UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[x] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended September 30, 2004
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period from to
Commission File Number: 1-7234
GP Strategies Corporation
(Exact name of registrant as specified in its charter)
Delaware 13-1926739
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
777 Westchester Avenue, White Plains, New York 10604
(Address of principal executive offices) (Zip Code)
(914)-249-9700
(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 November 5, 2004:
Common Stock 16,569,919 shares
Class B Capital 1,200,000 shares
GP STRATEGIES CORPORATION AND SUBSIDIARIES
TABLE OF CONTENTS
Page
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets -
September 30, 2004 and December 31, 2003 2
Condensed Consolidated Statements of Operations-
Three Months and Nine Months Ended September 30, 2004 3
Condensed Consolidated Statements of Cash Flows -
Nine Months Ended September 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 18
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 28
Signatures 29
1
PART I: Financial Information
ITEM I: Consolidated Financial Statements
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
September 30,
2004 December 31,
Assets (Unaudited) 2003
Current assets:
Cash and cash equivalents $ 3,818 4,416
Accounts and other receivables, net 43,063 39,737
Inventories 24,782 28,300
Costs and estimated earnings in excess of billings on uncompleted contracts 19,080 14,502
Prepaid expenses and other current assets 6,202 6,705
------ ------
Total current assets 96,945 93,660
------ ------
Investments, marketable securities and note receivable 2,263 4,225
Property, plant and equipment, net 8,406 8,994
Intangible assets:
Goodwill 62,552 62,395
Patents, licenses and contract rights, net 814 1,031
------- ------
63,366 63,426
Deferred tax assets 11,505 11,688
Other assets 5,436 6,330
------ ------
Total assets $ 187,921 188,323
======= =======
Liabilities and Stockholders' Equity
Current maturities of long-term debt $ 487 1,112
Short-term borrowings 27,852 26,521
Accounts payable and accrued expenses 38,199 38,107
Billings in excess of costs and estimated earnings on uncompleted contracts 8,659 9,922
------- -------
Total current liabilities 75,197 75,662
Long-term debt less current maturities 13,488 13,749
Other non-current liabilities 1,832 1,728
Total liabilities 90,517 91,139
------- -------
Minority interests 4,064 4,372
Stockholders' equity:
Common stock 165 163
Class B capital stock 12 12
Additional paid-in capital 197,282 196,541
Accumulated deficit (100,489) (101,443
Accumulated other comprehensive income (loss) (1,145) 24
Note receivable from stockholder (2,322) (2,322
Treasury stock, at cost (163) (163
-------- -------
Total stockholders' equity 93,340 92,812
-------- -------
Total liabilities and stockholders' equity $ 187,921 188,323
======= =======
See accompanying notes to the condensed consolidated financial statements.
2
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
(Unaudited)
(Dollars in thousands, except per share data)
Three months ended Nine months ended
September 30, September 30,
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
2004 2003 2004 2003
- ---------------------------------------------------------------------------------------------------------------------------
Sales $ 80,257 34,227 228,776 106,352
Cost of sales 68,313 29,614 194,660 93,598
- ---------------------------------------------------------------------------------------------------------------------------
Gross profit 11,944 4,613 34,116 12,754
Selling, general and administrative
expenses (10,409) (6,562) (29,468) (17,566)
------- ----- ------ ------
Operating income (loss) 1,535 (1,949) 4,648 (4,812)
Interest expense (797) (1,471) (2,550) (2,659)
Investment and other income (loss) 167 (562) 290 100
Valuation adjustment of liability for
warrants -- 1,162 -- 1,162
Gain on marketable securities -- 186 381 398
-------- ------ ------ ----------
Income (loss) before
income tax expense and
minority interests 905 (2,634) 2,769 (5,811)
Income tax expense (489) (213) (1,467) (605)
------- ------- ------- -------
Income (loss) before
minority interests 416 (2,847) 1,302 (6,416)
Minority interests 13 -- (349) --
------- ------- --------- --------
Net income (loss) $ 429 (2,847) 953 (6,416)
======= ======= ========= =========
Net income (loss) per share:
Basic and diluted $ 0.02 (0.16) 0.05 (0.38)
======= ======= ========= =======
See accompanying notes to the condensed consolidated financial statements.
