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 June 30, 2003
OR
[ ] TRANSITION REPORT PURSUANT 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
- -------------------------------------------------------------------------
(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 August 11, 2003:
Common Stock 16,161,902 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 -
June 30, 2003 and December 31, 2002 1
Consolidated Condensed Statements of Operations-
Three Months and Six Months Ended June 30,
2003 and 2002 3
Consolidated Condensed Statements of Cash Flows -
Six Months Ended June 30, 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 21
Item 3. Quantitative and Qualitative Disclosure About Market Risk 29
Item 4. Controls and Procedures 29
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 30
Signatures 32
PART I. FINANCIAL INFORMATION
GP STRATEGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(in thousands)
June 30, December 31,
2003 2002
--------- -------------
ASSETS (unaudited)
Current assets
- --------------
Cash and cash equivalents $ 827 $ 1,516
Accounts and other receivables 24,499 26,708
Inventories 1,425 1,380
Costs and estimated earnings
in excess of billings on uncompleted contracts 13,451 14,177
Prepaid expenses and other current assets 4,472 4,079
---------- ----------
Total current assets 44,674 47,860
---------- ---------
Investments, marketable securities and note receivable 11,552 14,130
Property, plant and equipment, net 7,552 8,299
Intangible assets
Goodwill 57,542 57,491
Patents and licenses, net 708 755
---------- -----------
58,250 58,246
---------- ----------
Deferred tax asset 11,439 10,846
Other assets 5,923 5,524
---------- -----------
$139,390 $144,905
======== ========
See accompanying notes to the consolidated condensed financial statements.
GP STRATEGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS (Continued)
(in thousands)
June 30, December 31,
2003 2002
---------- ---------------
LIABILITIES AND STOCKHOLDERS' EQUITY (unaudited)
Current liabilities:
Current maturities of long-term debt $ 1,200 $ 3,610
Short-term borrowings 21,230 22,058
Accounts payable and accrued expenses 16,708 17,552
Billings in excess of costs and estimated
earnings on uncompleted contracts 3,551 3,860
-------- ----------
Total current liabilities 42,689 47,080
------- ---------
Long-term debt less current maturities 2,513 3,302
Other non-current liabilities 1,131 1,541
Stockholders' equity
Common stock 161 154
Class B capital stock 12 12
Additional paid in capital 194,572 189,988
Accumulated deficit (96,736) (93,167)
Accumulated other comprehensive income (619) 460
Note receivable from stockholder (4,095) (4,095)
Treasury stock, at cost (238) (370)
--------- ------------
Total stockholders' equity 93,057 92,982
--------- ----------
$139,390 $144,905
======== ========
See accompanying notes to the consolidated condensed financial statements.
GP STRATEGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except per share data)
Three months Six months
ended June 30, ended June 30,
2003 2002 2003 2002
Sales $36,038 $ 39,242 $72,125 $ 79,468
Cost of sales 31,725 34,337 63,984 69,115
------ -------- ------ ------
Gross margin 4,313 4,905 8,141 10,353
------- --------- ------- ------
Executive incentive compensation bonus (1,000) (1,000)
Non-cash debt conversion expense, net (622) (622)
Other selling, general & administrative expenses (4,741) (4,737) (9,164) (9,277)
------- ------- --------- -------
Total selling, general & administrative expenses (6,363) (4,737) (10,786) (9,277)
------- --------- ------- -------
Interest expense (592) (675) (1,188) (1,429)
Investment and other income (loss), net 502 (303) 662 (738)
Gain on marketable securities 138 846 212 1,286
Restructuring (charge) reversal (218) 140 (218) 354
--------- ------- ----------- --------
(Loss) income before income taxes (2,220) 176 (3,177) 549
Income tax expense (646) (113) (392) (281)
--------- -------- ----------- ---------
Net (loss) income $(2,866) $ 63 $(3,569) $ 268
======== ======== ======= =========
Net (loss) income per share:
Basic and diluted $ (.17) $ (.01) $ (.21) $ -
========= ========= ========== =============
Dividends per share none none none none
========== ========= =========== =========
See accompanying notes to the consolidated condensed financial statements.
