rights compensation plans
(excluding securities
reflected in column
(a)
(a)(i) (b)(i) (c) (ii)
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Equity compensation
plans not approved
by security holders 2,612,997 $6.76 899,777
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
(i) Does not include warrants to purchase 300,000 shares of Common Stock issued
to a financial consulting firm at an exercise price of $4.60 per share.
(ii) Does not include shares of Common Stock that may be issued to directors of
the Company as director's fees.
For a description of the material terms of the Company's Non-Qualified
Stock Option Plan, see Note 11 to the Notes to the Consolidated Financial
Statements.
Directors of the Company who are not employees of the Company or its
subsidiaries receive an annual fee of $5,000, payable quarterly, equally in cash
and Common Stock of the Company. In addition, the directors receive $1,000 for
each meeting of the Board of Directors attended, and generally do not receive
any additional compensation for service on the committees of the Board of
Directors other than the Audit Committee. Employees of the Company or its
subsidiaries do not receive additional compensation for serving as directors.
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Item 6. Selected Financial Data
Operating Data (in thousands, except per share data)
- ------------------------------------------------------------------------------------------------------------------------------
Years ended December 31, 2002 2001 2000 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------
Sales $152,233 $186,611 $197,467 $224,810 $284,682
Gross margin 17,465 22,577 19,789 26,379 41,993
Interest expense 2,770 4,733 5,616 4,922 3,896
(Loss) income before taxes (6,047) 1,570 (34,265) (21,293) (695)
Net loss (5,228) (945) (25,392) (22,205) (2,061)
- -------------------------------------------------------------------------------------------------------------------------------
Loss per share:
Basic (.34) (.09) (2.04) (1.95) (.19)
Diluted (.34) (.09) (2.04) (1.95) (.19)
- ------------------------------------------------------------------------------------------------------------------------------
Balance Sheet Data
December 31, 2002 2001 2000 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------
Cash, cash equivalents and trading securities $1,516 $ 1,705 $ 11,317 $ 4,068 $ 7,548
Short-term borrowings 22,058 32,338 36,162 40,278 30,723
Working capital (deficit) 780 (2,750) 1,834 (146) 13,989
Total assets 144,905 160,824 212,578 197,118 210,905
Long-term debt 6,912 6,863 17,612 18,490 21,559
Stockholders' equity 92,982 95,943 112,518 99,982 120,335
- ------------------------------------------------------------------------------------------------------------------------------
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS:
RESULTS OF OPERATIONS
Overview
The Company's primary operating entity is General Physics, a global workforce
development company that improves the effectiveness of organizations by
providing training, management consulting, e-Learning solutions and engineering
services that are customized to meet the specific needs of clients. Clients
include Fortune 500 companies, manufacturing, process and energy companies, and
other commercial and governmental customers.
General Physics' operations were resegmented in 2000 to two segments: the
Manufacturing & Process Segment and the IT Segment. In addition to General
Physics, the Company has a third segment, Optical Plastics (MXL), which
manufactures molded and coated optical products. The Company also holds a number
of investments in publicly held companies, including Millennium Cell, Inc.
("Millennium"), GSE Systems ("GSES") and Five Star Products ("FSP"), and a
private company Hydro Med Sciences ("HMS") and owns certain real estate.
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.
The Company currently owns approximately 47.3% of the outstanding common stock
of FSP and would own approximately 50% if certain stock options beneficially
owned by the Company's officers were exercised. As of December 31, 2002, three
officers of the Company served on the board of FSP (out of a total of seven
directors), one of whom resigned effective March 27, 2003. However, effective
August 1998, the Company entered into a Voting Agreement which limits its
operating and financial control of FSP. Pursuant to an amendment of such
agreement, the Company agreed that until June 30, 2004, it would vote its shares
of common stock of FSP (i) such that not more than 50% of FSP's directors will
be officers or directors of the Company and (ii) in the same manner and in the
same proportion as the remaining stockholders of FSP vote on all matters
presented to a vote of stockholders, other than the election of directors.
Therefore, the Company accounts for its investment in FSP under the equity
method.
In the third quarter of 2002, the Company announced significant cost reductions
to reduce its future operating costs by over $7,000,000 on an annualized basis,
primarily as a result of personnel reductions at General Physics which were
substantially completed in the third quarter of 2002. In addition, the Company
is currently modifying its employee benefit program and considering other
measures to reduce expenses. It is anticipated that the full impact of the
$7,000,000 of cost reductions will be reflected in 2003.
Furthermore, the Company has continued to reduce its debt outstanding under its
revolving credit facility from approximately $49,500,000 at December 31, 2000 to
approximately $22,100,000 at December 31, 2002.
In 2002, the Company had a loss before income taxes of $6,047,000 compared to
income before income taxes of $1,570,000 in 2001. The decrease in income before
income taxes in 2002, as compared to 2001, was primarily due to a reduced gross
margin due to lower sales volume, severance and related expenses of $2,214,000,
non-cash equity losses of $1,401,000 on HMS and $1,210,000 on GSES,
respectively, and lower gains on sales of marketable securities, partially
offset by lower interest expense due to reduced debt levels and interest rates.
Additionally, effective January 1, 2002, the Company no longer amortizes
goodwill in accordance with SFAS No. 142, Goodwill and Other Intangible Assets.
In 2002, the Company had a net gain of $2,267,000 on marketable securities,
primarily relating to the Company's sale of 1,286,000 shares of Millennium,
which were held as available-for-sale. The Company received gross proceeds of
$3,833,000 from these sales. In addition, the Company recorded a $1,211,000
credit to compensation expense related to the Company's Millennium Cell Deferred
Compensation Plan offered to certain of its employees, which is included as a
credit to selling, general and administrative expense (see Note 3), and
restructuring charge reversals of $368,000 primarily relating to favorable
settlements on certain lease and contractual obligations. These items were
offset by equity losses of $2,611,000 of which $1,401,000 related to HMS and
$1,210,000 to GSES. The Company recorded charges of approximately $700,000
relating to financial and consulting fees and incurred approximately $800,000 of
legal fees relating to the Company's ongoing litigation against MCI
Communications, Systemhouse and Electronic Data Systems Corporation, as
successor to Systemhouse (see Note 18).
In 2001, the Company had a net gain of $4,294,000 on marketable securities,
primarily relating to the Company's sale of 2,081,000 shares of Millennium,
861,000 of which were trading securities and 1,220,000 of which were available
for sale. The Company received gross proceeds of $14,624,000 from these sales.
In addition, the Company recorded a $2,370,000 credit to compensation expense
related to the Company's Millennium Cell Deferred Compensation Plan , which is
included as a credit to selling, general and administrative expense (see Note
3). The Company had restructuring charge reversals of $1,174,000 primarily
relating to favorable settlements on certain lease and contractual obligations,
offset by an operating loss from HMS of approximately $3,400,000 and a $320,000
write-down on investments, of which $200,000 related to FSP. In addition, the
Company recorded charges of approximately $1,050,000 relating to financial
consulting services (of which $750,000 is a non-cash stock based award) and
$400,000 relating to a potential new credit agreement which was not consummated.
The Company also incurred in excess of $500,000 relating to legal fees relating
to the Company's litigation against MCI Communications Corporation, Systemhouse
and Electronic Data System Corporation, as successor to Systemhouse (see Note
18).
Sales
Years ended December 31, (in thousands) 2002 2001 2000
- ------------------------------------------------------------------------------------------
Manufacturing & Process 134,255 $164,361 161,859
Information Technology 7,982 11,061 24,593
Optical Plastics 9,996 11,184 10,998
HMS 5 17
- ----------------------------------------------------------------------------------------
$152,233 $186,611 197,467
- ----------------------------------------------------------------------------------------
The decreased sales of $30,106,000 by the Manufacturing & Process Segment in
2002 were primarily attributable to a reduction in sales from the automotive and
e-Learning divisions, as well as from advanced manufacturing clients and reduced
sales from a contract with Westinghouse Savannah River. The decrease in sales of
$3,079,000 in the IT Segment in 2002 was primarily due to the continued downturn
in the economy.
The increased sales of $2,502,000 achieved by the Manufacturing & Process
Segment in 2001 compared to 2000 was the result of increased sales in the
government sector, offset by decreased sales in the automotive,
telecommunications and advanced manufacturing sectors. These decreases were due
to the continued downturn in the economy compounded by the effects of the events
of September 11, 2001. The decrease in sales of $13,532,000 in the IT Segment in
2001 was primarily the result of the shut-down of the open enrollment IT
business in the third quarter of 2000.
In 2002, the Optical Plastics Segment (MXL) sales decreased by 11% primarily as
a result of the effects of the continued downturn in the economy. In 2002, MXL's
major customer comprised 23% of the segment's net sales and in 2001, MXL's major
customer comprised 27% of the segment's net sales.
Gross margin
Years ended December 31, (in thousands) 2002 2001 2000
- -----------------------------------------------------------------------------------------------------------
% % %
--- --- ---
Manufacturing & Process $15,158 11.3 $18,551 11.3 $22,277 13.8
Information Technology 208 2.6 1,781 16.1 (4,645) -
--------- ----- ------- ------ ------- -----
General Physics 15,366 10.8 20,332 11.6 17,632 9.5
------- ------ ------
Optical Plastics 2,099 21.0 2,816 25.2 2,888 26.3
HMS (571) - (731) -
- ----------------------------------------------------------------------------------------------------------
$17,465 11.5 $22,577 12.1 $19,789 10.0
- ----------------------------------------------------------------------------------------------------------
General Physics total gross margin decreased from $20,332,000 to $15,366,000
from 2001 to 2002. This decrease occurred within both segments of General
Physics as a result of decreased sales in 2002 compared to 2001.
The gross margin of $15,158,000 by the Manufacturing & Process Segment in 2002,
decreased by $3,393,000 when compared to 2001. This decrease was due to the
continued downturn in the economy as well as a reduction in higher value-added
services primarily provided to customers in the automotive division and advanced
manufacturing clients. However, the gross margin percentage for the
Manufacturing & Process Segment remained unchanged as a result of the Company's
efforts to monitor and control costs.
The gross margin of $18,551,000 by the Manufacturing & Process Segment in 2001
decreased both in terms of dollars and percent of sales as compared to 2000.
This decrease was due to the continued downturn in the higher margin automotive
and advanced manufacturing sectors. This decrease was offset by an increase in
revenues for the lower margin government sectors. In addition, there was
increased investment in the e-Learning business and increased expenses due to
staff reduction in the third and fourth quarters due to the events of September
11, 2001 and the continued downturn in the economy.
The decrease in the IT Segment gross margin in 2002 compared to 2001 was the
result of the continued downturn in the economy. The reduction in the gross
profit percentage in 2002 was due to the inability to reduce certain overhead
costs in proportion to the decline in sales. The increase in the IT Segment
gross margin in 2001 was due to the Company's renewed focus on its contract IT
operations.
Selling, general, and administrative expenses
The decrease in SG&A of $508,000 in 2002 as compared to 2001 was primarily
attributable to a reduction in SG&A expenses of HMS of $2,841,000 due to the
deconsolidation of HMS at December 27, 2001 and goodwill and other intangible
asset amortization expense of $1,410,000, which is not recorded in the current
year in accordance with SFAS 142, Goodwill and Other Intangible Assets. This
decrease was offset by severance and related expenses of $2,214,000, and a
decrease in the non-cash credit to compensation expense of $1,159,000 relating
to the Company's Millennium Cell Deferred Compensation Plan due to fluctuations
in the share price of Millennium.
The decrease in SG&A of $4,050,000 in 2001 as compared to 2000 was primarily
attributable to a deferred compensation credit of $2,370,000 in 2001 as opposed
to a charge of $3,809,000 in 2000 due to fluctuations in the share price of
Millennium. However, this decrease was partially offset by increased SG&A
expenses at HMS as a result of increased costs incurred by HMS for phase III
clinical trials of its prostate cancer product.
Interest expense
Interest expense was $2,770,000 in 2002, $4,733,000 in 2001 and $5,616,000 in
2000. The reduction in interest expense in 2002 and 2001 was attributable to
both a decrease in the Company's outstanding indebtedness and a reduction in
variable interest rates.
Investment and other income (loss), loss on investments, and gains on marketable
securities, net,
Years ended December 31, (in thousands) 2002 2001 2000
----------------------------------------------------------------------------
Investment and other income, (loss) $(1,814) $ 496 $(1,306)
Loss on investments (153) (320) (3,400)
Gains on marketable securities, net 2,267 4,294 10,111
-----------------------------------------------------------------------------
The investment and other income (loss) for 2002 was related to the Company's
equity losses on GSES of $1,210,000 and HMS of $1,401,000 offset by equity
income on FSP of $162,000, $584,000 of interest income on loans receivable and
$51,000 from other income. The investment and other income (loss) for 2001 was
primarily related to $701,000 of interest income on loans receivable offset by a
loss of $205,000 from equity investments and other miscellaneous losses. The
investment and other income (loss) for 2000 was due to equity losses of
$2,216,000 relating to the Company's equity investments offset by $910,000 of
interest income on loans receivable.
The loss on investments for 2002 was due to the write off of an investment. The
loss on investments for 2001 and 2000 was due to write downs of $320,000 and
$3,400,000, respectively, based upon the Company's impairment assessment in the
carrying value of the Company's equity investments.
The gains on marketable securities, net in 2002, 2001, and 2000 was primarily
due to the Company's disposal of securities of Millennium.
Income taxes
Income tax benefit (expense) for 2002, 2001 and 2000 was $819,000, $(2,515,000)
and $8,873,000, respectively.
For the year ended December 31, 2002, the current income tax provision
represents state taxes of $370,000, and foreign taxes of $361,000. The deferred
income tax benefit of $1,550,000 primarily represents a benefit relating to the
Company's federal net operating losses.
For the year ended December 31, 2001, the current income tax provision of
$723,000 represents state taxes of $537,000, and foreign taxes of $186,000. The
deferred income tax expense of $1,792,000 represents future estimated federal
and state taxes.
The Company had an effective tax rate of 14% for the year ended December 31,
2002. This rate was primarily due to certain nondeductible items, net losses
from foreign operations for which no tax benefit has been provided, and the tax
treatment for financial statement purposes of the sale by the Company in 2002 of
certain shares of available-for-sale securities accounted for pursuant to SFAS
115 "Accounting for Certain Investments in Debt and Equity Securities."
The Company had an effective tax rate of 160% for the year ended December 31,
2001. This rate was primarily due to the tax treatment for financial statement
purposes of the sale by the Company in 2001 of certain shares of
available-for-sale securities accounted for pursuant to SFAS 115 "Accounting for
Certain Investments in Debt and Equity Securities."
At December 31, 2002, the Company had a net deferred tax asset of $10,846,000,
which management believes will more likely than not be realized.
Liquidity and capital resources
At December 31, 2002, the Company had cash and cash equivalents totaling
$1,516,000.
The Company believes that cash generated from operations, borrowing availability
under its credit agreement and cash generated from its sale of marketable
securities will be sufficient to fund the working capital and other needs of the
Company. The Company entered into an amended three-year $40 million Revolving
Credit Facility in December 2001 with a syndicate of three banks (the "Amended
Agreement"). The commitment under the facility was reduced to $35 million as a
result of asset sales by the Company, but the Amended Agreement provides that
the commitment can not be reduced below $35 million as a result of any
additional asset sales.
The Company was not in compliance with certain financial covenants of its
Amended Agreement for the year ended December 31, 2002. The Company entered into
a First Amendment and Limited Waiver to the Amended Agreement with various banks
as of March 31, 2003 (the "First Amendment"). The First Amendment provided for a
waiver of certain financial covenants in the Amended Agreement and provided
certain revised financial covenants for periods beginning after December 31,
2002. The First Amendment further reduced the commitment under the Amended
Agreement to $30 million from $35 million and limited the availability of
borrowings under the revolving loan commitment to $27 million for the period
commencing March 31, 2003 through May 31, 2003 (the "First Test Period") and $26
million for the period commencing on June 1, 2003 and ending on delivery of the
Company's compliance certificate for the quarter ending September 30, 2003 (the
"Second Test Period"; and together with the First Test Period, the "Test
Periods"). The Company does not anticipate needing to borrow in excess of $27
million or $26 million, respectively during the Test Periods. The First
Amendment provides that the available revolving commitment amount may be
increased to $30 million after the Second Test Period, provided that no default
or event of default has occurred and is continuing under the Amended Agreement,
as amended by the First Amendment. The First Amendment also added a new
financial covenant with respect to minimum consolidated EBITDA effective March
31, 2003. The Company is currently negotiating with certain other lenders with
respect to obtaining a new facility for its future financing requirements. At
March 31, 2003, there is approximately $4,600,000, available under the facility,
as amended (see Note 5).