3
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
Nine Months Ended September 30, 2004 and 2003
(Unaudited)
(Dollars in thousands)
2004 2003
----- ----
Cash flows from operating activities:
Net income (loss) $ 953 (6,416)
Adjustments to reconcile net income (loss) to net cash (used)
provided by operating activities:
Depreciation and amortization 2,746 2,552
Non-cash debt conversion expense, net -- 622
Valuation adjustment of liability for warrants -- (1,162)
Write-off of deferred financing costs -- 860
Issuance of stock for retirement savings plan 339 846
Non-cash credit to compensation expense (239) (306)
Loss on equity investments, net -- 329
Gain on sales of marketable securities (381) (398)
Changes in other operating items (4,211) 6,569
------ ------
Net cash (used) provided by operating activities (793) 3,496
------- ------
Cash flows from investing activities:
Proceeds from sales of marketable securities 1,012 1,120
Proceeds from note receivable -- 1,000
Additions to property, plant and equipment (1,281) (800)
Reduction in investments and other assets, net -- (1,523)
------- ------
Net cash used by investing activities (269) (203)
------ ------
Cash flows from financing activities:
Proceeds from (repayment of) short-term borrowings, net 1,056 (10,440)
Proceeds from exercised stock options 404 776
Proceeds from issuance of long-term debt -- 8,673
Repayments of long-term debt, including capital leases (993) (853)
-------- -------
Net cash provided (used) by financing activities 467 (1,844)
-------- --------
Effect of exchange rate changes on cash and cash equivalents (3) (102)
-------- ------
Net (decrease) increase in cash and cash equivalents (598) 1,347
-------- -------
Cash and cash equivalents at the beginning of the period 4,416 1,516
--------- -------
Cash and cash equivalents at the end of the period $ 3,818 2,863
======== ========
See accompanying notes to the condensed consolidated financial statements.
4
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Nine months ended September 30, 2004 and 2003
(Unaudited)
(Dollars in thousands, except per share data)
(1) Basis of Presentation and Summary of Significant Accounting Policies
(a) 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.
GSE Systems, Inc. (GSE) is a world leader in real-time power plant
simulation and makes up the Company's Simulation Segment. During
the fourth quarter of 2003 the Company acquired additional shares
of GSE, which brought its ownership interest to 58%. GSE was
consolidated into the Company's condensed consolidated financial
statements as of and for the nine months ended September 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 Home Improvement Distribution Segment.
During the fourth quarter of 2003 the Company acquired additional
shares of Five Star, which brought its ownership interest at that
time to 54%. Five Star was consolidated into the Company's
condensed consolidated financial statements as of and for the nine
months ended September 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. The effect of the repurchase was to
increase the Company's ownership in Five Star to approximately 64%
as of March 31, 2004. As of September 30, 2004, the Company owned
58% and 64% of GSE and Five Star, respectively.
5
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Nine months ended September 30, 2004 and 2003
(Unaudited)
(Dollars in thousands, except per share data)
(b) Principles of Consolidation and Investments
The accompanying condensed consolidated balance sheet as of
September 30, 2004 and the condensed consolidated statements of
operations and cash flows for the three months and nine months
ended September 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 will be comprised of its
training and workforce development business operated by General
Physics and the GSE simulation business. NPDC will 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
November 9, 2004 the Company announced that the Securities and
Exchange Commission (the SEC) had declared effective NPDC's Form
S-1 Registration Statement relating to the spin-off of NPDC. In
the spin-off, holders of record on November 18, 2004 of GP
Strategies common stock and Class B capital stock will receive one
share of NPDC common stock for each share of GP Strategies common
stock or Class B capital stock owned. Shares of NPDC common stock
are expected to be distributed on or about November 24, 2004.
Following the spin-off, the Company will cease to have any
ownership interest in NPDC and NPDC will become an independent
publicly traded company. Effective with the spin-off, the
historical results of NPDC's operations will be presented as
discontinued operations.
(c) Derivatives and hedging activities
Five Star is a party to an interest rate swap agreement designated
as a cash flow hedge whereby changes in the cash flows of the swap
will offset changes in the interest rate payments on the Five
Star's variable-rate revolving loan, thereby reducing Five Star's
exposure to fluctuations in LIBOR. Changes in the fair value of
the interest rate swap are recognized in accumulated other
comprehensive income, net of income taxes.
6
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Nine months ended September 30, 2004 and 2003
(Unaudited)
(Dollars in thousands, except per share data)
(d) 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 No. 123), as amended
by SFAS No. 148, Accounting for Stock-Based Compensation -
Transition and Disclosure.
