UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 2004
OR
[ ] TRANSITION REPORT PURSAUNT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number: 1-7234
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GP STRATEGIES CORPORATION
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(Exact Name of Registrant as Specified in its Charter)
Delaware 13-1926739
- ------------------------------------ ------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)
777 Westchester Avenue, White Plains, NY 10604
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(Address of principal executive offices) (Zip code)
(914) 249-9700
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange act of 1934 during
the preceding 12 months (or for such shorter period) that the registrant was
required to file such reports and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12(b)-2 of the Exchange Act). Yes No X
--- ---
Indicate the number of shares outstanding of each of issuer's classes of common
stock as of May 12, 2004:
Common Stock 16,420,178 shares
Class B Capital 1,200,000 shares
GP STRATEGIES CORPORATION AND SUBSIDIARIES
TABLE OF CONTENTS
Page No.
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets -
March 31, 2004 and December 31, 2003 1
Condensed Consolidated Statements of Operations-
Three Months Ended March 31, 2004 and 2003 3
Condensed Consolidated Statements of Cash Flows -
Three Months Ended March 31, 2004 and 2003 4
Notes to Condensed Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 20
Item 3. Quantitative and Qualitative Disclosure About Market Risk 27
Item 4. Controls and Procedures 27
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 29
Signatures 30
PART I. FINANCIAL INFORMATION
GP STRATEGIES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(in thousands)
March 31, December 31,
2004 2003
---- ----
ASSETS
Current assets:
Cash and cash equivalents $ 4,308 $ 4,416
Accounts and other receivables, net 42,385 39,737
Inventories 27,967 28,300
Costs and estimated earnings
in excess of billings on uncompleted contracts 16,336 14,502
Prepaid expenses and other current assets 6,818 6,705
----------- -----------
Total current assets 97,814 93,660
---------- ----------
Investments and marketable securities 3,102 4,225
Property, plant and equipment, net 8,735 8,994
Intangible assets
Goodwill 62,432 62,395
Patents, licenses and contract rights, net 958 1,031
------------ ------------
63,390 63,426
Deferred tax assets 11,923 11,688
Other assets 5,698 6,330
----------- -----------
Total assets $190,662 $188,323
======== ========
See accompanying notes to the condensed consolidated financial statements.
GP STRATEGIES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (Continued)
(Unaudited)
(in thousands)
March 31, December 31,
2004 2003
---- ----
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 945 $ 1,112
Short-term borrowings 29,895 26,521
Accounts payable and accrued expenses 38,615 38,107
Billings in excess of costs and estimated
earnings on uncompleted contracts 9,334 9,922
---------- ----------
Total current liabilities 78,789 75,662
--------- ---------
Long-term debt less current maturities 13,755 13,749
Other non-current liabilities 1,852 1,728
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Total liabilities 94,396 91,139
--------- --------
Minority interests 3,861 4,372
Stockholders' equity:
Common stock 163 163
Class B capital stock 12 12
Additional paid in capital 196,804 196,541
Accumulated deficit (101,312) (101,443)
Accumulated other comprehensive income (loss) (777) 24
Note receivable from stockholder (2,322) (2,322)
Treasury stock, at cost (163) (163)
----------- ------------
Total stockholders' equity 92,405 92,812
---------- ----------
Total liabilities and stockholders' equity $190,662 $188,323
======== ========
See accompanying notes to the condensed consolidated financial statements.
GP STRATEGIES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except per share data)
Three months
ended March 31,
2004 2003
---- ----
Sales $71,841 $36,087
Cost of sales 61,375 32,259
------ ------
Gross profit 10,466 3,828
Selling, general & administrative expenses (9,230) (4,423)
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Operating income (loss) 1,236 (595)
Interest expense (902) (596)
Investment and other income, net 83 160
Gain on sales of marketable securities 301 74
-------- ------
Income (loss) before income tax (expense) benefit and
minority interests 718 (957)
Income tax (expense) benefit (441) 254
-------- -------
Income (loss) before minority interests 277 (703)
Minority interests (146) -
--------- ---------
Net income (loss) $ 131 $ (703)
======= =======
Net income (loss) per share:
Basic and diluted $ .01 $ (.04)
======== ========
See accompanying notes to the condensed consolidated financial statements.