The following table summarizes long term debt, capital lease commitments and
operating lease commitments as of December 31, 2002 (in thousands):
Balance at Payments Due In
December 31 2002 2003 2004-05 2006-07 after 2007
---------------- ---- ------- ------- ----------
Long term debt $ 6,082 $3,088 $ 670 $1,319 $1,005
Capital lease commitments 830 522 306 2 -
Operating lease commitments 12,959 3,620 3,742 1,953 3,644
------ ----- ----- ----- -----
Total $19,871 $7,230 $4,718 $3,274 $4,649
======= ====== ====== ====== ======
On March 23, 2000, the Company agreed to guarantee up to $1,800,000 of GSES's
debt pursuant to GSES's credit facility. In consideration for such guarantee,
the Company received warrants to purchase 150,000 shares of GSES common stock at
an exercise price of $2.38 per share, which expire on August 17, 2003. GSES's
credit facility, originally scheduled to expire on March 23, 2003, was extended
until March 31, 2004. As part of such extension, the Company was required to
extend its $1,800,000 limited guarantee. In consideration for the extension of
the guarantee, the Company received 150,000 shares of GSES common stock (see
Note 17).
The Company has guaranteed the leases for FSP's New Jersey and Connecticut
warehouses, totaling approximately $1,589,000 per year through the first quarter
of 2007, and an aggregate of $455,000 for certain equipment leases through April
2004. The Company's guarantee of such leases was in effect when FSP was a
wholly-owned subsidiary of the Company. In 1998, the Company sold substantially
all of the operating assets of Five Star Group to the predecessor company of
FSP. As part of this transaction, the landlord of the New Jersey and Connecticut
facilities and the lessor of the equipment did not consent to the release of the
Company's guarantee (see Note 17).
The following table summarizes the estimated expiration of financial guarantees
outstanding as of December 31, 2002 (in thousands):
Estimated Expiration Per Period
Total 2003 2004 2005 Thereafter
----- ---- ---- ---- ----------
GSES debt $1,800 $ - $1,800 $ - $ -
FSP warehouse leases 6,753 1,589 1,589 1,589 1,986
FSP equipment leases 455 339 116 - -
------ ------- ---------- ----------- --------
Total $9,008 $1,928 $3,505 $1,589 $ 1,986
====== ====== ====== ====== ======
The Company does not have any off-balance sheet financing, other than operating
leases entered into in the normal course of business and disclosed above. The
Company also does not use leveraged derivatives or derivatives for trading
purposes.
For the year ended December 31, 2002, the Company's working capital increased by
$3,530,000 to net working capital of $780,000. The working capital increase was
primarily due to decreases in short-term borrowings of $10,280,000, billings in
excess of costs and estimated earnings of $3,167,000, accounts and other
receivables of $3,294,000, and costs and estimated earnings in excess of
billings of $2,610,000, partially offset by increases in current maturities of
long term debt of $2,973,000 and accounts payable and accrued expenses of
$463,000. In addition, of the remaining restructuring charges of $1,141,000,
$221,000 is currently due. In connection with the reserves established for the
restructuring charges, $1,217,000 has been utilized and $368,000 has been
reversed during the year ended December 31, 2002 (see Note 15).
The decrease in cash and cash equivalents of $189,000 for the year ended
December 31, 2002 resulted from cash used in financing activities of $1,849,000
offset by cash provided by operations of $829,000 and cash provided by investing
activities of $903,000. Net cash provided by investing activities of $903,000
includes the proceeds from the sale of marketable securities of $3,833,000
offset by $1,916,000 of additions to property, plant and equipment, $1,503,000
of additions to intangible assets, and a $489,000 decrease to investments and
other assets. Net cash used in financing activities consisted primarily of
repayments of short-term borrowings, offset by net proceeds from sales of Common
and Class B common stock.
Management discussion of critical accounting policies
The preparation of our financial statements in conformity with accounting
principles generally accepted in the United States of America requires us to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Our estimates, judgments and assumptions are
continually evaluated based on available information and experience. Because of
the use of estimates inherent in the financial reporting process, actual results
could differ from those estimates.
Certain of our accounting policies require higher degrees of judgment than
others in their application. These include contract revenue and cost
recognition, valuation of accounts receivables, accounting for investments,
impairment of long-lived and intangible assets and income tax recognition of
deferred tax items which are summarized below. In addition, Note 1 to the
Consolidated Financial Statements includes further discussion of our significant
accounting policies.
Contract revenue and cost recognition.
The Company provides services under time-and-materials, cost-plus-fixed fee and
fixed-price contracts. Each contract has different terms based on the scope,
deliverables and complexity of the engagement, requiring the Company to make
judgments and estimates about recognizing revenue. In general, revenue is
recognized on these arrangements as the services are performed. Under
time-and-material contracts, as well as certain cost-plus-fixed fee and certain
fixed-price contracts, the contractual billing schedules are based on the
specified level of resources the Company is obligated to provide. As a result,
on those "level of effort" contracts, the contractual billing amount for a given
period acts as a measure of performance and, therefore, revenue is recognized in
that amount.
For other fixed price contracts, the contractual billing schedules are not based
on the specified level of resources the Company is obligated to provide. These
arrangements typically do not have milestones or other reliable measures of
performance. As a result, revenue on these arrangements is recognized using the
percentage-of-completion method based on the relationship of costs incurred to
total estimated costs expected to be incurred over the term of the contract. The
Company believes this methodology provides a reasonable measure of performance
on these arrangements since performance primarily involves personnel costs and
the customer is required to pay the Company for the proportionate amount of work
and cost incurred in the event of contract termination. Revenue for unpriced
change orders is not recognized until the customer agrees with the changes.
Costs and estimated earnings in excess of billings on uncompleted contracts are
recorded as a current asset. Billings in excess of costs and estimated earnings
on uncompleted contracts are recorded as a current liability. Generally
contracts provide for the billing of costs incurred and estimated earnings on a
monthly basis.
Risks relating to service delivery, usage, productivity and other factors are
considered when making estimates of total contract cost, contract profitability,
and progress towards completion. If sufficient risk exists, a reduced-profit
methodology is applied to a specific client contract's percentage-of-completion
model whereby the amount of revenue recognized is limited to the amount of costs
incurred until such time as the risks have been partially or wholly mitigated
through performance. The Company's estimates of total contract cost and contract
profitability change periodically in the normal course of business, occasionally
due to modifications of contractual arrangements. In addition, the
implementation of cost saving initiatives and achievement of productivity gains
generally results in a reduction of estimated total contract expenses on
affected client contracts. Such changes in estimate are recognized in the period
the changes are determined. For all client contracts, provisions for estimated
losses on individual contracts are made in the period in which the loss first
becomes apparent.
As part of the Company's on-going operations to provide services to its
customers, incidental expenses, which are commonly referred to as
"out-of-pocket" expenses, are billed to customers. Out-of-pocket expenses
include expenses such as airfare, mileage, hotel stays, out-of-town meals, and
telecommunication charges. The Company's policy provides for these expenses to
be recorded as both revenue and direct cost of services in accordance with the
provisions of EITF 01-14, "Income Statement Characterization of Reimbursements
Received for `Out-of-Pocket' Expenses Incurred."
Valuation of accounts receivables
Provisions for allowance for doubtful accounts are made based on historical loss
experience adjusted for specific credit risks. Measurement of such losses
requires consideration of the Company's historical loss experience, judgments
about customer credit risk, and the need to adjust for current economic
conditions. The allowance for doubtful accounts as a percentage of total gross
trade receivables was 3.2% and 1.8% at December 31, 2002 and 2001, respectively.
Impairment of long-lived tangible and intangible assets
Impairment of long-lived tangible and intangible assets with finite lives result
in a charge to operations whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. Recoverability of
long-lived tangible assets to be held and used is measured by a comparison of
the carrying amount of the asset to future undiscounted net cash flows expected
to be generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by determining the amount by which the
carrying amount of the assets exceeds the fair value of the asset.
The measurement of the future net cash flows to be generated is subject to
management's reasonable expectations with respect to the Company's future
operations and future economic conditions which may affect those cash flows.
In accordance with SFAS No. 142, which the Company adopted in 2002, goodwill is
no longer amortized, but instead tested for impairment at least annually. The
first step of the goodwill impairment test is a comparison of the fair value of
each reporting unit to its carrying value. The Company conducted a transitional
goodwill impairment test upon adoption of SFAS No. 142 as of January 1, 2002,
and its annual goodwill impairment test as of December 31, 2002. The goodwill
impairment test requires the Company to identify its reporting units and obtain
estimates of the fair values of those units as of the testing date. The Company
estimates the fair values of its reporting units using discounted cash flow
valuation models. The Company estimates these amounts by evaluating historical
trends, current budgets, operating plans and industry data. The estimated fair
value of each reporting unit exceeded its respective carrying value in both
tests conducted in 2002 indicating the underlying goodwill of each unit was not
impaired at the respective testing dates. The timing and frequency of our
goodwill impairment tests are based on an ongoing assessment of events and
circumstances that would more than likely reduce the estimated fair value of a
reporting unit below its carrying value. The Company will continue to monitor
its goodwill for impairment and conduct formal tests when impairment indicators
are present. A decline in the fair value of any reporting units below its
carrying value is an indicator that the underlying goodwill of the unit is
potentially impaired. This situation would require the second step of the
goodwill impairment test to determine whether the unit's goodwill is impaired.
The second step of the goodwill impairment test is a comparison of the implied
fair value of a reporting unit's goodwill to its carrying value. An impairment
loss is required for the amount which the carrying value of a reporting unit's
goodwill exceeds its implied fair value. The implied fair value of the reporting
unit's goodwill would become the new cost basis of the unit's goodwill.
The following table presents goodwill balances at December 31, 2002 and
operating income for the years ended December 31, 2002, 2001 and 2000 for each
of our reportable segments (in thousands):
Goodwill at Operating Income
December 31, For the Years Ended December 31
--------------------------------
2002 2002 2001 2000
-------- -------- ------ -------
Manufacturing & Process $51,020 $1,712 $ 8,679 $10,870
Information Technology 6,269 (182) 1,596 (7,331)
Optical Plastics 202 429 1,192 1,272
--------- ------- -------- -------
$57,491 $1,959 $11,467 $ 4,811
======= ====== ======= =======
Accounting for investments
At December 31, 2002 and 2001, the Company owned approximately 47.3% and 37%,
respectively of FSP and accounts for its investment in FSP using the equity
method. At December 31, 2002, the Company's investment in FSP was $6,317,000,
including a $4,500,000 senior unsecured 8% note. The Company currently owns
approximately 47.3% of the outstanding common stock of FSP and would own
approximately 50% if certain stock options beneficially owned by the Company's
officers were exercised. As of December 31, 2002, three officers of the Company
served on the board of FSP (out of a total of seven directors), one of whom
resigned effective March 27, 2003. However, effective August 1998, the Company
entered into a Voting Agreement which limits its operating and financial control
of FSP. Pursuant to an amendment of such agreement, the Company agreed that
until June 30, 2004, it would vote its shares of common stock of FSP (i) such
that not more than 50% of FSP's directors will be officers or directors of the
Company and (ii) in the same manner and in the same proportion as the remaining
stockholders of FSP vote on all matters presented to a vote of stockholders,
other than the election of directors. Therefore, the Company accounts for its
investment in FSP under the equity method.
At December 31, 2002 and 2001, the Company owned approximately 19.5% and 20.2%,
respectively, of GSES with a carrying value of $1,794,000 and $3,004,000,
respectively, and accounts for its investment in GSES using the equity method.
Although the Company owns approximately 19.5% of the common stock of GSES as of
December 31, 2002, the Company has accounted for its investment in GSES using
the equity method of accounting based upon management's conclusion that the
Company has significant influence with respect to the operations of GSES.
The Company currently owns 100% of HMS's common stock but no longer has
financial and operating control of HMS. As a condition of a private placement of
preferred stock in December 2001, the Company contractually gave up operating
control over HMS through an Investors Rights Agreement. Therefore, through
December 27, 2001, the operating results of HMS were consolidated within the
Consolidated Statements of Operations. However, subsequent to that date the
Company accounts for its investment in HMS under the equity method. Due to HMS's
operating losses during 2002, the Company's investment in HMS as of December 31,
2002 was written down to zero.
Income tax recognition
The Company accounts for income taxes using the asset and liability method.
Deferred tax assets and liabilities are recognized for future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and for operating
loss and tax credit carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered. In
assessing the realizability of the deferred tax assets, the Company considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of the deferred tax assets
is dependent upon the generation of future taxable income during the periods in
which temporary differences are deductible. Management considers the scheduled
reversal of deferred tax liabilities, projected future taxable income, and tax
planning strategies in making this assessment. Based upon these factors,
management believes it is more likely than not that the Company will realize the
benefits of deferred tax assets, net of the valuation allowance. The valuation
allowance primarily relates to foreign net operating loss carryforwards for
which the Company does not believe the benefits will be realized.
Restructuring reserves
The Company adopted restructuring plans, primarily related to its open
enrollment IT business, in 2000 and 1999. In order to identify and calculate the
associated costs to exit this business, management made assumptions regarding
estimates of future liabilities for operating leases and other contractual
obligations, severance costs and the net realizable value of assets. Management
believes its estimates, which are reviewed quarterly, to be reasonable and
considers its knowledge of the industry, its previous experience in exiting
activities and valuations from independent third parties if necessary, in
calculation of such estimates.
Recent accounting pronouncements
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations" ("SFAS No. 143"). SFAS No. 143 addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. This statement requires that
the fair value of a liability for an asset retirement obligation be recognized
in the period in which it is incurred if a reasonable estimate of fair value can
be made. This statement is effective for the Company in fiscal 2003. The Company
has evaluated SFAS No. 143 and does not anticipate that the impact of the new
pronouncement would have a material impact on the Company's consolidated
financial statements.
During April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections" ("SFAS No. 145"). Among other items, SFAS No. 145 updates and
clarifies existing accounting pronouncements related to reporting gains and
losses from the extinguishment of debt and certain lease modifications that have
economic effects similar to sale-leaseback transactions. The provisions of SFAS
No. 145 are generally effective for fiscal years beginning after May 15, 2002,
with earlier adoption of certain provisions encouraged. The application of SFAS
No. 145 did not have and is not expected to have a material impact o the
Company's Consolidated Financial Statements.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities" ("SFAS No. 146"). This Statement requires
companies to recognize costs associated with exit or disposal activities when
they are incurred rather than at the date of a commitment to an exit or disposal
plan. The Company is required to adopt the provisions of SFAS No. 146 for exit
or disposal activities, if any, initiated after December 31, 2002. Although the
Company believes the adoption of SFAS No. 146 will not impact the consolidated
financial position or results of operations, it can be expected to impact the
timing of liability recognition associated with future exit activities, if any.
SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure - an amendment of SFAS No. 123" ("SFAS No. 148"), was issued in
December 2002 and the transition guidance and annual disclosure provisions are
effective for the Company for the quarterly interim periods beginning in 2003.
SFAS No. 148 amends SFAS Statement No. 123 ("SFAS No. 123"), "Accounting for
Stock-Based Compensation" and provides alternative methods of transition for a
voluntary change to the fair value method of accounting for stock-based employee
compensation. In addition, the statement amends the disclosure requirements of
SFAS No. 123 to require more prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based compensation
and the effect of the method used. The Company continues to account for
stock-based compensation using APB Opinion No. 25 and has not adopted the
recognition provisions of SFAS No. 123, as amended by SFAS No. 148. The Company
has adopted the disclosure provisions for the current fiscal year and has
included this information in Note 1 to the Company's Consolidated Financial
Statements.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees Including Indirect Guarantees of
Indebtedness of Others" ("FIN No. 45"). FIN No. 45 elaborates on the disclosures
for interim and annual reports regarding obligations under certain guarantees
issued by a guarantor. Under FIN No. 45, the guarantor is required to recognize
a liability for the fair value of the obligation undertaken in issuing the
guarantee at the inception of a guarantee. The recognition and measurement
provisions of FIN No. 45 are applicable on a prospective basis to guarantees
issued or modified after December 31, 2002. The disclosure requirements for FIN
No. 45 are effective for interim and annual financial statements issued after
December 15, 2002. The Company has evaluated FIN No. 45 and does not anticipate
that the impact of the new pronouncement would have a material impact on the
Company's Consolidated Financial Statements.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN No. 46"). FIN No. 46 explains how to identify
variable interest entities and how an enterprise assesses its interests in a
variable interest entity to decide whether to consolidate that entity. FIN No.
46 requires existing unconsolidated variable interest entities to be
consolidated by their primary beneficiaries if the entities do not effectively
disperse risks among parties involved. The provisions of FIN No. 46 are
effective immediately for all entities with variable interests in variable
interest entities created after December 31, 2002. The provisions of FIN No. 46
are effective for public entities with a variable interest in a variable
interest entity created prior to January 1, 2003 no later than the end of the
first annual reporting period beginning after June 15, 2003. The Company is in
the process of evaluating its interests in certain entities to determine if any
such entity will require consolidation under FIN No. 46. If it is determined
that the Company should consolidate any such entity, the Company would recognize
certain assets and debt on its consolidated balance sheet and a cumulative
adjustment for the accounting change in the consolidated statement of
operations.
