UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 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
- -------------------------------------------------------------------------------
(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 X No
Indicate the number of shares outstanding of each of issuer's classes of common
stock as of August 12, 2004:
Common Stock 16,481,487 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 -
June 30, 2004 and December 31, 2003 1
Condensed Consolidated Statements of Operations-
Three Months and Six Months Ended June 30, 2004 and 2003 3
Condensed Consolidated Statements of Cash Flows -
Six Months Ended June 30, 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 31
Item 4. Controls and Procedures 32
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 33
Signatures 34
PART I. FINANCIAL INFORMATION
GP STRATEGIES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(in thousands)
June 30, December 31,
2004 2003
---- ----
ASSETS
Current assets:
Cash and cash equivalents $ 3,597 $ 4,416
Accounts and other receivables, net 42,693 39,737
Inventories 25,745 28,300
Costs and estimated earnings in excess
of billings on uncompleted contracts 15,800 14,502
Prepaid expenses and other current assets 5,975 6,705
----------- -----------
Total current assets 93,810 93,660
---------- ----------
Investments and marketable securities 3,131 4,225
Property, plant and equipment, net 8,549 8,994
Intangible assets
Goodwill 62,426 62,395
Patents, licenses and contract rights, net 886 1,031
----------- ------------
63,312 63,426
Deferred tax assets 11,177 11,688
Other assets 5,793 6,330
----------- -----------
Total assets $185,772 $188,323
======== ========
See accompanying notes to the condensed consolidated financial statements.
>
GP STRATEGIES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (Continued)
(Unaudited)
(in thousands)
June 30, December 31,
2004 2003
---- ----
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 476 $ 1,112
Short-term borrowings 30,198 26,521
Accounts payable and accrued expenses 33,599 38,107
Billings in excess of costs and estimated
earnings on uncompleted contracts 8,697 9,922
---------- ----------
Total current liabilities 72,970 75,662
--------- ---------
Long-term debt less current maturities 13,767 13,749
Other non-current liabilities 1,651 1,728
---------- ---------
Total liabilities 88,388 91,139
--------- --------
Minority interests 4,077 4,372
Stockholders' equity:
Common stock 164 163
Class B capital stock 12 12
Additional paid in capital 197,096 196,541
Accumulated deficit (100,918) (101,443)
Accumulated other comprehensive income (loss) (562) 24
Note receivable from stockholder (2,322) (2,322)
Treasury stock, at cost (163) (163)
------------- ------------
Total stockholders' equity 93,307 92,812
---------- ----------
Total liabilities and stockholders' equity $185,772 $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 Six months
ended June 30, ended June 30,
------------------------------ ----------------------------
--------------- -------------- --------------- ------------
2004 2003 2004 2003
---- ---- ---- ----
Sales $76,678 $36,038 $148,519 $72,125
Cost of sales 64,972 31,725 126,347 63,984
------- -------- -------- ------
Gross margin 11,706 4,313 22,172 8,141
Selling, general & administrative expenses (9,829) (6,581) (19,059) (11,004)
-------- --------- ---------- --------
Operating income (loss) 1,877 (2,268) 3,113 (2,863)
Interest expense (850) (592) (1,752) (1,188)
Investment and other income 39 502 122 662
Gain on marketable securities 80 138 381 212
---------- --------- ----------- -------
Income (loss) before income tax expense and
minority interests 1,146 (2,220) 1,864 (3,177)
Income tax expense (536) (646) (978) (392)
--------- --------- ----------- ---------
Income (loss) before minority interests 610 (2,866) 886 (3,569)
Minority interests (216) - (361) -
---------- ------------ ------------ ----------
Net income (loss) $ 394 $(2,866) $ 525 $(3,569)
======== ======== ========== =======
Net income (loss) per share:
Basic and diluted $ 0.02 $ (0.17) $ 0.03 $ (0.21)
======== ========= ========== =========
See accompanying notes to the condensed consolidated financial statements.