GP STRATEGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
Six months
ended June 30,
2003 2002
------- -------
Cash flows from operations:
Net (loss) income $(3,569) $ 268
Adjustments to reconcile net (loss) income to net cash
(used in) provided by operating activities:
Depreciation and amortization 1,758 1,320
Non-cash debt conversion expense, net 622
Issuance of stock for retirement savings plan 628 394
Non-cash (credit) charge to compensation and consultant fees (306) 240
(Income) loss on equity investments (307) 1,086
Restructuring charge (reversal) 218 (354)
Gain on marketable securities (212) (1,286)
Changes in other operating items 1,784 (2,142)
-------- --------
Net cash provided by (used in) operating activities 616 (474)
--------- ---------
Cash flows from investing activities:
Proceeds from sale of marketable securities 752 1,883
Proceeds from note receivable 500
Additions to property, plant and equipment (398) (344)
Increase in investments and other assets, net (1,043) (880)
---------- ----------
Net cash (used in) provided by investing activities (189) 659-
----------- ----------
Cash flows from financing activities:
Net proceeds from sale of Common Stock 7,950
Net proceeds from sale of Class B Stock 1,260
Proceeds for exercised stock options 377
Repayment of short-term borrowings (828) (8,213)
Repayments of long-term debt (559) (349)
----- ---------
Net cash (used in) provided by financing activities (1,010) 648
---------- --------
Effect of exchange rate changes on
cash and cash equivalents (106) (268)
----------- ---------
GP STRATEGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Continued)
(Unaudited)
(in thousands)
Six months
ended June 30,
2003 2002
-------- ---------
Net (decrease) increase in cash and cash equivalents $ (689) $ 565
Cash and cash equivalents at the beginning of the period 1,516 1,705
-------- --------
Cash and cash equivalents at the end of the period $ 827 $ 2,270
======== ========
Cash paid during the periods for:
Interest $ 699 $ 1,066
======= ========
Income taxes $ 231 $ 228
======= =========
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 Corporation ("GP") and the third segment through its operating
subsidiary MXL Industries ("MXL"). 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 June 30, 2003 and the
Consolidated Condensed Statements of Operations and Cash Flows for the periods
ended June 30, 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 periods are not
necessarily indicative of results to be expected for the entire year.
GP STRATEGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
2. Earnings per share
Earnings (loss) per share (EPS) for the three and six month periods
ended June 30, 2003 and 2002 are as follows (in thousands, except per share
amounts):
Three months Six months
ended June 30, ended June 30,
-------------------------- ---------------------------
2003 2002 2003 2002
---- ---- ---- ----
Basic and Diluted EPS
Net (loss) income $(2,866) $ 63 $(3,569) $ 268
-------- --------- -------- --------
Weighted average shares
outstanding basic 17,247 15,035 16,866 14,444
Weighted average shares
outstanding diluted 17,724 15,189 17,343 14,599
------ ------ ------ ------
Basic and diluted net (loss)
income per share (a) (b) $ (.17) $ (.01) $ (.21) $ -
--------- -------- -------- ---------
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 and six months ended June 30, 2003 presentation of the
dilutive effect of stock options, warrants and convertible notes, which totaled
476,379 shares are not included since they are anti-dilutive.
(b) At June 30, 2002, the Company had a put option obligation of $495,000. This
amount has been recorded in additional paid in capital in the Consolidated
Condensed Balance Sheets. The addition to the liability of $225,000 and $255,000
in the three and six months ended June 30, 2002, respectively, are deemed to be
a dividend for purposes of the basic and diluted (loss) income per share
calculation.
GP STRATEGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
(Unaudited)
3. Long-term debt
Long-term debt consists of the following (in thousands):
June 30, December 31,
2003 2002
--------- ----------
Mortgage on MXL Pennsylvania facility $ 1,455 $ 1,505
Mortgage on MXL Illinois facility 1,199 1,212
Senior subordinated debentures 404 558
6% convertible exchangeable notes (a) 2,640
Other 655 997
--------- ---------
3,713 6,912
Less current maturities (1,200) (3,610)
-------- ---------
$ 2,513 $ 3,302
======== ========
(a) On April 23, 2003, the Company entered into an agreement (the "Exchange
Agreement") with the Holders of the 6% Convertible Exchangeable Notes due June
30, 2003 (the "HMS Notes") to exchange the HMS Notes plus related accrued
interest to date for 554,000 shares of the Company's Common Stock. The original
agreement provided that the HMS Notes, at the option of the Holders, could be
exchanged for 19.9% of the outstanding capital stock of HMS, or into shares of
the Company's Common Stock at a conversion rate of $7.50 per share. As a result,
in accordance with the provisions of SFAS Statement No. 84, Induced Conversions
of Convertible Debt, the Company recorded debt conversion expense, net of
approximately $622,000, which is included in selling, general and administrative
expenses.
GP STRATEGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
(Unaudited)
4. Comprehensive (loss) income
The following are the components of comprehensive (loss) income (in thousands):
Three months ended Six months ended
June 30, June 30,
------------------------- ----------------------
2003 2002 2003 2002
---- ---- ---- ----
Net (loss) income $(2,866) $ 63 $(3,569) $ 268
-------- --------- -------- ---------
Other comprehensive loss before tax:
Net unrealized loss on
available-for-sale-securities (135) (3,900) (1,599) (8,904)
Foreign currency translation adjustment (45) (415) (106) (268)
----------- ---------- --------- ----------
Other comprehensive loss before tax (180) (4,315) (1,705) (9,172)
Income tax benefit relating to
items of other comprehensive income 54 1,524 626 3,459
---------- --------- --------- ---------
Comprehensive loss, net of tax $(2,992) $ (2,728) $(4,648) $ (5,445)
======== ======== ======== =========
The components of accumulated other comprehensive income (loss) are as follows:
June 30, December 31,
2003 2002
---- ----
Net unrealized gain on
available-for-sale-securities $1,081 $2,680
Foreign currency translation adjustment (1,255) (1,149)
------- ------
Accumulated other comprehensive (loss)
income before tax (174) 1,531
Accumulated income tax expense
related to items of other comprehensive loss (445) (1,071)
-------- ------
Accumulated other comprehensive (loss) income,
net of tax $ (619) $ 460
======== ======
GP STRATEGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
(Unaudited)
5. Short-term borrowings
On August 14, 2003, GP and GP's subsidiary SkillRight, Inc. ("SkillRight")
entered into a new two-year $25 million Revolving Credit Facility (the "Credit
Agreement") with a new bank, the proceeds of which were used to repay the
Company's existing credit facility. The Credit Agreement is secured by certain
of the assets of GP, Skillright and MXL. The Credit Agreement also provides for
an unsecured guaranty from the Company.