GP STRATEGIES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
Three months
ended March 31
-------------------------------------
--------------- ---------------------
2004 2003
---- ----
Cash flows from operating activities:
Net (loss) income $ 131 $ (703)
Adjustments to reconcile net (loss) income to net cash
used in operating activities:
Issuance of stock for retirement savings plan 45 290
Depreciation and amortization 875 837
Non-cash credit to compensation expense (167) (306)
Gain on sales of marketable securities (301) (74)
Changes in other operating items (4,518) (746)
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Net cash used in by operating activities (3,935) (702)
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Cash flows from investing activities:
Proceeds from sales of marketable securities 872 266
Additions to property, plant and equipment (374) (412)
Reduction in investments and other assets, net - 354
--------- --------
Net cash provided by investing activities 498 208
------ --------
Cash flows from financing activities:
Proceeds from short-term borrowings 3,374 304
Proceeds from exercised stock options 218 104
Repayments of long-term debt (266) (223)
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Net cash provided by financing activities 3,326 185
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Effect of exchange rate changes on cash and cash equivalents 3 (61)
-------- -----------
Net decrease in cash and cash equivalents $ (108) $ (370)
Cash and cash equivalents at the beginning of the period 4,416 1,516
-------- ---------
Cash and cash equivalents at the end of the period $ 4,308 $ 1,146
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See accompanying notes to the condensed consolidated financial statements.
GP STRATEGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of presentation and summary of significant accounting policies
Description of business
GP Strategies Corporation (the "Company") currently consists of 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.
GSE Systems, Inc. ("GSE") is a world leader in real-time power plant simulation
and makes up the Company's new Simulation Segment. During the fourth quarter of
2003 due to the Company's acquisition of additional shares of GSE, which brought
its ownership interest to 58%, GSE is consolidated into the Company's condensed
consolidated financial statements as of and for the three months ended March 31,
2004. 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. Five Star Products, Inc. ("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. During the fourth quarter of 2003, due to
the Company's acquisition of additional shares of Five Star, which brought its
ownership interest at that time to 54%, Five Star is consolidated into the
Company's condensed consolidated financial statements as of and for the three
months ended March 31, 2004.
Principles of consolidation and investments
The accompanying Condensed Consolidated Balance Sheet as of March 31, 2004 and
the Condensed Consolidated Statements of Operations and Cash Flows for the three
months ended March 31, 2004 and 2003 have not been audited, but have been
prepared in conformity with accounting principles generally accepted in the
GP STRATEGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
1. Basis of presentation and summary of significant accounting policies
(Continued)
United States for interim financial information and with the instructions to
Form 10-Q and Article 10 of Regulation S-X. These Condensed Consolidated
Financial Statements should be read in conjunction with the audited consolidated
financial statements for the year ended December 31, 2003 as presented in our
Annual Report on Form 10-K/A. In the opinion of management, this interim
information includes all material adjustments, which are of a normal and
recurring nature, necessary for a fair presentation. The results for the 2004
interim period are not necessarily indicative of results to be expected for the
entire year.
The condensed consolidated financial statements include the operations of the
Company and, except for Valera Pharmaceuticals ("Valera") as discussed below,
its majority-owned subsidiaries. The minority interests balance is comprised of
the 46 % minority share in Five Star and 42 % 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 or 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 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 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.
1. Basis of presentation and summary of significant accounting policies
(Continued)
Stock based compensation
The Company applies Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" ("APB No. 25") and related interpretations in
accounting for its plans, as permitted under Statement of Financial Accounting
Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation" ("SFAS
123"), as amended by SFAS No. 148 "Accounting for Stock-Based Compensation -
Transition and Disclosure."
Proforma net income and net income (loss) per share as if the Company recorded
compensation expense based upon the fair value of stock-based awards at the
grant date have been presented in accordance with the provisions of SFAS No 123,
for the three months ended March 31, 2004 and 2003 and are as follows (in
thousands, except per share amounts):
Three Months ended March 31,
2004 2003
---- ----
Net income (loss) - As reported $ 131 $ (703)
Compensation expense, net of tax
Company stock options (84) (81)
GSE stock options (9) -
Five Star stock options (2) -
-------- ----------
Pro forma net income (loss) $ 36 $ (784)
------ ------
Basic and diluted income (loss) per share
As reported $ .01 $ (.04)
Company stock options (.01) (.01)
GSE stock options - -
Five Star stock options - -
--------- ----------
Pro forma net income (loss) per share $ .00 $ (.05)
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Company stock options
The per share weighted-average fair value of stock options granted during the
three months ended March 31, 2004 and 2003 were $1.46 and $2.89, respectively,
1. Basis of presentation and summary of significant accounting policies
(Continued)
on the date of grantusing the modified Black Scholes option-pricing model with
the following weighted-average assumptions:
March 31,
2004 2003
---- ----
Expected dividend yield 0% 0%
Risk-free interest rate 1.70% 2.45%
Expected volatility 34.08% 78.76%
Expected life 2 years 4 years
There were no GSE and Five Star options granted during the three months ended
March 31, 2004. Outstanding GSE and Five Star options relate to grants to
employees and directors of those companies.
