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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1997
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 of Incorporation) (I.R.S. Employer Identification No.)
9 West 57th Street, New York, NY 10019
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (212) 826-8500
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of each exchange on which registered:
Common Stock, $.01 Par Value New York Stock Exchange, Inc.
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. / /
As of March 2, 1998, the aggregate market value of the outstanding shares of the
Registrant's Common Stock, par value $.01 per share, held by non-affiliates
(assuming for this calculation only that all officers and directors are
affiliates) was approximately $133,419,544 based on the closing price of the
Common Stock on the American Stock Exchange on March 2, 1998. None of the Class
B Capital Stock, par value $.01 per share, was held by non-affiliates.
Indicate the number of shares outstanding of each of the Registrant's classes of
common stock, as of the most recent practicable date.
Class Outstanding at March 2, 1998 Common Stock, par value $.01 per share
10,671,598 shares Class B Capital Stock, par value $.01 per share 62,500 shares
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive Proxy Statement for its 1998 Annual
Meeting of Stockholders are incorporated by reference into Part III hereof.
TABLE OF CONTENTS
Page
PART I
Item 1. Business
(a) General Development of Business 1
(b) Financial Information About
Industry Segments 1
(c) Narrative Description of Business 1
(d) Financial Information About Foreign
and Domestic Operations and Export
Sales 17
Item 2. Properties 18
Item 3. Legal Proceedings 18
Item 4. Submission of Matters to a Vote of
Security Holders 18
PART II
Item 5. Market for the Registrant's Common
Equity and Related Stockholder Matters 19
Item 6. Selected Financial Data 20
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations 21
Item 7A. Quantitative and Qualitative Disclosures About
Market Risk 29
Item 8. Financial Statements and Supplementary Data 30
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 74
PART III
Item 10. Directors and Executive Officers of the Registrant 74
Item 11. Executive Compensation 74
Item 12. Security Ownership of Certain
Beneficial Owners and Management 74
Item 13. Certain Relationships and Related Transactions 74
PART IV
Item 14. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K 75
PART I
ITEM 1. BUSINESS
(a) General Development of Business
GP Strategies Corporation (formerly National Patent Development
Corporation), incorporated in Delaware in 1959, is a New York Stock Exchange
listed company with established operating businesses and investments in several
publicly traded companies. The Company's operations consist of three operating
business segments:
Physical Science, Distribution and Optical Plastics.
The Company has taken significant steps in the past year to transform
itself from a holding company into an operating company focusing on providing
training, technical and educational services through its wholly owned operating
subsidiary General Physics Corporation ("General Physics"). In addition to the
Company's General Physics operating subsidiary, the Company's two other
operating subsidiaries consist of Five Star Group, Inc., a wholesale distributor
of home decorating, hardware and finishing products and MXL Industries, Inc.,
which manufactures and distributes coated and molded plastic products.
The Company's recent name change on March 5, 1998 is consistent with
the Company's strategy of attempting to increase sales and profitability within
the commercial training group of General Physics through internal growth and
acquisitions.
(b) Financial Information About Industry Segments
Certain financial information about business segments (classes of
similar products or services) is included in Note 16 of Notes to Consolidated
Financial Statements.
(c) Narrative Description of Business
PHYSICAL SCIENCE GROUP
GENERAL PHYSICS CORPORATION
Organization and Operations
General Physics, with approximately 1500 employees in 40 offices
primarily located in the United States, provides performance improvement
services to Fortune 500 companies in the manufacturing and process industries,
electric power utilities, and other commercial and governmental customers.
General Physics believes it is a global leader in performance
improvement, with over three decades of experience in providing systematic
training to optimize work force performance. Since 1966, General Physics has
provided clients with the products and services they need to successfully
integrate their people, processes and technology - the elements most critical to
the successful realization of any organization's goal.
General Physics' services are very broad and include customized
curriculum, instruction and development in operating new equipment and
facilities efficiently and safely, properly maintaining existing equipment, and
instruction in engineering, math, English, leadership training and team
building. At manufacturing and process facilities, multinational corporations,
power plants, military installations and government research centers in the U.S.
and abroad, General Physics provides training, engineering, and technical
services designed to assist work forces in meeting operational challenges, cost
management objectives and performance goals.
General Physics has three operating business units that serve diverse
customers. These units are Workforce Development and Training, Applied
Technology, and Facility and Process Technology. These units provide in-depth
industry knowledge with expertise in training and customized curriculum design
and development as well as on-site and interactive employee instruction. The
Workforce Development and Training Group focuses on training for Fortune 500 and
other commercial customers in the industrial and manufacturing sectors. The
Applied Technology Group focuses on the development of new technologies to meet
the training, management and operational challenges to commercial and
governmental clients. The Facility and Process Technology Group provides
engineering and technical support services to industrial companies, power plant
owners, including electric utilities, governmental clients as well as clients in
the aerospace industry.
General Physics was incorporated in 1966 to provide technical
consulting services in the field of nuclear science and engineering services to
nuclear power companies and government agencies. General Physics expanded its
operations in the late 1960's to provide, among other things, training and
technical support services to the commercial nuclear power industry. General
Physics expanded its markets even further in the late 1980's to provide training
and technical support services to United States Government nuclear weapons
production and waste processing facilities, and environmental services to
governmental and commercial clients.
In 1994, General Physics further expanded it range of capabilities, as
well as its governmental clients, by acquiring the design engineering, seismic
engineering, systems engineering, materials management and safety analysis
businesses of Cygna Energy Services, and by acquiring the management and
technical training and engineering consulting businesses of GPS Technologies,
Inc.
On January 23, 1997, stockholders of each of the Company and General
Physics voted to approve the merger of a wholly-owned subsidiary of the Company
with General Physics pursuant to which General Physics became a wholly-owned
subsidiary of the Company (the "Merger"). The Merger was completed on January
24, 1997. Under the terms of the Merger Agreement, holders of General Physics
Common Stock received .60 shares of the Company's Common Stock for each share of
General Physics common stock. The Company issued an aggregate of 3,028,574
shares of its Common Stock valued at $25,228,000 in the transaction.
In March 1997, General Physics was awarded a contract by the U.S.
Navy's Fleet and Industrial Supply Center Norfolk, Detachment Washington, to
provide naval aviation training development and support services for Naval Air
Systems Command. The anticipated revenues of the contract over its initial
one-year term and four option years, if all option years are exercised, are
estimated to be approximately $32,000,000.
In March 1997, General Physics was awarded a contract by Westinghouse
Savannah River Company ("WSRC") to provide environmental restoration services at
the DOE's Savannah River Site. The contract is one of three awarded to
successful contractors who will competitively bid for work to be awarded in the
future under separate delivery orders. General Physics assists WSRC in
developing and implementing environmental studies, programs and projects that
address the Resource Conservation and Recovery Act (RCRA) and Comprehensive
Environmental Response, Compensation and Liability Act (CERCLA) needs at the
Savannah River Site. The total value of all tasks to be awarded to the three
contractors over the five-year term of the contract is approximately $60 million
at the rate of approximately $12 million per year. However, the actual value of
the contract to General Physics will depend upon the value of individual
delivery orders awarded to General Physics. During 1997, General Physics was
awarded delivery orders totaling approximately $600,000 under the contract.
In mid-1997, General Physics launched an "enterprise resource planning"
initiative to provide change management, documentation, end-user training and
maintenance engineering support related to Enterprise-Wide Software
Applications, such as those sold by the Baan Company, SAP and Oracle Corp.
General Physics is a Baan Education Alliance Program member.
In July 1997, General Physics entered into a multi-year training
services agreement with a wholly-owned subsidiary of Fluor Daniel, Facility and
Plant Services, Inc., under which General Physics will develop and implement the
technical training component of comprehensive workforce preparation solutions
designed by Facility and Plant Services. Under the Agreement, General Physics
will be the exclusive provider of technical training solutions to Facility and
Plant Services' customers. The value of tasks awarded to General Physics in 1997
under the Agreement was approximately $6 million.
During 1997, General Physics formed an alliance with Primedia (formerly
Westcott Communications) to develop and deliver workplace training via satellite
broadcasts to subscribers. The Primedia venture, called Workplace Training
Network ("WTN"), began broadcasts in January 1998.
Effective January 1, 1998, General Physics acquired substantially all
of the assets and operations of United Training Services, Inc. ("UTS"). UTS
provides training and consulting services to the U.S. automotive industry and to
other commercial customers, including Ford Motor Company, Chrysler Corporation,
IBM Corporation and MBNA.
General Physics' performance is significantly affected by the timing of
performance on contracts. Results of operations are not seasonal, since
contracts are performed throughout the year.
While General Physics continues to provide services to the U.S.
Government and the commercial nuclear power industry, it has focused its
marketing resources on expanding management and technical training services to
manufacturing and process industries, and specialized engineering services to
federal agencies and process industries. Since 1995, General Physics has
experienced growth in these areas and anticipates future growth to come from
these areas.
Customers
General Physics currently provides services to more than 525 customers.
Significant customers include major automotive manufacturers, commercial nuclear
utilities, the Department of the Navy, the Department of the Air Force, the
Department of the Army, major defense and DOE contractors, and other large,
multinational companies. Revenue from the United States Government accounted for
approximately 43% of General Physics' revenue for the year ended December 31,
1997. However, such revenue was derived from many separate contracts and
subcontracts with a variety of Government agencies and contractors that are
regarded by General Physics as separate customers. In 1997, except for General
Motors Corporation, which accounted for approximately 14% of General Physics
revenue, no other customer accounted for more than 10% of General Physics'
revenue.
Workforce Development and Training Group
The Workforce Development and Training Group focuses on training and
human performance improvement needs of Fortune 500 and other commercial
companies. The Workforce Development and Training Group provides workforce
training and other related services to customers in the industrial and
manufacturing market sectors. This Group analyzes the human, organizational and
technical issues confronting its customers and recommends programs to improve
performance.
Fortune 500 and Other Commercial Customers
Fortune 500 and other commercial customers represent a wide range of
industries with diverse technical and geographic needs. These industries include
automotive, utility, forest products, steel, food and beverage, oil and gas,
pharmaceutical and others.
General Physics anticipates that the need for its services with Fortune
500 and other commercial customers will continue to grow. However, there can be
no assurance that such need will continue to grow or that such companies will
select General Physics over its competitors to provide such services.
Automotive Services
General Physics is a full-service training provider for the automotive
industry. Since 1987, General Physics has participated in a strategic business
partnership with the General Motors ("GM") Corporate Organization and Employee
Development Staff, which is now a part of General Motors University. Each year
several thousand GM employees attend courses conducted by General Physics.
Additionally, training and consulting services are provided on a project basis
to many divisions of GM, including GM Overseas operations in China, Europe,
Southeast Asia, South America and Central America. General Physics also provides
training and consulting services to Chrysler Corporation and Ford Motor Company
as well as many of the automotive supplier companies.