The interest rate on the Credit Agreement is at the Eurodollar plus 3.00%,
(which as of August 14, 2003 is approximately 4%). Based upon the financial
performance of GP, the interest rate can be reduced. The Credit Agreement
contains covenants with respect to GP's minimum tangible net worth, leverage
ratio, interest coverage ratio and its ability to make capital expenditures. The
Credit Agreement also contains certain restrictive covenants including, a
prohibition on future acquisitions, incurrence of debt and the payment of
dividends. The Company is also subject to certain restrictive covenants
including, limitations on future acquisitions. There is currently approximately
$15,000,000 outstanding under the facility and approximately $3,700,000 is
available to be borrowed under the facility.
As of June 30, 2003, the current amount outstanding under the then existing
current facility is $21,230,000.
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
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.
GP STRATEGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
(Unaudited)
6. Business segments (continued)
The management of the Company does not allocate the following items by segment:
Investment and other income, net, interest expense, selling, general and
administrative expenses, depreciation and amortization expense, income tax
expense, significant non-cash items and long-lived assets.
There are deminimis inter-segment sales. The reconciliation of gross margin to
net (loss) income is consistent with the presentation on the Consolidated
Condensed Statements of Operations.
The following tables set forth the sales and gross margin of each of the
Company's operating segments (in thousands):
Three months ended Six months ended
June 30, June 30,
------------------------- ----------------------
2003 2002 2003 2002
------- -------- ------- -------
Sales
Manufacturing and Process $32,349 $34,401 $64,587 $69,566
Information Technology 1,637 2,127 3,270 4,432
Optical Plastics 2,052 2,714 4,268 5,470
--------- --------- --------- ---------
$36,038 $39,242 $72,125 $79,468
------- ------- ------- -------
Gross margin
Manufacturing and Process $ 3,601 $4,259 $ 6,696 $8,849
Information Technology 305 (54) 675 258
Optical Plastics 407 700 770 1,246
--------- -------- -------- ---------
$ 4,313 $4,905 $8,141 $10,353
======= ====== ====== =======
GP STRATEGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
(Unaudited)
6. Business segments (Continued)
Information about the Company's sales in different geographic regions, which are
attributed to countries based on location of customers, is as follows (in
thousands):
Three months ended Six months ended
June 30, June 30,
------------------------ ------------------------
2003 2002 2003 2002
------- --------- -------- -------
United States $33,755 $36,367 $66,075 $73,946
Canada 66 432 618 731
United Kingdom 1,576 1,845 3,415 3,618
Latin America 641 598 2,017 1,173
------- --------- -------- ---------
$36,038 $39,242 $72,125 $79,468
------- ------- ------- -------
Information about the Company's identifiable assets in different geographic
regions, is as follows (in thousands):
June 30, December 31,
2003 2002
---- ----
United States $134,053 $137,303
Canada 521 3,076
United Kingdom 3,280 3,301
Latin America and other 1,536 1,225
----------- ----------
$139,390 $144,905
-------- --------
7. Restructuring charges
During 1999 and 2000, the Company adopted restructuring plans, primarily related
to its IT business segment. During the six month period ended June 30, 2003 the
Company utilized $378,000 of the restructuring reserve and recorded $254,000 of
other adjustments to the reserve. Of the remaining total restructuring reserve
balance of $1,077,000 at June 30, 2003 and $1,141,000 at December 31, 2002,
$145,000 and $221,000, respectively, were included in
GP STRATEGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
(Unaudited)
7. Restructuring charges (continued)
accounts payable and accrued expenses and $932,000 and $920,000, respectively,
were included in other non-current liabilities in the Consolidated Condensed
Balance Sheet.
The remaining components of the restructuring reserve at June 30, 2003 and
December 31, 2002 consist solely of lease and related obligations. Lease
obligations are presented at their fair value, net of assumed sublets.
8. Goodwill and intangible assets
The components of goodwill and intangible assets as of June 30, 2003 and
December 31, 2002 are as follows (in thousands):
June 30, December 31,
2003 2002
--------- ------------
Unamortized intangible assets:
Goodwill $57,542 $57,491
======= =======
Amortized intangible assets:
Patents and licenses $ 1,348 $ 1,348
Less: accumulated depreciation 640 593
--------- --------
Patents and licenses, net $ 708 $ 755
========= =========
Goodwill increased as of June 30, 2003 due to additional contingent payments
made for previous acquisitions as well as the impact of foreign currency
fluctuations.