GP STRATEGIES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
Six months
ended June 30
------------------------------------
-------------- ---------------------
2004 2003
---- ----
Cash flows from operating activities:
Net income (loss) $ 525 $ (3,569)
Adjustments to reconcile net income (loss) to net cash
(used) provided by operating activities:
Depreciation and amortization 1,872 1,758
Non-cash debt conversion expense, net - 622
Issuance of stock for retirement savings plan 232 628
Non-cash credit to compensation expense (125) (306)
Gain on sales of marketable securities (381) (212)
Changes in other operating items (6,205) 1,695
--------- --------
Net cash (used) provided by operating activities (4,082) 616
--------- ---------
Cash flows from investing activities:
Proceeds from sales of marketable securities 1,012 752
Proceeds from note receivable - 500
Additions to property, plant and equipment (930) (398)
Reduction in investments and other assets, net - (1,043)
---------- ---------
Net cash provided (used) by investing activities 82 (189)
---------- ----------
Cash flows from financing activities:
Proceeds (repayment) of short-term borrowings, net 3,677 (828)
Proceeds from exercised stock options 325 377
Repayments of long-term debt (814) (559)
---------- ----------
Net cash provided (used) by financing activities 3,188 (1,010)
-------- ---------
Effect of exchange rate changes on cash and cash equivalents (7) (106)
----------- -----------
Net decrease in cash and cash equivalents (819) (689)
Cash and cash equivalents at the beginning of the period 4,416 1,516
-------- ---------
Cash and cash equivalents at the end of the period $ 3,597 $ 827
------- ---------
See accompanying notes to the condensed consolidated financial statements.
GP STRATEGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(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 six months ended June 30,
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 six
months ended June 30, 2004. As a result of an issuer tender offer by Five Star,
approximately 2,648,000 shares of common stock were tendered and repurchased by
Five Star effective March 31, 2004 at a cost of $657,000. The effect of the
repurchase was to increase the Company's ownership in Five Star to approximately
64% at March 31, 2004. As of June 30, 2004, the Company owned 58% and 64% of GSE
and Five Star, respectively.
1. Basis of presentation and summary of significant accounting policies
(Continued)
Principles of consolidation and investments
The accompanying Condensed Consolidated Balance Sheet as of June 30, 2004 and
the Condensed Consolidated Statements of Operations and Cash Flows for the three
months and six months ended June 30, 2004 and 2003 have not been audited, but
have been prepared in conformity with accounting principles generally accepted
in the United States for interim financial information and with the instructions
to Form 10-Q and Article 10 of Regulation S-X. These 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 periods 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 its majority-owned and controlled subsidiaries. The minority
interests balance is comprised of the minority ownerships of Five Star and GSE.
All significant intercompany balances and transactions have been eliminated.
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.
On August 16, 2004, the Company announced that the spin-off of NPDC by the
Company did not take place on August 13, 2004 because the Securities and
Exchange Commission (the "SEC") has not yet cleared the required filings. The
Company had previously announced that the spin-off would take place on such
date, subject to SEC clearance.
1. Basis of presentation and summary of significant accounting policies
(Continued)
The delay in the spin-off resulted from the request of the SEC that the spin-off
be effected by means of a prospectus and registration statement under the
Securities Act rather than by means of an information statement and registration
statement under the Exchange Act. While the Company does not believe that there
are currently any substantive issues remaining that will impede its ability to
obtain SEC clearance and believes that it will obtain such clearance
expeditiously, it is difficult to predict when such clearance will be obtained.
The Company will announce the revised date of the spin-off at such time as such
clearance is obtained.
Following the spin-off, the Company will cease to have any ownership interest in
NPDC and NPDC will become an independent publicly traded company.
Reclassifications
Certain prior year amounts in the financial statements and notes thereto have
been reclassified to conform to 2004 classifications.
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 and six months ended June 30, 2004 and 2003 and are as
follows (in thousands, except per share amounts):
1. Basis of presentation and summary of significant accounting policies
(Continued)
Three Months ended Six Months ended
June 30, June 30,
2004 2003 2004 2003
---- ---- ---- ----
Net income (loss) - as reported $ 394 $ (2,866) $ 525 $ (3,569)
Compensation expense, net of tax
Company stock options (54) (295) (138) (396)
GSE stock options (9) - (18) -
Five Star stock options (2) - (4) -
--------- ----------- --------- -----------
Pro forma net income (loss) $ 329 $(3,161) $ 365 $(3,965)
----- -------- ----- --------
Basic and diluted net income (loss) per share
As reported $ 0.02 $ (0.17) $ 0.03 $ (0.21)
Company stock options - $ (0.02) (0.01) $ (0.03)
GSE stock options - - - -
Five Star stock options - - - -
--------- --------- ----------- ---------
Pro forma net income (loss) per share $ 0.02 $ (0.19) $ 0.02 $ (0.24)
------ -------- ------- --------
Company stock options
The per share weighted-average fair value of the Company's stock options granted
during the six months ended June 30, 2004 and 2003 were $1.46 and $2.89,
respectively, on the date of grant using the modified Black Scholes
option-pricing model with the following weighted-average assumptions:
June 30,
2004 2003
---- --------
Expected dividend yield 0% 0%
Risk-free interest rate 1.69% 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 and six month
periods ended June 30, 2004. Outstanding GSE and Five Star options relate to
grants to employees and directors of those companies.