Industrial Training Services
General Physics develops and provides customized training programs to
the metals, forest products, food and beverage, and petrochemical industries.
These services focus on continuous improvement in the maintenance and operations
aspects of plants and facilities. General Physics supports several customers by
providing complete process line or facility start-up services. Customers include
Georgia Pacific Corp., Anheuser-Busch, Inc., Mobil Oil Company, USX Corporation
and Aramco Services Company.
Manufacturing Services
General Physics offers training and technical services to manufacturing
concerns. General Physics frequently supports the introduction of new work
practices associated with lean manufacturing, self-directed work teams and
engineering. General Physics' combination of technical skills and work practices
training helps meet the needs of a diverse customer base, including Ford
Electronics, Inland Steel, USX Corporation and Bell and Howell - Postal Systems,
Inc.
Energy Services
General Physics furnishes a wide variety of training, engineering,
technical and management support services to the commercial nuclear power
industry, specializing in services which improve plant operation and maintenance
and ultimately increase plant availability. General Physics has provided
services at one time or another to virtually all of the commercial nuclear power
plants in the United States. Services provided include development of training
programs and materials; conduct of training, development and upgrade of
operations and maintenance procedures; development and implementation of
preventative maintenance programs; plant configuration management; training
simulator maintenance and modification; staff augmentation; and computer based
training (CBT) development and implementation. Major customers include General
Electric Company, Public Service Electric & Gas Company, Entergy Operations,
Inc. and Commonwealth Edison Company.
General Physics also provides services designed to improve the
operations of conventional utility power plants, gas turbine combined cycle and
cogeneration plants, waste-to-energy plants, and industrial facilities. These
services include plant operations and maintenance documentation, simulator
training programs, computer based training (CBT) development and implementation,
plant startup engineering, maintenance management systems, and plant operations
and maintenance training. Major customers include Entergy Operations, Inc.,
Cogentrix and Metropolitan Washington Airport Authority.
International Operations
General Physics maintains international operations in Kuala Lumpur,
Beijing, Mexico City and London offering substantially the same services as are
offered in the United States. Customers include electric utilities, independent
power producers, automobile manufacturers and parts suppliers, pulp and paper
companies, steel manufacturers and major petroleum refiners.
Enterprise Solutions
General Physics' Enterprise Solutions team provides Enterprise Resource
Planning in the form of change management, documentation, end-user training and
maintenance engineering support related to Enterprise Wide Software
Applications. The Enterprise Solutions team includes support for products
developed by the Baan Company, Oracle Corp. and SAP. General Physics is a Baan
Education Alliance Program member.
Facility and Process Technology Group
General Physics' Facility and Process Technology Group provides
engineering and technical support services to clients to help them
cost-effectively realize their goals, whether involving new designs,
modification of existing facilities and systems, regulatory compliance, or
improved operations and maintenance. The Facility and Process Technology Group
brings experience, knowledge, skill and judgment to the U.S. Government,
aerospace research and test facilities, numerous utilities, and the process
industry.
The Facility and Process Technology Group's commercial customers
include clients on the Fortune 500 directory of industrial companies; power
plants owners, including electric utilities (nuclear and fossil fuel); and
independent power producers. Governmental clients include NASA, DOE, Department
of Transportation, Air Force, Army and Navy research, development, test and
evaluation laboratories and centers.
Specializing in technologies, processes, and equipment which are
critical to these markets, the Facility and Process Technology Group's services
are designed to provide customers with improved performance as well as
regulatory compliance by increasing efficiency, reliability, and availability of
plants and facilities. Service offerings range from computer aided design to
construction management to environmental engineering to an online monitoring
system that continuously checks the efficiency of operations.
General Physics' Facility and Process Technology Group, with over 20
years of applied engineering and management experience in helping clients
increase efficiency and reduce risk, is consistently recognized for exceptional
performance. General Physics' clients call upon the Facility and Process
Technology Group to address their global competitive challenge, especially when
that challenge requires significant capital investment in plants and facilities,
and presents a potential risk to the workforce and the environment.
Process Industry Services
General Physics has expanded its services to the process industry which
includes pharmaceutical, chemical, and petrochemical clients. Contract work
includes regulatory compliance, process equipment, and performance and
maintenance engineering. This work complements technical training and other
related services provided by General Physics. Many clients request
confidentiality, however others include Lyondell-Citgo, PPG, BFGoodrich, Witco,
Pharmacia-Upjohn, and Merck, Inc.
Energy Services
General Physics continues to support the electric power generation
business with systems engineering, regulatory support, performance engineering,
and plant technical services. Assistance to nuclear utilities with licensing and
related support was expanded through General Physics' alliance with GE Power
Systems Group. General Physics' performance engineering services have enabled
electric power generation clients to reduce operational costs, important for the
deregulation ongoing in this industry. A major client is Entergy Operations,
Inc., where General Physics has provided software and engineering support for
plant efficiency improvement.
Aerospace Facilities
An outgrowth of General Physics' services to NASA and the Air Force has
been work in support of commercial aerospace vehicle development and test
facilities. General Physics provides design, analysis, inspection and test
services for systems and equipment used for rocket engine development and
testing. Major customers include Rocketdyne, now a part of Boeing, and Aerojet
Corporation. These and other companies are looking to capture an expected growth
market for space launches.
U.S. Government Services
General Physics supports major government research, development, and
test centers across the country with facility design and modification,
engineering and inspection, environmental services, and systems engineering.
Larger contracts include environmental services for U.S. Army, Aberdeen Proving
Ground; technical support services, such as new rocket propulsion facility and
system design, and program support for USAF, Research Laboratory; engineering
and inspection of wind tunnels and pressure systems at USAF Arnold Engineering
Development Center and NASA's Lewis Research Center; engineering design,
technical documentation development, and environmental services for the DOE,
Savannah River Site; and systems engineering and computer science for new combat
systems for The Johns Hopkins University, Applied Physics Laboratory.
Applied Technology Group
The Applied Technology Group includes General Physics Federal Systems,
Inc., a wholly-owned subsidiary of General Physics. The Applied Technology Group
provides services in three defined market sectors: DOD, Other Government and
Information Technology ("IT"). The DOD market sector represents nearly 80% of
this Group's operating revenues, while the Other Government and IT sectors are
approximately equally represented in the remaining 20% of operating revenues.
General Physics provides a wide range of services to its government
clients. These services fall into four "core competencies": training material
development and delivery using the Instructional System Development (ISD) model,
configuration management and the full range of Integrated Logistics Support
(ILS) disciplines, Information Technology services, and multimedia development.
Within each of these four areas, the Group has met rigorous qualification and
certification requirements mandated by government agencies.
Major Naval command customers include NAVSEA, Naval Undersea Warfare
Center, and Naval Surface Warfare Center. Additionally, this Group provides
services to other agencies of the Federal Government, including the Department
of the Army, Department of Energy, Defense Finance Accounting Service ("DFAS"),
Department of Treasury, and Department of Justice.
Applied Technology and Undersea Warfare
General Physics provides engineering services to United States
Navy-related activities, particularly the Naval Undersea Warfare Center, which
is headquartered in Newport, Rhode Island, with detachments throughout the
United States. General Physics has considerable computerized Information Systems
Management expertise and is noted for its Bar Coded Inventory Management, Local
Area Network and Wide Area Network design and administration capabilities and
the development of Electronic Interactive technical manuals.
Systems Command Services
General Physics specializes in providing program and financial
management services for Department of Defense ("DOD") commands in support of
major weapon systems acquisitions, including providing the United States Navy
with training/trainer products and services, including Submarine Operational
Readiness Assessment and Training. General Physics also maintains full-service
broadcast quality video production and computer-generated animation facilities
and has developed more than 500 instructional hours of computer-based training,
linear videotape and interactive video disc/CDROM productions.
Government Services
General Physics provides financial, specialty software and office
automation training through contracts with EDS. The training is customer
tailored for specific end-users, including the Department of Defense-DFAS and
the Department of Justice-Immigration and Naturalization Service. General
Physics provides specialized anti-submarine warfare technical services and
training, including development of computer-based training used at the Naval
Aviation Warfare Operator Training School.
U.S. Army Services
General Physics operates the training center in Edgewood, Maryland
supporting the United States Army's chemical weapons demilitarization program.
General Physics provides training for personnel who will operate and maintain
demilitarization plants at seven locations across the country. General Physics
has trained chemical demilitarization specialists from Russia as part of an
effort to introduce U.S. technology and approaches for Russian chemical
munitions demilitarization programs. In addition, General Physics is a
subcontractor to Westinghouse at the Anniston Army Depot, with responsibility
for training and operations engineering in support of Westinghouse's contract to
destroy chemical weapons.
DOE Services
At the DOE's Savannah River site, General Physics provides professional
services in such areas as training program design, development and accreditation
assistance, technical support and quality assurance and various other operations
support services. General Physics also has technical services contracts at many
of the DOE's research laboratories, including Princeton Plasma Physics
Laboratory and Brookhaven National Laboratory.
Contracts
General Physics is currently performing under approximately 1020
contracts, providing charges on a time-and-materials, a fixed-price or a cost
reimbursable basis. General Physics' subcontracts with the United States
Government have predominantly been cost reimbursable contracts and fixed-price
contracts. General Physics is required to comply with the Federal Acquisition
Regulations and the Government Cost Accounting Standards with respect to
services provided to the United States Government and agencies thereof. These
Regulations and Standards govern the procurement of goods and services by the
United States Government and the nature of costs that can be charged with
respect to such goods and services. All such contracts are subject to audit by a
designated government audit agency, which in most cases is the Defense Contract
Audit Agency (the "DCAA"). The DCAA has audited General Physics' contracts
through 1995 without any material disallowances.
The following table illustrates the percentage of total revenue of
General Physics attributable to each type of contract for the year ended
December 31, 1997:
Year ended December 31, 1997
Time and 37%
Materials.........................
Fixed-Price.......................
42
Cost
Reimbursable...................... 21
Total 100%
====
Revenue...........................
General Physics' time-and-materials contracts generally provide for
billing of services based upon the hourly labor rates of the employees
performing the services and the actual expenses incurred, each multiplied by a
specified mark-up factor, up to a certain aggregate dollar amount. General
Physics' time-and-materials contracts include certain contracts under which
General Physics has agreed to provide training, engineering and technical
services at fixed hourly rates (subject to adjustment for labor costs).
Time-and-materials contracts generally permit the client to control the amount,
type and timing of the services to be performed by General Physics and to
terminate the contract on written notice. If a contract is terminated, General
Physics typically is paid for the services provided by it through the date of
termination. While General Physics' clients often modify the nature and timing
of services to be performed, no significant terminations of General Physics'
time-and-materials contracts have occurred.