Reclassifications
Certain prior year amounts in the financial statements and notes thereto have
been reclassified to conform to 2004 classifications.
2. Income (loss) per share
Income (loss) per share (EPS) for the three months ended March 31, 2004 and 2003
is as follows (in thousands, except per share amounts):
Three months
ended March 31,
---------------------------
2004 2003
---- ----
Basic and diluted EPS
Net income (loss) $ 131 $ (703)
------ --------
Basic weighted average shares outstanding 17,574 16,581
Dilutive impact of stock options 593 -
Diluted weighted average shares outstanding 18,167 16,581
------ -------
Basic net income (loss) per share $ .01 $ (.04)
-------- ----------
Diluted net income (loss) per share (a) $ .01 $ (.04)
-------- ----------
2. Income (loss) per share (Continued)
Basic net income (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 stock holders. Diluted net income (loss) per
share is based upon the weighted average number of common shares outstanding and
potentially dilutive securities outstanding, which are calculated in accordance
with the treasury stock method.
(a) For the three months ended March 31, 2003 presentation of the dilutive
effect of stock options, warrants and convertible notes, which totaled 245,510
shares, were not included since the effect would have been anti-dilutive.
3. Long-term debt
Long-term debt consists of the following (in thousands):
- ------------------------------------------------------- ------------------ ---------------------
March 31, December 31,
2004 2003
- ------------------------------------------------------- ------------------ ---------------------
6% conditional subordinated notes due 2008 (a) $7,500 $7,500
ManTech Note (b) 5,251 5,251
Mortgage on MXL Pennsylvania facility (c) 1,380 1,405
Mortgage on MXL Illinois facility (d) 1,178 1,185
Senior subordinated debentures 395 423
AOtec Debt (e) 868 922
Other (f) 301 437
- ------------------------------------------------------- ------------------ ---------------------
- ------------------------------------------------------- ------------------ ---------------------
16,873 17,123
- ------------------------------------------------------- ------------------ ---------------------
- ------------------------------------------------------- ------------------ ---------------------
Less warrant related discount, net of accretion (2,173) (2,262)
- ------------------------------------------------------- ------------------ ---------------------
- ------------------------------------------------------- ------------------ ---------------------
14,700 14,861
Less current maturities (945) (1,112)
- ------------------------------------------------------- ------------------ ---------------------
- ------------------------------------------------------- ------------------ ---------------------
$13,755 $13,749
- ------------------------------------------------------- ------------------ ---------------------
(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.
3. Long-term debt (Continued)
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 prior to February 2005, the Noteholders
will have the right to require the Company to redeem the Gabelli Notes in 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.
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.
(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
3.Long-term debt (Continued)
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 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 (collectively, the "AOtec 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. 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") 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. The Aotec Note due August 5, 2004 of $275,000 is
classified as short-term borrowings on the Company's Consolidated Balance Sheets
and is not included in the table above.
(f) Represents primarily capital lease obligations for equipment.
4. Short-term borrowings
General Physics and GSE
On August 13, 2003, General Physics, General Physics' 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.
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, MXL's accounts receivable were eliminated from the borrowing base
and no prepayment was required by General Physics under the Credit Agreement.
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. At March 31, 2004, GSE's available borrowing base was
$1,500,000, none of which had been utilized. 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 as part of its fee pursuant to the Management Services
Agreement.
The interest rate on the Credit Agreement is at Eurodollar plus 3.00%, (which as
of March 31, 2004 is approximately 4.0%). 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
4. Short-term borrowings (Continued)
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 March 31, 2004.