GP STRATEGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
(Unaudited)
9. Investments, marketable securities and note receivable
In March 2003, the Company and Inteferon Sciences, Inc. ("ISI") entered into an
agreement whereby 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 debt obligations (the
"ISI Debt"). The Company retained all of its rights in the collateral under the
ISI Debt until its receipt of the Guaranteed Shares. The Company received the
shares in the second quarter of 2003. The agreement obligates HEB to register
the Guaranteed Shares, sets limits on the amount of shares the Company may sell
and requires HEB to pay the Company an amount equal to the number of Guaranteed
Shares remaining unsold on September 11, 2005 multiplied by $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 $4,000,000 (the
"Five Star Note"). On June 20, 2003, the Company entered into an Agreement of
Subordination and Assignments (the "Subordination Agreement") with FSP that
permits the annual repayment of principal on the Five Star Note. On June 27,
2003, the Company received a partial repayment from FSP in the amount of
$500,000, reducing the outstanding principal amount of the note from $4,500,000
to $4,000,000, the balance currently outstanding as of June 30, 2003. In July
2003, the Company received an additional repayment of $500,000, further reducing
the outstanding principal from $4,000,000 to $3,500,000. Under the Subordination
Agreement, FSP is permitted to make a further repayment in the amount of
$200,000 during the remainder of 2003.
In the second quarter of 2003, HMS completed a private placement offering
pursuant to which HMS raised approximately $12 million in gross proceeds from
the sale of Series B preferred stock. As part of such transaction, the Company
was granted an option (the "HMS Option") until June 30, 2004 to purchase up to
$5 million of Series B preferred stock at the offering price of $.72 per share.
For the HMS Option, the Company valued the option using the Black-Scholes model
and recorded approximately $500,000 of income which is included in Investments
and other income (loss), net for the quarter and six months ended June 30, 2003.
GP STRATEGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
(Unaudited)
10. Litigation
On January 3, 2001, the Company commenced an action alleging that MCI
Communications Corporation ("MCI"), MCI's Systemhouse subsidiaries
("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 "State
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 new business from Systemhouse even though
the defendants knew that the sale of Systemhouse to EDS was imminent and that
such new 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 State 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.
On May 15, 2003 the Company and General Physics submitted their opposition to
the objections. The Company and General Physics subsequently made a motion in
Bankruptcy Court to lift the automatic stay to permit the litigation to proceed
against MCI in State Court. MCI opposed the motion, which is scheduled to be
heard by the Bankruptcy Court on September 23, 2003.
The defendants other than MCI made an application to the State Court to stay the
action until a later-commenced arbitration, alleging breach of the acquisition
agreement and related agreements, is concluded.
In a decision dated May 9, 2003, the State 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.
GP STRATEGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
(Unaudited)
10. Litigation (continued)
The Company has filed an appeal from the order staying the action. In the
meantime, the arbitration is proceeding.
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 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. During the second quarter of
2003, the Company recorded $45,000 of income.
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.
GP STRATEGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
(Unaudited)
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
and six months ended June 30, 2003 and 2002 are as follows (in thousands, except
per share amounts):
Three months Six Months
ended June 30, ended June 30,
2002 2003 2003 2002
---- ---- ---- ----
Net (loss) income As reported $(2,866) $ 63 $(3,569) $ 268
Proforma $(3,161) $(318) $(3,965) $(487)
Basic and Diluted
earnings (loss) per share
As reported $ (.17) $(.01) $(.21) $ -
Proforma $ (.19) $(.02) $(.24) $ (.03)
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 June 30, 2003 and 2002, the per share weighted-average fair value of stock
options granted was $2.89 and $2.68, 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
4.0 years; 2002 expected dividend yield 0%, risk-free interest rate of 4.35%,
expected volatility of 73.27% and an expected life of 5.71 years.
GP STRATEGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
(Unaudited)
13. Related party transactions
Pursuant to the incentive compensation agreement entered into in 2002, Jerome I.
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. On each of June 11, 2003 and July 23, 2003, Mr. Feldman earned an
incentive payment of $1 million each, which payments will be made in December
2003. 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 first against the outstanding accrued
interest under such loans and next against any outstanding principal. The
Company recorded compensation expense of $1 million in the second quarter ended
June 30, 2003, which is included in selling, general and administrative expense.
Although the set-off of the payment earned on June 11, 2003 and July 23, 2003
will take place in December 2003, for accounting purposes the set-offs will be
deemed to have occurred on the dates earned. Therefore, as of June 30, 2003,
$4,095,000 of Mr. Feldman's loan was outstanding and the Company applied the
first $1million earned by Mr. Feldman against accrued interest. As of July 23,
2003, the Company applied the second $1million against the remaining $163,000 of
accrued interest, which resulted in the outstanding balance of the loan being
reduced by $837,000 from $4,095,000 at June 30th to $3,258,000 as of July 23,
2003.
