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 September 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
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Indicate the number of shares outstanding of each of issuer's classes of common
stock as of November 7, 2003:
Common Stock 16,288,493 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 -
September 30, 2003 and December 31, 2002 1
Consolidated Condensed Statements of Operations-
Three Months and Nine Months Ended September 30,
2003 and 2002 3
Consolidated Condensed Statements of Cash Flows -
Nine Months Ended September 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
(unaudited)
(in thousands)
September 30, December 31,
2003 2002
---- ----
ASSETS
Current assets
Cash and cash equivalents $ 2,863 $ 1,516
Accounts and other receivables 23,878 26,708
Inventories 1,803 1,380
Costs and estimated earnings
in excess of billings on uncompleted contracts 11,217 14,177
Prepaid expenses and other current assets 4,503 4,079
----------- -----------
Total current assets 44,264 47,860
---------- ----------
Investments, marketable securities and note receivable 11,916 14,130
Property, plant and equipment, net 8,150 8,299
Intangible assets
Goodwill 57,554 57,491
Patents and licenses, net 688 755
------------ ------------
58,242 58,246
---------- ----------
Deferred tax asset 10,754 10,846
Other assets 5,395 5,524
----------- -----------
$138,721 $144,905
======== ========
See accompanying notes to the consolidated condensed financial statements.
GP STRATEGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS (Continued)
(unaudited)
(in thousands)
September 30, December 31,
2003 2002
------------- -------------
------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 1,771 $ 3,610
Short-term borrowings 11,618 22,058
Accounts payable and accrued expenses 18,550 17,552
Billings in excess of costs and estimated
earnings on uncompleted contracts 4,955 3,860
---------- ----------
Total current liabilities 36,894 47,080
--------- ---------
Long-term debt less current maturities 7,974 3,302
Other non-current liabilities 1,134 1,541
Stockholders' equity
Common stock 163 154
Class B capital stock 12 12
Additional paid in capital 195,143 189,988
Accumulated deficit (99,583) (93,167)
Accumulated other comprehensive income 456 460
Note receivable from stockholder (3,258) (4,095)
Treasury stock, at cost (214) (370)
------------ ------------
Total stockholders' equity 92,719 92,982
---------- ----------
$138,721 $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 Three months
ended September 30, ended September 30,
------------------- -------------------
2003 2002 2003 2002
---- ---- ---- ----
Sales $34,227 $36,616 $106,352 $116,084
Cost of sales 29,614 33,190 93,598 102,305
------ ------ ------ -------
Gross profit 4,613 3,426 12,754 13,779
------- ------- ------ --------
Executive incentive compensation bonus (1,000) (2,000)
Non-cash debt conversion expense, net (622)
Other selling, general & administrative expenses (5,562) (6,918) (14,944) (15,841)
------- ----- ------ ------
Total selling, general & administrative expenses (6,562) (6,918) (17,566) (15,841)
------- ----- ------ ------
Operating loss (1,949) (3,492) (4,812) (2,062)
Write-off of deferred financing costs (860) (860)
Interest expense (611) (654) (1,799) (2,083)
--------- -------- ----- -----
Total interest expense (1,471) (654) (2,659) (2,083)
------- ------- ----- -----
Investment and other income (loss), net (562) 16 100 (722)
Valuation adjustment of liability for warrants 1,162 1,162
Gain on sales of marketable securities 186 391 398 1,677
-------- ------- ------- --------
Loss before income taxes (2,634) (3,739) (5,811) (3,190)
Income tax expense (213) (148) (605) (429)
-------- -------- -------- --------
Net loss $(2,847) $(3,887) $(6,416) $(3,619)
======= ======= ======= =======
Net loss per share:
Basic and diluted $ (.16) $ (.25) $ (.38) $ (.24)
========= ======== ========= ========
Dividends per share $ none $ none $ none $ none
======== ======== ======== ========
See accompanying notes to the consolidated condensed financial statements.
GP STRATEGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
Nine Months
ended September 30,
---------------------------------
------------ ---- ---------------
2003 2002
---- ----
Cash flows from operations:
Net loss $(6,416) $(3,619)
Adjustments to reconcile net loss to net cash
(used in) provided by operating activities:
Depreciation and amortization 2,552 2,238
Non-cash debt conversion expense, net 622
Valuation adjustment of liability for warrants (1,162)
Write-off of deferred financing costs 860
Issuance of stock for retirement savings plan 846 594
Non-cash (credit) charge to compensation and consultant fees (306) 240
Loss on equity investments, net 329 1,112
Gain on sale of marketable securities (398) (1,677)
Changes in other operating items 6,569 (709)
------- --------
Net cash provided by (used in) operating activities 3,496 (1,821)
------- ------
Cash flows from investing activities:
Repayments of note receivable 1,000
Proceeds from sale of marketable securities 1,120 2,687
Additions to property, plant and equipment (800) (1,504)
(Increases) reductions in investments and other assets, net (1,523) 188
------- ------
Net cash (used in) provided by investing activities (203) 1,371
-------- -----
Cash flows from financing activities:
Net proceeds from sale of Common Stock 7,850
Net proceeds from sale of Class B Stock 1,260
Proceeds from exercise of stock options 776
Repayment of short-term borrowings (10,440) (8,713)
Proceeds from issuance of long-term debt 8,673
Repayments of long-term debt (853) 224
-------- -----
Net cash (used in) provided by financing activities (1,844) 621
------- ------
Effect of exchange rate changes on
cash and cash equivalents (102) (521)
-------- -------
GP STRATEGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Continued)
(Unaudited)
(in thousands)
Nine months
ended September 30,
2003 2002
------- -------
Net (decrease) increase in cash and cash equivalents $1,347 $ (350)
Cash and cash equivalents at the beginning of the period 1,516 1,705
------ --------
Cash and cash equivalents at the end of the period $2,863 $ 1,355
====== ========
Cash paid during the periods for:
Interest $ 958 $ 1,563
====== ========
Income taxes $ 372 $ 431
====== =========
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. MXL is a specialist in the manufacture of polycarbonate
parts requiring adherence to strict optical quality specifications and in the
applications of abrasion and fog resistant coatings to those parts.