As of March 31, 2004, the amount outstanding under the Credit Agreement is
approximately $6,941,000, and approximately $7,643,000 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 Star
achieves and maintains certain performance benchmarks. At March 31, 2004,
approximately $22,644,000 was outstanding under the Loan Agreement and
approximately $1,980,000 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 interest rate swap, which is included in other
liabilities in the Company's condensed consolidated Balance Sheets as of March
31, 2004 and December 1, 2003, had a fair value of a liability of $196,000 and
an asset of $122,000, respectively.
5. Comprehensive loss
The following are the components of comprehensive loss (in thousands):
5. Comprehensive loss (Continued)
Three months
Ended March 31,
----------------------------------------------
----------------------- ----------------------
2004 2003
---- ----
Net (loss) income $131 $ (703)
----------
Other comprehensive loss before tax:
Net unrealized loss on
available-for-sale-securities (914) (1,464)
Net unrealized loss on interest rate swap (303)
Foreign currency translation adjustment (59) (61)
---------- ------------
Other comprehensive loss, before tax (1,145) (1,525)
Income tax benefit relating to items
of other comprehensive loss 475 572
-------- -----------
Comprehensive loss, net of tax $ (670) $ (1,656)
======= =========
The components of accumulated other comprehensive income, net are as follows:
March 31, December 31,
2004 2003
---- ----
Net unrealized gain on
available-for-sale-securities $ 699 $1,613
Net unrealized gain (loss) on interest rate swap (221) 82
Foreign currency translation adjustment (1,069) (1,010)
------- --------
Accumulated other comprehensive income (loss)
before tax (591) 685
Accumulated income tax expense related to
items of other comprehensive income (loss) (186) (661)
------- --------
Accumulated other comprehensive (loss) income,
net of tax $ (777) $ 24
======= =======
6. 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.
6. Business segments (Continued)
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 real-time simulation,
homeland security and engineering services for the energy, process and military
industries. The Company acquired additional shares of GSE in fourth quarter of
2003, bringing its ownership to 58%. 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 the fourth quarter of 2003, bringing
its ownership at that time to 54%. Five Star is consolidated in the Company's
financial statements effective October 8, 2003.
The following tables set forth the sales and operating income (loss) of each of
the Company's operating segments (in thousands):
Three months
ended March 31,
-------------------------------
--------------- ---------------
2004 2003
---- ----
Sales
Manufacturing & Process $33,642 $32,238
Information Technology 1,517 1,633
Simulation 7,561 -
Optical Plastics 2,130 2,216
Home Improvement Distribution 26,991 -
--------------- ---------------
--------------- ---------------
$71,841 $36,087
--------------- ---------------
6. Business segments (Continued)
Three months
ended March 31,
-------------------------------
--------------- ---------------
Operating income (loss) 2004 2003
---- ----
Manufacturing & Process $ 1,166 $ 445
Information Technology 191 289
Simulation 322
Optical Plastics (244) (97)
Home Improvement Distribution 682
--------------- ---------------
--------------- ---------------
$ 2,117 $ 637
--------------- ---------------
A reconciliation of the total operating income reported for the operating
segments to income (loss) before income tax (expense) benefit and minority
interests in the condensed consolidated statements of operations is shown below
(in thousands):
Three months
ended March 31,
--------------------
--------------------
2004 2003
---- ----
Total segment operating income $2,117 $ 637
Corporate and other general and administrative expenses (881) (1,232)
Interest expense (902) (596)
Investment and other income, net 83 160
Gain on sales of marketable securities 301 74
- ------------------------------------------------------- --------- -------
Income (loss) before
income tax (expense) benefit and minority interests $ 718 $(957)
- ------------------------------------------------------- --------- --------
7. Restructuring charges
During 1999 and 2000, the Company adopted restructuring plans, primarily related
to its IT business segment. During the three months ended March 31, 2004, the
Company utilized $116,000 of the restructuring reserve and recorded
restructuring charges of $32,000. Of the remaining total restructuring balance
of $1,010,000 at March 31, 2004 and $1,094,000 at December 31, 2003, $46,000 and
$72,000, respectively, were included in accounts payable and accrued expenses
and $964,000 and $1,022,000, respectively, were included in other non-current
liabilities in the condensed consolidated balance sheet.
The remaining components of the restructuring charge reserve as of March 31,
2004 and December 31, 2003 consist solely of lease and related obligations.
Lease obligations are presented at their present value, net of assumed sublets.