In November 2002, the EITF reached a consensus on Issue No. 00-21, "Accounting
for Revenue Arrangements with Multiple Deliverables." This Issue provides
guidance on when and how to separate elements of an arrangement that may involve
the delivery or performance of multiple products, services and rights to use
assets into separate units of accounting. The guidance in the consensus is
effective for revenue arrangements entered into in fiscal periods beginning
after June 15, 2003. The transition provision allows either prospective
application or a cumulative effect adjustment upon adoption. The Company is
currently evaluating the impact of adopting this guidance.
Item 7A. Quantitative and Qualitative Disclosures About
Market Risk
The Company is exposed to the impact of interest rate, market risks and currency
fluctuations. In the normal course of business, the Company employs internal
processes to manage its exposure to interest rate, market risks and currency
fluctuations. The Company's objective in managing its interest rate risk is to
limit the impact of interest rate changes on earnings and cash flows and to
lower its overall borrowing costs. The Company is exposed to the impact of
currency fluctuations because of its international operations.
As of December 31, 2002, the Company had approximately $24,120,000 of variable
rate borrowings. The Company estimates that for every 1% fluctuation in general
interest rates, assuming debt levels at December 31, 2002, interest expense
would vary by $241,200.
The Company's net investment in its foreign subsidiaries, including intercompany
balances, at December 31, 2002 was approximately $2,639,000, and accordingly,
fluctuations in foreign currency do not have a material impact on the Company's
financial position.
The Company revenues and profitability are related to general levels of economic
activity and employment in the United States and the United Kingdom. As a
result, any significant economic downturn or recession in one or both of those
countries could harm our business and financial condition. A significant portion
of the Company's revenues are derived from Fortune 500 level companies and their
international equivalents, which historically have adjusted expenditures for
external training during economic downturns. If the economies in which these
companies operate weaken in any future period, these companies may not increase
or may reduce their expenditures on external training, which could adversely
affect the Company's business and financial condition.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Page
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
FINANCIAL STATEMENTS OF GP STRATEGIES CORPORATION
AND SUBSIDIARIES:
Independent Auditors' Report 37
Consolidated Balance Sheets - December 31, 2002
and 2001 38
Consolidated Statements of Operations - Years ended
December 31, 2002, 2001, and 2000 40
Consolidated Statements of Changes in Stockholders'
Equity - Years ended December 31, 2002, 2001, and 2000 41
Consolidated Statements of Cash Flows - Years ended
December 31, 2002, 2001, and 2000 42
Notes to Consolidated Financial Statements 44
SUPPLEMENTARY DATA (Unaudited)
Selected Quarterly Financial Data 86
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
GP Strategies Corporation:
We have audited the consolidated financial statements of GP Strategies
Corporation and subsidiaries as listed in the accompanying index. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of GP Strategies
Corporation and subsidiaries as of December 31, 2002 and 2001, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 2002, in conformity with accounting principles
generally accepted in the United States of America.
As discussed in Note 2 to the consolidated financial statements, the Company
adopted Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets", effective January 1, 2002.
KPMG LLP
New York, New York
April 9, 2003
GP STRATEGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except shares and par value per share)
December 31, 2002 2001
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Assets
Current assets
Cash and cash equivalents $ 1,516 $ 1,705
Accounts and other receivables (of which
$4,865 and $3,637 are from government contracts)
less allowance for doubtful accounts of $854 and $529 26,708 30,002
Inventories 1,380 1,734
Costs and estimated earnings in excess of billings on
uncompleted contracts 14,177 16,787
Prepaid expenses and other current assets 4,079 4,113
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Total current assets 47,860 54,341
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Investments, marketable securities
and note receivable 14,130 30,400
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Property, plant and equipment, net 8,299 8,718
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Intangible assets
Goodwill 57,491 55,988
Patents and licenses, net of accumulated
amortization of $593 and $490 755 858
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58,246 56,846
Deferred tax asset 10,846 4,289
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Other assets 5,524 6,230
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$144,905 $160,824
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See accompanying notes to consolidated financial statements.
GP STRATEGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Continued)
(in thousands, except shares and par value per share)
December 31, 2002 2001
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Liabilities and stockholders' equity
Current liabilities
Current maturities of long-term debt $3,610 $ 637
Short-term borrowings 22,058 32,338
Accounts payable and accrued expenses 17,552 17,089
Billings in excess of costs and estimated
earnings on uncompleted contracts 3,860 7,027
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Total current liabilities 47,080 57,091
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Long-term debt less current maturities 3,302 6,226
Other non-current liabilities 1,541 1,564
Stockholders' equity
Preferred stock, authorized 10,000,000
shares, par value $.01 per share, none issued
Common stock, authorized 25,000,000 shares, par
value $.01 per share, issued 15,361,437 and 12,788,743
shares (of which 33,417 and 54,323 shares are held in
treasury) 154 128
Class B common stock, authorized 2,800,000 shares, par
value $.01 per share, issued and outstanding 1,200,000 and
900,000 shares 12 9
Additional paid-in capital 189,988 180,078
Accumulated deficit (93,167) (87,939)
Accumulated other comprehensive income 460 8,364
Notes receivable from stockholder (4,095) (4,095)
Treasury stock at cost (370) (602)
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Total stockholders' equity 92,982 95,943
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$144,905 $160,824
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See accompanying notes to consolidated financial statements.
GP STRATEGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
Years ended December 31, 2002 2001 2000
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Sales $152,233 $186,611 $197,467
Cost of sales 134,768 164,034 177,678
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Gross margin 17,465 22,577 19,789
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Selling, general and administrative (21,410) (21,918) (25,968)
Interest expense (2,770) (4,733) (5,616)
Investment and other income (loss)
(including interest income of $584,
$701 and $910) (1,814) 496 (1,306)
Loss on investments (153) (320) (3,400)
Gains on marketable securities, net 2,267 4,294 10,111
Asset impairment charge (19,245)
Restructuring reversal (charge) 368 1,174 (8,630)
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Income (loss) before income taxes (6,047) 1,570 (34,265)
Income tax benefit (expense) 819 (2,515) 8,873
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Net loss $ (5,228) $ (945) (25,392)
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Net loss per share
Basic $ (.34) $ (.09) $ (2.04)
Diluted (.34) (.09) (2.04)
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See accompanying notes to consolidated financial statements.
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity
Years ended December 31, 2002, 2001, and 2000
(in thousands, except for par value per share)
Accumulated
other Notes
Class B compre- Compre- receivable Treasury Total
Common common Additional hensive hensive from stock stock-
stock stock paid-in Accumulated income income stock- at holders'
($.01 Par) ($.01 Par) capital deficit (loss) (loss) holder cost equity
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Balance at December 31, 1999 $115 $ 5 $170,011 $(61,602) $ (817) $ $ (2,817) $(4,913) $ 99,982
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Other comprehensive income 28,054 28,054 28,054
Net loss (25,392) (25,392) (25,392)
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Total comprehensive income 2,662 2,662
Issuance and sale of common
stock 10 3 5,430 (1,278) 4,165
Issuance of treasury stock 1,195 1,195
Issuance of stock by equity
investee 4,514 4,514
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Balance at December 31, 2000 $125 $ 8 $179,955 $(86,994) $ 27,237 $ $ (4,095) $ (3,718) $112,518
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Other comprehensive loss (18,873) (18,873) (18,873)
Net loss (945) (945) (945)
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Total comprehensive loss (19,818) (19,818)
Issuance and sale of common
stock and warrants 3 3 2,924 313 3,243
Issuance of treasury stock in
exchange for Class B common
stock (2) (2,801) 2,803
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Balance at December 31, 2001 $128 $ 9 $180,078 $(87,939) $ 8,364 $ $ (4,095) $ (602) $ 95,943
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Other comprehensive loss (7,904) (7,904) (7,904)
Net loss (5,228) (5,228) (5,228)
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Total comprehensive loss (13,132) (13,132)
Issuance and sale of common
stock 26 3 9,910 232 10,171
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Balance at December 31, 2002 $154 $12 $189,988 $(93,167) $ 460 $ $ (4,095) $ (370) $ 92,982
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See accompanying notes to consolidated financial statements.
GP STRATEGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
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Years ended December 31, 2002 2001 2000
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Cash flows from operations:
Net loss $(5,228) $ (945) $(25,392)
Adjustments to reconcile net loss
to net cash provided by operating activities:
Depreciation and amortization 3,304 5,902 6,628
Issuance of stock for retirement savings plan 1,065 1,780 1,668
Restructuring reversal (368) (1,174) 8,630
Gains on marketable securities (2,267) (4,294) (10,111)
Loss on investments 153 320 3,400
Non-cash consultant fees 240 750
Non-cash compensation (1,211) (2,370) 3,809
Loss on equity investments and other, net 2,450 7 2,389
Deferred income taxes (1,839) 1,112 (9,649)
Asset impairment charge 19,245
Proceeds from sale of trading securities 9,141 2,031
Changes in other operating items,
net of effect of acquisitions and disposals:
Accounts and other receivables 3,195 4,285 8,997
Inventories 354 (197) (177)
Costs and estimated earnings in excess of
billings on uncompleted contracts 2,584 3,936 1,723
Prepaid expenses and other current assets (330) (74) 1,030
Accounts payable and accrued expenses 1,901 (5,764) (12,899)
Billings in excess of costs and estimated
earnings on uncompleted contracts (3,174) (1,228) 1,324
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Net cash provided by operations $ 829 $11,187 $ 2,646
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See accompanying notes to consolidated financial statements.
GP STRATEGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(in thousands)
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Years ended December 31, 2002 2001 2000
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Cash flows from investing activities:
Additions to property, plant and
equipment, net $(1,916) $ (1,451) $ (1,040)
Additions to intangible assets (1,503) (822) (429)
Proceeds from sale of marketable securities 3,833 5,567 668
Deconsolidation of HMS (6,700)
Decrease (increase) to investments and other 489 (482) (2,119)
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Net cash provided by (used in) investing activities 903 (3,888) (2,920)
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Cash flows from financing activities:
Proceeds from sale of Common Stock 7,850
Proceeds from issuance of Class B Stock 1,260 900 1,200
Net proceeds from issuance of HMS Preferred Stock 6,700
Repayment of short-term borrowings (10,280) (3,824) (4,116)
Deferred financing costs (728) (1,132)
Proceeds from issuance of long-term debt 890 3,131 2,640
Repayment of long-term debt (841) (13,880) (1,343)
Exercise of common stock
options and warrants 234
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Net cash used in financing activities (1,849) (8,105) (1,385)
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Effect of exchange rate changes on
cash and cash equivalents (72) 24 78
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Net decrease in cash and
cash equivalents (189) (782) (1,581)
Cash and cash equivalents at
beginning of year 1,705 2,487 4,068
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Cash and cash equivalents at end of year $1,516 $ 1,705 $ 2,487
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Supplemental disclosures of
cash flow information:
Cash paid during the year for:
Interest $1,942 $ 3,958 $ 5,447
Income taxes $ 434 $ 407 $ 557
See accompanying notes to consolidated financial statements.
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
1. Description of business and summary of significant accounting policies
Description of business.
GP Strategies Corporation (the "Company") currently has three operating business
segments. The Company's principal operating subsidiary is General Physics
Corporation (GP or General Physics). GP is a global workforce development
company that improves the effectiveness of organizations by providing training,
management consulting, e-Learning solutions and engineering services that are
customized to meet the needs of specific clients. Clients include Fortune 500
companies, manufacturing, process and energy companies, and other commercial and
governmental customers.
GP operates in two business segments. The Manufacturing & Process Segment
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 Segment provides information
technology (IT) training programs and solutions, including Enterprise Solutions
and comprehensive career training and transition programs.
The Company's third operating segment is the Optical Plastics Segment comprised
of the Company's wholly owned subsidiary MXL Industries, Inc. (MXL). MXL is a
specialist in the manufacture of polycarbonate parts requiring strict adherence
to optical quality specifications, and in the application of abrasion and fog
resistant coatings to these parts. Products include shields, and face masks and
non-optical plastic products.
In addition, as of December 31, 2002, the Company has investments in Millennium
Cell Inc. (Millennium), Hydro Med Sciences (HMS), Five Star Products, Inc.
(FSP), GSE Systems, Inc. (GSES) and owns certain real estate (see Note 3).
Principles of consolidation and investments. The consolidated financial
statements include the operations of the Company and, except for HMS as
discussed below, its majority-owned subsidiaries. Investments in 20% - 50% owned
companies are generally accounted for by the equity method of accounting. All
significant intercompany balances and transactions have been eliminated.
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
1. Description of business and summary of significant accounting policies
(Continued)
The Company owns approximately 19.5% of the common stock of GSES as of December
31, 2002, however, the Company has accounted for its investment in GSES using
the equity method of accounting based upon management's conclusion that the
Company has significant influence with respect to the operations of GSES.
The Company owns 100% of the common stock of HMS, however, it no longer has
financial and operating control of the entity and accordingly, effective
December 27, 2001, the Company has accounted for its investment in HMS under the
equity method.
The Company owns approximately 47.3% of the outstanding common stock of FSP and
would own approximately 50% if certain stock options beneficially owned by the
Company's officers were exercised. However, effective August 1998, the Company
entered into a Voting Agreement which limits its operating and financial control
of FSP, and therefore, the Company accounts for its investment in FSP under the
equity method.
Cash and cash equivalents. Cash and cash equivalents of $1,516,000 and
$1,705,000 at December 31, 2002 and 2001, respectively, consist of cash and
highly liquid debt instruments with original maturities of three months or less.
Marketable securities. Marketable securities at December 31, 2002 and 2001
consist of U.S. corporate equity securities. The Company classifies its
marketable securities as available-for-sale investments. A decline in the market
value of any available-for-sale security below cost that is deemed to be other
than temporary results in a reduction in carrying amount to fair value. The
impairment is charged to earnings, and a new cost basis is established. Gains
and losses are derived using the average cost method for determining the cost of
securities sold.
Trading securities are those securities which are generally expected to be sold
within one year. Available-for-sale securities are included in Investments,
marketable securities and notes receivable on the Consolidated Balance Sheet.
Trading and available-for-sale securities are recorded at their fair value.
Trading securities are held principally for the purpose of selling them in the
near term. Unrealized holding gains and losses on trading securities are
included in earnings. Unrealized holding gains and losses on available-for-sale
securities are excluded from earnings and are reported as a separate component
of stockholders' equity in accumulated other comprehensive income, net of the
related tax effect, until realized.
Inventories. Inventories are valued at the lower of cost or market, using the
first-in, first-out (FIFO) method.
1. Description of business and summary of significant accounting policies
(Continued)
Foreign currency translation. The functional currency of the Company's
international operations is the applicable local currency. The translation of
the applicable foreign currency into U.S. dollars is performed for balance sheet
accounts using current exchange rates in effect at the balance sheet date and
for revenue and expense accounts using the weighted-average rates of exchange
prevailing during the year. The unrealized gains and losses resulting from such
translation are included as a separate component of stockholders' equity in
accumulated other comprehensive income.
Contract revenue and cost recognition. The Company provides services under
time-and-materials, cost-plus-fixed fee and fixed-price contracts. Each contract
has different terms based on the scope, deliverables and complexity of the
engagement, requiring the Company to make judgments and estimates about
recognizing revenue. In general, revenue is recognized on these arrangements as
the services are performed. Under time-and-material contracts, as well as
certain cost-plus-fixed fee and certain fixed-price contracts, the contractual
billing schedules are based on the specified level of resources the Company is
obligated to provide. As a result, on those "level of effort" contracts, the
contractual billing amount for a given period acts as a measure of performance
and, therefore, revenue is recognized in that amount.
For other fixed price contracts, the contractual billing schedules are not based
on the specified level of resources the Company is obligated to provide. These
arrangements typically do not have milestones or other reliable measures of
performance. As a result, revenue on these arrangements is recognized using the
percentage-of-completion method based on the relationship of costs incurred to
total estimated costs expected to be incurred over the term of the contract. The
Company believes this methodology provides a reasonable measure of performance
on these arrangements since performance primarily involves personnel costs and
the customer is required to pay the Company for the proportionate amount of work
and cost incurred in the event of contract termination. Revenue for unpriced
change orders is not recognized until the customer agrees with the changes.
Costs and estimated earnings in excess of billings on uncompleted contracts are
recorded as a current asset. Billings in excess of costs and estimated earnings
on uncompleted contracts are recorded as a current liability. Generally
contracts provide for the billing of costs incurred and estimated earnings on a
monthly basis.
Risks relating to service delivery, usage, productivity and other factors are
considered when making estimates of total contract cost, contract profitability,
and progress towards completion. If sufficient risk exists, a reduced-profit
methodology is applied to a specific client contract's percentage-of-completion
model whereby the amount of revenue recognized is limited to the amount of costs
incurred until such time as the risks have been partially or wholly mitigated
through performance. The Company's estimates of total contract cost and contract
profitability change periodically in the normal course of business, occasionally
1. Description of business and summary of significant accounting policies
(Continued)
due to modifications of contractual arrangements. In addition, the
implementation of cost saving initiatives and achievement of productivity gains
generally results in a reduction of estimated total contract expenses on
affected client contracts. Such changes in estimate are recognized in the period
the changes are determined. For all client contracts, provisions for estimated
losses on individual contracts are made in the period in which the loss first
becomes apparent.
