UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 1-7234
GP STRATEGIES CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware 13-1926739
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(State of Incorporation) (I.R.S. Employer Identification No.)
777 Westchester Avenue, White Plains, NY 10604
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (914) 249-9700
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of each exchange on which registered: Common Stock,
$.01 Par Value New York Stock Exchange, Inc.
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. / /
Indicate by check mark whether the registrant is an accelerated filer. Yes No X
The aggregate market value of the outstanding shares of the Registrant's Common
Stock, par value $.01 per share and Class B Capital Stock, par value $.01 per
share held by non-affiliates as of June 30, 2003 was approximately $68,737,653.
The number of shares outstanding of each of the Registrant's Common Stock and
Class B Stock as of March 15, 2004:
Class Outstanding
Common Stock, par value $.01 per share 16,391,006 shares
Class B Capital Stock, par value $.01 per share 1,200,000 shares
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive Proxy Statement for its 2004 Annual
Meeting of Stockholders are incorporated herein by reference into Part III
hereof.
TABLE OF CONTENTS
Page
PART I
Item 1. Business 1
Item 2. Properties 24
Item 3. Legal Proceedings 25
Item 4. Submission of Matters to a Vote of
Security Holders 27
PART II
Item 5. Market for the Registrant's Common
Equity and Related Stockholder Matters 28
Item 6. Selected Financial Data 30
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations 31
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 50
Item 8. Financial Statements and Supplementary Data 51
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 115
Item 9A. Controls and Procedures 115
PART III
Item 10. Directors and Executive Officers of the Registrant* 116
Item 11. Executive Compensation* 116
Item 12. Security Ownership of Certain
Beneficial Owners and Management* 116
Item 13. Certain Relationships and Related Transactions* 116
Item 14. Principal Accountant Fees and Services* 116
PART IV
Item 15. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K 117
*To be incorporated by reference from the proxy statement for the
Registrant's 2004 Annual Meeting of Shareholders.
Cautionary Statement Regarding Forward-Looking Statements
The forward-looking statements contained herein reflect GP Strategies'
management's current views with respect to future events and financial
performance. We use words such as "expects", "intends" and "anticipates" to
indicate forward-looking statements. These forward-looking statements are
subject to certain risks and uncertainties that could cause actual results to
differ materially from those in the forward-looking statements, all of which are
difficult to predict and many of which are beyond the control of GP Strategies,
including, but not limited to, our inability to generate funds by selling any
assets that are included in the proposed spin-off, our holding company
structure, failure to continue to attract and retain personnel, loss of business
from significant customers, failure to keep pace with technology, changing
economic conditions, competition, and those other risks and uncertainties
detailed in GP Strategies' periodic reports and registration statements filed
with the Securities and Exchange Commission.
If any one or more of these expectations and assumptions proves
incorrect, actual results will likely differ materially from those contemplated
by the forward-looking statements. Even if all of the foregoing assumptions and
expectations prove correct, actual results may still differ materially from
those expressed in the forward-looking statements as a result of factors we may
not anticipate or that may be beyond our control. While we cannot assess the
future impact that any of these differences could have on our business,
financial condition, results of operations and cash flows or the market price of
shares of our common stock, the differences could be significant. We do not
undertake to update any forward-looking statements made by us.
PART I
ITEM 1. BUSINESS
GENERAL DEVELOPMENT OF BUSINESS
GP Strategies Corporation (the "Company") was incorporated in Delaware
in 1959. The Company is a New York Stock Exchange listed company traded under
the symbol GPX. Effective October 23, 2003, the Company has five operating
business segments. Two of these segments, the Manufacturing & Process Segment
and the Information Technology Segment, are managed through the Company's
principal operating subsidiary General Physics Corporation ("General Physics").
The third segment is the Optical Plastics Segment, comprised of the Company's
subsidiary MXL Industries, Inc. ("MXL"). The fourth segment is the Simulation
segment, comprised of the Company's majority-owned subsidiary GSE Systems Inc.
("GSE"). The fifth segment is the Home Improvement Distribution Segment,
comprised of the Company's majority-owned subsidiary Five Star Products Inc.
("Five Star").
General Physics is a workforce development company that improves the
effectiveness of organizations by providing training, management consulting,
e-Learning solutions and engineering services that are customized to meet the
specific needs of clients. Additional information about General Physics may be
found at www.gpworldwide.com.
GSE develops and delivers business and technology solutions by applying
simulation software, systems and services to the energy, process and
manufacturing industries worldwide. GSE was previously an investment of the
Company accounted for under the equity method. During the fourth quarter of 2003
due to the Company's acquisition of additional shares of GSE, bringing its
ownership to 58%, GSE will be consolidated into the Company's financial
statements effective October 23, 2003. GSE is a part of the Company's new
Simulation Segment.
MXL is a specialist in the manufacture of polycarbonate parts requiring
strict adherence to optical quality specifications, and in the application of
abrasion and fog resistant coatings to those parts. Products include shields,
face masks and non-optical plastic products.
Five Star is a leading regional distributor of paint sundry items,
interior and exterior stains, brushes, rollers, caulking compounds and hardware
products. Five Star was previously an investment of the Company accounted for
under the equity method. During the fourth quarter of 2003 due to the Company's
acquisition of additional shares of Five Star, bringing its ownership to 54%,
Five Star will be consolidated into the Company's financial statements effective
October 8, 2003. Five Star is a part of the Company's new Home Improvement
Distribution Segment.
In addition, the Company holds an investment in Millennium Cell Inc., a
publicly held company, and an investment in a private company, Valera
Pharmaceuticals (formerly Hydro Med Sciences ) ("Valera"), and also owns certain
real estate.
The Company is actively pursuing a spin-off of certain of its non-core
assets, including MXL, its ownership in Five Star, the investment in Millennium
Cell Inc., the investment in Valera and certain real estate, into a separate
corporation to be named National Patent Development Corporation (See Recent
Developments)
Company Information Available on the Internet
The Company's internet address is www.gpstrategies.com. The Company
makes available free of charge through its internet site, its annual reports on
Form 10-K; quarterly reports on Form 10-Q; current reports on Form 8-K; and any
amendment to those reports filed or furnished pursuant to the Securities
Exchange Act of 1934, or the "Exchange Act," as soon as reasonably practicable
after such material is electronically filed with, or furnished to, the U.S.
Securities and Exchange Commission.
RECENT DEVELOPMENTS
On October 23, 2003, the Company purchased from ManTech International
("ManTech") 3,426,699 shares of common stock of GSE and a GSE Subordinated Note
in the outstanding principal amount of $650,000, which the Company immediately
converted into 418,653 shares of common stock of GSE. This transaction (the "GSE
Acquisition") increased the Company's ownership of the common stock of GSE from
approximately 22% to approximately 58%, and as a result, commencing in the
fourth quarter of 2003, GSE will be consolidated into the Company's consolidated
financial statements. Simultaneously with the closing of the GSE Acquisition,
three directors nominated by the Company were added to the GSE board of
directors.
The consideration paid to ManTech by the Company consisted of a
five-year 5% note of $5,250,955 (the "ManTech Note") due in full in October
2008. Each year during the term of the ManTech 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.
As part of the GSE Acquisition, the Company and ManTech entered into a
five-year Teaming Agreement pursuant to which ManTech and the Company will work
together to give the Company the opportunity to provide training services to
ManTech's customers.
On October 8, 2003, the Company converted $500,000 principal amount of
the $3,500,000 Senior Unsecured 8% Note due June 30, 2005, as amended, (the
"Five Star Note") of Five Star into 2,000,000 shares of Five Star common stock
(the "Five Star Acquisition"). In consideration for the Company agreeing to
convert at a conversion price of $0.25 per share, Five Star agreed to terminate
the voting agreement between the Company and Five Star. 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 Five Star common stock so that not more than
50% of the members of the Five Star 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 Five Star stockholders.
The Five Star Acquisition, which was approved by a Special Committee of
the Five Star board of directors comprised of an independent non-management
director who is unaffiliated with the Company, increased the Company's ownership
in Five Star from approximately 48% to approximately 54% of the outstanding Five
Star common stock and as a result, commencing in the fourth quarter of 2003,
Five Star will be consolidated into the Company's consolidated financial
statements. In addition, the Company continues to own the remaining $2.8 million
principal amount of the Five Star Note, the balance of which decreased in 2003
due to repayments of $1,000,000 prior to the Five Star Acquisition, $500,000 due
to the conversion of principal to common stock in the Five Star Acquisition and
a $200,000 repayment subsequent to the Five Star Acquisition.
In July 2002, the Company announced that it was actively considering a
spin-off of certain of its non-core assets into a separate corporation to be
named National Patent Development Corporation ("NPDC"). On November 14, 2002,
the Company filed a ruling request with the Internal Revenue Service (the
"IRS"), which if approved, would enable the Company to do a tax-free spin-off of
certain non-core assets, including MXL and Five Star. Each holder of the
Company's common stock would receive one share of NPDC common stock for each
share of the Company's common stock held and each holder of the Company's Class
B capital stock would receive one share of NPDC common stock for each share of
Class B capital stock held. On March 21, 2003, the IRS issued a favorable tax
ruling, however, the spin-off is still subject to certain conditions, including
certain SEC filings. On February 12, 2004 the Company filed documents with the
Securities and Exchange Commission relating to the proposed spin-off and the
Company anticipates that the spin-off will occur at the conclusion of the SEC
review process.
After the spin-off becomes effective, the Company's business would be
comprised of its training and workforce development business operated by General
Physics and the GSE simulation business. NPDC would be a stand- alone public
company owning all of the stock of MXL, the interest in Five Star and certain
other non-core assets.
GENERAL PHYSICS CORPORATION
Organization and Operations
General Physics provides performance improvement services and products
to multinational companies in manufacturing and process industries, electric
power utilities, and other commercial and governmental customers. General
Physics is a global leader in performance improvement, with over three decades
of experience in providing solutions to optimize work force performance. Since
its incorporation in 1966, General Physics has provided clients with the
products and services they need to successfully integrate their people,
processes and technology. General Physics' instruction delivery capabilities
include traditional classroom, structured on-the-job training (OJT),
just-in-time methods, electronic performance support systems (EPSS), and the
full spectrum of e-learning technologies. For businesses, government agencies
and other organizations, General Physics offers services and products spanning
the entire lifecycle of production facilities. General Physics products and
services include plant equipment and process launch assistance; operations and
maintenance practice training and consulting services; curriculum development
and delivery; facility and enterprise change and configuration management; lean
enterprise consulting; plant and process engineering review and re-design;
learning resource management; e-learning consulting and systems implementation;
and development and delivery of information technology (IT) training on an
enterprise-wide scale. General Physics' personnel bring a wide variety of
professional, technical and military backgrounds together to create
cost-effective solutions for modern business and governmental challenges.
General Physics' Operating Segments
General Physics provides services and sells products within a structure
that is integrated both vertically and horizontally. Vertically, General Physics
is organized into Strategic Business Units (SBUs), Business Units (BUs), and
Groups focused on providing a wide range of products and services to clients and
prospective clients predominantly within targeted markets. Horizontally, General
Physics is organized across SBUs, BUs and Groups to integrate similar service
lines, technology, information, work products, client management and other
resources. Communications and market research, accounting, finance, legal, human
resources and other administrative services are organized at the corporate
level. Business development and sales resources are aligned with operating units
to support existing customer accounts and new customer development. General
Physics operates in two business segments: Manufacturing & Process and
Information Technology.
Manufacturing & Process
The Manufacturing & Process Segment provides technology-based training,
engineering, consulting and technical services to leading companies in the
automotive, steel, power, oil and gas, chemical, energy, pharmaceutical, and
food and beverage industries, as well as to the government sector, and focuses
on developing long-term relationships with Fortune 500 companies, their
suppliers and agencies of the government. Through this segment General Physics
provides training, Learning Resource Management (LRM) training outsourcing,
engineering and technical support services to clients, whether involving
workforce development, product, process and plant launch, modification of
existing facilities and systems or regulatory compliance. This segment
frequently supports the introduction of new work practices associated with lean
manufacturing, self-directed work teams and engineering. Adult learning delivery
capabilities include traditional classroom, structured on-the-job training
(OJT), just in time methods, electronic performance support systems (EPSS), and
the full spectrum of e-Learning technologies. Also included in this segment are
e-Learning services, which function as a single-source e-learning solution
provider through its integration services, the development and provisioning of
proprietary content and the aggregation and distribution of third party content.
Information Technology
The Information Technology Segment provides information technology (IT)
training programs and solutions, including Enterprise Solution training.
Specific services include software applications training, change management, and
courseware development. This segment has operations in the United States and
Canada.
General Physics Products and Services
Training. Each of General Physics' segments provides training services and
products to support existing, as well as the launch of new, plants, products,
equipment, technologies and processes. The range of services includes
fundamental analysis of a client's training needs, curriculum design,
instructional material development (in hard copy, electronic/software or other
format), information technology service support, and delivery of training using
an instructor-led, on-the-job, computer-based, web-based, video-based or other
technology-based method. General Physics has available an existing curriculum of
business and technical courses and also is involved in the management of the
training business operations at several of its customers. Training products
include instructor and student training manuals, instructional material on
CD-ROM and PC-based simulators.
Consulting. Consulting services include not only training-related consulting
services, but also more traditional business management, engineering and other
disciplines. General Physics is able to provide high-level lean enterprise
consulting services, as well as training in the concept, methods and application
of lean enterprise and other quality practices, organizational development and
change management. General Physics also provides engineering consulting services
to support regulatory and environmental compliance, modification of facilities
and processes, reliability-centered maintenance practices, and plant start-up
activities. Consulting products include copyrighted training and reference
materials.
Technical Support and Engineering. General Physics is staffed and equipped to
provide engineering and technical support services and products to clients.
Technical support services include procedure writing and configuration control
for capital intensive facilities, plant start-up assistance, logistics support
(e.g., inventory management and control), implementation and engineering
assistance for facility or process modifications, facility management for high
technology training environments, staff augmentation, and help-desk support for
standard and customized client desktop applications. Technical support products
include EtaPro(TM) General Physics software applications.
Contracts
General Physics is currently performing under time-and-materials,
fixed-price and cost-reimbursable contracts. General Physics' contracts with the
United States Government have predominantly been cost-reimbursable contracts and
fixed-price contracts. General Physics is required to comply with the Federal
Acquisition Regulations and the Government Cost Accounting Standards with
respect to services provided to the United States Government and agencies
thereof. These Regulations and Standards govern the procurement of goods and
services by the United States Government and the nature of costs that can be
charged with respect to such goods and services. All such contracts are subject
to audit by a designated government audit agency, which in most cases is the
Defense Contract Audit Agency (the "DCAA"). The DCAA has audited General
Physics' contracts through 2000 without any material disallowances.
The following table illustrates the percentage of total revenue of
General Physics attributable to each type of contract for the year ended
December 31, 2003:
Fixed-Price...............................69%
Time and Materials........................17
Cost-Reimbursable.........................14
--
Total Revenue.......................100%
====
General Physics' fixed-price contracts provide for payment to General
Physics of pre-determined amounts as compensation for the delivery of specific
products or services, without regard to the actual cost incurred by General
Physics. General Physics bears the risk that increased or unexpected costs
required to perform the specified services may reduce General Physics' profit or
cause General Physics to sustain a loss, but General Physics has the opportunity
to derive increased profit if the costs required to perform the specified
services are less than expected. Fixed-price contracts generally permit the
client to terminate the contract on written notice; in the event of such
termination, General Physics would typically, at a minimum, be paid a
proportionate amount of the fixed price.
General Physics' time-and-materials contracts generally provide for
billing of services based upon the hourly billing rates of the employees
performing the services and the actual expenses incurred multiplied by a
specified mark-up factor up to a certain aggregate dollar amount. General
Physics' time-and-materials contracts include certain contracts under which
General Physics has agreed to provide training, engineering and technical
services at fixed hourly rates (subject to adjustment for labor costs).
Time-and-materials contracts generally permit the client to control the amount,
type and timing of the services to be performed by General Physics and to
terminate the contract on written notice. If a contract is terminated, General
Physics typically is paid for the services provided by it through the date of
termination.
General Physics' cost-reimbursable contracts provide for General
Physics to be reimbursed for its actual costs plus a specified fee. These
contracts also are generally subject to termination at the convenience of the
client. If a contract is terminated, General Physics typically would be
reimbursed for its costs to the date of termination, plus the cost of an orderly
termination, and paid a proportionate amount of the fee.
No significant terminations of General Physics' contracts have occurred
over the last five years.
International
General Physics conducts its business outside the United States and
Canada primarily through its wholly-owned subsidiaries General Physics (UK)
Ltd., General Physics Corporation Mexico, S.A. de C.V., General Physic Asia,
Ptd. Ltd. and General Physics (Malaysia) Sdn Bhd. Through these companies,
General Physics is capable of providing substantially the same services and
products as are available to clients in the United States, although modified as
appropriate to address the language, business practices and cultural factors
unique to each client and country. In combination with its subsidiaries, General
Physics is able to coordinate the delivery to multi-national clients of services
and products that achieve consistency on a global, enterprise-wide basis.
SIMULATION SEGMENT
GSE
GSE is a world leader in real-time power plant simulation. GSE provides
simulation solutions and services to the nuclear and fossil electric utility
industry, as well as process industries such as the chemical and petrochemical
industries. In addition, GSE provides plant monitoring, security access and
control, and signal analysis monitoring and optimization software primarily to
the power industry.
Prior to September 25, 2003, GSE also had a process automation and
control business. The automation products of this business unit optimized batch
and hybrid plant control for the specialty chemical, food and beverage, and
pharmaceutical industries. On September 25, 2003, GSE completed the sale of
substantially all of the assets of this business to Novatech, LLC. GSE is
currently comprised of three divisions: Power Simulation, Process Simulation and
Emergency Management Simulation.
GSE is positioning itself to take advantage of emerging trends in the
power industry. The operating licenses for numerous nuclear power plants will
expire over the next several years. Fourteen plants have already received
license extensions, and sixteen more have applications pending. Many plants are
also planning significant upgrades to the physical equipment and control room
technology in conjunction with the license extensions. Both will result in the
need to modify or replace the existing plant control room simulators. GSE,
having the largest installed base of existing simulators, is well positioned to
capture the majority of this business.
To address the varying levels of technology that exists across GSE's
installed base, GSE has developed a Java-based graphical overlay technology
called JADE (Java Application Development Environment). JADE provides a common
look and feel to GSE's various simulation tools regardless of whether the
underlying technology is UNIX, LINUX or Microsoft Windows XP. JADE also works
with all of GSE's tools for building electrical, logic and control, and flow
system models for plants.
GSE continues to focus on the fossil power segment of the power
industry. Several fossil plant simulator projects were awarded in 2003,
expanding GSE's presence in the market and establishing key strategic
relationships with power industry DCS providers. GSE expects continued growth in
this market segment and is focusing on second time simulation buyers that now
demand the more sophisticated and realistic simulation models offered by GSE.
Sales and marketing resources have been expanded for the fossil power industry.
While GSE simulators are primarily utilized for power plant operator
training, the uses are expanding to include engineering analysis, plant
modification studies, and operation efficiency improvements for both nuclear and
fossil utilities. During plant construction, simulators are used to test control
strategies and ensure on-time start-up. After commissioning, the same tools can
be used to increase plant availability and optimize plant performance for the
life of the facility. In 2003, GSE demonstrated its ability to link its
simulation models to plant optimization tools of third parties to provide a
unique and broad based optimization solution. GSE and its partners will be
bringing these new products to market in 2004.
GSE has targeted the Process simulation business as an area with a
significant potential for growth. The process industries, particularly oil and
gas and chemical, are expanding worldwide and are faced with the challenges of
performance improvement at existing facilities and training of personnel to
staff new and upgraded facilities. GSE's SimSuite Pro product and experience in
the process industries provide GSE with excellent capabilities to service these
needs. Dedicated sales and marketing resources have been assigned to Process
simulation to facilitate this initiative.
In 2003, GSE continued to expand the sale of its plant optimization
tools based on advanced signal analysis technology. GSE's Pegasus Plant
Surveillance and Diagnosis System helps improve plant availability, safety and
economy. Pegasus is a software package for semi-automatic plant surveillance and
diagnostics and enables site engineers to perform detailed analysis for
specified component faults, allowing the identification of degraded performance
and replacement of components before they fail. SensBase provides comprehensive
sensor test services, thus ensuring that changes in transmitters and other
instruments do not jeopardize the function of the nuclear plant protection
systems. BRUS, a noise analysis program package, is a collection of signal
analysis tools which allow users to detect developing abnormalities in the
plant. GSE's worldwide reputation for boiling water reactor stability training
lead to an increase in sales of both stability training courses and GSE's SIMON
Stability Monitoring equipment. GSE has been very successful in selling this
technology to European and Asian customers and is investigating its viability in
the US market.
The acquisition by the Company of controlling interest in GSE has led
to further cooperation between the companies. In addition to cooperating in the
marketing of individual products, the companies will combine some of General
Physics' extensive training materials and programs with GSE's power plant
simulation models to provide truly interactive and adaptive total training
solutions. Cooperative marketing activities between General Physics and GSE will
enable GSE to extend simulation capabilities into industries beyond Power and
Process and to expand the range of products and services offered to customers.
In 2003, GSE began to aggressively market its access control and
intrusion detection system to the nuclear and process industries, however, the
market has been slow to develop. The nuclear industry security focus has been on
investing in technology to detect the approach of intruders farther away from
the plant perimeter. As a result, much of the anticipated sales of GSE's GAARDS
system have failed to materialize. At the end of 2003, GSE made the decision to
reduce its investment in this market segment until the market rebounds.
In lieu of pursuing physical security system projects, GSE has turned
its attention to opportunities for simulation in disaster recovery and terrorist
threat response. In 2003, GSE modified its simulation technology to simulate the
operation of Emergency Operations Centers (EOC) run by municipal and state
governments. REMITS is a Real-time Emergency Management Interactive Training
System designed to simulate emergency situations and enable EOC staffs to train
without requiring human participation in the field. REMITS enables the EOC staff
to stay current with the technology and enables instructors to introduce new
problems and challenges during the exercise to test the EOC staff response to
changing situations. As the Federal Government spends billions in first
responder training, GSE believes its REMITS product will find a large market in
the developing field of training for disaster recovery and terrorist threat
response.
Additional information about GSE may be found at www.gses.com
OPTICAL PLASTICS SEGMENT
MXL
MXL is a specialist in the manufacture of polycarbonate parts requiring
strict adherence to optical quality specifications, and in the application of
abrasion and fog resistant coatings to those parts at its Lancaster, Pa.
facility. Polycarbon is the most impact resistant plastic utilized in optical
quality molded parts. Products include shields, face masks and non-optical
plastic products. Additionally, at its Illinois facility, MXL has the capability
to design and construct injection molds for a variety of applications (optical
and non-optical).
As the market for optical injection molding, tooling and coating is
focused, MXL believes that the principal strengths of its business are its
state-of-the-art injection molding equipment, advanced production technology,
high quality standards, and on time deliveries. MXL believes that the
combination of its proprietary "Anti-Fog" coating, precise processing of the
"Anti-Scratch" coatings, and precise molding and proprietary grinding and
polishing methods for its injection tools will provide it with the opportunity
to expand into related products.
MXL uses only polycarbonate resin to manufacture shields, face masks
and lenses for over 50 clients in the safety, recreation and military
industries. For its manufacturing work as a subcontractor in the military
industry, MXL is required to comply with various federal regulations including
Military Specifications and Federal Acquisition Regulations for military end use
applications. At its Lancaster, Pa. facility, molding machines are housed in a
climate controlled clean environment designed and built by MXL. In September
2003, MXL acquired certain of the precision custom optical assemblies inventory,
machinery and equipment of AOtec for $1.1 million in cash and notes, subject to
adjustment. MXL leased space in Massachusetts for the newly purchased equipment.
MXL's contracts in the military and commercial area often require
either vacuum deposited beam-splitter coatings, vacuum deposited anti-reflective
coatings, laser eye protection, or a combination of these technologies in
addition to MXL's capabilities of providing difficult and optically correct
molded and coated components. The laser eye protection manufacturing equipment
purchased from AOtec will enable MXL to better service purchase orders for
precision pilot visors for next generation military fighter and attack aircraft,
which require beam-splitter and anti-reflective coatings and will shortly
require laser eye protection.
Additional information about MXL may be found at www.mxl-industries.com
HOME IMPROVEMENT DISTRIBUTION SEGMENT
Five Star
Five Star is engaged in the wholesale distribution of home decorating,
hardware and finishing products. It serves over 3,500 independent retail dealers
in twelve states, making Five Star one of the largest distributors of its kind
in the Northeast. Five Star operates two state -of -the -art warehouse
facilities, located in Newington, CT and East Hanover, NJ with approximately
347,000 square feet of space between them. All operations are coordinated by
senior management from offices in New Jersey. Five Star's sales force consists
almost entirely of employees.
Five Star is a leading distributor of paint sundry items, interior and
exterior stains, brushes, rollers, caulking compounds and hardware products.
Five Star offers products from leading manufacturers such as Cabot Stain,
William Zinsser & Company, DAP, General Electric Corporation, American Tool,
USG, Stanley Tools, Minwax and 3M Company. Five Star distributes its products to
retail dealers, which include lumber yards, "do-it yourself" centers, hardware
stores and paint stores principally in the northeast region. It carries an
extensive inventory of the products it distributes and provides delivery,
generally within 24 to 72 hours. Five Star has grown to be one of the largest
independent distributors in the Northeast by providing a complete line of
competitively priced products, timely delivery and attractive pricing and
financing terms to its customers. Much of Five Star's success can be attributed
to a continued commitment to provide customers with the highest quality service
at reasonable prices.
As one of the largest distributors of paint sundry items in the
Northeast, Five Star enjoys cost advantages and favorable supply arrangements
over the smaller distributors in the industry. This enables Five Star to compete
as a "low cost" provider. Five Star uses a fully computerized warehouse system
to track all facets of its distribution operations. Five Star has enhanced the
sophistication of its warehouse and office facilities to take full advantage of
economies of scale, speed the flow of orders and to compete as a low cost
distributor. Nearly all phases of the selling process from inventory management
to receivable collection are automated and tracked; all operations are overseen
by senior management at the New Jersey facility. Five Star is able to capitalize
on manufacturer discounts by strategically timing purchases involving large
quantities.
Five Star has developed strong, long-term relationships with leading
suppliers since its predecessor company, J. Leven, was founded in 1912. As a
major distributor of paint sundry items, suppliers rely on Five Star to
introduce new products to market. Furthermore, suppliers have grown to trust
Five Star's ability to penetrate the market. As a result, Five Star is often
called on first by manufacturers to introduce new products into the marketplace.
For example, Minwax, Best Liebco and Cabot Stain have utilized Five Star to
introduce and distribute some of their new product innovations.
On February 6, 2004 Five Star announced that it will repurchase up to 5,000,000
shares, or approximately 30% of its common stock currently outstanding, through
a tender offer for the shares at $0.21 per share, originally set to expire on
March 16, 2004. On March 17, 2004 Five Star announced that it had increased the
price it was offering to pay for the shares in the tender offer to $0.25 per
share and extended the offer to March 31, 2004. Based on the final tabulation by
the depositary for the tender offer, approximately 2,648,000 shares of common
stock were tendered and acquired by Five Star. The effect of the tender offer
was to increase the Company's ownership in Five Star to approximately 64%.
If the Company increases its ownership to at least 80% of Five Star's
common stock, Five Star would become, for federal tax purposes, part of the
affiliated group of which the Company is the common parent. As a member of such
affiliated group, Five Star would be included in the Company's consolidated
federal income tax returns, Five Star's income or loss would be included as part
of the income or loss of the affiliated group and any of Five Star's income so
included might be offset by the consolidated net operating losses, if any, of
the affiliated group. As part of this agreement, Five Star has agreed to enter
into a tax sharing agreement with the Company pursuant to which Five Star will
make tax sharing payments to the Company once Five Star becomes a member of the
consolidated group equal to 80% of the amount of taxes Five Star would pay if
Five Star were to file separate consolidated tax returns but did not pay as a
result of being included in the Company affiliated group. If the Company
completes the spin-off of certain of its assets, including its interest in Five
Star into NPDC (See Recent Developments above), the foregoing agreement would be
assigned by the Company to NPDC.
Additional information about Five Star, may be found at
www.fivestargroup.com
INVESTMENTS
Over the last several years, the Company has taken significant steps to focus
primarily on becoming a global workforce development company and has divested
many of its non-core assets. However, the Company still has investments in the
common stock of Valera and Millennium Cell and also owns certain real estate.
Valera is a specialty pharmaceutical company focused on the acquisition,
development and commercialization of novel prescription pharmaceuticals,
particularly for the treatment of urological conditions and disorders. Valera
intends to develop new formulations using its hydron drug delivery technology,
which is a subcutaneous implant that controls the amount, timing and location of
the release of drug compounds into the body.
Valera's lead product is a twelve-month implant that delivers the luteinizing
hormone releasing hormone, or LHRH, histrelin for the palliative treatment of
metastatic prostate cancer. LHRH agonists are the premium standard of care in
the palliative treatment for metastatic breast cancer. This implant is currently
in open label Phase III clinical trials and is currently meeting its two primary
endpoints. On December 16, 2003, Valera submitted its New Drug Application (NDA)
for Vantas(TM), the name for Valera's long-acting LHRH implant for treating
prostate cancer.
Prior to June 2000, Valera operated as a division of the Company, however, in
connection with an offering of the Company's 6% Convertible Subordinated
Exchangeable Notes due 2003 (the "Valera Notes"), Valera was incorporated as a
separate company and became a wholly-owned subsidiary of the Company. The Valera
Notes, at the option of the holders, could previously have been exchanged for
19.9% of the outstanding common stock of Valera on a fully diluted basis or into
shares of the Company's common stock. On April 23, 2003, the Company entered
into an agreement with the holders of the Valera Notes to exchange the Valera
Notes plus related accrued interest for 554,000 shares of the Company's Common
Stock at a conversion rate of $5.00 per share with a fair value of $2,770,000.
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 in 2003.
On December 27, 2001, Valera completed a $7 million private placement of Valera
Series A Convertible Preferred Stock (the "Preferred Stock") to certain
institutional investors. The Preferred Stock is convertible at any time at the
option of the holder and participates in dividends with Valera common stock on
an as converted basis.
The Company owns 100% of Valera's common stock but no longer has financial and
operating control of Valera. As a condition of the private placement, the
Company contractually gave up operating control over Valera through an Investors
Rights Agreement. Therefore, through December 27, 2001, the operating results of
Valera are consolidated within the Consolidated Statements of Operations.
However, subsequent to that date the Company accounts for its investment in
Valera under the equity method. Due to Valera's operating losses in 2002 the
Company's investment in Valera as of December 31, 2002 was written down to zero.
In the second quarter of 2003, Valera completed a $12 million private placement
offering of Series B Convertible Preferred Stock. As part of such transaction,
the Company was granted an option (the "Valera Option") until March 31, 2004
(which the Company did not exercise) 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. Assuming
conversion of all of the outstanding shares of Series A and Series B convertible
preferred stock and exercise of options for the total number of Valera common
shares reserved for Valera's employee stock option plans, the Company would own
approximately 25% of Valera.