General Physics' fixed-price contracts provide for General Physics to
perform specified services for a fixed price. General Physics bears the risk
that increased or unexpected costs required to perform the specified services
may reduce General Physics' profit or cause General Physics to sustain a loss,
but General Physics has the opportunity to derive increased profit if the costs
required to perform the specified services are less than expected. Fixed-price
contracts generally permit the client to terminate the contract on written
notice; in the event of such termination, General Physics would typically, at a
minimum, be paid a proportionate amount of the fixed price. No significant
terminations of General Physics' fixed-price contracts have occurred over the
last three years.
General Physics' cost reimbursable contracts provide for General
Physics to be reimbursed for its actual costs plus a specified fee. These
contracts also are generally subject to termination at the convenience of the
client. If a contract is terminated, General Physics typically would be
reimbursed for its costs to the date of termination, plus the cost of an orderly
termination, and paid a proportionate amount of the fee. No significant
terminations of General Physics' cost reimbursable contracts have occurred.
Competition
The principal competitive factors in General Physics' markets are the
experience and capability of technical personnel, performance, reputation and
price. Services such as those provided by General Physics' Workforce Development
and Training Group and by its Facility and Process Technology Group are
performed by many of the customers themselves, architectural and engineering
firms that have expanded their range of services beyond design and construction
activities, major suppliers of equipment and independent service companies such
as General Physics. A significant factor determining the business available to
General Physics and its competitors is the ability of customers to use their own
personnel to perform services provided by General Physics and its competitors.
Competition has increased as architectural and engineering firms have devoted
additional efforts to these areas as their work in other areas has diminished.
Another factor affecting the competitive environment is the existence of small,
specialty companies located at or near particular customer facilities and
dedicated solely to servicing the technical needs of those particular
facilities.
Competition in the industries served by the Applied Technology Group is
strong and comes from large defense contractors and other service corporations,
many of which have significantly greater resources than General Physics, as well
as from small and disadvantaged businesses, which receive certain preferential
treatment in the awarding of government contracts.
Competition in the environmental services industry is intense and comes
from large corporations, such as architect-engineering firms, that have expanded
their businesses to include environmental services, specialized service firms
that work exclusively in the environmental arena and professional service firms
such as General Physics.
Personnel
General Physics' principal resource is its technical personnel. General
Physics' future success will depend to a significant degree upon its continued
ability to hire, train, integrate into its operations and retain professionals.
General Physics competes for new professionals with clients, as well as with its
other competitors. In the United States, competition for qualified personnel has
intensified. As of March 1, 1998, General Physics employed approximately 1,500
persons. Many of General Physics' employees perform multiple functions depending
upon changes in the mix of demand for the services provided by General Physics.
General Physics' personnel have backgrounds in mechanical, electrical,
chemical, civil, nuclear and human factors engineering; in technical education
and training; in power plant design, operation and maintenance; in United States
Navy weapons systems design, operation and maintenance; in instructional
technology and computer-based training; in enterprise-wide resource planning
software training; and in toxicology, industrial hygiene, health physics,
chemistry, microbiology, ecology and mathematical modeling.
The United States Navy, the United States Army, the DOE and various
other United States Government agencies generally require that contractor
employees have appropriate security clearances. Thus, recruiting and retaining
employees having appropriate security clearance to work at government facilities
is important to the continued growth of General Physics.
None of General Physics' employees is represented by a labor union.
General Physics generally has not entered into employment agreements with its
employees, but has entered into employment agreements with certain officers and
other employees. General Physics believes its relations with its employees are
good.
Marketing
General Physics has more than fifty employees dedicated solely to
marketing efforts through Corporate Sales and Market Sector development
programs. Corporate level marketing is directed at long-term strategic business
development with specific customers and with international business. General
Physics markets its services to existing customers primarily through its
technical personnel, using senior management to aid in the planning of marketing
strategies and evaluating current and long-term marketing opportunities and
business directions. General Physics has 40 offices and 57 sites, located in 30
states and offices in Kuala Lumpur, Beijing, Mexico City and London, from which
it markets its services. Courses and workshops given by General Physics
personnel to the public from time to time serve an important marketing function.
General Physics also sends a variety of sales literature to current and
prospective clients whose names are maintained in a computerized database which
is updated periodically.
The goal of General Physics' marketing process is to obtain awards of
new contracts and expansion of existing contracts. By staying in contact with
clients and looking for opportunities to provide further services, General
Physics sometimes obtains contract awards or extensions without having to
undergo competitive bidding. In other cases, clients request General Physics to
bid competitively. In both cases, General Physics submits formal proposals to
the client for evaluation. The period between submission of a proposal to final
award can range from 30 days or less (generally for non-competitive, short-term
contracts), to a year or more (generally for large, competitive multi-year
contracts with governmental clients).
General Physics maintains a site on the World Wide Web located at
http://www.genphysics.com/.
Backlog
The following table sets forth the appropriate amounts of General
Physics' backlog for services under signed contracts and subcontracts as of
December 31, 1997, with information for each of General Physics' three business
groups:
Year ended December 31, 1997
(in thousands)
Workforce Development and Training Group......... $47,736
Facility and Process Technology Group............ 18,747
Applied Technology Group......................... 16,291
--------
Total $82,774
=======
Backlog..........................................
General Physics anticipates that most of its backlog as of December 31, 1997
will be recognized as revenue during fiscal year 1998; however, the rate at
which services are performed under certain contracts, and thus the rate at which
backlog will be recognized, is at the discretion of the client, and most
contracts are, as mentioned above, subject to termination by the client upon
written notice.
Insurance
By providing services to the commercial electric power industry and to
the United States Armed Forces, General Physics is engaged in industries in
which there are substantial risks of potential liability. As of January 1, 1996,
General Physics' insurance was combined with GP Strategies Corporation's
insurance in a consolidated insurance program (including general liability
coverage). However, certain liabilities associated with General Physics'
business are not covered by these insurance policies. In addition, such
liabilities may not be covered by Federal legislation providing a liability
protection system for licensees of the Nuclear Regulatory Commission (typically
utilities) for certain damages caused by nuclear incidents, since General
Physics is not such a licensee. Finally, few of General Physics' contracts with
clients contain a waiver or limitation of liability. Thus, to the extent a risk
is neither insured nor indemnified against nor limited by an enforceable waiver
or limitation of liability, General Physics could be materially adversely
affected by a nuclear incident. Certain other environmental risks, such as
liability under the Comprehensive Environmental Response, Compensation and
Liability Act, as amended (Superfund), also may not be covered by General
Physics' insurance.
Environmental Statutes and Regulations
General Physics provides environmental engineering services to its
clients, including the development and management of site environmental
remediation plans. Due to the increasingly strict requirements imposed by
Federal, state and local environmental laws and regulations (including, without
limitation, the Clean Water Act, the Clean Air Act, Superfund, the Resource
Conservation and Recovery Act and the Occupational Safety and Health Act),
General Physics' opportunities to provide such services may increase.
General Physics' activities in connection with providing environmental
engineering services may also subject General Physics itself to such Federal,
state and local environmental laws and regulations. Although General Physics
subcontracts most remediation construction activities and all removal and
offsite disposal and treatment of hazardous substances, General Physics could
still be held liable for clean-up or violations of such laws as an "operator" or
otherwise under such Federal, state and local environmental laws and regulations
with respect to a site where it has provided environmental engineering and
support services. General Physics believes, however, that it is in compliance in
all material respects with such environmental laws and regulations.
Properties
General Physics' principal executive offices are located at 6700
Alexander Bell Drive, Suite 400, Columbia, Maryland 21046, and its telephone
number is (410) 290-2300. General Physics leases approximately 32,470 square
feet of an office building at that address, and approximately 220,000 square
feet of office space at various other locations throughout the United States,
and in China, Great Britain, Mexico and Malaysia. General Physics believes that
its facilities are adequate to carry on its business as currently conducted.
DISTRIBUTION GROUP
FIVE STAR GROUP, INC.
The Distribution Group, incorporated under the name Five Star Group,
Inc. ("Five Star"), is engaged in the wholesale distribution of home decorating,
hardware and finishing products. Five Star has two strategically located
warehouses and office locations, with approximately 360,000 square feet of space
in New Jersey and Connecticut, which enables Five Star to service the market
from Maine to Virginia.
Five Star believes it is a leading distributor in the U.S. of paint
sundry items, interior and exterior stains, brushes, rollers, caulking compounds
and hardware products and offers products from leading manufacturers such as
Cabot, Dap, 3-M, Stanley, Kwikset, Minwax and Rustoleum. Five Star distributes
its products to retail dealers which include lumber yards, "do-it-yourself"
centers, hardware stores and paint suppliers principally in the northeast
region. It carries an extensive inventory of the products it distributes and
provides delivery, generally, within 24 to 72 hours from the placement of an
order.
The primary working capital investment for Five Star is inventory.
Inventory levels will vary throughout the year reflecting the seasonal nature of
the business. Five Star's strongest sales are typically in March through October
because of strong seasonal consumer demand for its products. As a result,
inventory levels tend to peak in the spring and reach their lowest levels in
late fall.
The largest customer accounted for approximately 9% of Five Star's
sales in 1997 and its 10 largest customers accounted for approximately 17% of
such sales. No other customer accounted for in excess of 10% of Five Star's
sales in 1997. All such customers are unaffiliated companies and neither Five
Star nor the Company has a long-term contractual relationship with any of them.
Competition within the industry is intense. There are much larger
national companies commonly associated with national franchises such as Ace and
True Serv as well as smaller regional distributors, all of whom offer similar
products and services. Additionally, in some instances manufacturers will bypass
the distributor and choose to sell and ship their products directly to the
retail outlet. The principal means of competition for Five Star are its
strategically placed distribution centers and its extensive inventory of quality
name brand products. Five Star will continue to focus its efforts on supplying
its products to its customers at a competitive price and on a timely, and
consistent basis. In the future, Five Star will attempt to acquire complementary
distributors and to expand the distribution of its line of private-label
products sold under the "Five Star" name.
OPTICAL PLASTICS GROUP
MXL INDUSTRIES, INC.
The Optical Plastics Group consisting of MXL Industries, Inc. ("MXL")
is engaged in the manufacture of molded and coated optical products, such as
shields and face masks and non-optical plastic products. MXL is a
state-of-the-art injection molder and precision coater of large optical products
such as shields and face masks and non-optical plastics. MXL believes that the
principal strengths of its business are its state-of-the-art injection molding
equipment, advanced production technology, high quality standards, and on time
deliveries. Through its Woodland Mold and Tool Division, MXL also designs and
engineers state-of-the-art injection molding tools as well as providing a
commodity custom molding shop.