The accompanying Consolidated Condensed Balance Sheet at September 30, 2003 and
the Consolidated Condensed Statements of Operations and Cash Flows for the
periods ended September 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.
In July 2002, the Company's Board of Directors approved a spin-off of certain of
its non-core assets into a separate corporation, National Patent Development
Corporation ("NPDC"). The Company would own and operate its manufacturing and
process business and information technology business through its subsidiary, GP,
and NPDC would own and operate the Company's optical plastics business through
its subsidiary, MXL and would own certain of the Company's non-core assets. The
separation of these businesses will be accomplished through a pro-rata
distribution (the "Distribution") of 100% of the outstanding Class A common
stock of NPDC to the Company's stockholders on the record date of the
Distribution.
GP STRATEGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
(Unaudited)
1. Basis of Presentation (Continued)
On March 21, 2003, the Internal Revenue Service issued a favorable tax ruling
which would enable the Distribution to be tax-free. As a result, each
stockholder of the Company would receive a tax-free stock dividend of one share
of NPDC Class A common stock for every share of the Company's common stock or
Class B capital stock owned on the record date of the Distribution.
The spin-off is still subject to certain conditions, including certain SEC
filings.
2. Earnings per share
Earnings (loss) per share (EPS) for the three and nine month periods
ended September 30, 2003 and 2002 are as follows (in thousands, except per share
amounts):
Three months Nine months
ended September 30, ended September 30,
------------------- --------------------------
2003 2002 2003 2002
---- ---- ---- ----
Basic and Diluted EPS
Net loss $(2,847) $(3,887) $(6,416) $(3,619)
-------- -------- -------- --------
Weighted average shares
outstanding basic 17,404 15,618 17,028 15,030
Weighted average shares
outstanding diluted 17,404 15,618 17,028 15,030
------ ------ ------ ------
Basic and diluted net loss
per share (a) $ (.16) $ (.25) $ (.38) $ (.24)
--------- --------- --------- ---------
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 nine months ended September 30, 2003 and 2002 presentation
of the dilutive effect of stock options, warrants and convertible notes are not
included since they are anti-dilutive.
3. Long-term debt
Long-term debt consists of the following (in thousands):
September 30, December 31,
2003 2002
---- ----
6% conditional subordinated notes due 2008 (a) $7,500 -
Mortgage on MXL Pennsylvania facility 1,330 $1,505
Mortgage on MXL Illinois facility 1,162 1,212
Senior subordinated debentures 427 558
6% convertible exchangeable notes (b) - 2,640
AOtec equipment facility (c) 1,000 -
Other 673 997
------- -------
12,092 6,912
Less warrant related discount, net of accretion (2,347) -
------- -------
9,745 6,912
Less current maturities (1,771) (3,610)
------- ------
$7,974 $3,302
====== ======
(a) 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 bear interest at 6% per annum payable semi-annually commencing on
December 31, 2003, and mature in August 2008. 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
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.
3. Long term debt (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 fair value of the GP Warrants at the date of issuance was $2,389,000, which
reduced long-term debt in the accompanying consolidated balance sheet. This
amount is being accreted as additional interest expense using the effective
interest rate over the term of the Notes. The Notes have a yield to maturity of
15.436% based on the discounted value. Accretion charged as non-cash interest
was approximately $42,000 as of September 30, 2003.
The GP Warrants are accounted for as a liability of the Company since the shares
of the Company's common stock issuable on exercise of the GP Warrants were not
registered as of September 30, 2003. Changes in the fair market value of the GP
Warrants are marked to market with the adjustment shown as other income in the
consolidated statement of operations. The Company recognized a gain of
$1,162,000 in its September 30, 2003 valuation adjustment of the GP Warrants
under the Black-Scholes model. The value of the GP Warrants of $1,227,000 at
September 30, 2003 is included in accounts payable and accrued expenses. The
Note and Warrant Purchase Agreement provides that, on completion of the
Distribution described in Note 1 above, 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 allocated to the holders of the GP Warrants on a pro-rata
basis, on the respective number of GP Warrants held by them on such date.