8. Financial guarantees
On March 23, 2003, the Company extended its guarantee of up to $1,800,000 of
GSE's debt pursuant to then existing GSE's credit facility. GSE's credit
facility was scheduled to expire on March 23, 2003; however, it was extended
until March 31, 2004. In consideration for the extension of the guarantee, the
Company received 150,000 shares of GSE common stock with a value of $180,000.
9. Pro forma statement of operations information for the three months ended
March 31, 2003
As discussed in note 1, the Company's condensed consolidated statements of
operations include the results of Five Star and GSE effective October 2003. Pro
forma sales, net loss and diluted net loss per share for the three months ended
March 31, 2003, assuming the acquisitions had occurred on January 1, 2003, would
have been $66,277,000, ($732,000), and ($.04), respectively. The pro forma
information is presented for comparative purposes only and may not be indicative
of what would have occurred had the acquisitions actually occurred on that date,
nor is it indicative of future operating results.
10. Litigation
On January 3, 2001, the Company commenced an action alleging that MCI
Communications Corporation ("MCI"), MCI's Systemhouse subsidiaries
("Systemhouse"), and Electronic Data Systems Corporation, as successor to
Systemhouse ("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
10. Litigation (Continued)
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.
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and
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 is 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 at that
time to 54%, Five Star is 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 64% 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 is
currently revising its documents to provide updated financial information and to
reflect SEC comments and expects to file shortly with the SEC.
Management expects the spin-off to result in several benefits to the Company and
its shareholders. By engaging in the spin-off, the Company believes it will
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. Management believes that by having two separate public
companies, financial markets will be able to more effectively evaluate each
company, thereby enhancing stockholder value over the long term for both
companies and making the stock of each more attractive as currency for future
acquisitions. Management believes the spin-off will provide NPDC's management
with increased strategic flexibility and decision-making power to realize
significant growth opportunities, and believes that 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. 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 ManTech 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. 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. 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 2004, GSE will reimburse the
Company $300,000 ($75,000 per quarter) for his compensation and benefits. 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. The term of the agreement is one year, during which
GSE will pay an annual fee to General Physics of $685,000 ($171,250 per
quarter). 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 amount of the Five Star Note, which had a
principal balance of $2.8 million as of March 31, 2004. 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.
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 2,628,000 shares of common
stock were tendered and acquired by Five Star. Five Star made full payment of
$657,000 to the depository on April 6, 2004. The effect of the tender offer was
to increase the Company's ownership in Five Star to approximately 64%.
Operating Highlights
For the quarter ended March 31, 2004, the Company had income before income tax
(expense) benefit and minority interests of $718,000 compared to a loss of
$957,000 in the first quarter of 2003. The improved results were primarily due
to reduced general and administrative expenses at the corporate level; as well
as increased sales and profitability at the segment level, including
approximately $651,000 in pre-tax income from the consolidation of Five Star and
GSE into the Company's condensed consolidated financial statements.
Sales
Quarter ended March 31, (in thousands) 2004 2003
- ------------------------------------------- ---------------- ----------------
- ------------------------------------------- ---------------- ----------------
Manufacturing & Process $33,642 $32,238
Information Technology 1,517 1,633
Simulation 7,561 -
Optical Plastics 2,130 2,216
Home Improvement Distribution 26,991 -
- ------------------------------------------- ---------------- ----------------
$71,841 $36,087
- ------------------------------------------- ---------------- ----------------
The increase in sales of $1,404,000 by the Manufacturing & Process Segment in
the first quarter of 2004 was primarily due to increased revenue related to the
Company's E-learning, Business Process Outsourcing and Domestic Preparedness
initiatives. The increase in revenue was partially offset by decreased revenue
from engineering and related services in connection with liquefied natural gas
projects.
The decrease in sales of $116,000 in the IT Segment in the first quarter 2004
was primarily due to the Company's continued focus on higher margin projects by
declining certain work with lower margins.
For the first quarter of 2004, the Optical Plastics Segment (MXL) sales
decreased by $86,000 as a result of lower levels of purchases from several key
customers, and a discontinuance of a product line associated with a diabetes
treatment produced by one of MXL's most significant customers. The decrease was
partly offset by increased revenue from MXL's Massachusetts facility, purchased
in September 2003.
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, for the first quarter of 2004, sales
of GSE and Five Star of $7,561,000 and $26,991,000, respectively, are included
in the Company's Condensed Consolidated Statement of Operations. GSE comprises
the Company's new Simulation Segment and Five Star comprises the Company's new
Home Improvement Distribution Segment.