Millennium Cell Inc. ("Millennium") is a publicly traded emerging technology
company engaged in the business of developing innovative fuel systems for the
safe storage, transportation and generation of hydrogen for use as an energy
source. The Company owns approximately 4% of the outstanding common stock of
Millennium as of December 31, 2003, with a market value of $3,570,000.
CUSTOMERS
General Physics currently provides services to more than 500 customers.
Significant customers include multinational automotive manufacturers, such as
General Motors Corporation, Ford Motor Company and Daimler Chrysler Corporation;
commercial electric power utilities, such as Consolidated Edison Company of New
York, Public Service Electric & Gas Company and Entergy Operations, Inc.;
governmental agencies, such as the U.S. Departments of Defense, Energy and
Treasury, the U.S. Department of Homeland Security, U.S. Department of
Transportation and U.S. Social Security Administration; U.S. government prime
contractors, such as Northrop-Grumman and Lockheed Martin; and other large
multinational companies, such as Pfizer, Inc., Merck & Co., Eli Lily & Co, IBM
Corporation, United Technologies Corporation, Anheuser-Busch Company, The
Coca-Cola Company, ExxonMobil, USX Corporation, and General Electric Company.
Revenue from the United States Government accounted for approximately 38% of
General Physics' revenue for the year ended December 31, 2003. Revenue was
derived from many separate contracts and subcontracts with a variety of
Government agencies and contractors that are regarded by General Physics as
separate customers. In 2003, revenue from the Department of the Army, which is
included in United States Government revenue accounted for approximately 22% of
General Physics' revenue.
As the market for optical injection molded plastics is relatively
focused, MXL serves virtually all of the major users. The customer base of MXL
includes over 50 commercial customers in 27 states and Japan, the United
Kingdom, Europe, the Middle East, Mexico, Canada and Australia. These commercial
customers are primarily in the recreation, safety, and security industries.
MXL's largest two customers comprised approximately 25% and 12%, respectively,
of its total sales in 2003.
GSE has provided approximately 200 simulation systems to an installed
base of over 75 customers worldwide. GSE's largest two customers accounted for
approximately 28.7% and 11.0%, respectively, of its sales in 2003 and its 10
largest customers accounted for approximately 73.6% of such sales. In 2003,
approximately 15.2% of revenue was generated from end users outside the United
States.
Five Star's largest customer accounted for approximately 3.6% of its sales
in 2003 and its 10 largest customers accounted for approximately 12.4% of its
sales.
EMPLOYEES
At December 31, 2003, the Company and its subsidiaries employed 1,692
persons, including 10 in the Company's headquarters, 1,189 at General Physics,
146 at GSE, 93 at MXL and 254 at Five Star.
General Physics' principal resource is its personnel. General Physics'
future success depends to a significant degree upon its ability to continue to
attract, retain and integrate into its operations instructors, technical
personnel and consultants who possess the skills and experience required to meet
the needs of its clients. As of December 31, 2003, General Physics employed
1,189 employees and over 100 adjunct instructors.
During 2003, General Physics transferred certain contracts and
employees to SkillRight, Inc., a wholly-owned subsidiary of General Physics.
Substantially all of the non-management employees of SkillRight, Inc. are
members of the United Auto Workers union and covered by the terms of a
collective bargaining agreement entered into between SkillRight, Inc. and the
UAW.
General Physics utilizes a variety of methods to attract and retain
personnel. General Physics believes that the compensation and benefits offered
to its employees are competitive with the compensation and benefits available
from other organizations with which it competes for personnel. In addition,
General Physics maintains and continuously improves the professional development
of its employees, both internally via General Physics University (the Company's
internal training organization) and through third parties, and also offers
tuition reimbursement for job-related educational costs. General Physics
believes its relations with its employees are good.
GSE employs a highly educated and experienced multinational workforce
of 146 employees, including approximately 84 engineers and scientists.
Approximately 60% of these engineers and scientists have advanced science and
technical degrees in fields such as chemical, mechanical and electrical
engineering, applied mathematics and computer sciences. GSE believes its
employees offer a competitive advantage that enhances its position to compete in
the Simulation markets.
COMPETITION
General Physics' services and products face a highly competitive
environment. The principal competitive factors are the experience and capability
of service personnel, performance, quality and functionality of products,
reputation and price. Consulting services such as those provided by General
Physics are performed by many of the customers themselves, large architectural
and engineering firms that have expanded their range of services beyond design
and construction activities, large consulting firms, information technology
companies, major suppliers of equipment, degree-granting colleges and
universities, vocational and technical training schools, continuing education
programs, small privately held training providers and individuals and
independent service companies similar to General Physics. The training industry
is highly fragmented and competitive, with low barriers to entry and no single
competitor accounting for a significant market share. Some of General Physics'
competitors offer services and products that are similar to those of General
Physics at lower prices, and some competitors have significantly greater
financial, managerial, technical, marketing and other resources than does
General Physics. There can be no assurance that General Physics will be
successful against such competition.
The Power Simulation business encounters intense competition. In the
nuclear simulation market, GSE competes directly with larger firms primarily
from Canada and Germany, such as Canadian Aerospace & Electronics (CAE) and STN
Atlas. The fossil simulation market is represented by smaller companies in the
U.S. and overseas. Several of GSE's competitors have greater capital and other
resources than it has, including, among other advantages, more personnel and
greater marketing, financial, technical and research and development
capabilities. Customer purchasing decisions are generally based upon price, the
quality of the technology, experience in related projects, and the financial
stability of the supplier. GSE's competitors in Process Simulation include major
corporations offering a wide range of products and services that include
operator training simulators, companies focused on Process Technology and
manufacturing enhancement, companies with specific industry niches that enables
them to compete in operator training simulation and smaller training companies
that compete at the lower cost levels of Computer Based Training (CBT) or simple
simulations close to CBT. GSE's competition in Emergency Management Simulation
is unclear at this time.
The markets for the products currently manufactured and sold by MXL are
characterized by extensive competition. The principal competitive factors of MXL
are its reputation for quality, service and integrity. MXL is able to provide
its customers with a breadth of experience, from mold design through mold
construction, to injection molding, coating, laser eye protection and/or high
technology optical coating. MXL is able to accomplish the most complex projects
for its customers. In addition, MXL's engineering, performance, availability and
reliability are important competitive factors. Many existing and potential
competitors have greater financial, marketing and research resources than MXL.
Competition within the home improvement distribution industry is
intense. Among Five Star's competitors are much larger national companies
commonly associated with national franchises such as Ace and TruServ, smaller
regional distributors, Lowe's and Home Depot, which purchase directly from
manufacturers and dealer-owned distributors. Moreover, in some instances
manufacturers will bypass the distributor and choose to sell and ship their
products directly to the retail outlet. The principal means of competition for
Five Star are its strategically placed distribution centers and its extensive
inventory of quality, name-brand products. Five Star will continue to focus its
efforts on supplying its products to its customers at a competitive price and on
a timely, consistent basis.
MARKETING
General Physics has approximately 39 employees dedicated primarily to
marketing its services and products through Business Development initiatives at
both the Group and Business Unit levels. General Physics uses attendance at
trade shows, presentations of technical papers at industry and trade association
conferences, press releases, public courses and workshops given by General
Physics personnel to serve an important marketing function. General Physics also
does selective advertising and sends a variety of sales literature, including a
catalog of course listings, to current and prospective clients. By staying in
contact with clients and looking for opportunities to provide further services,
General Physics sometimes obtains contract awards or extensions without having
to undergo competitive bidding. In other cases, clients request General Physics
to bid competitively. In both cases, General Physics submits proposals to the
client for evaluation. The period between submissions of a proposal to final
award can range from 30 days or less (generally for non-competitive, short-term
contracts), to a year or more (generally for large, competitive multi-year
contracts with governmental clients).
GSE markets its Power Simulation products and services through a
network of direct sales staff, agents and representatives, systems integrators
and strategic alliance partners. A direct sales force is employed in the
continental United States. Market-oriented business and customer development
teams define and implement specific campaigns to pursue opportunities in the
power marketplace. GSE's ability to support its multi-facility, international
and/or multinational Power Simulation clients is facilitated by its network of
offices and strategic partners in the U.S. and overseas. Power Simulation
offices are maintained in Maryland and Georgia, and outside the U.S., in Sweden,
China and Japan. GSE will market its Process Simulation technologies through a
combination of techniques including its existing direct sales channel, sales
agents, and strategic alliance partners. GSE will market its product in the U.S.
Homeland Security industry through the existing sales channels of General
Physics and foreign markets through existing power simulation partners and
agents
Because of the narrow niche MXL serves, its sales and marketing effort
concentrates on industry trade shows, such as the Society of Plastics Engineers,
and advertising in industry journals. Its senior management team, as well as
four marketing and sales executives, is responsible for the sales and marketing
effort. It also utilizes one sales representative to market its products.
Five Star distributes and markets products from hundreds of manufacturers
to all of the various types of retailers from regional paint stores, to lumber
yards, to independent paint and hardware stores. The marketing efforts are
directed by regional sales managers who are responsible for designing,
implementing and coordinating marketing policies. The sales managers coordinate
company-wide marketing plans together with senior management, service Five
Star's major multi-state customers and oversee the efforts of sales
representatives.
The sales representatives each cover an assigned geographic area and are
responsible for generating revenue, ensuring customer satisfaction and expanding
the customer base. The representatives are compensated based solely on
commission. In addition, the representatives' efforts are strengthened by
company-sponsored marketing events. Each year in the first quarter, Five Star
invites all of its customers to special trade shows for Five Star's major
suppliers, so that suppliers may display their products and innovations. Five
Star also participates in advertising circular programs in the spring and the
fall which contain discount specials and information concerning new product
innovations.
BACKLOG
General Physics' backlog for services under signed contracts and
subcontracts as of December 31, 2003 was approximately $74,918,000 compared to
$72,500,000 as of December 31, 2002. General Physics anticipates that most of
its backlog as of December 31, 2003 will be recognized as revenue during fiscal
year 2004, however, the rate at which services are performed under certain
contracts, and thus the rate at which backlog will be recognized, is at the
discretion of the client, and most contracts are, as mentioned above, subject to
termination by the client upon written notice.
GSE does not reflect an order in backlog until it has received a
contract that specifies the terms and milestone delivery dates. As of December
31, 2003, GSE's aggregate contract backlog totaled approximately $30,400,000.
Approximately $19,500,000 or 64% of the backlog is expected to be converted to
revenue by December 31, 2004.
MXL's sales order backlog as of December 31, 2003 was approximately
$1,703,000 and most of the orders were expected to be completed during fiscal
2004.
Five Star does not have any significant backlog.
INSURANCE
By providing services to the commercial electric power industry, in the
area of alternative fuel construction management and to the United States Armed
Forces, the Company is engaged in industries in which there are substantial
risks of potential liability. The Company maintains a consolidated insurance
program (including general liability coverage) and claims made by any covered
insured will reduce the amount of available insurance for the other insureds. In
addition, certain liabilities associated with the Company's business are not
covered by these insurance policies. In addition, such liabilities may not be
covered by Federal legislation providing a liability protection system for
licensees of the Nuclear Regulatory Commission (typically utilities) for certain
damages caused by nuclear incidents, since the Company is not such a licensee.
Finally, few of the Company's contracts with clients contain a waiver or
limitation of liability. Thus, to the extent a risk is neither insured nor
indemnified against nor limited by an enforceable waiver or limitation of
liability, the Company could be materially adversely affected by a nuclear
incident. Certain other environmental risks, such as liability under the
Comprehensive Environmental Response, Compensation and Liability Act, as amended
(Superfund), also may not be covered by the Company's insurance.
ENVIRONMENTAL STATUTES AND REGULATIONS
General Physics provides environmental engineering services to its
clients, including the development and management of site environmental
remediation plans. Due to the increasingly strict requirements imposed by
Federal, state and local environmental laws and regulations (including, without
limitation, the Clean Water Act, the Clean Air Act, Superfund, the Resource
Conservation and Recovery Act and the Occupational Safety and Health Act),
General Physics' opportunities to provide such services may increase.
General Physics' activities in connection with providing environmental
engineering services may also subject General Physics itself to such Federal,
state and local environmental laws and regulations. Although General Physics
subcontracts most remediation construction activities and all removal and
offsite disposal and treatment of hazardous substances, General Physics could
still be held liable for clean-up or violations of such laws as an "operator" or
otherwise under such Federal, state and local environmental laws and regulations
with respect to a site where it has provided environmental engineering and
support services. General Physics believes, however, that it is in compliance in
all material respects with such environmental laws and regulations.
The nuclear power industry is associated with a number of hazards which
could create significant liabilities for GSE. GSE's business could expose it to
third party claims with respect to product, environmental and other similar
liabilities. Although GSE has sought to protect itself from these potential
liabilities through a variety of legal and contractual provisions as well as
through liability insurance, the effectiveness of such protections has not been
fully tested. The failure or malfunction of one of GSE's systems or devices
could create potential liability for substantial monetary damages and
environmental cleanup costs. Such damages or claims could exceed the applicable
coverage of their insurance. Although management has no knowledge of material
liability claims against GSE to date, such potential future claims could have a
material adverse effect on their business or financial condition.
For its manufacturing work as a subcontractor in the military industry,
MXL is required to comply with various federal regulations including Military
Specifications and Federal Acquisition Regulations for military end use
applications. In addition, MXL's activities may subject it to federal, state and
local environmental laws and regulations. MXL believes that it is in compliance
in all material respects with such government regulations and environmental
laws.
Factors Affecting Our Future Performance
Set forth below and elsewhere in this report and in other documents the Company
files with the Securities and Exchange Commission are risks and uncertainties
that could cause the Company's actual results to differ materially from the
results contemplated by the forward-looking statements contained in this report
and other public statements the Company makes.
Our history of net losses could cause us to need additional capital.
For the years ended December 31, 1999, 2000, 2001, 2002 and 2003, we have
experienced net losses of $22,205,000, $25,392,000, $945,000, $5,228,000, and
$8,276,000, respectively. If such net losses continue, we will need additional
capital to fund our operations. If adequate funds are not available, we may be
required to curtail our operations.
A spin-off of non-core assets could hamper our ability to generate funds by
selling such assets.
We are actively considering transferring certain of our non-core assets
into a separate corporation and spinning off that corporation to our
stockholders. We would lose our ability to raise funds by selling any assets
that are included in any spin-off.
Our holding company structure could adversely affect our ability to pay our
expenses.
Our principal operations are conducted through our General Physics
subsidiary. General Physics' credit agreement currently limits its ability to
dividend or pay funds to us, which could adversely affect our ability to pay our
expenses.
Failure to continue to attract and retain qualified personnel could harm our
business.
Our principal resource is our personnel. A significant portion of our
revenue is derived from services and products that are delivered by instructors,
engineers, technical personnel and consultants. Our success depends upon our
ability to continue to attract and retain instructors, engineers, technical
personnel and consultants who possess the skills and experience required to meet
the needs of our clients. In order to initiate and develop client relationships
and execute our growth strategy, we must maintain and continue to hire qualified
salespeople. We must also continue to attract and develop capable management
personnel to guide our business and supervise the use of our resources.
Competition for qualified personnel can be intense. We cannot assure you that
qualified personnel will continue to be available to us. Any failure to attract
or retain qualified instructors, engineers, technical personnel, consultants,
salespeople and managers in sufficient numbers could adversely affect our
business and financial condition.
The loss of our key personnel, including Jerome I. Feldman and Scott N.
Greenberg, could harm our business.
Our success is largely dependent upon the experience and continued services
of Jerome I. Feldman, our Chairman and Chief Executive Officer, Scott N.
Greenberg, our President and Chief Financial Officer, and our other key
personnel. The loss of one or more of our key personnel and a failure to attract
suitable replacements for them may adversely affect our business.
Our revenue and financial condition could be adversely affected by the loss of
business from significant customers.
For the years ended December 31, 2001, 2002 and the 2003, revenue from the
United States Government represented approximately 29%, 32%, and 32% of our
revenue, respectively. However, the revenue was derived from a number of
separate contracts and subcontracts with a variety of government agencies and
contractors we regard as separate customers. Most of our contracts and
subcontracts are subject to termination on written notice, and therefore our
operations are dependent on our clients' continued satisfaction with our
services and their continued inability or unwillingness to perform those
services themselves or to engage other third parties to deliver such services.
Failure to keep pace with technology and changing market needs could harm our
business.
Traditionally, most of our training and performance improvement services
and products have been delivered through instructors, written materials or
video. Our future success will depend upon our ability to gain expertise in
technological advances rapidly and respond quickly to evolving industry trends
and client needs. We intend to deliver many of our training and development
services and products, including some services and products previously delivered
in "traditional" formats, via interactive multimedia software, such as CD-ROM,
and distance-based media, such as video conferencing, intranets and the
Internet. We cannot assure you that we will be successful in adapting to
advances in technology, addressing client needs on a timely basis, or marketing
our services and products in multimedia software and distance-based media
formats. In addition, services and products delivered in the newer formats may
not provide comparable training results. Furthermore, subsequent technological
advances may render moot any successful expansion of the methods of delivering
our services and products. If we are unable to develop new means of delivering
our services and products due to capital, personnel, technological or other
constraints, our business and financial condition could be adversely affected.
Our business and financial condition could be adversely affected by government
limitations on contractor profitability and the possibility of cost
disallowance.
A significant portion of our revenue and profit is derived from contracts
and subcontracts with the United States Government. The United States Government
places limitations on contractor profitability; therefore, government related
contracts may have lower profit margins than the contracts we enter into with
commercial customers. Furthermore, United States Government contracts and
subcontracts are subject to audit by a designated government agency. Although we
have not experienced any material cost disallowances as a result of these
audits, we may be subject to material disallowances in the future.
Changing economic conditions in the United States or the United Kingdom could
harm our business and financial condition.
Our revenues and profitability are related to general levels of economic
activity and employment in the United States and the United Kingdom. As a
result, any significant economic downturn or recession in one or both of those
countries could harm our business and financial condition. A significant portion
of our revenues are derived from Fortune 1000-level companies and their
international equivalents, which historically have adjusted expenditures for
external training during economic downturns. If the economies in which these
companies operate weaken in any future period, these companies may not increase
or may reduce their expenditures on external training, which could adversely
affect our business and financial condition.
Our financial results are subject to quarterly fluctuations.
We experience, and expect to continue to experience, fluctuations in
quarterly operating results. Consequently, you should not deem our results for
any particular quarter to be necessarily indicative of future results. These
fluctuations in our quarterly operating results may vary because of, among other
things, the overall level of performance improvement services and products sold,
the gain or loss of material clients, the timing, structure and magnitude of
acquisitions, the commencement or completion of client engagements or custom
services and products in a particular quarter, and the general level of economic
activity. To the extent they are unexpected, downward fluctuations may result in
a decline in the trading price of our Common Stock.
Competition could adversely affect our performance.
The training industry is highly fragmented and competitive, with low
barriers to entry and no single competitor accounting for a significant market
share. Our competitors include several large publicly traded and privately held
companies, vocational and technical training schools, degree-granting colleges
and universities, continuing education programs and thousands of small privately
held training providers and individuals. In addition, many of our clients
maintain internal training departments. Some of our competitors offer similar
services and products at lower prices, and some competitors have significantly
greater financial, managerial, technical, marketing and other resources.
Moreover, we expect to face additional competition from new entrants into the
training and performance improvement market due, in part, to the evolving nature
of the market and the relatively low barriers to entry.
We are subject to potential environmental liabilities and liabilities associated
with nuclear incidents.
We provide services that could subject us to significant environmental,
third party and professional liability. If we were found to have been negligent
or to have breached our obligations to our clients, we could be exposed to
significant fines and penalties and third-party liabilities and our reputation
could be adversely affected. The Company maintains a consolidated insurance
program (including general liability coverage) and claims made by any covered
insured will reduce the amount of available insurance for the other insureds.
Although we believe that we currently have appropriate insurance coverage, since
2000 we have experienced increasing premiums and decreasing quality of available
insurance coverage, and we may not be able to obtain appropriate coverage on a
cost-effective basis in the future. In addition, we do not presently have
coverage for all of the risks to which we are subject. For example, liabilities
associated with nuclear incidents may not be covered by our insurance policies,
or by indemnification provisions contained in agreements with clients. In
addition, these liabilities may not be covered by federal legislation providing
liability protection for licensees of the Nuclear Regulatory Commission,
typically utilities, for some damages caused by nuclear incidents because we are
not a licensee. Finally, few of our contracts with clients contain a waiver or
limitation of liability. A nuclear incident could adversely affect our business
and financial condition.
We also provide environmental engineering services to our clients,
including the development and management of site environmental remediation
plans. Although we subcontract most remediation construction activities, and in
all cases subcontract the removal and off-site disposal and treatment of
hazardous substances, we could be subject to liability relating to the
environmental services we perform directly or through subcontracts.
Specifically, if we were deemed under federal and state legislation, including
"Superfund" legislation, to be an "operator" of sites to which we provide
environmental engineering and support services, we could be subject to
liabilities. Our insurance policies may not provide coverage for these risks.
Various mechanisms exist whereby the United States Government may limit
liability for environmental claims and losses or indemnify us for such claims or
losses under governmental contracts. Nonetheless, incurrence of any substantial
"Superfund" or other environmental liability could adversely affect our business
and financial condition.
We do not anticipate paying cash dividends on our Common Stock.
We do not, in the foreseeable future, anticipate paying any cash dividends
on our Common Stock.
Our Chief Executive Officer and directors can exercise significant influence
over GP Strategies.
The holder of a share of our Common Stock is entitled to one vote per share
and the holder of a share of our Class B capital stock is entitled to ten votes
per share. As of March 15, 2004, Jerome I. Feldman, our Chairman and Chief
Executive Officer, beneficially owned shares of Common Stock and Class B capital
stock constituting 20% of our voting stock; Harvey Eisen, one of our directors,
beneficially owned shares of Common Stock and Class B capital stock constituting
18% of our voting stock; and EGI-Fund (02-04) Investors, L.L.C., which has
designated Mark Radzik to be one of our directors, beneficially owns shares of
Common Stock and Class B capital stock constituting 14% of our voting stock.
Messrs. Feldman and Eisen and EGI will be able to influence our management and
affairs and all matters requiring stockholder approval, including the election
of directors and approval of significant corporate transactions. This
concentration of ownership may have the effect of delaying, discouraging or
preventing a change in control and might affect the market price of our Common
Stock.
Our stockholder rights plan and authorized preferred stock could make a
third-party acquisition of us difficult.
We have a stockholder rights plan. Our stockholder rights plan would cause
substantial dilution to any person or group that attempts to acquire us on terms
not approved in advance by our Board of Directors. In addition, our certificate
of incorporation allows us to issue up to 5,000,000 shares of preferred stock,
the rights, preferences, qualifications, limitations, and restrictions of which
may be fixed by the Board of Directors without any further vote or action by the
stockholders. The stockholder rights plan, the ability to issue preferred stock,
and certain provisions in our by-laws may have the effect of delaying,
discouraging or preventing a change in control and might affect the market price
of our Common Stock.
Our certificate of incorporation may discourage foreign ownership of our Common
Stock.
The United States Departments of Energy and Defense have policies regarding
foreign ownership, control or influence over government contractors who have
access to classified information, and inquire as to whether any foreign interest
has beneficial ownership of 5% or more of a contractor's or subcontractor's
voting securities. If either Department determines that an undue risk to the
common defense and security of the United States exists, it may, among other
things, terminate the contractor's or subcontractor's existing contracts. Our
certificate of incorporation allows us to redeem or require the prompt
disposition of all or any portion of the shares of our Common Stock owned by a
foreign stockholder beneficially owning 5% or more of the outstanding shares of
our Common Stock if either Department threatens termination of any of our
contracts as a result of such an ownership interest. These provisions may have
the additional effect of delaying, discouraging or preventing a change in
control and might affect the market price of our Common Stock.
FINANCIAL INFORMATION
For financial information about segments and geographic operations and
sales, see Note 13 to Notes to Consolidated Financial Statements. Foreign
operations and export sales represent less than 10% of the Company's sales.
Item 2. Properties
The following information describes the material physical properties
owned or leased by the Company and its subsidiaries.
The Company leases approximately 10,000 square feet of space for its
White Plains, New York principal executive offices. General Physics leases
approximately 30,700 square feet in an office building in Elkridge, Maryland and
approximately 215,000 square feet of office, classroom and warehouse space at
various other locations throughout the United States, the United Kingdom,
Canada, Mexico, and Malaysia.
GSE is headquartered in an approximately 53,000 square feet facility in
Columbia, Maryland which also houses their support functions. In addition, GSE
leases office space domestically in Georgia and internationally in China, Japan,
and Sweden. GSE leases these facilities for terms ending between 2004 and 2008.
MXL owns 50,200 square feet of warehouse and office space in Lancaster,
PA and 55,000 square feet of warehouse and office space in Downer's Grove, IL,
both of which are subject to mortgages. In September 2003, MXL entered into a
three-year lease for a 55,000 square foot storage and manufacturing facility in
Southbridge, Massachusetts for its newly purchased equipment from AOtec.
Five Star leases 236,000 square feet in New Jersey, 111,000 square feet
in Connecticut, 1,300 square feet of sales offices in New York and 800 square
feet in Maryland. Five Star's operating lease for the New Jersey facility
expires in March, 2007 and the operating lease for the Connecticut facility
expires in February, 2007.
The facilities owned or leased by the Company are considered to be
suitable and adequate for their intended uses and are considered to be well
maintained and in good condition.
ITEM 3. LEGAL PROCEEDINGS
On January 3, 2001, the Company commenced an action alleging that MCI
Communications Corporation ("MCI"), MCI's Systemhouse subsidiaries
("Systemhouse"), and Electronic Data Systems Corporation, as successor to
Systemhouse ("EDS"), 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 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 court due to the MCI bankruptcy described
below.
The defendants other than MCI then made an application to the court to
stay the fraud action until a later-commenced arbitration, alleging breach of
the acquisition agreement and of a separate agreement to refer business to
General Physics on a preferred provider basis, is concluded. In a decision dated
May 9, 2003, the court granted the motion and stayed the fraud action pending
the outcome of the arbitration. Limited discovery was conducted in connection
with the arbitration. The arbitration hearings are scheduled to begin on May 17,
2004 before JAMS, a private dispute resolution firm.
MCI filed for bankruptcy protection in July 2002. As a result, the
action was automatically stayed as to MCI. The Company and its subsidiary,
General Physics, both filed timely Proofs of Claim in the United States
Bankruptcy Court against MCI and WorldCom, Inc., among others. On or around
April 22, 2003, MCI served objections to these Proofs of Claim. 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
February 2004, the Bankruptcy Court granted the motion of the Company and
General Physics to the extent that they sought to have the stay lifted so that
the state court could rule on the merits of MCI's summary judgment motion. On
February 19, 2004, the Company and General Physics notified the state court of
the Bankruptcy Court's decision.
The Company will make a capital contribution to NPDC, which in turn
will transfer to MXL, the right to receive the first $5 million of any proceeds
(net of certain litigation expenses), and 50% of any proceeds (net of certain
litigation expenses) in excess of $15 million, received with respect to the
foregoing claims.
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 and operating results of
the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
fourth quarter of the fiscal year covered by this report.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock, $.01 par value, is traded on the New York
Stock Exchange. The following table presents its high and low market prices for
the last two years. During the periods presented below, the Company has not paid
any dividends.
Quarter High Low
2003 First $5.30 $4.72
Second 6.60 4.62
Third 7.44 5.90
Fourth 8.00 7.01
Quarter High Low
2002 First $4.00 $3.23
Second 5.75 3.50
Third 5.04 4.20
Fourth 5.10 3.60
The number of shareholders of record of the Common Stock as of March
15, 2004 was 1,370 and the closing price of the Common Stock on the New York
Stock Exchange on that date was $6.80.
The Company has not declared or paid any cash dividends on its Common
Stock during the two most recent fiscal years. The Company currently intends to
retain future earnings to finance the growth and development of its business. In
addition the Credit Agreement contains restrictive covenants, including a
prohibition on the payment of dividends. General Physics is currently restricted
from paying dividends or management fees to the Company in excess of $1,000,000
in any fiscal year.
Equity Compensation Plan Information as of December 31, 2003
(a) (b) (c)
- ------------------------------- ---------------------------- ---------------------------- --------------------------------------
- ------------------------------- ---------------------------- ---------------------------- --------------------------------------
Plan category Number of securities Weighted-average Number of securities remaining
to be issued upon exercise price of available for future issuance under
Equity compensation exercise of outstanding options, equity
plans not approved outstanding options, warrants and rights(i) compensation plans (excluding
by security holders warrants and rights (i) securities reflected in column(a))
(ii)
- ------------------------------- ---------------------------- ---------------------------- --------------------------------------
- ------------------------------- ---------------------------- ---------------------------- --------------------------------------
Non-Qualified
Stock Option Plan 2,552,397 $6.91 711,394
- ------------------------------- ---------------------------- ---------------------------- --------------------------------------
- ------------------------------- ---------------------------- ---------------------------- --------------------------------------
(a) (b) (c)
- ------------------------------- ---------------------------- ---------------------------- --------------------------------------
- ------------------------------- ---------------------------- ---------------------------- --------------------------------------
Plan category Number of securities Weighted-average Number of securities remaining
to be issued upon exercise price of available for future issuance under
Equity compensation exercise of outstanding outstanding options, equity
plans approved options, warrants and rights compensation plans
by security holders warrants and rights
- ------------------------------- ---------------------------- ---------------------------- --------------------------------------
- ------------------------------- ---------------------------- ---------------------------- --------------------------------------
GP Strategies Corporation's
2003 Incentive Stock Plan
0 2,000,000
- ------------------------------- ---------------------------- ---------------------------- --------------------------------------
(i) Does not include warrants to purchase 300,000 shares of Common Stock issued
to a financial consulting firm at an exercise price of $4.60 per share and
warrants to purchase 937,500 shares issued and sold to four Gabelli funds
in conjunction with the 6% Conditional Subordinated Notes due 2008.
(ii) Does not include shares of Common Stock that may be issued to directors of
the Company as director's fees.
For a description of the material terms of the Company's Non-Qualified
Stock Option Plan and the GP Strategies Corporation's 2003 Incentive Stock Plan,
see Note 12 to the Notes to the Consolidated Financial Statements.
Directors of the Company who are not employees of the Company or its
subsidiaries receive an annual fee of $10,000, payable quarterly, in cash or
Common Stock of the Company, at their option. In addition, the directors receive
$1,500 for each meeting of the Board of Directors attended, and generally do not
receive any additional compensation for service on the committees of the Board
of Directors other than the Audit Committee. Employees of the Company or its
subsidiaries do not receive additional compensation for serving as directors.