Proforma net income (loss) 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 nine months ended September 30, 2004 and 2003 and are
as follows:
Three months ended Nine months ended
September 30, September 30,
---------------------------- ----------------------------
------------ ------------- ------------ ------------
2004 2003 2004 2003
------------ ------------- ------------ ------------
Net income (loss) - as reported $ 429 (2,847) 953 (6,416)
Compensation expense, net of
tax:
Company stock options (31) (542) (194) (938)
GSE stock options (9) -- (27) --
Five Star stock options (2) -- (6) --
------------ ------------- ------------ ------------
Pro forma net
income (loss) $ 387 (3,389) 726 (7,354)
============ ============= ============ ============
Basic and diluted net income (loss) per share:
As reported $ 0.02 (0.16) 0.05 (0.38)
Company stock options -- (0.03) (0.01) (0.04)
GSE stock options -- -- -- --
Five Star stock options -- -- -- --
------------ ------------- ------------ ------------
Pro forma net income (loss)
per share $ 0.02 (0.19) 0.04 (0.42)
============ ============= ============ ============
7
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Nine months ended September 30, 2004 and 2003
(Unaudited)
(Dollars in thousands, except per share data)
(e) Company Stock Options
There were no Company stock options granted during the three
months ended September 30, 2004. The per share weighted-average
fair value of the Company's stock options granted during the three
months ended September 30, 2003 and the nine months ended
September 30, 2004 and 2003 were $3.75, $1.46 and $2.74,
respectively, on the date of grant using the modified Black
Scholes option-pricing model with the following weighted-average
assumptions:
Three months Nine months
ended September 30, ended September 30,
2004 2003 2004 2003
--------------- --------------- -------------- --------------
Expected dividend yield -- 0% 0% 0%
Risk-free interest rate -- 2.41% 1.69% 2.00%
Expected volatility -- 75.24% 34.08% 67.61%
Expected life -- 4.0 years 2.0 years 2.5 years
There were no GSE or Five Star options granted during the three
and nine-month periods ended September 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 nine months ended
September 30, 2004 and 2003 is as follows:
Three months ended Nine months ended
September 30, September 30,
---------------------------- ---------------------------
2004 2003 2004 2003
------------ ------------ ------------ ------------
Basic and diluted EPS:
Net income (loss) $ 429 (2,847) 953 (6,416)
============ ============ ============ ============
Basic weighted average shares
outstanding (in thousands) 17,694 17,404 17,628 17,028
Dilutive impact of stock options 511 -- 530 --
Diluted weighted average shares
outstanding 18,205 17,404 18,158 17,028
============ ============ ============ ============
Basic net income (loss) per share $ 0.02 (0.16) 0.05 (0.38)
============ ============ ============ ============
Diluted net income (loss) per share (a) $ 0.02 (0.16) 0.05 (0.38)
============ ============ ============ ============
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
8
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Nine months ended September 30, 2004 and 2003
(Unaudited)
(Dollars in thousands, except per share data)
share in profits and losses and liquidation values as common
stockholders. 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.
For the three months and nine months ended September 30, 2003,
presentation of the dilutive effect of stock options, warrants and
convertible notes, which totaled 3,873,333 shares, were not included
since the effect would have been anti-dilutive. For the three months and
nine months ended September 30, 2004, presentation of the dilutive effect
of stock options, warrants and convertible notes, which totaled 3,041,858
shares and 3,022,868 shares, respectively, were not included since the
effect would have been anti-dilutive.
(3) Long-Term Debt
Long-term debt consists of the following:
September 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) 1,330 1,405
Mortgage on MXL Illinois facility (d) 1,162 1,185
Senior subordinated debentures -- 423
AOtec debt and notes (e) 478 922
Other 242 437
------------------- -------------------
15,963 17,123
Less warrant related discount, net of accretion (1,988) (2,262)
------------------- -------------------
13,975 14,861
Less current maturities (487) (1,112)
------------------- -------------------
$ 13,488 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
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.
9
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Nine months ended September 30, 2004 and 2003
(Unaudited)
(Dollars in thousands, except per share data)
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 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,
which reduced long-term debt at the date of purchase, and 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.
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 $5,251 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,
secured by a mortgage covering the real estate and fixtures on its
property in Pennsylvania. The loan requires monthly repayments of
10
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Nine months ended September 30, 2004 and 2003
(Unaudited)
(Dollars in thousands, except per share data)
$8 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 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,
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 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 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, subject to
adjustment. In connection with this purchase, the Company valued
the machinery and equipment at approximately $900, the inventory
at approximately $300 and recorded accrued expenses of $100. MXL
paid $100 of the purchase price in cash and issued three notes
(collectively, the AOtec Notes), in the amount of $450, $275 and
$275 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 from a bank (the AOtec Debt) to finance the
purchase price and used the proceeds to pay the $450 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 Notes, which amounted to $550
as of September 30, 2004, are classified as short-term borrowings
on the Company's Condensed Consolidated Balance Sheets and are not
included in the table above.
(4) Short-Term Borrowings
(a) General Physics and GSE
General Physics has a two-year $25,000 Financing and Security
Agreement (the Credit Agreement) with a bank which expires in
August 2006. Borrowings outstanding under the Credit Agreement are
secured by accounts receivable and property, plant and equipment
of General Physics. The Credit Agreement is guaranteed by 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 of a part of its fee pursuant to the Management
Services Agreement (described in Item 2, Management's Discussion
and Analysis of Financial Condition and Results of Operations).