In connection with the Distribution, 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.
If the Distribution 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.
3. Long term debt (Continued)
(b) 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 with a fair
value of $2,770,000. 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 Valera Pharmaceuticals (formerly Hydro Med Sciences), 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.
(c) On September 15, 2003, MXL purchased machinery, equipment and inventory from
AOtec LLC ("AOtec"), located in the Massachusetts area, for $1,100,000, subject
to adjustment. In connection with this purchase, the Company valued the
machinery and equipment at approximately $900,000, the inventory at
approximately $300,000 and recorded an accrued expense of $100,000. MXL paid
$100,000 of the purchase price in cash and issued three notes, in the amount of
$450,000, $275,000 and $275,000 each, due October 1, 2003, August 5, 2004 and
August 5, 2005, respectively (collectively, the "AOtec Notes"). The AOtec Notes
bear interest on the unpaid principal amount at the rate of 4% per annum. On
October 1, 2003, MXL borrowed $700,000 from a bank under a lease agreement to
finance the purchase price (the "AOtec Debt") and used the proceeds to pay the
$450,000 note. The AOtec Debt is payable monthly for three years and is secured
by the machinery and equipment purchased from AOtec. The Company guaranteed the
AOtec Debt.
4. Comprehensive (loss) income
The following are the components of comprehensive (loss) income (in thousands):
Three months ended Nine months ended
September 30, September 30,
--------------------------------- -------------------------------
2003 2002 2003 2002
---- ---- ---- ----
Net loss $(2,847) $(3,887) $(6,416) $(3,619)
-------- -------- -------- --------
Other comprehensive income (loss) before tax:
Net unrealized income (loss)
available-for-sale-securities 1,757 (2,955) 158 (11,859)
Foreign currency translation adjustment 4 (253) (102) (521)
---------- ------- -------- --------
Other comprehensive income (loss) before tax 1,761 (3,208) 56 (12,380)
Income tax (expense) benefit relating to
items of other comprehensive income (loss) (686) 1,142 (60) 4,601
---------- -------- ----------- ----------
Comprehensive loss, net of tax $(1,772) $(5,953) $(6,420) $(11,398)
======== ======= ======== =========
The components of accumulated other comprehensive income (loss) are as follows:
September 30, December 31,
2003 2002
---- ----
Net unrealized gain on
available-for-sale-securities $2,838 $2,680
Foreign currency translation adjustment (1,251) (1,149)
------- ------
Accumulated other comprehensive
income before tax 1,587 1,531
Accumulated income tax expense
related to items of other comprehensive income (1,131) (1,071)
------- ------
Accumulated other comprehensive income,
net of tax $ 456 $ 460
====== ======
5. Short-term borrowings
On August 14, 2003, GP, GP's subsidiary, Skillright, Inc., and MXL, entered into
a 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 assets of GP and certain of
the accounts receivable of MXL. The Credit Agreement also provides for an
unsecured guaranty from the Company. MXL provided a limited guaranty of the
Credit Agreement up to the value of its accounts receivable collateral securing
the Credit Agreement. For the continuation of the lender's security interest in
5. Short-term borrowings (Continued)
MXL's accounts receivables and the continuation of its limited guarantee after
the potential spin-off, GP will pay MXL a guarantee fee. At GP's option, upon
prior written notice to the lender under the Credit Agreement, MXL's accounts
receivables can be eliminated from the borrowing base under the Credit
Agreement, provided that GP makes a prepayment under the Credit Agreement, if
necessary, to eliminate a borrowing base deficiency, if any. At such point, all
obligations of MXL relating to the Credit Agreement shall terminate and MXL's
limited guaranty of the Credit Agreement shall be void.
The interest rate on the Credit Agreement is at Eurodollar plus 3.00%, (which as
of September 30, 2003 is approximately 4.1%). 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. GP is currently restricted from paying dividends or management fees
to the Company in excess of $1,000,000 in any fiscal year. GP is also subject to
certain restrictive covenants including limitations on future acquisitions. GP
was in compliance with all loan covenants under the Credit Agreement as of
September 30, 2003.
The Company wrote off $860,000 of deferred financing costs due to the early
termination of its previous credit agreement. This expense is included in
interest expense for the three month and nine months ended September 30, 2003.
As of September 30, 2003, the current amount outstanding under the Credit
Agreement is approximately $11,618,000, and approximately $4,700,000 was
available to be borrowed under the Credit Agreement.
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.
6. Business segments (Continued)
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.