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Item 6. Selected Financial Data
Operating Data (in thousands, except per share data)
- ------------------------------------------------------ ----------------------------------------------------------------------------
- ------------------------------------------------------ ------------- -------------- ------------- ----------------- ---------------
Years ended December 31, 2003 2002 2001 2000 1999
- ------------------------------------------------------ ------------- -------------- ------------- ----------------- ---------------
- ------------------------------------------------------ ------------- -------------- ------------- ----------------- ---------------
Sales $168,678 $152,233 $186,611 $197,467 $224,810
Gross margin 23,442 17,465 22,577 19,789 26,379
Interest expense 3,625 2,770 4,733 5,616 4,922
(Loss) income before taxes and minority interests (7,420) (6,047) 1,570 (34,265) (21,293)
Net loss (8,276) (5,228) (945) (25,392) (22,205)
- ------------------------------------------------------ ------------- -------------- ------------- ----------------- ---------------
- ------------------------------------------------------ ------------- -------------- ------------- ----------------- ---------------
Loss per share:
Basic (.48) (.34) (.09) (2.04) (1.95)
Diluted (.48) (.34) (.09) (2.04) (1.95)
- ------------------------------------------------------ ------------- -------------- ------------- ----------------- ---------------
- ------------------------------------------------------ ------------- -------------- ------------- ----------------- ---------------
Balance Sheet Data
December 31, 2003 2002 2001 2000 1999
- ------------------------------------------------------ ------------- -------------- ------------- ----------------- ---------------
- ------------------------------------------------------ ------------- -------------- ------------- ----------------- ---------------
Cash and cash equivalents $ 4,416 $1,516 $ 1,705 $ 11,317 $4,068
Short-term borrowings 26,521 22,058 32,338 36,162 40,278
Working capital (deficit) 17,998 780 (2,750) 1,834 (146)
Total assets 188,323 144,905 160,824 212,578 197,118
Long-term debt 14,861 6,912 6,863 17,612 18,490
Stockholders' equity 92,812 92,982 95,943 112,518 99,982
- ------------------------------------------------------ ------------- -------------- ------------- ----------------- ---------------
- ------------------------------------------------------ ------------- -------------- ------------- ----------------- ---------------
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS:
RESULTS OF OPERATIONS
Overview
The Company's primary operating entity is General Physics, a global workforce
development company that improves the effectiveness of organizations by
providing training, management consulting, e-Learning solutions and engineering
services that are customized to meet the specific needs of clients. Clients
include Fortune 500 companies, manufacturing, process and energy companies, and
other commercial and governmental customers.
General Physics operates in two segments: the Manufacturing & Process Segment
and the IT Segment. The Company has a third segment, Optical Plastics (MXL),
which manufactures molded and coated optical products. During the fourth quarter
of 2003 due to the Company's acquisition of additional shares of GSE, bringing
its ownership to 58%, GSE will be consolidated into the Company's consolidated
financial statements as the Company's new Simulation Segment effective October
23, 2003. Also during the fourth quarter of 2003 due to the Company's
acquisition of additional shares of Five Star, bringing its ownership to 54%,
Five Star will be consolidated into the Company's consolidated financial
statements as the Company's new Home Improvement Distribution Segment effective
October 8, 2003. The Company also holds investments in a publicly held company,
Millennium Cell, Inc. ("Millennium"), and in a private company, Valera
Pharmaceuticals (formerly Hydro Med Sciences) ("Valera"), and owns certain real
estate.
Spin-off of National Patent Development Corporation
In July 2002, the Company announced that it was actively considering a spin-off
of certain of its non-core assets into a separate corporation to be named
National Patent Development Corporation ("NPDC"). The spin-off, when effective,
will result in the Company being separated into two independent, publicly-held
companies. GP Strategies will own and operate the manufacturing & process
business and information technology business through its subsidiary, General
Physics Corporation, and retain the 58% interest in GSE. NPDC will own and
operate the optical plastics business through its subsidiary, MXL, and will own
the 54% interest in Five Star and certain other non-core assets.
On November 14, 2002, the Company filed a ruling request with the Internal
Revenue Service (the "IRS"), which enables the Company to do a tax-free spin-off
of certain non-core assets, including MXL and Five Star. Each holder of the
Company's common stock would receive one share of NPDC common stock for each
share of the Company's common stock held and each holder of the Company's Class
B capital stock would receive one share of NPDC common stock for each share of
Class B capital stock held. On March 21, 2003, the IRS issued a favorable tax
ruling for the spin-off. On February 12, 2004 the Company filed documents with
the Securities and Exchange Commission relating to the proposed spin-off and the
Company anticipates that the spin-off will occur at the conclusion of the SEC
review process.
The spin-off is expected to result in several benefits to the Company and its
shareholders. By engaging in the spin-off, the Company would improve its access
to capital and significantly improve its borrowing capacity, thereby satisfying
its need to raise additional funds as well as achieving other corporate
benefits. Having two separate public companies will enable financial markets to
better evaluate each company more effectively, thereby enhancing stockholder
value over the long term for both companies and making the stock of each more
attractive as currency for future acquisitions. The spin-off will provide NPDC's
management with increased strategic flexibility and decision-making power to
realize significant growth opportunities. Having a separate management and
ownership structure for NPDC will provide equity based compensation that is more
closely related to the business in which its employees work.
Acquisitions
On October 23, 2003, the Company purchased from ManTech International
("ManTech") 3,426,699 shares of common stock of GSE and a GSE Subordinated Note
in the outstanding principal amount of $650,000, which the Company immediately
converted into 418,653 shares of common stock of GSE. This transaction (the "GSE
Acquisition") increased the Company's ownership of the common stock of GSE from
approximately 22% to approximately 58%, and as a result, effective October 23,
2003, GSE is consolidated in the Company's financial statements.
The consideration paid to ManTech by the Company consisted of a five-year 5%
note of $5,250,955 (the "ManTech Note") due in full in October 2008.
The GSE Acquisition was carried out in order to allow the Company to work
together with GSE to expand GSE's simulation technology to the power, military
and homeland defense markets that are currently served by General Physics. In
December 2003, John Moran, an executive of the Company with experience in both
the power industry and simulation technology, was elected Chief Executive
Officer of GSE by GSE's Board of Directors. In addition GSE restructured its
Power Simulation Business in order to reduce expenses and focus on business
development. Several operating personnel were terminated in the fourth quarter,
and GSE entered into a Management Services Agreement with the Company effective
January 1, 2004 pursuant to which GSE outsourced most of its corporate functions
to the Company and General Physics and terminated most of its corporate staff.
GSE recognized $256,000 of severance expense in connection with this
transaction. The Company agreed to provide corporate support services to GSE,
including accounting, finance, human resources, legal, network support and tax.
In addition, GSE will use General Physics' financial system. GSE will pay an
annual fee to General Physics of $685,000. The term of the agreement is one
year, subject to earlier termination only upon the mutual consent of the parties
to the agreement. The agreement can be renewed for successive one-year terms.
GSE reorganized, creating a dedicated worldwide business development
organization under the direction of one manager, and consolidating all of its
worldwide operations under another manager. To maintain its capability to
fulfill customer orders, GSE strengthened and expanded its relationships with
international partners to provide the necessary workforce augmentation.
On October 8, 2003, the Company converted $500,000 principal amount of the
$3,500,000 Senior Unsecured 8% Note due June 30, 2005, as amended, (the "Five
Star Note") of Five Star into 2,000,000 shares of Five Star common stock (the
"Five Star Acquisition"). The Five Star Acquisition increased the Company's
ownership in Five Star from approximately 48% to approximately 54% of the
outstanding Five Star common stock. As a result, effective October 8, 2003 Five
Star is consolidated in the Company's financial statements. In addition, the
Company continues to own the remaining $2.8 million principal amount of the Five
Star Note, the balance of which decreased in 2003 due to repayments of
$1,000,000 prior to the Five Star Acquisition, $500,000 due to the conversion of
principal to common stock in the Five Star Acquisition and a $200,000 repayment
subsequent to the Five Star Acquisition. The Five Star Acquisition occurred
because the Company believed that the common stock of Five Star represented an
attractive investment opportunity based on its valuation at that time.
Operating Highlights
In 2003, the Company had a loss before income taxes and minority interests of
$7,420,000 compared to a loss before income taxes of $6,047,000 in 2002. The
decrease in income before income taxes in 2003, as compared to 2002, was
primarily due to the following factors: (i) executive incentive bonuses of
$3,000,000, (ii) lower gains on sales of marketable securities by $1,421,000,
(iii) increased interest expense due to a write-off of deferred financing costs
of $860,000 and (iv) non-cash debt conversion expense of $622,000. These items
were partially offset by non-cash gain of $1,436,000 (due to a valuation
adjustment to the liability for the warrant to purchase Company Common Stock
issued in connection with the Gabelli Note and Warrant Purchase Agreement) (see
below), as well as increased operating profit from the consolidation of GSE and
Five Star, following the GSE and Five Star Acquisitions in the fourth quarter of
2003 of $358,000 and $333,000 respectively.
In 2003, the Company had a net gain of $846,000 on marketable securities,
primarily relating to the Company's sale of 783,000 shares of Millennium, which
were held as available-for-sale. The Company received gross proceeds of
$1,648,000 from these sales. In addition, the Company recorded a $150,000 credit
to compensation expense related to the GP Strategies Corporation Millennium
Cell, LLC Option Plan (the "Millennium Option Plan") offered to certain of its
employees, which is included as a credit to selling, general and administrative
expense, a $500,000 non-cash gain associated with an option to purchase Valera
Series B preferred stock and a non-cash gain of $1,436,000 due to a valuation
adjustment to the liability for the Gabelli warrant. These items were offset by
restructuring charges of $291,000, primarily attributable to adjustments to the
reserve for lease obligations, and $500,000 equity loss of Valera. The Company
incurred approximately $1,200,000 of legal fees relating to the Company's
ongoing litigation against MCI Communications, Systemhouse and Electronic Data
Systems Corporation, as successor to Systemhouse and incurred costs of
approximately $500,000 in connection with the proposed spin-off of NPDC.
In 2002, the Company had a net gain of $2,267,000 on marketable securities,
primarily relating to the Company's sale of 1,286,000 shares of Millennium,
which were held as available-for-sale. The Company received gross proceeds of
$3,833,000 from these sales. In addition, the Company recorded a $1,211,000
credit to compensation expense related to the Millennium Option Plan offered to
certain of its employees, which is included as a credit to selling, general and
administrative expense, and restructuring charge reversals of $368,000 primarily
relating to favorable settlements on certain lease and contractual obligations.
These items were offset by equity losses of $2,611,000 of which $1,401,000
related to Valera and $1,210,000 to GSE. The Company recorded charges of
approximately $700,000 relating to financial and consulting fees and incurred
approximately $800,000 of legal fees relating to the Company's ongoing
litigation against MCI Communications, Systemhouse and Electronic Data Systems
Corporation, as successor to Systemhouse.
In 2001, the Company had a net gain of $4,294,000 on marketable securities,
primarily relating to the Company's sale of 2,081,000 shares of Millennium,
861,000 of which were trading securities and 1,220,000 of which were available
for sale. The Company received gross proceeds of $14,624,000 from these sales.
In addition, the Company recorded a $2,370,000 credit to compensation expense
related to the Millennium Option Plan, which is included as a credit to selling,
general and administrative expense. The Company had restructuring charge
reversals of $1,174,000 primarily relating to favorable settlements on certain
lease and contractual obligations, offset by an operating loss from Valera of
approximately $3,400,000 and a $320,000 write-down on investments, of which
$200,000 related to Five Star. In addition, the Company recorded charges of
approximately $1,050,000 relating to financial consulting services (of which
$750,000 is a non-cash stock based award) and $400,000 relating to a potential
new credit agreement which was not consummated. The Company also incurred in
excess of $500,000 relating to legal fees relating to the Company's litigation
against MCI Communications Corporation, Systemhouse and Electronic Data System
Corporation, as successor to Systemhouse.
Sales
Years ended December 31, (in thousands) 2003 2002 2001
- ------------------------------------------------------------ ---------------- -----------------
- ------------------------------------------------------------ ---------------- -----------------
Manufacturing & Process $127,762 $134,255 $164,361
Information Technology 6,213 7,982 11,061
Simulation 6,059
Optical Plastics 8,613 9,996 11,184
Home Improvement Distribution 20,031
Valera 5
- ------------------------------------------------------------ ---------------- -----------------
- ------------------------------------------------------------ ---------------- -----------------
$168,678 $152,233 $186,611
- ------------------------------------------------------------ ---------------- -----------------
The decreased sales of $6,493,000 by the Manufacturing & Process Segment in 2003
were primarily due to the following: o A decrease in engineering and related
services in connection with Liquefied Natural Gas projects. o Decreased services
provided to nuclear power utilities.
o A decline in attendance at General Physics Training Institute (GPTI)
open enrollment courses primarily due to reduced spending on training
within the automotive industry.
o A general decline in client spending (and budgets for spending) on
consulting and training services due to overall economic conditions
during the past year.
The decline in revenue was partially offset by an increase in revenue from the
United States Army for Domestic Preparedness services for the Department of
Homeland Security.
The decreased sales of $30,106,000 by the Manufacturing & Process Segment in
2002 were primarily attributable to a reduction in sales from the automotive and
e-Learning divisions, as well as from advanced manufacturing clients and reduced
sales from a contract with Westinghouse Savannah River.
The decreased sales of $1,769,000 in the IT Segment in 2003 was primarily due to
the Company focusing on higher margin projects and declining certain work with
lower margins. The decrease in sales of $3,079,000 in the IT Segment in 2002 was
primarily due to the continued downturn in the economy, which caused a reduction
in overall technology spending, including training and consulting.
In 2003, the Optical Plastics Segment (MXL) sales decreased by $1,383,000 or 14%
primarily as a result of a decline in revenue from the discontinuance of a
product line. In 2002 MXL sales decreased by $1,188,000 or 11% primarily due to
the overall downturn in the economy, which caused a reduction in orders from
MXL's most significant customers.
In the fourth quarter of 2003 the Company acquired additional shares of GSE and
Five Star, bringing its ownership to 58% and 54% as of October 23, 2003 and
October 8, 2003 respectively. As a result, sales of GSE and Five Star of
$6,059,000 and $20,031,000, respectively, are included in the Company's
consolidated financial statements. GSE comprises the Company's new Simulation
Segment and Five Star comprises the Company's new Home Improvement Distribution
Segment.
Gross margin
- ------------------------------------------------------- ----------------------- ---------------------- ----------------------
Years ended December 31, (in thousands) 2003 2002 2001
- ------------------------------------------------------- ------------ ---------- ----------- ---------- ------------ ---------
% % %
Manufacturing & Process $14,240 11.1 $15,158 11.3 $18,551 11.3
Information Technology 1,261 20.3 208 2.6 1,781 16.1
Simulation 1,594 27.3
Optical Plastics 1,863 21.6 2,099 21.0 2,816 25.2
Home Improvement Distribution 4,484 22.4
Valera (571)
- ------------------------------------------------------- ------------ ---------- ----------- ---------- ------------ ---------
- ------------------------------------------------------- ------------ ---------- ----------- ---------- ------------ ---------
$23,442 13.8 $17,465 11.5 $22,577 12.1
- ------------------------------------------------------- ------------ ---------- ----------- ---------- ------------ ---------
The Manufacturing & Process Segment gross margin of $14,240,000 in 2003
decreased by $918,000 when compared to 2002. This decrease was primarily due to
reduced sales. In addition, the Company experienced a reduction in higher
value-added services primarily provided to customers in the automotive division,
that typically generate higher gross margins. However, the gross margin
percentage for the Manufacturing & Process Segment remained relatively
consistent as a result of the Company's efforts to monitor and control costs.
The gross margin of $15,158,000 by the Manufacturing & Process Segment in 2002,
decreased by $3,393,000 when compared to 2001. This decrease was due to the
continued downturn in the economy as well as a reduction in higher value-added
services primarily provided to customers in the automotive division and advanced
manufacturing clients. Nonetheless, the gross margin percentage for the
Manufacturing & Process Segment remained unchanged as a result of the Company's
efforts to monitor and control costs.
The IT Segment gross margin of $1,261,000 in 2003 increased by $1,053,000 when
compared to 2002. This increase was due to the Company concentrating on higher
gross margin opportunities and cost cutting initiatives. The decrease of
$1,573,000 in the IT Segment gross margin in 2002 compared to 2001 was the
result of the continued downturn in the economy, and primarily due to the
inability to reduce certain overhead costs in proportion to the decline in
sales.
In the fourth quarter of 2003 the Company acquired additional shares of GSE and
Five Star, bringing its ownership to 58% and 54% as of October 23, 2003 and
October 8, 2003 respectively. As a result, gross margins of GSE and Five Star of
$1,594,000 and $4,484,000, respectively, are included in the Company's
consolidated financial statements as part of the new Simulation and Home
Improvement Distribution Segments, respectively.
Selling, general, and administrative expenses
The increase in SG&A of $8,428,000 in 2003 as compared to 2002 was primarily
attributable to the following factors: (i) $1,228,000 and $4,151,000 of SG&A for
GSE and Five Star, respectively, being consolidated in the Company's financial
statements subsequent to the GSE and Five Star Acquisitions, (ii) executive
incentive bonuses of $3,000,000, (iii) a non-cash debt conversion expense of
$622,000, (iv) restructuring charges of $291,000 (as compared to a reversal of
restructuring charges of $368,000 in 2002) and (v) a decrease in the non-cash
credit to compensation expense of $1,061,000, relating to the Millennium Option
Plan. The increase was offset by a decrease in severance and related expense of
$2,089,000 and decrease in rental expense of approximately $540,000 due to the
relocation of the Company's corporate office from New York City to White Plains,
New York.
The decrease in SG&A of $508,000 in 2002 as compared to 2001 was primarily
attributable to a reduction in SG&A expenses of Valera of $2,841,000 due to the
deconsolidation of Valera at December 27, 2001 and goodwill and other intangible
asset amortization expense of $1,410,000, which is not recorded in 2002 in
accordance with SFAS 142, Goodwill and Other Intangible Assets. This decrease
was offset by severance and related expenses of $2,214,000, and a decrease in
the non-cash credit to compensation expense of $1,159,000 relating to the
Millennium Option Plan, due to fluctuations in the share price of Millennium.
Interest expense
Interest expense was $3,625,000 in 2003, $2,770,000 in 2002, and $4,733,000 in
2001. The increase in interest expense in 2003 is primarily due to the write off
of $860,000 of deferred financing costs as a result of the early termination of
the Company's prior credit agreement. This expense is included in interest
expense for year ended December 31, 2003.
The reduction in interest expense in 2002 was attributable to both a decrease in
the Company's outstanding indebtedness and a reduction in variable interest
rates.
Investment and other income (loss) and gains on marketable securities, net,
Years ended December 31, (in thousands) 2003 2002 2001
Investment and other income, (loss) $ (49) $(1,967) $176
Gains on marketable securities, net 846 2,267 4,294
The investment and other income (loss) for 2003 was primarily related to
interest income on loans receivable of $424,000, equity income of Five Star of
$190,000 (before its consolidation) and other income of $70,000, offset by an
equity loss of GSE of $733,000 (before its consolidation).
The investment and other income (loss) for 2002 was related to equity losses on
GSE of $1,210,000 and Valera of $1,401,000, and a write-off of an investment of
$153,000 offset by equity income on Five Star of $162,000, $584,000 of interest
income on loans receivable, and $51,000 from other income.
The investment and other income (loss) for 2001 was primarily related to
$701,000 of interest income on loans receivable offset by write downs of
$320,000 based upon the Company's impairment assessment in the carrying value of
the Company's equity investments, a loss of $205,000 from equity investments and
other miscellaneous losses.
The gains on marketable securities, net in 2003 were primarily due to the
Company's disposal of shares of Millennium and Hemispherx Biopharma, Inc. The
gains on marketable securities, net in 2002 and 2001 were primarily due to the
Company's disposal of shares of Millennium.
Valuation adjustment of liability for warrants
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 "Gabelli 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 GP Warrants were accounted for as a liability of the Company until the
shares of the Company's common stock issuable on exercise of the GP Warrants
were registered, which occurred on December 8, 2003, at which time the liability
was reclassified to additional paid in capital at its then fair market value of
$953,000. The changes in the fair market value of the GP Warrants were marked to
market through December 8, 2003 with the adjustment shown as other income in the
consolidated statement of operations. The Company recognized a gain of
$1,436,000 in its December 8, 2003 valuation adjustment of the liability
relating to the GP Warrants using the Black-Scholes model.
Income taxes
Income tax benefit (expense) for 2003, 2002 and 2001 was $(886,000), 819,000 and
$(2,515,000) respectively.
For the year ended December 31, 2003, the current income tax provision of
$1,131,000 represents federal taxes of $39,000, state taxes of $399,000, and
foreign taxes of $693,000. The deferred income tax benefit of $245,000
represents a benefit for the future utilization of a portion of the Company's
foreign net operating loss.
For the year ended December 31, 2002, the current income tax provision
represents state taxes of $370,000, and foreign taxes of $361,000. The deferred
income tax benefit of $1,550,000 primarily represents a benefit relating to the
Company's federal net operating losses.
For the year ended December 31, 2001, the current income tax provision of
$723,000 represents state taxes of $537,000, and foreign taxes of $186,000. The
deferred income tax expense of $1,792,000 represents future estimated federal
and state taxes.
The Company had an effective tax rate of 11.9% for the year ended December 31,
2003. This rate was primarily due to certain nondeductible items, an increase in
the valuation allowance for domestic net operating losses for which no tax
benefit has been provided, and the tax treatment for financial statement
purposes of the sale by the Company in 2003 of certain shares of
available-for-sale securities accounted for pursuant to SFAS No.115 "Accounting
for Certain Investments in Debt and Equity Securities" ("SFAS 115").
The Company had an effective tax rate of 14% for the year ended December 31,
2002. This rate was primarily due to certain nondeductible items, net losses
from foreign operations for which no tax benefit has been provided, and the tax
treatment for financial statement purposes of the sale by the Company in 2002 of
certain shares of available-for-sale securities accounted for pursuant to SFAS
115.
The Company had an effective tax rate of 160% for the year ended December 31,
2001. This rate was primarily due to the tax treatment for financial statement
purposes of the sale by the Company in 2001 of certain shares of
available-for-sale securities accounted for pursuant to SFAS 115.
At December 31, 2003, the Company had a net deferred tax asset of $11,688,000,
which management believes will more likely than not be realized.
Liquidity and capital resources
At December 31, 2003, the Company had cash and cash equivalents totaling
$4,416,000. 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. On February 12, 2004 the Company filed documents with the Securities and
Exchange Commission relating to the proposed spin-off and the Company
anticipates that the spin-off will occur at the conclusion of the SEC review
process. The Company does not believe the spin-off will significantly impact the
Company's liquidity.
For the year ended December 31, 2003, the Company's working capital increased by
$17,218,000 from $780,000 to $179,998,000. As a result of the GSE and Five Star
Acquisitions, GSE and Five Star are now consolidated in the Company's financial
statements which increased working capital by $2,449,000 and $6,217,000,
respectively. In addition the Company has increased working capital
substantially during the year ended December 31, 2003 by reducing the level of
its short-term indebtedness by utilizing the proceeds of the Gabelli Notes.
The increase in cash and cash equivalents of $2,900,000 for the year ended
December 31, 2003 resulted from cash provided by operations of $5,350,000 and
the effect of exchange rate changes on cash of $70,000; offset by cash used in
investing activities of $1,618,000 and cash used in financing activities of
$902,000. Net cash used in investing activities of $1,618,000 includes cash
acquired in acquisitions of $2,853,000, proceeds from the sale of marketable
securities of $2,124,000 offset by $2,123,000 of capital expenditures, $422,000
of additions to intangible assets, and a $4,050,000 decrease to investments and
other assets. Net cash used in financing activities of $902,000 consisted
primarily of repayments of short-term borrowings of $13,461,000 and deferred
financing costs of $1,619,000, offset by proceeds from issuance of long term
debt, net of repayments, of $13,223,000 and of net proceeds from exercises of
stock options of $955,000.
On October 23, 2003, the Company purchased from ManTech additional shares of
common in GSE exchange for 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.
Five Star is indebted to the Company for the Five Star Note in the principal
amount of $4,500,000 as of December 31, 2002. In June 2003, and July 2003 the
Company received partial repayments from Five Star in the amount of $500,000
each, reducing the outstanding principal amount of the Note from $4,500,000 to
$3,500,000. On October 8, 2003, the Company exchanged $500,000 principal amount
of the $3,500,000 Five Star Note for 2,000,000 shares of Five Star common stock,
reducing the outstanding principal balance of the Five Star note from $3,500,000
to $3,000,000 and increasing the Company's ownership of the Five Star common
stock to approximately 54%. In December 2003 the Company received a partial
repayment from Five Star in the amount of $200,000, reducing the outstanding
principal amount of the Five Star Note from $3,000,000 to $2,800,000.
On September 15, 2003, MXL acquired certain of the precision custom optical
assemblies inventory, machinery and equipment of AOtec for $1.1 million in cash
and notes, subject to adjustment. MXL leased space in Massachusetts for the
newly purchased equipment. 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 (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.
On August 13, 2003, General Physics, General Physics's subsidiary Skillright,
Inc. and MXL entered into a two-year $25 million Financing and Security
Agreement ("Credit Agreement") with a new bank, the proceeds of which were used
to repay the Company's previous credit facility. The Credit Agreement, as
amended in March 2004 is secured by certain assets of General Physics. The
Credit Agreement also provides for an unsecured guaranty from the Company. The
Credit Agreement also contains certain restrictive covenants including a
prohibition on future acquisitions (except for the Five Star Acquisition),
incurrence of debt and the payment of dividends. The Company received a waiver
under the Credit Agreement with respect to the GSE Acquisition. General Physics
is currently restricted from paying dividends or management fees to the Company
in excess of $1,000,000 in any fiscal year.
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 Gabelli Notes
and GP Warrants was $7,500,000. The Gabelli Notes are secured by a mortgage on
the Company's property located in Pawling, New York. In the event that the
spin-off does not occur, the Company may be required to redeem the Gabelli Notes
by April 2005. In addition, at any time that less than $1,875,000 principal
amount of the Gabelli 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 Gabelli
Notes in an amount not less than the outstanding principal amount of the Gabelli
Notes. The Company used $5,800,000 of the proceeds to repay its previous credit
facility. The Company and NPDC agreed to allocate to NPDC $1,875,000 of the
$7,500,000 received for the Gabelli Notes and Warrants, which the Company will
transfer to NPDC prior to the spin-off of NPDC.
The following table summarizes long term debt, capital lease commitments and
operating lease commitments as of December 31, 2003 (in thousands)
- ---------------------------------------- -------------------------- -----------------------------------------------------
Balance at Payments Due In
December 31, 2003 2004 2005-06 2007-08 after 2008
---- ------- ------- ----------
- ---------------------------------------- -------------------------- ----------- ------------- ------------- -------------
- ---------------------------------------- -------------------------- ----------- ------------- ------------- -------------
Long term debt $16,654 $ 775 $ 2,054 $12,951 $ 874
Capital lease commitments 469 337 132
Operating lease commitments 22,096 5,650 9,363 4,127 2,956
- ---------------------------------------- -------------------------- ----------- ------------- ------------- -------------
- ---------------------------------------- -------------------------- ----------- ------------- ------------- -------------
Total $39,219 $6,762 $11,549 $17,078 $3,830
------- ====== ======= ======= ======
- ---------------------------------------- -------------------------- ----------- ------------- ------------- -------------
GSE previously had a $1.5 million bank line of credit. The credit facility
provided for borrowings to support working capital needs and foreign letters of
credit. The line was collateralized by substantially all of GSE's assets. The
interest rate on this line of credit was based on the bank's prime rate plus
1.00% (5.00% as of December 31, 2003), with interest only payments due monthly.
At December 31, 2003, GSE's available borrowing base was $1.5 million, none of
which had been utilized. On March 23, 2000, the Company initially agreed to
guarantee up to $1,800,000 of GSE's indebtedness under its credit facility for
three years. In consideration for the extension of the guarantee from March 23,
2003 to March 31, 2004, the Company received 150,000 shares of GSE common stock,
with a value of $180,000. A deferred credit of $180,000 was recorded for the
receipt of these shares which will amortize to income over the term of the
guarantee. During the year ended December 31, 2003, the Company recorded
$135,000 to other income in the Statement of Operations.
GSE's current credit facility was scheduled to expire on May 31, 2004, as
amended; however on March 30, 2004, GSE was added as an additional borrower
under the General Physics Credit Agreement. Under the terms of the Credit
Agreement, as amended, $1,500,000 of General Physics' Credit Agreement has been
allocated for use by GSE. The Credit Agreement was amended to provide for
additional collateral consisting of substantially all of the GSE's assets as
well as certain covenants specific to GSE. It provides for borrowings by GSE up
to 80% of eligible accounts receivable and 80% of eligible unbilled receivables,
up to a maximum of $1,500,000. The interest rate is based upon the LIBOR Market
Index Rate plus 3%, with interest only payments due monthly. The Company agreed
to guarantee GSE's borrowings under the Credit Agreement, as amended, in
consideration for a fee pursuant to the Management Services Agreement.
The Company has guaranteed the leases for Five Star's New Jersey and Connecticut
warehouses, totaling approximately $1,347,000 per year through the first quarter
of 2007, and an aggregate of $116,000 for certain equipment leases through April
2004. The Company's guarantee of such leases was in effect when Five Star was
originally a wholly-owned subsidiary of the Company prior to the sale by the
Company in 1998 of substantially all of the operating assets of Five Star Group
to the predecessor company of Five Star. As part of this transaction, the
landlords of the New Jersey and Connecticut facilities and the lessors of the
equipment did not consent to the release of the Company's guarantee (see Note
16).
On June 20, 2003 Five Star obtained a new Loan and Security Agreement (the "Loan
Agreement") with Fleet Capital Corporation. The Loan Agreement has a five-year
term, with a maturity date of June 30, 2008. The Loan Agreement provides for a
$25,000,000 revolving credit facility, which allows Five Star to borrow based
upon a formula of eligible inventory and eligible accounts receivable, as
defined therein. The interest rates under the Loan Agreement are LIBOR plus a
credit spread for borrowings not to exceed $15,000,000 and the prime rate plus a
credit spread for borrowings in excess of the above-mentioned LIBOR-based
borrowings. The credit spreads can be reduced in the event that Five Star
achieves and maintains certain performance benchmarks. In addition, under a
Subordination Agreement between the Company and Fleet Capital Corporation dated
June 20, 2003, Five Star may make annual cash payments of principal to the
Company provided Five Star achieves certain financial performance benchmarks. At
December 31, 2003, approximately $16,685,000 was outstanding under the Loan
Agreement and approximately $480,000 was available to be borrowed.
In connection with the Loan Agreement, Five Star also entered into a
derivative transaction with Fleet National Bank on June 20, 2003. The derivative
transaction is an interest rate swap which has been designated as a cash flow
hedge. Effective July 1, 2004 through June 30, 2008, Five Star will pay a fixed
interest rate of 3.38% to Fleet National Bank on notional principal of
$12,000,000. In return, Fleet National Bank will pay to Five Star a floating
rate, namely, LIBOR, on the same notional principal amount. The credit spread
under the Loan Agreement is not included in and will be paid in addition to this
fixed interest rate of 3.38%.
The following table summarizes the estimated expiration of financial guarantees
outstanding as of December 31, 2003 (in thousands):
- -------------------------------------- --------------------------- ---------------------------------------------------------
Estimated Expiration Per Period
Total 2004 2005 2006 Thereafter
----- ---- ---- ---- ----------
- -------------------------------------- --------------------------- ------------- ------------ ------------ -----------------
- -------------------------------------- --------------------------- ------------- ------------ ------------ -----------------
GSE debt $1,500 $ 0 $1,500
Five Star warehouse leases 4,355 1,347 1,347 1,347 314
Five Star equipment leases 116 116
--- ---
- -------------------------------------- --------------------------- ------------- ------------ ------------ -----------------
- -------------------------------------- --------------------------- ------------- ------------ ------------ -----------------
Total $5,971 $1,463 $2,847 $1,347 $314
====== ====== ====== ====== ====
- -------------------------------------- --------------------------- ------------- ------------ ------------ -----------------
The Company does not have any off-balance sheet financing, other than operating
leases entered into in the normal course of business and disclosed above. The
Company does not use derivatives for trading purposes.