The interest rate on the Credit Agreement is at Eurodollar or
LIBOR Market Rate plus 3.00%, (4.84% at September 30, 2004). 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
11
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Nine months ended September 30, 2004 and 2003
(Unaudited)
(Dollars in thousands, except per share data)
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 September 30, 2004. In
July 2004, General Physics obtained a waiver to allow a one-time
additional management fee not to exceed $1,000 to be paid to the
Company in fiscal year 2004.
As of September 30, 2004, the amount outstanding under the Credit
Agreement was approximately $7,858 and approximately $9,983 was
available to be borrowed under the Credit Agreement.
(b) 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 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. As of September 30, 2004,
approximately $19,426 was outstanding under the Loan Agreement and
approximately $2,359 was available to be borrowed.
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. 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
September 30, 2004 and December 31, 2003, had a fair value of $0
and $122, respectively.
12
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Nine months ended September 30, 2004 and 2003
(Unaudited)
(Dollars in thousands, except per share data)
(5) Comprehensive Income (loss)
The following are the components of comprehensive income (loss):
Three months ended Nine months ended
September 30, September 30,
---------------------------- ----------------------------
2004 2003 2004 2003
------------ ------------- ------------ ------------
Net income (loss) $ 429 (2,847) 953 (6,416)
Other comprehensive income (loss)
before income tax expense:
Net unrealized gain (loss) on
available-for-sale securities (877) 1,757 (1,703) 158
Net unrealized loss on interest
rate swap (165) -- (116) --
Foreign currency translation
adjustment 53 4 (59) (102)
------------ ------------- ------------ ------------
(560) (1,086) (925) (6,360)
Income tax benefit (expense) relating
to items of other comprehensive
income (loss) 406 (686) 709 (60)
------------ ------------- ------------ ------------
Comprehensive loss,
net of tax $ (154) (1,772) (216) (6,420)
============ ============= ============ ============
The components of accumulated other comprehensive income (loss), net are
as follows:
September December 31,
2004 2003
------------------- ------------------
Net unrealized gain (loss) on available-for-sale securities $ (90) 1,613
Net unrealized gain (loss) on interest rate swap (34) 82
Foreign currency translation adjustment (1,069) (1,010)
------------------- ----------------
Accumulated other comprehensive income (loss) before tax (1,193) 685
Accumulated income tax benefit (expense) related to items
of other comprehensive income (loss) 48 (661)
------------------- ------------------
Accumulated other comprehensive (loss)
income, net of tax $ (1,145) 24
=================== ===================
13
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Nine months ended September 30, 2004 and 2003
(Unaudited)
(Dollars in thousands, except per share data)
(6) Business Segments
The operations of the Company currently consist of the following five
business operating 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.
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 optical 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.
14
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Nine months ended September 30, 2004 and 2003
(Unaudited)
(Dollars in thousands, except per share data)
The following tables set forth the sales and operating income (loss) of
each of the Company's operating segments:
Three months ended Nine months ended
September 30, September 30,
- ---------------------------------------------------------------------------------------------------------------------
Sales 2004 2003 2004 2003
- ---------------------------------------------------------------------------------------------------------------------
Manufacturing & Process $ 42,592 30,843 114,140 95,430
Information Technology 1,586 1,470 4,674 4,740
Simulation 7,340 -- 22,498 --
Optical Plastics (a) 2,061 1,914 6,493 6,182
Home Improvement Distribution (a) 26,678 -- 80,971 --
----------- -------- -------- ------
$ 80,257 34,227 228,776 106,352
=========== ======== ======== =======
Segment operating income (loss)
- ----------------------------------------
Manufacturing & Process $ 2,528 1,142 5,485 2,380
Information Technology 275 163 704 607
Simulation (163) -- 597 --
Optical Plastics (a) (299) 126 (600) (64)
Home Improvement Distribution (a) 469 -- 1,931 --
----------- ---------- --------- ----------
$ 2,810 1,431 8,117 2,923
============= ========== ========= ===========
(a) The Optical Plastics and Home Improvement Distribution segments will
be spun-off to NPDC on or about November 24, 2004.