There are deminimis inter-segment sales. The reconciliation of gross profit 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 profit of each of the Company's operating segments (in thousands):
Three months ended Nine months ended
September 30, September 30,
2003 2002 2003 2002
Sales
Manufacturing and Process $30,843 $32,543 $95,430 $102,109
Information Technology 1,470 1,852 4,740 6,284
Optical Plastics 1,914 2,221 6,182 7,691
--------- --------- ---------- -----------
$34,227 $36,616 $106,352 $116,084
======= ======= ======== ========
Gross profit
Manufacturing and Process $3,810 $3,024 $10,506 $11,873
Information Technology 318 (43) 993 215
Optical Plastics 485 445 1,255 1,691
-------- -------- --------- ---------
$4,613 $3,426 $12,754 $13,779
====== ====== ======= =======
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 Nine months ended
September 30, September 30,
------------------- --------------------
2003 2002 2003 2002
-------- ------- ------- -------
United States $31,244 $34,037 $97,319 $107,983
Canada 262 265 880 996
United Kingdom 1,803 1,787 5,218 5,405
Latin America and other 918 527 2,935 1,700
-------- --------- ----------- ---------
$34,227 $36,616 $106,352 $116,084
======= ------- ======== --------
6. Business segments (Continued)
Information about the Company's identifiable assets in different geographic
regions, is as follows (in thousands):
September 30, December 31,
2003 2002
---- ----
United States $133,362 $137,303
Canada 483 3,076
United Kingdom 3,239 3,301
Latin America and other 1,637 1,225
----------- ----------
$138,721 $144,905
-------- --------
7. Restructuring reserves
During 1999 and 2000, the Company adopted restructuring plans, primarily related
to its IT business segment. During the nine month period ended September 30,
2003 the Company utilized $547,000 of the restructuring reserve and recorded
$365,000 of other adjustments to the reserve. Of the remaining restructuring
reserve balance of $959,000 and $1,141,000 at September 30, 2003 and December
31, 2002, respectively, $79,000 and $221,000, respectively, were included in
accounts payable and accrued expenses and $880,000 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 September 30, 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
The components of goodwill and intangible assets as of September 30, 2003 and
December 31, 2002 are as follows (in thousands):
September 30, December 31,
2003 2002
----------- ---------------
Goodwill:
Manufacturing Process $51,073 $51,020
Information Technology 6,269 6,269
Optical Plastics 202 202
--------- --------
Total Goodwill $57,544 $57,491
======= =======
Amortized intangible assets:
Patents and licenses $ 1,348 $ 1,348
Less: accumulated depreciation 660 593
--------- --------
Patents and licenses, net $ 688 $ 755
======== =========
Amortization expense for patents and licenses was $67,000 and $80,000 for the
nine months ended September 30, 2003 and 2002. The weighted average amortization
period as of September 30, 2003 is approximately six years. Amortization expense
for the next six years is estimated to be approximately $100,000 a year.
Goodwill increased as of September 30, 2003 due to additional contingent
payments made for previous acquisitions as well as the impact of foreign
currency fluctuations.
9. Investments, marketable securities and note receivable
In March 2003, the Company and Interferon 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 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 Guaranteed Shares were registered by
HEB in the fourth quarter of 2003.
The Company currently has an 8% senior unsecured note receivable from Five Star
Products, Inc. ("FSP") in the outstanding principal amount of $3,000,000 (the
"FSP Note"). On June 20, 2003, the Company entered into an Agreement of
9. Investments, marketable securities and note receivable (Continued)
Subordination and Assignments (the "Subordination Agreement") with FSP that
amended the amount of annual repayment of principal on the FSP Note. Future
repayments of the FSP Note are contingent on the operating results of FSP,
subject to certain limitations as defined in the Subordination Agreement.
Pursuant to the provisions of the Subordination Agreement, 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 FSP Note from $4,500,000 to
$4,000,000. 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 an
additional repayment of up to $200,000 during the remainder of 2003.
On October 8, 2003, the Company exchanged $500,000 of the then outstanding
amount of the FSP Note of $3,500,000 for 2,000,000 shares of FSP common stock,
reducing the outstanding principal balance of the FSP Note from $3,500,000 to
$3,000,000 and increasing the Company's ownership of FSP common stock to
9,133,417 shares, representing approximately 54% of FSP's outstanding shares. In
consideration for the Company agreeing to the exchange at a price of $0.25 per
share, FSP agreed to terminate the voting agreement between the Company and FSP.
The voting agreement, which by its terms would in any event have terminated on
June 30, 2004, provided that the Company (i) would vote its FSP common stock so
that not more than 50% of the members of the FSP Board of Directors would be
officers or directors of the Company, and (ii) would vote on matters other than
the election of directors in the same proportion as the other FSP stockholders.
As a result, commencing in the fourth quarter of 2003 the financial statements
of FSP will be consolidated in the Company's consolidated financial statements.
In the second quarter of 2003, Valera Pharmaceuticals, Inc. (formerly Hydro Med
Sciences) ("Valera") completed a private placement offering pursuant to which
Valera 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 "Valera Option") until March 31, 2004 (with a closing by June 30,
2004) to purchase up to $5 million of Series B preferred stock at the offering
price of $.72 per share. The Company valued the Valera Option using the
Black-Scholes model and recorded approximately $500,000 of income, which is
included in Investments and other income (loss) net. The Valera Option was
written down to zero in the quarter ended September 30, 2003 due to the
recognition of the Company's share of Valera's equity loss.
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
10. Litigation (continued)
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 GP 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 GP.
On May 15, 2003 the Company and GP submitted their opposition to the objections.
The Company and GP 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 now subjudice.