As the market for optical injection molding, tooling and coating is
focused, MXL believes that the combination of its proprietary "Anti-Fog"
coating, precise processing of the "Anti-Scratch" coatings, and precise molding
and proprietary grinding and polishing methods for its injection tools will
enable it to increase its sales in the future and to expand into related
products.
MXL uses only polycarbonate resin to manufacture shields, face masks
and lenses for over 55 clients in the safety, recreation and military
industries. For its manufacturing work as a subcontractor in the military
industry, MXL is required to comply with various federal regulations including
Military Specifications and Federal Acquisition Regulations for military end use
applications.
MXL is dependent upon one client which accounts for approximately 35%
of MXL's total sales and MXL's 10 largest customers accounted for approximately
72% of its total sales.
MXL's sales and marketing effort concentrates on industry trade shows.
In addition, the Company employs one marketing and sales executive and one sales
engineer. In the future, MXL will attempt to acquire complementary businesses.
HYDRO MED SCIENCES
Hydro Med Sciences ("HMS"), a division of the Company, is a drug
delivery company focused on the development of proprietary, implantable,
controlled release drug delivery products based upon its unique group of Hydron
polymer biomaterials. HMS's lead product in development is a patented,
subcutaneous retrievable hydrogel reservoir drug delivery device (the "Hydrogel
Implant") designed to allow reliable, sustained release of a broad spectrum of
therapeutic compounds continuously, at a constant, predetermined rate over at
least a 12-month period. HMS is presently compiling data from clinical studies
for this drug delivery system for the treatment of prostate cancer. The lead
application of the Hydrogel Implant delivers the luteinizing hormone releasing
hormone analog, histrelin, for the treatment of prostate cancer for a 12-month
period. HMS's sales currently comprise less than 1% of the Company's revenues.
THE COMPANY'S INVESTMENTS
The Company has investments in the stock of certain publicly traded
companies described below.
GTS Duratek, Inc.
GTS Duratek, Inc. ("Duratek") is an environmental technology and
services firm that uses its proprietary vitrification processes to convert
radioactive and hazardous waste into glass for long-term storage and disposal.
As of December 31, 1997, the Company owned approximately 12% of the outstanding
shares of Common Stock of Duratek.
Interferon Sciences, Inc.
Interferon Sciences, Inc. ("ISI") is a biopharmaceutical company
engaged in the manufacture and sale of pharmaceutical products based on its
highly purified, natural source multispecies alpha interferon. ISI's ALFERON(R)
N Injection (Interferon Alfa-n3) product has been approved by the United States
Food and Drug Administration for the treatment of certain types of genital warts
and is being studied for potential use in the treatment of HIV and hepatitis C.
As of December 31, 1997, the Company owned approximately 12% of the outstanding
shares of common stock of ISI.
GSE Systems, Inc.
GSE Systems, Inc. ("GSE") is a global provider of integrated enterprise
software and information solutions to the energy, process and manufacturing
industries. As of December 31, 1997, the Company controlled approximately 22% of
the outstanding shares of common stock of GSE.
American Drug Company
American Drug Company ("ADC") was organized in 1993 to initiate
marketing activities for American generic pharmaceutical and medical products in
Russia and the Commonwealth of Independent States ("CIS"). In 1997, ADC made the
decision to concentrate on the sale of medical equipment and consulting services
to Western companies doing business in Russia and Eastern Europe from offices in
Prague and Moscow. As of December 31, 1997 the Company owned 54% of the
outstanding shares of ADC.
Employees
At December 31, 1997, the Company and its subsidiaries employed 1,863
persons, including 19 in the Company's headquarters, 1,468 in the Physical
Science Group, 273 in the Distribution Group, (116 of which are union employees)
and 76 in the Optical Plastics Group. Of these, 5 persons were engaged in
research and development. The Company considers its employee relations to be
satisfactory.
Patents and Licenses
The operating businesses of the Company are not materially dependent
upon patents, or patent and know-how licenses. The know-how and expertise gained
with respect to the manufacture and sale of its products, acquired as a result
of its license and ownership of patents, are of greater importance to its future
ability to manufacture and sell such products than are the patents themselves.
(d) Financial Information about the Foreign and Domestic operations and
Export Sales.
The Company has no material Foreign Operations or Export Sales.
ITEM 2. PROPERTIES
The following information describes the material physical properties
owned or leased by the Company and its subsidiaries.
The Company leases approximately 10,000 square feet of space for its
New York City principal executive offices. The Company's Physical Sciences Group
leases approximately 32,470 square feet of an office building in Columbia,
Maryland and approximately 226,900 square feet of office space at various other
locations throughout the United States and China, Great Britain, Mexico and
Malaysia.
The Distribution Group leases 250,000 square feet in New Jersey and
110,000 square feet in Connecticut.
The Optical Plastics Group owns 33,000 square feet of office space in
Lancaster, PA and 12,594 square feet of office space in Westmont, IL.
The facilities owned or leased by the Company are considered to be
suitable and adequate for their intended uses and are considered to be well
maintained and in good condition.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any legal proceedings the outcome of
which are believed by management to have a reasonable likelihood of having any
material adverse effect upon the financial condition of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
fourth quarter of the fiscal year covered by this report.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
The Company's Common Stock, $.01 par value, was traded on the American
Stock Exchange, Inc. ("AMEX") and the Pacific Stock Exchange, Inc. ("Pacific")
until March 27, 1998. On March 27, 1998 the Company's Common Stock commenced
trading on the New York Stock Exchange. The following tables present its high
and low market prices for the last two years. During the periods presented
below, the Company has not paid any dividends.
Quarter High Low
1997 First 9.00 6.00
Second 8.44 5.50
Third 13.00 7.75
Fourth 15.50 11.75
1996 First 9.875 8.125
Second 11.625 8.375
Third 10.125 8.125
Fourth 9.125 7.063
The number of shareholders of record of the Common Stock as of March 2,
1998 was 3,354. On March 2, 1998, the closing price of the Common Stock on the
American Stock Exchange was $12.875.
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Item 6. Selected Financial Data
Operating Data (in thousands, except per share data)
Years ended December 31, 1997 1996 1995 1994 1993
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Sales $234,801 $203,800 $185,025 $204,774 $185,846
Gross margin 35,229 30,242 28,322 32,559 26,974
Interest expense 4,075 4,358 5,019 6,458 8,199
Income (loss) before discontinued operation and extraordinary items 3,423 11,380 4,032 (11,397) (6,849)
Net income (loss) 3,423 11,380 1,012 (13,971) (5,977)
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Earnings (loss) per share before discontinued
operation and extraordinary items:
Basic $.33 $1.55 $.60 $(2.10) $(1.60)
Diluted .31 1.54 .60 (2.10) (1.60)
Earnings (loss) per share:
Basic .33 1.55 .15 (2.57) (1.40)
Diluted .31 1.54 .15 (2.57) (1.40)
Cash dividends declared per share
Balance Sheet Data
Years ended December 31, 1997 1996 1995 1994 1993
Cash, cash equivalents, restricted cash and marketable securities $ 13,725 $25,927 $11,657 $10,075 $10,976
Short-term borrowings 23,945 20,281 18,043 31,060 21,390
Working capital 34,797 41,691 32,949 25,823 33,224
Total assets 190,612 176,027 151,720 175,546 166,057
Long-term debt 6,588 20,116 23,932 31,213 40,858
Stockholders' equity 126,583 94,029 70,998 65,165 67,438
Notes: (a) General Physics Corporation's (General Physics) results of operations
were consolidated with the results of the Company from September 1, 1994 through
December 31, 1997. The balance sheets of General Physics have been consolidated
with the Company at December 31, 1997, 1996, 1995 and 1994. For all other
periods General Physics' financial data has been accounted for on the equity
basis.
(b) Interferon Sciences, Inc.'s (ISI) results of operations were consolidated
with the results of the Company from January 1, 1993 through September 1993.
ISI's financial data has been accounted for on the equity basis from October
1993 through June 1996. From July 1996, ISI's financial data has been accounted
for as a combination of long-term investments and as long-term
available-for-sale equity securities.
c) GTS Duratek, Inc., (Duratek) results of operations were consolidated with the
results of the Company from January 1, 1993 through December 31, 1994. The
balance sheets of Duratek were consolidated with the Company at December 31,
1994 and 1993. At December 31, 1995, for the year then ended and through March
31, 1996, Duratek's financial data has been accounted for on the equity basis.
At December 31, 1997 and 1996, and since April 1996, the Company has accounted
for its investment as a combination of marketable securities, long-term
investments and as long-term available-for-sale equity securities.
See Management's discussion and analysis of
financial condition and results operations for further details.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS:
RESULTS OF OPERATIONS
Overview
During 1997, the Company completed a major step in its transformation into an
operating company through the purchase in January 1997 of the 48% of General
Physics Corporation (General Physics) that it did not previously own (see Note 2
to the consolidated financial statements). General Physics, with over 1500
employees located in 40 offices worldwide, provides training and performance
improvement services to Fortune 500 companies, manufacturing and process
industries, electric power utilities, and other commercial and governmental
customers. On March 5, 1998, the Company changed its name from National Patent
Development Corporation to GP Strategies Corporation. The name change reflects
the Company's plan to focus its efforts on General Physics and to concentrate on
strategically growing General Physics' business both domestically and
internationally. In 1997, General Physics experienced significant increases in
sales and operating profit, fueled primarily by the continued growth of their
commercial business.
In 1997, income before income taxes, discontinued operation and extraordinary
item was $2,730,000, as compared to $11,244,000 in 1996. The reduced income in
1997 is due to certain non recurring events in 1996, partially mitigated by
increased operating profits generated by all three operating Groups of the
Company. In 1996 the Company recognized a $12,200,000 gain on the sale of
1,000,000 shares of GTS Duratek, Inc. (Duratek) common stock, a $3,314,000 gain
on the transfer of 250,000 shares of Duratek common stock from long-term
investments to trading securities and a $2,168,000 gain recognized on the
issuance of stock by affiliates. These gains in 1996 were partially offset by a
$4,000,000 loss recognized on the Company's investment in American White Cross,
Inc. (AWC). In 1997, the Company recognized a $689,000 net gain on trading
securities related to Duratek. The gain is the result of an $828,000 gain on the
transfer from long-term investments to trading securities, partially offset by a
$139,000 loss on the sale of Duratek common stock.
The Physical Science Group, which is primarily General Physics, achieved a
$3,099,000 increase in operating profits or 48% in 1997 as a result of increased
sales and gross margin, and the ability of General Physics to maintain their
general and administrative expenses at the same level, even though sales
increased by 20%. The Distribution Group, which is the Five Star Group, Inc.