14. Subsequent events
Pursuant to a Note and Warrant Purchase Agreement dated August 8, 2003, the
Company issued and sold to four Gabelli funds $7,500,000 aggregate principal
amount of 6% Conditional Subordinated Notes due 2008 (the "Notes") and 937,500
warrants ("GP Warrants"), each entitling the holder thereof to purchase (subject
to adjustment) one share of the Company's common stock. The aggregate purchase
price for the Notes and GP Warrants was $7,500,000.
The Notes mature August 2008 with interest at the rate of 6% per annum payable
semi-annually commencing on December 31, 2003. The Notes are secured by a
mortgage on the Company's property located in Pawling, New York. At any time
that less than $1,875,000 principal amount of Notes are outstanding, the Company
may defease the obligations secured by the mortgage and obtain a release of the
lien of the mortgage by depositing with an agent for the Noteholders bonds or
government securities with an investment grade rating by a nationally recognized
rating agency which, without reinvestment, will provide cash on the maturity
date of the Notes in an amount not less than the outstanding principal amount of
the Notes.
GP STRATEGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
(Unaudited)
14. Subsequent events (continued)
The GP Warrants have an exercise price of $8.00 per share and are exercisable at
any time until August 2008. The exercise price may be paid in cash, by delivery
of Notes, or a combination of the two. The GP Warrants contain anti-dilution
provisions for stock splits, reorganizations, mergers, and similar transactions.
The Company has agreed to file a registration statement to register the resale
of the shares of its common stock issuable on exercise of the GP Warrants, and
to certain other registration rights in favor of the holders of the GP Warrants.
In July 2002, the Company announced that it was actively considering a spin-off
of certain of its non-core assets, including MXL, into a separate corporation
named National Patent Development Corporation ("NPDC"). In the spin-off, it is
contemplated that each holder of the Company's common stock will receive one
share of NPDC common stock for each share of the Company's common stock or Class
B capital stock held. The Note and Warrant Purchase Agreement provides that, on
completion of the spin-off, NPDC will issue warrants ("NPDC Warrants") to the
holders of the GP Warrants. The NPDC Warrants will entitle the holders to
purchase, in the aggregate, a number of shares of NPDC common stock equal to 8%
of the number of shares outstanding at completion of the spin-off, subject to
reduction for any GP Warrants exercised prior to the spin-off. The NPDC Warrants
will be issued to the holders of the GP Warrants on the record date for the
spin-off, and allocated among them pro-rata based on the respective number of GP
Warrants held by them on such date. The exercise price of the GP Warrants will
be adjusted to take into account the spin-off and issuance of the NPDC Warrants
by multiplying the exercise price of the GP Warrants in effect immediately prior
to the spin-off by a fraction, the numerator of which is the average closing
price of GP common stock over the 20 consecutive trading days commencing on the
record date of the spin-off, and the denominator is the sum of the average
closing prices of GP common stock and NPDC common stock over the same period
(assuming the issuance in the spin-off of one share of NPDC common stock for
each share of the Company's common stock or Class B capital stock held). The
exercise price of the NPDC Warrants will be 160% of the average closing price of
the NPDC common stock over the 20 consecutive trading days commencing on the
record date of the spin-off. The NPDC Warrants will be exercisable at any time
after their exercise price is calculated through August 2008. The NPDC Warrants
will have similar anti-dilution provisions. NPDC has agreed to provide the
holders of the NPDC Warrants with registration rights similar to those provided
by the Company to the holders of the GP Warrants.
GP STRATEGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
(Unaudited)
14. Subsequent events (continued)
In connection with the spin-off, the Company intends to contribute the Pawling
property, subject to the mortgage, to MXL. MXL will assume the mortgage, but
without liability for repayment of the Notes or any other obligations of the
Company under the Note and Warrant Purchase Agreement (other than foreclosure on
such property). If there is a foreclosure on the mortgage for payment of the
Notes, the Company has agreed to indemnify MXL for loss of the value of the
property.
The spin-off is still subject to certain conditions, including certain SEC
filings. If the spin-off does not occur by January 2005, the Noteholders will
have the right to require the Company to redeem the Notes. There can be no
assurance that the spin-off will be consummated.
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 Corporation and the
third segment through its operating subsidiary MXL Industries. In addition, the
Company holds a number of investments in publicly held companies, including
Millennium Cell Inc., GSE Systems and Five Star Products, an investment in a
private company Hydro Med Sciences and also 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.
For the quarter ended June 30, 2003, the Company had a net loss before income
taxes of $2,220,000 compared to net income before income taxes of $176,000 for
the quarter ended June 30, 2002. The loss in the second quarter of 2003 was
primarily a result of an executive incentive compensation bonus of $1,000,000, a
debt conversion expense, net, of approximately $622,000 related to the
conversion of the Company's Convertible Exchangeable Notes, and a restructuring
charge of $218,000. The income for the second quarter of 2002 was primarily
attributable to a $846,000 gain from the sale of securities of Millennium Cell,
Inc., and a non-cash credit of $311,000 relating to the Company's Millennium
Cell Deferred Compensation Plan, offset by a non-cash equity loss of $596,000 on
HMS. The Company's three operating business segments had decreased operating
margins in the quarter ended June 30, 2003, compared to the quarter ended June
30, 2002 due to the reduction in sales.