The defendants other than MCI made an application to the State Court to stay the
fraud 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 and of a separate agreement to refer
business to GP on a preferred provider basis. Discovery is now being conducted
in connection with the arbitration.
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 GSE
Systems, Inc. ("GSE") debt pursuant to GSE's credit facility. GSE's credit
facility was scheduled to expire on March 23, 2003, however, it was extended
until March 31, 2004. In consideration for the extension of the guarantee, the
Company received 150,000 shares of GSE 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 be amortized to income over the term of the guarantee. During the
quarter and nine months ended September 30, 2003, the Company recorded $45,000
and $90,000, respectively, to other income in the Statement of Operations.
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.
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 nine months ended September 30, 2003 and 2002 are as follows (in thousands,
except per share amounts):
12. Stock based compensation (Continued)
Three months Nine Months
ended September 30, ended September 30,
2003 2002 2003 2002
---- ---- ---- ----
Net loss As reported $(2,847) $(3,887) $(6,416) $(3,619)
Proforma compensation expense (542) (435) (938) (1,190)
---------- --------- ---------- ---------
Proforma $(3,389) $(4,322) $(7,354) $(4,809)
======== ======== ======== ========
Basic and Diluted
loss per share
As reported $(.16) $(.25) $(.38) $(.24)
Proforma $(.19) $(.28) $(.42) $(.32)
At September 30, 2003 and 2002, the per share weighted-average fair value of
stock options granted was $2.74 and $2.69, 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 2.00%, expected volatility of 67.61% and an expected life of
2.46 years; 2002 expected dividend yield 0%, risk-free interest rate of 4.33%,
expected volatility of 73.28% and an expected life of 5.70 years.
13. Related party transactions
Pursuant to the incentive compensation agreement (the "Incentive Agreement")
entered into in 2002, Jerome I. Feldman, the Company's Chief Executive Officer,
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 or averaging 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 are to be
made in December 2003 unless deferred as set forth below. To the extent there
are any outstanding loans from the Company to Mr. Feldman at the time an
incentive payment is payable, the Company has the right to 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 third quarter ended September 30, 2003
and $2,000,000 for the nine months ended September 30, 2003, which is included
in selling, general and administrative expense. Although the set-off of the
payments earned on June 11, 2003 and July 23, 2003 will take place in future
periods, for accounting purposes, the set-offs will be deemed to have occurred
on the dates earned since the Company possesses the right of set-off under the
Incentive Agreement. As a result, the Company applied the first $1 million
13. Related party transactions (Continued)
earned by Mr. Feldman against $1 million of accrued interest receivable and the
second $1million against the remaining $163,000 of accrued interest receivable
and $837,000 of principal, which resulted in the outstanding balance of the note
receivable being reduced from $4,095,000 at June 30, 2003 to $3,258,000 as of
September 30, 2003.
On October 1, 2003, the incentive agreement was amended to allow Mr. Feldman to
defer receipt of any incentive payment for a period of at least six months. The
deferral period will automatically renew unless Mr. Feldman gives a termination
notice at least 30 days prior to the expiration of the deferral period. However,
no deferral period may end later than May 31, 2007. A deferral notice with
respect to any incentive payment earned prior to December 31, 2003 must be given
prior to December 1, 2003, and a deferral notice with respect to any incentive
payment earned on or after December 31, 2003 must be given at least five
business days prior to the date that such incentive payment is earned. A
deferral notice cannot be given, and any deferral period will end, if any
outstanding loan from the Company to Mr. Feldman is due and payable and is not
otherwise paid. Interest accrues on each deferred amount at the prime rate minus
1%, which is 1% less than the interest rate accrued on the Company's outstanding
loans to Mr. Feldman.
14. Subsequent events
On October 23, 2003, the Company purchased from ManTech International
("ManTech") 3,426,699 shares of common stock of GSE and a GSE Subordinated
Convertible Note of $650,000, which the Company immediately converted into
418,653 shares of common stock of GSE.
This transaction increased the Company's ownership of the common stock of GSE
from approximately 22% to approximately 58%, assuming conversion of the GSE
Subordinated Note. As a result, commencing in the fourth quarter of 2003, the
financial statements of GSE will be consolidated in the Company's consolidated
financial statements. Simultaneously with the closing of this transaction, three
directors nominated by the Company were added to the GSE board of directors.
GSE, which is headquartered in Columbia, Maryland, is a provider of real-time
simulation, security and engineering services for the energy, process and
military industries.
The consideration paid to ManTech by the Company consisted of a 5% note for
$5,250,955 due in full in October 2008. Interest is payable quarterly. Each year
during the term of the note, ManTech will have the option to convert up to 20%
of the original principal amount of the note into common stock of the Company at
the then market price of the Company's common stock, but only in the event that
the Company's common stock is trading at $10 per share or more. In the event
that less than 20% of the principal amount of the note is not converted in any
Subsequent events (Continued)
year, such amount not converted will be eligible for conversion in each
subsequent year until converted or until the note is repaid in cash.
The Company and ManTech entered into a five-year Teaming Agreement pursuant to
which ManTech and the Company will work together to pursue training
opportunities that will utilize the skills of the Company, GSE and ManTech.