Management discussion of critical accounting policies
The preparation of our financial statements in conformity with accounting
principles generally accepted in the United States of America requires us to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Our estimates, judgments and assumptions are
continually evaluated based on available information and experience. Because of
the use of estimates inherent in the financial reporting process, actual results
could differ from those estimates.
Certain of our accounting policies require higher degrees of judgment than
others in their application. These include contract revenue and cost
recognition, valuation of accounts receivables, accounting for investments,
impairment of long-lived and intangible assets and income tax recognition of
deferred tax items which are summarized below. In addition, Note 1 to the
Consolidated Financial Statements includes further discussion of our significant
accounting policies.
Contract revenue and cost recognition.
Revenue Recognition
General Physics contract revenue and cost recognition. General Physics provides
services under time-and-materials, cost-plus-fixed fee and fixed-price
contracts. Each contract has different terms based on the scope, deliverables
and complexity of the engagement, requiring General Physics to make judgments
and estimates about recognizing revenue. In general, revenue is recognized on
these arrangements as the services are performed. Under time-and-material
contracts, as well as certain cost-plus-fixed fee and certain fixed-price
contracts, the contractual billing schedules are based on the specified level of
resources General Physics is obligated to provide. As a result, on those "level
of effort" contracts, the contractual billing amount for a given period acts as
a measure of performance and, therefore, revenue is recognized in that amount.
For other fixed price contracts, the contractual billing schedules are not based
on the specified level of resources General Physics is obligated to provide.
These arrangements typically do not have milestones or other reliable measures
of performance. As a result, revenue on these arrangements is recognized using
the percentage-of-completion method based on the relationship of costs incurred
to total estimated costs expected to be incurred over the term of the contract.
General Physics believes this methodology provides a reasonable measure of
performance on these arrangements since performance primarily involves personnel
costs and the customer is required to pay General Physics for the proportionate
amount of work and cost incurred in the event of contract termination. Revenue
for unpriced change orders is not recognized until the customer agrees with the
changes. Costs and estimated earnings in excess of billings on uncompleted
contracts are recorded as a current asset. Billings in excess of costs and
estimated earnings on uncompleted contracts are recorded as a current liability.
Generally contracts provide for the billing of costs incurred and estimated
earnings on a monthly basis.
Risks relating to service delivery, usage, productivity and other factors are
considered when making estimates of total contract cost, contract profitability,
and progress towards completion. If sufficient risk exists, a reduced-profit
methodology is applied to a specific client contract's percentage-of-completion
model whereby the amount of revenue recognized is limited to the amount of costs
incurred until such time as the risks have been partially or wholly mitigated
through performance. General Physics' estimates of total contract cost and
contract profitability change periodically in the normal course of business,
occasionally due to modifications of contractual arrangements. In addition, the
implementation of cost saving initiatives and achievement of productivity gains
generally results in a reduction of estimated total contract expenses on
affected client contracts. Such changes in estimate are recognized in the period
the changes are determined. For all client contracts, provisions for estimated
losses on individual contracts are made in the period in which the loss first
becomes apparent.
As part of General Physics' on-going operations to provide services to its
customers, incidental expenses, which are commonly referred to as
"out-of-pocket" expenses, are billed to customers. Out-of-pocket expenses
include expenses such as airfare, mileage, hotel stays, out-of-town meals, and
telecommunication charges. General Physics' policy provides for these expenses
to be recorded as both revenue and direct cost of services in accordance with
the provisions of EITF 01-14, "Income Statement Characterization of
Reimbursements Received for `Out-of-Pocket' Expenses Incurred."
GSE revenue recognition. The majority of GSE's revenue is derived through the
sale of uniquely designed systems containing hardware, software and other
materials under fixed-price contracts. In accordance with Statement of Position
81-1 "Accounting for Performance of Construction-Type and Certain
Production-Type Contracts", the revenue under these fixed-price contracts is
accounted for on the percentage-of-completion method, based on contract costs
incurred to date and estimated costs to complete. Estimated contract earnings
are reviewed and revised periodically as the work progresses, and the cumulative
effect of any change is recognized in the period in which the change is
identified. Estimated losses are charged against earnings in the period such
losses are identified.
As GSE recognizes revenue under the percentage-of-completion method, it provides
an accrual for estimated future warranty costs based on historical and projected
claims experience. GSE's longer-term contracts generally provide for a one-year
warranty on parts, labor and any bug fixes as it relates to software embedded in
the systems.
GSE's system design contracts do not provide for "post customer support service"
(PCS) in terms of software upgrades, software enhancements or telephone support.
In order to obtain PCS, the customers must purchase a separate contract at the
date of system installation. Such PCS arrangements are generally for a one-year
period renewable annually and include customer support, unspecified software
upgrades, maintenance releases. GSE recognizes revenue from these contracts
ratably over the life of the agreements in accordance with Statement of Position
97-2 "Software Revenue Recognition".
Revenues from certain consulting or training contracts are recognized on a
time-and-material basis. For time-and-material type contracts, revenue is
recognized based on hours incurred at a contracted labor rate plus expenses.
Five Star and MXL revenue recognition. Revenue is recognized upon shipment of
product to customers. Allowances for estimated returns and allowances are
recognized when sales are recorded.
Valuation of accounts receivables
Provisions for allowance for doubtful accounts are made based on historical loss
experience adjusted for specific credit risks. Measurement of such losses
requires consideration of the historical loss experience of the Company and its
subsidiaries, judgments about customer credit risk, and the need to adjust for
current economic conditions. The allowance for doubtful accounts as a percentage
of total gross trade receivables was 4.2% and 3.2% at December 31, 2003 and
2002, respectively.
Impairment of long-lived tangible and intangible assets
Impairment of long-lived tangible and intangible assets with finite lives result
in a charge to operations whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. Recoverability of
long-lived tangible assets to be held and used is measured by a comparison of
the carrying amount of the asset to future undiscounted net cash flows expected
to be generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by determining the amount by which the
carrying amount of the assets exceeds the fair value of the asset.
The measurement of the future net cash flows to be generated is subject to
management's reasonable expectations with respect to the Company's future
operations and future economic conditions which may affect those cash flows.
In accordance with SFAS No. 142, which the Company adopted in 2002, goodwill is
no longer amortized, but instead tested for impairment at least annually. The
first step of the goodwill impairment test is a comparison of the fair value of
each reporting unit to its carrying value. The Company conducted a transitional
goodwill impairment test upon adoption of SFAS No. 142 as of January 1, 2002,
and its annual goodwill impairment test as of December 31, 2003 and 2002. The
goodwill impairment test requires the Company to identify its reporting units
and obtain estimates of the fair values of those units as of the testing date.
The Company estimates the fair values of its reporting units using discounted
cash flow valuation models. The Company estimates these amounts by evaluating
historical trends, current budgets, operating plans and industry data. The
estimated fair value of each reporting unit exceeded its respective carrying
value in both tests conducted in 2003 and 2002 indicating the underlying
goodwill of each unit was not impaired at the respective testing dates. The
timing and frequency of our goodwill impairment tests are based on an ongoing
assessment of events and circumstances that would more than likely reduce the
estimated fair value of a reporting unit below its carrying value. The Company
will continue to monitor its goodwill for impairment and conduct formal tests
when impairment indicators are present. A decline in the fair value of any
reporting units below its carrying value is an indicator that the underlying
goodwill of the unit is potentially impaired. This situation would require the
second step of the goodwill impairment test to determine whether the unit's
goodwill is impaired. The second step of the goodwill impairment test is a
comparison of the implied fair value of a reporting unit's goodwill to its
carrying value. An impairment loss is required for the amount which the carrying
value of a reporting unit's goodwill exceeds its implied fair value. The implied
fair value of the reporting unit's goodwill would become the new cost basis of
the unit's goodwill.
The following table presents goodwill balances at December 31, 2003 and
operating income for the years ended December 31, 2003, 2002 and 2001 for each
of the Company's reportable segments (in thousands):
Goodwill at Operating Income
December 31, For the Years Ended December 31
-------------------------------
2003 2003 2002 2001
---- ---- ---- ----
Manufacturing & Process $51,036 $3,823 $1,712 $8,679
Information Technology 6,401 860 (182) 1,596
Simulation 4,756 358
Optical Plastics 202 (60) 429 1,192
Home Improvement Distribution 333
- ----------------------------------- --------------------------- ---------------- ------------------ --------------
- ----------------------------------- --------------------------- ---------------- ------------------ --------------
$62,395 $5,314 $1,959 $11,467
======= ====== ====== =======
- ----------------------------------- --------------------------- ---------------- ------------------ --------------
Accounting for investments
On October 8, 2003 the Company acquired additional shares of Five Star, bringing
its ownership to 54%. Five Star is consolidated into the Company's consolidated
financial statements and is no longer accounted for as an equity investment
effective as of that date. At December 31, 2002 the Company owned approximately
47.3% of Five Star, and would have owned approximately 50% if certain stock
options beneficially owned by the Company's officers were exercised, and
accounted for its investment in Five Star using the equity method. At December
31, 2002, the Company's investment in Five Star was $6,317,000, including a
$4,500,000 senior unsecured 8% note. As of December 31, 2002, three officers of
the Company served on the board of Five Star (out of a total of seven
directors). However, effective August 1998, the Company entered into a Voting
Agreement which limited its operating and financial control of Five Star.
Pursuant to an amendment of such agreement, the Company agreed that until June
30, 2004, it would vote its shares of common stock of Five Star (i) such that
not more than 50% of Five Star's directors will be officers or directors of the
Company and (ii) in the same manner and in the same proportion as the remaining
stockholders of Five Star vote on all matters presented to a vote of
stockholders, other than the election of directors. Therefore, the Company had
previously accounted for its investment in Five Star under the equity method.
On October 8, 2003 the Company acquired additional shares of GSE, bringing its
ownership to 58%. GSE is consolidated into the Company's consolidated financial
statements and is no longer accounted for as an equity investment effective as
of that date. At December 31, 2002 the Company owned approximately 19.5% of GSE
with a carrying value of $1,794,000 and accounted for its investment in GSE
using the equity method. Although the Company owned approximately 19.5% of the
common stock of GSE as of December 31, 2002, the Company had accounted for its
investment in GSE using the equity method of accounting based upon management's
conclusion that the Company had significant influence with respect to the
operations of GSE.
The Company currently owns 100% of Valera's common stock but no longer has
financial and operating control of Valera. As a condition of a private placement
of preferred stock in December 2001, the Company contractually gave up operating
control over Valera through an Investors Rights Agreement. Therefore, through
December 27, 2001, the operating results of Valera were consolidated within the
Consolidated Statements of Operations. However, subsequent to that date the
Company accounts for its investment in Valera under the equity method. Due to
Valera's operating losses during 2002, the Company's investment in Valera as of
December 31, 2002 was written down to zero.
Income tax recognition
The Company accounts for income taxes using the asset and liability method.
Deferred tax assets and liabilities are recognized for future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and for operating
loss and tax credit carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered. In
assessing the realizability of the deferred tax assets, the Company considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of the deferred tax assets
is dependent upon the generation of future taxable income during the periods in
which temporary differences are deductible. Management considers the scheduled
reversal of deferred tax liabilities, projected future taxable income, and tax
planning strategies in making this assessment. Based upon these factors,
management believes it is more likely than not that the Company will realize the
benefits of deferred tax assets, net of the valuation allowance. The valuation
allowance relates to both foreign and domestic net operating loss carryforwards
for which the Company does not believe the benefits will be realized.
Restructuring reserves
The Company adopted restructuring plans, primarily related to its open
enrollment IT business, in 2000 and 1999. In order to identify and calculate the
associated costs to exit this business, management made assumptions regarding
estimates of future liabilities for operating leases and other contractual
obligations, severance costs and the net realizable value of assets. Management
believes its estimates, which are reviewed quarterly, to be reasonable and
considers its knowledge of the industry, its previous experience in exiting
activities and valuations from independent third parties if necessary, in
calculation of such estimates. As of December 31, 2003 and 2002 only lease
obligations comprised the restructuring reserve.
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 an 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.
Item 7A. Quantitative and Qualitative Disclosures About
Market Risk
The Company is exposed to the impact of interest rate, market risks and currency
fluctuations. In the normal course of business, the Company employs internal
processes to manage its exposure to interest rate, market risks and currency
fluctuations. The Company's objective in managing its interest rate risk is to
limit the impact of interest rate changes on earnings and cash flows and to
lower its overall borrowing costs. The Company is exposed to the impact of
currency fluctuations because of its international operations.
As of December 31, 2003, the Company had approximately $14,212,000 of variable
rate borrowings. The Company estimates that for every 1% fluctuation in general
interest rates, assuming debt levels at December 31, 2003, interest expense
would vary by $142,120.
The Company's net investment in its foreign subsidiaries, including intercompany
balances, at December 31, 2003 was immaterial, and accordingly, fluctuations in
foreign currency do not have a material impact on the Company's financial
position.
The Company revenues and profitability are related to general levels of economic
activity and employment in the United States and the United Kingdom. As a
result, any significant economic downturn or recession in one or both of those
countries could harm our business and financial condition. A significant portion
of the Company's revenues are derived from Fortune 500 level companies and their
international equivalents, which historically have adjusted expenditures for
external training during economic downturns. If the economies in which these
companies operate weaken in any future period, these companies may not increase
or may reduce their expenditures on external training, which could adversely
affect the Company's business and financial condition.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Page
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
FINANCIAL STATEMENTS OF GP STRATEGIES CORPORATION AND SUBSIDIARIES:
Independent Auditors' Report 52
Consolidated Balance Sheets - December 31, 2003 and 2002 54
Consolidated Statements of Operations - Years ended
December 31, 2003, 2002, and 2001 56
Consolidated Statements of Changes in Stockholders' Equity
- Years ended December 31, 2003, 2002, and 2001 57
Consolidated Statements of Cash Flows - Years ended
December 31, 2003, 2002, and 2001 58
Notes to Consolidated Financial Statements 60
SUPPLEMENTARY DATA (Unaudited)
Selected Quarterly Financial Data 114
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
GP Strategies Corporation:
We have audited the accompanying consolidated balance sheets of GP Strategies
Corporation and subsidiaries as of December 31, 2003 and 2002, and the related
consolidated statements of income, stockholders' equity, and cash flows for the
years then ended. These consolidated financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audits. We did not audit
the financial statements of Five Star Products Inc., a 54 % owned subsidiary,
which statements reflect total assets constituting 20 percent and total revenues
constituting 12 percent (after elimination of intercompany balances and
transactions) in 2003 of the related consolidated totals. Those statements were
audited by other auditors whose report has been furnished to us, and our
opinion, insofar as it relates to the amounts included for Five Star Products
Inc., is based solely on the report of the other auditors.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits and the report of
the other auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of GP Strategies Corporation and
subsidiaries as of December 31, 2003 and 2002, and the results of their
operations and their cash flows for the years then ended in conformity with
accounting principles generally accepted in the United States of America.
As discussed in Note 2 to the consolidated financial statements, the Company
adopted Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets", effective January 1, 2002
KPMG LLP
New York, New York
April 5, 2004
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
Five Star Products, Inc.
We have audited the consolidated balance sheets of Five Star Products,
Inc. and subsidiaries (the "Company") as of December 31, 2003 and 2002,
and the related consolidated statements of operations and comprehensive
income, changes in stockholders' equity and cash flows for each of the
years in the three-year period ended December 31, 2003 (not shown
separately herein). These financial statements are the responsibility
of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that
we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
Five Star Products, Inc. and subsidiaries as of December 31, 2003 and
2002, and the results of their operations and their cash flows for each
of the years in the three-year period ended December 31, 2003, in
conformity with accounting principles generally accepted in the United
States of America.
Eisner LLP
New York, New York
March 17, 2004, except for the first paragraph of Note 7, as to which
the date is March 31, 2004
GP STRATEGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except shares and par value per share)
- --------------------------------------------------------------------------------------- ----------------- ---------------
- --------------------------------------------------------------------------------------- ----------------- ---------------
December 31, 2003 2002
- --------------------------------------------------------------------------------------- ----------------- ---------------
- --------------------------------------------------------------------------------------- ----------------- ---------------
Assets
Current assets
Cash and cash equivalents $4,416 $1,516
Accounts and other receivables (of which
$9,899 and $4,865 are from government contracts)
less allowance for doubtful accounts of $1,739 and $854 39,737 26,708
Inventories 28,300 1,380
Costs and estimated earnings in excess of billings on
uncompleted contracts 14,502 14,177
Prepaid expenses and other current assets 6,705 4,079
- --------------------------------------------------------------------------------------- ----------------- ---------------
- --------------------------------------------------------------------------------------- ----------------- ---------------
Total current assets 93,660 47,860
- --------------------------------------------------------------------------------------- ----------------- ---------------
- --------------------------------------------------------------------------------------- ----------------- ---------------
Investments, marketable securities and note receivable 4,225 14,130
- --------------------------------------------------------------------------------------- ----------------- ---------------
Property, plant and equipment, net 8,994 8,299
- --------------------------------------------------------------------------------------- ----------------- ---------------
- --------------------------------------------------------------------------------------- ----------------- ---------------
Intangible assets
Goodwill 62,395 57,491
Patents, licenses and contract rights, net 1,031 755
- --------------------------------------------------------------------------------------- ----------------- ---------------
- --------------------------------------------------------------------------------------- ----------------- ---------------
63,426 58,246
Deferred tax asset 11,688 10,846
- --------------------------------------------------------------------------------------- ----------------- ---------------
- --------------------------------------------------------------------------------------- ----------------- ---------------
Other assets 6,330 5,524
- --------------------------------------------------------------------------------------- ----------------- ---------------
- --------------------------------------------------------------------------------------- ----------------- ---------------
$188,323 $144,905
- --------------------------------------------------------------------------------------- ----------------- ---------------
- --------------------------------------------------------------------------------------- ----------------- ---------------
See accompanying notes to consolidated financial statements.
GP STRATEGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Continued)
(in thousands, except shares and par value per share)
- ---------------------------------------------------------------------------------------- ------------------- -----------------
December 31, 2003 2002
- ---------------------------------------------------------------------------------------- ------------------- -----------------
- ---------------------------------------------------------------------------------------- ------------------- -----------------
Liabilities and stockholders' equity
Current liabilities
Current maturities of long-term debt $ 1,112 $ 3,610
Short-term borrowings 26,521 22,058
Accounts payable and accrued expenses 38,107 17,552
Billings in excess of costs and estimated
earnings on uncompleted contracts 9,922 3,860
- ---------------------------------------------------------------------------------------- ------------------- -----------------
- ---------------------------------------------------------------------------------------- ------------------- -----------------
Total current liabilities 75,662 47,080
- ---------------------------------------------------------------------------------------- ------------------- -----------------
- ---------------------------------------------------------------------------------------- ------------------- -----------------
Long-term debt less current maturities 13,749 3,302
Other non-current liabilities 1,728 1,541
Minority interests 4,372
Stockholders' equity
Preferred stock, authorized 10,000,000
shares, par value $.01 per share, none issued
Common stock, authorized 25,000,000 shares, par value $.01 per share, issued
16,348,777 and 15,361,437 shares (of which 14,722 and 33,417 shares are held in
treasury) 163 154
Class B common stock, authorized 2,800,000 shares, par
value $.01 per share, issued and outstanding 1,200,000 shares 12 12
Additional paid-in capital 196,541 189,988
Accumulated deficit (101,443) (93,167)
Accumulated other comprehensive income 24 460
Notes receivable from stockholder (2,322) (4,095)
Treasury stock at cost (163) (370)
- ---------------------------------------------------------------------------------------- ------------------- -----------------
- ---------------------------------------------------------------------------------------- ------------------- -----------------
Total stockholders' equity 92,812 92,982
- ---------------------------------------------------------------------------------------- ------------------- -----------------
- ---------------------------------------------------------------------------------------- ------------------- -----------------
$188,323 $144,905
- ---------------------------------------------------------------------------------------- ------------------- -----------------
See accompanying notes to consolidated financial statements.
GP STRATEGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
- --------------------------------------------------------------------- ----------------- ------------------- -------------------
Years ended December 31, 2003 2002 2001
- --------------------------------------------------------------------- ----------------- ------------------- -------------------
- --------------------------------------------------------------------- ----------------- ------------------- -------------------
Sales $168,678 $152,233 $186,611
Cost of sales 145,236 134,768 164,034
- --------------------------------------------------------------------- ----------------- ------------------- -------------------
- --------------------------------------------------------------------- ----------------- ------------------- -------------------
Gross margin 23,442 17,465 22,577
- --------------------------------------------------------------------- ----------------- ------------------- -------------------
- --------------------------------------------------------------------- ----------------- ------------------- -------------------
Executive incentive compensation bonus (3,000)
Non-cash debt conversion expense, net (622)
Other selling, general & administrative expenses (25,848) (21,042) (20,744)
- --------------------------------------------------------------------- ----------------- ------------------- -------------------
- --------------------------------------------------------------------- ----------------- ------------------- -------------------
Total selling, general & administrative expenses (29,470) (21,042) (20,744)
- --------------------------------------------------------------------- ----------------- ------------------- -------------------
- --------------------------------------------------------------------- ----------------- ------------------- -------------------
- --------------------------------------------------------------------- ----------------- ------------------- -------------------
Operating profit (loss) (6,028) (3,577) 1,833
- --------------------------------------------------------------------- ----------------- ------------------- -------------------
- --------------------------------------------------------------------- ----------------- ------------------- -------------------
Write-off of deferred financing costs (860)
Interest expense (2,765) (2,770) (4,733)
- --------------------------------------------------------------------- ----------------- ------------------- -------------------
- --------------------------------------------------------------------- ----------------- ------------------- -------------------
Total interest expense (3,625) (2,770) (4,733)
- --------------------------------------------------------------------- ----------------- ------------------- -------------------
- --------------------------------------------------------------------- ----------------- ------------------- -------------------
Investment and other income (loss)
(including interest income of $424,
$584 and $701) (49) (1,967) 176
Gains on marketable securities, net 846 2,267 4,294
Valuation adjustment of liability for warrants 1,436
- --------------------------------------------------------------------- ----------------- ------------------- -------------------
- --------------------------------------------------------------------- ----------------- ------------------- -------------------
Income (loss) before income taxes and minority interests
(7,420) (6,047) 1,570
Income tax benefit (expense) (886) 819 (2,515)
- --------------------------------------------------------------------- ----------------- ------------------- -------------------
Loss before minority interests (8,306) (5,228) (945)
- --------------------------------------------------------------------- ----------------- ------------------- -------------------
Minority interests 30
- --------------------------------------------------------------------- ----------------- ------------------- -------------------
- --------------------------------------------------------------------- ----------------- ------------------- -------------------
Net loss $ (8,276) $ (5,228) $ (945)
- --------------------------------------------------------------------- ----------------- ------------------- -------------------
- --------------------------------------------------------------------- ----------------- ------------------- -------------------
Net loss per share
Basic $ (.48) $ (.34) $ (.09)
Diluted (.48) (.34) (.09)
- --------------------------------------------------------------------- ----------------- ------------------- -------------------
- --------------------------------------------------------------------- ----------------- ------------------- -------------------
See accompanying notes to consolidated financial statements.
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity
Years ended December 31, 2003, 2002, and 2001
(in thousands, except for par value per share)
Accumulated
other
Class B compre- Compre- Notes Total
Common common Additional hensive hensive receivable Treasury stock-
stock stock paid-in Accumulated income income from stock holders'
$.01 Par) ($.01 Par) capital deficit (loss) (loss) stockholder at cost equity
- ---------------------------------------- ----------- -------------- ---------- --------- ---------- ----------- -------- -----------
- ---------------------------------------- ----------- -------------- ---------- --------- ---------- ----------- -------- -----------
Balance at December 31, 2000 $125 $ 8 $179,955 $(86,994) $27,237 $ $(4,095) $(3,718) $112,518
- ---------------------------------------- ----------- -------------- ---------- --------- ---------- ----------- -------- -----------
- ---------------------------------------- ----------- -------------- ---------- --------- ---------- ----------- -------- -----------
Other comprehensive loss (18,873) (18,873) (18,873)
Net loss (945) (945) (945)
- ---------------------------------------- ----------- -------------- ---------- --------- ---------- ----------- -------- -----------
- ---------------------------------------- ----------- -------------- ---------- --------- ---------- ----------- -------- -----------
Total comprehensive loss (19,818) (19,818)
Issuance and sale of common
stock and warrants 3 3 2,924 313 3,243
Issuance of treasury stock
in exchange for Class B
common stock (2) (2,801) 2,803
- ---------------------------------------- ----------- -------------- ---------- --------- ---------- ----------- ------ -----------
- ---------------------------------------- ----------- -------------- ---------- --------- ---------- ----------- -------- -----------
Balance at December 31, 2001 $128 $ 9 $180,078 $(87,939) $ 8,364 $ $(4,095) $ (602) $ 95,943
- ---------------------------------------- ----------- -------------- ---------- --------- ---------- ----------- -------- -----------
- ---------------------------------------- ----------- -------------- ---------- --------- ---------- ----------- -------- -----------
Other comprehensive loss (7,904) (7,904) (7,904)
Net loss (5,228) (5,228) (5,228)
- ---------------------------------------- ----------- -------------- ---------- --------- ---------- ----------- -------- -----------
- ---------------------------------------- ----------- -------------- ---------- --------- ---------- ----------- -------- -----------
Total comprehensive loss (13,132) (13,132)
Issuance and sale of common
stock 26 3 9,910 232 10,171
- ---------------------------------------- ----------- -------------- ---------- --------- ---------- ----------- -------- -----------
- ---------------------------------------- ----------- -------------- ---------- --------- ---------- ----------- -------- -----------
Balance at December 31, 2002 $154 $12 $189,988 $(93,167) $460 $ $(4,095) $(370) $ 92,982
- ---------------------------------------- ----------- -------------- ---------- --------- ---------- ----------- -------- -----------
- ---------------------------------------- ----------- -------------- ---------- --------- ---------- ----------- -------- -----------
Other comprehensive loss (436) (436) (436)
Net loss (8,276) (8,276) (8,276)
- ---------------------------------------- ----------- -------------- ---------- --------- ---------- ----------- -------- -----------
- ---------------------------------------- ----------- -------------- ---------- --------- ---------- ----------- -------- -----------
Total comprehensive loss (8,712) (8,712)
Repayment of notes receivable
from stockholder 1,773 1,773
Issuance and sale of common
stock and warrants 9 6,553 207 6,769
- ---------------------------------------- ----------- -------------- ----------- -------- ----------- ----------- -------- ----------
Balance at December 31, 2003 $163 $12 $196,541 $(101,443) $24 $ $(2,322) $(163) $ 92,812
- ---------------------------------------- ----------- -------------- ----------- -------- ----------- ----------- --------- ---------
See accompanying notes to consolidated financial statements.
GP STRATEGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
- --------------------------------------------------------------------- -------------------- ------------------- --------------------
- --------------------------------------------------------------------- -------------------- ------------------- --------------------
Years ended December 31, 2003 2002 2001
- --------------------------------------------------------------------- -------------------- ------------------- --------------------
- --------------------------------------------------------------------- -------------------- ------------------- --------------------
Cash flows from operations:
Net loss $(8,276) $(5,228) $ (945)
Adjustments to reconcile net loss
to net cash provided by operating activities:
Depreciation and amortization 2,928 3,304 5,902
Issuance of stock for retirement savings plan and stock bonuses
1,053 1,065 1,780
Restructuring charge (reversal) 291 (368) (1,174)
Gains on marketable securities (846) (2,267) (4,294)
Write-off of deferred financing costs 860
Non-cash debt conversion expense, net 622
Valuation adjustment of liability for warrants (1,436)
Non-cash consultant fees 240 750
Non-cash compensation expense (credit) 2,850 (1,211) (2,370)
Loss on equity investments and other, net 559 2,603 327
Deferred income taxes (623) (1,839) 1,112
Proceeds from sale of trading securities 249 9,141
Changes in other operating items, net of effect of acquisitions and disposals:
Accounts and other receivables 2,713 3,195 4,285
Inventories (6,698) 354 (197)
Costs and estimated earnings in excess of
billings on uncompleted contracts 3,788 2,584 3,936
Accounts payable and accrued expenses 4,656 1,901 (5,764)
Billings in excess of costs and estimated
earnings on uncompleted contracts 2,534 (3,174) (1,228)
Minority interests (30)
Changes in other operating items 156 (330) (74)
- --------------------------------------------------------------------- -------------------- ------------------- --------------------
- --------------------------------------------------------------------- -------------------- ------------------- --------------------
Net cash provided by operations $5,350 $ 829 $11,187
- --------------------------------------------------------------------- -------------------- ------------------- --------------------
See accompanying notes to consolidated financial statements.
GP STRATEGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(in thousands)
- --------------------------------------------------------------------- -------------------- ------------------- -----------------
- --------------------------------------------------------------------- -------------------- ------------------- -----------------
Years ended December 31, 2003 2002 2001
- --------------------------------------------------------------------- -------------------- ------------------- -----------------
- --------------------------------------------------------------------- -------------------- ------------------- -----------------
Cash flows from investing activities:
Additions to property, plant and equipment $(2,123) $(1,916) $(1,451)
Additions to intangible assets (422) (1,503) (822)
Proceeds from sale of marketable securities 2,124 3,833 5,567
Deconsolidation of Valera (6,700)
Cash acquired in acquisitions 2,853
Decrease (increase) to investments and other (4,050) 489 (482)
- --------------------------------------------------------------------- -------------------- ------------------- -----------------
- --------------------------------------------------------------------- -------------------- ------------------- -----------------
Net cash provided by (used in) investing activities (1,618) 903 (3,888)
- --------------------------------------------------------------------- -------------------- ------------------- -----------------
- --------------------------------------------------------------------- -------------------- ------------------- -----------------
Cash flows from financing activities:
Proceeds from sale of Common Stock 955 7,850
Proceeds from issuance of Class B Stock 1,260 900
Net proceeds from issuance of Valera Preferred Stock 6,700
Repayment of short-term borrowings (13,461) (10,280) (3,824)
Deferred financing costs (1,619) (728) (1,132)
Proceeds from issuance of long-term debt 14,674 890 3,131
Repayment of long-term debt (1,451) (841) (13,880)
- --------------------------------------------------------------------- -------------------- ------------------- -----------------
Net cash used in financing activities (902) (1,849) (8,105)
- --------------------------------------------------------------------- -------------------- ------------------- -----------------
- --------------------------------------------------------------------- -------------------- ------------------- -----------------
Effect of exchange rate changes on
cash and cash equivalents 70 (72) 24
- --------------------------------------------------------------------- -------------------- ------------------- -----------------
- --------------------------------------------------------------------- -------------------- ------------------- -----------------
Net increase (decrease) in cash and
cash equivalents 2,900 (189) (782)
Cash and cash equivalents at
beginning of year 1,516 1,705 2,487
- --------------------------------------------------------------------- -------------------- ------------------- -----------------
- --------------------------------------------------------------------- -------------------- ------------------- -----------------
Cash and cash equivalents at end of year $4,416 $1,516 $ 1,705
- --------------------------------------------------------------------- -------------------- ------------------- -----------------
- --------------------------------------------------------------------- -------------------- ------------------- -----------------
Supplemental disclosures of
cash flow information:
Cash paid during the year for:
Interest $1,379 $1,942 $ 3,958
Income taxes $ 734 $ 434 $ 407
See accompanying notes to consolidated financial statements.