For the six months ended June 30, 2003, the Company had a loss before income
taxes of $3,177,000 compared to income before income taxes of $549,000 for the
six months ended June 30, 2002. The six months ended June 30, 2003 included an
executive incentive compensation bonus of $1,000,000, a debt conversion expense,
net of approximately $622,000 related to the conversion of the Convertible
Exchangeable Notes, and a restructuring charge of $218,000 offset by a $212,000
gain from the sale of securities of Millennium Cell, Inc., and a non-cash credit
of $321,000 relating to the Millennium Cell Deferred Compensation Plan. The
income before income taxes for the six months ended June 30, 2002 included a
$1,286,000 gain from the sale of shares of Millennium Cell, Inc. and a non-cash
credit of $868,000 relating to the Millennium Cell Deferred Compensation Plan,
offset by a non-cash equity loss of $1,331,000 on HMS.
Three months ended Six months ended
June 30, June 30,
--------------------- ---------------------
2003 2002 2003 2002
---- ---- ---- ----
Sales
Manufacturing and Process $32,349 $34,401 $64,587 $69,566
Information Technology 1,637 2,127 3,270 4,432
Optical Plastics 2,052 2,714 4,268 5,470
------- --------- --------- ---------
$36,038 $39,242 $72,125 $79,468
======= ======= ======= =======
For the quarter and six months ended June 30, 2003, sales decreased by
$3,204,000 and $7,343,000 respectively, from the corresponding periods in 2002.
The decrease in sales was primarily attributable to a continued reduction in
sales from the automotive division of the Manufacturing and Process Segment, as
well as decreased sales from certain high tech clients. The Information
Technology and the Optical Plastic Segment's sales continue to decline primarily
due to the overall continued downturn in the economy.
Three months ended Six months ended
June 30, June 30,
------------------------------------- ----------------------------------
2003 % 2002 % 2003 % 2002 %
---- - ---- - ---- - ---- -
Gross margin
Manufacturing and Process $3,601 11.1 $ 4,259 12.4 $6,696 10.4 $ 8,849 12.7
Information Technology 305 18.6 (54) 675 20.6 258 5.8
Optical Plastics 407 19.8 700 25.8 770 18.0 1,246 22.8
------- ---- -------- ---- ------ ---- --------- ----
$4,313 12.0 $ 4,905 12.5 $8,141 11.3 $10,353 13.0
====== ==== ======= ==== ====== ==== ======= ====
Consolidated gross margin of $4,313,000 or 12.0% of sales for the quarter ended
June 30, 2003, decreased by $592,000, compared to the consolidated gross margin
of $4,905,000, or 12.5% of sales for the quarter ended June 30, 2002. For the
six months ended June 30, 2003, gross margin decreased by $2,212,000 from
$10,353,000 to $8,141,000. The decreased gross margin in both the quarter and
six months ended June 30, 2003 occurred within the Manufacturing and Process and
Optical Plastics Segments, as a result of a reduction in sales for the periods.
The increased gross margin in both the quarter and six months ended June 30,
2003 for the Information Technology Segment was a direct result of cost
reduction initiatives within the segment and the Company's continued efforts to
control costs on existing contracts. The overall gross margin percentage
decreased slightly for the three months and six months ended June 30, 2003 due
to reduced revenues without the ability to reduce certain fixed costs.
Selling, general and administrative expenses
For the quarter ended June 30, 2003, selling, general and administrative (SG&A)
expenses were $6,363,000 compared to $4,737,000 in the second quarter of 2002.
The increase in SG&A of $1,626,000 is primarily attributable to an executive
incentive compensation bonus of $1,000,000, a debt conversion expense, net of
approximately $622,000 related to the conversion of the Company's Convertible
Exchangeable Notes, a reduction in the non-cash credit relating to the Deferred
Compensation Plan of $295,000, offset by a reduction in SG&A expenses of
approximately $290,000 due to the Company's continued efforts to reduce costs
through reductions in personnel, office rental costs and other operating
expenses.
For the six months ended June 30, 2003, SG&A expenses increased by $1,509,000
from $9,277,000 to $10,786,000 primarily as a result of an executive incentive
compensation bonus of $1,000,000, a debt conversion expense, net of
approximately $622,000, a reduction in the non-cash credit relating to the
Deferred Compensation Plan of $547,000, offset by a reduction in SG&A expenses
of approximately $660,000 due to the Company's efforts to reduce operating
expenses.
Interest expense
For the quarter ended June 30, 2003, interest expense decreased by $83,000
compared to the quarter ended June 30, 2002. For the six months ended June 30,
2002, there was a decrease in interest expense of $241,000 from $1,429,000 to
$1,188,000. The decreased interest expense in 2003 was attributable to both 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 quarter and six months ended June 30, 2003, investment and other income
(loss), net was $502,000 and $662,000 as compared to $(303,000) and $(738,000)
for the quarter and six months ended June 30, 2002. The income in 2003 was
primarily attributable to non-cash equity realized in connection with the HMS
option as compared to equity losses recognized on HMS of $596,000 and $1,331,000
for comparable periods in 2002 and on interest income on loans receivable and
other income of $104,000 and $355,000, respectively.