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 ("GP") and the third
segment through its operating subsidiary MXL. In addition, the Company holds a
number of investments in publicly held companies, including Millennium Cell
Inc., GSE and FSP, an investment in a private company Valera Pharmaceuticals
(formerly Hydro Med) and also owns certain real estate.
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 specific needs of
clients. Clients include Fortune 500 companies, manufacturing, process and
energy companies, and other commercial and governmental customers. MXL is a
specialist in the manufacture of polycarbonate parts requiring adherence to
strict optical quality specifications and in the application of abrasion and fog
resistant coatings to those parts.
For the quarter ended September 30, 2003, the Company had a net loss before
income taxes of $2,634,000 compared to a net loss before income taxes of
$3,739,000 for the quarter ended September 30, 2002. The loss in the third
quarter of 2003 was primarily a result of the following: (i) an expense for an
executive incentive compensation bonus of $1,000,000, (ii) a write-off of
$860,000 of deferred finance costs due to the early termination of the Company's
prior credit agreement, (iii)an equity loss on the Company's investment in
Valera Pharmaceuticals, (formerly Hydro Med Sciences) of $500,000, and (iv) a
non-cash charge of $339,000 relating to the Company's Millennium Cell Deferred
Compensation Plan. These losses were offset by a non-cash gain of $1,162,000
from the September 30, 2003 valuation adjustment under the Black-Scholes method
to the liability for the warrant to purchase Company Common Stock issued in
connection with the Gabelli transaction. The loss before income taxes of
$3,739,000 in the third quarter of 2002 included severance and related expenses
of $1,944,000, offset by a $391,000 gain from the sale of shares of Millennium
Cell Inc. and a non-cash credit of $348,000 relating to the Company's Millennium
Cell Deferred Compensation Plan.
Each of the Company's three operating business segments had increased gross
profit for the quarter ended September 30, 2003 as compared to 2002.
For the nine months ended September 30, 2003, the Company had a loss before
income taxes of $5,811,000 compared to a net loss before income taxes of
$3,190,000 for the nine months ended September 30, 2002. The nine months ended
September 30, 2003 included the following: (i) an expense for an executive
incentive compensation bonus of $2,000,000, (ii) a debt conversion expense, net
of approximately $622,000 related to the conversion of the Convertible
Exchangeable Notes, (iii) the write-off of deferred financing costs of $860,000
and (iv) a non-cash equity loss on the Company's investment in Valera of
$500,000, offset by a $398,000 gain from the sale of shares of Millennium Cell,
a non-cash gain of $1,162,000 from the September 30, 2003 valuation adjustment
to the liability for the warrant to purchase Company common stock issued in
connection with the Gabelli transaction, and income of approximately $500,000
from a warrant received by the Company in connection with a Valera private
placement transaction.
For the nine months ended September 30, 2002, the Company had a loss before
income taxes of $3,190,000. The loss for the nine months ended September 30,
2002 included severance and related expenses of $1,944,000 and a non-cash equity
loss of $1,401,000 on HMS, offset by a $1,677,000 gain from the sale of shares
of Millennium Cell Inc., and a non-cash credit of $1,216,000 relating to the
Company's Millennium Cell Deferred Compensation Plan.
Three months ended Nine months ended
September 30, September 30,
----------------------------- ----------------------------
-------------- -------------- ------------- --------------
2003 2002 2003 2002
---- ---- ---- ----
Sales
Manufacturing and Process $30,843 $32,543 $95,430 $102,109
Information Technology 1,470 1,852 4,740 6,284
Optical Plastics 1,914 2,221 6,182 7,691
--------- --------- ----------- -----------
$34,227 $36,616 $106,352 $116,084
======= ======= ======== ========
For the quarter and nine months ended September 30, 2003, sales decreased by
$2,389,000 and $9,731,000 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 clients in the utility industry and the Department
of Energy. The Information Technology and the Optical Plastic segments sales
continued to decline primarily due to the overall downturn in the economy.
Three months ended Nine months ended
September 30, September 30,
---------------------------------------- ------------------------------------------
2003 % 2002 % 2003 % 2002 %
---- - ---- - ---- - ---- -
Gross profit
Manufacturing and Process $3,810 12.4$3,024 9.3 $10,506 11.0 $11,873 11.6
Information Technology 318 21.5 (43) 993 20.9 215 3.4
Optical Plastics 485 25.3 445 20.0 1,255 20.3 1,691 22.0
------- ---------- ---- ----- ---- --------- ----
$4,613 13.5$3,426 9.4 $12,754 12.0 $13,779 11.9
====== ========== ===== ======= ==== ======= ====
Consolidated gross profit of $4,613,000 or 13.5% of sales for the quarter ended
September 30, 2003, increased by $1,187,000, compared to consolidated gross
profit of $3,426,000, or 9.4% of sales for the quarter ended September 30, 2002.
For the nine months ended September 30, 2003, gross profit decreased by
$1,025,000 from $13,779,000 to $12,754,000. The increase in gross profit and
gross profit percentage in the third quarter was the result of the Company's
continued effort to control costs on existing contracts. The decreased gross
profit in the nine months ended September 30, 2003 occurred within the
Manufacturing and Process and Optical Plastics Segments, as a result of a
reduction in sales for the periods despite a consistent consolidated gross
profit percentage.