(Five Star), the Company's distributor of home decorating, hardware and
finishing products, had a $463,000 increase in operating profits. The increase
was due to increased sales and the related gross margin, as well as increased
marketing income earned, partially offset by increased selling, general and
administrative expenses. The Optical Plastics Group, which is MXL Industries,
Inc. (MXL), the Company's injection molding and coating subsidiary, had an
increase in operating profits of $379,000 due to increased sales. The increased
operating profits achieved by all the Company's operating subsidiaries were
partially mitigated by reduced Investment and other income, net in 1997. The
reduced Investment and other income, net in 1997 was primarily the result of a
$1,880,000 loss recognized on the Company's 22% controlled affiliate, GSE
Systems, Inc.(GSES), compared to income of $924,000 recognized in 1996.
In 1996, income before income taxes, discontinued operation and extraordinary
item was $11,244,000, as compared to income of $5,819,000 in 1995. The
improvement in the Company's results is due to several factors. In April 1996,
the Company sold 1,000,000 shares of Duratek common stock recognizing a gain of
$12,200,000. In addition, the Company recorded gains totaling $3,314,000 on the
transfer of 250,000 shares of Duratek common stock from long-term investments to
trading securities and from subsequent changes in the market value of these
shares. At December 31, 1997, the Company owns approximately 12.3% of Duratek
and accounts for its investment in Duratek as a combination of marketable
securities, long-term investments and as long-term available-for-sale
securities. In 1996, the Company also recognized a gain of $2,168,000 on the
issuance of stock by affiliates, primarily as a result of the issuance in April
1996 by Interferon Sciences, Inc. (ISI) of additional shares of common stock.
The Company owns approximately 12% of ISI at December 31, 1997, and effective in
the third quarter of 1996 the Company commenced accounting for its investment in
ISI as a combination of long-term investments and as long-term
available-for-sale equity securities. The above gains were partially offset by a
$4,000,000 loss recognized on the Company's investments in AWC, due to AWC
filing for protection under Chapter 11 of the United States Bankruptcy Code in
July 1996. In 1996 the Company generated increased operating profits due to
improvements within the Distribution and Physical Science Groups, partially
offset by reduced operating profits achieved by the Optical Plastics Group (see
Note 16 to the consolidated financial statements). General Physics, achieved
increased operating profits of $1,650,000 as a result of increased sales and
gross margin. At December 31, 1996 the Company owned 52% of General Physics and
in January 1997 purchased the remaining 48% (see Note 2 to the consolidated
financial statements). Five Star increased operating profits by $393,000 due to
increased sales and the related gross margin, partially offset by increased
selling, general and administrative expenses. MXL had a reduction in operating
profits of $1,176,000 due to both reduced sales and gross margin percentage. The
Company also had Investment and other income (expense), net totaling $3,756,000
in 1996 as compared to $1,129,000 in 1995. The increased Investment and other
income (expense), net was primarily the result of foreign currency transaction
gains in 1996 as opposed to losses in 1995, reduced losses related to ISI, which
since the third quarter of 1996 was accounted for as a combination of long-term
investments and as long-term available-for-sale equity securities, and increased
investment income due to increased cash and cash equivalents. The Company also
reduced its interest expense by $661,000 in 1996 due to the continued reduction
of long-term debt at the Corporate level in 1995 and in the first quarter of
1996.
Sales
Consolidated sales from continuing operations increased by $18,775,000 from
$185,025,000 in 1995 to $203,800,000 in 1996 and increased by $31,001,000 to
$234,801,000 in 1997. In 1996, the Company had increased sales within the
Physical Science and Distribution Groups, partially offset by reduced sales
within the Optical Plastics Group. In 1997, the Company had increased sales
within the Physical Science, Distribution and Optical Plastics Groups.
The Physical Science Group's sales increased from $107,549,000 in 1995 to
$117,183,000 in 1996 and to $140,620,000 in 1997. The increased sales of
$9,634,000 in 1996 were the result of increased sales within General Physics'
Workforce Development and Training Group and Applied Technology Group, partially
mitigated by reduced sales within the Facility and Process Technology Group. The
increased sales of $23,437,000 in 1997 were primarily the result of increased
sales within General Physics' Workforce Development and Training Group, as well
as to a lesser extent, increased sales within both its Facility and Process
Technology and Applied Technology Groups. The increased sales within all groups
of General Physics during 1997 is the result of the continuing focus of General
Physics' marketing efforts to expand its range of performance improvement
services to Fortune 500 companies, manufacturing and process industries, as well
as electric power utilities and other commercial and governmental customers.
The Distribution Group sales increased from $65,098,000 in 1995 to $76,102,000
in 1996 and to $82,300,000 in 1997. The increased sales of $11,004,000 in 1996
were the result of Five Star commencing sales to a major retail chain, as well
as a significant growth in sales to independent retail stores. The growth in
independent retail store sales was primarily generated by a significant increase
in sales of hardware products due to an expansion of Five Star's product line.
The sales increase in 1996 was partially mitigated by the closing of two retail
chains in the northeast which had generated $5,866,000 of sales in 1995. The
increased sales of $6,198,000 in 1997 were the result of the continued growth of
Five Star's sales to independent retail stores due to the continued growth of
Five Star's hardware related business, as well as increased regional marketing
efforts. In September 1997, a major retail chain, which generated sales of
$7,753,000 and $7,777,000 in 1996 and 1997, respectively, ceased operations.
Five Star plans to replace the majority of this sales volume in 1998 with both
new customers, as well as increased sales within its existing customer base. For
the first quarter of 1998, Five Star's sales are expected to be at approximately
the same level as for the first quarter of 1997, in spite of the loss of the
major retail chain which had sales in excess of $2,200,000 during the first
three months of 1997.
The Optical Plastics Group sales decreased from $10,949,000 in 1995 to
$8,781,000 in 1996 and increased to $10,362,000 in 1997. The reduced sales of
$2,168,000 in 1996 were the result of reduced orders from MXL's largest
customer, due to changes in their product line. The increased sales of
$1,581,000 in 1997 were primarily the result of sales generated from new
customers as well as increased sales from MXL's existing customers. In 1997,
sales from MXL's largest customer remained approximately the same as in 1996,
therefore reducing MXL's reliance on this customer.
Gross margin
Consolidated gross margin was $28,322,000 or 15% in 1995, $30,242,000 or 15% in
1996 and $35,229,000 or 15% of net sales in 1997. The increased gross margin of
$1,920,000 in 1996 was the result of increased gross margin within the Physical
Science and Distribution Groups, partially offset by reduced gross margin
achieved by the Optical Plastics Group. The increased gross margin achieved in
1997 of $4,987,000 in 1997 was the result of increased gross margins achieved
within all operating Groups of the Company.
The Physical Science Group gross margin increased from $12,368,000 or 12% of net
sales in 1995 to $14,309,000 or 12% of net sales in 1996 and to $17,945,000 or
13% of net sales in 1997. In 1996, the increased gross margin of $1,941,000 was
the result of increased sales as well as reduced overhead costs as a percentage
of sales. In 1997, the increased gross margin of $3,636,000 was the result of
increased sales as well as an increased gross margin percentage. The increased
gross margin percentage is the result of increased sales within General Physics'
commercial business, which historically achieves higher gross margin percentages
than the government. The increased gross margin dollars and percentage was
achieved in 1997 despite investments by General Physics in the enterprise wide
software end user training market and international markets, which led to
negative gross margins totaling approximately $1,200,000. In addition, in 1997
General Physics made a significant investment in business development in their
existing market sectors, which had the effect of reducing gross margin dollars
and percentages during the year. The Company believes that these investments are
an integral part of its overall strategy of expanding into new markets and
businesses, and are evaluated on a continuing basis.
The Distribution Group gross margin increased from $10,966,000 or 17% of net
sales in 1995 to $12,313,000 or 16% of net sales in 1996 and to $13,722,000 or
17% of net sales in 1997. The increased gross margin of $1,347,000 in 1996 was
the result of increased sales. The reduced gross margin percentage was the
result of an increase in drop-ship sales, as well as lower margins generated on
sales to a major retail chain, partially offset by continued efficiencies
achieved in Five Star's warehouse operations. The increased gross margin of
$1,409,000 in 1997 was the result of increased sales as well as increased gross
margin percentage. The increased gross margin percentage was primarily the
result of a favorable product mix and the growth in independent retail business.
The Optical Plastics Group gross margin decreased from $4,336,000 or 40% of net
sales in 1995 to $2,913,000 or 33% of net sales in 1996 and increased to
$3,449,000 or 33% of net sales in 1997. The reduced gross margin of $1,423,000,
as well as the reduced gross margin percentage in 1996 was the result of reduced
sales to MXL's major customer, who historically generated higher gross margin
percentages than the remainder of MXL's business on average. In 1997 the
increased gross margin was the result of increased sales.
Investment and other income, net
Investment and other income, net was $1,129,000 in 1995, $3,756,000 in 1996 and
$2,364,000 in 1997. The reduced Investment and other income in 1997 is primarily
due to a $1,880,000 loss recognized on the Company's 22% investment in GSES in
1997, as compared to income of $924,000 recognized on the Company's equity
investment in GSES in 1996. The loss on the Company's equity investment in GSES
was partially mitigated by increased consulting revenue earned by the American
Drug Company (ADC), the Company's 54% owned subsidiary, in 1997 due to the
receipt of a success fee related to a consulting project. In addition, Five Star
earned increased marketing income in 1997 due to increased sales as well as
implementation of new marketing programs.
The improvement in 1996 is primarily due to three factors. The Company had
increased investment income in 1996 as a result of an increase in cash and cash
equivalents during 1996. In addition, the Company incurred reduced losses
related to ISI, in which the Company has an approximately 12% interest at
December 31, 1997, which effective in the third quarter of 1996 was accounted
for as a combination of long-term available-for-sale equity securities and
long-term investments. In 1996, the Company had a foreign currency transaction
gain of $340,000 compared to a loss of $1,066,000 in 1995, related to the
Company's decision not to hedge its Swiss denominated debt, increased investment
income and reduced losses incurred on investments in 20% to 50% owned
affiliates.
Although the Company is exposed to foreign currency transaction losses as a
result of its Swiss denominated indebtedness, the Company considers its risk of
loss to be acceptable due in part to the low level of such indebtedness at
December 31, 1997. Accordingly, the Company has not hedged such risk at December
31, 1997 and will review this policy on a continuing basis.
At December 31, 1997 and 1996, the Company's Investments and advances of
$28,093,000 and $25,108,000 were primarily its investments in Duratek, ISI and
GSES, which were $5,113,000, $6,360,000, $9,868,000 in 1996 and $8,237,000,
$8,125,000 and $7,988,000, in 1997, respectively.