Income taxes
For the quarter and six months ended June 30, 2003, the Company recorded an
income tax expense of $646,000 and $392,000, which represents the Company's
applicable federal, state and local, and foreign tax expense for these periods.
In the quarter and six months ended June 30, 2002, the Company recorded an
income tax expense of $113,000 and $281,000, which represents the applicable
federal, state and local, and foreign tax expense for these periods.
Liquidity and capital resources
On August 14, 2003,GP and GP's subsidiary SkillRight, Inc. ("SkillRight")
entered into a new two-year $25 million Revolving Credit Facility (the "Credit
Agreement") with a new bank, the proceeds of which were used to repay the
Company's existing credit facility. The Credit Agreement is secured by certain
of the assets of GP, Skillright and MXL. The Credit Agreement also provides for
an unsecured guaranty from the Company.
The interest rate on the Credit Agreement is at the Eurodollar plus 3.00%,
(which as of August 14, 2003 is approximately 1%). Based upon the financial
performance of GP, the interest rate can be reduced. The Credit Agreement
contains covenants with respect to GP's minimum tangible net worth, leverage
ratio, interest coverage ratio and its ability to make capital expenditures. The
Credit Agreement also contains certain restrictive covenants including a
prohibition on future acquisitions, incurrence of debt and the payment of
dividends. The Company is also subject to certain restrictive covenants
including limitations on future acquisitions. There is currently approximately
$15,000,000 outstanding under the facility and $3,700,000 is available to be
borrowed under the facility.
As of June 30, 2003, the current amount outstanding under the prior credit
facility is $21,230,000. Due to the Company's subsidiaries entering into a new
Credit Agreement on August 14, 2003, described above, the Company anticipates
writing off approximately $800,000 of unamortized deferred financing costs in
the third quarter of 2003 relating to the prior credit facility.
Pursuant to a Note and Warrant Purchase Agreement dated August 8, 2003, the
Company issued and sold to four Gabelli Funds, $7,500,000 aggregate principal
amount of 6% Conditional Subordinated Notes due 2008 (the "Notes") and 937,500
warrants ("GP Warrants"), each entitling the holder thereof to purchase (subject
to adjustment) one share of the Company's common stock. The aggregate purchase
price for the Notes and GP Warrants was $7,500,000.
The Notes mature August 2008 with interest payable semi-annually commencing on
December 31, 2003. The Notes are secured by a mortgage on the Company's property
located in Pawling, New York. At any time that less than $1,875,000 principal
amount of Notes are outstanding, the Company may defease the obligations secured
by the mortgage and obtain a release of the lien of the mortgage by depositing
with an agent for the Noteholders bonds or government securities with an
investment grade rating by a nationally recognized rating agency which, without
reinvestment, will provide cash on the maturity date of the Notes in an amount
not less than the outstanding principal amount of the Notes.
The GP Warrants have an exercise price of $8.00 per share and are exercisable at
any time until August 2008. The exercise price may be paid in cash, by delivery
of Notes, or a combination of the two. The GP Warrants contain anti-dilution
provisions for stock splits, reorganizations, mergers, and similar transactions.
The Company has agreed to file a registration statement to register the resale
of the shares of its common stock issuable on exercise of the GP Warrants, and
to certain other registration rights in favor of the holders of the GP Warrants.
In July 2002, the Company announced that it was actively considering a spin-off
of certain of its non-core assets, including MXL, into a separate corporation
named National Patent Development Corporation ("NPDC"). In the spin-off, it is
contemplated that each holder of the Company's common stock will receive one
share of NPDC common stock for each share of the Company's common stock or Class
B capital stock held. The Note and Warrant Purchase Agreement provides that, on
completion of the spin-off, NPDC will issue warrants ("NPDC Warrants") to the
holders of the GP Warrants. The NPDC Warrants will entitle the holders to
purchase, in the aggregate, a number of shares of NPDC common stock equal to 8%
of the number of shares outstanding at completion of the spin-off, subject to
reduction for any GP Warrants exercised prior to the spin-off. The NPDC Warrants
will be issued to the holders of the GP Warrants on the record date for the
spin-off, and allocated among them pro-rata based on the respective number of GP
Warrants held by them on such date. The exercise price of the GP Warrants will
be adjusted to take into account the spin-off and issuance of the NPDC Warrants,
as specified in the Note and Warrant Purchase Agreement. The exercise price of
the NPDC Warrants will be 160% of the average closing price of the NPDC common
stock over the 20 consecutive trading days commencing on the record date of the
spin-off. The NPDC Warrants will be exercisable at any time after their exercise
price is calculated through August 2008. The NPDC Warrants will have
anti-dilution provisions similar to the GP Warrants. NPDC has agreed to provide
the holders of the NPDC Warrants with registration rights similar to those
provided by the Company to the holders of the GP Warrants.
The spin-off is still subject to certain conditions, including certain SEC
filings. If the spin-off does not occur by January, 2005, the Noteholders will
have the right to require the Company to redeem to the Notes. There can be no
assurance that the spin-off will be consummated.