A reconciliation of the segment operating income to income (loss) before
income tax expense and minority interests in the condensed consolidated
statements of operations is shown below:
Three months ended Nine months ended
September 30, September 30,
-------------- -------------- --------------- ---------------
2004 2003 2004 2003
-------------- -------------- --------------- ---------------
Segment operating income $ 2,810 1,431 8,117 2,923
Corporate and other general and
administrative expenses (1,275) (3,380) (3,469) (7,735)
Interest expense (797) (1,471) (2,550) (2,659)
Investment and other income 167 600 290 1,262
Gain on marketable securities -- 186 381 398
-------------- -------------- --------------- ---------------
Income (loss) before
income tax expense
and minority interests $ 905 (2,634) 2,769 (5,811)
============== ============== =============== ===============
15
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Nine months ended September 30, 2004 and 2003
(Unaudited)
(Dollars in thousands, except per share data)
(7) Pro Forma Statement of Operations Information for the Three and Nine
Months Ended September 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
$65,763, ($2,727), and ($0.16) for the three months ended September 30,
2003, and $198,065, ($6,400) and ($0.38) for the nine months ended
September 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, 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. On September 10, 2004
General Physics received a $12 million interim award in its arbitration
against EDS. The arbitrator found that the sellers of Learning
Technologies breached certain representations and warranties contained in
the acquisition agreement. The arbitrator directed the parties to attempt
to reach agreement with respect to certain other matters, including
whether General Physics is entitled to pre-award interest and, if so, in
what amount. The parties were unable to reach agreement. The arbitrator
has set forth a briefing schedule, which the parties agreed to modify and
which concluded on November 1, 2004. The interim arbitration award is not
subject to appeal but, once the arbitration award becomes final, General
Physics will file in New York state court an application for an order
confirming the award and EDS will have the right to seek to vacate the
award. The Company will record a gain, net of any expenses, from the
arbitration award, if any, in the period it is realized.
16
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Nine months ended September 30, 2004 and 2003
(Unaudited)
(Dollars in thousands, except per share data)
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.
On July 30, 2004 GP Strategies agreed to make an additional capital
contribution to NPDC in an amount equal to the first $5 million of any
proceeds (net of litigation expenses and taxes incurred, if any), and 50%
of any proceeds (net of litigation expenses and taxes incurred, if any)
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.
17
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, the
Company acquired additional shares of GSE, bringing its ownership to 58%. GSE is
consolidated into the Company's consolidated financial statements as the
Company's Simulation Segment effective October 23, 2003. Also during the fourth
quarter of 2003 the Company acquired 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 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.
In the course of management's evaluation of the Company's internal control over
financial reporting, which is ongoing, the Company has identified areas of
internal control over financial reporting requiring improvement. The Company is
in the process of designing enhanced internal controls to address issues
identified to date.
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, 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 November 9, 2004 the
Company announced that the Securities and Exchange Commission (the SEC) had
declared effective National Patent Development's Form S-1 Registration Statement
relating to the spin-off of NPDC. In the spin-off, holders of record on November
18, 2004 of GP Strategies common stock and Class B capital stock will receive
one share of NPDC common stock for each share of GP Strategies common stock or
Class B capital stock owned. Shares of NPDC common stock are expected to be
distributed on or about November 24, 2004.
Following the spin-off, the Company will cease to have any ownership interest in
NPDC and NPDC will become an independent publicly traded company. Effective with
the spin-off, the historical results of NPDC's operations will be presented as
discontinued operations.
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.
18
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 and thereafter, 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 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 of 2003, 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 the Company
and General Physics totaling $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 and
thereafter, 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 September 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.
19
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%.
Three Months Ended September 30, 2004 Compared To the Three Months Ended
September 30, 2003 (dollars in thousands)
For the three months ended September 30, 2004, the Company had income before
income tax expense and minority interests of $905 compared to a loss of $ 2,634
for the three months ended September 30, 2003. The improved results were
primarily due to increased operating segment income of $1,379, principally by
the Manufacturing & Process and IT segments, as well as reduced general and
administrative expenses at the corporate level of $2,105.
Sales.
The sales by segment for the three months ended September 30, 2004 and 2004 are
as follows:
Three months ended
September 30,
----------------------------------------
------------------ ------------------
2004 2003
------------------ ------------------
Manufacturing & Process $ 42,592 30,843
Information Technology 1,586 1,470
Simulation 7,340 --
Optical Plastics 2,061 1,914
Home Improvement Distribution 26,678 --
------------------ ------------------
$ 80,257 34,227
================== ==================
The increase in sales of $11,749 by the Manufacturing & Process Segment in the
third quarter of 2004 was primarily due to increases in revenue from the
organization's business process outsource and e-Learning businesses. The
business process outsource organization was awarded new contracts from both
government and commercial clients at the end of 2003 and in 2004 to provide
outsourced training management services. The e-Learning organization has been
awarded several new contracts in 2004 with the federal government to provide
hosting and learning management systems integration services. In addition, the
Company's Manufacturing and Process Segment experienced a revenue increase of
approximately $2.0 million in the third quarter of 2004 related to hurricane
relief services provided in the State of Florida. Such revenue is not expected
to be ongoing after the fourth quarter of 2004.