As part of the Company's on-going operations to provide services to its
customers, incidental expenses, which are commonly referred to as
"out-of-pocket" expenses, are billed to customers. Out-of-pocket expenses
include expenses such as airfare, mileage, hotel stays, out-of-town meals, and
telecommunication charges. The Company's policy provides for these expenses to
be recorded as both revenue and direct cost of services in accordance with the
provisions of EITF 01-14, "Income Statement Characterization of Reimbursements
Received for `Out-of-Pocket' Expenses Incurred."
Comprehensive income. Comprehensive income consists of net income (loss), net
unrealized gains (losses) on available-for-sale securities and foreign currency
translation adjustments.
Property, plant and equipment. Property, plant and equipment are carried at
cost. Major additions and improvements are capitalized while maintenance and
repairs which do not extend the lives of the assets are expensed as incurred.
Gain or loss on the disposition of property, plant and equipment is recognized
in operations when realized.
Depreciation. The Company provides for depreciation of property, plant and
equipment primarily on a straight-line basis over the following estimated useful
lives:
CLASS OF ASSETS USEFUL LIFE
Buildings and improvements 5 to 40 years
Machinery, equipment and furniture
and fixtures 3 to 7 years
Leasehold improvements Shorter of asset life or term of lease
Recoverability of Long-Lived Assets. Effective January 1, 2002, the Company
adopted Statement No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets, which addresses financial accounting and reporting for the
impairment or disposal of long-lived assets. While Statement No. 144 supersedes
FASB Statement No. 121, Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of, it retains many of the fundamental
provisions of that Statement.
1. Description of business and summary of significant accounting policies
(Continued)
The recoverability of long-lived assets, other than goodwill and intangible
assets with indefinite lives, is assessed whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable through future undiscounted net cash flows expected to be generated
by the asset. If such assets are considered to be impaired, the impairment is
measured by determining the amount by which the carrying value of the assets
exceeds the fair value of the assets. Assets to be disposed of are reported at
the lower of the carrying amount or fair value, less costs to sell.
The Company has investments in land of approximately $2.6 million, included in
other assets in the Consolidated Balance Sheet, which are currently held for
sale. Management believes the fair value of these investments exceed their
carrying value.
Intangible assets. The excess of cost over the fair value of net assets of
businesses acquired is recorded as goodwill and through December 31, 2001, was
amortized on a straight line basis over periods ranging from 5 to 40 years. The
Company capitalizes costs incurred to obtain and maintain patents and licenses.
Patent costs are amortized over the lesser of 17 years or the remaining lives of
the patents, and license costs over the lives of the licenses. The Company also
capitalizes costs incurred to obtain long-term debt financing. Such costs are
amortized on a straight line basis over the terms of the related debt and such
amortization is classified as interest expense in the Consolidated Statements of
Operations.
Effective January 1, 2002, the Company adopted SFAS No. 142, Goodwill and Other
Intangible Assets. SFAS No. 142 requires that goodwill and intangible assets
with indefinite useful lives no longer be amortized but instead tested for
impairment at least annually. SFAS No. 142 also requires that intangible assets
with definite useful lives be amortized over their respective estimated useful
lives to their estimated residual values.
The Company periodically assesses the recoverability of goodwill and intangible
assets with indefinite lives by a comparison of the estimated fair value of each
reporting unit to its carrying value. The estimated fair value of each reporting
unit exceeded the carrying value of each respective reporting unit. The Company
will perform its annual impairment review as of the end of each fiscal year.
As of the date of adoption (January 1, 2002), the Company had unamortized
goodwill in the amount of approximately $56 million and unamortized identifiable
intangible assets in the amount of approximately $1.4 million, all of which will
be subject to the transition provisions of Statement 142. Amortization expense
related to goodwill was $2.7 million and $2.8 million for the years ended
December 31, 2001 and 2000, respectively.
1. Description of business and summary of significant accounting policies
(Continued)
Sales of subsidiary stock. The Company recognizes gains and losses on sales of
subsidiary stock in its Consolidated Statements of Operations, except in
circumstances where the realization of the gain is not reasonably assured or the
sale relates to issuance of preferred stock.
Income taxes. Income taxes are accounted for under the asset and liability
method. Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and for operating loss and tax credit carryforwards. Deferred tax assets
and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
Income (loss) per share. Basic earnings (loss) per share is based upon the
weighted average number of common shares outstanding, including Class B common
stock, during the period.
Diluted earnings (loss) per share is based upon the weighted average number of
common shares outstanding during the period assuming the issuance of common
stock for all dilutive potential common stock equivalents outstanding.
1. Description of business and summary of significant accounting policies
(Continued)
Loss per share (EPS) for the years ended December 31, 2002, 2001 and 2000 are as
follows (in thousands, except per share amounts):
2002 2001 2000
---- ---- ----
Basic and Diluted EPS
Net loss $ (5,228) $ (945) $(25,392)
Weighted average shares
outstanding, basic and diluted 15,370 13,209 12,468
Basic loss per share $ (.34) $ (.09) $ (2.04)
Diluted loss per share (a) $ (.34) $ (.09) $ (2.04)
Basic loss 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. Diluted loss per share are based upon the
weighted average number of common shares outstanding during the period, assuming
the issuance of common shares for all dilutive potential common shares
outstanding.
(a) For the years ended December 31, 2002, 2001 and 2000, presentation of
the dilutive effect of stock options, warrants and convertible notes,
which totaled 612,000, 376,000 and 556,000 shares, respectively, are
not included since they are anti-dilutive.
Stock based compensation. The Company applies the intrinsic value-based method
of accounting prescribed by Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations, in
accounting for its fixed plan stock options. As such compensation expense would
be recorded on the date of grant only if the current market price of the
underlying stock exceeded the exercise price. The difference between the quoted
market price as of the date of the grant and the contractual purchase price of
shares is charged to operations over the vesting period. No compensation cost
has been recognized for fixed stock options with exercise prices equal to the
market price of the stock on the dates of grant and shares acquired by employees
under the Company's non-qualified stock option plan. SFAS No. 123, "Accounting
for Stock-Based Compensation," established accounting and disclosure
requirements using a fair value-based method of accounting for stock-based
employee compensation plans. As allowed by SFAS No. 123, the Company has elected
to continue to apply the intrinsic value-based method of accounting described
above, and has adopted the disclosure requirements of SFAS No. 123.
1. Description of business and summary of significant accounting policies
(Continued)
SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure - an amendment of SFAS No. 123" ("SFAS No. 148"), was issued in
December 2002 and is effective for the Company for the quarterly interim periods
beginning in 2003. SFAS No. 148 amends SFAS No. 123 and provides alternative
methods of transition for a voluntary change to the fair value method of
accounting for stock-based employee compensation. In addition, the statement
amends the disclosure requirements of SFAS No. 123 to require more prominent
disclosures in both annual and interim financial statements about the method of
accounting for stock-based compensation and the effect of the method used.
Pro forma net income and earnings per share disclosures as if the Company
recorded compensation expense based on the fair value for stock-based awards
have been presented in accordance with the provisions of SFAS No. 123, are as
follows for the years ended December 31, 2002, 2001 and 2000 (in thousands,
except per share amounts):
2002 2001 2000
---- ---- ----
Net loss As reported $(5,228) $ (945) $(25,392)
Proforma $(6,723) $(3,388) $(27,137)
Basic loss per share
As reported $ (.34) $ (.09) $ (2.04)
Proforma $ (.44) $ (.27) $ (2.18)
Diluted loss per share
As reported $ (.34) $ (.09) $ (2.04)
Proforma $ (.44) $ (.27) $ (2.18)
Pro forma net loss reflects only options granted since 1995. Therefore, the full
impact of calculating compensation cost for stock options under SFAS No. 123 is
not reflected in the pro forma net loss amounts presented above because
compensation cost is reflected over the options' vesting period and compensation
cost for options granted prior to January 1, 1995 is not considered.
At December 31, 2002, 2001 and 2000, the per share weighted-average fair value
of stock options granted was $2.78, $2.98 and $2.82, respectively, on the date
of grant using the modified Black Scholes option-pricing model with the
following weighted-average assumptions: 2002 - expected dividend yield 0%,
risk-free interest rate of 4.30%, expected volatility of 72.84% and an expected
life of 6.16 years; 2001 - expected dividend yield 0%, risk-free interest rate
of 4.78%, expected volatility of 66.13% and an expected life of 3.7 years; 2000
- - expected dividend yield 0%, risk-free interest rate of 6.45%, expected
volatility of 57.11% and an expected life of 4.7 years.
1. Description of business and summary of significant accounting policies
(Continued)
Use of estimates. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.
Concentrations of credit risk. Financial instruments that potentially subject
the Company to significant concentrations of credit risk consist principally of
cash investments and accounts receivable. The Company places its cash
investments with high quality financial institutions and limits the amount of
credit exposure to any one institution. With respect to accounts receivable,
approximately 22% are related to United States government contracts, and the
remainder are dispersed among various industries, customers and geographic
regions. In addition, the Company has investments in various public and private
equity securities, including HMS, Millennium, ISI, FSP and GSES.
Reclassifications. Certain prior year amounts in the financial statements and
notes thereto have been reclassified to conform to 2002 classifications.
Recent accounting pronouncements: In June 2001, the FASB issued Statement No.
143, Accounting for Asset Retirement Obligations, 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. This statement requires
that the fair value of a liability for an asset retirement obligation be
recognized in the period in which it is incurred if a reasonable estimate of
fair value can be made. This statement is effective for the Company in fiscal
2003. The Company has evaluated SFAS No. 143 and does not anticipate that the
impact of the new pronouncement would have a material impact on the Company's
consolidated financial statements.
Statement No. 144 also supersedes the accounting and reporting provisions of APB
Opinion No. 30, Reporting the Results of Operations - Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions, for the disposal of a segment of a business.
However, it retains the requirement in Opinion 30 to report separately
discontinued operations and extends that reporting to a component of an entity
that either has been disposed of (by sale, abandonment, or in a distribution to
owners) or is classified as held for sale. By broadening the presentation of
discontinued operations to include more disposal transactions, the FASB has
enhanced management's ability to provide information that helps financial
statement users to assess the effects of a disposal transaction on the ongoing
operations of an entity. Statement No. 144 is effective for fiscal years
beginning after December 15, 2001. The implementation of SFAS No. 144 did not
have an impact on the Company's consolidated financial statements.
1. Description of business and summary of significant
accounting policies (Continued)
During April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections
("SFAS No. 145"). Among other items, SFAS No. 145 updates and clarifies existing
accounting pronouncements related to reporting gains and losses from the
extinguishment of debt and certain lease modifications that have economic
effects similar to sale-leaseback transactions. The provisions of SFAS No. 145
are generally effective for fiscal years beginning after May 15, 2002, with
earlier adoption of certain provisions encouraged. The application of SFAS No.
145 did not have and is not expected to have a material impact o the Company's
consolidated financial statements.
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with
Exit or Disposal Activities ("SFAS No. 146"). This Statement requires companies
to recognize costs associated with exit or disposal activities when they are
incurred rather than at the date of a commitment to an exit or disposal plan.
The Company is required to adopt the provisions of SFAS No. 146 for exit or
disposal activities, if any, initiated after December 31, 2002. Although the
Company believes the adoption of SFAS No. 146 will not impact the consolidated
financial position or results of operations, it can be expected to impact the
timing of liability recognition associated with future exit activities, if any.
In November 2002, the FASB issued Interpretation No. 45, Guarantor's Accounting
and Disclosure Requirements for Guarantees Including Indirect Guarantees of
Indebtedness of Others ("FIN No. 45"). FIN No. 45 elaborates on the disclosures
for interim and annual reports regarding obligations under certain guarantees
issued by a guarantor. Under FIN No. 45, the guarantor is required to recognize
a liability for the fair value of the obligation undertaken in issuing the
guarantee at the inception of a guarantee. The recognition and measurement
provisions of FIN No. 45 are applicable on a prospective basis to guarantees
issued or modified after December 31, 2002. The disclosure requirements for FIN
No. 45 are effective for interim and annual financial statements issued after
December 15, 2002. The Company has evaluated FIN No. 45 and does not anticipate
that the impact of the new pronouncement would have a material impact on the
Company's consolidated financial statements.
In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities ("FIN No. 46"). FIN No. 46 explains how to identify
variable interest entities and how an enterprise assesses its interests in a
variable interest entity to decide whether to consolidate that entity. FIN No.
46 requires existing unconsolidated variable interest entities to be
consolidated by their primary beneficiaries if the entities do not effectively
disperse risks among parties involved. The provisions of FIN No. 46 are
effective immediately for all entities with 1. Description of business and
summary of significant accounting policies (Continued)
variable interests in variable interest entities created after December 31,
2002. The provisions of FIN No. 46 are effective for public entities with a
variable interest in a variable interest entity created prior to January 1, 2003
no later than the end of the first annual reporting period beginning after June
15, 2003. The Company is in the process of evaluating its interests in certain
entities to determine if any such entity will require consolidation under FIN
No. 46. If it is determined that the Company should consolidate any such entity,
the Company would recognize certain assets and debt on its consolidated balance
sheet and a cumulative adjustment for the accounting change in the consolidated
statement of operations.
In November 2002, the EITF reached a consensus on Issue No. 00-21, "Accounting
for Revenue Arrangements with Multiple Deliverables." This Issue provides
guidance on when and how to separate elements of an arrangement that may involve
the delivery or performance of multiple products, services and rights to use
assets into separate units of accounting. The guidance in the consensus is
effective for revenue arrangements entered into in fiscal periods beginning
after June 15, 2003. The transition provision allows either prospective
application or a cumulative effect adjustment upon adoption. The Company is
currently evaluating the impact of adopting this guidance.
2. Goodwill and intangible assets
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. As of
December 31, 2002, the Company had unamortized goodwill in the amount of
$57,491,000. The Company did not recognize any impairment as a result of the
adoption of this statement.
2. Goodwill and intangible assets (Continued)
The components of goodwill and intangible assets as of December 31, 2002 and
2001 are as follows (in thousands):
Original Cost or Accumulated
Carrying Value Additions Amortization Total
2002:
Amortizing intangible assets:
Patents and licenses $1,348 $ - $593 $755
------ ---------- ---- ----
Non-amortizing intangible assets:
Goodwill 55,988 1,503 - 57,491
------ ----- -------- ------
2001:
Amortizing intangible assets:
Patents and licenses 1,348 - 490 858
Goodwill 89,838 822 34,672 55,988
------ --- ------ ------
$91,186 $822 $35,162 $56,846
======= ==== ======= =======
Amortization expense for patents and licenses was $103,000 in 2002, $126,000 in
2001, and $162,000 in 2000. The weighted average amortization period as of
December 31, 2002 is seven years. Amortization expense for the next five years
is estimated to be approximately $100,000 per year.
Goodwill increased in 2002 and 2001 due to additional contingent payments made
for previous acquisitions as well as the impact of foreign currency
fluctuations.
2. Goodwill and intangible assets (Continued)
The following is a summary of proforma net income and earnings (loss) per share
for the years ended December 31, 2001 and 2000, as adjusted to remove the
amortization of goodwill and intangible assets with indefinite useful lives (in
thousands, except per share amounts):
2001 2000
---- ----
Net Income (loss)
As Reported $(945) $(25,392)
Proforma $ 488 $(23,685)
Basic and Diluted
Earnings (loss) Per Share
As Reported $ (.09) $ (2.04)
Proforma $ .02 $ (1.90)
3. Investments, marketable securities and notes receivable
Investments and note receivable
At December 31, 2002 and 2001, Investments and notes receivable were comprised
of the following:
December 31,
2002 2001
---------- ----------
Five Star Products, Inc. $6,317 $ 6,238
GSE Systems, Inc. 1,794 3,004
Hydro Med Sciences, Inc. 1,296
Other 422 419
------- --------
$8,533 $10,957
====== =======
(a) Five Star Products, Inc.
FSP is a distributor of home decorating, hardware and finishing products in the
northeast. The Company currently owns approximately 47.3% of the outstanding
common stock of FSP and would own approximately 50% if certain stock options
beneficially owned by the Company's officers were exercised. As of December 31,
2002, three officers of the Company served on the board of FSP (out of a total
of seven directors), one of whom resigned effective March 27, 2003. However,
effective August 1998, the Company entered into a Voting Agreement which limits
its operating and financial control of FSP. Pursuant to an amendment of such
agreement, the Company agreed that until June 30, 2004, it would vote its shares
of common stock of FSP (i) such that not more than 50% of FSP's directors will
be officers or directors of the Company and (ii) in the same manner and in the
same proportion as the remaining stockholders of FSP vote on all matters
presented to a vote of stockholders, other than the election of directors.
Therefore, the Company accounts for its investment in FSP under the equity
method.