2. Income (loss) per share
Income (loss) per share (EPS) for the three months and six months ended June 30,
2004 and 2003 is as follows (in thousands, except per share amounts):
Three months Six months
ended June 30, ended June 30,
2004 2003 2004 2003
Basic and diluted EPS
Net income (loss) $ 394 $(2,866) $ 525 $(3,569)
------- -------- ------- --------
Basic weighted average shares outstanding 17,634 17,247 17,600 16,866
Dilutive impact of stock options 519 - 548 -
Diluted weighted average shares outstanding 18,153 17,247 18,148 16,866
------- ------- ------ ------
Basic net income (loss) per share $ 0.02 $ (0.17) $ 0.03 $(0.21)
------ -------- ------ -------
Diluted net income (loss) per share (a) $ 0.02 $ (0.17) $ 0.03 $(0.21)
------ -------- ------ -------
Basic net income (loss) per share is based upon the weighted average number of
common shares outstanding, including Class B common shares, during the periods.
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 using the
treasury stock method.
(a) For the three months and six months ended June 30, 2003 presentation of
the dilutive effect of stock options, warrants and convertible notes,
which totaled 476,379 shares, were not included since the effect would
have been anti-dilutive. For the three months and six months ended June
30, 2004 presentation of the dilutive effect of stock options, warrants
and convertible notes, which totaled 2,062,775 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):
- -------------------------------------------------------------- --------------------------- --------------------
June 30, 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) 1,355 1,405
Mortgage on MXL Illinois facility (d) 1,170 1,185
Senior subordinated debentures - 423
AOtec Debt and Notes(e) 813 922
Other 239 437
- -------------------------------------------------------------- --------------------------- --------------------
- -------------------------------------------------------------- --------------------------- --------------------
16,328 17,123
Less warrant related discount, net of accretion (2,085) (2,262)
- -------------------------------------------------------------- --------------------------- --------------------
- -------------------------------------------------------------- --------------------------- --------------------
14,243 14,861
Less current maturities (476) (1,112)
- -------------------------------------------------------------- --------------------------- --------------------
- -------------------------------------------------------------- --------------------------- --------------------
$13,767 $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
proceeds from 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 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
3. Long-term debt (Continued)
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 at the date of purchase, is being amortized to interest
expense until maturity.
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, which will be part of the
Distribution. 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
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
3. Long-term debt (Continued)
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 condensed consolidated
balance sheets and is not included in the table above.
4. Short-term borrowings
General Physics and GSE
General Physics has a two-year $25,000,000 Financing and Security Agreement (the
"Credit Agreement") with a bank, which expires in August, 2006. As of June 30,
2004, borrowings outstanding under the Credit Agreement are secured by accounts
receivable and property, plant and equipment of General Physics. The Credit
Agreement also provides for an unsecured guaranty from the Company.
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
4. Short-term borrowings (Continued)
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 costs and estimated earnings in
excess of billings on uncompleted contracts, up to a maximum of $1,500,000. 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 or LIBOR Market Rate
plus 3.00%, (which as of June 30, 2004 is approximately 4.37%). 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 without approval, incurrence of
debt and the payment of dividends. GP is currently restricted from paying
dividends or management fees to the Company in excess of $1,000,000 in any
fiscal year. GP was in compliance with all loan covenants under the Credit
Agreement as of June 30, 2004. In July 2004, General Physics obtained a waiver
to allow a one-time additional management fee to be paid to the Company.
As of June 30, 2004, the amount outstanding under the Credit Agreement is
approximately $7,723,000, and approximately $9,493,000 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. As of June 30, 2004,
approximately $22,176,000 was outstanding under the Loan Agreement and
approximately $440,000 was available to be borrowed.
