UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 2003
OR
[ ] TRANSITION REPORT PURSAUNT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
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Commission File Number: 1-7234
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GP STRATEGIES CORPORATION
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(Exact Name of Registrant as Specified in its Charter)
Delaware 13-1926739
- ------------------------------------ ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)
777 Westchester Avenue, White Plains, NY 10604
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(Address of principal executive offices) (Zip code)
(914) 249-9700
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange act of 1934 during
the preceding 12 months (or for such shorter period) that the registrant was
required to file such reports and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12(b)-2 of the Exchange Act).
Yes No X
Indicate the number of shares outstanding of each of issuer's classes of common
stock as of May 12, 2003:
Common Stock 15,996,496 shares
Class B Capital 1,200,000 shares
GP STRATEGIES CORPORATION AND SUBSIDIARIES
TABLE OF CONTENTS
Page No.
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Consolidated Condensed Balance Sheets -
March 31, 2003 and December 31, 2002 1
Consolidated Condensed Statements of Operations-
Three Months Ended March 31, 2003 and 2002 3
Consolidated Condensed Statements of Cash Flows -
Three Months Ended March 31, 2003 and 2002 4
Notes to Consolidated Condensed Financial
Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 16
Item 3. Quantitative and Qualitative Disclosure About Market Risk 23
Item 4. Controls and Procedures 23
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 24
Signatures 25
PART I. FINANCIAL INFORMATION
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Item 1. Financial Statements
CONSOLIDATED CONDENSED BALANCE SHEETS
(in thousands)
March 31, December 31,
2003 2002
--------- -----------
ASSETS (unaudited) *
Current assets
Cash and cash equivalents $ 1,146 $ 1,516
Accounts and other receivables, net 27,655 26,708
Inventories 1,513 1,380
Costs and estimated earnings in excess of billings on
uncompleted contracts 13,900 14,177
Prepaid expenses and other current assets 4,956 4,079
---------- ----------
Total current assets 49,170 47,860
--------- ----------
Investments, marketable securities
and note receivable 12,185 14,130
---------- ----------
Property, plant and equipment, net 7,951 8,299
----------- -----------
Intangible assets
Goodwill 57,460 57,491
Patents and licenses, net 731 755
----------- ------------
58,191 58,246
Deferred tax asset 11,848 10,846
Other assets 5,445 5,524
----------- -----------
$144,790 $144,905
======== ========
* The Consolidated Condensed Balance Sheet as of December 31, 2002 has been
summarized from the Company's audited Consolidated Balance Sheet as of that
date. Certain amounts in the Balance Sheet as of December 31, 2002 and notes
thereto, have been reclassified to conform to the 2003 classifications.
See accompanying notes to the consolidated condensed financial statements.
GP STRATEGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS (Continued)
(in thousands)
March 31, December 31,
2003 2002
-------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY (unaudited) *
Current liabilities
Current maturities of long-term debt $ 3,565 $ 3,610
Short-term borrowings 22,362 22,058
Accounts payable and accrued expenses 19,150 17,552
Billings in excess of costs and estimated
earnings on uncompleted contracts 3,772 3,860
--------- ----------
Total current liabilities 48,849 47,080
-------- ---------
Long-term debt less current maturities 3,124 3,302
--------- ----------
Other non-current liabilities 1,097 1,541
---------- ----------
Stockholders' equity
Common stock 154 154
Class B capital stock 12 12
Additional paid in capital 190,370 189,988
Accumulated deficit (93,870) (93,167)
Accumulated other comprehensive income (493) 460
Note receivable from stockholder (4,095) (4,095)
Treasury stock, at cost (358) (370)
----------- -----------
Total stockholders' equity 91,720 92,982
--------- ---------
$144,790 $144,905
======== ========
* The Consolidated Condensed Balance Sheet as of December 31, 2002 has been
summarized from the Company's audited Consolidated Balance sheet as of that
date. Certain amounts in the Balance Sheet as of December 31, 2002 and notes
thereto, have been reclassified to conform to the 2003 classifications.