Selling, general, and administrative expenses
Selling, general and administrative expenses (SG&A) increased from $30,372,000
in 1995 to $30,788,000 in 1996 and to $31,502,000 in 1997. The increase of
$714,000 in SG&A in 1997 was primarily the result of increased costs incurred
within the Distribution Group, partially offset by reduced costs at the
corporate level. The increased costs incurred within the Distribution Group were
the result of increased sales commissions incurred by Five Star due to increased
sales, as well as increased reserves taken for uncollectable accounts due to the
bankruptcy and the subsequent ceasing of operations of a major retail chain in
the fourth quarter of 1997. The Physical Science and Optical Plastics Groups
experienced marginal increases in SG&A in 1997, due to General Physics and MXL's
ability to increase sales while maintaining the same overhead structure as in
1996.
The increase of $416,000 in SG&A in 1996 was the result of increased SG&A
incurred by the Distribution Group, partially offset by reduced SG&A achieved by
the Physical Science and Optical Plastics Groups and at the Corporate level. The
increased SG&A within the Distribution Group was primarily the result of
increased sales commissions paid due to increased sales, as well as increased
costs incurred by Five Star for equipment and computer rental due to the
continued upgrading and development of their facility management systems. The
reduced SG&A achieved by General Physics was the result of the $1,015,000
reserve taken in 1995 related to potentially uncollectible revenue recorded in
years prior to December 31, 1993, partially offset by a $259,000 reserve
recorded in 1996 for the settlement of a legal action brought against General
Physics by a former employee. The Optical Plastics Group achieved lower SG&A in
1996 due to efforts to reduce their operating costs due to their reduced sales
volume.
Interest expense
Interest expense aggregated $5,019,000 in 1995, $4,358,000 in 1996 and
$4,075,000 in 1997. The reduced interest expense in 1996, was the result of the
Company's continuing successful effort to reduce its interest expense at the
corporate level due to reduced interest on the Company's Swiss Debt obligations
due to the Exchange Offers in 1995 and the repayment of various Swiss Debt
obligations in 1996 (see Note 11 to the consolidated financial statements). The
continued reduction in interest expense in 1997 was the result the Company's
continued plan of debt reduction. On September 30, 1997, the Company's repaid in
full its 12% Subordinated Debentures totaling $6,697,000 (see Note 11(c) to the
consolidated financial statements).
Income taxes
Income tax (expense) benefit from operations for 1995, 1996 and 1997 was
$(1,787,000), $136,000 and $693,000, respectively.
In 1997, the Company recorded an income tax benefit of $693,000. The current
income tax provision of $1,335,000 represents the estimated taxes payable by the
Company for the year ended December 31, 1997. The deferred income tax benefit of
$2,028,000 results primarily from the utilization of net operating loss
carryovers and a reduction in the valuation allowance. The decrease of
$3,153,000 in the valuation allowance in 1997 was attributable in part to the
utilization of the Company's net operating loss carryforwards, and to the
Company's expectation of generating sufficient taxable income that will allow
for the realization of a portion of its deferred tax assets.
In 1996, the Company recorded an income tax benefit of $136,000. The current
income tax provision of $1,724,000 represents the estimated taxes payable by
General Physics, the Company's 52% owned subsidiary. The deferred income tax
benefit of $1,860,000 results from utilization of net operating loss carryovers
and a reduction in the valuation allowance, among other factors. The decrease in
the valuation allowance in 1996 was attributable in part to the utilization of
the Company's net operating loss carryforwards, and to the Company's expectation
of generating sufficient taxable income that will allow for the realization of a
portion of its deferred tax assets.
In 1995, the Company recorded an income tax expense of $1,787,000. The current
income tax provision of $258,000 represents the estimated taxes payable by the
Company for the year ended December 31, 1995. The deferred income tax provision
of $1,529,000 represents the deferred taxes of General Physics, the Company's
then 51% owned subsidiary.
As of December 31, 1997, the Company has approximately $13,657,000 of
consolidated net operating losses available for Federal income tax purposes.
Accounting developments
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 128, "Earnings per Share" which
established standards for computing and presenting earnings per share (EPS). The
Statement simplifies the standards for computing EPS, replaces the presentation
of primary EPS with a presentation of basic EPS and requires dual presentation
of basic and diluted EPS on the face of the income statement. This Statement was
effective for financial statements issued for periods ending after December 15,
1997 and required restatement of all prior-period EPS data presented. The
Company has adopted this statement in the December 31, 1997 consolidated
financial statements.
The Financial Accounting standards Board issued Accounting Standards (SFAS 130),
"Reporting Comprehensive Income", in June 1997 which requires a statement of
comprehensive income to be included in the financial statement for fiscal years
beginning after December 15, 1997. The Company is presently designing such
statement and, accordingly, will include the required information beginning with
the first quarter of 1998.
In addition, in June of 1997, the FASB issued SFAS 131, "Disclosures About
Segments of an Enterprise and Related Information". SFAS 131 requires disclosure
of certain information about operating segments and about products and services,
geographic areas in which a company operates, and their major customers. The
Company is presently in the process of evaluating the effect that this new
standard will have on disclosures in the Company's financial statements and the
required information will be reflected in the December 31, 1998 financial
statements.
The Company is aware of the issues associated with the programming code in
existing computer systems as the millennium (year 2000) approaches. The "year
2000" problem is pervasive and complex as virtually every computer operation
will be affected in some way by the rollover of the two digit year value to 00.
The issue is whether computer systems will properly recognize date sensitive
information when the year changes to 2000. Systems that do not properly
recognize such information could generate erroneous data or cause a system to
fail.
The Company is utilizing both internal and external resources to identify,
correct or reprogram and test systems for year 2000 compliance. It is
anticipated that the project will be completed by the middle of 1999. Management
has not yet assessed the year 2000 compliance expense and related potential
effect on the Company's earnings. However, there can be no assurance that the
systems of other companies on which the Company's systems rely also will be
timely converted or that any such failure to convert by another company would
not have an adverse effect on the Company's systems.
Liquidity and capital resources
At December 31, 1997, the Company had cash, cash equivalents and marketable
securities totaling $13,725,000. SGLG, Inc. and ADC had cash and cash
equivalents of $278,000 at December 31, 1997. The minority interests of these
companies are owned by the general public, and therefore, the assets of these
subsidiaries have been dedicated to the operations of these companies and may
not be readily available for the general corporate purposes of the parent.
The Company has sufficient cash, cash equivalents and marketable securities,
marketable long-term investments and borrowing availability under existing and
potential lines of credit as well as the ability to obtain additional funds from
its operating subsidiaries in order to fund its working capital requirements. At
December 31, 1997, approximately $18,767,000 was available to the Company under
its credit agreements (see Note 9 to the consolidated financial statements). At
December 31, 1997, the Company had classified 100,000 shares of Duratek stock
valued at $1,350,000 as marketable securities due to the Company's intention to
sell these shares promptly in 1998.
For the year ended December 31, 1997, the Company's working capital decreased by
$6,894,000 to $34,797,000, reflecting the effect of reduced cash, cash
equivalents and marketable securities and increased short-term borrowing,
partially offset by reduced current maturities of long-term debt. Consolidated
cash and cash equivalents decreased by $10,302,000 to $12,375,000 at December
31, 1997.
The decrease in cash and cash equivalents of $10,302,000 in 1997 resulted from
cash used for financing of $10,932,000, investing activities of $9,636,000,
partially offset by cash provided by operations of $10,266,000. The cash used by
investing activities was primarily for additions to property, plant and
equipment and intangible assets.
Financing activities consisted primarily of repayments and reductions in
short-term borrowings and long-term debt.
The Company is required to meet certain financial covenants pursuant to its loan
agreements, and is currently in compliance with these covenants, except for
fixed asset additions relating to General Physics. The Company has received a
waiver for this violation.
The Company's principal manufacturing facilities were constructed subsequent to
1976 and management does not anticipate having to replace major facilities in
the near term. As of December 31, 1997, the Company has not contractually
committed itself for any major capital expenditures.