4. Short-term borrowings (Continued)
In connection with the Loan Agreement, Five Star also entered into an interest
rate swap with Fleet National Bank on June 20, 2003, 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 assets in the Company's condensed consolidated balance sheets as of
June 30, 2004 and December 31, 2003, had a fair value of $174,000 and $122,000,
respectively.
5. Comprehensive loss
The following are the components of comprehensive loss (in thousands):
Three months ended Six months ended
June 30,______ June 30,_____
------------------------ ---------------------
2004 2003 2004 2003
---- ---- ---- ----
Net income (loss) $ 394 $(2,866) $ 525 $(3,569)
------ -------- ------ --------
Other comprehensive income (loss) before
income tax expense:
Net unrealized gain (loss) on
available-for-sale-securities 88 (135) (826) (1,599)
Net unrealized gain on interest rate swap 352 - 49 -
Foreign currency translation adjustment (53) (45) (112) (106)
-------- ----------- ------- ---------
387 (180) (889) (1,705)
Income tax benefit (expense) relating to
items of other comprehensive income (loss) (172) 54 303 626
--------- ---------- ------- ---------
Comprehensive loss, net of tax $ (61) $(2,992) $ (61) $(4,648)
======== ======== ======== ========
5. Comprehensive loss (Continued)
The components of accumulated other comprehensive income, net are as follows:
June 30, December 31,
2004 2003
---- ----
Net unrealized gain on
available-for-sale-securities $ 787 $1,613
Net unrealized gain on interest rate swap 131 82
Foreign currency translation adjustment (1,122) (1,010)
------- --------
Accumulated income tax expense related to
items of other comprehensive income (loss) (358) (661)
-------- --------
Accumulated other comprehensive (loss) income,
net of tax $ (562) $ 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. 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
6. Business segments
(Continued)
its ownership at that time to 54%. Five Star is consolidated in the Company's
financial statements effective October 8, 2003. Upon the distribution described
in Note 1, Optical Plastics and Home Improvement Distribution will be spun off
to NPDC.
The following tables set forth the sales and operating income (loss) of each of
the Company's operating segments (in thousands):
Three months Six Months ended
ended June 30 June 30
-------------- -------------- --------------- ----------
2004 2003 2004 2003
---- ---- ---- ----
Sales
Manufacturing & Process $ 37,905 $32,349 $ 71,547 $64,587
Information Technology 1,572 1,637 3,089 3,270
Simulation 7,597 - 15,158 -
Optical Plastics 2,302 2,052 4,432 4,268
Home Improvement Distribution 27,302 - 54,293 -
-------------- -------------- --------------- -------------
-------------- -------------- --------------- -------------
$76,678 $36,038 $ 148,519 $72,125
-------------- -------------- --------------- -------------
Three months Six Months ended
ended June 30, June 30
--------------- -------------- --------------- -------------
2004 2003 2004 2003
---- ---- ---- ----
Segment operating income (loss)
Manufacturing & Process $ 1,783 $ 803 $ 2,949 $ 1,249
Information Technology 246 145 437 433
Simulation 438 - 760 -
Optical Plastics (58) (93) (302) (190)
Home Improvement Distribution 780 - 1,462 -
------------- ------------ --------------- -------------
------------- ------------ --------------- -------------
$ 3,189 $ 855 $ 5,306 $ 1,492
--------------- -------------- --------------- -------------
6. Business segments (Continued)
A reconciliation of the segment operating income 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 Six months
ended June 30, ended June 30,
---------------------------- -------------------------------
-------------- ------------- ---------------- --------------
2004 2003 2004 2003
---- ---- ---- ----
Segment operating income $ 3,189 $ 855 $ 5,306 $ 1,492
Corporate and other general and
administrative expenses (1,312) (3,123) (2,193) (4,355)
Interest expense (850) (592) (1,752) (1,188)
Investment and other income 39 502 122 662
Gain on marketable securities 80 138 381 212
- ---------------------------------------------------- -------------- ------------- ---------------- --------------
Income (loss) before income tax
expense and minority interests $ 1,146 ($ 2,220) $ 1,864 ($3,177)
- ---------------------------------------------------- -------------- ------------- ---------------- --------------
7. Pro forma statement of operations information for the three and six
months ended June 30, 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 assuming the acquisitions
had occurred on January 1, 2003, would have been $66,025,000, $(2,941,000), and
$(0.17) for the three months ended June 30, 2003, and $132,302,000,
($3,673,000), and ($0.21), for the six months ended June 30, 2003. 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.