Gross margin
- ---------------------------------------- ---------------------- ----------------
Quarter ended March 31, (in thousands) 2004 2003
- ---------------------------------------- ----------- ---------- ------- --------
% %
Manufacturing & Process $3,684 11.0 $3,095 9.6
Information Technology 293 19.3 370 22.6
Simulation 1,725 16.9
Optical Plastics 296 13.9 363 16.4
Home Improvement Distribution 4,468 16.6
Valera
- ---------------------------------------- ----------- ---------- ------- --------
- ---------------------------------------- ----------- ---------- ------- --------
$10,466 14.6 $3,828 10.6
- ---------------------------------------- ----------- ---------- ------- --------
The Manufacturing & Process Segment gross margin of $3,684,000, or 11%, for the
first quarter of 2004 increased by $589,000, or 1.4%, when compared to gross
margin of $3,095,000, or 9.6%, for the first quarter of 2003. This increase was
primarily due to increased sales, as well as the Company's efforts to monitor
and control costs.
The IT Segment gross margin of $293,000, or 19.3%, for the first quarter of 2004
decreased by $77,000 or 3.3%, when compared to gross margin of $370,000, or
22.6%, for the first quarter of2003. This decrease was due to slightly decreased
sales with the group's costs remaining relatively stable.
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, for the first quarter of 2004, gross
margins of GSE and Five Star of $1,725,000, or 16.9%, and $4,468,000, or 16.6%,
respectively, are included in the Condensed Consolidated Statement of Operations
as part of the new Simulation and Home Improvement Distribution Segments,
respectively.
Selling, general, and administrative expenses
The increase in SG&A of $4,807,000 in the first quarter as compared to 2003 was
primarily attributable to the inclusion of $1,403,000 and $3,786,000 of SG&A for
GSE and Five Star, respectively, being consolidated in the Company's Condensed
Consolidated Statement of Operations subsequent to the GSE and Five Star
acquisitions, offset by a reduction of expenses at the Corporate and General
Physics levels, due to the Company's efforts to monitor and control costs.
Interest expense
Interest expense was $902,000 in the first quarter of 2004, and $596,000 in the
first quarter of 2003. The increase in interest expense is due to the inclusion
of interest expense for GSE and Five Star of $143,000 and $155,000,
respectively, being consolidated in the Company's Condensed Consolidated
Statement of Operations subsequent to the GSE and Five Star Acquisitions.
Investment and other income and gain on sales of marketable securities
Quarter ended March 31, (in thousands) 2004 2003
Investment and other income $ 83 $160
Gain on sales of marketable securities 301 74
The investment and other income for the first quarters of 2004 and 2003 was
primarily related to interest income on loans receivable.
The gain on sales of marketable securities in the first quarter of 2004 was
primarily due to the Company's disposal of shares of Millennium and Hemispherx
Biopharma, Inc. The gain on sales of marketable securities in the first quarter
2003 was primarily due to the Company's disposal of shares of Millennium.
Income taxes
For the first quarter of 2004 and 2003, the Company recorded an income tax
(expense) benefit of ($441,000) and $257,000, respectively, which represents the
Company's applicable federal, state and local, and foreign tax expense for the
periods.
Liquidity and capital resources
As of March 31, 2004, the Company had cash and cash equivalents totaling
$4,308,000. 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 quarter ended March 31, 2004, the Company's working capital increased by
$1,027,000 from $17,998,000 to $19,025,000 which was primarily due to increased
accounts receivable and cost and estimated earnings in excess of billings on
uncompleted contracts, offset by increased short-term borrowings at Five Star.
The decrease in cash and cash equivalents of $108,000 for the quarter ended
March 31, 2004 resulted from cash used by operations of $3,935,000 offset by
cash provided in investing activities of $498,000 and cash provided in financing
activities of $3,326,000. Net cash used by operations of $3,935,000 primarily
consists of changes in other operating items of $4,518,000, mainly due to
changes in accounts receivable and costs and earnings in excess of billings on
uncompleted contracts; offset by depreciation and amortization expense of
$875,000. Net cash provided by investing activities of $498,000 consists of
proceeds from sales of marketable securities of $872,000, offset by capital
expenditures of $374,000. Net cash provided in financing activities of
$3,326,000 consists of proceeds from short-term borrowings of $3,374,000,
proceeds from exercised stock options of $218,000, offset by repayments of
long-term debt of $266,000.