The increase in sales of $147 in the Optical Plastics Segment (MXL) in the third
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 third quarter of 2004, sales
of GSE and Five Star of $7,340 and $26,678, 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 profit.
The gross profit by segment for the three months ended September 30, 2004 and
2004 is as follows:
20
Three months ended September 30,
2004 2003
- ---------------------------------------------------------------------------------------------------------------------
Gross Gross Gross Gross
Profit Profit Margin Profit Profit Margin
- ---------------------------------------------------------------------------------------------------------------------
Manufacturing & Process $ 5,175 12.2% $ 3,810 12.4%
Information Technology 361 22.8% 318 21.6%
Simulation 1,453 19.8% -- --
Optical Plastics 211 10.2% 485 25.3%
Home Improvement Distribution 4,744 17.8% -- --
-------------- ------ ------------ ------
$ 11,944 14.9% $ 4,613 13.5%
========= ====== ============ =======
The Manufacturing & Process Segment gross profit of $5,175, or 12.2% of sales,
for the third quarter of 2004 increased by $1,365, or 36%, when compared to
gross profit of $3,810, or 12.4% of sales for the third quarter of 2003. This
increase in gross profit is primarily driven by increases in revenue from the
organization's business process outsource and e-Learning businesses. The
incremental profit increase was offset slightly by increases in benefits and
expenses due to the growth of the business.
The IT Segment gross profit of $361, or 22.8% of sales, for the third quarter of
2004 increased by $43, or 14%, when compared to gross profit of $318, or 21.6%
of sales for the third quarter of 2003. This increase was primarily due to a
slight increase in revenue and a reduction of overhead expenses in the
organization.
The Optical Plastics Segment (MXL) gross profit of $211, or 10.2% of sales, for
the third quarter of 2004 decreased by $274 or 56% when compared to gross profit
of $485, or 25.3% of sales, for the third quarter of 2003, mainly due to
increases in raw material resin costs and a less favorable product mix.
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 third quarter of 2004, gross
profits of GSE and Five Star of $1,453, or 19.8% of sales, and $4,744, or 17.8%
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. The increase in SG&A of $3,847 in
the third quarter of 2004 was primarily attributable to the inclusion of $1,616
and $4,275 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 of $2,105 at the Corporate level, mainly due to third quarter of 2003
executive bonuses of $1,000 and debt conversion expense of $622.
Interest expense. The decrease in interest expense of $674 in the third quarter
of 2004 was primarily attributable to the Company's write-off to interest
expense in the third quarter of 2003 of deferred financing costs on its prior
credit agreement of $860. The decrease was offset by Five Star interest expense
of $231, being consolidated in the Company's condensed consolidated statement of
operations subsequent to the Five Star Acquisition.
Investment and other income (loss) and gain on sales of marketable securities.
The investment and other income of $167 for the third quarter of 2004 was
primarily related to interest income on loans receivable. The investment and
other loss of $(562) for the third quarter of 2003 was primarily related to
21
interest income on loans receivable and other investments of $73, as well as
equity in earnings (loss) of Valera, Five Star and GSE of ($465), $32 and
($202), respectfully.
The gains on marketable securities of $186 in the third quarter of 2003 were
primarily due to the Company's disposal of shares of Millennium.
Income taxes. For the third quarters of 2004 and 2003, the Company recorded an
income tax expense of $489 and $213, respectively, which represents the
Company's applicable federal, state and local, and foreign tax expense for the
periods. The effective tax rate was 54% and 8% for the third quarters of 2004
and 2003, respectively.
Nine Months Ended September 30, 2004 Compared To Nine Months Ended September 30,
2003
(dollars in thousands)
For the nine months ended September 30, 2004, the Company had income before
income tax expense and minority interests of $2,769 compared to a loss of $5,811
for the nine months ended September 30, 2003. The improved results were
primarily due to increased operating segment income of $5,194, principally by
the Manufacturing & Process segment of $3,105 and $2,528 in operating income
from the consolidation of Five Star and GSE into the Company's condensed
consolidated financial statements, as well as reduced general and administrative
expenses at the corporate level of $4,266.
Sales.