8. 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,
8. Litigation (Continued)
punitive damages in an amount to be determined at trial, and costs.
The complaint, which is pending in the New York State Supreme Court, alleges
that the defendants created a doctored budget to conceal the poor performance of
the United Kingdom operation of Learning Technologies. The complaint also
alleges that the defendants represented that Learning Technologies would
continue to receive new business from Systemhouse even though the defendants
knew that the sale of Systemhouse to EDS was imminent and that such new business
would cease after such sale. In February 2001, the defendants filed answers
denying liability. No counterclaims against the plaintiffs have been asserted.
Although discovery had not yet been completed, defendants made a motion for
summary judgment, which was submitted in April 2002. The motion was denied by
the court due to the MCI bankruptcy described below, but with leave to the other
defendants to renew.
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 and seeking actual damages in the amount
of $17.6 million plus interest, 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 began on May 17, 2004 and concluded on May
24, 2004 before JAMS, a private dispute resolution firm. The Company expects to
receive a ruling on the arbitration hearing during the third quarter of 2004.
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 litigation expenses), and 50% of any proceeds (net of litigation expenses) in
excess of $15 million, received with respect to the foregoing claims.
8. Litigation (Continued)
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 Corporation (GP or
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. The Company will own and operate the manufacturing & process business
and information technology business through its subsidiary, General Physics, 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 March 21, 2003, the Internal Revenue Service issued a favorable tax ruling,
which would enable the Distribution to be tax-free.
On August 16, 2004, the Company announced that the spin-off of National Patent
Development Corporation by the Company did not take place on August 13, 2004
because the Securities and Exchange Commission (the "SEC") has not yet cleared
the required filings. The Company had previously announced that the spin-off
would take place on such date, subject to SEC clearance.
The delay in the spin-off resulted from the request of the SEC that the spin-off
be effected by means of a prospectus and registration statement under the
Securities Act rather than by means of an information statement and registration
statement under the Exchange Act. While the Company does not believe that there
are currently any substantive issues remaining that will impede its ability to
obtain SEC clearance and believes that it will obtain such clearance
expeditiously, it is difficult to predict when such clearance will be obtained.
GP Strategies will announce the revised date of the spin-off at such time as
such clearance is obtained. Following the spin-off, the Company will cease to
have any ownership interest in NPDC and NPDC will become an independent publicly
traded company.
Management expects the spin-off to result in several benefits to the Company and
its shareholders. The Company believes the spin-off 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, 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. The executive will continue as an employee of the
Company, however, he will devote 100% of his time to the performance of his
duties as CEO of GSE. For 2004, GSE will reimburse the Company 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. 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. 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 June 30, 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.
As a result of an issuer tender offer by Five Star, approximately 2,648,000
shares of common stock were tendered and repurchased by Five Star effective
March 31, 2004 at a cost of $657,000. The effect of the repurchase was to
increase the Company's ownership in Five Star to approximately 64%.
Operating Highlights
Three months ended June 30, 2004 compared to the three months ended June 30,
2003 (dollars in thousands)
For the three months ended June 30, 2004, the Company had income before income
tax expense and minority interests of $1,146 compared to a loss of $2,220 for
the three months ended June 30, 2003. The improved results were primarily due to
reduced general and administrative expenses at the corporate level of $1,811; as
well as increased sales and profitability at the segment level, including
approximately $1,218 in operating income from the consolidation of Five Star and
GSE into the Company's condensed consolidated financial statements.
Upon the distribution previously described, Optical Plastics and Home
Improvement Distribution will be spun off to NPDC.
Sales
(dollars in thousands)
Three months ended
June 30,
------------------------------
------------- ----------------
2004 2003
-------- -------
Manufacturing and Process $37,905 $32,349
Information Technology 1,572 1,637
Simulation 7,597 -
Optical Plastics 2,302 2,052
Home Improvement Distribution 27,302 -
------ ------------
$76,678 $36,038
------- -------
The increase in sales of $5,556 by the Manufacturing & Process Segment in the
second quarter of 2004 was primarily due to increased sales related to the
Company's E-learning, Business Process Outsourcing and Domestic Preparedness
initiatives. The increase in sales was partially offset by decreased sales from
engineering and related services in connection with liquefied natural gas
projects and decreased sales in the automotive sector.