3. Investments, marketable securities and notes receivable (Continued)
FSP is currently indebted to the Company in the amount of $4,500,000 pursuant to
an 8% senior unsecured note due September 30, 2004, as amended (the "Note"). On
August 2, 2002, the Company converted $500,000 of the original $5,000,000 Note
into 2,272,727 shares of common stock of FSP at a price of $.22 per share, which
was at a premium to the open market value of $0.17 at the time. As a result of
this transaction, the Company's ownership of FSP increased to approximately
47.3% from approximately 37%. All other terms of the Note remain unchanged. The
Note, as amended, is due in 2004, with interest due quarterly. The amendment,
which extended the due date of the Note until September 30, 2004, also provides
that the Company can receive quarterly payments of principal from FSP, if FSP
achieves certain financial performance benchmarks.
At December 31, 2002, the Company owned approximately 47.3% of FSP and accounts
for its investment in FSP using the equity method. At December 31, 2002, the
Company's investment in FSP was $6,317,000, including the $4,500,000 senior
unsecured 8% note. The Company recorded a write down on its investment of
$200,000 and $2,400,000 in 2001 and 2000, respectively, which are included in
Loss on investments. The Company's excess of its investment in FSP over its
basis of the underlying net assets, was approximately $265,000 at December 31,
2002.
In 1994 Jerome Feldman, Chairman and CEO of the Company was granted options to
purchase 250,000 shares of FSP from the Company at an exercise price of $.50.
These options expire in 2004.
Information relating to the Company's investment in FSP is as follows (in
thousands):
2002 2001
- -------------------------------------------------------------------------
Long-term note receivable $ 4,500 $ 5,000
Number of shares 7,103 4,830
Carrying amount of shares $1,817 $ 1,238
Equity income included in Investment
and other income, net $162 $ 155
- -------------------------------------------------------------------------
3. Investments, marketable securities and notes receivable (Continued)
Condensed financial information for FSP as of December 31, 2002 and 2001 and for
the years then ended is as follows (in thousands):
2002 2001
- -----------------------------------------------------------------------
Current assets $34,191 $35,045
Non current assets 1,142 1,139
Current liabilities 27,552 28,762
Non current liabilities 4,500 5,000
Stockholders' equity 3,281 2,422
Sales 94,074 94,908
Gross profit 16,613 16,054
Net income 391 417
(b) GSE Systems, Inc.
GSES designs, develops and delivers business and technology solutions by
applying high technology-related process control, data acquisition, simulation,
and business software, systems and services to the energy, process and
manufacturing industries worldwide. At December 31, 2002 and 2001, the Company
owned approximately 19.5% and 20.2%, respectively of GSES and accounts for its
investment in GSES using the equity method. Although the Company owns
approximately 19.5% of the common stock of GSES as of December 31, 2002, the
Company has accounted for its investment in GSES using the equity method of
accounting based upon management's conclusion that the Company has significant
influence with respect to the operations of GSES. Pursuant to the Company's
guarantee of GSES debt through March 23, 2003, the Company received a warrant to
purchase 150,000 shares of GSES common stock at an exercise price of $2.08 per
share, which expires on August 17, 2003. Additionally, pursuant to the extension
of the Company's guarantee of GSES debt in March 2003 (see Note 17), the Company
received 150,000 shares of GSES common stock. The Company recorded a write-down
on investments of $1,000,000 during 2000 which is included in Loss on
Investments. The Company's excess of its investment in GSES over its basis of
the underlying net assets of GSES was approximately $212,000 at December 31,
2002.
Information relating to the Company's investment in GSES is as follows (in
thousands):
2002 2001
- ------------------------------------------------------------------------------
Number of shares 1,159 1,159
Carrying amount $ 1,794 $ 3,004
Equity (loss) income included in Investment
and other income, net $(1,210) $ 83
- ------------------------------------------------------------------------------
3. Investments, marketable securities and notes receivable (Continued)
Condensed financial information for GSES as of December 31, 2002 and 2001 and
for the years then ended is as follows (in thousands):
- ------------------------------------------------------------------------------
2002 2001
- ------------------------------------------------------------------------------
Current assets $17,202 $19,622
Non current assets 11,692 14,052
Current liabilities 11,116 12,604
Non current liabilities 9,617 7,218
Stockholders' equity 8,111 13,852
Revenue 43,116 50,331
Gross profit 11,315 13,950
Net (loss) income (5,943) 259
- ------------------------------------------------------------------------------
(c) Hydro Med Sciences, Inc.
HMS is a specialty pharmaceutical company engaged in the development and
commercialization of prescription pharmaceuticals principally utilizing HMS's
patented Hydron drug delivery technology.
Prior to June 2000, HMS operated as a division of the Company, however, in
connection with an offering of the Company's convertible subordinated
exchangeable notes (see Note 7(a)), HMS was incorporated as a separate company
and became a wholly-owned subsidiary of the Company.
On December 27, 2001, HMS completed a $7 million private placement of HMS Series
A Convertible Preferred Stock (the "Preferred Stock") to certain institutional
investors. The Company currently owns 100% of HMS's common stock but no longer
has financial and operating control of HMS. As a condition of the private
placement, the Company contractually gave up operating control over HMS through
an Investors Rights Agreement. Therefore, through December 27, 2001, the
operating results of HMS are consolidated within the Consolidated Statements of
Operations. However, subsequent to that date the Company accounts for its
investment in HMS under the equity method. Due to HMS's operating losses during
2002, the Company's investment in HMS as of December 31, 2002 was written down
to zero.
3. Investments, marketable securities and notes receivable (Continued)
The Preferred Stock is convertible at any time at the option of the holder into
approximately 41% of HMS's common stock and participates in dividends with HMS
common stock on an as converted basis. Certain of the Preferred Stock holders
hold the HMS Notes which can be exchanged for 19.9% of the outstanding common
stock of HMS common stock on a fully diluted basis or into shares of the
Company's common stock. If such holders exercise the exchange right and the
Preferred Stock is converted to common stock of HMS, the Company's ownership of
HMS would then be reduced to approximately 47%.
Marketable securities
At December 31, 2002 and 2001, Marketable securities were comprised of the
following:
December 31,
2002 2001
------ -------
Millennium Cell Inc. $5,552 $19,341
Other 45 102
------ --------
$5,597 $19,443
====== =======
(a) Millennium Cell Inc.
Millennium Cell Inc. ("Millennium") is a development-stage company that has
created a proprietary technology to safely generate and store hydrogen or
electricity from environmentally friendly raw materials. As of December 31, 2002
and 2001, the Company had an 8% and 14% ownership interest, respectively, in
Millennium, representing approximately 2,325,000 and 3,703,000 shares, including
approximately 349,000 and 445,000 shares of common stock subject to options
which were granted to the Company's employees to acquire Millennium shares from
the Company's holdings. The Company's shares (excluding the 349,000 shares
subject to options) have been pledged to its bank to secure its credit facility.
On August 14, 2000, Millennium completed an IPO of 3,000,000 shares of common
stock at a price of $10 per share. Based upon the consummation of the IPO, which
reduced the Company's holdings in Millennium from approximately 27% to
approximately 22%, and certain organizational changes, including lack of board
representation, the Company believed that it did not have significant influence
on the operating and financial policies of Millennium and as such believed that
it was appropriate to account for this investment under the cost method of
accounting.
3. Investments, marketable securities and notes receivable (Continued)
On August 23, 2000, the Company entered into an agreement to sell 1,000,000
shares of Millennium. As the Company intended to dispose of these shares within
the near term, the Company classified these shares as trading securities. During
the fourth quarter of 2000, the Company sold 138,500 shares of Millennium. As a
result of the sale of the shares, the Company recognized a gain of $1,818,434.
Therefore, at December 31, 2000, the Company owned 861,500 shares included in
trading securities.
In 2001, the Company sold the remaining 861,500 shares for proceeds of
$9,141,440. In addition, the Company sold approximately 1,220,000 shares from
available for sale securities for $5,482,216. For the year ended December 31,
2001, the Company has recognized a net gain of $4,294,000, which is included in
gain on marketable securities, net. The approximately 3,703,000 shares remaining
were classified as available for sale securities. At December 31, 2001, these
shares had a fair value of approximately $19,341,000.
In 2002, the Company sold approximately 1,286,000 shares from available for sale
securities for $3,833,000. For the year ended December 31, 2002, the Company has
recognized a net gain of $2,267,000 which is included in gain on marketable
securities, net. The approximately 2,325,000 shares remaining are classified as
available for sale securities at December 31, 2002. These shares had a fair
value of approximately $5,552,000.
On February 11, 2000, the Company granted options to certain of its employees
pursuant to the GP Strategies Corporation Millennium Cell, LLC Option Plan (the
"Millennium Option Plan") to purchase an aggregate of approximately 547,000 of
its shares of Millennium common stock, of which there are currently
approximately 349,000 options outstanding. These options vest over either a one
year or two year period and expire on June 30, 2003, as amended. The Company may
receive approximately $500,000 (of which approximately $177,000 was received in
2001 and 2002) upon exercise of all options pursuant to the Millennium Option
Plan. At December 31, 2001, the Company recorded net deferred compensation of
$30,000, to be amortized over the remaining vesting period of the options, and a
liability to employees of $767,000 and $2,008,000 at December 31, 2002 and
December 31, 2001, respectively. These amounts are included in prepaid expenses
and other current assets and as accounts payable and accrued expenses,
respectively, in the accompanying Consolidated Balance Sheets. Pursuant to the
vesting provisions of the Millennium Option Plan, the Company recorded a
non-cash compensation (credit) expense of $(1,211,000), $(2,370,000), and
$3,809,000 for the years ended December 31, 2002, 2001, and 2000, respectively,
which is included in selling, general and administrative expenses in the
accompanying Consolidated Statement of Operations.
3. Investments, marketable securities and notes receivable (Continued)
Information relating to the Company's investment in Millennium is as follows at
December 31, 2002 and 2001 (in thousands):
- ----------------------------------------------------------------------------
2002 2001
- ----------------------------------------------------------------------------
Number of shares 2,325 3,703
Available-for-sale equity securities,
at market $5,552 $19,341
- ----------------------------------------------------------------------------
(b) Interferon Sciences, Inc.
ISI is a biopharmaceutical company in which the Company owns 181,201 shares at
December 31, 2002 and 2001 with a market value of $9,000 and $8,000,
respectively. In an agreement dated March 25, 1999, the Company agreed to lend
ISI $500,000 (the "ISI Debt"). In return, ISI granted the Company (i) a first
mortgage on ISI's real estate, (ii) a two-year option to purchase ISI's real
estate, provided that ISI has terminated its operations and certain other
specified ISI debt has been repaid, and (iii) a two-year right of first refusal
in the event ISI desires to sell its real estate. ISI issued the Company 500,000
shares of ISI common stock and a five-year warrant to purchase 500,000 shares of
ISI common stock at a price of $1 per share as a loan origination fee. Pursuant
to the agreement, as amended, ISI issued a Note due March 15, 2002, to the
Company for $500,000 of which approximately $300,000 and $400,000 is outstanding
as of December 31, 2002 and 2001, respectively which is included in accounts and
other receivables on the Consolidated Balance Sheets. Interest accrues at the
rate of 6% per annum.
In March 2003, the Company and ISI entered into an agreement pursuant to which
the Company agreed until May 31, 2003, to forbear from exercising its rights as
a result of defaults by ISI under the terms of the ISI Debt. In exchange for
such forbearance, the Company agreed to receive shares of common stock of
Hemispherx Biopharma Inc. ("HEB") with a market value of $425,000 (the
"Guaranteed Shares") in full settlement of all of ISI's obligations, however,
the Company retains all of its rights in the collateral under the ISI Debt until
its receipt of the Guaranteed Shares. The Agreement obligates HEB to register
the Guaranteed Shares, sets periodic limits on the amount of shares the Company
may sell and requires HEB to pay the Company an amount equal to the product
received by multiplying (i) the number of Guaranteed Shares unsold on September
11, 2005 and (ii) $1.59.
4. Property, plant and equipment
Property, plant and equipment consists of the following (in thousands):
December 31, 2002 2001
- ------------------------------------------------------------------------
Land $ 915 $ 915
Buildings and improvements 3,525 3,515
Machinery and equipment 11,884 12,849
Furniture and fixtures 14,929 16,111
Leasehold improvements 2,649 4,147
- ------------------------------------------------------------------------
33,902 37,537
Accumulated depreciation and amortization (25,603) (28,819)
- ------------------------------------------------------------------------
$ 8,299 $ 8,718
- ------------------------------------------------------------------------
As of December 31, 2002, the Company wrote off certain fully depreciated assets
as a result of its General Physics and Corporate office relocations of
approximately $5,100,000.
5. Short-term borrowings
The Company and certain of its wholly owned subsidiaries entered into an Amended
and Restated secured $40 million Revolving Credit (the "Amended Agreement") with
various banks on December 14, 2001 which amended in its entirety the Company's
former credit facility discussed below. The Amended Agreement reduced the
commitment pursuant to the revolving facility to $40 million (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
the Amended Agreement provides that the commitment cannot be reduced below $35
million as a result of any additional assets sales.
The current amount outstanding under the revolving credit agreement is
$22,058,000. 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 March 31, 2003, there is $4,600,000 available under the
facility, as amended.
5. Short-term borrowings (Continued)
The Company was not in compliance with certain financial covenants of its
Amended Agreement for the year ended December 31, 2002. The Company entered into
a First Amendment and Limited Waiver to the Amended Agreement with various banks
as of March 31, 2003 (the "First Amendment"). The First Amendment provided for a
waiver of certain financial covenants in the Amended Agreement and provided
certain revised financial covenants for periods beginning after December 31,
2002. The First Amendment further reduced the commitment under the Amended
Agreement to $30 million from $35 million and limited the availability of
borrowings under the revolving loan commitment to $27 million for the period
commencing March 31, 2003 through May 31, 2003 (the "First Test Period") and $26
million for the period commencing on June 1, 2003 and ending on delivery of the
Company's compliance certificate for the quarter ending September 30, 2003 (the
"Second Test Period"; and together with the First Test Period, the "Test
Periods"). The Company does not anticipate needing to borrow in excess of $27
million or $26 million, respectively during the Test Periods. The First
Amendment provides that the available revolving commitment amount may be
increased to $30 million after the Second Test Period, provided that no default
or event of default has occurred and is continuing under the Amended Agreement,
as amended by the First Amendment. The First Amendment also added a new
financial covenant with respect to minimum consolidated EBITDA effective March
31, 2003. The Company is currently negotiating with certain other lenders with
respect to obtaining a new facility for its future financing requirements.
The Company and General Physics Canada Ltd. (GP Canada), a wholly-owned
subsidiary of General Physics, had previously entered into a credit agreement,
dated as of June 15, 1998, with various banks providing for a secured credit
facility of $80,000,000 (the "Credit Facility") comprised of a revolving credit
facility of $65,000,000 expiring on June 15, 2001 and a five-year term loan of
$15,000,000. The five year term loan was payable in quarterly installments of
$187,500 commencing on October 1, 1998 with a final payment of $11,250,000 due
on June 15, 2003. All amounts outstanding under the term loan were repaid in
2001 in connection with the Company's Amended Agreement.
6. Accounts payable and accrued expenses
Accounts payable and accrued expenses are comprised of the following (in
thousands):
December 31, 2002 2001
- -----------------------------------------------------------------------------
Accounts payable $6,324 $ 6,661
Payroll and related costs 4,617 2,340
Restructuring reserve 221 1,162
Other 6,390 6,926
- -----------------------------------------------------------------------------
$ 17,552 $ 17,089
- -----------------------------------------------------------------------------
7. Long-term debt
Long-term debt is comprised of the following (in thousands):
December 31, 2002 2001
- ----------------------------------------------------------------------------
6% Convertible Exchangeable Notes (a) $2,640 $2,640
Senior Subordinated Debentures (b) 558 641
MXL Pennsylvania Mortgage (c) 1,505 1,605
MXL Illinois Mortgage (d) 1,212 1,237
Other (e) 997 740
- ----------------------------------------------------------------------------
$6,912 $6,863
Less current maturities (3,610) (637)
- ----------------------------------------------------------------------------
$3,302 $6,226
- ----------------------------------------------------------------------------
7. Long-term debt (Continued)
(a) In July 2000, the Company in a private placement transaction with two
institutional investors, received $2,640,000 for 6% Convertible Exchangeable
Notes due June 30, 2003 (the "HMS Notes"). The HMS Notes, at the option of the
holders, may be exchanged for 19.9% of the outstanding capital stock of HMS on a
fully diluted basis, as defined in the HMS Notes, or into shares of the
Company's Common Stock at a conversion rate of $7.50 per share, subject to
adjustment, as provided in the HMS Notes. The holders of the HMS Notes can
convert or exchange at any time prior to June 30, 2003. The HMS Notes are
subordinated to borrowings under the Amended Agreement.
(b) In 1994, GP issued $15 million of 6% Senior Subordinated Debentures of which
the Company owned approximately 92.7%. The Debentures are subordinated to
borrowings under the Amended Agreement. During the fourth quarter of 2000, the
Company converted its portion of GP's Senior Subordinated Debentures to
stockholder's equity of GP. At December 31, 2002, the remaining carrying value
of the Debentures outstanding was $558,000 and are repayable through 2004.