The sales by segment for the nine months ended September 30, 2004 and 2004 are
as follows:
Nine months ended
September 30,
----------------------------
------------- ------------
2004 2003
------------- ------------
Manufacturing & Process $ 114,140 95,430
Information Technology 4,674 4,740
Simulation 22,498 --
Optical Plastics 6,493 6,182
Home Improvement Distribution 80,971 --
------------- ------------
$ 228,776 106,352
============= ============
The increase in sales of $18,710 by the Manufacturing & Process Segment for the
nine months ended September 30, 2004 was primarily due to increased sales
related to increases in revenue from the organization's government training,
business process outsource and e-Learning businesses. The government training
organization was awarded additional chemical demilitarization training work in
2004. The business process outsource organization was awarded new contracts from
both government and commercial clients at the end of 2003 and in 2004 to provide
outsourced training management services. The e-Learning organization has been
awarded several new contracts in 2004 with the federal government to provide
hosting and learning management systems integration services. In addition, the
Company's Manufacturing and Process Segment experienced a revenue increase of
approximately $2.0 million in the third quarter of 2004 related to hurricane
relief services provided in the State of Florida. Such revenue is not expected
to be ongoing after the fourth quarter of 2004. The 2004 revenue increases were
offset by a 2004 decline in training revenue and services provided to the
company's automotive clients.
22
The increase in Optical Plastics sales of $311 for the nine months ended
September 30, 2004 was a result of the increased revenues from MXL's
Massachusetts facility, which was purchased in September 2003. The increased
sales from the Massachusetts facility is partly offset by a decrease in sales
from the Illinois and Lancaster facilities. The decrease in sales from the
Illinois facility is primarily a result of decreased commodity molding
operations and normal market fluctuations on tool purchases. The decrease in
sales from the Lancaster facility are primarily a result of 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 nine months ended September
30, 2004, sales of GSE and Five Star of $22,498 and $80,971, 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 profit.
The gross profit by segment for the nine months ended September 30, 2004 and
2004 is as follows:
Nine months ended September 30,
2004 2003
--------------------------------------------------------------------------
Gross Gross Gross Gross
Profit Profit Margin Profit Profit Margin
--------------------------------------------------------------------------
Manufacturing & Process $ 13,046 11.4% $ 10,506 11.0%
Information Technology 982 21.0% 993 20.9%
Simulation 4,963 22.1% -- --
Optical Plastics 972 15.0% 1,255 20.3%
Home Improvement Distribution 14,153 17.5% -- --
------- -------- ----- -----
$ 34,116 14.9% 12,754 12.0%
========== ========= $ ======== ======
========== ========= ========= ======
The Manufacturing & Process Segment gross profit of $13,046 or 11.4% of sales
for the nine months ended September 30, 2004 increased by $2,540 or 24%, when
compared to gross profit of $10,506, or 11% of sales, for the nine months ended
September 30, 2003. This increase in gross profit is primarily driven by
increases in revenue from the organization's government training, business
process outsource and e-Learning businesses. The incremental profit increase was
offset slightly by increases in benefits and expenses due to the growth of the
business.
The IT Segment gross profit of $982, or 21% of sales for the nine months ended
September 30, 2004 decreased by $11 or 1%, when compared to gross profit of $993
or 20.9% of sales, for the nine months ended September 30, 2003. Gross profit
has remained relatively flat in this organization year over year.
The Optical Plastics Segment (MXL) gross profit of $972 or 15% of sales for the
nine months ended September 30, 2004 decreased by $283 or 23%, when compared to
gross profit of $1,255 or 20.3% of sales, for the nine months ended September
30, 2003, mainly due to increases in raw material resin costs and a less
favorable product mix.
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 nine months ended September
23
30, 2004, gross profits of GSE and Five Star of $4,963 or 22.1% of sales, and
$14,153 or 17.5% 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. The increase in SG&A of $11,902
for the nine months ended September 30, 2004 was primarily attributable to the
inclusion of $4,366 and $12,222 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 of $4,266 at the Corporate level, due to the
Company's efforts to monitor and control costs as well as 2003 executive bonuses
of $2,000 and debt conversion expense of $622.
Interest expense. The decrease in interest expense of $109 for the nine months
ended September 30, 2004 was primarily attributable to the Company's write-off
to interest expense in 2003 of deferred financing costs on its prior credit
agreement of $860. The decrease was offset by GSE and Five Star interest expense
of $164 and $598, 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. The
investment and other income of $290 for the nine months ended September 30, 2004
was primarily related to interest income on loans receivable. The investment and
other income of $100 for the nine months ended September 30, 2003 was primarily
related to interest income on loans receivable and other investments of $430, as
well as equity in earnings (loss) of Five Star and GSE of $174 and ($504),
respectfully.
The gain on marketable securities of $381 for the nine months ended September
30, 2004 was primarily due to the Company's disposal of shares of Millennium and
Hemispherx Biopharma, Inc. The gain on marketable securities of $398 for the
nine months ended September 30, 2003 was primarily due to the Company's disposal
of shares of Millennium.