See accompanying notes to the consolidated condensed financial statements.
GP STRATEGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except per share data)
Three months
ended March 31,
2003 2002
----------- ------------
Sales $ 36,087 $ 40,226
Costs of sales 32,259 34,778
--------- --------
Gross margin 3,828 5,448
Selling, general and administrative expenses (4,423) (4,326)
Interest expense (596) (754)
Investment and other income (loss), net 160 (435)
Gain on marketable securities 74 440
---------- ---------
(Loss) income before income taxes (957) 373
Income tax benefit (expense) 254 (168)
---------- ----------
Net (loss) income $ (703) $ 205
=========== ========
Net (loss) income per share
Basic and Diluted $ (.04) $ .01
----------- ---------
See accompanying notes to the consolidated condensed financial statements.
GP STRATEGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
Three months
ended March 31,
2003 2002
--------- ---------
Cash flows from operating activities:
Net (loss) income $ (703) $ 205
Adjustments to reconcile net (loss) income to net cash
provided by (used in) operating activities:
Issuance of stock for retirement savings plan 290 200
Depreciation and amortization 837 671
Non-cash credit to compensation expense (306) (558)
Non-cash consultant fees 125
Gain on marketable securities (74) (440)
(Income) loss on equity investments (8) 575
Changes in other operating items (738) 1,191
---------- -------
Net cash (used in) provided by operating activities (702) 1,969
---------- -------
Cash flows from investing activities:
Proceeds from sale of marketable securities 266 561
Additions to property, plant and equipment (412) (116)
Reduction in investments and other assets, net 354 419
-------- --------
Net cash provided by investing activities 208 864
--------- --------
Cash flows from financing activities:
Proceeds from (repayments of) short-term
borrowings 304 (2,842)
Proceeds from exercised stock options 104
Payments of long-term debt (223) (178)
--------- ----------
Net cash provided by (used in) financing activities 185 (3,020)
--------- --------
Effect of exchange rate
changes on cash and cash equivalents (61) 147
----------- ---------
GP STRATEGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Continued)
(Unaudited)
(in thousands)
Three months
ended March 31,
2003 2002
-------- ---------
Net decrease in cash and cash
equivalents $ (370) $ (40)
Cash and cash equivalents at the
beginning of the periods 1,516 1,705
--------- ---------
Cash and cash equivalents at the end
of the periods $ 1,146 $ 1,665
-------- --------
Supplemental disclosures of cash flow information:
Cash paid during the periods for:
Interest $ 363 $ 536
========= =========
Income taxes $ 110 $ 144
========= =========
See accompanying notes to the consolidated condensed financial statements.
GP STRATEGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of presentation
GP Strategies Corporation (the "Company") currently has three operating
business segments. Two of these segments, the Manufacturing & Process Segment
and the IT Segment, are managed through the Company's principal operating
subsidiary General Physics and the third segment through its operating
subsidiary MXL Industries. The Company's principle operating subsidiary is
General Physics Corporation ("GP"). 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.
The accompanying Consolidated Condensed Balance Sheet at March 31, 2003
and the Consolidated Condensed Statements of Operations and Cash Flows for the
periods ended March 31, 2003 and 2002 have not been audited, but have been
prepared in conformity with accounting principles generally accepted in the
United States for interim financial information and with the instructions to
Form 10-Q and Article 10 of Regulation S-X. These Consolidated Condensed
Financial Statements should be read in conjunction with the audited consolidated
financial statements for the year ended December 31, 2002 as presented in our
Annual Report on Form 10-K. In the opinion of management, this interim
information includes all material adjustments, which are of a normal and
recurring nature, necessary for a fair presentation. The results for the 2003
interim period are not necessarily indicative of results to be expected for the
entire year.