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
1. Description of business and summary of significant accounting policies
Description of business.
GP Strategies Corporation (the "Company") currently has five operating business
segments. The Company's principal operating subsidiary is General Physics
Corporation (GP or General Physics). GP is a global workforce development
company that improves the effectiveness of organizations by providing training,
management consulting, e-Learning solutions and engineering services that are
customized to meet the needs of specific clients. Clients include Fortune 500
companies, manufacturing, process and energy companies, and other commercial and
governmental customers.
GP operates in two business segments. The Manufacturing & Process Segment
provides technology based training, engineering, consulting and technical
services to leading companies in the automotive, steel, power, oil and gas,
chemical, energy, pharmaceutical and food and beverage industries, as well as to
the government sector. The Information Technology Segment provides information
technology (IT) training programs and solutions, including Enterprise Solutions
and comprehensive career training and transition programs.
During the fourth quarter of 2003 due to the Company's acquisition of additional
shares of GSE Systems, Inc. ("GSE"), bringing its ownership to 58%, GSE will be
consolidated into the Company's consolidated financial statements effective
October 23, 2003. GSE is a world leader in real-time power plant simulation and
makes up the Company's new Simulation Segment. The Company intends to use GSE's
simulation technology to enhance General Physics capabilities.
The Company's Optical Plastics Segment is comprised of the Company's wholly
owned subsidiary MXL Industries, Inc. (MXL). MXL is a specialist in the
manufacture of polycarbonate parts requiring strict adherence to optical quality
specifications, and in the application of abrasion and fog resistant coatings to
these parts. Products include shields, and face masks and non-optical plastic
products.
During the fourth quarter of 2003 due to the Company's acquisition of additional
shares of Five Star Products, Inc. ("Five Star"), bringing its ownership to 54%,
Five Star will be consolidated into the Company's consolidated financial
statements effective October 8, 2003. Five Star is a leading regional
distributor of paint sundry items, interior and exterior stains, brushes,
rollers, caulking compounds and hardware products and makes up the Company's new
Home Improvement Distribution Segment.
GP STRATEGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. Description of business and summary of significant accounting policies
(Continued)
In addition, as of December 31, 2003, the Company has investments in Millennium
Cell Inc. (Millennium), Valera Pharmaceuticals (formerly Hydro Med Sciences)
("Valera") and owns certain real estate (see Note 3).
Principles of consolidation and investments. The consolidated financial
statements include the operations of the Company and, except for Valera as
discussed below, its majority-owned subsidiaries. The minority interests balance
is comprised of the 46 percent minority share in Five Star and 42 percent
minority share in GSE which the Company did not own. All significant
intercompany balances and transactions have been eliminated.
The Company owns 100% of the common stock of Valera, however, it no longer has
financial and operating control of the entity and accordingly, effective
December 27, 2001, the Company has accounted for its investment in Valera under
the equity method.
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"). After the spin-off becomes effective, the Company's
business would be comprised of its training and workforce development business
operated by General Physics and the GSE simulation business. NPDC would be a
stand- alone public company owning all of the stock of MXL, the interest in Five
Star and certain other 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.
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. On February
12, 2004 the Company filed documents with the Securities and Exchange Commission
relating to the proposed spin-off.
Cash and cash equivalents. Cash and cash equivalents of $4,416,000 and
$1,516,000 at December 31, 2003 and 2002, respectively, consist of cash and
highly liquid debt instruments with original maturities of three months or less.
Marketable securities. Marketable securities at December 31, 2003 and 2002
consist of U.S. corporate equity securities. The Company classifies its
marketable securities as trading or available-for-sale investments. A decline in
GP STRATEGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. Description of business and summary of significant accounting policies
(Continued)
the market value of any available-for-sale security below cost that is deemed to
be other than temporary results in a reduction in carrying amount to fair value.
The impairment is charged to earnings, and a new cost basis is established.
Gains and losses are derived using the average cost method for determining the
cost of securities sold.
Trading securities are included in Prepaid expenses and other current assets and
are those securities which are generally expected to be sold within one year.
Available-for-sale securities are included in Investments, marketable securities
and notes receivable on the Consolidated Balance Sheet. Trading and
available-for-sale securities are recorded at their fair value. Trading
securities are held principally for the purpose of selling them in the near
term. Unrealized holding gains and losses on trading securities are included in
earnings. Unrealized holding gains and losses on available-for-sale securities
are excluded from earnings and are reported as a separate component of
stockholders' equity in accumulated other comprehensive income, net of the
related tax effect, until realized.
Inventories. Inventories are valued at the lower of cost or market, using the
first-in, first-out (FIFO) method.
Foreign currency translation. The functional currency of the Company's
international operations is the applicable local currency. The translation of
the applicable foreign currency into U.S. dollars is performed for balance sheet
accounts using current exchange rates in effect at the balance sheet date and
for revenue and expense accounts using the weighted-average rates of exchange
prevailing during the year. The unrealized gains and losses resulting from such
translation are included as a separate component of stockholders' equity in
accumulated other comprehensive income.
Revenue Recognition
General Physics contract revenue and cost recognition. GP provides services
under time-and-materials, cost-plus-fixed fee and fixed-price contracts. Each
contract has different terms based on the scope, deliverables and complexity of
the engagement, requiring GP to make judgments and estimates about recognizing
revenue. In general, revenue is recognized on these arrangements as the services
are performed. Under time-and-material contracts, as well as certain
cost-plus-fixed fee and certain fixed-price contracts, the contractual billing
schedules are based on the specified level of resources GP is obligated to
provide. As a result, on those "level of effort" contracts, the contractual
billing amount for a given period acts as a measure of performance and,
therefore, revenue is recognized in that amount.
For other fixed price contracts, the contractual billing schedules are not based
on the specified level of resources GP is obligated to provide. These
arrangements typically do not have milestones or other reliable measures of
GP STRATEGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. Description of business and summary of significant accounting policies
(Continued)
performance. As a result, revenue on these arrangements is recognized using the
percentage-of-completion method based on the relationship of costs incurred to
total estimated costs expected to be incurred over the term of the contract. GP
believes this methodology provides a reasonable measure of performance on these
arrangements since performance primarily involves personnel costs and the
customer is required to pay GP for the proportionate amount of work and cost
incurred in the event of contract termination. Revenue for unpriced change
orders is not recognized until the customer agrees with the changes. Costs and
estimated earnings in excess of billings on uncompleted contracts are recorded
as a current asset. Billings in excess of costs and estimated earnings on
uncompleted contracts are recorded as a current liability. Generally contracts
provide for the billing of costs incurred and estimated earnings on a monthly
basis.
Risks relating to service delivery, usage, productivity and other factors are
considered when making estimates of total contract cost, contract profitability,
and progress towards completion. If sufficient risk exists, a reduced-profit
methodology is applied to a specific client contract's percentage-of-completion
model whereby the amount of revenue recognized is limited to the amount of costs
incurred until such time as the risks have been partially or wholly mitigated
through performance. GP's estimates of total contract cost and contract
profitability change periodically in the normal course of business, occasionally
due to modifications of contractual arrangements. In addition, the
implementation of cost saving initiatives and achievement of productivity gains
generally results in a reduction of estimated total contract expenses on
affected client contracts. Such changes in estimate are recognized in the period
the changes are determined. For all client contracts, provisions for estimated
losses on individual contracts are made in the period in which the loss first
becomes apparent.
As part of GP's on-going operations to provide services to its customers,
incidental expenses, which are commonly referred to as "out-of-pocket" expenses,
are billed to customers. Out-of-pocket expenses include expenses such as
airfare, mileage, hotel stays, out-of-town meals, and telecommunication charges.
GP's policy provides for these expenses to be recorded as both revenue and
direct cost of services in accordance with the provisions of EITF 01-14, "Income
Statement Characterization of Reimbursements Received for `Out-of-Pocket'
Expenses Incurred."
GSE revenue recognition. The majority of GSE's revenue is derived through the
sale of uniquely designed systems containing hardware, software and other
materials under fixed-price contracts. In accordance with Statement of Position
81-1 "Accounting for Performance of Construction-Type and Certain
Production-Type Contracts", the revenue under these fixed-price contracts is
accounted for on the percentage-of-completion method, based on contract costs
incurred to date and estimated costs to complete. Estimated contract earnings
are reviewed and revised periodically as the work progresses, and the cumulative
effect of any change is recognized in the period in which the change is
identified. Estimated losses are charged against earnings in the period such
losses are identified.
GP STRATEGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. Description of business and summary of significant accounting policies
(Continued)
As GSE recognizes revenue under the percentage-of-completion method, it provides
an accrual for estimated future warranty costs based on historical and projected
claims experience. GSE's longer-term contracts generally provide for a one-year
warranty on parts, labor and any bug fixes as it relates to software embedded in
the systems.
GSE's system design contracts do not provide for "post customer support service"
(PCS) in terms of software upgrades, software enhancements or telephone support.
In order to obtain PCS, the customers must purchase a separate contract at the
date of system installation. Such PCS arrangements are generally for a one-year
period renewable annually and include customer support, unspecified software
upgrades, maintenance releases. GSE recognizes revenue from these contracts
ratably over the life of the agreements in accordance with Statement of Position
97-2 "Software Revenue Recognition".
Revenues from certain consulting or training contracts are recognized on a
time-and-material basis. For time-and-material type contracts, revenue is
recognized based on hours incurred at a contracted labor rate plus expenses.
Five Star and MXL revenue recognition. Revenue is recognized upon shipment of
product to customers. Allowances for estimated returns and allowances are
recognized when sales are recorded.
Comprehensive income. Comprehensive income consists of net income (loss), net
unrealized gains (losses) on available-for-sale securities and the interest rate
swap, and foreign currency translation adjustments.
Property, plant and equipment. Property, plant and equipment are carried at
cost. Major additions and improvements are capitalized while maintenance and
repairs which do not extend the lives of the assets are expensed as incurred.
Gain or loss on the disposition of property, plant and equipment is recognized
in operations when realized.
Depreciation and amortization. The Company provides for depreciation of
property, plant and equipment primarily on a straight-line basis over the
following estimated useful lives:
GP STRATEGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. Description of business and summary of significant accounting policies
(Continued)
CLASS OF ASSETS USEFUL LIFE
Buildings and improvements 5 to 40 years
Machinery, equipment and furniture
and fixtures 3 to 7 years
Leasehold improvements Shorter of asset life or term of lease
Recoverability of Long-Lived Assets. Effective January 1, 2002, the Company
adopted Statement No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets, which addresses financial accounting and reporting for the
impairment or disposal of long-lived assets. While Statement No. 144 supersedes
FASB Statement No. 121, Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of, it retains many of the fundamental
provisions of that Statement.
The recoverability of long-lived assets, other than goodwill and intangible
assets with indefinite lives, is assessed whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable through future undiscounted net cash flows expected to be generated
by the asset. If such assets are considered to be impaired, the impairment is
measured by determining the amount by which the carrying value of the assets
exceeds the fair value of the assets. Assets to be disposed of are reported at
the lower of the carrying amount or fair value, less costs to sell.
Intangible assets. The excess of cost over the fair value of net assets of
businesses acquired is recorded as goodwill and through December 31, 2001, was
amortized on a straight line basis over periods ranging from 5 to 40 years. The
Company capitalizes costs incurred to obtain and maintain patents and licenses
as well as contract rights acquired. Patent costs are amortized over the lesser
of 17 years or the remaining lives of the patents, and license costs over the
lives of the licenses. Contract rights are amortized over the lives of the
contracts acquired, ranging up to two years. The Company also capitalizes costs
incurred to obtain long-term debt financing. Such costs are included in other
current assets and other assets in the accompanying Consolidated Balance Sheets,
are amortized on a straight line basis over the terms of the related debt and
such amortization is classified as interest expense in the Consolidated
Statements of Operations.
In accordance with Statement of Financial Accounting Standards (SFAS) No. 86,
Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise
Marketed, the Company capitalizes computer software development costs incurred
after technological feasibility has been established, but prior to the release
of the software product for sale to customers. Once the product is available to
be sold, the Company begins to amortize the costs over the estimated useful life
of the product, which normally ranges from three to five years. On an annual
GP STRATEGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. Description of business and summary of significant accounting policies
(Continued)
basis, the Company assesses the recovery of the unamortized software computer
costs by estimating the net undiscounted cash flows expected to be generated by
the sale of the product. If the undiscounted cash flows are not sufficient to
recover the unamortized software costs the Company will write-down the
investment to its estimated fair value based on future discounted cash flows.
The excess of any unamortized computer software costs over the related net
realizable value is written down and charged to income. Significant changes in
the sales projections could result in an impairment with respect to the
capitalized software. Capitalized software is included in other assets on the
Company's Consolidated Balance Sheets.
Effective January 1, 2002, the Company adopted SFAS No. 142, Goodwill and Other
Intangible Assets. SFAS No. 142 requires that goodwill and intangible assets
with indefinite useful lives no longer be amortized but instead tested for
impairment at least annually. SFAS No. 142 also requires that intangible assets
with definite useful lives be amortized over their respective estimated useful
lives to their estimated residual values.
The Company periodically assesses the recoverability of goodwill and intangible
assets with indefinite lives by a comparison of the estimated fair value of each
reporting unit to its carrying value. The estimated fair value of each reporting
unit exceeded the carrying value of each respective reporting unit. The Company
will perform its annual impairment review as of the end of each fiscal year.
As of the date of adoption (January 1, 2002), the Company had unamortized
goodwill in the amount of approximately $56 million and unamortized identifiable
intangible assets in the amount of approximately $1.4 million, all of which were
subject to the transition provisions of Statement 142. Amortization expense
related to goodwill was $2.7 million for the year ended December 31, 2001.
Sales of subsidiary stock. The Company recognizes gains and losses on sales of
subsidiary stock in its Consolidated Statements of Operations, except in
circumstances where the realization of the gain is not reasonably assured or the
sale relates to issuance of preferred stock.
Income taxes. Income taxes are accounted for under the asset and liability
method. Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and for operating loss and tax credit carryforwards. Deferred tax assets
and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
GP STRATEGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. Description of business and summary of significant accounting policies
(Continued)
Five Star files separate federal and state tax returns and GSE files separate
federal, state and foreign tax returns from the Company, as those entities are
not consolidated with the Company for tax purposes.
Income (loss) per share. Basic earnings (loss) per share is based upon the
weighted average number of common shares outstanding, including Class B common
stock, during the period.
Diluted earnings (loss) per share is based upon the weighted average number of
common shares outstanding during the period assuming the issuance of common
stock for all dilutive potential common stock equivalents outstanding.
Loss per share (EPS) for the years ended December 31, 2003, 2002 and 2001 are as
follows (in thousands, except per share amounts):
2003 2002 2001
---- ---- ----
Basic and Diluted EPS
Net loss $(8,276) $(5,228) $ (945)
Weighted average shares
outstanding, basic and diluted 17,139 15,370 13,209
Basic loss per share $ (.48) $ (.34) $ (.09)
Diluted loss per share (a) $ (.48) $ (.34) $ (.09)
Basic loss per share is based upon the weighted average number of common shares
outstanding, including Class B common shares, during the period. Class B common
stockholders have the same rights to share in profits and losses and liquidation
values as common stockholders. Diluted loss per share are based upon the
weighted average number of common shares outstanding during the period, assuming
the issuance of common shares for all dilutive potential common shares
outstanding.
(a) For the years ended December 31, 2003, 2002 and 2001, presentation of
the dilutive effect of stock options, warrants and convertible notes,
which totaled 1,249,000, 612,000 and 376,000 shares, respectively, are
not included since they are anti-dilutive.
For the year ended December 31, 2003 presentation of the dilutive
effect of GSE and Five Star stock options are not included since they
are anti-dilutive.
Stock based compensation. Options are granted to purchase Company, GSE and Five
Star common shares under stock-based incentive plans, which are described more
fully in Note 12. The Company applies the intrinsic value-based method of
accounting prescribed by Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations, in
accounting for its fixed plan stock options. As such compensation expense would
GP STRATEGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. Description of business and summary of significant accounting policies
(Continued)
be recorded on the date of grant only if the current market price of the
underlying stock exceeded the exercise price. The difference between the quoted
market price as of the date of the grant and the contractual purchase price of
shares is charged to operations over the vesting period. No compensation cost
has been recognized for fixed stock options with exercise prices equal to the
market price of the stock on the dates of grant and shares acquired by employees
under the stock option plans. SFAS No. 123, "Accounting for Stock-Based
Compensation," established accounting and disclosure requirements using a fair
value-based method of accounting for stock-based employee compensation plans. As
allowed by SFAS No. 123, the Company has elected to continue to apply the
intrinsic value-based method of accounting described above, and has adopted the
disclosure requirements of SFAS No. 123.
SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure - an amendment of SFAS No. 123" ("SFAS No. 148"), was issued in
December 2002 and is effective for the Company for the quarterly interim periods
beginning in 2003. SFAS No. 148 amends SFAS No. 123 and provides alternative
methods of transition for a voluntary change to the fair value method of
accounting for stock-based employee compensation. In addition, the statement
amends the disclosure requirements of SFAS No. 123 to require more prominent
disclosures in both annual and interim financial statements about the method of
accounting for stock-based compensation and the effect of the method used.
Pro forma net income and earnings per share disclosures as if compensation
expense was recorded based on the fair value for stock-based awards have been
presented in accordance with the provisions of SFAS No. 123, are as follows for
the years ended December 31, 2003, 2002 and 2001 (in thousands, except per share
amounts):
2003 2002 2001
---- ---- ----
Net loss - As reported $(8,276) $ (5,228) $ (945)
Compensation expense, net of tax
Company stock options (1,251) (1,495) (2,443)
GSE stock options (181)
Five Star stock options (4)
--------------- ----------- -------------
--------------- ----------- -------------
Pro forma net loss $(9,712) $ (6,723) $ (3,388)
--------------- ----------- -------------
--------------- ----------- -------------
Basic and diluted loss per share
As reported $(.48) $ (.34) $ (.09)
Company stock options (.08) (.10) (.18)
GSE stock options (.01)
Five Star stock options (.00)
--------------- ----------- -------------
--------------- ----------- -------------
Pro forma net loss per share $(.57) $ (.44) $ (.27)
--------------- ----------- -------------
GP STRATEGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. Description of business and summary of significant accounting policies
(Continued)
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.
Company stock options
At December 31, 2003, 2002 and 2001, the per share weighted-average fair value
of the Company's stock options granted was $2.95, $2.78 and $2.98, respectively,
on the date of grant using the modified Black Scholes option-pricing model with
the following weighted-average assumptions:
2003 2002 2001
---- ---- ----
Expected dividend yield 0% 0% 0%
Risk-free interest rate 2.00% 4.30% 4.78%
Expected volatility 78.33% 72.84% 66.13%
Expected life 4.00 years 6.16 years 3.70 years
There were no GSE and Five Star options granted during 2003 subsequent to their
consolidation.
Use of estimates. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.
Concentrations of credit risk. Financial instruments that potentially subject
the Company to significant concentrations of credit risk consist principally of
cash investments and accounts receivable. The Company places its cash
investments with high quality financial institutions and limits the amount of
credit exposure to any one institution. With respect to accounts receivable,
approximately 25% are related to United States government contracts, and the
remainder are dispersed among various industries, customers and geographic
regions. In addition, the Company has investments in public and private equity
securities, consisting of Valera and Millennium.
Fair value of financial instruments. The carrying value of financial instruments
including cash and cash equivalents, marketable securities, accounts receivable,
accounts payable and short-term borrowings approximate estimated market values
because of short maturities and interest rates that approximate current rates.
The carrying values of investments approximate fair values based upon quoted
GP STRATEGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. Description of business and summary of significant accounting policies
(Continued)
market prices. The investments for which there is no quoted market price are not
significant. The estimated fair value for the Company's debt is equal to the
carrying amount. Fair value estimates are made at a specific point in time,
based on relevant market information and information about the financial
instrument. These estimates are subjective in nature and involve uncertainties
and matters of significant judgment and therefore cannot be determined with
precision. Changes in assumptions could significantly affect the estimates.
Five Star interest rate swap. The interest rate swap is being accounted for
under SFAS No. 133, as amended, "Accounting for Derivative Instruments and
Hedging Activities." SFAS No. 133 requires all derivatives to be recognized in
the balance sheet at fair value. Derivatives that are not hedges must be
adjusted to fair value through earnings. If the derivative is a cash flow hedge,
changes in the fair value of the derivative are recognized in other
comprehensive income until the hedged item is recognized in earnings. The
ineffective portion of a derivative's change in fair value is immediately
recognized in earnings. The fair value of the interest rate swap at December 31,
2003 was recognized through a credit to other comprehensive income.
Reclassifications. Certain prior year amounts in the financial statements and
notes thereto have been reclassified to conform to 2003 classifications.
Recent accounting pronouncements. In June 2001, the FASB issued Statement No.
143, Accounting for Asset Retirement Obligations, which addresses financial
accounting and reporting for obligations associated with the retirement of
tangible long-lived assets and the associated asset retirement costs. This
Statement applies to all entities that have legal obligations associated with
the retirement of long-lived assets that result from the acquisition,
construction, development or normal use of the asset. This statement requires
that the fair value of a liability for an asset retirement obligation be
recognized in the period in which it is incurred if a reasonable estimate of
fair value can be made. This statement is effective for the Company in 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 an impact on the Company's Consolidated Financial Statements.
GP STRATEGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. Description of business and summary of significant accounting policies
(Continued)
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 were
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
GP STRATEGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. Description of business and summary of significant accounting policies
(Continued)
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.
GP STRATEGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. Goodwill and intangible assets
Effective January 1, 2002, the Company adopted FASB Statement No. 141, Business
Combinations, and Statement No. 142, Goodwill and Other Intangible Assets.
Statement No. 141 requires that the purchase method of accounting be used for
all business combinations initiated after June 30, 2001 as well as all purchase
method business combinations completed after June 30, 2001. Statement No. 141
also specifies criteria intangible assets acquired in a purchase method business
combination must meet to be recognized and reported apart from goodwill, noting
that any purchase price allocable to an assembled workforce may not be accounted
for separately. Statement No. 142 requires that goodwill and intangible assets
with indefinite useful lives no longer be amortized but instead tested for
impairment at least annually in accordance with the provisions of Statement No.
142. Statement No. 142 also requires that intangible assets with definite useful
lives be amortized over their respective estimated useful lives to their
estimated residual values, and reviewed for impairment in accordance with SFAS
No. 144, Accounting for the Impairment or Disposed of Long-Lived Assets. The
Company did not recognize any impairment as a result of the adoption of this
statement. For the years ended December 31, 2003 and 2002 the Company performed
a test for potential impairment of goodwill and other intangible assets. The
Company did not recognize any impairment as a result of the impairment test. As
of December 31, 2003 and 2002, the Company had unamortized goodwill in the
amount of $62,395,000 and $57,491,000, respectively.
The components of goodwill and intangible assets as of December 31, 2003 and
2002 are as follows (in thousands):
Original Cost or Accumulated
Carrying Value Additions Amortization Total
2003:
Amortizing intangible assets:
Patents, licenses and contract rights $ 1,348 $ 422 $ 739 $ 1,031
------- ------- ----- ---------
Non-amortizing intangible assets:
Goodwill 57,491 4,904 62,395
------ ------- ------- ------
2002:
Amortizing intangible assets:
Patents and licenses $1,348 $ 593 $ 755
------ ------- ----- -------
Non-amortizing intangible assets:
Goodwill 55,988 1,503 57,491
------ ------- ------- ------
GP STRATEGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. Goodwill and intangible assets (Continued)
Amortization expense for patents, licenses and contract rights was $147,000 in
2003, $103,000 in 2002, and $126,000 in 2001. The weighted average amortization
period as of December 31, 2003 is six years. Amortization is estimated to be
approximately $289,000 in 2004, $233,000 in 2005, and $73,000 from 2006 through
2008.
Goodwill increased in 2003 due to the GSE Acquisition (see Note 4) as well as
the impact of foreign currency fluctuations. The increase in goodwill in 2002
was due to additional contingent payments made for previous acquisitions as well
as the impact of foreign currency fluctuations.
The following is a summary of proforma net income and earnings (loss) per share
for the year ended December 31, 2001, as adjusted to remove the amortization of
goodwill and intangible assets with indefinite useful lives (in thousands,
except per share amounts):
Net Income (loss)
As Reported $(945)
Proforma $ 488
Basic and Diluted
Earnings (loss) Per Share
As Reported $ (.09)
Proforma $ .02
3. Investments, marketable securities and notes receivable
Investments and note receivable
At December 31, 2003 and 2002, Investments and notes receivable were comprised
of the following (in thousands):
December 31,
2003 2002
---- -------
Five Star Products, Inc. (See Note 4) $ $6,317
GSE Systems, Inc. (See Note 4) 1,794
Valera
Other 655 422
----- -------
$655 $8,533
==== ======
GP STRATEGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3. Investments, marketable securities and notes receivable (Continued)
(a) Five Star Products, Inc.
Five Star is a leading regional distributor of home decorating, hardware and
finishing products. On October 8, 2003 the Company acquired additional shares of
Five Star, bringing its ownership to 54%. Five Star is consolidated into the
Company's consolidated financial statements and no longer accounted for as an
equity investment effective as of that date. The Company recognized equity
income of Five Star of $190,000 in 2003 prior to its date of consolidation.
At December 31, 2002, the Company owned approximately 47.3% of Five Star and
accounted for its investment in Five Star using the equity method. At December
31, 2002, the Company's investment in Five Star was $6,317,000, including the
$4,500,000 senior unsecured 8% note. The Company recorded a write down on its
investment of $200,000 in 2001, which is included in Loss on investments on the
Consolidated Statements of Operations.
In 1994 Jerome Feldman, Chairman and CEO of the Company was granted options to
purchase 250,000 shares of Five Star from the Company at an exercise price of
$.50. These options expired unexercised in June 2003.
Information relating to the Company's investment in Five Star as of December 31,
2002 is as follows (in thousands):
Long-term note receivable $ 4,500
Number of shares 7,103
Carrying amount of shares $1,817
Equity income included in Investment
and other income, net $162
Condensed financial information for Five Star as of December 31, 2002 and for
the years ended December 31, 2002 and 2001 is as follows (in thousands):
2002 2001
Current assets $34,191
Non current assets 1,142
Current liabilities 27,552
Non current liabilities 4,500
Stockholders' equity 3,281
Sales 94,074 94,908
Gross profit 16,613 16,054
Net income 391 417
GP STRATEGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3. Investments, marketable securities and notes receivable (Continued)
(b) GSE Systems, Inc.
GSE is a leading global provider of real-time simulation, homeland security and
engineering services for the energy, process and military industries. On October
23, 2003 the Company acquired additional shares of GSE, bringing its ownership
to 58%. GSE will be consolidated into the Company's consolidated financial
statements and will no longer be accounted for as an equity investment effective
as of that date. The Company recognized equity losses of GSE of $733,000 in 2003
prior to its date of consolidation.
At December 31, 2002 the Company owned approximately 19.5% of GSE and accounted
for its investment in GSE using the equity method. Although the Company owned
approximately 19.5% of the common stock of GSE as of December 31, 2002, the
Company has accounted for its investment in GSE using the equity method of
accounting based upon management's conclusion that the Company has significant
influence with respect to the operations of GSE. Additionally, pursuant to the
extension of the Company's guarantee of GSE debt in March 2003 (see Note 16),
the Company received 150,000 shares of GSE common stock.
Information relating to the Company's investment in GSE as of December 31, 2002
is as follows (in thousands):
Number of shares 1,159
Carrying amount $ 1,794
Equity loss included in Investment
and other income, net $(1,210)
Condensed financial information for GSE as of December 31, 2002 and for the
years ended December 31, 2002 and 2001 is as follows (in thousands):
2002 2001
---- ----
Current assets $17,202
Non current assets 11,692
Current liabilities 11,166
Non current liabilities 9,617
Stockholders' equity 8,111
Revenue 20,220 25,509
Gross profit 3,560 5,765
Net income (loss) (5,943) 259
GP STRATEGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3. Investments, marketable securities and notes receivable (Continued)
(c) Valera Pharmaceuticals
Valera is a specialty pharmaceutical company engaged in the development and
commercialization of prescription pharmaceuticals principally utilizing Valera's
patented Hydron drug delivery technology.
Prior to June 2000, Valera operated as a division of the Company, however, in
connection with an offering of the Company's 6% Convertible Subordinated
Exchangeable Notes due 2003 (the "Valera Notes"), Valera was incorporated as a
separate company and became a wholly-owned subsidiary of the Company. The Valera
Notes, at the option of the holders, could have been exchanged for 19.9% of the
outstanding common stock of Valera on a fully diluted basis or into shares of
the Company's common stock. On April 23, 2003, the Company entered into an
agreement with the holders of the Valera Notes to exchange the Valera Notes plus
related accrued interest for 554,000 shares of the Company's Common Stock at a
conversion rate of $5.00 per share with a fair value of $2,770,000. 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 in 2003.
On December 27, 2001, Valera completed a $7 million private placement of Valera
Series A Convertible Preferred Stock (the "Preferred Stock") to certain
institutional investors. The Preferred Stock is convertible into Valera's common
stock at any time at the option of the holder and participates in dividends with
Valera common stock on an as converted basis.
The Company owns 100% of Valera's common stock but no longer has financial and
operating control of Valera. As a condition of the private placement, the
Company contractually gave up operating control over Valera through an Investors
Rights Agreement. Therefore, through December 27, 2001, the operating results of
Valera are consolidated within the Consolidated Statements of Operations.
However, subsequent to that date the Company accounts for its investment in
Valera under the equity method. Due to Valera's operating losses in 2002 the
Company's investment in Valera as of December 31, 2002 was written down to zero.
In the second quarter of 2003, Valera completed a $12 million private placement
offering. As part of such transaction, the Company was granted an option (the
"Valera Option") until March 31, 2004 (which the Company did not exercise) 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
GP STRATEGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3. Investments, marketable securities and notes receivable (Continued)
Company's share of Valera's equity loss. Assuming conversion of all of the
outstanding shares of Series A and Series B convertible preferred stock and
exercise of options for the total number of Valera common shares reserved for
Valera's employee stock option plans, the Company would own approximately 25% of
Valera.
Marketable securities
At December 31, 2003 and 2002, Marketable securities were comprised of the
following (in thousands):
2003 2002
---- ----
Millennium Cell Inc. $3,570 $5,552
Hemispherx Biopharma, Inc. 361 0
Other 0 45
------ ------
$3,931 $5,597
====== ======
(a) Millennium Cell Inc.
Millennium Cell Inc. ("Millennium") is a publicly traded emerging technology
company engaged in the business of developing innovative fuel systems for the
safe storage, transportation and generation of hydrogen for use as an energy
source. As of December 31, 2003 and 2002, the Company had a 4% and 8% ownership
interest, respectively, in Millennium, representing approximately 1,532,000 and
2,325,000 shares, including approximately 340,000 and 349,000 shares of common
stock subject to options which were granted to the Company's employees to
acquire Millennium shares from the Company's holdings.