The increase in sales of $250 in the Optical Plastics Segment (MXL) in the
second quarter of 2004 was a result of increased revenues from MXL's
Massachusetts facility, which was 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 second quarter of 2004, sales
of GSE and Five Star of $7,597 and $27,302, respectively, are included in the
Company's condensed consolidated statement of operations. GSE comprises the
Company's Simulation Segment and Five Star comprises the Company's Home
Improvement Distribution Segment.
Gross margin
(dollars in thousands)
Three months ended
June 30,
---------------------------------------------------
---------------- --------- ------------- ----------
2004 % 2003 %
-------- - ------- -
Manufacturing and Process $4,181 11.0 $3,601 11.1
Information Technology 334 21.3 305 18.6
Simulation 1,786 23.5 - -
Optical Plastics 465 20.2 407 19.8
Home Improvement Distribution 4,940 18.1 - -_
----- ---- ---------- -----
$11,706 15.3 $4,313 12.0
------- ---- ------ ----
The Manufacturing & Process Segment gross margin of $4,181, or 11.0% of sales,
for the second quarter of 2004 increased by $580, or 16.1%, when compared to
gross margin of $3,601, or 11.1% of sales, for the second quarter of 2003. This
increase was primarily due to increased sales.
The IT Segment gross margin of $334, or 21.3% of sales, for the second quarter
of 2004 increased by $29 or 9.5%, when compared to gross margin of $305, or
18.6% of sales, for the second quarter of 2003. The increase in gross margin
dollars and percentage, despite the decrease in sales, reflects the Company's
focus on increasing project margins.
The Optical Plastics Segment (MXL) gross margin of $465, or 20.2% of sales, for
the second quarter of 2004 increased by $58 or 14.3% when compared to gross
margin of $407, or 19.8% of sales, for the second quarter of 2003, mainly due to
increased sales and improved gross margin percentage from the Massachusetts
facility. The improved gross margin percentage for the Massachusetts facility
resulted from a more favorable product mix and production streamlining efforts
at this facility.
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 second quarter of 2004, gross
margins of GSE and Five Star of $1,786, or 23.5% of sales, and $4,940, or 18.1%
of sales, respectively, are included in the condensed consolidated statement of
operations as part of the Simulation and Home Improvement Distribution Segments,
respectively.
Selling, general, and administrative expenses
(dollars in thousands)
The increase in SG&A of $3,248 in the second quarter of 2004 was primarily
attributable to the inclusion of $1,348 and $4,160 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. The
increase was offset by a reduction of expenses at the Corporate level, due to
the Company's efforts to monitor and control costs.
Interest expense
(dollars in thousands)
The increase in interest expense of $258 in the second quarter of 2004 is
primarily due to the inclusion of interest expense for GSE and Five Star of $16
and $212, 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
(dollars in thousands)
Three Months Ended
June 30,
--------------------------------
-------------- -----------------
2004 2003
---- ----
Investment and other income $ 39 $502
Gain on marketable securities $ 80 $138
The investment and other income for the second quarter of 2004 was primarily
related to interest income on loans receivable. The investment and other income
for the second quarter of 2003 was primarily related to interest income on loans
receivable and other investments of $203, as well as equity in earnings (loss)
of Valera, Five Star and GSE of 465, $34 and ($200), respectfully.
The gain on marketable securities in the second quarter of 2004 and 2003 were
primarily due to the Company's disposal of shares of Millennium.
Income taxes
(dollars in thousands)
For the second quarter of 2004 and 2003, the Company recorded an income tax
expense of ($536) and ($646), respectively, which represents the Company's
applicable federal, state and local, and foreign tax expense for the periods.
Six months ended June 30, 2004 compared to the six months ended June 30, 2003
(dollars in thousands)
For the six months ended June 30, 2004, the Company had income before income tax
expense and minority interests of $1,864 compared to a loss of $3,177 for the
six months ended June 30, 2003. The improved results were primarily due to
reduced general and administrative expenses at the corporate level of $2,162; as
well as increased sales and profitability at the segment level, including $1,899
in operating income from the consolidation of Five Star and GSE into the
Company's condensed consolidated financial statements and an increase of $1,700
in Manufacturing and Process operating income. The increases were offset by a
decrease in investment and other income and gains on sale of marketable
securities of $371 and an increase in interest expense of $564.