2. Earnings (loss) per share
Earnings (loss) per share (EPS) for the periods ended March 31, 2003
and 2002 are as follows (in thousands, except per share amounts):
Three months
ended March 31,
2003 2002
----------- ----------
Basic and diluted EPS
Net (loss) income $ (703) $ 205
---------- ---------
Weighted average shares
outstanding basic 16,581 13,666
Diluted securities - 29
----------- ---------
Weighted average shares
outstanding diluted 16,581 13,695
--------- ------
Basic and diluted net (loss) income
per share (a) $ (.04) $ .01
---------- ----------
Basic earnings (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 stock holders. Diluted earnings (loss) per
share is 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 three months ended March 31, 2003 presentation of the dilutive
effect of stock options, warrants and convertible notes, which totaled 245,510
shares, are not included since they are anti-dilutive.
3. Long-term debt
Long-term debt consists of the following (in thousands):
March 31, December 31,
2003 2002
--------- ----------
Mortgage on MXL Pennsylvania facility $ 1,480 $ 1,505
Mortgage on MXL Illinois facility 1,206 1,212
Senior subordinated debentures 530 558
Convertible exchangeable notes 2,640 2,640
Other 833 997
--------- ----------
6,689 6,912
Less current maturities (3,565) (3,610)
--------- ----------
$ 3,124 $ 3,302
======== ========
4. Comprehensive loss
The following are the components of comprehensive loss (in thousands):
Three months
ended March 31,
2003 2002
--------- ----------
Net (loss) income $ (703) $ 205
---------- ---------
Other comprehensive loss before tax:
Net unrealized loss on
available-for-sale-securities (1,464) (5,004)
Foreign currency translation adjustment (61) 147
----------- ----------
Other comprehensive loss, before tax (1,525) (4,857)
Income tax benefit relating to items
of other comprehensive income 572 1,935
---------- ----------
Comprehensive loss, net of tax $ (1,656) $ (2,717)
========= =========
4. Comprehensive loss (continued)
The components of accumulated other comprehensive income, net are as follows:
March 31, December 31,
2003 2002
--------- ----------
Net unrealized gain on
available-for-sale-securities $ 1,216 $2,680
Foreign currency translation adjustment (1,210) (1,149)
------- -------
Accumulated other comprehensive income
before tax 6 1,531
Accumulated income tax expense related to
items of other comprehensive income (499) (1,071)
-------- --------
Accumulated other comprehensive (loss) income,
net of tax $ (493) $ 460
========== ========
5. Short-term borrowings
The Company and certain of its wholly owned subsidiaries entered into a First
Amendment and Limited Waiver to the Amended Agreement (defined below) 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
since the Company was not in compliance with certain financial covenants at
December 31, 2002 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 was in compliance with all of its
financial covenants at March 31, 2003.
The Company has previously 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 previous credit
facility. The Amended Agreement had reduced the commitment pursuant to the
revolving facility to $40 million (subject to borrowing base limitations
specified in the Amended Agreement) which was subsequently reduced to $35
million as a result of asset sales by the Company.
5. Short term borrowings (Continued)
As of March 31, 2003, the current amount outstanding under the revolving credit
agreement is $22,362,000. 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 $4,638,000 available under the
facility.
The Company is currently negotiating with certain other lenders with respect to
obtaining a new facility for its future financing requirements.
6. Business segments
The operations of the Company currently consist of three business segments, by
which the Company is managed. The Company's principal operating subsidiary is
General Physics Corporation (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 and
distributes coated and molded plastic products.
The management of the Company does not allocate the following items by segment:
Investment and other income, net, interest expense, selling, general and
administrative expenses, depreciation and amortization expense, income tax
expense, significant non-cash items and long-lived assets.
6. Business segments (continued)
There are deminimis inter-segment sales. The reconciliation of gross margin to
net income (loss) is consistent with the presentation on the Consolidated
Condensed Statements of Operations.