(c) On March 8, 2001, MXL entered into a loan in the amount of $1,680,000,
secured by a mortgage covering the real estate and fixtures on its property in
Pennsylvania. 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, when the
remaining amount outstanding of approximately $680,000 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 short-term borrowings pursuant to the Amended Agreement
described in Note 5.
(d) 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 in the
amount 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
the Amended Agreement described in Note 5.
(e) Represents primarily capital lease obligations for certain equipment.
7. Long-term debt (Continued)
Aggregate annual maturities of long-term debt at December 31, 2002 are as
follows (in thousands):
2003 $ 3,610
2004 802
2005 174
2006 1,221
2007 100
Thereafter 1,005
8. Employee benefit plans
GP (including the Company's employees) maintains a Retirement Savings Plan (the
Plan) for employees who have completed ninety days of service with GP. The Plan
permits pre-tax contributions to the Plan by participants pursuant to Section
401(k) of the Internal Revenue Code of 1% to 14% of base compensation. GP
matches participants' contributions up to a specific percentage of the first 7%
of base compensation contributed for employees who have completed one year of
service with GP and may make additional matching contributions at its
discretion. In 2001, 2000 and 1999 the Company did not make any discretionary
matching contributions. The Company matches participants' contributions in
shares of the Company's Common Stock up to 57% of monthly employee salary
deferral contributions. In 2002, 2001, and 2000 the Company contributed 270,000
shares, 291,185 shares and 308,000 shares of the Company's common stock directly
to the Plan with a value of approximately $1,058,000, $1,151,000 and $1,340,000,
respectively.
9. Income taxes
The components of income tax expense (benefit) are as follows (in thousands):
Years ended December 31, 2002 2001 2000
- --------------------------------------------------------------------------------
Current
State and local 370 $ 537 $ 717
Foreign 361 186 198
- ------------------------------------------------------------------------------
Total current 731 723 915
- ------------------------------------------------------------------------------
Deferred
Federal (1,420) 1,392 (9,322)
State and local (130) 400 (459)
Foreign (7)
- -------------------------------------------------------------------------------
Total deferred (1,550) 1,792 (9,788)
- -------------------------------------------------------------------------------
Total income tax expense (benefit) $ (819) $ 2,515 $ (8,873)
- -------------------------------------------------------------------------------
9. Income taxes (Continued)
The deferred expense (benefit) excludes activity in the net deferred tax assets
relating to tax on appreciation (depreciation) in available-for-sale securities,
which is recorded directly to stockholders' equity.
The difference between the expense (benefit) for income taxes computed at the
statutory rate and the reported amount of tax expense (benefit) is as follows:
- -----------------------------------------------------------------------------------------------------------
December 31, 2002 2001 2000
- -----------------------------------------------------------------------------------------------------------
Federal income tax rate (35.0%) 35.0% (35.0%)
Foreign, State and local taxes net of Federal benefit 6.8 32.6 1.0
Items not deductible - primarily meals
and entertainment 3.0 23.8 2.0
Valuation allowance adjustment (6.9) (13.7)
Net losses from foreign operations for which
no tax benefit has been provided 1.7 41.2 18.9
Tax effect recorded in stockholders' equity for
sale of available for sale securities 9.2 32.0
Other 0.8 2.5 0.9
- -----------------------------------------------------------------------------------------------------------
Effective tax rate expense (benefit) (13.5%) 160.2% (25.9%)
- -----------------------------------------------------------------------------------------------------------
In 2002, the Company recorded an income tax benefit of $819,000. The current
income tax provision of $731,000 represents estimated state taxes of $370,000
and foreign taxes of $361,000. The deferred income tax benefit of $1,550,000
primarily represents a benefit for the future utilization of the Company's
domestic net operating losses.
In 2001, the Company recorded income tax expense of $2,515,000. The current
income tax provision of $723,000 represents estimated state taxes of $537,000
and foreign taxes of $186,000.
In 2000, the deferred income tax benefit of $9,788,000 primarily represents a
benefit for the future utilization of the Company's domestic net operating
losses.
The Company had an effective tax rate of 14% for the year ended December 31,
2002. This rate was primarily due to certain nondeductible items, net losses
from foreign operations for which no tax benefit has been provided, and the tax
treatment for financial statement purposes of the sale by the Company in 2002 of
certain shares of available-for-sale securities accounted for pursuant to SFAS
No.115 "Accounting for Certain Investments in Debt and Equity Securities."
9. Income taxes (Continued)
The Company had an effective tax rate of 160% for the year ended December 31,
2001. This rate was primarily due to the tax treatment for financial statement
purposes of the sale by the Company in 2001 of certain shares of
available-for-sale securities accounted for pursuant to SFAS No.115.
The Company had an effective tax rate of 26% for the year ended December 31,
2000, which was primarily due to net losses from foreign operations for which no
tax benefit has been provided.
As of December 31, 2002, the Company has approximately $25,063,000 of Federal
net operating loss carryforwards. These carryforwards expire in the years 2005
through 2020. Foreign net operating losses at December 31, 2002 were
approximately $34,835,000. In addition, the Company has approximately $987,000
of available credit carryovers of which approximately $15,000 expires in 2003,
and approximately $972,000 may be carried over indefinitely.
The tax effects of temporary differences between the financial reporting and tax
bases of assets and liabilities that are included in the net deferred tax
(liability) asset are summarized as follows (in thousands):
December 31, 2002 2001
Deferred tax assets:
Allowance for doubtful accounts $ 337 $ 208
Accrued liabilities 883 1,071
Net Federal and Foreign operating loss carryforwards 20,221 18,425
Tax credit carryforwards 987 1,492
Restructuring reserves 484 1,032
- -----------------------------------------------------------------------------
Deferred tax assets 22,912 22,228
- -----------------------------------------------------------------------------
Deferred tax liabilities:
Property and equipment, principally due to
difference in depreciation and amortization 1,049 249
Investment in partially owned companies 556 6,825
- -----------------------------------------------------------------------------
Deferred tax liabilities 1,605 7,074
- -----------------------------------------------------------------------------
Net deferred tax assets 21,307 15,154
Less valuation allowance (10,461) (10,865)
- -----------------------------------------------------------------------------
Net deferred tax (liability) asset $10,846 $4,289
- -----------------------------------------------------------------------------
In 2002, the valuation allowance decreased by $404,000 attributable primarily to
the expiration of tax credit carryforwards. In 2001, the valuation allowance
increased by $533,000, and was attributable to foreign net operating losses for
which no tax benefit has been provided.
3
9. Income taxes (Continued)
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of the deferred tax assets
is dependent upon the generation of future taxable income during the periods in
which temporary differences are deductible. Management considers the scheduled
reversal of deferred tax liabilities, projected future taxable income, and tax
planning strategies in making this assessment. Based upon these factors,
management believes it is more likely than not that the Company will realize the
benefits of deferred tax assets, net of the valuation allowance. The valuation
allowance primarily relates to foreign net operating loss carryforwards for
which the Company does not believe the benefits will be realized. As of December
31, 2002, the Company has recorded a net deferred tax asset of $10,846,000.
10. Comprehensive income (loss)
The following are the components of comprehensive income (loss) (in thousands):
Year ended December 31,
-----------------------------------------------
2002 2001 2000
----------- --------- ---------
Net loss $ (5,228) $ (945) $(25,392)
Other comprehensive (loss) income,
before tax:
Net unrealized gain (loss) on
available-for-sale-securities (12,130) (30,802) 45,667
Foreign currency translation adjustment (492) 24 78
---------- ------------ -----------
Comprehensive (loss) income before tax (11,622) (31,723) 20,353
Income tax benefit (expense) related to
items of other comprehensive
income (loss) 4,718 11,905 (17,691)
--------- -------- --------
Comprehensive income (loss), net of tax $(13,132) $(19,818) $ 2,662
========= ======== ========
The components of accumulated other comprehensive income (loss) are as follows:
December 31, 2002 2001 2000
- ----------------------------------------------------------------------------------------------------------
Net unrealized gain (loss) on
available-for-sale-securities $ 2,680 $ 14,810 $ 45,612
Foreign currency translation adjustment (1,149) (657) (681)
------- --------- ---------
Accumulated other comprehensive
income (loss) before tax 1,531 14,153 44,931
Accumulated income tax expense related
to items of other comprehensive
loss (1,071) (5,789) (17,694)
---------- --------- ---------
Accumulated other comprehensive
income (loss), net of tax $ 460 $ 8,364 $ 27,237
====== ======== ========
11. Common Stock, stock options and warrants
(a) Under the Company's non-qualified stock option plan, employees and certain
other parties may be granted options to purchase shares of common stock.
Although the Plan permits options to be granted at a price not less than 85% of
the fair market value, the Plan options primarily are granted at the fair market
value of the common stock at the date of the grant and are exercisable over
periods not exceeding ten years from the date of grant. Shares of common stock
may also be reserved for issuance pursuant to other agreements. Changes in
options and warrants outstanding during 2000, 2001 and 2002, and options and
warrants exercisable and shares reserved for issuance at December 31, 2002,
2001, and 2000 are as follows:
Options and warrants Price Range Number Weighted-Average
outstanding per share of shares Exercise Price
- -------------------------------------------------------------------------------------------------------------------
December 31, 1999 $4.59 - 24.00 2,806,015 $9.21
- -------------------------------------------------------------------------------------------------------------------
Granted 3.375 - 6.00 666,133 4.66
Exercised 3.375 - (69,200) 3.38
Terminated 5.375 - 17.25 (897,600) 10.46
- -------------------------------------------------------------------------------------------------------------------
December 31, 2000 3.375 - 24.00 2,505,348 7.74
- -------------------------------------------------------------------------------------------------------------------
Granted 3.00 - 4.61 452,000 4.47
Terminated 4.61 - 24.00 (166,683) 7.85
- -------------------------------------------------------------------------------------------------------------------
December 31, 2001 3.00 - 15.375 2,790,665 7.37
- -------------------------------------------------------------------------------------------------------------------
Granted 3.60 - 4.75 845,800 4.13
Exercised 3.60 - 4.61 (1,233) 4.08
Terminated 3.60 - 14.625 (722,235) 7.87
- -------------------------------------------------------------------------------------------------------------------
December 31, 2002 3.00 15.375 2,912,997 6.57
- -------------------------------------------------------------------------------------------------------------------
Options and warrants exercisable
December 31, 2000 4.59 - 24.00 1,464,106 7.64
- -------------------------------------------------------------------------------------------------------------------
December 31, 2001 3.00 - 15.375 2,058,096 7.12
- -------------------------------------------------------------------------------------------------------------------
December 31, 2002 3.00 - 15.375 2,096,199 6.39
- -------------------------------------------------------------------------------------------------------------------
Shares reserved for issuance
December 31, 2000 3,816,571
- -------------------------------------------------------------------------------------------------------------------
December 31, 2001 3,938,303
- -------------------------------------------------------------------------------------------------------------------
December 31, 2002 3,937,070
- -------------------------------------------------------------------------------------------------------------------
At December 31, 2002, the weighted average remaining contractual life of all
outstanding options was 4.2 years.
11. Common Stock, stock options and warrants (Continued)
The following table summarizes information about the Plan's options outstanding
at December 31, 2002:
Weighted
Range Number Average Weighted
Of Outstanding Years Average
Exercise Prices Remaining Exercise Price
- -------------------------------------------------------------------------------------------------------------------
$3.00 - $ 7.75 1,885,497 5.2 $5.30
$8.00 - $10.41 545,000 1.6 $8.14
$11.15 - $15.375 182,500 2.0 $14.55
- -------------------------------------------------------------------------------------------------------------------
$ 3.00 - $15.375 2,612,997 4.2 $ 6.76
- -------------------------------------------------------------------------------------------------------------------
The following table summarizes the Class B Common Stock options as follows:
Options Price Range Number Weighted-Average
outstanding per share of shares Exercise Price
- ----------------------------------------------------------------------------
December 31, 2000 8.69 350,000 8.69
- ----------------------------------------------------------------------------
Terminated 8.69 (350,000) 8.69
- ----------------------------------------------------------------------------
December 31, 2001 -0-
- ----------------------------------------------------------------------------
December 31, 2002 -0-
- ----------------------------------------------------------------------------
Options exercisable
December 31, 2000 8.69 350,000 8.69
- ----------------------------------------------------------------------------
December 31, 2001 -0-
- ----------------------------------------------------------------------------
December 31, 2002 -0-
- ----------------------------------------------------------------------------
The holders of Common Stock are entitled to one vote per share and the holders
of Class B Common Stock are entitled to ten votes per share on all matters
without distinction between classes, except when approval of a majority of each
class is required by statute. The Class B Common Stock is convertible at any
time, at the option of the holders of such stock, into shares of common stock on
a share-for-share basis. At December 31, 2002, 2001, and 2000, shares reserved
for issuance of common stock were primarily related to options and warrants and
the conversion of long-term debt.
The Company reserved 950,000 shares of its Common Stock for issuance upon
conversion of Class B Common Stock at December 31, 2000. The Company reserved an
additional 300,000 shares for a private placement transaction (see Note 11(b))
bringing the total to 1,250,000 shares reserved for issuance upon conversion of
Class B Common Stock at December 31, 2002 and 2001.
At December 31, 2002, 2001, and 2000, options outstanding included options for
353,623, 239,498 and 239,498 shares, respectively, for certain executive
officers.
11. Common Stock, stock options and warrants (Continued)
(b) Pursuant to an agreement dated as of October 19, 2001 (the "Stock Purchase
Agreement"), the Company sold to Bedford Oak Partners, LP (the "Bedford Oak") in
a private placement transaction, 300,000 shares of Class B Common Stock (the
"Bedford Class B Shares") for $900,000. Upon the disposition of any of the
Bedford Class B Shares (other than to an affiliate of Bedford Oak who agrees to
be bound by the provisions of the Stock Purchase Agreement) or at the request of
the Board of Directors of the Company, Bedford Oak is required to exercise the
right to convert all of the Bedford Class B Shares then owned by Bedford Oak
into an equal number of shares of common stock of the Company (the "Bedford
Underlying Shares"). The Company was required to file a registration statement
to register the resale of the Bedford Underlying Shares by Bedford Oak, which
registration statement was declared effective as of August 13, 2002.
On any date prior to October 19, 2003 during which Bedford Oak was not
able to resell the Bedford Underlying Shares pursuant to the registration
statement, Bedford Oak had the right to require the Company to purchase all, but
not less than all, of the Shares and the Bedford Underlying Shares then held by
Bedford Oak for a purchase price as specified in the Stock Purchase Agreement.
The put option obligation expired upon the effectiveness of the registration
statement on August 13, 2002 covering the Bedford Underlying Shares.
At December 31, 2001, the Company had a put option obligation of
$240,000 relating to the above-described Bedford transaction, however, the put
option obligation expired in August 2002. This amount had been recorded in
additional paid in capital in the accompanying Consolidated Balance Sheet and
was deemed to be a dividend for purposes of the basic and diluted loss per share
calculation.
Pursuant to an agreement dated May 3, 2002, the Company agreed to sell
to Bedford Oak in a private placement transaction 1,200,000 shares of Common
Stock (the "Bedford Common Shares") of the Company for an aggregate purchase
price of $4,200,000. Harvey Eisen, the managing member of Bedford Oak Advisors,
LLC, the investment manager of Bedford Oak, was elected a director of the
Company in July 2002.
Pursuant to an agreement dated May 3, 2002, the Company sold 100,000
shares of Common Stock for $350,000 to Marshall Geller (the "Geller Shares"), a
director of the Company, in a private placement transaction.
Pursuant to an agreement dated May 3, 2002 ( the "EGI Agreement"), 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 Common Stock (the "EGI Class B Shares")
for $1,260,000. Mark Radzik, a designee of EGI, was elected a director of the
Company in July 2002.
11. Common Stock, stock options and warrants (Continued)
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
convert all of the 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.
On August 13, 2002, a registration statement covering the resale of the
Bedford Underlying Shares, the Bedford Common Shares, the EGI Common Shares, the
EGI Underlying Shares and the Geller Shares was declared effective by the SEC.
(c) In June 2001, the Company entered into an agreement with a financial
consulting firm to provide certain services for which the Company, in addition
to cash payments, agreed to issue warrants to purchase 300,000 shares of the
Company's common stock at an exercise price of $4.60 per share. In connection
with the issuance of these warrants, the Company recorded an expense of $750,000
in 2001 for these warrants which is included in selling, general and
administrative expense in the Consolidated Statement of Operations.
(d) On February 11, 2000, an affiliate of Andersen, Weinroth & Co., L.P.
("Andersen Weinroth") purchased 200,000 shares of Class B Common Stock for
$1,200,000. In addition, a general partner of Andersen Weinroth joined the Board
of Directors of the Company. On October 11, 2001, this general partner resigned
from the Board of Directors of the Company and pursuant to an agreement dated as
of February 11, 2000, on October 11, 2001, this general partner converted the
200,000 shares of Class B Common Stock into an equal number of shares of Common
Stock.
12. Business segments
The operations of the Company currently consist of the following three business
segments, by which the Company is managed.
The Company's principal operating subsidiary is GP. GP operates in two business
segments. The Manufacturing & Process Segment 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 Segment provides IT training programs and solutions,
including Enterprise Solutions and comprehensive career training and transition
programs.