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 Man Tech Note,
ManTech will have the option to convert up to 20% of the original principal
amount of the Man Tech 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 Man Tech 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 Man Tech Note is repaid in cash.
Five Star was 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 Five Star 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 August 13, 2003, General Physics, General Physics' 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. As of March 31, 2004, the amount
outstanding under the Credit Agreement is approximately $6,941,000, and
approximately $7,643,000 was available to be borrowed under the Credit
Agreement.
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 prior to February 2005, the Noteholders will have the
right to require the Company to redeem the Gabelli Notes in 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.
GSE previously had a $1,500,000 bank line of credit. 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 of GSE's indebtedness, in March 2003 the Company received 150,000
shares of GSE common stock, with a value of $180,000.
On March 30, 2004, GSE was added as an additional borrower under the General
Physics Credit Agreement and GSE's previous bank agreement was terminated. 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
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. At March 31, 2004, GSE's
available borrowing base was $1,500,000, none of which had been utilized. 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 as part of its fee
pursuant to the Management Services Agreement.
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. At March 31, 2004,
approximately $22,644,000 was outstanding under the Loan Agreement and
approximately $1,980,000 was available to be borrowed.
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. From June 20, 2003 through December 31, 2003 (as
discussed above) Five Star made three cash payments to the Company for a total
of $1,200,000. No cash payments were made during the three months ended March
31, 2004.
Forward-looking statements
The forward-looking statements contained herein reflect managements'
current expectations regarding future growth, results of operations, performance
and business prospects and opportunities. Wherever possible, words such as
"anticipate," "believe," "plan," "expect" and similar expressions have been used
to identify these forward- looking statements. These statements reflect the
Company's current beliefs and are based on information currently available to
the Company. Except as otherwise required by federal securities law, the company
is not obligated to update or revise these forward-looking statements to reflect
new events or circumstances. Accordingly, these statements are subject to
certain risks and uncertainties which could cause the Company's actual growth,
results, performance and business prospects and opportunities to differ from
those expressed in, or implied by these statements, including, but not limited
to, 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 the Company's periodic
reports and registration statements filed with the Securities and Exchange
Commission.
Item 3. Quantitative and Qualitative Disclosure About Market Risk
We have no material changes to the disclosure on this matter made in
our report on Form 10-K/A for the fiscal year ended December 31, 2003.
Item 4. Controls and Procedures
a. Evaluation of disclosure controls and procedures. The Company's
Chief Executive Officer and Chief Financial Officer have reviewed and evaluated
the effectiveness of the Company's disclosure controls and procedures (as
defined in Exchange Act Rules 240.13a-14(c) and 15d-14(c)) as of a date within
ninety days before the filing date of this quarterly report. Based on that
evaluation, the Chief Executive Officer and Chief Financial Officer have
concluded that the Company's current disclosure controls and procedures are
effective, providing them with material timely information relating to the
Company required to be disclosed in the reports the Company files or submits
under the Exchange Act.
b. Changes in internal controls. There have not been any significant
changes in the Company's internal controls or in other factors that could
significantly affect these controls subsequent to the date of their evaluation.
There were no significant deficiencies or material weaknesses and therefore no
corrective actions were taken.
GP STRATEGIES CORPORATION AND SUBSIDIARIES
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
31.1 Certification of Chief Executive Officer of the
Company dated May 17, 2004 pursuant to Securities and
Exchange Act Rule 13d-14(a)/15(d-14(a), as adopted
pursuant to Section 302 and 404 of the Sarbanes-Oxley
Act of 2002.
31.2 Certification of Chief Financial Officer of the
Company dated May 17, 2004 pursuant to Securities and
Exchange Act Rule 13d-14(a)/15(d-14(a), as adopted
pursuant to Section 302 and 404 of the Sarbanes-Oxley
Act of 2002.
32.2 Certification of Chief Executive Officer and
Chief Financial Officer of the Company dated May 17,
2004 pursuant to 18U.S.C. Section 1350 as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
b. Reports on Form 8-K
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed in its behalf by the
undersigned thereunto duly authorized.
GP STRATEGIES CORPORATION
DATE: May 17, 2004 Jerome I. Feldman
Chairman of the Board and
Chief Executive Officer
DATE: May 17, 2004 Scott N. Greenberg
President and
Chief Financial Officer