The following tables set forth the sales and gross margin of each of the
Company's operating segments (in thousands):
Three months
ended March 31,
2003 2002
--------- --------
Sales
Manufacturing & Process $32,238 $35,165
Information Technology 1,633 2,305
Optical Plastics 2,216 2,756
--------- ---------
$36,087 $40,226
------- -------
Gross margin
Manufacturing & Process $ 3,095 $ 4,590
Information Technology 370 312
Optical Plastics 363 546
--------- ---------
$ 3,828 $ 5,448
------- -------
Information about the Company's net sales in different geographic regions, which
are attributed to countries based on location of customers, is as follows (in
thousands):
Three months
ended March 31,
2003 2002
-------- ----------
United States $32,320 $37,579
Canada 552 299
United Kingdom 1,839 1,773
Latin America and other 1,376 575
------- ----------
$36,087 $40,226
------- -------
Information about the Company's identifiable assets in different geographic
regions, is as follows (in thousands):
March 31, December 31,
2003 2002
-------- -----------
United States $139,790 $137,303
Canada 626 3,076
United Kingdom 3,069 3,301
Latin America and other 1,305 1,225
-------- -----------
$144,790 $144,905
-------- --------
7. Restructuring charges
During 1999 and 2000, the Company adopted restructuring plans, primarily related
to its IT business segment. During the period ended March 31, 2003, the Company
utilized $185,000 of the restructuring reserve and recorded $60,000 of other
adjustments to the reserve. Of the remaining total restructuring balance of
$1,016,000 at March 31, 2003 and $1,141,000 at December 31, 2002, $162,000 and
$221,000, respectively, were included in accounts payable and accrued expenses
and $854,000 and $920,000, respectively, were included in other non-current
liabilities in the Consolidated Condensed Balance Sheet.
The remaining components of the restructuring charge reserve at March 31, 2003
and December 31, 2002 consist solely of lease and related obligations. Lease
obligations are presented at their present value, net of assumed sublets.
8. 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. 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 March 31, 2003, the Company
had unamortized goodwill in the amount of $57,460,000. The Company did not
recognize any impairment as a result of the adoption of this statement in 2002.
The components of goodwill and intangible assets as of March 31, 2003 and
December 31, 2002 are as follows (in thousands):
March 31, December 31,
2003 2002
--------- -----------
Unamortized intangible assets:
Goodwill $57,460 $57,491
======= =======
Amortized intangible assets:
Patents and licenses $ 1,348 $ 1,348
Less: accumulated amortization 617 593
--------- --------
Patents and licenses, net $ 731 $ 755
========= =========
Goodwill decreased as of March 31, 2003 due to the impact of foreign currency
fluctuations.
9. Investments, marketable securities and note receivable
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.
The Company currently has an 8% senior unsecured note receivable from Five Star
Products, Inc. ("FSP") due September 30, 2004 in the amount of $4,500,000 (the
"Five Star Note"). FSP and its lenders have orally agreed to prepay to the
Company $1,000,000 of the Five Star Note in 2003. There can be no assurance that
a final agreement will be entered into by FSP and its lenders to permit the
$1,000,000 prepayment.
10. 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 (the
"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. On or around April 22, 2003, MCI served objections to
the Proofs of Claim filed by the Company and General Physics.
10. Litigation (continued)
On May 15, 2003 the Company and General Physics submitted their opposition to
the objections. The matter is scheduled to be heard by the Bankruptcy Court on
June 3, 2003.
The defendants other than MCI made an application to the Court to stay the
action until a later-commenced arbitration, alleging breach of the acquisition
agreement, is concluded.
In a decision dated May 9, 2003, the Court granted the motion and stayed the
fraud action pending the outcome of the arbitration of the claim based on breach
of the acquisition agreement. The Company has a right to appeal the order
staying the action. It has not yet decided whether to do so.
Before the action was stayed, the parties engaged in non-binding mediation which
did not result in a settlement.
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.
11. Financial guarantees
On March 23, 2003, the Company extended its guarantee of up to $1,800,000 of
GSES's debt pursuant to GSES's credit facility. GSES's credit facility was
scheduled to expire on March 23, 2003, however, was extended until March 31,
2004. In consideration for the extension of the guarantee, the Company received
150,000 additional shares of GSES common stock with a value of $180,000. A
deferred credit of $180,000 has been recorded for the receipt of these shares
which will amortize to income over the term of the guarantee.