In 2001, the Company sold 861,500 shares of Millennium classified as trading
securities for proceeds of $9,141,440. In addition, the Company sold
approximately 1,220,000 shares from available for sale securities for
$5,482,216. For the year ended December 31, 2001, the Company has recognized a
net gain of $4,294,000, which is included in gain on marketable securities, net.
The approximately 3,703,000 shares remaining were classified as available for
sale securities. At December 31, 2001, these shares had a fair value of
approximately $19,341,000.
In 2002, the Company sold approximately 1,286,000 shares for $3,833,000. For the
year ended December 31, 2002, the Company has recognized a net gain of
$2,267,000 which is included in gain on marketable securities, net. The
approximately 2,325,000 shares remaining at December 31, 2002 had a fair value
of approximately $5,552,000.
In 2003, the Company sold approximately 783,000 shares for $1,648,000. For the
year ended December 31, 2003, the Company has recognized a net gain of $704,000
GP STRATEGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3. Investments, marketable securities and notes receivable (Continued)
which is included in gain on marketable securities, net. The approximately
1,532,000 shares remaining at December 31, 2003 had a fair value of
approximately $3,570,000.
On February 11, 2000, the Company granted options to certain of its employees
pursuant to the GP Strategies Corporation Millennium Cell, LLC Option Plan (the
"Millennium Option Plan") to purchase an aggregate of approximately 547,000 of
its shares of Millennium common stock, of which there are currently
approximately 340,000 options outstanding. These options vested over either a
one year or two year period and expire on June 30, 2004, as amended. The options
in the Millennium Option Plan were fully vested as of December 31, 2002. The
Company may receive approximately $500,000 (of which approximately $189,000 was
received in 2001, 2002 and 2003) upon exercise of all options pursuant to the
Millennium Option Plan. The Company recorded a liability to employees of
$650,000 and $767,000 at December 31, 2003 and December 31, 2002, respectively.
These amounts are included in accounts payable and accrued expenses in the
accompanying Consolidated Balance Sheets.
The Company recorded a non-cash compensation credit of $150,000, $1,211,000 and
$2,370,000 for the years ended December 31, 2003, 2002, and 2001, respectively,
which is included in selling, general and administrative expenses in the
accompanying Consolidated Statement of Operations.
Information relating to the Company's investment in Millennium is as follows at
December 31, 2003 and 2002 (in thousands):
- ---------- ----------------------------------------------------------- ----------------- ------------------
2003 2002
- ---------- ----------------------------------------------------------- ----------------- ------------------
- ---------- ----------------------------------------------------------- ----------------- ------------------
Number of shares 1,532 2,325
Available-for-sale equity securities, at market $3,570 $5,552
- ---------- ----------------------------------------------------------- ----------------- ------------------
The gross unrealized holding gains (losses) and fair value for
available-for-sale securities (primarily Millennium Cell) were as follows (in
thousands):
Gross Unrealized Holding
Available-for-sale equity securities: Cost Gains Losses Fair Value
---- ----- ------ ----------
December 31, 2003 $ 1,957 $ 1,613 $ 3,570
December 31, 2002 $ 2,917 $ 2,680 $ 5,597
December 31, 2001 $ 4,633 $14,810 $ 19,443
- ----------------------------------------------------------------------------------------------------
Differences between cost and market, net of taxes, of $984,000, $1,609,000, and
$9,021,000 at December 31, 2003, 2002 and 2001, respectively, were credited to a
separate component of stockholders' equity called accumulated other
comprehensive income (loss).
GP STRATEGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3. Investments, marketable securities and notes receivable (Continued)
(b) Interferon Sciences, Inc. ("ISI") and Hemispherx Biopharma Inc.
ISI is a biopharmaceutical company in which the Company owned 181,201 shares at
December 31, 2002 with a market value of $9,000. In an agreement dated March 25,
1999, the Company agreed to lend ISI $500,000 (the "ISI Debt"). ISI issued the
Company 500,000 shares of ISI common stock and a five-year warrant to purchase
500,000 shares of ISI common stock at a price of $1 per share as a loan
origination fee. Pursuant to the agreement, as amended, ISI issued a Note due
March 15, 2002, to the Company for $500,000 of which approximately $300,000 plus
accrued interest receivable was outstanding as of December 31, 2002, which was
included in accounts and other receivables on the Consolidated Balance Sheets.
In March 2003, the Company and 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 agreement obligated HEB to register the
Guaranteed Shares, set limits on the amount of shares the Company could sell and
required 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 received 268,000 shares of HEB from ISI and subsequently sold 108,000 of
the shares during the fourth quarter of 2003 for $249,000. For the year ended
December 31, 2003, the Company has recognized a net gain of $142,000 on the sale
of these shares, which is included in gain on marketable securities, net. The
approximately 160,000 shares remaining are classified as trading securities at
December 31, 2003. These shares had a fair value of approximately $361,000 and
were sold in the first quarter of 2004.
4. Acquisitions
(a) Five Star Products, Inc.
Five Star was previously a 47.3% investment of the Company accounted
for under the equity method and was indebted to the Company for a Unsecured 8%
Note ("the Five Star Note") due June 30, 2005, as amended, which amounted to
$4,500,000 as of December 31, 2002. On June 20, 2003, the Company entered into
an Agreement of Subordination and Assignments (the "Subordination Agreement")
with Five Star that amended the amount of annual repayment of principal on the
Five Star Note. Future repayments of the Five Star Note are contingent on the
operating results of Five Star, subject to certain limitations as defined in the
Subordination Agreement. Pursuant to the provisions of the Subordination
Agreement, in June 2003 and July 2003 the Company received partial repayments
from Five Star in the amount of $500,000 each, reducing the outstanding
principal amount of the Five Star Note from $4,500,000 to $3,500,000. On October
8, 2003 the Company converted an additional $500,000 principal amount of the
GP STRATEGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
4. Acquisitions (Continued)
Five Star Note into 2,000,000 shares of Five Star common stock (the "Five Star
Acquisition") increasing the Company's investment in Five Star to 54%. In
December 2003 the Company received a partial repayment from Five Star in the
amount of $200,000, reducing the outstanding principal amount of the Five Star
Note from $3,000,000 to $2,800,000.
In consideration for the Company agreeing to convert at a conversion price of
$0.25 per share, Five Star agreed to terminate the voting agreement between the
Company and Five Star. 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 Five Star common stock so that not more than 50% of the members of the Five
Star 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 Five Star stockholders.
The Five Star Acquisition, which was approved by a Special Committee of the Five
Star board of directors comprised of an independent non-management director who
is unaffiliated with the Company, increased the Company's ownership in Five Star
from approximately 47.3% to approximately 54% of the outstanding Five Star
common stock. The Five Star Acquisition occurred because the Company believed
that the common stock of Five Star represented an attractive investment
opportunity based on its valuation at that time. Subsequent to the Five Star
Acquisition, Five Star will be consolidated into the Company's consolidated
financial statements. Five Star comprises the Company's new Home Improvement
Distribution Segment.
The acquisition was accounted for as a purchase transaction in accordance with
SFAS No. 141, and accordingly, the net assets acquired were recorded at their
fair value at the date of the acquisition. The excess of the net assets acquired
over the purchase price was recorded as a reduction to property, plant and
equipment to reflect the allocation of negative goodwill arising in purchase
accounting.
The components of the net assets acquired were as follows (in thousands):
Accounts receivable $13,267
Inventory 20,222
Property, plant & equipment and other assets 1,529
- --------------------------------------------------------- -------------
Total assets 35,018
- --------------------------------------------------------- -------------
Short term borrowings 17,616
Accounts payable and accrued expenses 10,063
Debt to GP Strategies 3,000
- --------------------------------------------------------- -------------
- --------------------------------------------------------- -------------
Total liabilities assumed 30,679
- --------------------------------------------------------- -------------
- --------------------------------------------------------- -------------
Five Star net assets as of October 8, 2003 4,339
- --------------------------------------------------------- -------------
GP STRATEGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
4. Acquisitions (Continued)
On February 6, 2004 Five Star announced that it would repurchase up to 5,000,000
shares, or approximately 30% of its common stock currently outstanding, through
a tender offer for the shares at $0.21 per share, originally set to expire on
March 16, 2004. On March 17, 2004 Five Star announced that it had increased the
price it was offering to pay for the shares in the tender offer to $0.25 per
share and extended the offer to March 31, 2004. Based on the final tabulation by
the depositary for the tender offer, approximately 2,648,000 shares of common
stock were tendered and acquired by Five Star. The effect of the tender offer
was to increase the Company's ownership in Five Star to approximately 64%.
If the Company increases its ownership to at least 80% of Five Star's common
stock, Five Star would become, for federal tax purposes, part of the affiliated
group of which the Company is the common parent As a member of such affiliated
group, Five Star would be included in the Company's consolidated federal income
tax returns, Five Star's income or loss would be included as part of the income
or loss of the affiliated group and any of Five Star's income so included might
be offset by the consolidated net operating losses, if any, of the affiliated
group. As part of this agreement, Five Star has agreed to enter into a tax
sharing agreement with the Company pursuant to which Five Star will make tax
sharing payments to the Company once Five Star becomes a member of the
consolidated group equal to 80% of the amount of taxes Five Star would pay if
Five Star were to file separate consolidated tax returns but did not pay as a
result of being included in the Company affiliated group. If the Company
completes the spin-off of certain of its assets, including a majority interest
in Five Star into NPDC (See Note 1), the foregoing agreement would be assigned
by the Company to NPDC.
(b) GSE Systems Inc.
On October 23 2003, the Company purchased from ManTech International ("ManTech")
3,426,699 shares of common stock of GSE and a GSE Subordinated Note in the
outstanding principal amount of $650,000, which the Company immediately
converted into 418,653 shares of common stock of GSE. This transaction (the "GSE
Acquisition") increased the Company's ownership of the common stock of GSE from
approximately 22% to approximately 58%. Simultaneously with the closing of the
GSE Acquisition, three directors nominated by the Company were added to the GSE
board of directors. GSE was previously an investment of the Company accounted
for under the equity method. Subsequent to the GSE Acquisition, GSE is
consolidated into the Company's consolidated financial statements and comprises
the Company's new Simulation Segment. The GSE Acquisition was carried out in
order to allow the Company to work together with GSE to expand GSE's simulation
technology to the power, military and homeland defense markets that are
currently served by General Physics.
The consideration paid to ManTech by the Company consisted of a five-year 5%
note of $5,250,955 (the "ManTech Note") due in full in October 2008. Each year
GP STRATEGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
4. Acquisitions (Continued)
during the term of the ManTech 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 Company's common stock, but only in the
event that 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. As part of
the GSE Acquisition, the Company and ManTech entered into a five-year Teaming
Agreement pursuant to which ManTech and the Company will work together to give
the Company the opportunity to provide training services to ManTech's customers.
On January 1, 2004, GSE entered into a Management Services Agreement with the
Company in which the Company agreed to provide corporate support services to
GSE, including accounting, finance, human resources, legal, network support and
tax. In addition, GSE will use General Physics' financial system. GSE will pay
an annual fee to General Physics of $685,000. The term of the agreement is one
year, subject to earlier termination only upon the mutual consent of the parties
to the agreement. The agreement can be renewed for successive one-year terms.
The acquisition was accounted for as a purchase transaction in accordance with
SFAS No. 141, and accordingly, the net assets acquired were recorded at their
fair value at the date of the acquisition. The excess of the purchase price over
the estimated fair values of the net assets acquired was recorded as goodwill.
Goodwill associated with this acquisition will be deductible for tax purposes.
The components of the net assets acquired were as follows (in thousands):
Cash $2,847
Accounts receivable and unbilled receivables 6,587
Intangible assets 2,684
Property, plant & equipment and other assets 2,444
-------------------------------------------------------------- --------
Total assets 14,562
-------------------------------------------------------------- --------
-------------------------------------------------------------- --------
Accounts payable, accrued expenses and other liabilities 5,303
Billings in excess of revenue earned 3,528
-------------------------------------------------------------- --------
Total liabilities assumed 8,831
-------------------------------------------------------------- --------
-------------------------------------------------------------- --------
GSE net assets as of October 23, 2003 $5,731
-------------------------------------------------------------- --------
The following table represents the Company's pro forma consolidated statements
of operations for the years ended December 31, 2003 and 2002, as if the Five
Star and GSE Acquisitions had been completed at the beginning of each period.
The pro forma information is presented for comparative purposes only and does
not purport to be indicative of what would have occurred had the acquisition
GP STRATEGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
4. Acquisitions (Continued)
actually been made at such date, nor is it necessarily indicative of future
operating results (in thousands, except per share data):
------------------------------------------------- ----------- -------------
Years ended December 31, 2003 2002
------------------------------------------------- ----------- -------------
------------------------------------------------- ----------- -------------
Sales $262,692 $266,527
Loss before minority interests (9,522) (8,405)
Minority interests 1,207 2,316
Net loss $ (8,315) $ (6,089)
Net loss per share
Basic and diluted $ (.49) $ (.40)
------------------------------------------------- ----------- -------------
5. Property, plant and equipment
Property, plant and equipment consists of the following (in thousands):
December 31, 2003 2002
- ----------------------------------------------------- ---------------- ---------
- ----------------------------------------------------- ---------------- ---------
Land $ 915 $ 915
Buildings and improvements 3,561 3,525
Machinery and equipment 14,534 11,884
Furniture and fixtures 8,583 6,300
Leasehold improvements 2,072 2,649
- ----------------------------------------------------- ---------------- ---------
- ----------------------------------------------------- ---------------- ---------
29,665 25,273
Accumulated depreciation and amortization (20,671) (16,974)
- ----------------------------------------------------- ---------------- ---------
- ----------------------------------------------------- ---------------- ---------
$ 8,994 $ 8,299
- ----------------------------------------------------- ---------------- ---------
During 2003 the Company wrote off certain fully depreciated assets of
approximately $3,663,000. During 2002 the Company wrote off certain fully
depreciated assets as a result of its General Physics and Corporate office
relocations of approximately $5,100,000.
6. Short-term borrowings
General Physics
On August 13, 2003, General Physics, General Physics's subsidiary, Skillright,
Inc., and MXL, entered into a two-year $25 million Financing and Security
Agreement (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 General Physics 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.
GP STRATEGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
At General Physics's option,
6. Short-term borrowings (Continued)
At General Physics'option, upon prior written notice to the lender, MXL's
accounts receivables can be eliminated from the borrowing base under the Credit
Agreement, provided that General Physics 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. In
March 2004 the Company eliminated MXL's accounts receivable from the borrowing
base, which would have had the effect as of December 31, 2003 of reducing the
borrowing base by $453,000. At the same time, the Credit Agreement was also
amended to include GSE.
The interest rate on the Credit Agreement is at Eurodollar plus 3.00%, (which as
of December 31, 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 (except for the Five Star Acquisition),
incurrence of debt and the payment of dividends. The Company received a waiver
under the Credit Agreement with respect to the GSE Acquisition. 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 December 31, 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 year ended December 31, 2003.
As of December 31, 2003, the amount outstanding under the Credit Agreement is
approximately $9,527,000, and approximately $7,225,000 was available to be
borrowed under the Credit Agreement.
Five Star
On June 20, 2003 Five Star obtained a new Loan and Security Agreement
(the "Loan Agreement") with Fleet Capital Corporation. The Loan Agreement has a
five-year term, with a maturity date of June 30, 2008. The Loan Agreement
provides for a $25,000,000 revolving credit facility, which allows Five Star to
borrow based upon a formula of eligible inventory and eligible accounts
receivable, as defined therein. The interest rates under the Loan Agreement are
LIBOR plus a credit spread for borrowings not to exceed $15,000,000 and the
prime rate plus a credit spread for borrowings in excess of the above-mentioned
LIBOR-based borrowings. The credit spreads can be reduced in the event that Five
GP STRATEGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
6. Short-term borrowings (Continued)
Star achieves and maintains certain performance benchmarks. At December 31,
2003, approximately $16,685,000 was outstanding under the Loan Agreement and
approximately $480,000 was available to be borrowed.
In connection with the Loan Agreement, Five Star also entered into a derivative
transaction with Fleet National Bank on June 20, 2003. The derivative
transaction is an interest rate swap which has been designated as a cash flow
hedge. Effective July 1, 2004 through June 30, 2008, Five Star will pay a fixed
interest rate of 3.38% to Fleet National Bank on notional principal of
$12,000,000. In return, Fleet National Bank will pay to Five Star a floating
rate, namely, LIBOR, on the same notional principal amount. The credit spread
under the Loan Agreement is not included in and will be paid in addition to this
fixed interest rate of 3.38%.
GSE
GSE previously had a $1.5 million bank line of credit. The credit
facility provided for borrowings to support working capital needs and foreign
letters of credit. The line was collateralized by substantially all of GSE's
assets. The interest rate on this line of credit was based on the bank's prime
rate plus 1.00% (5.00% as of December 31, 2003), with interest only payments due
monthly. At December 31, 2003, GSE's available borrowing base was $1.5 million,
none of which had been utilized. On March 23, 2000, the Company agreed to
guarantee up to $1,800,000 of GSE credit facility, through May 31, 2004, as
extended.
GSE's current credit facility was scheduled to expire on May 31, 2004;
however on March 30, 2004, GSE was added as an additional borrower under the
General Physics Credit Agreement. Under the terms of the Credit Agreement, as
amended, $1,500,000 of General Physics' Credit Agreement has been allocated for
use by GSE as well as certain covenants specific to GSE. The Credit Agreement
was amended to provide for additional collateral consisting of substantially all
of the GSE's assets, as well as certain covenants specific to GSE. It provides
for borrowings by GSE up to 80% of eligible accounts receivable and 80% of
eligible unbilled receivables, up to a maximum of $1,500,000. The interest rate
is based upon the LIBOR Market Index Rate plus 3%, with interest only payments
due monthly. The Company agreed to guarantee GSE's borrowings under the Credit
Agreement, as amended, in consideration for a fee pursuant to the Management
Services Agreement.
GP STRATEGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
7. Accounts payable and accrued expenses
Accounts payable and accrued expenses are comprised of the following (in
thousands):
- ----------------------------------------------------- --------------- ----------
December 31, 2003 2002
- ----------------------------------------------------- --------------- ----------
- ----------------------------------------------------- --------------- ----------
Accounts payable $22,795 $ 6,324
Payroll and related costs 6,324 4,617
Restructuring reserve 72 221
Other 8,916 6,390
- ----------------------------------------------------- --------------- ----------
- ----------------------------------------------------- --------------- ----------
$38,107 $17,552
- ----------------------------------------------------- --------------- ----------
8. Long term debt
Long-term debt is comprised of the following (in thousands):
- ------------------------------------------------------ -------------------------
December 31, 2002 2001
- ------------------------------------------------------ -------------------------
- ------------------------------------------------------ -------------------------
6% conditional subordinated notes due 2008 (a) $7,500 -
ManTech Note (b) 5,251 -
Mortgage on MXL Pennsylvania facility (c) 1,405 $1,505
Mortgage on MXL Illinois facility (d) 1,185 1,212
Senior subordinated debentures 423 558
6% convertible exchangeable notes (e) 2,640
AOtec Debt (f) 922 -
Other (g) 437 997
- ------------------------------------------------------ -------------------------
- ------------------------------------------------------ -------------------------
17,123 6,912
- ------------------------------------------------------ -------------------------
- ------------------------------------------------------ -------------------------
Less warrant related discount, net of accretion (2,262) -
- ------------------------------------------------------ -------------------------
- ------------------------------------------------------ -------------------------
14,861 6,912
Less current maturities (1,112) (3,610)
- ------------------------------------------------------ -------------------------
- ------------------------------------------------------ -------------------------
$13,749 $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 "Gabelli 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 Gabelli Notes and GP Warrants was $7,500,000.
The Gabelli Notes bear interest at 6% per annum payable semi-annually commencing
on December 31, 2003, and mature in August 2008. The Gabelli Notes are secured
by a mortgage on the Company's property located in Pawling, New York. In the
event that the spin-off does not occur, the Company may be required to redeem
GP STRATEGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
8. Long term debt (Continued)
the Gabelli Notes by April 2005. In addition, 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 Gabelli
Notes in an amount not less than the outstanding principal amount of the Gabelli
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 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 Gabelli Notes. The Gabelli Notes have a yield
to maturity of 15.436% based on the discounted value. Accretion charged as
non-cash interest expense was approximately $127,000 during 2003.
The GP Warrants were accounted for as a liability of the Company until the
shares of the Company's common stock issuable on exercise of the GP Warrants
were registered, which occurred on December 8, 2003, at which time the liability
was reclassified to additional paid in capital at its then fair market value of
$953,000. The changes in the fair market value of the GP Warrants were marked to
market through December 8, 2003 with the adjustment shown as other income in the
consolidated statement of operations. The Company recognized a gain of
$1,436,000 in its December 8, 2003 valuation adjustment of the liability
relating to the GP Warrants using the Black-Scholes model.
The Note and Warrant Purchase Agreement provides that, on completion of the
Distribution described in Note 1, 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 Gabelli 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 Gabelli Notes, the Company has agreed to indemnify MXL for
loss of the value of the property.
GP STRATEGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
8. Long term debt (Continued)
(b)On October 23, 2003 in connection with the GSE Acquisition the Company
issued a five-year 5% note due in full on October 21, 2008 in the principal
amount of $5,250,955 to ManTech International. Interest is payable quarterly.
Each year during the term of the note, the holder of the note will have the
option to convert up to 20% of the original principal amount of the note into
common stock of GP Strategies at the then market price of GP Strategies' common
stock, but only in the event that GP Strategies' 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.
(c) On March 8, 2001, MXL entered into a loan in the amount of $1,680,000,
secured by a mortgage covering the real estate and fixtures on its property in
Pennsylvania. The loan requires monthly repayments of $8,333 plus interest at
2.5% above the one month LIBOR rate and matures on March 8, 2011, when the
remaining amount outstanding of approximately $680,000 is due in full. The loan
is guaranteed by the Company.
(d) On July 3, 2001, MXL entered into a loan in the amount of $1,250,000,
secured by a mortgage covering the real estate and fixtures on its property in
Illinois. The loan requires monthly payments of principal and interest in the
amount of $11,046 with interest at a fixed rate of 8.75% per annum, and matures
on June 26, 2006, when the remaining amount outstanding of approximately
$1,100,000 is due in full. The loan is guaranteed by the Company.
(e) 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 "Valera Notes") to exchange the Valera Notes plus related accrued
interest for 554,000 shares of the Company's Common Stock with a fair value of
$2,770,000. The original agreement provided that the Valera Notes, at the option
of the Holders, could be exchanged for 19.9% of the outstanding capital stock of
Valera, or into shares of the Company's Common Stock at a conversion rate of
$5.00 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.
(f) On September 15, 2003, MXL purchased machinery, equipment and inventory from
AOtec LLC ("AOtec"), 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 accrued expenses
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
GP STRATEGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
8. Long term debt (Continued)
rate of 4% per annum. On October 1, 2003, MXL borrowed $700,000 from a bank (the
"AOtec Debt") to finance the purchase price 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.
(g) Represents primarily capital lease obligations for equipment.
Aggregate annual maturities of long-term debt at December 31, 2003 are as
follows (in thousands):
2004 $ 1,112
2005 467
2006 1,719
2007 100
2008 12,851
Thereafter 874
----------------------------------- -----------------------------------
9. Employee benefit plans
The Company and its employees maintain a Retirement Savings Plan (the Plan) for
employees who have completed at least one month of service. The Plan permits
pre-tax contributions to the Plan by participants pursuant to Section 401(k) of
the Internal Revenue Code of 1% to 14% of base compensation. The Company matches
participants' contributions up to a specific percentage of the first 7% of base
compensation contributed for employees who have completed one year of service
and may make additional matching contributions at its discretion. In 2003, 2002
and 2001 the Company did not make any discretionary matching contributions. The
Company matches participants' contributions in shares of its Common Stock up to
57% of monthly employee salary deferral contributions. In 2003, 2002 and 2001
the Company contributed 188,317 shares, 270,000 shares and 291,185 shares of the
Company's common stock directly to the Plan with a value of approximately
$1,053,000, $1,058,000 and $1,151,000, respectively.
GSE Employee Benefit Plan
GSE has a qualified defined contribution plan that covers substantially all its
U.S. employees under Section 401(k) of the Internal Revenue Code. Under this
plan, GSE stipulated basic contribution matches a portion of the participants'
contributions based upon a defined schedule. GSE's contributions to the plan
were approximately $12,000 from October 23, 2003 to December 31, 2003.
GP STRATEGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
9. Employee benefit plans (Continued)
Five Star Employee Benefit Plan
Five Star maintains a 401(k) Savings Plan for employees who have completed one
year of service. The Savings Plan permits pre-tax contributions to the plan of
2% to 50% of compensation by participants pursuant to Section 401(k) of the
Internal Revenue Code. Five Star matches 40% of the participants' first 6% of
compensation contributed, not to exceed an amount equivalent to 2.4% of that
participant's compensation. Five Star's contribution to the plan was
approximately $31,000 from October 8, 2003 to December 31, 2003.
10. Income taxes
The components of income tax expense (benefit) are as follows (in thousands):
- --------------------------------------------- --------------- ---------- -------
Years ended December 31, 2003 2002 2001
- --------------------------------------------- --------------- ---------- -------
- --------------------------------------------- --------------- ---------- -------
Current
Federal $ 39
State and local 399 $ 370 $ 537
Foreign 693 361 186
- --------------------------------------------- --------------- ---------- -------
- --------------------------------------------- --------------- ---------- -------
Total current 1,131 731 723
- --------------------------------------------- --------------- ---------- -------
- --------------------------------------------- --------------- ---------- -------
Deferred
Federal - (1,420) 1,392
State and local - (130) 400
Foreign (245)
- --------------------------------------------- --------------- ---------- -------
- --------------------------------------------- --------------- ---------- -------
Total deferred (245) (1,550) 1,792
- --------------------------------------------- --------------- ---------- -------
- --------------------------------------------- --------------- ---------- -------
Total income tax expense (benefit) $886 $ (819) $2,515
- --------------------------------------------- --------------- ---------- -------
The deferred expense (benefit) excludes activity in the net deferred tax assets
relating to tax on appreciation (depreciation) in available-for-sale securities,
which is recorded directly to stockholders' equity.
GP STRATEGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
10. Income taxes (Continued)
The difference between the expense (benefit) for income taxes computed at the
statutory rate and the reported amount of tax expense (benefit) is as follows:
- ----------------------------------------------------------------------- -------------- --------------- ---------------
December 31, 2003 2002 2001
- ----------------------------------------------------------------------- -------------- --------------- ---------------
- ----------------------------------------------------------------------- -------------- --------------- ---------------
Federal income tax rate (35.0%) (35.0%) 35.0%
Foreign, State and local taxes net of Federal benefit 5.5 6.8 32.6
Taxes of subsidiaries that are not consolidated
for tax purposes 1.8
Items not deductible - primarily meals
and entertainment 6.2 3.0 23.8
Valuation allowance adjustment 28.1 (6.9)
Net losses from foreign operations for which
no tax benefit has been provided 0.7 1.7 41.2
Tax effect recorded in stockholders' equity for
sale of available-for sale-securities 4.4 9.2 32.0
Other 0.2 0.8 2.5
- ----------------------------------------------------------------------- -------------- --------------- ---------------
- ----------------------------------------------------------------------- -------------- --------------- ---------------
Effective tax rate expense (benefit) 11.9% (13.5%) 160.2%
- ----------------------------------------------------------------------- -------------- --------------- ---------------
In 2003, the Company recorded income tax expense of $886,000. The current income
tax provision of $1,131,000 represents estimated federal taxes of $39,000, state
taxes of $399,000, and foreign taxes of $693,000. The deferred income tax
benefit of $245,000 represents a benefit for the future utilization of a portion
of the Company's foreign net operating loss.
In 2002, the Company recorded an income tax benefit of $819,000. The current
income tax provision of $731,000 represents estimated state taxes of $370,000
and foreign taxes of $361,000. The deferred income tax benefit of $1,550,000
primarily represents a benefit for the future utilization of the Company's
domestic net operating losses.
In 2001, the Company recorded income tax expense of $2,515,000. The current
income tax provision of $723,000 represents estimated state taxes of $537,000
and foreign taxes of $186,000. The deferred income tax expense of $1,792,000
represents future estimated federal and state taxes.
The Company had an effective tax rate of 11.9% for the year ended December 31,
2003. This rate was primarily due to certain nondeductible items, an increase in
the valuation allowance for domestic net operating losses for which no tax
benefit has been provided, and the tax treatment for financial statement
purposes of the sale by the Company in 2003 of certain shares of
available-for-sale securities accounted for pursuant to SFAS No.115 "Accounting
for Certain Investments in Debt and Equity Securities."
GP STRATEGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
10. Income taxes (Continued)
The Company had an effective tax rate of 14% for the year ended December 31,
2002. This rate was primarily due to certain nondeductible items, net losses
from foreign operations for which no tax benefit has been provided, and the tax
treatment for financial statement purposes of the sale by the Company in 2002 of
certain shares of available-for-sale securities accounted for pursuant to SFAS
No.115.
The Company had an effective tax rate of 160% for the year ended December 31,
2001. This rate was primarily due to the tax treatment for financial statement
purposes of the sale by the Company in 2001 of certain shares of
available-for-sale securities accounted for pursuant to SFAS No.115.
As of December 31, 2003, the Company has approximately $30,778,000 of Federal
net operating loss carryforwards. These carryforwards expire in the years 2005
through 2023. Foreign net operating losses at December 31, 2003 were
approximately $35,825,000. In addition, the Company has approximately $972,000
of available credit carryovers which may be carried over indefinitely.
The tax effects of temporary differences between the financial reporting and tax
bases of assets and liabilities that are included in the net deferred tax
(liability) asset are summarized as follows (in thousands):
- ----------------------------------------------------------------------- -------------------- ---------------------
December 31, 2003 2002
- ----------------------------------------------------------------------- -------------------- ---------------------
- ----------------------------------------------------------------------- -------------------- ---------------------
Deferred tax assets:
Allowance for doubtful accounts $ 405 $ 337
Accrued liabilities 1,706 883
Net Federal and Foreign operating loss carryforwards 22,751 20,221
Tax credit carryforwards 972 987
Restructuring reserves 460 484
Tax benefits of subsidiaries not consolidated for tax
purposes 227
Investment in partially owned companies 128
- ----------------------------------------------------------------------- -------------------- ---------------------
- ----------------------------------------------------------------------- -------------------- ---------------------
Deferred tax assets 26,649 22,912
- ----------------------------------------------------------------------- -------------------- ---------------------
- ----------------------------------------------------------------------- -------------------- ---------------------
Deferred tax liabilities:
Property and equipment, principally due to
difference in depreciation and amortization 2,375 1,049
Investment in partially owned companies 556
- ----------------------------------------------------------------------- -------------------- ---------------------
- ----------------------------------------------------------------------- -------------------- ---------------------
Deferred tax liabilities 2,375 1,605
- ----------------------------------------------------------------------- -------------------- ---------------------
- ----------------------------------------------------------------------- -------------------- ---------------------
Net deferred tax assets 24,274 21,307
Less valuation allowance (12,586) (10,461)
- ----------------------------------------------------------------------- -------------------- ---------------------
- ----------------------------------------------------------------------- -------------------- ---------------------
Net deferred tax asset $11,688 $10,846
- ----------------------------------------------------------------------- -------------------- ---------------------
GP STRATEGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
10. Income taxes (Continued)
In 2003 the valuation allowance increased by $2,125,000 attributable primarily
to domestic net operating losses for the year ended December 31, 2003 for which
no tax benefit has been provided. In 2002, the valuation allowance decreased by
$404,000 attributable primarily to the expiration of tax credit carryforwards.