The Optical Plastics Segment, which consists of MXL, manufactures coated and
molded plastic products.
Effective January 1, 2002, HMS no longer exists as a business segment (see Note
3). Information presented for Corporate & Other includes financial information
for the operations and assets of the HMS subsidiary as of and for the years
ended December 31, 2001 and 2000 prior to its treatment as an equity investment.
The management of the Company does not allocate the following items by segment:
Investment and other income, interest expense, selling, general and
administrative expenses, depreciation and amortization expense, income tax
expense, significant non-cash items and long-lived assets. Inter-segment sales
are not significant.
12. Business segments (Continued)
The following tables set forth the sales and operating results attributable to
each line of business and includes a reconciliation of the segments sales to
consolidated sales and operating results to consolidated income (loss) before
income taxes (in thousands):
Years ended December 31, 2002 2001 2000
- --------------------------------------------------------------------------------------------
Sales
Manufacturing & Process $134,255 $164,361 $161,859
Information Technology 7,982 11,061 24,593
Optical Plastics 9,996 11,184 10,998
Corporate & Other 5 17
- ------------------------------------------------------------------------------------------
$152,233 $186,611 $197,467
- ------------------------------------------------------------------------------------------
Operating results
Manufacturing & Process $1,712 $ 8,679 $ 10,870
Information Technology (182) 1,596 (7,331)
Optical Plastics 429 1,192 1,272
Corporate & Other (5,506) (3,285) (2,131)
- -------------------------------------------------------------------------------------------
Total operating profit (3,547) 8,182 2,680
Interest expense (2,770) (4,733) (5,616)
Corporate general and administrative
expenses, amortization of goodwill,
and Investment and other
income, net 270 (1,879) (31,329)
- -------------------------------------------------------------------------------------------
(Loss) income from operations before
income taxes $ (6,047) $ 1,570 $ (34,265)
- -------------------------------------------------------------------------------------------
Operating profits represent sales less operating expenses. In computing
operating profits, none of the following items have been added or deducted:
general corporate expenses at the holding company level, restructuring charges,
foreign currency transaction gains and losses, investment income, loss on
investments, loss on sale of assets, amortization of goodwill and interest
expense. General corporate expenses at the holding company level, which are
primarily salaries, occupancy costs, professional fees and costs associated with
being a publicly traded company, totaled approximately $4,882,000 (net of a
non-cash credit to compensation expense of $1,211,000 relating to a deferred
compensation plan), $3,033,000 (net of a non-cash credit to compensation expense
of $2,370,000) and $7,632,000 (including a non cash charge to compensation
expense of $3,809,000) for the years ended December 31, 2002, 2001 and 2000,
respectively. For the years ended December 31, 2002, 2001 and 2000, sales to the
United States government and its agencies represented approximately 32%, 29% and
24%, respectively, of sales and are included in the Manufacturing & Process and
Information Technology Segments.
12. Business segments (Continued)
Additional information relating to the Company's business segments is as follows
(in thousands):
December 31, 2002 2001 2000
- -------------------------------------------------------------------------------
Identifiable assets
Manufacturing & Process $ 61,896 $ 67,156 $ 78,761
Information Technology 8,978 8,787 9,283
Optical Plastics 9,818 9,929 9,807
Corporate & Other 64,213 74,952 114,727
- -------------------------------------------------------------------------------
144,905 $160,824 $212,578
- -------------------------------------------------------------------------------
Years ended December 31, 2002 2001 2000
- --------------------------------------------------------------------------------
Additions to property,
plant, and equipment, net
Manufacturing & Process $1,523 $ 557 $ 530
Information Technology 38 58
Optical Plastics 368 693 255
Corporate & Other 25 163 197
- -------------------------------------------------------------------------------
$ 1,916 $ 1,451 $ 1,040
- -------------------------------------------------------------------------------
Years ended December 31, 2002 2001 2000
- --------------------------------------------------------------------------------
Depreciation and Amortization
Manufacturing & Process $1,397 $ 1,322 $1,432
Information Technology 18 231 835
Optical Plastics 510 474 489
Corporate & Other 216 81 115
- -------------------------------------------------------------------------------
$2,141 $ 2,108 $2,871
- -------------------------------------------------------------------------------
Identifiable assets by industry segment are those assets that are used in the
Company's operations in each segment. Corporate and other assets are principally
cash and cash equivalents, marketable securities and intangible assets,
including goodwill. Depreciation and amortization excludes amortization of
goodwill.
12. 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):
Year ended December 31,
2002 2001 2000
---- ---- ----
United States $139,831 $173,008 $174,462
Canada 1,421 2,756 7,181
United Kingdom 7,258 6,962 11,028
Latin America and other 3,723 3,885 4,796
-------- ---------- ----------
$152,233 $186,611 $197,467
-------- -------- --------
Information about the Company's identifiable assets in different geographic
regions is as follows (in thousands):
December 31,
2002 2001 2000
---- ---- ----
United States $137,303 $152,627 $205,797
Canada 3,076 3,653 3,371
United Kingdom 3,301 2,821 1,928
Latin America and other 1,225 1,723 1,482
----- ---------- ---------
$144,905 $160,824 $212,578
-------- -------- --------
All corporate intangible assets of the Company, as well as other corporate
assets, are assumed to be in the United States.
13. Fair value of financial instruments
The carrying value of financial instruments including cash and cash equivalents,
marketable securities, accounts receivable, accounts payable and short-term
borrowings approximate estimated market values because of short maturities and
interest rates that approximate current rates.
The carrying values of investments, other than those accounted for on the equity
basis, approximate fair values based upon quoted market prices. The investments
for which there is no quoted market price are not significant.
13. Fair value of financial instruments (Continued)
The estimated fair value for the Company's debt is as follows (in thousands):
December 31, 2002 December 31, 2001
Carrying Estimated Carrying Estimated
amount fair value amount fair value
Long term debt 6,912 6,912 6,863 6,863
Limitations. Fair value estimates are made at a specific point in time, based on
relevant market information and information about the financial instrument.
These estimates are subjective in nature and involve uncertainties and matters
of significant judgment and therefore cannot be determined with precision.
Changes in assumptions could significantly affect the estimates.
14. Accounting for certain investments in equity securities
The gross unrealized holding gains (losses) and fair value for
available-for-sale securities (primarily Millennium Cell) were as follows (in
thousands):
Gross Unrealized Holding
Cost Gains Losses Fair Value
Available-for-sale equity securities:
December 31, 2002 $ 2,917 $ 2,680 $ - $ 5,597
- -------------------------------------------------------------------------------------------------
December 31, 2001 $ 4,633 $14,810 $ - $ 19,443
- -------------------------------------------------------------------------------------------------
December 31, 2000 $ 6,136 45,619 $ (7) $ 51,748
- -------------------------------------------------------------------------------------------------
Differences between cost and market, net of taxes, of $1,609,000, $9,021,000,
and $27,918,000 at December 31, 2002, 2001 and 2000, respectively, were credited
to a separate component of stockholders' equity called accumulated other
comprehensive income (loss).
15. Restructuring and other charges
During 1999, the Company adopted restructuring plans, primarily related to its
IT Segment. The Company took steps in order to change the focus of the IT
Segment from open enrollment information technology training courses to project
oriented work for corporations, which was consistent with the focus of GP's
current business.
In connection with the restructuring, the Company recorded a charge of
$7,374,000 in 1999, of which $2,754,000 had been utilized through December 31,
1999. During 2000, the Company utilized $2,501,000 of the reserve and reversed
$180,000.
15. Restructuring and other charges (Continued)
During 2001, the Company utilized $663,000 of the reserve and reversed $202,000.
As of December 31, 2001, $330,000 is included in accounts payable and accrued
expenses and $744,000 is included in other non-current liabilities in the
accompanying Consolidated Balance Sheet. During 2002, the Company utilized
$528,000 of the reserve. As of December 31, 2002, $104,000 is included in
accounts payable and accrued expenses and $442,000 is included in other
non-current liabilities in the accompanying Consolidated Balance Sheet.
The Company believed at the time the restructuring plan was adopted that the
strategic initiatives and cost cutting moves taken in 1999 and the first quarter
of 2000 would enable the IT Segment to return to profitability in the last six
months of 2000. However, those plans were not successful, and the Company
determined that it could no longer bring the open enrollment IT business to
profitability. Additionally there had been further impairment to intangible and
other assets. In July 2000, as a result of the continued operating losses
incurred by the IT Segment, as well as the determination that revenues would not
increase to profitable levels, the Company decided to close its open enrollment
IT business in the third quarter of 2000.
As a result, for the year ended December 31, 2000, the Company recorded asset
impairment charges of $19,245,000 related to the IT Segment. The charges are
comprised of a write-off of intangible assets of $16,663,000 as well as
write-offs of property, plant and equipment and other assets relating to the
closed offices, totaling $2,582,000.
In addition, the Company recorded an $8,630,000 restructuring charge, net of a
$180,000 reversal of the 1999 restructuring plan, in 2000. Of this charge,
$3,884,000 had been utilized through December 31, 2000. During 2001, the Company
utilized $2,302,000 of the reserve and reversed $972,000 as a result of
favorable settlements on certain leases and contractual obligations. As of
December 31, 2001 $832,000 is included in accounts payable and accrued expenses
and $820,000 is included in other non-current liabilities in the Consolidated
Balance Sheet. During 2002, the Company utilized $689,000 of the reserve and
reversed $368,000. As of December 2002, $117,000 is included in accounts payable
and accrued expenses and $478,000 is included in other non-current liabilities
in the accompanying Consolidated Balance Sheet.
15. Restructuring and other charges (Continued
The components of the 2000 restructuring charge are as follows (in thousands):
Severance Lease Other facility
and related and related Contractual related
benefits obligations obligations costs Total
- --------------------------------------------------------------------------------------------------------------------
Restructuring
charges during 2000 $ 1,825 $ 5,185 $ 1,590 $ 210 $ 8,810
Utilization 1,683 1,826 165 210 3,884
- --------------------------------------------------------------------------------------------------------------------
Balance December 31, 2000 $ 142 $ 3,359 $ 1,425 $ - $ 4,926
- --------------------------------------------------------------------------------------------------------------------
Utilization 142 1,484 676 2,302
Reversal of Restructuring
charges during 2001 575 397 972
- --------------------------------------------------------------------------------------------------------------------
Balance December 31, 2001 $ - $ 1,300 $ 352 $ - $ 1,652
- --------------------------------------------------------------------------------------------------------------------
Utilization 337 352 689
Reversal of Restructuring
charges during 2002 368 368
- --------------------------------------------------------------------------------------------------------------------
Balance December 31, 2002 $ - $595 $ - $ - $ 595
- --------------------------------------------------------------------------------------------------------------------
The components of the 1999 restructuring charge are as follows (in thousands):
Severance Lease Other facility
and related and related related
benefits obligations costs Total
- ---------------------------------------------------------------------------------------------------------
Balance December 31, 1999 $ 289 $ 4,206 $ 125 $ 4,620
Utilization 184 2,264 53 2,501
Reversal of restructuring charges
during 2000 105 3 72 180
- ---------------------------------------------------------------------------------------------------------
Balance December 31, 2000 $ - $ 1,939 $ - $ 1,939
- ---------------------------------------------------------------------------------------------------------
Utilization 663 663
Reversal of Restructuring
charges during 2001 202 202
- ---------------------------------------------------------------------------------------------------------
Balance December 31, 2001 $ - $ 1,074 $ - $ 1,074
- ---------------------------------------------------------------------------------------------------------
Utilization 528 528
Balance December 31, 2002 $ - $ 546 $ - $ 546
- ---------------------------------------------------------------------------------------------------------
Lease and related obligations are presented at their present value, net of
assumed sublets.
15. Restructuring and other charges (Continued)
Effective September 4, 2002, John C. McAuliffe resigned as President of GP. Mr.
McAuliffe and GP entered into a Separation 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 year ended December 31, 2002.
16. 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, Chief Executive Officer of the Company. Jerome
Feldman owns less than 1% of the outstanding common stock of RSS. In addition,
Roald Hoffmann, a director of the Company, is a director of RSS and has options
to purchase shares of RSS common stock.
In 2000, the Company made loans to Jerome Feldman totaling
approximately $1,278,000 to purchase an aggregate of 150,000 shares of Class B
Common Stock. At December 31, 2002 and 2001, the Company had total loans
receivable from Mr. Feldman in the amount of approximately $4,095,000, the
proceeds of which were used to purchase an aggregate of 537,500 shares of Class
B Common Stock.
Such loans bear interest at the prime rate of Fleet Bank and are
secured by the purchased Class B Common Stock and certain other assets. All
principal on the loans and accrued interest, totaling $1,075,000, $881,000 and
$594,000 at December 31, 2002, 2001, and 2000, respectively, are due on May 31,
2007.
16. Related party transactions (Continued)
The Compensation Committee approved an Incentive Compensation Agreement
(the "Incentive Agreement") with Mr. Feldman on April 1, 2002. The Incentive
Agreement provides that Mr. Feldman is eligible to receive from the Company up
to five payments in an amount of $1 million each, based on the closing price of
the Company's common stock sustaining increasing specified levels over periods
of at least 10 consecutive trading days. In the event that the higher specified
thresholds are attained prior to the lower specified thresholds being attained,
the lower thresholds automatically become payable as well. To the extent there
are any outstanding loans from the Company to Mr. Feldman at the time an
incentive payment is payable, the Company will set off the payment of such
incentive payment against the outstanding principal and interest under such
loans. The Incentive Agreement will terminate on the earlier of (a) May 3, 2007
or (b) the date of termination of Mr. Feldman's employment with the Company
(other than termination by (i) the Company in breach of Mr. Feldman's Employment
Agreement or (ii) Mr. Feldman for Good Reason).
In prior years, the Company made unsecured loans to Mr. Feldman in the
amount of approximately $334,000, which unsecured loans primarily bear interest
at the prime rate of Fleet Bank.
For a description of certain transactions pursuant to which the Company
received proceeds from the sale of Common Stock and Class B Common Stock to
certain related parties, see Note 11.
On May 16, 2001, the Company sold 200,000 shares of Millennium common
stock at $8.50 per share and on September 28, 2001, the Company sold 300,000
shares of its Millennium common stock at $3.50 per share, to an affiliated
entity of Liberty Wanger Asset Management L.P., a 5% stockholder of the Company.
17. Commitments and contingencies
(a) The Company has various noncancellable leases for real property and
machinery and equipment. Such leases expire at various dates with, in some
cases, options to extend their terms. Lease commitments related to facilities
closed as part of the restructuring (see Note 15) are not included below.
Minimum rentals under long-term operating leases are as follows (in
thousands):
Real Machinery &
property equipment Total
- ----------------------------------------------------------------------------
2003 $ 2,726 $ 894 $ 3,620
2004 1,708 464 2,172
2005 1,368 202 1,570
2006 1,097 105 1,202
2007 675 76 751
Thereafter 3,644 3,644
- ----------------------------------------------------------------------------
Total $11,218 $1,741 $12,959
- ----------------------------------------------------------------------------
Several of the leases contain provisions for rent escalation based primarily on
increases in real estate taxes and operating costs incurred by the lessor. Rent
expense was approximately $4,041,861, $5,349,547 and $9,565,038 for 2002, 2001
and 2000, respectively.
(b) On March 23, 2000, the Company agreed to guarantee up to $1,800,000 of
GSES's debt pursuant to GSES's credit facility. In consideration for such
guarantee, the Company received warrants to purchase 150,000 shares of GSES
common stock at an exercise price of $2.38 per share, which warrants expire on
August 17, 2003. GSES's credit facility would have expired on March 23, 2003,
however, this facility was extended until March 31, 2004. As part of such
extension, the Company was required to extend its $1,800,000 limited guarantee.
In consideration for the extension of the guarantee, the Company received
150,000 shares of GSES common stock.
(c) The Company has guaranteed the leases for FSP's New Jersey and Connecticut
warehouses, totaling approximately $1,589,000 per year through the first quarter
of 2007, and an aggregate of $455,000 for certain equipment leases through April
2004. The Company's guarantee of such leases was in effect when FSP was a
wholly-owned subsidiary of the Company. In 1998, the Company sold substantially
all of the operating assets of Five Star Group to the predecessor company of
FSP. As part of this transaction, the landlord of the New Jersey and Connecticut
facilities and the lessor of the equipment did not consent to the release of the
Company's guarantee.
17. Commitments and contingencies (Continued)
(d) The Company is party to several lawsuits and claims incidental to its
business, including a claim regarding an environmental matter. Management
believes that the ultimate liability, if any, of these lawsuits and claims will
not have a material adverse effect on the Company's consolidated financial
statements.
18. Litigation
On January 3, 2001, the Company commenced an action alleging that MCI
Communications Corporation, 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 the
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 had not yet been completed, defendants 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 Company and General
Physics both filed timely Proofs of Claim in the United States Bankruptcy Court
against MCI and WorldCom, Inc., et al. The other defendants 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.