12. Stock based compensation
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure - an amendment of SFAS No. 123" ("SFAS
No. 148"), 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 of SFAS No. 148 for the 2003 fiscal year.
12. Stock based compensation (continued)
Proforma net income and earnings (loss) per share as if the Company recorded
compensation expense based upon the fair value of stock-based awards have been
presented in accordance with the provisions of SFAS No 123, for the three months
ended March 31, 2003 and 2002 and are as follows (in thousands, except per share
amounts):
Three months
ended March 31,
2003 2002
---- ----
Net (loss) income As reported $(703) $ 205
Proforma $(784) $ (34)
Basic and Diluted
earnings (loss) per share
As reported $(.04) $ .01
Proforma $(.05) $ -
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 March 31, 2003 and 2002, the per share weighted-average fair value of stock
options granted was $2.89 and $2.58, respectively, on the date of grant using
the modified Black Scholes option-pricing model with the following
weighted-average assumptions: 2003 expected dividend yield 0%, risk-free
interest rate of 2.45%, expected volatility of 78.76% and an expected life of
4.00 years; 2002 expected dividend yield 0%, risk-free interest rate of 4.41%,
expected volatility of 73.04% and an expected life of 5.96 years.
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Overview
The Company has three operating business segments. Two of these segments, the
Manufacturing & Process Segment and the IT Segment, are managed through the
Company's principal operating subsidiary General Physics and the third segment
through its operating subsidiary MXL Industries. In addition, the Company holds
a number of investments in publicly held companies, and including publicly
traded stock in Millennium Cell Inc, GSE Systems and Five Star Products, a
private company Hydro Med Sciences and owns certain real estate.
General Physics 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
specific needs of clients. Clients include Fortune 500 companies, manufacturing,
process and energy companies, and other commercial and governmental customers.
The Company had net loss before income taxes of $957,000 for the quarter ended
March 31, 2003 compared to net income before taxes of $373,000 for the quarter
ended March 31, 2002. Net loss before taxes for the first quarter ended March
31, 2003 included a $74,000 gain from the sale of the Company's marketable
securities of Millennium Cell Inc. and a non-cash credit of $306,000 relating to
the Company's Millennium Cell Deferred Compensation Plan. The income before
income tax of $373,000 in the first quarter of 2002 was primarily attributable
to a $440,000 gain from the sale of marketable securities of Millennium Cell
Inc., and a non-cash credit of $558,000 relating to the Company's Millennium
Cell Deferred Compensation Plan, offset by a non-cash equity loss of $735,000 on
HMS.
Sales
Three months
March 31,
2003 2002
--------- ---------
Manufacturing & Process $32,238 $35,165
Information Technology 1,633 2,305
Optical Plastics 2,216 2,756
------- ---------
$36,087 $40,226
------- -------
For the quarter ended March 31, 2003, consolidated sales decreased by $4,139,000
to $36,087,000 from $40,226,000 in the corresponding quarter of 2002. The
decrease in sales in 2003 was primarily attributable to a reduction in sales
from the automotive division and e-Learning division of the Manufacturing and
Process Segment, as well as decreased sales from advanced manufacturing and
certain high tech clients. In addition, the Information Technology Segment's
sales decreased from $2,305,000 to $1,633,000 and the Optical Plastics Segment's
sales decreased from $2,756,000 to $2,216,000. These decreases in sales were due
primarily to the continued downturn in the economy.
Gross margin
Three months
Ended March 31,
---------------------------------------------------
2003 % 2002 %
--------- ----- --------- -------
Manufacturing & Process $ 3,095 9.6 $4,590 13.1
Information Technology 370 22.6 312 13.5
Optical Plastics 363 16.4 546 19.8
------- ----- -------- ----
$ 3,828 10.6 $5,448 13.5
------- ----- ------ ----
Consolidated gross margin of $3,828,000 or 10.6% of sales, for the quarter ended
March 31, 2003, decreased by $1,620,000 compared to the consolidated gross
margin of $5,448,000, or 13.5% of sales, for the quarter ended March 31, 2002.