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of the deferred tax assets
is dependent upon the generation of future taxable income during the periods in
which temporary differences are deductible. Management considers the scheduled
reversal of deferred tax liabilities, projected future taxable income, and tax
planning strategies in making this assessment. Based upon these factors,
management believes it is more likely than not that the Company will realize the
benefits of deferred tax assets, net of the valuation allowance. The valuation
allowance relates to both foreign and domestic net operating loss carryforwards
for which the Company does not believe the benefits will be realized. As of
December 31, 2003, the Company has recorded a net deferred tax asset of
$11,688,000.
11. Comprehensive income (loss)
The following are the components of comprehensive income (loss) (in thousands):
Year ended December 31,
--------------------------------------------------------
------------------ ------------------ ------------------
2003 2002 2001
---- ---- ----
Net loss $(8,276) $(5,228) $(945)
Other comprehensive (loss) income,
before tax:
Net unrealized loss on
available-for-sale-securities (1,067) (12,130) (30,802)
Net unrealized gain on interest rate swap 82
Foreign currency translation adjustment 139 (492) 24
--------- ---------- ----------
Comprehensive loss before tax (846) (11,622) (31,723)
Income tax benefit related to
items of other comprehensive income (loss) 410 4,718 11,905
--------- -------- --------
Comprehensive income (loss), net of tax $(8,712) $(13,132) $(19,818)
======== ========= =========
The components of accumulated other comprehensive income are as follows (in
thousands):
- --------------------------------------------------------- ------------------ ------------------ -------------------
December 31, 2003 2002 2001
- --------------------------------------------------------- ------------------ ------------------ -------------------
- --------------------------------------------------------- ------------------ ------------------ -------------------
Net unrealized gain on
available-for-sale-securities $1,613 $2,680 $14,810
Net unrealized gain on interest rate swap 82
Foreign currency translation adjustment (1,010) (1,149) (657)
-------- ------- ----------
Accumulated other comprehensive
income before tax 685 1,531 14,153
Accumulated income tax expense related
to items of other comprehensive loss (661) (1,071) (5,789)
-------- ------- --------
Accumulated other comprehensive
income, net of tax $ 24 $ 460 $ 8,364
======= ======= =======
GP STRATEGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
12. Common Stock, stock options and warrants
(a) On October 29, 2003 the Company's shareholders approved the GP Strategies
Corporation's 2003 Incentive Stock Plan (the "2003 Plan"). The 2003 Plan was
adopted because only approximately 660,000 shares of the Company's Common Stock
were available for grant under the Company's existing Non-Qualified Stock Option
Plan (the "Plan"), which the Company believed did not provide sufficient shares
for market-competitive grant levels.
The 2003 Plan will permit awards of incentive stock options, nonqualified stock
options, restricted stock, stock units, performance shares, performance units
and other incentives payable in cash or in shares of the Company's Common Stock
or Class B Common Stock. The aggregate number of shares of Common Stock or Class
B Common Stock available for issuance under the 2003 Plan is 2,000,000, of which
not more than 500,000 shares may be shares of Class B Common Stock. As of
December 31, 2003 approximately 711,000 shares of the Company's Common Stock
were available for grant under the Plan, and 2,000,000 shares of the Company's
Common Stock were available for grant under the 2003 Plan.
Under the Plan, employees and certain other parties may be granted options to
purchase shares of common stock. Although the Plan permits options to be granted
at a price not less than 85% of the fair market value, the Plan options
primarily are granted at the fair market value of the common stock at the date
of the grant and vest over periods from two to ten years from the date of grant.
Shares of common stock may also be reserved for issuance pursuant to other
agreements.
Changes in options and warrants outstanding during 2003, 2002 and 2001, and
options and warrants exercisable and shares reserved for issuance at December
31, 2003, 2002, and 2001 are as follows:
GP STRATEGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
12. Common Stock, stock options and warrants (Continued)
- ------------------------------------------- ------------------------------ ---------------- -------------------------
Options and warrants Price Range Number Weighted-Average
Outstanding per share of shares Exercise Price
- ------------------------------------------- ------------------------------ ---------------- -------------------------
- ------------------------------------------- --------------- -------------- ---------------- -------------------------
December 31, 2000 $3.375 - 24.00 2,505,348 $7.74
- ------------------------------------------- --------------- -------------- ---------------- -------------------------
- ------------------------------------------- --------------- -------------- ---------------- -------------------------
Granted 3.00 - 4.61 452,000 4.47
Terminated 4.61 - 24.00 (166,683) 7.85
- ------------------------------------------- --------------- -------------- ---------------- -------------------------
- ------------------------------------------- --------------- -------------- ---------------- -------------------------
December 31, 2001 3.00 - 15.375 2,790,665 7.37
- ------------------------------------------- --------------- -------------- ---------------- -------------------------
- ------------------------------------------- --------------- -------------- ---------------- -------------------------
Granted 3.60 - 4.75 845,800 4.13
Exercised 3.60 - 4.61 (1,233) 4.08
Terminated 3.60 - 14.625 (722,235) 7.87
- ------------------------------------------- --------------- -------------- ---------------- -------------------------
- ------------------------------------------- --------------- -------------- ---------------- -------------------------
December 31, 2002 3.00 - 15.375 2,912,997 6.57
- ------------------------------------------- --------------- -------------- ---------------- -------------------------
- ------------------------------------------- --------------- -------------- ---------------- -------------------------
Granted 4.90 - 8.00 1,222,250 7.32
Exercised 3.00 - 5.1875 (248,983) 3.94
Terminated 3.60 - 14.625 (96,367) 6.16
- ------------------------------------------- --------------- -------------- ---------------- -------------------------
- ------------------------------------------- --------------- -------------- ---------------- -------------------------
December 31, 2003 3.00 - 15.375 3,789,897 7.00
- ------------------------------------------- --------------- -------------- ---------------- -------------------------
Options and warrants exercisable
- ------------------------------------------- --------------- -------------- ---------------- -------------------------
December 31, 2001 3.00 - 15.375 2,058,096 7.12
- ------------------------------------------- --------------- -------------- ---------------- -------------------------
- ------------------------------------------- --------------- -------------- ---------------- -------------------------
December 31, 2002 3.00 - 15.375 2,096,199 6.39
- ------------------------------------------- --------------- -------------- ---------------- -------------------------
- ------------------------------------------- --------------- -------------- ---------------- -------------------------
December 31, 2003 $3.00 - 15.375 3,212,922 $6.98
- ------------------------------------------- --------------- -------------- ---------------- -------------------------
- ------------------------------------------- --------------- -------------- ---------------- -------------------------
Shares reserved for issuance
December 31, 2001 3,938,303
- ------------------------------------------- --------------- -------------- ---------------- -------------------------
- ------------------------------------------- --------------- -------------- ---------------- -------------------------
December 31, 2002 3,937,070
- ------------------------------------------- --------------- -------------- ---------------- -------------------------
- ------------------------------------------- --------------- -------------- ---------------- -------------------------
December 31, 2003 4,625,587
- ------------------------------------------- --------------- -------------- ---------------- -------------------------
At December 31, 2003, the weighted average remaining contractual life of all
outstanding options was 4 years.
The following table summarizes information about the Plan's options outstanding
at December 31, 2003:
Range of Number Weighted Average Weighted-Average
Exercise Prices Outstanding Years Remaining Exercise Price
- -------- ------------- ----------------- ------------------- ------------------------- ----------------------------
- -------- ------------- ---------------- ------------------- ------------------------- ----------------------------
$ 3.00 - $ 7.75 1,625,272 3.71 $ 4.72
$ 7.76 - $ 10.41 560,000 .71 $ 8.16
$10.42 - $ 15.375 367,125 4.21 $ 14.72
- -------- ------------- ---------------- ------------------- ------------------------- ----------------------------
- -------- ------------- ---------------- ------------------- ------------------------- ----------------------------
$ 3.00 - $15.375 2,552,397 3.12 $ 6.91
- -------- ------------- ---------------- ------------------- ------------------------- ----------------------------
The Company had no outstanding Class B Common Stock options during fiscal years
2003, 2002 and 2001.
GP STRATEGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
12. Common Stock, stock options and warrants (Continued)
The holders of Common Stock are entitled to one vote per share and the holders
of Class B Common Stock are entitled to ten votes per share on all matters
without distinction between classes, except when approval of a majority of each
class is required by statute. The Class B Common Stock is convertible at any
time, at the option of the holders of such stock, into shares of common stock on
a share-for-share basis. Shares reserved for issuance of common stock were
primarily related to options, warrants and the conversion of long-term debt.
The Company reserved 950,000 shares of its Common Stock for issuance upon
conversion of Class B Common Stock at December 31, 2000. The Company reserved an
additional 300,000 shares for a private placement transaction (see Note 12(c))
bringing the total to 1,250,000 shares reserved for issuance upon conversion of
Class B Common Stock at December 31, 2003, 2002 and 2001.
At December 31, 2003, 2002, and 2001, options outstanding included options for
353,623, 353,623 and 239,498 shares, respectively, for certain executive
officers.
(b) Pursuant to an agreement dated as of October 19, 2001 (the "Stock Purchase
Agreement"), the Company sold to Bedford Oak Partners, LP (the "Bedford Oak") in
a private placement transaction, 300,000 shares of Class B Common Stock (the
"Bedford Class B Shares") for $900,000. Upon the disposition of any of the
Bedford Class B Shares (other than to an affiliate of Bedford Oak who agrees to
be bound by the provisions of the Stock Purchase Agreement) or at the request of
the Board of Directors of the Company, Bedford Oak is required to exercise the
right to convert all of the Bedford Class B Shares then owned by Bedford Oak
into an equal number of shares of common stock of the Company (the "Bedford
Underlying Shares"). The Company was required to file a registration statement
to register the resale of the Bedford Underlying Shares by Bedford Oak, which
registration statement was declared effective as of August 13, 2002.
On any date prior to October 19, 2003 during which Bedford Oak was not able to
resell the Bedford Underlying Shares pursuant to the registration statement,
Bedford Oak had the right to require the Company to purchase all, but not less
than all, of the Bedford Class B Shares and the Bedford Underlying Shares then
held by Bedford Oak for a purchase price as specified in the Stock Purchase
Agreement. The put option obligation expired upon the effectiveness of the
registration statement on August 13, 2002 covering the Bedford Underlying
Shares.
Pursuant to an agreement dated May 3, 2002, the Company agreed to sell to
Bedford Oak in a private placement transaction 1,200,000 shares of Common Stock
(the "Bedford Common Shares") of the Company for an aggregate purchase price of
$4,200,000. Harvey Eisen, the managing member of Bedford Oak Advisors, LLC, the
investment manager of Bedford Oak, was elected a director of the Company in July
2002.
GP STRATEGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
12. Common Stock, stock options and warrants (Continued)
Pursuant to an agreement dated May 3, 2002, the Company sold 100,000 shares of
Common Stock for $350,000 to Marshall Geller (the "Geller Shares"), a director
of the Company, in a private placement transaction.
Pursuant to an agreement dated May 3, 2002 ( the "EGI Agreement"), the Company
sold to Equity Group Investments, L.L.C. ("EGI") in a private placement
transaction 1,000,000 shares of Common Stock (the "EGI Common Shares") for
$3,500,000 and 300,000 shares of Class B Common Stock (the "EGI Class B Shares")
for $1,260,000. Mark Radzik, a designee of EGI, was elected a director of the
Company in July 2002.
Upon the disposition of any of the EGI Class B Shares (other than to an
affiliate of EGI or to a transferee approved by the Board who in each case
agrees to be bound by the provisions of the EGI Agreement), EGI was required to
convert all of the EGI Class B Shares into an equal number of shares of Common
Stock (the "EGI Underlying Shares"). Until May 3, 2003, the Company had the
right to purchase all, but not less than all, of the EGI Class B Shares then
owned by EGI. On April 14, 2003, the Company irrevocably waived its right to
exercise such call option with respect to the EGI Class B Shares.
The Company and EGI have entered into an advisory services agreement providing
that, to the extent requested by the Company and deemed appropriate by EGI, EGI
shall assist the Company in developing, identifying, evaluating, negotiating,
and structuring financings and business acquisitions. The Company has agreed to
pay EGI a transaction fee equal to 1% of the proceeds received by the Company in
a financing, or of the consideration paid by the Company in a business
acquisition, in respect of which EGI has provided material services.
On August 13, 2002, a registration statement covering the resale of the Bedford
Underlying Shares, the Bedford Common Shares, the EGI Common Shares, the EGI
Underlying Shares and the Geller Shares was declared effective by the SEC.
(c) In June 2001, the Company entered into an agreement with a financial
consulting firm to provide certain services for which the Company, in addition
to cash payments, agreed to issue warrants to purchase 300,000 shares of the
Company's common stock at an exercise price of $4.60 per share. In connection
with the issuance of these warrants, the Company recorded an expense of $750,000
in 2001 for these warrants which is included in selling, general and
administrative expense in the Consolidated Statement of Operations. These
warrants expire in June 2011.
(d) On February 11, 2000, an affiliate of Andersen, Weinroth & Co., L.P.
("Andersen Weinroth") purchased 200,000 shares of Class B Common Stock for
$1,200,000. In addition, a general partner of Andersen Weinroth joined the Board
of Directors of the Company. On October 11, 2001, this general partner resigned
GP STRATEGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
12. Common Stock, stock options and warrants (Continued)
resigned from the Board of Directors of the Company and converted the 200,000
shares of Class B Common Stock into an equal number of shares of Common Stock.
(e) On August 8, 2003, the Company issued and sold to four Gabelli funds 937,500
GP Warrants, each entitling the holder thereof to purchase (subject to
adjustment) one share of the Company's common stock (See Note 8). The GP
Warrants have an exercise price of $8.00 per share and are exercisable at any
time until August 2008.
(f) GSE long term incentive plan
During 1995, GSE established the 1995 Long-Term Incentive Stock Option
Plan (the "GSE Plan"), which includes all officers, key employees and
non-employee members of GSE's Board of Directors. All options to purchase shares
of GSE's common stock under the GSE Plan expire seven years from the date of
grant and generally become exercisable in three installments with 40% vesting on
the first anniversary of the grant date and 30% vesting on each of the second
and third anniversaries of the grant date, subject to acceleration under certain
circumstances. At December 31, 2003, GSE had 679,644 shares of common stock
reserved for future grants under the GSE Plan.
Stock option activity under the GSE Plan is as follows:
- ------------------------------- --------------------------- --------------- --------------------------
Options Price Range Number Weighted-Average
Outstanding per share of shares Exercise Price
- ------------------------------- --------------------------- --------------- --------------------------
- ------------------------------- -------------- ------------ --------------- --------------------------
October 23, 2003 $2.00 - 14.750 1,683,876 $4.16
- ------------------------------- -------------- ------------ --------------- --------------------------
- ------------------------------- -------------- ------------ --------------- --------------------------
Granted
Exercised
Terminated 2.00 - 2.800 (27,400) 2.31
- ------------------------------- -------------- ------------ --------------- --------------------------
- ------------------------------- -------------- ------------ --------------- --------------------------
December 31, 2003 $2.00 - 14.750 1,656,476 $4.65
- ------------------------------- -------------- ------------ --------------- --------------------------
The following table summarizes information relating to currently outstanding and
exercisable options at December 31, 2003:
GP STRATEGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
12. Common Stock, stock options and warrants (Continued)
Weighted Weighted Weighted
Average Average Average
Range of Number Years Exercise Number Exercise
Exercise Prices Outstanding Remaining Price Exercisable Price
- ----------------------------- ---------------- -------------- ------------- --------------- -------------
- ------------- --- ----------- ---------------- -------------- ------------- --------------- -------------
$ 1.48 - $ 2.95 510,550 4.0 $2.15 393,550 $2.18
$ 2.96 - $ 4.43 789,485 2.6 3.67 389,485 3.83
$ 4.44 - $ 5.90 200,000 3.1 4.75 200,000 4.75
$ 5.91 - $ 7.38 10,000 3.3 6.38 10,000 6.38
$ 7.39 - $ 8.85 20,000 3.2 7.50 20,000 7.50
$ 8.86 - $ 11.80 200 2.6 11.25 200 11.25
$ 11.81 - $ 14.75 26,241 1.7 14.11 126,241 14.11
- ------------- --- ----------- ---------------- -------------- ------------- --------------- -------------
- ------------- --- ----------- ---------------- -------------- ------------- --------------- -------------
Total 1,656,476 3.0 $4.19 1,139,476 $4.65
- ------------- --- ----------- ---------------- -------------- ------------- --------------- -------------
(g) Five Star Stock Option plan
On January 1, 1994, Five Star's Board of Directors adopted the Five Star
Products, Inc. 1994 Five Star Plan (the "Five Star Plan"), which became
effective August 5, 1994. On January 1, 2002, the Board of Directors amended the
Five Star Plan increasing the total number of shares of common stock to
4,000,000 shares reserved for issuance, subject to adjustment in the event of
stock splits, stock dividends, recapitalizations, reclassifications or other
capital adjustments. Unless designated as "incentive stock options" intended to
qualify under Section 422 of the Internal Revenue Code, options granted under
the Five Star Plan are intended to be nonqualified options. Options may be
granted to any director, officer or other key employee of Five Star and its
subsidiaries, and to consultants and other individuals providing services to
Five Star.
The term of any option granted under the Five Star Plan will not exceed ten
years from the date of the grant of the option and, in the case of incentive
stock options granted to a 10% or greater holder in the total voting stock of
Five Star, three years from the date of grant. The exercise price of any option
will not be less than the fair market value of the Common Stock on the date of
grant or, in the case of incentive stock options granted to a 10% or greater
holder in the total voting stock, 110% of such fair market value.
Options granted vest 20% on date of grant with the balance vesting in equal
annual installments over four years.
GP STRATEGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
12. Common Stock, stock options and warrants (Continued)
Activity relating to stock options granted by Five Star:
------------------------------------- ------------------- -------------------
Options Outstanding Number of Weighted Average
Shares Exercise Price
------------------------------------- ------------------- -------------------
------------------------------------- ------------------- -------------------
October 8, 2003 1,530,000 $.19
Granted
Exercised
Terminated
------------------------------------- ------------------- -------------------
------------------------------------- ------------------- -------------------
December 31, 2003 1,530,000 .19
------------------------------------- ------------------- -------------------
------------------------------------- ------------------- -------------------
Exercisable at December 31, 2003 975,000 $.22
------------------------------------- ------------------- -------------------
The following table summarizes information about the Five Star Plan's options at
December 31, 2003:
Weighted Weighted Weighted
Average Average Average
Range of Number Exercise Years Number Exercise
Exercise Prices Outstanding Prices Remaining Exercisable Price
- ----------------------- ----------------- ------------- ---------------- ---------------- ---------------
- ------------ -- ------- ----------------- ------------- ---------------- ---------------- ---------------
$.14 - .14 925,000 .14 2.95 460,000 .14
..15 - .15 50,000 .15 3.24 50,000 .15
..16 - .16 150,000 .16 3.64 60,000 .16
..33 - .33 405,000 .33 .29 405,000 .33
- ------------ -- ------- ----------------- ------------- ---------------- ---------------- ---------------
- ------------ -- ------- ----------------- ------------- ---------------- ---------------- ---------------
$.13 - $.33 1,530,000 $.19 .90 975,00 $.22
- ------------ -- ------- ----------------- ------------- ---------------- ---------------- ---------------
13. Business segments
The operations of the Company currently consist of the following five 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 Simulation Segment, which consists of GSE, provides of real-time simulation,
homeland security and engineering services for the energy, process and military
industries. The Company
GP STRATEGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
13. Business segments (Continued)
industries. The Company acquired additional shares of GSE in fourth quarter of
2003, bringing its ownership to 58% (see Note 4). GSE is consolidated in the
Company's financial statements effective October 23, 2003.
The Optical Plastics Segment, which consists of MXL, manufactures coated and
molded plastic products.
The Home Improvement Distribution Segment, which consists of Five Star,
distributes paint sundry items, interior and exterior stains, brushes, rollers,
caulking compounds and hardware products on a regional basis. The Company
acquired additional shares of Five Star in fourth quarter of 2003, bringing its
ownership to 54% (see Note 4). Five Star is consolidated in the Company's
financial statements effective October 8, 2003.
Effective January 1, 2002, Valera no longer exists as a business segment (see
Note 3). Information presented for Corporate & Other includes financial
information for the operations and assets of the Valera subsidiary as of and for
the year ended December 31, 2001 prior to its treatment as an equity investment.
The management of the Company does not allocate the following items by segment:
Investment and other income, interest expense, selling, general and
administrative expenses, depreciation and amortization expense, income tax
expense, significant non-cash items and long-lived assets. Inter-segment sales
are not significant.
The following tables set forth the sales and operating results attributable to
each line of business and includes a reconciliation of the segments sales to
consolidated sales and operating results to consolidated income (loss) before
income taxes (in thousands):
GP STRATEGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
13. Business segments (Continued)
- ----------------------------------------------------------------- ----------------- ---------------- --------------
Years ended December 31, 2003 2002 2001
- ----------------------------------------------------------------- ----------------- ---------------- --------------
- ----------------------------------------------------------------- ----------------- ---------------- --------------
Sales
Manufacturing & Process $127,762 $134,255 $164,361
Information Technology 6,213 7,982 11,061
Simulation 6,059
Optical Plastics 8,613 9,996 11,184
Home Improvement Distribution 20,031
Corporate & Other 5
- ----------------------------------------------------------------- ----------------- ---------------- --------------
- ----------------------------------------------------------------- ----------------- ---------------- --------------
$168,678 $152,233 $186,611
- ----------------------------------------------------------------- ----------------- ---------------- --------------
- ----------------------------------------------------------------- ----------------- ---------------- --------------
Operating results
Manufacturing & Process $ 3,823 $ 1,712 $ 8,679
Information Technology 860 (182) 1,596
Simulation 358
Optical Plastics (60) 429 1,192
Home Improvement Distribution 333
Corporate & Other (10,532) (5,506) (3,285)
- ----------------------------------------------------------------- ----------------- ---------------- --------------
- ----------------------------------------------------------------- ----------------- ---------------- --------------
Total operating results (5,218) (3,547) 8,182
Interest expense (3,625) (2,770) (4,733)
Gains on equity investments, restructuring
charges, amortization of intangible assets,
valuation adjustment of liability for warrants
and gain on sale of marketable securities 1,423 270 (1,879)
- ----------------------------------------------------------------- ----------------- ---------------- --------------
- ----------------------------------------------------------------- ----------------- ---------------- --------------
(Loss) income from operations before
income taxes and minority interests $(7,420) $ (6,047) $ 1,570
- ----------------------------------------------------------------- ----------------- ---------------- --------------
Operating results represent sales less operating expenses. In computing
operating results, none of the following items have been added or deducted:
general corporate expenses at the holding company level, restructuring charges,
foreign currency transaction gains and losses, investment income, loss on
investments, loss on sale of assets, amortization of intangible assets,
valuation adjustment of liability for warrants and interest expense. General
corporate expenses at the holding company level, which are primarily salaries,
occupancy costs, professional fees and costs associated with being a publicly
traded company, totaled approximately $10,472,000 (net of a non-cash credit to
compensation expense of $150,000 relating to a deferred compensation plan and
including executive incentive bonuses of $3,000,000 and non-cash debt conversion
expense of $622,000), $4,882,000 (net of a non-cash credit to compensation
expense of $1,211,000 relating to the deferred compensation plan) and $3,033,000
(net of a non-cash credit to compensation expense of $2,370,000) for the years
ended December 31, 2003, 2002 and 2001, respectively. For the years ended
December 31, 2003, 2002 and 2001, sales to the United States government and its
agencies represented approximately 32%, 32% and 29%, respectively, of the
Company's sales.
GP STRATEGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
13. Business segments (Continued)
Additional information relating to the Company's business segments is as follows
(in thousands):
- ------------------------------------------------------------------- ---------------- ---------------- ----------------
December 31, 2003 2002 2001
- ------------------------------------------------------------------- ---------------- ---------------- ----------------
- ------------------------------------------------------------------- ---------------- ---------------- ----------------
Identifiable assets
Manufacturing & Process $89,201 $ 93,193 $ 98,453
Information Technology 8,088 8,978 8,787
Simulation 19,817
Optical Plastics 10,462 9,818 9,929
Home Improvement Distribution 38,721
Corporate & Other 22,034 32,916 43,655
- ------------------------------------------------------------------- ---------------- ---------------- ----------------
- ------------------------------------------------------------------- ---------------- ---------------- ----------------
$188,323 $144,905 $ 160,824
- ------------------------------------------------------------------- ---------------- ---------------- ----------------
- ------------------------------------------------------------------- ---------------- ---------------- ----------------
- ------------------------------------------------------------------- ---------------- ---------------- ----------------
- ------------------------------------------------------------------- ---------------- ---------------- ----------------
Years ended December 31, 2003 2002 2001
- ------------------------------------------------------------------- ---------------- ---------------- ----------------
- ------------------------------------------------------------------- ---------------- ---------------- ----------------
Additions to property,
plant, and equipment
Manufacturing & Process $ 685 $ 1,523 $ 557
Information Technology 22 38
Simulation 20
Optical Plastics 1,135 368 693
Home Improvement Distribution 159
Corporate & Other 102 25 163
- ------------------------------------------------------------------- ---------------- ---------------- ----------------
- ------------------------------------------------------------------- ---------------- ---------------- ----------------
$2,123 $ 1,916 $ 1,451
- ------------------------------------------------------------------- ---------------- ---------------- ----------------
- ------------------------------------------------------------------- ---------------- ---------------- ----------------
- ------------------------------------------------------------------- ---------------- ---------------- ----------------
Years ended December 31, 2003 2002 2001
- ------------------------------------------------------------------- ---------------- ---------------- ----------------
Depreciation and Amortization
Manufacturing & Process $ 1,600 $ 1,836 $ 2,544
Information Technology 1 18 606
Simulation 192
Optical Plastics 565 510 491
Home Improvement Distribution 47
Corporate & Other 523 940 2,261
- ------------------------------------------------------------------- ---------------- ---------------- ----------------
- ------------------------------------------------------------------- ---------------- ---------------- ----------------
$ 2,928 $ 3,304 $ 5,902
- ------------------------------------------------------------------- ---------------- ---------------- ----------------
Identifiable assets by industry segment are those assets that are used in the
Company's operations in each segment. Corporate and other assets are principally
cash and cash equivalents, marketable securities and intangible assets,
including goodwill.
GP STRATEGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
13. Business segments (Continued)
Information about the Company's net sales in different geographic regions, which
are attributed to countries based on location of customers, is as follows (in
thousands):
Year ended December 31,
2003 2002 2001
---- ---- ----
United States $156,394 $139,831 $173,008
Canada 1,221 1,421 2,756
United Kingdom 7,131 7,258 6,962
Latin America and other 3,932 3,723 3,885
----- -------- --------
$168,678 $152,233 $186,611
-------- -------- --------
Information about the Company's total assets in different geographic regions is
as follows (in thousands):
December 31,
2003 2002 2001
---- ---- ----
United States $180,026 $137,303 $152,627
Canada 404 3,076 3,653
United Kingdom 3,820 3,301 2,821
Latin America and other 4,073 1,225 1,723
----- -------- --------
$188,323 $144,905 $160,824
-------- -------- --------
All corporate intangible assets of the Company, as well as other corporate
assets, are assumed to be in the United States.
14. Restructuring and other charges
During 1999, the Company adopted restructuring plans, primarily related to its
IT Segment. The Company took steps in order to change the focus of the IT
Segment from open enrollment information technology training courses to project
oriented work for corporations, which was consistent with the focus of GP's
current business.
In connection with the restructuring, the Company recorded a charge of
$7,374,000 in 1999, of which $1,939,000 was the remaining balance as of December
31, 2000. During 2001, the Company utilized $663,000 of the reserve and reversed
$202,000. During 2002, the Company
utilized $528,000 of the reserve, and as of December 31, 2002, $104,000 was
included in accounts payable and accrued expenses and $442,000 was included in
other non-current liabilities in the accompanying Consolidated Balance Sheet.
GP STRATEGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
14. Restructuring and other charges (Continued)
During 2003 the Company utilized $256,000 of the reserve and recorded
restructuring charges of $298,000 primarily relating to lease obligations. As of
December 31, 2003, $61,000 was included in accounts payable and accrued expenses
and $527,000 was included in other non-current liabilities in the accompanying
Consolidated Balance Sheet.
The Company believed at the time the restructuring plan was adopted that the
strategic initiatives and cost cutting moves taken in 1999 and the first quarter
of 2000 would enable the IT Segment to return to profitability in the last six
months of 2000. However, those plans were not successful, and the Company
determined that it could no longer bring the open enrollment IT business to
profitability. As a result of the continued operating losses incurred by the IT
Segment, as well as the determination that revenues would not increase to
profitable levels, the Company decided to close its open enrollment IT business
in the third quarter of 2000 recording a charge of $8,810,000 of which
$4,926,000 was the remaining balance as of December 31, 2000.
During 2001, the Company utilized $2,302,000 of the reserve and reversed
$972,000 as a result of favorable settlements on certain leases and contractual
obligations. During 2002, the Company utilized $689,000 of the reserve and
reversed $368,000, and as of December 2002, $117,000 was included in accounts
payable and accrued expenses and $478,000 was included in other non-current
liabilities in the accompanying Consolidated Balance Sheet. During 2003, the
Company utilized $81,000 and reversed $8,000 of charges primarily relating to
lease obligations. As of December 31, 2003, $11,000 was included in accounts
payable and accrued expenses and $495,000 was included in other non-current
liabilities in the accompanying Consolidated Balance Sheet.
GP STRATEGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
14. Restructuring and other charges (Continued)
The components of the restructuring charges are as follows (in thousands):
1999 2000
Restructuring Restructuring
Charge Charge
- ------------------------------------------ ----------------- -------------------
- ------------------------------------------ ----------------- -------------------
Balance December 31, 2000 $ 1,939 $ 4,926
Utilization (663) (2,302)
Reversal of Restructuring
charges during 2001 (202) 972
- ------------------------------------------ ----------------- -------------------
- ------------------------------------------ ----------------- -------------------
Balance December 31, 2001 $ 1,074 $ 1,652
- ------------------------------------------ ----------------- -------------------
- ------------------------------------------ ----------------- -------------------
Utilization (528) (689)
Reversal of Restructuring
charges during 2002 (368)
- ------------------------------------------- ----------------- ------------------
- ------------------------------------------ ----------------- -------------------
Balance December 31, 2002 $ 546 $ 595
- ------------------------------------------ ----------------- -------------------
- ------------------------------------------ ----------------- -------------------
Utilization (256) (81)
Restructuring charges (reversals)
during 2003 298 (8)
- ------------------------------------------ ----------------- -------------------
Balance December 31, 2003 $ 588 $ 506
- ------------------------------------------ ----------------- -------------------
Lease and related obligations are presented at their present value, net of
assumed sublets.
Effective September 4, 2002, John C. McAuliffe resigned as President of GP. Mr.