The increased gross profit in both the quarter and nine months ended September
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
increased dramatically in this segment due to cost reductions.
Selling, general and administrative expenses
For the quarter ended September 30, 2003, selling, general and administrative
(SG&A) expenses were $6,562,000 compared to $6,918,000 in the third quarter of
2002, resulting in a decrease in SG&A of $356,000. Selling general and
administrative expenses for the quarter ended September 30, 2003, included an
executive incentive compensation bonus of $1,000,000, and a $339,000 non-cash
charge relating to the Company's Millennium Cell Deferred Compensation Plan. The
selling, general and administrative expense in the third quarter of 2002
included severance and related expenses of $1,944,000, and a non-cash credit of
$348,000 relating to the Company's Millennium Cell Deferred Compensation Plan.
For the nine months ended September 30, 2003, SG&A expenses increased by
$1,725,000 from $15,841,000 to $17,566,000. The selling, general and
administrative expense for nine months ended September 30, 2003 included an
executive incentive compensation bonus of $2,000,000, a debt conversion expense,
net of approximately $622,000 related to the conversion of the Convertible
Exchangeable Notes, and a restructuring charge of $365,000. The selling general
and administrative expenses for the nine months ended September 30, 2002
included severance and related expenses of $1,944,000. Without such items,
selling general and administrative expenses in 2002 would have been consistent
with the nine months ended September 30, 2003.
Interest expense
For the quarter ended September 30, 2003, interest expense increased by $817,000
to $1,471,000 compared to $654,000 the quarter ended September 30, 2002. For the
nine months ended September 30, 2003, there was also an increase in interest
expense of $576,000 from $2,083,000 to $2,659,000. The increase for both three
months and nine months ended September 30, 2003 was primarily attributable to
the Company's write-off of deferred financing costs on its prior credit
agreement of $860,000 offset by a decrease in interest expense during 2003 as a
result of 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 nine months ended September 30, 2003, investment and other
income (loss), net was $(562,000) and $100,000 as compared to $16,000 and
$(722,000) for the quarter and nine months ended September 30, 2002. The loss
for the third quarter in 2003 was primarily attributable to the equity loss on
the Company's investment in Valera of approximately $500,000 which offset the
income of $500,000 recorded by the Company in the second quarter of 2003 in
connection with the Company's receipt of the Valera Option. The increase of
$822,000 for the nine months ended September 30, 2003 compared to the nine
months ended September 30, 2002 was attributable to an increase in net income
recorded on the Company's equity investments of approximately $874,000
(primarily due to an equity loss on Valera of $1,401,000 in 2002 as compared to
$500,000 in 2003) and a reduction of interest income on loans receivable of
approximately $47,000.
Valuation adjustment of liability for warrants
The Company recognized a gain of $1,162,000 in its September 30, 2003 valuation
adjustment of the liability relating to the GP Warrants which was valued using
the Black-Scholes model for the quarter and nine months ended September 30,
2003. This liability will continue to be marked to market until the underlining
shares are registered with the SEC. The Company intends to file a registration
statement with the SEC to register the underlying shares on November 20, 2003.
Gain on sale of marketable securities
The gains on sale of marketable securities of $186,000 and $398,000 for the
quarter and nine months of 2003 and $391,000 and $1,677,000 for the
corresponding periods in 2002 related to the Company's continued sale of
Millennium Cell stock.
Income taxes
For the quarter and nine months ended September 30, 2003, the Company recorded
an income tax expense of $213,000 and $605,000, which represents the Company's
applicable federal, state and local, and foreign tax expense for these periods.
In the quarter and nine months ended September 30, 2002, the Company recorded an
income tax expense of $148,000 and $429,000, which represents the applicable
federal, state, and local, and foreign tax expense for these periods.
Liquidity and capital resources
At September 30, 2003, the Company had cash and cash equivalents totaling
$2,863,000. The Company believes that cash generated from operations, borrowing
availability under the new credit agreement, cash generated from sales of
marketable securities and potential equity financings will be sufficient to fund
the working capital and other requirements of the Company for the foreseeable
future.
For the nine months ended September 30, 2003, the Company's working capital
increased by $6,590,000 to $7,370,000. The Company has increased working capital
substantially during the nine months ended September 30, 2003 by paying certain
of its short-term indebtedness with the proceeds of long-term debt.
The increase in cash and cash equivalents of $1,347,000 for the nine months
ended September 30, 2003 resulted primarily from cash provided by operating
activities of $3,496,000 offset by cash used in investing activities of $203,000
and financing activities of $1,844,000.