The Company currently has an 8% senior unsecured note receivable from Five Star
Products, Inc. ("FSP") due September 30, 2004 in the amount of $4,000,000 (the
"Five Star Note"). On June 20, 2003, the Company entered into an Agreement of
Subordination and Assignments (the "Subordination Agreement") with FSP that
permits the annual repayment of principal on the Five Star Note. On June 27,
2003, the Company received a partial repayment from FSP in the amount of
$500,000, reducing the outstanding principal amount of the note from $4,500,000
to $4,000,000, the balance currently outstanding as of June 30, 2003. In July
2003, the Company received an additional repayment of $500,000, further reducing
the outstanding principal from $4,000,000 to $3,500,000. Under the Subordination
Agreement, FSP is permitted to make a further repayment in the amount of
$200,000 during the remainder of 2003.
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. During the second quarter of
2003, the Company recorded $45,000 of income.
At June 30, 2003, the Company had cash and cash equivalents totaling $827,000.
The Company believes that cash generated from operations, borrowing availability
under the new 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.
For the six months ended June 30, 2003, the Company's working capital increased
by $1,205,000 to $1,985,000.
The decrease in cash and cash equivalents of $689,000 for the six months ended
June 30, 2003 resulted primarily from cash provided by operating activities of
$616,000 offset by cash used in investing activities of $189,000 and financing
activities of $1,010,000.
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 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
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 April 2003, the FASB issued SFAS No. 149, "Amendment of SFAS No. 133 on
Derivative Instruments and Hedging Activities." SFAS No. 149 amends and
clarifies accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities under SFAS
No. 133. In particular, this Statement clarifies under what circumstances a
contract with an initial net investment meets the characteristic of a
derivative. It also clarifies when a derivative contains a financing component
that warrants special reporting in the statement of cash flows. SFAS No. 149 is
generally effective for contracts entered into or modified after June 30, 2003
and is not expected to have an impact on the Company's Consolidated Financial
Statements.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." SFAS No. 150
establishes standards for how a company classifies and measures certain
financial instruments with characteristics of both liabilities and equity. It
requires that an issuer classify certain financial instruments as a liability
(or as an asset in some circumstances). SFAS No. 150 is effective for financial
instruments entered into or modified after May 31, 2003, and otherwise is
effective at the beginning of the first interim period beginning after June 15,
2003.The adoption of SFAS No. 150 did not have an impact on 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 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 adoption of
Issue No. 00-21 did not have an impact on the Company's Consolidated Financial
Statements.
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
new events or circumstances. Accordingly, these statements are subject to
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.
GP STRATEGIES CORPORATION AND SUBSIDIARIES
QUALIFICATION RELATING TO FINANCIAL INFORMATION
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
10.0 Note and Warrant Purchase Agreement dated August 8, 2003 among GP
Strategies Corporation, National Patent Development Corporation and
Gabelli Funds, LLC.
10.01 Form of GP Strategies Corporation 6% Conditional Subordinated
Note due 2008 dated August 14, 2003.
10.02 Form of GP Strategies Corporation Warrant Certificate dated
August 14, 2003.
10.03 Form of National Patent Development Corporation Warrant
Certificate dated August 14, 2003.
10.04 Mortgage Security Agreement and Assignment of Leases dated
August 14, 2003 between GP Strategies Corporation and Gabelli Funds,
LLC.
10.05 Registration Rights Agreement dated August 14, 2003 between GP
Strategies Corporation and Gabelli Funds, LLC.
10.06 Registration Rights Agreement dated August 14, 2003 between
National Patent Development Corporation and Gabelli Funds, LLC.
10.07 Indemnity Agreement dated August 14, 2003 by GP Strategies
Corporation for the benefit of National Patent Development Corporation
and MXL Industries, Inc.
10.08 Subordination Agreement dated August 14, 2003 among GP
Strategies Corporation, Gabelli Funds LLC, as Agent on behalf of the
holders of the Company's 6% Conditional Subordinated Notes due 2008
and Wachovia Bank, National Association.
10.09 Amended and Restated Incentive Compensation Agreement dated June
11, 2003 between GP Strategies Corporation and Jerome I. Feldman.
10.10 Financial and Security Agreement dated August 13, 2003 by and
between General Physics Corporation, MXL Industries, Inc. and Wachovia
Bank, National Association.
10.11 Guaranty of Payment Agreement dated August 13, 2003 by GP
Strategies Corporation for the benefit of Wachovia Bank, National
Association.
10.12 Limited Guaranty of Payment Agreement dated August 13, 2003 by
MXL Industries, Inc. for the benefit of Wachovia Bank, National
Association.
31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14
of the Securities Act of 1934.
31.2 Certification of Chief Financial Officer pursuant to Rule 13a-14
of the Securities Act of 1934.
32.1 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.
32.2 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 May 15, 2003 reporting event under Item 12.
GP STRATEGIES CORPORATION AND SUBSIDIARIES
June 30, 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: August 18, 2003 BY: Scott N. Greenberg
President &
Chief Financial Officer
DATE: August 18, 2003 BY: Jerome I. Feldman
Chief Executive Officer