Income taxes. For the nine months ended September 30, 2004 and 2003, the Company
recorded an income tax expense of $1,467 and $605, respectively, which
represents the Company's applicable federal, state and local, and foreign tax
expense for the periods. The effective tax rate was 53% and 10% for the nine
months ended September 30, 2004 and 2003, respectively.
Liquidity And Capital Resources
(dollars in thousands)
As of September 30, 2004, the Company had cash and cash equivalents totaling
$3,818. 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
On March 21, 2003, the Internal Revenue Service issued a favorable tax ruling,
which would enable the Distribution to be tax-free. The spin-off will be
effective November 24, 2004 and each stockholder of record on November 18, 2004
will receive one share of NPDC common stock for each share of the Company's
common stock or Class B capital stock.
For the nine months ended September 30, 2004, the Company's working capital
increased by $3,750 from $17,998 to $21,748 which was primarily due to increased
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accounts receivable and cost and estimated earnings in excess of billings on
uncompleted contracts, as well as a decrease in billings in excess of costs and
estimated earnings on uncompleted contracts, offset by increased short-term
borrowings at Five Star.
The decrease in cash and cash equivalents of $598 for the nine months ended
September 30, 2004 resulted from cash used by operations of $793 and cash used
by investing activities of $269 and offset by cash provided by financing
activities of $467. Net cash used by operations of $793 primarily consists of
changes in other operating items of $4,211, mainly due to changes in accounts
receivable, inventory, costs and earnings in excess of billings on uncompleted
contracts, and billings in excess of costs and earnings on uncompleted
contracts; primarily offset by depreciation and amortization expense of $2,746.
Net cash used by investing activities of $269 consists of capital expenditures
of $1,281, offset by proceeds from sales of marketable securities of $1,012. Net
cash provided in financing activities of $467 consists of proceeds from
short-term borrowings of $1,056, proceeds from exercised stock options of $404,
offset by repayments of long-term debt of $993.
On October 23, 2003, the Company purchased from ManTech additional shares of GSE
common stock in 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 that expires in August 2006. Borrowings
outstanding under the Credit Agreement are secured by accounts receivable and
property, plant and equipment of General Physics. The Credit Agreement is
guaranteed by 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 of 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%, (4.84% at September 30, 2004). 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
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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 September 30, 2004. In July
2004, General Physics obtained a waiver to allow a one-time additional
management fee not to exceed $1,000 to be paid to the Company in fiscal 2004.
As of September 30, 2004, the amount outstanding under the Credit Agreement was
approximately $7,858 and approximately $9,983 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. The Company used $5,800 of
the proceeds to repay its previous credit facility. The Company and NPDC agreed
to allocate to NPDC $1,875 of the $7,500 received for the Gabelli Notes and
Warrants, which the Company will transfer to NPDC prior to the spin-off of NPDC.
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 September 30, 2004, approximately
$19,426 was outstanding under the Loan Agreement and approximately $2,359 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 nine months ended September 30,
2004.
Forward-Looking Statements
The forward-looking statements contained herein reflect management's 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, the Company's inability to generate funds by selling any assets that are
26
included in the proposed spin-off, the Company's holding company structure,
failure to continue to attract and retain qualified or key 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.
27
Item 3. Quantitative and Qualitative Disclosure About Market Risk
The Company has no material changes to the disclosure on this matter made in its
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 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 been no 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.
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PART II. OTHER INFORMATION
Item 6. Exhibits
10.1 Form of Distribution Agreement between GP Strategies Corporation
and National Patent Development Corporation. Incorporated herein by
reference to Exhibit 2.1 of National Patent Development Corporation
Form S-1, Registration No. 333-118568.
10.2 Form of Management Agreement between GP Strategies Corporation and
National Patent Development Corporation. Incorporated herein by
reference to Exhibit 10.1 of National Patent Development
Corporation Form S-1, Registration No. 333-118568.
10.3 Form of Management Agreement between National Patent Development
Corporation and GP Strategies Corporation. Incorporated herein by
reference to Exhibit 10.2 of National Patent Development
Corporation Form S-1, Registration No. 333-118568.
10.4 Form of Tax Sharing Agreement between GP Strategies Corporation and
National Patent Development Corporation. Incorporated herein by
reference to Exhibit 10.4 of National Patent Development
Corporation Form S-1, Registration No. 333-118568.
31.1 Certification of Chief Executive Officer of the Company dated
November 15, 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
November 15, 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 November 15, 2004 pursuant to
18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.*
_______________________
*Filed herewith
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed in its behalf by the
undersigned thereunto duly authorized.
GP STRATEGIES CORPORATION
Date: November 15, 2004 Jerome I. Feldman
Chairman of the Board,
Chief Executive Officer
Date: November 15, 2004 Scott N. Greenberg
President,
Chief Financial Officer
30