Forward-Looking Statements. This report contains certain forward-looking
statements reflecting management's current views with respect to future events
and financial performance. These forward-looking statements are subject to
certain risks and uncertainties that could cause actual results to differ
materially from those in the forward-looking statements, including, but not
limited to the Company's dependence on its subsidiaries and its investments to
fund its operations; and the Company's ability to comply with financial
covenants in connection with various loan agreements.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required by Item 7A is not applicable to the Company's
business.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Page
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
FINANCIAL STATEMENTS OF GP STRATEGIES CORPORATION
AND SUBSIDIARIES:
Independent Auditors' Report 31
Consolidated Balance Sheets - December 31, 1997 and 1996 32
Consolidated Statements of Operations - Years ended December 31,
1997, 1996, and 1995 34
Consolidated Statements of Changes in Stockholders' Equity - Years
ended December 31, 1997, 1996, and 1995 35
Consolidated Statements of Cash Flows - Years ended December 31,
1997, 1996, and 1995 37
Notes to Consolidated Financial Statements 40
SUPPLEMENTARY DATA (Unaudited)
Selected Quarterly Financial Data 73
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
GP Strategies Corporation:
We have audited the consolidated financial statements of GP Strategies
Corporation and subsidiaries as listed in the accompanying index. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of GP Strategies
Corporation and subsidiaries at December 31, 1997 and 1996, and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 1997, in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
New York, New York
March 17, 1998
GP STRATEGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
December 31, 1997 1996
- ----------------------------------------------------------------------------------------------------------
Assets
Current assets
Cash and cash equivalents $ 12,375 $ 22,677
Marketable securities 1,350 3,250
Accounts and other receivables (of which
$10,246 and $13,296 are from government
contracts) less allowance for doubtful
accounts of $2,782 and $2,155 42,720 40,633
Inventories 24,842 23,193
Costs and estimated earnings in excess of billings on
uncompleted contracts, of which $649 and $481
relate to government contracts 7,726 9,466
Prepaid expenses and other current assets 3,565 3,462
- ----------------------------------------------------------------------------------------------------------
Total current assets 92,578 102,681
- ----------------------------------------------------------------------------------------------------------
Investments and advances 28,093 25,108
- ----------------------------------------------------------------------------------------------------------
Property, plant and equipment, at cost 39,759 36,045
Less accumulated depreciation and amortization (30,027) (26,767)
- ----------------------------------------------------------------------------------------------------------
9,732 9,278
- ----------------------------------------------------------------------------------------------------------
Intangible assets, net of accumulated
amortization of $32,184 and $29,577
Goodwill 54,528 33,737
Patents, licenses and deferred charges 1,197 739
- ----------------------------------------------------------------------------------------------------------
55,725 34,476
Deferred tax asset 1,101 843
- ----------------------------------------------------------------------------------------------------------
Other assets 3,383 3,641
- ----------------------------------------------------------------------------------------------------------
$190,612 $176,027
- ----------------------------------------------------------------------------------------------------------
GP STRATEGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Continued)
(in thousands, except shares and par value per share)
December 31, 1997 1996
- ----------------------------------------------------------------------------------------------------------
Liabilities and stockholders' equity
Current liabilities
Current maturities of long-term debt $ 342 $ 9,309
Short-term borrowings 23,945 20,281
Accounts payable and accrued expenses 25,515 22,879
Billings in excess of costs and estimated
earnings on uncompleted contracts 7,979 8,521
- ----------------------------------------------------------------------------------------------------------
Total current liabilities 57,781 60,990
- ----------------------------------------------------------------------------------------------------------
Long-term debt less current maturities 6,246 10,807
Minority interests 2 10,201
Commitments and contingencies
Stockholders' equity
Preferred stock, authorized 10,000,000
shares, par value $.01 per share, none issued
Common stock, authorized 25,000,000 shares, par
value $.01 per share, issued 10,810,644 and 7,518,725
shares (of which 152,667 and 1,497 shares are held in treasury) 108 75
Class B common stock, authorized 2,800,000 shares, par
value $.01 per share, issued and outstanding
62,500 shares 1 1
Capital in excess of par value 158,676 131,388
Deficit (37,336) (40,759)
Net unrealized gain on available-for-sale securities 6,630 3,324
Treasury stock at cost (1,496)
- -----------------------------------------------------------------------------------------
Total stockholders' equity 126,583 94,029
- ----------------------------------------------------------------------------------------------------------
$190,612 $176,027
- ----------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
GP STRATEGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
Years ended December 31, 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------
Sales $234,801 $203,800 $185,025
Cost of goods sold 199,572 173,558 156,703
- -------------------------------------------------------------------------------------------------------------------
Gross margin 35,229 30,242 28,322
- -------------------------------------------------------------------------------------------------------------------
Selling, general and administrative (31,502) (30,788) (30,372)
Interest expense (4,075) (4,358) (5,019)
Investment and other income,
net (including interest income of $621,
$906 and $555) 2,364 3,756 1,129
Loss on investments (4,000)
Gain on disposition of stock of
a subsidiary and an affiliate 12,200 3,768
Gain on issuance of stock by a
subsidiary and affiliates 2,168 5,912
Gains on trading securities, net 689 3,314 3,183
Minority interests 25 (1,290) (1,104)
- -------------------------------------------------------------------------------------------------------------------
Income before income taxes,
discontinued operation and
extraordinary item 2,730 11,244 5,819
Income tax benefit (expense) 693 136 (1,787)
- --------------------------------------------------------------------------------------------------------------------
Income before discontinued
operation and extraordinary item 3,423 11,380 4,032
- -------------------------------------------------------------------------------------------------------------------
Discontinued operation
Loss from operations (331)
Loss on disposal (2,610)
- -------------------------------------------------------------------------------------------------------------------
Loss from discontinued operation (2,941)
- -------------------------------------------------------------------------------------------------------------------
Income before extraordinary item 3,423 11,380 1,091
Extraordinary item
- ------------------
Extinguishment of debt, (net of income tax) (79)
- -------------------------------------------------------------------------------------------------------------------
Net income $ 3,423 $ 11,380 $ 1,012
- -------------------------------------------------------------------------------------------------------------------
Net income per share
Basic $.33 $1.55 $.15
Diluted .31 1.54 .15
- -------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity
Years ended December 31, 1997, 1996, and 1995
(in thousands, except shares, par value per share and per share amounts)
Net
unrealized
Class B Capital in gain (loss) Minimum Treasury Total
Common common excess on available- pension stock stock-
stock stock of par for-sale liability at holders'
($.01 Par) ($.01 Par) value Deficit securities adjustment cost equity
- -----------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1994 $ 60 $ 1 $120,038 $(53,151) $(1,783) $ $ $65,165
- --------------------------------------------------------------------------------------------------------------------------------
Minimum pension liability adjustment (911) (911)
Net unrealized gain on available-for-sale
securities 343 343
Net income 1,012 1,012
Issuance of stock in connection with
Swiss Bonds 6 3,725 3,731
Issuance and sale of common stock 2 1,046 1,048
Transfer from common stock issued
subject to repurchase obligation 610 610
- --------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1995 68 1 125,419 (52,139) (1,440) (911) 70,998
- ----------------------------------------------------------------------------------------------------------------------------------
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity (Continued)
Years ended December 31, 1997, 1996, and 1995
(in thousands, except shares, par value per share and per share amounts)
Net
unrealized
Class B Capital in gain (loss) Minimum Treasury Total
Common Common excess on available- pension stock stock-
stock Stock of par for-sale liability at holders'
$.01 Par) ($.01 Par) value Deficit securities adjustment cost equity
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1995 $ 68 $ 1 $125,419 $(52,139) (1,440) $ (911) $70,998
- ---------------------------------------------------------------------------------------------------------------------------------
Minimum pension liability adjustment 911 911
Net unrealized gain on
available-for-sale securities 4,764 4,764
Net income 11,380 11,380
Issuance and sale of common stock and
common stock warrants 7 5,969 5,976
- ---------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 75 1 131,388 (40,759) 3,324 94,029
- ---------------------------------------------------------------------------------------------------------------------------------
Issuance of stock in connection with
acquisition of General Physics 30 25,198 25,228
Net unrealized gain on available-for-sale
securities 3,306 3,306
Net income 3,423 3,423
Issuance and sale of common stock 3 2,090 2,093
Purchase of treasury stock (1,496) (1,496)
- ---------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 $108 $ 1 $158,676 $(37,336) $6,630 $ $(1,496) $126,583
- ---------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
GP STRATEGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Years ended December 31, 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------
Cash flows from operations:
Net income $ 3,423 $ 11,380 $ 1,012
Adjustments to reconcile net income
to net cash used in operating activities:
Provision for discontinued operation 2,460
Depreciation and amortization 5,867 4,069 4,316
Issuance of stock for profit incentive plan 777
Loss from extinguishment
of debt, net of income tax 79
Gain on disposition of stock of a
subsidiary and an affiliate (12,200) (3,768)
Gain on issuance of stock by
a subsidiary and affiliates (2,168) (5,912)
Gains on trading securities (689) (3,314) (3,183)
Loss on investments 700 4,000
Equity loss on investments 1,880 540 685
Deferred income taxes (2,028) (1,860)
Proceeds from sale of trading securities 2,589 4,425
Changes in other operating items, net of effect of acquisitions and disposals:
Accounts and other receivables (2,087) (2,167) 1,228
Inventories (1,649) (2,749) (1,687)
Costs and estimated earnings in excess of
billings on uncompleted contracts 1,740 (348) 6,119
Prepaid expenses and other current assets (103) 178 2,993
Accounts payable and accrued expenses 388 3,297 (4,768)
Billings in excess of costs and estimated
earnings on uncompleted contracts (542) 220 2,210
- ----------------------------------------------------------------------------------------------------------
Net cash provided by operations $ 10,266 $ 3,303 $ 1,784
- ----------------------------------------------------------------------------------------------------------
GP STRATEGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(in thousands)
Years ended December 31, 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Proceeds from sale of stock of a subsidiary $ 13,275 $ 7,051
Additions to property, plant and
equipment, net (3,714) (2,678) (2,006)
Additions to intangible assets (1,233) (2,446) (388)
Acquisition of General Physics (4,533)
Reduction of (increase to) investments
and other assets (156) 1,158 (297)
- ----------------------------------------------------------------------------------------------------------
Net cash (used in) provided by
investing activities (9,636) 9,309 4,360
- ----------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Repayments of short-term borrowings (4,124) (11,020)
Proceeds from short-term borrowings 1,313 2,238 5,634
Proceeds from issuance of long-term debt 531 1,400 5,162
Reduction of long-term debt (7,333) (4,213) (8,145)
Proceeds from issuance of
common stock 2,546 244
Exercise of common stock
options and warrants 177
Repurchase of treasury stock (1,496)
Net cash (used in) provided by
financing activities (10,932) 1,971 (8,125)
- -----------------------------------------------------------------------------------------------------------
Net (decrease) increase in cash and
cash equivalents (10,302) 14,583 (1,981)
Cash and cash equivalents at
beginning of year 22,677 8,094 10,075
- ----------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 12,375 $ 22,677 $ 8,094
- ----------------------------------------------------------------------------------------------------------
GP STRATEGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(in thousands)
Years ended December 31, 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------
Supplemental disclosures of
cash flow information:
Cash paid during the year for:
Interest $ 3,961 $ 4,200 $ 4,577
Income taxes $ 946 $ 1,301 $ 655
Supplemental schedule of
non-cash transactions:
Reduction of debt $ 251 $ 1,003 $ 6,250
Additions to investments, intangibles,
other assets and prepaid expenses 18,460 5,379 625
Reduction of accrued
interest payable 295 372
Reduction of minority interest 10,074 372
Reduction (increase) in accrued pension liability 911 (911)
Net unrealized gain on available-for-sale
securities, net of tax (3,306) (3,324)
Issuances of common stock (25,774) (3,430) (4,535)
Issuance of long-term debt (2,340)
Minimum pension liability adjustment (911) 911
- ----------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
GP STRATEGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Description of business and summary of significant accounting policies
Description of business. GP Strategies Corporation, formerly National Patent
Development Corporation (the "Company") has three operating business segments:
Physical Science, Distribution and Optical Plastics. In addition, the Company
owns approximately 54% of the outstanding shares of common stock of the American
Drug Company (ADC) (See Note 5). The Company also has an approximately 12%
investment in Interferon Sciences, Inc. (ISI) (See Note 4), a 12.3% investment
in GTS Duratek, Inc. (Duratek) (See Note 3) and controls approximately 22% of
GSE Systems, Inc. (GSES) (See Note 6). The Company's Physical Science Group,
through its wholly-owned subsidiary, General Physics Corporation (General
Physics), (See Note 2) provides performance improvement services to Fortune 500
companies, manufacturing and process industries, electric power utilities and
other commercial and governmental customers. The Company's Distribution Group,
through its wholly-owned subsidiary, the Five Star Group, Inc. (Five Star), is
engaged in the wholesale distribution of home decorating, hardware and finishing
products. The Company's Optical Plastics Group, through its wholly owned
subsidiary MXL Industries, Inc. (MXL), manufactures molded and coated optical
products, such as shields and face masks and non-optical plastic products.
Principles of consolidation and investments. The consolidated financial
statements include the operations of GP Strategies Corporation and its
majority-owned subsidiaries. Investments in 20% - 50% owned companies are
accounted for on the equity basis. All significant intercompany balances and
transactions have been eliminated in consolidation.
Statements of cash flows. For purposes of the statements of cash flows, the
Company considers all highly liquid instruments with original maturities of
three months or less from purchase date to be cash equivalents.
Marketable securities. Marketable securities at December 31, 1997 and 1996
consist of U.S. corporate equity securities. The Company classifies its
marketable equity securities as trading, available-for-sale and long-term.