On August 14, 2003, GP, GP's subsidiary Skillright, Inc. and MXL entered into a
two-year $25 million 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 assets of GP and up to $1.5 million of the accounts
receivable of MXL. The Credit Agreement also provides for an unsecured guaranty
from the Company. MXL provided a limited guaranty up to the value of its account
receivable collateral securing the Credit Agreement and will receive a guarantee
fee from GP for the continuation of its limited guarantee after the NPDC
distribution. At GP's option, upon prior written notice to the lender under the
credit facility, MXL's account receivables can be eliminated from the borrowing
base under the Credit Agreement, provided that GP makes a mandatory prepayment
under the Credit Agreement to eliminate any borrowing base deficiency. At such
point, all obligations of MXL relating to the Credit Agreement shall terminate
and MXL's limited guaranty of the Credit Agreement shall be void. The Credit
Agreement contains certain restrictive covenants, including a prohibition on
future acquisitions, incurrence of debt and the payment of dividends. GP is
currently restricted from paying dividends or management fees to the Company in
excess of $1,000,000 in any fiscal year.
On October 23, 2003, the Company purchased from ManTech 3,426,699 shares of
common stock of GSE and a GSE Subordinated Convertible Note of $650,000, which
the Company immediately converted into 418,653 shares of common stock of GSE.
This transaction increased the Company's ownership of the common stock of GSE
from approximately 22% to approximately 58%, assuming conversion of the GSE
Subordinated Note. The consideration paid to ManTech by the Company consisted of
a 5% note for $5,250,955 due in full in October 2008. Interest is payable
quarterly. Each year during the term of the note, ManTech will have the option
to convert up to 20% of the original principal amount of the note into common
stock of the Company at the then market price of the Company's common stock, but
only in the event that the Company's common stock is trading at $10 per share or
more. In the event that less than 20% of the principal amount of the note is not
converted in any year, such amount not converted will be eligible for conversion
in each subsequent year until converted or until the note is repaid in cash.
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 and 937,500 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 Company currently has an 8% senior unsecured note receivable from FSP due
September 30, 2004 in the outstanding principal amount of $3,500,000 (the "FSP
Note"). On June 20, 2003, the Company entered into an Agreement of Subordination
and Assignments (the "Subordination Agreement") with FSP that amended the amount
of annual repayment of principal on the FSP Note. Future repayments of the FSP
Note are contingent on the operating results of FSP, subject to certain
limitations as defined in the Subordination Agreement. Pursuant to the
provisions of the Subordination Agreement, 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 FSP Note from $4,500,000 to $4,000,000. 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 an additional repayment of up
to $200,000 during the remainder of 2003.
On October 8, 2003, the Company exchanged $500,000 principal amount of the
$3,500,000 FSP Note for 2,000,000 shares of FSP common stock, reducing the
outstanding principal balance of the FSP note from $3,500,000 to $3,000,000 and
increasing the Company's ownership of the FSP common stock to 9,133,417 shares,
or approximately 54% of the then FSP outstanding shares. As a result, commencing
in the fourth quarter of 2003 the financial statements of FSP will now be
consolidated in the Company's consolidated financial statements.
On March 23, 2000, the Company agreed to guarantee up to $1,800,000 of GSE's
debt pursuant to GSE's credit facility. GSE'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 third quarter and nine
months ended September 30, 2003, the Company recorded $45,000 and $90,000,
respectively, to other income in the Statement of Operations.
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. The adoption of
SFAS No. 146 did not impact the consolidated financial position or results of
operations, although 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 did not 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 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 December 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
Except for the valuation adjustment of liability relating to the GP
Warrants, 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
4. 2003 Incentive Stock Plan.*
10. Amended and Restated Incentive Compensation Agreement
dated June 11, 2003 between GP Strategies Corporation
and Jerome I.Feldman. *
10.1 Amendment dated as of October 1, 2003 to the Amended
and Restated Incentive Compensation Agreement dated
June 11, 2003 between GP Strategies Corporation and
Jerome I. Feldman.*
10.2 Amended and Restated Incentive Compensation Agreement
dated November 17, 2003 between GP Strategies
Corporation and Jerome I. Feldman. *
10.3 Purchase and Sale Agreement dated October 21, 2003 by
and between GP Strategies Corporation and ManTech
International. Incorporated herein by reference to
Exhibit 10.1 of GP Strategies Form 8-K dated October
23, 2003.
10.4 Teaming Agreement dated October 21, 2003 by and
between GP Strategies Corporation and ManTech
International. Incorporated herein by reference to
Exhibit 10-2 of GP Strategies Form 8-K dated October
23, 2003.
10.5 $5,250,955 Promissory Note dated October 21, 2003 of
GP Strategies Corporation. Incorporated herein by
reference to Exhibit 10.3 of GP Strategies Form 8-K
dated October 23, 2003.
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
1. Form 8-K filed on August 14, 2003 reporting an event under
Item 12.
2. Form 8-K filed on October 13, 2003 reporting an event under
Item 5 with respect to Five Star Products, Inc.
3. Form 8-K filed on October 27, 2003 reporting an event under
Item 5 with respect to GSE Systems, Inc.
4. Form 8-K filed on November 17, 2003 reported an event under
Item 12.
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*Filed herewith
GP STRATEGIES CORPORATION AND SUBSIDIARIES
September 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: November 18, 2003 BY: Scott N. Greenberg
President &
Chief Financial Officer
DATE: November 18, 2003 BY: Jerome I. Feldman
Chief Executive Officer