The decreases in gross margin in 2003 within the Manufacturing and Process and
Optical Plastics Segments were primarily due to decreased sales for the period.
The overall gross margin percentage decreased due to reduced revenues without
the ability to reduce certain fixed costs. In addition, the Company's gross
margin was negatively impacted with the elimination of one of the Company's
minor product lines within its Optical Plastics Illinois facility.
The increase in gross margin and gross margin percentage for the three months
ended March 31, 2003 within the Information Technology Segment was due largely
to cost reduction initiatives within the segment and the Company's efforts to
control costs on its existing contracts.
Selling, general and administrative expenses
For the three months ended March 31, 2003, Selling, general and administrative
(SG&A) expenses were $4,423,000 compared to $4,326,000 in the first quarter of
2002. The increase was primarily due to a reduction in the non-cash credit
relating to the Company's Deferred Compensation Plan of $252,000 and a reduction
in the Company's restructuring charge reversal from 2002 of $274,000 which is
included in SG&A, offset by a reduction in SG&A expenses of approximately
$429,000 as a direct result of the Company's efforts to reduce costs through
reductions in personnel, relocating its corporate offices at a significantly
reduced rental charge and other operating expenses.
Interest expense
For the three months ended March 31, 2003, interest expense was $596,000
compared to $754,000 for the three months ended March 31, 2002. The decrease in
interest expense in 2003 was primarily attributable to a decrease in the
Company's outstanding indebtedness and a reduction in interest rates offset by
increased fees.
Investment and other income (loss), net
For the three months ended March 31, 2003, investment and other income (loss),
net was an income of $160,000, as compared to a loss of $435,000 for the quarter
ended March 31, 2002. Investment and other income (loss), net for the first
quarter 2003 included a non-cash equity gain of $8,000 and approximately
$152,000 of interest income on loans receivable and other income. For the
quarter ended March 31, 2002, investment and other income (loss) included a
non-cash equity loss of $575,000 offset by approximately $140,000 of interest
income on loans receivable and other income. Included in the non-cash equity
loss for 2002 was an equity loss of $735,000 for HMS. The Company's investment
in HMS had been written down to zero in 2002.
Income taxes
For the three months ended March 31, 2003, the Company recorded an income tax
benefit of $254,000 compared to an income tax expense of $168,000 for the three
months ended March 31, 2002. The current income tax benefit of $254,000 includes
a deferred federal and state income tax benefit of $431,000 relating to the
Company's net operating losses, offset by a current year provision for state and
foreign taxes of $177,000.
Liquidity and capital resources
At March 31, 2003, the Company had cash and cash equivalents totaling
$1,146,000. 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 and certain of its wholly owned subsidiaries 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 since the Company
was not in compliance with certain financial covenants at December 31, 2002 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 was in compliance with all of its financial covenants at
March 31, 2003.
As of March 31, 2003, the current amount outstanding under the revolving credit
agreement is $22,362,000. 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 $4,638,000 available under the
facility.
The Company currently has an 8% senior unsecured note receivable from Five Star
Products, Inc. ("FSP") due September 30, 2004 in the amount of $4,500,000 (the
"Five Star Note"). FSP and its lenders have orally agreed to prepay to the
Company $1,000,000 of the Five Star Note in 2003. There can be no assurance that
a final agreement will be entered into by FSP and its lenders to permit the
$1,000,000 prepayment.
The Company is currently negotiating with certain other lenders with respect to
obtaining a new facility for its future financing requirements.
On March 23, 2000, the Company agreed to guarantee up to $1,800,000 of GSES's
debt pursuant to GSES's credit facility. GSES's credit facility would have
expired on March 23, 2003, however the facility was extended until March 31,
2004. In consideration for the extension of the guarantee, the Company received
150,000 shares of GSES common stock, with a value of $180,000. A deferred credit
of $180,000 has been recorded for the receipt of these shares which will
amortize to income over the term of the guarantee.