Upon the distribution previously described, Optical Plastics and Home
Improvement Distribution will be spun off to NPDC.
Sales
(dollars in thousands)
Six months ended
June 30,
-----------------------------
------------ ----------------
2004 2003
--------- --------
Manufacturing and Process $71,547 $64,587
Information Technology 3,089 3,270
Simulation 15,158 -
Optical Plastics 4,432 4,268
Home Improvement Distribution 54,293 -
---------- ------------
$148,519 $72,125
The increase in sales of $6,960 by the Manufacturing & Process Segment for the
six months ended June 30, 2004 was primarily due to increased sales related to
the Company's E-learning, Business Process Outsourcing and Domestic Preparedness
initiatives. The increase in sales was partially offset by decreased sales from
engineering and related services in connection with liquefied natural gas
projects and decreased sales in the automotive sector.
The increase in sales of $164 in the for the six months ended June 30, 2004 was
a result of the increased revenues from MXL's Massachusetts facility, which was
purchased in September 2003. The increase in sales from the Massachusetts
facility was partly offset by a decrease in sales from the Illinois and
Lancaster facilities, primarily a result of market fluctuations on tool
purchases, lower levels of purchases from several key customers and a
discontinuance of a product line associated with diabetes treatment produced by
one of MXL's most significant customers following the first quarter of 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 six months ended June 30,
2004, sales of GSE and Five Star of $15,158 and $54,293, respectively, are
included in the Company's condensed consolidated statement of operations. GSE
comprises the Company's Simulation Segment and Five Star comprises the Company's
Home Improvement Distribution Segment.
Gross margin
(dollars in thousands)
Six months ended
June 30,
-------------------------------------------
----------- --------- ------------ --------
2004 % 2003 %
---- - ---- -
Manufacturing and Process $7,864 11.0 $6,696 10.4
----
Information Technology 627 20.3 675 20.6
----
Simulation 3,511 23.2 - -
Optical Plastics 761 17.2 770 18.0
----
Home Improvement Distribution 9,409 17.3 - -_
----- ---- ---------- ------
$22,172 14.9 $8,141 11.3
------- ---- ------ ----
The Manufacturing & Process Segment gross margin of $7,864, or 11.0% of sales,
for the six months ended June 30, 2004 increased by $1,168, or 17.4%, when
compared to gross margin of $6,696, or 10.4% of sales, for the six months ended
June 30, 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 $627, or 20.3% of sales, for the six months ended
June 30, 2004 decreased by $29 or 9.5%, when compared to gross margin of $675,
or 20.6% of sales, for the six months ended June 30, 2003. This decrease was due
to slightly decreased sales with the group's costs remaining relatively stable.
The Optical Plastics Segment (MXL) gross margin of $761, or 17.2% of sales, for
the six months ended June 30, 2004 was consistent with gross margin of $770, or
18.0% of sales, for the six months ended June 30, 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 six months ended June 30,
2004, gross margins of GSE and Five Star of $3,511, or 23.2% of sales, and
$9,409, or 17.3% of sales, respectively, are included in the condensed
consolidated statement of operations as part of the Simulation and Home
Improvement Distribution Segments, respectively.
Selling, general, and administrative expenses
(dollars in thousands)
The increase in SG&A of $8,055 for the six months ended June 30, 2004 was
primarily attributable to the inclusion of $2,751 and $7,947 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. The increase was 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
(dollars in thousands)
The increase in interest expense of $564 for the six months ended June 30, 2004
is primarily due to the inclusion of interest expense for GSE and Five Star of
$159 and $366, 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
(dollars in thousands)
Six Months Ended
June 30,
--------------------------------
-------------- -----------------
2004 2003
---- ----
Investment and other income $122 $662
Gain on marketable securities $381 $212
The investment and other income for the six months ended June 30, 2004 was
primarily related to interest income on loans receivable. The investment and
other income for the six months ended June 30, 2003 and 2003 was primarily
related to interest income on loans receivable and other investments of $355, as
well as equity in earnings (loss) of Five Star, GSE and Valera of $143, ($301)
and $465, respectfully.
The gain on marketable securities for the six months ended June 30, 2004 was
primarily due to the Company's disposal of shares of Millennium and Hemispherx
Biopharma, Inc. The gain on marketable securities for the six months ended June
30, 2003 was primarily due to the Company's disposal of shares of Millennium.