The parties have engaged in non-binding mediation. At the latest
mediation conference, EDS stated that it did not intend to file a motion for
summary judgment following the close of discovery on February 28, 2003, and
intended to try the case if a settlement was not reached. On March 14, 2003, the
Company filed a Note of Issue which places the case on the trial calendar.
The Company is not a party to any legal proceeding, the outcome of
which is believed by management to have a reasonable likelihood of having a
material adverse effect upon the financial condition of the Company.
GP STRATEGIES CORPORATION AND SUBSIDIARIES
GP Strategies Supplementary Data
Corporation
and Subsidiaries
SELECTED QUARTERLY FINANCIAL DATA
(unaudited) (in thousands, except per share data)
three months ended
March 31, June 30, Sept. 30, Dec. 31, March 31, June 30, Sept. 30, Dec. 31,
2002 2002 2002 2002 2001 2001 2001 2001
- -----------------------------------------------------------------------------------------------------------------------------------
Sales $40,226 $39,242 $36,616 $36,149 $49,114 $50,347 $44,713 $42,437
Gross margin 5,448 4,905 3,426 3,686 6,359 6,974 4,683 4,561
Net income (loss) 205 63 $(3,887) $(1,609) (244) 734 847 (2,282)
Net income (loss) per share:
Basic .01 (.01) (.24) (.10) (.02) .06 .06 (.19)
Diluted .01 (.01) (.24) (.10) (.02) .06 .06 (.19)
- -----------------------------------------------------------------------------------------------------------------------------------
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information with respect to the directors and executive officers of the
Company is incorporated herein by reference to the Company's definitive proxy
statement pursuant to Regulation 14A, which proxy statement will be filed not
later than 120 days after the end of the fiscal year covered by this Report.
ITEM 11. EXECUTIVE COMPENSATION
Information with respect to the Executive Compensation of the Company
is incorporated herein by reference to the Company's definitive proxy statement
pursuant to Regulation 14A, which proxy statement will be filed not later than
120 days after the end of the fiscal year covered by this Report.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
Information with respect to the security ownership of certain
beneficial owners and management of the Company is incorporated herein by
reference to the Company's definitive proxy statement pursuant to Regulation
14A, which proxy statement will be filed not later than 120 days after the end
of the fiscal year covered by this Report.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information with respect to the certain relationships and related
transactions of the Company is incorporated herein by reference to the Company's
definitive proxy statement pursuant to Regulation 14A, which proxy statement
will be filed not later than 120 days after the end of the fiscal year covered
by this Report.
ITEM 14. CONTROLS AND PROCEDURES
Within the 90-day period prior to the filing of this report, the
Company's management, including the Chief Executive Officer and the President
and Chief Financial Officer, conducted an evaluation of the effectiveness of the
design and operation of the Company's disclosure controls and procedures as
defined in Exchange Act Rule 13a-14(c). Based on that evaluation, the Chief
Executive Officer and the President and Chief Financial Officer concluded that
the Company's disclosure controls and procedures were effective as of the date
of that evaluation. There have been no significant changes in internal controls,
or in factors that could significantly affect internal controls, subsequent to
the date the Chief Executive Officer and the President and Chief Financial
Officer completed their evaluation.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K:
(a)(1) The following financial statements are included in Part II,
Item 8. Financial Statements and Supplementary Data:
FINANCIAL STATEMENTS OF GP STRATEGIES CORPORATION AND SUBSIDIARIES:
Page
Independent Auditors' Report 37
Financial Statements:
Consolidated Balance Sheets -
December 31, 2002 and 2001 38
Consolidated Statements of Operations -
Years ended December 31, 2002, 2001 and 2000 40
Consolidated Statements of Changes in Stockholders' Equity -
Years ended December 31, 2002, 2001 and 2000 41
Consolidated Statements of Cash Flows -
Years ended December 31, 2002, 2001 and 2000 42
Notes to Consolidated Financial Statements 44
(a)(2) Financial Statement Schedules
Schedule II - Validation and Qualifying Accounts i
Independent Auditors' Report on Schedule ii
(a)(3) Exhibits
*
Consent of KPMG LLP, Independent Auditors
(b) There were no reports filed on Form 8-K by the Registrant
during the last quarter covered by this report.
* Filed herewith
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
GP STRATEGIES CORPORATION
Jerome I. Feldman
Chief Executive Officer
Dated: April 14, 2003
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated.
Signatures Title
Jerome I. Feldman Chief Executive Officer and Director
(Principal Executive Officer)
Scott N. Greenberg President and Chief Financial Officer and Director
Ogden R. Reid Director
Harvey P. Eisen Director
Roald Hoffmann Director
CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO RULE 13a-14 OF THE
SECURITIES EXCHANGE ACT OF 1934
I, Jerome I. Feldman, Chief Executive Officer of GP Strategies Corporation,
certify that:
1. I have reviewed this annual report on Form 10-K of GP Strategies
Corporation;
2. Based on my knowledge, this annual 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 annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual report;
4. The registrant's other certifying officer 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 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 annual 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 annual report (the "Evaluation Date"); and
c) presented in this annual 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 officer 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
functions):
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 officer and I have indicated in this
annual 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: April 14, 2003 Jerome I. Feldman
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 annual report on Form 10-K of GP Strategies
Corporation;
2. Based on my knowledge, this annual 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 annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual report;
4. The registrant's other certifying officer 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 annual 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 annual report (the "Evaluation Date"); and
c) presented in this annual 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 officer 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
functions):
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 officer and I have indicated in this
annual 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: April 14, 2003 Scott N. Greenberg
GP STRATEGIES CORPORATION AND SUBSIDIARIES
SCHEDULE II
Valuation and qualifying accounts (in thousands)
Additions
Balance at Charged to Balance at
Beginning Costs & End of
of Period Expenses Deductions(a) Period
Year ended December 31, 2002:
Allowance for doubtful accounts (a) $ 529 $ 823 $ (498) $ 854
Year ended December 31, 2001:
Allowance for doubtful accounts (b) $ 859 $ 102 $ (432) $ 529
Year ended December 31, 2000:
Allowance for doubtful accounts (b) $ 2,905 $ 139 $(2,185) $ 859
(a) Write-off of uncollectible accounts, net of recoveries. (b) Deducted from
related asset on Balance Sheet.
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
GP Strategies Corporation
Under date of April 11, 2003, we reported on the consolidated balance sheets of
GP Strategies Corporation and subsidiaries as of December 31, 2002 and 2001, and
the related consolidated statements of operations, changes in stockholders'
equity, and cash flows for each of the years in the three-year period ended
December 31, 2002, as contained in the Annual Report on Form 10-K for the year
ended December 31, 2002. In connection with our audits of the aforementioned
consolidated financial statements, we also have audited the related financial
statement schedule as listed in Item 15. This financial statement schedule is
the responsibility of the Company's management. Our responsibility is to express
an opinion on this financial statement schedule based on our audits.
In our opinion, the related financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.
KPMG LLP
New York, New York
April 11, 2003
The following is a list of all exhibits filed as part of this Report.
SEQUENTIAL
EXHIBIT NO. DOCUMENT PAGE NO.
3.1 Amendment to the Registrant's Restated
Certificate of Incorporation filed on March
5, 1998. Incorporated herein by reference to
Exhibit 3.1 of the Registrant's Annual Report
on Form 10-K for the year ended December 31,
1998.
3.2 Amended and Restated By-Laws of the
Registrant. Incorporated herein by reference to
Exhibit 1 of the Registrant's Form 8-K filed on
September 1, 1999.
10.1 1973 Non-Qualified Stock Option Plan of the
Registrant, as amended on June 26, 2000.
Incorporated herein by reference to Exhibit
10.1 of the Registrant's Annual Report on
Form 10-K for the year ended December 31,
2000.
10.2 GP Strategies' Millennium Cell, LLC Option
Plan. Incorporated herein by reference to Exhibit 10.2
to the Registrant's Annual Report on Form 10-K for the
year ended December 31, 2001.
10.3 Employment Agreement, dated as of June 1,
1999, between the Registrant and Jerome I.
Feldman. Incorporated herein by reference
to Exhibit 10 of the Registrant's Form 10-Q
for the second quarter ended June 30, 1999.
10.4 Incentive Compensation Agreement dated as
of May 3, 2002 between the Registrant and
Jerome I. Feldman.*
10.5 Employment Agreement, dated as of July 1,
1999, between the Registrant and Scott N.
Greenberg. Incorpo-rated herein by
reference to Exhibit 10.1 of the
Registrant's Form 10-Q for the third
quarter ended September 30, 1999
10.6 Separation Agreement, dated as of September
3, 2002, between the General Physics
Corporation and John C. McAuliffe.
Incorporated herein by reference to Exhibit
10 of the Registrant's Form 8-K filed on
September 4, 2002.
10.7 Employment Agreement dated as of May 1,
2001 between the Registrant and Andrea D.
Kantor. Incorporated herein by reference
to Exhibit 10 of the Registrant's Form 10-Q
for the second quarter ended June 30, 2001.
10.8 Termination of Merger Agreement, dated
February 11, 2000, to the Agreement and
Plan of Merger dated as of October 6, 1999,
by and among the Registrant, VS&A
Communica- tions Partners III, L.P., VS&A
Communications Parallel Partners III, L.P.,
VS&A-GP, L.L.C. and VS&A-GP Acquisitions,
Inc. Incorporated herein by reference to
Exhibit 10 of the Registrants Form 8-K
filed on February 14, 2000.
10.9 Registrant's 401(k) Savings Plan, dated
January 29, 1992, effective March 1, 1992.
Incorporated herein by reference to Exhibit
10.12 of the Registrant's Annual Report on
Form 10-K for the year ended December 31,
1991.
10.10 Asset Purchase Agreement, dated as of June
3, 1998, by and among SHL Systemhouse Co.,
MCI Systemhouse Corp., SHL Computer
Innovations Inc., SHL Technology Solutions
Limited and General Physics Corporation.
Incorporated herein by reference to Exhibit
10.1 of the Registrant's Form 8-K dated
June 29, 1998.
10.11 Preferred Provider Agreement, dated as of
June 3, 1998, by and among SHL Systemhouse
Co., MCI Systemhouse Corp., SHL Computer
Innovations Inc., SHL Technology Solutions
Limited and General Physics Corporation.
Incorporated herein by reference to Exhibit
10.2 of the Registrant's Form 8-K dated
June 29, 1998.
10.12 Second Amended and Restated Credit
Agreement dated as of December 14, 2001, by
and among the Registrant, General Physics
Corporation, as the Borrowers, LaSalle
Business Credit Inc. and Dime Savings Bank
of New York, FSB, the Lenders and Fleet
National Bank, as Agent, as Issuing Bank
and as Lead Arranger. Incorporated herein
by reference to Exhibit 10.11 to the
Registrant's Form 10-K for the year ended
December 31, 2001
10.13 Asset Purchase Agreement dated as of July
13, 1998, between the Registrant's
wholly-owned subsidiary, General Physics
Corporation and The Deltapoint
Corporation. Incorporated herein by
reference to the Registrant's Form 8-K
dated July 27, 1998.
10.14 Rights Agreement, dated as of June 23,
1997, between National Patent Development
Corporation and Computershare Investor
Services LLC, as Rights Agent, which
includes, as Exhibit A thereto, the
Resolution of the Board of Directors with
respect to Series A Junior Participating
Preferred Stock, as Exhibit B thereto, the
form of Rights Certificate and as Exhibit C
thereto the form of Summary of Rights.
Incorporated herein by reference to Exhibit
4.1 of the Registrant's Form 8-K filed on
July 17, 1997.
10.15 Amendment, dated as of July 30, 1999, to
the Rights Agreement dated as of June 23,
1997, between the Computershare Investor
Services LLC, as Rights Agent.
Incorporated herein by reference to Exhibit
4.2 of the Registrant's report on Form
8-A12B/A filed on August 2, 1999.
10.16 Amendment, dated as of December 16, 1999,
to the Rights Agreement dated as of June
23, 1997, between the Registrant and
Computershare Investor Services LLC, as
Rights Agent. Incorporated herein by
reference to Exhibit 4.2 of the Company's
report on From 8-A12B/A filed on December
17, 1999.
10.17 Consulting and Severance Agreement dated
December 29, 1998 between the Registrant
and Martin M. Pollak. Incorporated herein
by reference to Exhibit 10.10 of the
Registrant's Form 10K for the year ended
December 31, 1998.
10.18 Agreement dated, December 29, 1998, among
the Registrant, Jerome I. Feldman and
Martin M. Pollak. . Incorporated herein by
reference to Exhibit 10.11 of the
Registrant's Form 10K for the year ended
December 31, 1998.
10.19 Amendment No. 1, dated March 22, 1999, to
Agreement dated December 29, 1998 among the
Registrant, Jerome I. Feldman and Martin M.
Pollak. Incorporated herein by reference
to Exhibit 10.12 of the Registrant's Form
10K for the year ended December 31, 1998.
10.20 Agreement dated September 22, 1999 among GP
Strategies Corporation, Jerome I. Feldman
and Martin M. Pollak. Incorporated herein
by reference to Exhibit 9 of Jerome I.
Feldman's Amendment No. 1 to Schedule 13D
filed on September 27, 1999.
10.21 Stockholders Agreement dated February 11,
2000, among the Registrant, Andersen
Weinroth & Co., L.P. and Jerome I.
Feldman. Incorporated herein by reference
to Exhibit 16 of Jerome I. Feldman's
Amendment No. 5 to Schedule 13D filed on
February 23, 2000
10.22 Subscription Agreement dated as of October
19, 2001 between the Registrant and Bedford
Oak Partners, L.P. Incorporated herein by
reference to Exhibit 10.21 to the
Registrant's Annual Report on Form 10-K for
the year ended December 31, 2001.
10.23 Subscription Agreement dated as of May 3,
2002 by and between the Registrant and
Bedford Oak Partners, L.P. Incorporated
herein by reference to Exhibit 10.3 to the
Registrant's Form 10-Q for the second
quarter ended March 31, 2002.
10.24 Investor Rights Agreement dated as of
December 27, 2001 among the Registrant,
Hydro Med Sciences and certain
Institutional Investors. Incorporated
herein by reference to Exhibit 10.23 to the
Registrants Annual Report on Form 10-K for
the year ended December 31, 2001.
10.25 Stock Purchase Agreement dated as of
December 27, 2001 among the Registrant,
Hydro Med Sciences and certain
Institutional Investors. Incorporated
herein by reference to Exhibit 10.24 to the
Registrant's Annual Report on Form 10-K for
the year ended December 31, 2001.
10.26 Right of First Refusal Co-Sale Agreement
dated as of December 27, 2001 among the
Registrant, Hydro Med Sciences and certain
Institutional Investors. Incorporated
herein by reference to Exhibit 10.25 to the
Registrant's Annual Report on Form 10-K for
the year ended December 31, 2001.
10.27 Termination Agreement dated as of December
21, 2001 between Hydro med Sciences and
Shire US Inc. Incorporated herein by
reference to Exhibit 10.26 to the
Registrant's Annual Report on Form 10-K for
the year ended December 31, 2002.
10.28 Amended Note dated August 2, 2002 in the
amount of $4,500,000 payable by Five Star
Products, Inc. to JL Distributors, a wholly
owned subsidiary of the Registrant.*
10.29 Voting Agreement dated as of June 30, 2002
between the Registrant and Five Star
Products, Inc.*
10.30 Stock Purchase Agreement dated as of May 3,
2002 by and between the Registrant and
EGI-Fund(02)04 Investors, L.L.L.
Incorporated herein by reference to Exhibit
10.1 to the Registrant's Form 10-Q for the
second quarter ended March 31, 2002.
10.31 Advisory Services Agreement dated as of May
3, 2002 by and between the Registrant and
Equity Group Investments, L.L.C.
Incorporated herein by reference to Exhibit
10.2 to the Registrant's Form 10-Q for the
second quarter ended March 31, 2002.
10.32 Subscription Agreement dated as of May 3,
2002 by and between the Registrant and
Marshall Geller. Incorporated herein by
reference to Exhibit 10.4 to the
Registrant's Form 10-Q for the second
quarter ended March 31, 2002.
10.33 Form of Officer's Pledge Agreement*
10.34 Form of Officer's Promissory Note*
10.35 Sublease Agreement dated as of December 13,
2002 between the Registrant and Austin
Nichols & Company, Inc.*
10.36 Lease Agreement dated as of July 5, 2002
between the Registrant's wholly-owned
subsidiary, General Physics Corporation and
Riggs Company.*
10.37 First Amendment and Limited Waiver to
Credit Agreement dated as of March 31, 2003
by and among the Registrant and General
Physics Corporation as the Borrower and
Fleet National Bank as agent for the
Lenders.**
18 Not Applicable
19 Not Applicable
20 Not Applicable
21 Subsidiaries of the Registrant*
22 Not Applicable
23 Consent of KPMG LLP, Independent Auditors*
28 Not Applicable
99.1 Certification Pursuant to Section 18 U.S.C.
Section 1350 of Chief Executive Officer.*
99.2 Certification Pursuant to Section 18 U.S.C.
Section 1350 of Chief Financial Officer.*
* Filed herewith.