For the quarter ended March 31, 2003, the Company's working capital decreased by
$459,000 to a working capital of $321,000.
The decrease in cash and cash equivalents of $370,000 for the quarter ended
March 31, 2003 resulted primarily from cash used in operating activities of
$702,000 offset by cash provided by investing activities of $208,000 and
financing activities of $185,000.
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 application of SFAS No. 143 did not have and is not expected
to have a material impact on the Company's Condensed 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 on the Company's
Condensed 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 December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure - an amendment of SFAS No. 123" ("SFAS
No. 148"),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 of SFAS No. 148 for the 2003 fiscal year.
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 applied the provisions of FIN No. 45 for its
financial guarantee entered into in the first quarter of 2003.
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 has
evaluated its interests in certain entities to determine if any such entities
will require consolidation under FIN No. 46, and has determined that, at this
time, it is not necessary to consolidate any such entities.
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.
Forward-looking statements
The forward-looking statements contained herein reflect managements'
current expectations regarding future growth, results of operations, performance
and business prospects and opportunities. Wherever possible, words such as
"anticipate," "believe," "plan," "expect" and similar expressions have been used
to identify these forward- looking statements. These statements reflect the
Company's current beliefs and are based on information currently available to
the Company. Except as otherwise required by federal securities law, the company
is not obligated to update or revise these forward-looking statements to reflect
certain risks and uncertainties which could cause the Company's actual growth,
results, performance and business prospects and opportunities to differ from
those expressed in, or implied by these statements, 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.
Item 3. Quantitative and Qualitative Disclosure About Market Risk
We have no material changes to the disclosure on this matter made in
our report on Form 10-K for the fiscal year ended December 31, 2002.
Item 4. Controls and Procedures
a. Evaluation of disclosure controls and procedures. The Company's
Chief Executive Officer and Chief Financial Officer have reviewed and evaluated
the effectiveness of the Company's disclosure controls and procedures (as
defined in Exchange Act Rules 240.13a-14(c) and 15d-14(c)) as of a date within
ninety days before the filing date of this quarterly report. Based on that
evaluation, the Chief Executive Officer and Chief Financial Officer have
concluded that the Company's current disclosure controls and procedures are
effective, providing them with material timely information relating to the
Company required to be disclosed in the reports the Company files or submits
under the Exchange Act.
b. Changes in internal controls. There have not been any significant
changes in the Company's internal controls or in other factors that could
significantly affect these controls subsequent to the date of their evaluation.
There were no significant deficiencies or material weaknesses and therefore no
corrective actions were taken.
GP STRATEGIES CORPORATION AND SUBSIDIARIES
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
99.1 Certification of Chief Executive Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
99.2 Certification of Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
b. Reports
Form 8-K filed on March 31, 2003 reporting event under Item
12.
GP STRATEGIES CORPORATION AND SUBSIDIARIES
March 31, 2003
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed in its behalf by the
undersigned thereunto duly authorized.
GP STRATEGIES CORPORATION
DATE: May 20, 2003 Jerome I. Feldman
Chairman of the Board and
Chief Executive Officer
DATE: May 20, 2003 Scott N. Greenberg
President and
Chief Financial Officer
CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO RULE 13a-14
OF THE SECURITIES EXCHANGE ACT OF 1934
I, Jerome I. Feldman, Chairman of the Board and Chief Executive Officer of
GP Strategies Corporation, certify that:
1. I have reviewed this quarterly report on Form 10-Q of GP Strategies
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date");
and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 20, 2003
Jerome I. Feldman
Chairman of the Board and
Chief Executive Officer
CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO RULE 13a-14
OF THE SECURITIES EXCHANGE ACT OF 1934
I, Scott N. Greenberg, President and Chief Financial Officer of GP
Strategies Corporation, certify that:
1. I have reviewed this quarterly report on Form 10-Q of GP Strategies
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date");
and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 20, 2003
Scott N. Greenberg
President and Chief Financial Officer