Income taxes
(dollars in thousands)
For the six months ended June 30, 2004 and 2003, the Company recorded an income
tax expense of ($978) and ($392), respectively, which represents the Company's
applicable federal, state and local, and foreign tax expense for the periods.
Liquidity and capital resources
(dollars in thousands)
As of June 30, 2004, the Company had cash and cash equivalents totaling $3,597.
The Company believes that cash generated from operations, borrowing availability
under the new credit agreement and cash generated from sales of marketable
securities will be sufficient to fund the working capital and other requirements
of the Company for at least the next twelve months.
For the six months ended June 30, 2004, the Company's working capital increased
by $2,842 from $17,998 to $20,840 which was primarily due to increased accounts
receivable and cost and estimated earnings in excess of billings on uncompleted
contracts, as well as a decrease in accounts payable and accrued expenses,
offset by increased short-term borrowings at Five Star.
The decrease in cash and cash equivalents of $819 for the six months ended June
30, 2004 resulted from cash used by operations of $4,082 offset by cash provided
by investing activities of $82 and cash provided by financing activities of
$3,188. Net cash used by operations of $4,082 primarily consists of changes in
other operating items of $6,205, mainly due to changes in accounts receivable,
accounts payable and accrued expenses, and costs and earnings in excess of
billings on uncompleted contracts; offset by depreciation and amortization
expense of $1,872. Net cash provided by investing activities of $82 consists of
proceeds from sales of marketable securities of $1,012, offset by capital
expenditures of $930. Net cash provided in financing activities of $3,188
consists of proceeds from short-term borrowings of $3,677, proceeds from
exercised stock options of $325, offset by repayments of long-term debt of $814.
On October 23, 2003, the Company purchased from ManTech additional shares of
common in GSE exchange for a 5% note for $5,251 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 as of December 31, 2002. In June 2003, and July 2003 the
Company received partial repayments from Five Star in the amount of $500 each,
reducing the outstanding principal amount of the Five Star Note from $4,500 to
$3,500. On October 8, 2003, the Company exchanged $500 principal amount of the
$3,500 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 to $3,000
and increasing the Company's ownership of the Five Star common stock at that
time to approximately 54%. In December 2003 the Company received a partial
repayment from Five Star in the amount of $200, reducing the outstanding
principal amount of the Five Star Note from $3,000 to $2,800.
General Physics has a two-year $25,000 Financing and Security Agreement (the
"Credit Agreement") with a bank, which expires in August, 2006. As of June 30,
2004, borrowings outstanding under the Credit Agreement are secured by accounts
receivable and property, plant and equipment of General Physics. The Credit
Agreement also provides for an unsecured guaranty from the Company.
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 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 costs and estimated earnings in excess of
billings on uncompleted contracts, up to a maximum of $1,500. 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 or LIBOR Market Rate
plus 3.00%, (which as of June 30, 2004 is approximately 4.37%). 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 without approval, incurrence of
debt and the payment of dividends. GP is currently restricted from paying
dividends or management fees to the Company in excess of $1,000 in any fiscal
year. GP was in compliance with all loan covenants under the Credit Agreement as
of June 30, 2004. In July 2004, General Physics obtained a waiver to allow a
one-time additional management fee to be paid to the Company.
As of June 30, 2004, the amount outstanding under the Credit Agreement is
approximately $7,723 and approximately $9,493 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 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. 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 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.
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 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 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 June 30, 2004, approximately
$22,176 was outstanding under the Loan Agreement and approximately $440 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. No cash payments were made during the six months ended June 30, 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, the timing of the spin-off, 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-15(e) or 15d-15(e) as of the end of period
covered by the 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 as of the evaluation date, 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.
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 August 16, 2004 pursuant to Securities
and Exchange Act Rule 13a-14(a)/15d-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 August 16, 2004 pursuant to Securities
and Exchange Act Rule 13a-14(a)/15d-14(a), as adopted
pursuant to Section 302 and 404 of the Sarbanes-Oxley
Act of 2002.
32.1 Certification of Chief Executive Officer and
Chief Financial Officer of the Company dated August
16, 2004 pursuant to 18 U.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: August 16, 2004 __________________________________
Jerome I. Feldman
Chairman of the Board and
Chief Executive Officer
DATE: August 16, 2004 _________________________________
Scott N. Greenberg
President and Chief Financial Officer