McAuliffe and GP entered into a Separation Agreement pursuant to which Mr.
McAuliffe will be a consultant to GP for a six-month period. In consideration
for such services, GP agreed to pay Mr. McAuliffe the sum of $350,000, $300,000
in equal installments over the course of the consultancy period and $50,000 in
September 2005. In addition, GP agreed to pay Mr. McAuliffe severance of
$1,200,000 payable in equal installments on the following dates (i) September
2002, (ii) March 2003 and (iii) January 2, 2004. The Company recorded an expense
of approximately $125,000 in 2003 and of approximately $1,440,000 in 2002,
including $125,000 of related legal fees, which is recorded in selling, general
and administrative expense in the Consolidated Statements of Operations.
15. Related party transactions
In December 2003, GSE's Board of Directors elected John Moran, an executive of
the Company with extensive experience in the power industry and simulation
technology, as Chief Executive Officer. Mr. Moran will continue as an employee
of the Company, however, Mr. Moran will devote 100% of his time to the
performance of his duties as CEO of GSE. For 2003, GSE will reimburse the
Company $35,000 for his compensation and benefits; in 2004 GSE will reimburse
the Company $300,000 for Mr. Moran's compensation and benefits.
GP STRATEGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
15. Related party transactions (Continued)
At December 31, 2003 and 2002, the Company had total loans receivable
from Mr. Feldman, the Company's Chief Executive Officer in the amount of
approximately $2,323,000 and $4,095,000, the proceeds of which were used to
purchase an aggregate of 537,500 shares of Class B Common Stock. Such loans bear
interest at the prime rate and are secured by the purchased Class B Common Stock
and certain other assets. All principal on the loans and accrued interest,
totaling $0 and $1,075,000 at December 31, 2003 and 2002, respectively, are due
on May 31, 2007.
Pursuant to the incentive compensation agreement (the "Incentive
Agreement") entered into in 2002, Mr. Feldman, is eligible to receive from the
Company up to five payments in an amount of $1 million each, based on the
closing price of the Company's common stock sustaining or averaging increasing
specified levels over periods of at least 10 consecutive trading days. On each
of June 11, 2003, July 23, 2003 and December 22, 2003, Mr. Feldman earned an
incentive payment of $1 million each. 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 $3 million for the year
ended December 31, 2003, which is included in selling, general and
administrative expense. Although the set-off of the payments earned on June 11,
2003, July 23, 2003 and December 22, 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 earned by Mr.
Feldman against $1 million of accrued interest receivable, the second $1 million
against $163,000 of accrued interest receivable and $837,000 of principal, and
the third $1 million against $64,000 of accrued interest receivable and $936,000
of principal, which resulted in the outstanding balance of the note receivable
being reduced from $4,095,000 at December 31, 2002 to $2,322,000 as of December
31, 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 (which deferral notice was timely given
by Mr. Feldman) 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.
GP STRATEGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
15. Related party transactions (Continued)
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.
In prior years, the Company made unsecured loans to Mr. Feldman in the
amount of approximately $334,000, which unsecured loans primarily bear interest
at the prime rate of Fleet Bank.
For a description of certain transactions pursuant to which the Company
received proceeds from the sale of Common Stock and Class B Common Stock to
certain related parties, see Note 12.
In 2002, the Company and Redstorm Scientific, Inc. ("RSS") entered into
an agreement pursuant to which the Company agreed to provide general business
and administrative support to RSS. RSS is a privately held computational drug
design company focused on utilizing bio-informatics and computer aided molecular
design to assist pharmaceutical and biotechnology companies. The Company
performed and completed all necessary services for RSS during the third quarter
of 2002. In consideration for such services, RSS agreed to grant the Company a
five-year option to purchase shares of RSS common stock. The Company also has an
option to purchase additional equity in RSS upon the occurrence of certain
events. Michael Feldman is the Chief Executive Officer of RSS and owns
approximately 25.5% of the outstanding common stock of RSS. Michael Feldman is
the son of Jerome Feldman, Chief Executive Officer of the Company. Jerome
Feldman owns less than 1% of the outstanding common stock of RSS. In addition,
Roald Hoffmann, a director of the Company, is a director of RSS and has options
to purchase shares of RSS common stock.
In 2001, the Company sold 200,000 shares of Millennium common stock at
$8.50 per share and 300,000 shares of Millennium common stock at $3.50 per
share, to an affiliated entity of Liberty Wanger Asset Management L.P., a 5%
stockholder of the Company.
16. Commitments and contingencies
(a) The Company has various noncancellable leases for real property and
machinery and equipment. Such leases expire at various dates with, in some
cases, options to extend their terms. Lease commitments related to facilities
closed as part of the restructuring (see Note 14) are not included below.
GP STRATEGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
16. Commitments and contingencies (Continued)
Minimum rentals under long-term operating leases are as follows (in
thousands):
Real Machinery &
property equipment Total
- ----------------------------- ------------------------- -------------------
- ----------------------------- ------------------------- -------------------
2004 $4,862 $1,888 $6,750
2005 4,724 941 5,665
2006 4,319 552 4,871
2007 2,620 360 2,980
2008 1,501 76 1,577
Thereafter 2,956 2,956
- ----------------------------- ------------------------- -------------------
- ----------------------------- ------------------------- -------------------
Total $20,982 $3,817 $24,799
- ----------------------------- ------------------------- -------------------
Several of the leases contain provisions for rent escalation based primarily on
increases in real estate taxes and operating costs incurred by the lessor. Rent
expense was approximately $5,051,000, $4,042,000 and $5,350,000 for 2003, 2002
and 2001, respectively.
(b) On March 23, 2003, the Company extended its guarantee of up to $1,800,000 of
GSE debt pursuant to GSE's previous credit facility through March 31, 2004 (see
Note 6). 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 was recorded for the receipt of these shares which is being
amortized to income over the term of the guarantee. During the year ended
December 31, 2003, the Company recorded $135,000 to other income in the
Statement of Operations. The guarantee was extended through May 31, 2004. On
March 30, 2004, GSE was added as a borrower under the Genral Physics Credit
Agreement (see Note 6). The Company agreed to guarantee GSE's allocated portion
($1,500,000) of the Credit Agreement.
(c) The Company has guaranteed the leases for Five Star's New Jersey and
Connecticut warehouses, totaling approximately $1,589,000 per year through the
first quarter of 2007, and an aggregate of $455,000 for certain equipment leases
through April 2004. The Company's guarantee of such leases was in effect when
Five Star was originally a wholly-owned subsidiary of the Company prior to the
sale by the Company in 1998 of substantially all of the operating assets of Five
Star Group to the predecessor company of Five Star. As part of this transaction,
the landlord of the New Jersey and Connecticut facilities and the lessor of the
equipment did not consent to the release of the Company's guarantee, as part of
its fee under the Management Services Agreement.
GP STRATEGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
17. 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 ("EDS"), 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 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 court due to the MCI bankruptcy described
below.
The defendants other than MCI then made an application to the court to
stay the fraud action until a later-commenced arbitration, alleging breach of
the acquisition agreement and of a separate agreement to refer business to
General Physics on a preferred provider basis, is concluded. In a decision dated
May 9, 2003, the court granted the motion and stayed the fraud action pending
the outcome of the arbitration. Limited discovery was conducted in connection
with the arbitration. The arbitration hearings are scheduled to begin on May 17,
2004 before JAMS, a private dispute resolution firm.
MCI filed for bankruptcy protection in July 2002. As a result, the
action was automatically stayed as to MCI. The Company and its subsidiary,
General Physics, both filed timely Proofs of Claim in the United States
Bankruptcy Court against MCI and WorldCom, Inc., among others. On or around
April 22, 2003, MCI served objections to these Proofs of Claim. 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
February 2004, the Bankruptcy Court granted the motion of the Company and
General Physics to the extent that they sought to have the stay lifted so that
the state court could rule on the merits of MCI's summary judgment motion. On
February 19, 2004, the Company and General Physics notified the state court that
of the Bankruptcy Court's decision.
The Company will make a capital contribution to NPDC, which in turn
will transfer to MXL, the right to receive the first $5 million of any proceeds
(net of certain litigation expenses), and 50% of any proceeds (net of certain
litigation expenses) in excess of $15 million, received with respect to the
foregoing claims.The Company is not a party to any legal proceeding, the
GP STRATEGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
17. Litigation (Continued)
outcome of which is believed by management to have a reasonable
likelihood of having a material adverse effect upon the financial condition and
operating results of the Company.
GP Strategies Supplementary Data
Corporation
and Subsidiaries
SELECTED QUARTERLY FINANCIAL DATA
(unaudited) (in thousands, except per share data)
- ---------------------------- -------------------------------------------------------------------------------------------------------
- ---------------------------- -------------------------------------------------------------------------------------------------------
three months ended
- ---------------------------- -------------------------------------------------------------------------------------------------------
- ---------------------------- ------------ ---------- ----------- ------------ ---------------- ----------- ------------- -----------
March 31, June 30, Sept. 30, Dec. 31, March 31, June 30, Sept. 30, Dec. 31,
2003 2003 2003 2003 2002 2002 2002 2002
- ---------------------------- ------------ ---------- ----------- ------------ ---------------- ----------- ------------- -----------
- ---------------------------- ------------ ---------- ----------- ------------ ---------------- ----------- ------------- -----------
Sales $36,087 $36,038 $34,227 $62,326 $40,226 $39,242 $36,616 $36,149
Gross margin 3,828 4,313 4,613 10,688 5,448 4,905 3,426 3,686
Net income (loss) (703) (2,866) (2,847) (1,860) 205 63 (3,887) (1,609)
Net income (loss) per share:
Basic (.04) (.17) (.16) (.11) .01 (.01) (.24) (.10)
Diluted (.04) (.17) (.16) (.11) .01 (.01) (.24) (.10)
- ---------------------------- ------------ ---------- ----------- ------------ ---------------- ----------- ------------- -----------
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
"Disclosure controls and procedures" are the controls and other
procedures of an issuer that are designed to ensure that information required to
be disclosed by the issuer in the reports filed or submitted by it under the
Securities Exchange Act of 1934, as amended (the "Exchange Act") is recorded,
processed, summarized and reported within the time periods specified in the
Securities and Exchange Commission's rules and forms. These controls and
procedures are designed to ensure that information required to be disclosed by
an issuer in its Exchange Act reports is accumulated and communicated to the
issuer's management, including its principal executive and financial officers,
as appropriate, to allow timely decisions regarding required disclosure.
Under the supervision and with the participation of our management,
including the Company's Chief Executive Officer and Chief Financial Officer, the
Company carried out an evaluation of the effectiveness of the design and
operation of the Company's disclosure controls and procedures pursuant to the
Exchange Act Rule 13a - 14. Based upon the evaluation, the Chief Executive
Officer and Chief Financial Officer concluded that the Company's disclosure
controls and procedures are effective as of December 31, 2003.
There was no change in the Company's internal control over financial
reporting during the quarter ended December 31, 2003 that has materially
affected, or is reasonably likely to materially affect, the internal control
over financial reporting.
PART III
The Company has adopted a Code of Business Conduct and Ethics for
directors, officers and employees of the Company and its subsidiaries, which was
approved by the Company's Audit Committee and Board of Directors. A copy of this
Code of Business Conduct and Ethics is incorporated herein by reference into
this report as Exhibit 14.1. If the Company makes any amendments to the Code of
Business Conduct and Ethics or grants any waiver from a provision of the Code of
Business Conduct and Ethics for its executive officers or directors, the Company
will within five (5) days disclose the nature of such amendment or waiver on its
website at www.gpstrategies.com or in a report on Form 8-K.
All other information required by Items 10, 11, 12, 13, and 14 of Part
III of this Annual Report on Form 10-K is hereby incorporated herein by
reference to the information under the captions "Directors and Executive
Officers of the Registrant", "Executive Compensation", Security Ownership of
Certain Beneficial Owners and Management and Related Stockholder Matters",
"Certain Relationships and Related Transactions", and "Principal Accountant Fees
and Services" in the Proxy Statement for the company's 2004 Annual Meeting of
Shareholders.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K:
a)(1)The following financial statements are included in Part II,
Item 8. Financial Statements and Supplementary Data:
FINANCIAL STATEMENTS OF GP STRATEGIES CORPORATION AND SUBSIDIARIES:
Page
Independent Auditors' Report 52
Financial Statements:
Consolidated Balance Sheets -
December 31, 2003 and 2002 54
Consolidated Statements of Operations -
Years ended December 31, 2003, 2002 and 2001 56
Consolidated Statements of Changes in Stockholders' Equity -
Years ended December 31, 2003, 2002 and 2001 57
Consolidated Statements of Cash Flows -
Years ended December 31, 2003, 2002 and 2001 58
Notes to Consolidated Financial Statements 60
(a)(2) Financial Statement Schedules
Schedule II - Validation and Qualifying Accounts i
Independent Auditors' Report on Schedule ii
(a)(3) Exhibits
*
Consent of KPMG LLP, Independent Auditors
Consent of Eisner LLP, Independent Auditors *
(b) Form 8-K filed on October 13, 2003 reporting an event under Item 5.
Form 8-K filed on October 27, 2003 reporting events under Items 5 and 7.
Form 8-K filed on November 17, 2003 reporting an event under Item 12.
Form 8-K/A filed on December 19, 2003 amending Form 8-K filed on October
13, 2003 reporting events under Items 2 and 7.
* Filed herewith
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
GP STRATEGIES CORPORATION
Jerome I. Feldman
Chief Executive Officer
Dated: April 14, 2004
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated.
Signatures Title
Jerome I. Feldman Chief Executive Officer and Director
(Principal Executive Officer)
Scott N. Greenberg President and Chief Financial Officer and Director
Ogden R. Reid Director
Harvey P. Eisen Director
Roald Hoffmann Director
GP STRATEGIES CORPORATION AND SUBSIDIARIES
SCHEDULE II
- ---------------------------------------------- --------------- ---------------- --------------- ------------------- --------------
Additions
Balance at Additional Charged to Balance at
Beginning Allowance Costs & End of
of Period Acquired(a) Expenses Deductions(b) Period
- ---------------------------------------------- --------------- ---------------- --------------- ------------------- --------------
- ---------------------------------------------- --------------- ---------------- --------------- ------------------- --------------
Year ended December 31, 2003:
Allowance for doubtful accounts (c) $ 854 $ 707 $ 423 $ (245) $ 1,739
- ---------------------------------------------- --------------- ---------------- --------------- ------------------- --------------
Year ended December 31, 2002:
Allowance for doubtful accounts (c) $ 529 $ 823 $ (498) $ 854
- ---------------------------------------------- --------------- ---------------- --------------- ------------------- --------------
- ---------------------------------------------- --------------- ---------------- --------------- ------------------- --------------
Year ended December 31, 2001:
Allowance for doubtful accounts (c) $ 859 $ 102 $ (432) $ 529
- ---------------------------------------------- --------------- ---------------- --------------- ------------------- --------------
(a) Represents the allowance for doubtful accounts acquired as part of the Five
Star and GSE Acquisitions of $700 and $7, respectively.
(b) Write-off of uncollectible accounts, net of recoveries.
(c) Deducted from related asset on Balance Sheet.
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
GP Strategies Corporation
Under date of April 5, 2004, we reported on the consolidated balance sheets of
GP Strategies Corporation and subsidiaries as of December 31, 2003 and 2002, and
the related consolidated statements of operations, changes in stockholders'
equity, and cash flows for each of the years in the three-year period ended
December 31, 2003, as contained in the Annual Report on Form 10-K for the year
ended December 31, 2003. In connection with our audits of the aforementioned
consolidated financial statements, we also have audited the related financial
statement schedule as listed in Item 15. This financial statement schedule is
the responsibility of the Company's management. Our responsibility is to express
an opinion on this financial statement schedule based on our audits.
In our opinion, the related financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.
[GRAPHIC OMITTED][GRAPHIC OMITTED]
KPMG LLP
New York, New York
April 5, 2004
The following is a list of all exhibits filed as part of this Report.
SEQUENTIAL
EXHIBIT NO. DOCUMENT PAGE NO.
3.1 Amendment to the Registrant's Restated
Certificate of Incorporation filed on March
5, 1998. Incorporated herein by reference to
Exhibit 3.1 of the Registrant's Annual Report
on Form 10-K for the year ended December 31,
1997.
3.2 Amended and Restated By-Laws of the
Registrant. Incorporated herein by reference to
Exhibit 1 of the Registrant's Form 8-K filed on
September 1, 1999.
10.1 1973 Non-Qualified Stock Option Plan of the
Registrant, as amended on June 26, 2000.
Incorporated herein by reference to Exhibit
10.1 of the Registrant's Annual Report on
Form 10-K for the year ended December 31,
2000.
10.2 GP Strategies Corporation 2003 Incentive
Stock Plan. Incorporated herein by
reference to Exhibit 4 of the Registrant's Form 10-K
for the quarter ended September 30, 2004.
10.3 GP Strategies' Millennium Cell, LLC Option
Plan. Incorporated herein by reference to Exhibit 10.2
to the Registrant's Annual Report on Form 10-K for the
year ended December 31, 2001.
10.4 Employment Agreement, dated as of June 1,
1999, between the Registrant and Jerome I.
Feldman. Incorporated herein by reference
to Exhibit 10 of the Registrant's Form 10-Q
for the second quarter ended June 30, 1999.
10.5 Amended and Restated Incentive Compensation
Agreement dated as June 11, 2003 between
the Registrant and Jerome I. Feldman.
Incorporated here in by reference to
Exhibit 10 to the Registrant's Form 10-Q
for the Quarter Ended September 30, 2003.
10.6 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. Incorporated herein by
reference to Exhibit 10.1 to the
Registrants Form 10-Q for the Quarter Ended
September 30, 2003.
10.7 Amended and Restated Incentive Compensation
Agreement dated November 17, 2003 between
GP Strategies Corporation and Jerome I.
Feldman. Incorporated herein by reference
to Exhibit 10.2 to the Registrant's Form
10-Q for the Quarter Ended September 30,
2003.
10.8 Employment Agreement, dated as of July 1,
1999, between the Registrant and Scott N.
Greenberg. Incorporated herein by
reference to Exhibit 10.1 of the
Registrant's Form 10-Q for the third
quarter ended September 30, 1999.
10.9 Separation Agreement, dated as of September
3, 2002, between the General Physics
Corporation and John C. McAuliffe.
Incorporated herein by reference to Exhibit
10 of the Registrant's Form 8-K filed on
September 4, 2002.
10.10 Employment Agreement dated as of May 1,
2001 between the Registrant and Andrea D.
Kantor. Incorporated herein by reference
to Exhibit 10 of the Registrant's Form 10-Q
for the second quarter ended June 30, 2001.
10.11 Employment Agreement, dated as of July 1,
1999, between the Registrant and Douglas E.
Sharp.*
10.12 Termination of Merger Agreement, dated
February 11, 2000, to the Agreement and
Plan of Merger dated as of October 6, 1999,
by and among the Registrant, VS&A
Communica- tions Partners III, L.P., VS&A
Communications Parallel Partners III, L.P.,
VS&A-GP, L.L.C. and VS&A-GP Acquisitions,
Inc. Incorporated herein by reference to
Exhibit 10 of the Registrants Form 8-K
filed on February 14, 2000.
10.13 Registrant's 401(k) Savings Plan, dated
January 29, 1992, effective March 1, 1992.
Incorporated herein by reference to Exhibit
10.12 of the Registrant's Annual Report on
Form 10-K for the year ended December 31,
1991.
10.14 Asset Purchase Agreement, dated as of June
3, 1998, by and among SHL Systemhouse Co.,
MCI Systemhouse Corp., SHL Computer
Innovations Inc., SHL Technology Solutions
Limited and General Physics Corporation.
Incorporated herein by reference to Exhibit
10.1 of the Registrant's Form 8-K dated
June 29, 1998.
10.15 Preferred Provider Agreement, dated as of
June 3, 1998, by and among SHL Systemhouse
Co., MCI Systemhouse Corp., SHL Computer
Innovations Inc., SHL Technology Solutions
Limited and General Physics Corporation.
Incorporated herein by reference to Exhibit
10.2 of the Registrant's Form 8-K dated
June 29, 1998.
10.16 Financial and Security Agreement dated
August 13, 2003 by and between General
Physics Corporation, MXL Industries, Inc.
and Wachovia Bank National Association.
Incorporated herein by reference to Exhibit
10.10 to the Registrant's Form 10-Q for the
quarter ended June 30, 2003.
10.17 Guaranty of Payment Agreement dated August
13, 2003 by GP Strategies Corporation for
the benefit of Wachovia Bank, National
Association. Incorporated herein by
reference to Exhibit 10.11 to the
Registrant's Form 10-Q for the quarter
ended June 30, 2003
10.18 Limited Guaranty of Payment Agreement dated
August 13, 2003 by MXL Industries, Inc. for
the benefit of Wachovia Bank, National
Association. Incorporated herein by
reference to Exhibit 10.12 to the
Registrant's Form 10-Q for the quarter
ended June 30, 2003
10.19 Rights Agreement, dated as of June 23,
1997, between National Patent Development
Corporation and Computershare Investor
Services LLC, as Rights Agent, which
includes, as Exhibit A thereto, the
Resolution of the Board of Directors with
respect to Series A Junior Participating
Preferred Stock, as Exhibit B thereto, the
form of Rights Certificate and as Exhibit C
thereto the form of Summary of Rights.
Incorporated herein by reference to Exhibit
4.1 of the Registrant's Form 8-K filed on
July 17, 1997.
10.20 Amendment, dated as of July 30, 1999, to
the Rights Agreement dated as of June 23,
1997, between the Computershare Investor
Services LLC, as Rights Agent.
Incorporated herein by reference to Exhibit
4.2 of the Registrant's report on Form
8-A12B/A filed on August 2, 1999.
10.21 Amendment, dated as of December 16, 1999,
to the Rights Agreement dated as of June
23, 1997, between the Registrant and
Computershare Investor Services LLC, as
Rights Agent. Incorporated herein by
reference to Exhibit 4.2 of the Company's
report on From 8-A12B/A filed on December
17, 1999.
10.22 Consulting and Severance Agreement dated
December 29, 1998 between the Registrant
and Martin M. Pollak. Incorporated herein
by reference to Exhibit 10.10 of the
Registrant's Form 10K for the year ended
December 31, 1998.
10.23 Agreement dated, December 29, 1998, among
the Registrant, Jerome I. Feldman and
Martin M. Pollak. . Incorporated herein by
reference to Exhibit 10.11 of the
Registrant's Form 10K for the year ended
December 31, 1998.
10.24 Amendment No. 1, dated March 22, 1999, to
Agreement dated December 29, 1998 among the
Registrant, Jerome I. Feldman and Martin M.
Pollak. Incorporated herein by reference
to Exhibit 10.12 of the Registrant's Form
10K for the year ended December 31, 1998.
10.25 Agreement dated September 22, 1999 among GP
Strategies Corporation, Jerome I. Feldman
and Martin M. Pollak. Incorporated herein
by reference to Exhibit 9 of Jerome I.
Feldman's Amendment No. 1 to Schedule 13D
filed on September 27, 1999.
10.26 Subscription Agreement dated as of October
19, 2001 between the Registrant and Bedford
Oak Partners, L.P. Incorporated herein by
reference to Exhibit 10.21 to the
Registrant's Annual Report on Form 10-K for
the year ended December 31, 2001.
10.27 Subscription Agreement dated as of May 3,
2002 by and between the Registrant and
Bedford Oak Partners, L.P. Incorporated
herein by reference to Exhibit 10.3 to the
Registrant's Form 10-Q for the second
quarter ended March 31, 2002.
10.28 Investor Rights Agreement dated as of
December 27, 2001 among the Registrant,
Hydro Med Sciences and certain
Institutional Investors. Incorporated
herein by reference to Exhibit 10.23 to the
Registrants Annual Report on Form 10-K for
the year ended December 31, 2001.
10.29 Stock Purchase Agreement dated as of
December 27, 2001 among the Registrant,
Hydro Med Sciences and certain
Institutional Investors. Incorporated
herein by reference to Exhibit 10.24 to the
Registrant's Annual Report on Form 10-K for
the year ended December 31, 2001.
10.30 Right of First Refusal Co-Sale Agreement
dated as of December 27, 2001 among the
Registrant, Hydro Med Sciences and certain
Institutional Investors. Incorporated
herein by reference to Exhibit 10.25 to the
Registrant's Annual Report on Form 10-K for
the year ended December 31, 2001.
10.31 Termination Agreement dated as of December
21, 2001 between Hydro med Sciences and
Shire US Inc. Incorporated herein by
reference to Exhibit 10.26 to the
Registrant's Annual Report on Form 10-K for
the year ended December 31, 2002.
10.32 Stock Purchase Agreement dated as of May
30, 2003, by and among Hydro Med Sciences,
Inc. and Investors.*
10.33 Amendment No. 1 to Stock Purchase Agreement
dated November 18, 2003 by and among Valera
Pharmaceutical, Inc. (f/k/a Hydro Med
Sciences, Inc.) and Investors.*
10.34 Amended and Restated Investor Rights
Agreement dated May 30, 2003, by and among
Hydro Med Sciences, Inc. and Investors.*
10.35 Amended and Restated Investor Right of
First Refusal and Co-Sale Agreement dated as of May
30, 2003 by and among Hydro Med Sciences, Inc. and
Investors.*
10.36 Amended Note dated December 19, 2003 in the
amount of $2,800,000 payable by Five Star
Products, Inc. to JL Distributors, a wholly
owned subsidiary of the Registrant.*
10.37 Amended Note dated March 31, 2003 in the
amount of $2,800,000 payable by Five Star
Products, Inc. to JL Distributors, a wholly
owned subsidiary of the Registrant.*
10.38 Tax Sharing Agreement dated as of February
1, 2004 between Registrant and Five Star
Products.*
10.39 Conversion Letter dated January 22, 2004
between the Registrant and Five Star
Products.*
10.40 Agreement of Subordination & Assignment
dated as of June 30, 2003 by JL
Distributors in Favor of Fleet Capital
Corporation.*
10.41 Stock Purchase Agreement dated as of May 3,
2002 by and between the Registrant and
EGI-Fund(02)04 Investors, L.L.L.
Incorporated herein by reference to Exhibit
10.1 to the Registrant's Form 10-Q for the
second quarter ended March 31, 2002.
10.42 Advisory Services Agreement dated as of May
3, 2002 by and between the Registrant and
Equity Group Investments, L.L.C.
Incorporated herein by reference to Exhibit
10.2 to the Registrant's Form 10-Q for the
second quarter ended March 31, 2002.
10.43 Subscription Agreement dated as of May 3,
2002 by and between the Registrant and
Marshall Geller. Incorporated herein by
reference to Exhibit 10.4 to the
Registrant's Form 10-Q for the second
quarter ended March 31, 2002.
10.44 Form of Officer's Pledge Agreement.
Incorporated herein by reference to Exhibit 10.33 to
the Registrant's Form 10-K for the year ended December
31, 2002.
10.45 Form of Officer's Promissory Note.
Incorporated herein by reference to Exhibit 10.34 to
the Registrant's Form 10-K for the year ended December
31, 2002.
10.46 Sublease Agreement dated as of December 13,
2002 between the Registrant and Austin
Nichols & Company, Inc. Incorporated
herein by reference to Exhibit 10.35 to the
Registrant's Form 10-K for the year ended
December 31, 2002.
10.47 Lease Agreement dated as of July 5, 2002
between the Registrant's wholly-owned
subsidiary, General Physics Corporation and
Riggs Company. Incorporated herein by
reference to Exhibit 10.36 to the
Registrant's Form 10-K for the year ended
December 31, 2002.
10.48 Note and Warrant Purchase Agreement dated
August 8, 2003 among GP Strategies
Corporation, National Patent Development
Corporation and Gabelli Funds, LLC.
Incorporated herein by reference to Exhibit
10.0 to the Registrant's Form 10-Q for the
quarter ended June 30, 2003.
10.49 Form of GP Strategies Corporation 6%
Conditional Subordinated Note due 2008
dated August 14, 2003. Incorporated herein
by reference to Exhibit 10.01 to the
Registrant's Form 10-Q for the quarter
ended June 30, 2003.
10.50 Form of GP Strategies Corporation Warrant
Certificate dated August 14, 2003.
Incorporated herein by reference to Exhibit
10.02 to the Registrant's Form 10-Q for the
quarter ended June 30, 2003.
10.51 Form of National Patent Development
Corporation Warrant Certificate dated
August 14, 2003. Incorporated herein by
reference to Exhibit 10.03 to the
Registrant's Form 10-Q for the quarter
ended June 30, 2003.
10.52 Mortgage Security Agreement and Assignment
of Leases dated August 14, 2003 between GP
Strategies Corporation and Gabelli Funds,
LLC. Incorporated herein by reference to
Exhibit 10.04 to the Registrant's Form 10-Q
for the quarter ended June 30, 2003.
10.53 Registration Rights Agreement dated August
14, 2003 between GP Strategies and Gabelli
Funds, LLC. Incorporated herein by
reference to Exhibit 10.05 to the
Registrant's Form 10-Q for the quarter
ended June 30, 2003.
10.54 Registration Rights Agreement dated August
14, 2003 between National Patent
Development Corporation and Gabelli Funds,
LLC. Incorporated herein by reference to
Exhibit 10.06 to the Registrant's Form 10-Q
for the quarter ended June 30, 2003.
10.55 Indemnity Agreement dated August 14, 2003
by GP Strategies Corporation for the
benefit of National Patent Development
Corporation and MXL Industries, Inc.
Incorporated herein by reference to Exhibit
10.07 to the Registrant's Form 10-Q for the
quarter ended June 30, 2003.
10.56 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. Incorporated
herein by reference to Exhibit 10.08 to the
Registrant's Form 10-Q for the quarter
ended June 30, 2003.
10.57 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 to the Registrant's Form 8-K dated
October 23, 2003.
10.58 Teaming Agreement dated October 21, 2003 by
and between GP Strategies Corporation and
ManTech International. Incorporated herein
by reference to Exhibit 10.2 to the
Registrant's Form 8-K dated October 23,
2003.
10.59 $5,250,955 Promissory Note dated October
21, 2003 of GP Strategies Corporation.
Incorporated herein by reference to Exhibit
10.3 of the Registrant's Form 8-K dated
October 23, 2003.
10.60 Management Service Agreement dated January
1, 2004 between the Registrant and GSE
Systems, Inc. *
10.61 Form of Management Agreement between the
Registrant and National Patent Development
Corporation. Incorporated herein by
reference to Exhibit 10.1 to National
Patent's Form 10 filed on February 12,
2004.
10.62 Form of Management Agreement between
National Patent Development Corporation and
the Registrant. Incorporated herein by
reference to Exhibit 10.2 to National
Patent's Form 10 filed on February 12, 2004.
10.63 Form of Tax Sharing Agreement between the
Registrant and National Patent Development
Corporation. Incorporated herein by
reference to Exhibit 10.4 of National
Patent's Form 10 filed on February 12, 2004.
14.1 Code of Ethics Policy*
18 Not Applicable
19 Not Applicable
20 Not Applicable
21 Subsidiaries of the Registrant*
22 Not Applicable
23 Consent of KPMG LLP, Independent Auditors*
23.1 Consent of Eisner LLP, Independent Auditors*
28 Not Applicable
32.1 Certification Pursuant to Section 18 U.S.C.
Section 1350.*
* Filed herewith.