Long-term investments, in which the Company has less than a 20% interest, have
not been reclassed to available-for-sale securities due to restrictions on the
amount the Company is able to sell within a one year period. These long-term
investments are carried at cost.
GP STRATEGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. Description of business and summary of significant accounting
policies (Continued)
The Company's trading securities, which are included in Marketable securities on
the consolidated balance sheet, are expected to be sold within one year.
Available-for-sale securities and long-term investments are included in
Investments and advances on the consolidated balance sheet. The Company records
trading and available-for-sale securities at their fair value. Trading
securities are held principally for the purpose of selling them in the near
term. Unrealized holding gains and losses on trading securities are included in
earnings. Unrealized holding gains and losses on available-for-sale securities
are excluded from earnings and are reported as a separate component of
stockholders' equity, net of tax, until realized.
Inventories. Inventories are valued at the lower of cost or market, principally
using the first-in, first-out (FIFO) method.
Foreign currency transactions. The Company's Swiss Bonds (see Note 11) are
subject to currency fluctuations and the Company has hedged portions of such
debt from time to time, but not within the three year period ended December 31,
1997. During the years ended December 31, 1997, 1996 and 1995, the Company
realized foreign currency transaction gains (losses) of $131,000, $340,000 and
$(1,066,000), respectively. These amounts are included in Investment and other
income, net. The Company's 54% owned subsidiary, the American Drug Company (See
Note 5) conducts its business primarily in U.S. dollars.
Contract revenue and cost recognition. The Company provides services under
time-and-materials, cost-plus-fixed-fee and fixed-price contracts. Revenue is
recognized as costs are incurred and includes estimated fees at predetermined
rates. Differences between recorded costs and estimated earnings and final
billings are recognized in the period in which they become determinable. Costs
and estimated earnings in excess of billings on uncompleted contracts are
recorded as a current asset. Billings in excess of costs and estimated earnings
on uncompleted contracts are recorded as a current liability. Generally,
contracts provide for the billing of costs incurred and estimated earnings on a
monthly basis. Retainages, amounts subject to future negotiation and amounts
which are expected to be collected after one year are not material for any
period.
Property, plant and equipment. Property, plant and equipment are carried at
cost. Major additions and improvements are capitalized while maintenance and
repairs which do not extend the lives of the assets are expensed currently. Gain
or loss on the disposition of property, plant and equipment is recognized in
operations when realized.
1. Description of business and summary of significant accounting
policies (Continued)
Depreciation. The Company provides for depreciation of property, plant and
equipment primarily on a straight-line basis over the following estimated useful
lives:
CLASS OF ASSETS USEFUL LIFE
Buildings and improvements 5 to 40 years
Machinery, equipment and furniture
and fixtures 3 to 7 years
Leasehold improvements Shorter of asset life or term of lease
Intangible assets. The excess of cost over the fair value of net assets of
businesses acquired is recorded as goodwill and is amortized on a straight-line
basis generally over periods ranging from 5 to 40 years. The Company capitalizes
costs incurred to obtain and maintain patents and licenses. Patent costs are
amortized over the lesser of 17 years or the remaining lives of the patents, and
license costs over the lives of the licenses. The Company also capitalizes costs
incurred to obtain long-term debt financing. Such costs are amortized on an
effective yield basis over the terms of the related debt and such amortization
is classified as interest expense in the Consolidated Statements of Operations.
The periods of amortization of goodwill are evaluated at least annually to
determine whether events and circumstances warrant revised estimates of useful
lives. This evaluation considers, among other factors, expected cash flows and
profits of the businesses to which the goodwill relates. Based upon the periodic
analysis, goodwill is written down or written off if it appears that future
profits or cash flows will be insufficient to recover such goodwill.
Treasury stock. Treasury stock is recorded at cost. Reissuances of treasury
stock are valued at market value at the date of reissuance. The cost of the
treasury stock is relieved from the treasury stock account and the difference
between the cost and market value is recorded within the equity accounts, as
appropriate.
1. Description of business and summary of significant accounting
policies (Continued)
Stock option plan. Prior to January 1, 1996, the Company accounted for its stock
option plan in accordance with the provisions of Accounting Principles Board
("APB") Opinion No. 25, Accounting for Stock Issued to Employees, and related
interpretations. As such, compensation expense would be recorded on the date of
grant only if the current market price of the underlying stock exceeded the
exercise price. On January 1, 1996, the Company adopted SFAS No. 123, Accounting
for Stock-Based Compensation, which permits entities to recognize as expense
over the vesting period the fair value of all stock-based awards on the date of
grant. Alternatively, SFAS No. 123 also allows entities to continue to apply the
provisions of APB Opinion No. 25 and provide pro forma net income and pro forma
earnings per share disclosures for employee stock option grants made in 1995 and
future years as if the fair-value-based method defined in SFAS No. 123 had been
applied. The Company has elected to continue to apply the provisions of APB
Opinion No. 25 and provide the pro forma disclosure provisions of SFAS No. 123.
Sales of stock by a subsidiary. The Company records in the Consolidated
Statements of Operations gain or loss realized when a subsidiary sells its
shares at an offering price which differs from the Company's carrying amount per
share of such subsidiary's stock.
Income taxes. Income taxes are accounted for under the asset and liability
method. Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
Income (loss) per share. Basic earnings per share is based upon the weighted
average number of common shares outstanding, including Class B common stock
during the period. Diluted earnings per share is based upon the weighted average
number of common shares outstanding during the period assuming the issuance of
common stock for all dilutive potential common shares outstanding.
Use of estimates. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.
1. Description of business and summary of significant accounting
policies (Continued)
Concentrations of credit risk. Financial instruments that potentially subject
the Company to significant concentrations of credit risk consist principally of
cash investments and accounts receivable. The Company places its cash
investments with high quality financial institutions and limits the amount of
credit exposure to any one institution. With respect to accounts receivable,
approximately 24% are related to United States government contracts, and the
remainder are dispersed among various industries, customers and geographic
regions. In addition, the Company has investments in various equity securities,
including GTS Duratek, Inc., Interferon Sciences, Inc. and GSE Systems, Inc.
(See Notes 3, 4 and 6).
The Company adopted the provisions of SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, on
January 1, 1996. This Statement requires that long-lived assets and certain
identifiable intangibles be reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the assets. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceed the fair value of the assets. Assets to be disposed
of are reported at the lower of the carrying amount or fair value less costs to
sell. Adoption of this Statement did not have a material impact on the Company's
financial position, results of operations, or liquidity.
2. General Physics Corporation
On January 24, 1997, the Company acquired the remaining 5,047,623 shares (48% of
the outstanding shares) of General Physics that it did not already own, in
exchange for .60 shares of GP Strategies common stock for each share of General
Physics. The transaction has been accounted for as a purchase of a minority
interest. The Company issued an aggregate of 3,028,574 shares of its common
stock, valued at $25,228,000 in the transaction. In addition, the Company paid
$4,533,000 in cash and had accrued $1,515,000 additional liabilities in relation
to the purchase. As a result of this transaction, the Company purchased for a
total of $31,143,000 the remaining 48% of the outstanding shares of General
Physics and recorded $21,069,000 of goodwill, which is being amortized over
approximately 30 years.
2. General Physics Corporation (Continued)
The following information shows on a pro-forma basis, the results of operations
for the Company for the year ended December 31, 1996, as if the above
transaction had occurred as of January 1, 1996 (in thousands):
(unaudited)
Sales $203,800
Income before discontinued operation
and extraordinary item 13,751
Net income 13,751
Basic earnings per share 1.33
Diluted earnings per share 1.32
The following selected balance sheet information shows on a pro-forma basis, the
financial position of the Company as if the above transaction had occurred on
December 31, 1996 (in thousands):
(unaudited)
Cash, cash equivalents and marketable securities $ 24,334
Working capital 36,836
Intangible assets, net 54,200
Total assets 194,158
Stockholders' equity 118,972
The above pro-forma information is not necessarily indicative of the actual
financial position or results of operations that would have been achieved if the
transaction had occurred as of or for the period indicated, or of future results
that may be achieved.
General Physics provides performance improvement services to Fortune 500
companies, manufacturing and process industries, electric power utilities and
other commercial and governmental customers.
3. GTS Duratek, Inc.
On January 24, 1995, the Company sold 1,666,667 shares of common stock of GTS
Duratek, Inc. (Duratek) at a price of $3.00 per share to The Carlyle Group
(Carlyle) in connection with a $16 million financing by Duratek with Carlyle, a
Washington, D.C. based private merchant bank. In addition, the Company granted
Carlyle an option, which was exercised in December 1995, to purchase up to an
additional 500,000 shares of the Company's Duratek common stock over the next
year at $3.75 per share. The Company realized a gain of $3,768,000 during 1995
on sales of Duratek common stock, primarily in these two transactions.
3. GTS Duratek, Inc. (Continued)
In April 1996, the Company sold 1,000,000 shares of its Duratek common stock,
received proceeds of $17,700,000 and recognized a gain of $12,200,000.
As a result of the above transactions, the Company accounted for its investment
in Duratek on the equity basis from January 24, 1995 through the first quarter
of 1996. The Company's share of Duratek's income included in Investment and
other income, net is $31,000 in 1995. Commencing in April 1996, the Company
accounts for its investment in Duratek as a combination of marketable
securities, available-for-sale securities and securities held for long-term
investment.
Duratek is an integrated environmental services and technology firm with
proprietary waste processing systems applicable to radioactive, hazardous, mixed
and other wastes.
At December 31, 1997, the Company owned 1,514,250 shares of Duratek, or 12.3% of
the outstanding shares of common stock.
Information relating to the Company's investment in Duratek is as follows (in
thousands):
1997 1996
- -------------------------------------------------------------------------------
Included in Marketable securities:
Number of shares 100 250
Value $ 1,350 $ 3,250
Included in Investments and advances:
Number of shares 500 225
Available-for-sale equity securities, at market $ 6,750 $ 2,925
Number of shares 914 1,345
Securities held for long-term
investment, at cost $ 1,487 $ 2,188
Total number of shares owned 1,514 1,820
Market value of shares $20,442 $23,660
- -------------------------------------------------------------------------------
4. Interferon Sciences, Inc.
Interferon Sciences, Inc. (ISI) is approximately 12% owned by the Company. It is
engaged in the manufacture and sale of ALFERON N Injection, ISI's first product
commercially approved by the FDA for the treatment of recurring and refractory
external genital warts, and the research and development of other alpha
interferon based products for the treatment of viral diseases, cancers and
diseases of the immune system.
In May 1996, the Company realized a $1,938,000 gain on issuance of stock by this
affiliate as a result of the issuance of 2,000,000 shares of common stock by ISI
at $8.00 per share. Effective in the third quarter of 1996, the Company
accounted for its investment in ISI as a combination of long-term investments
carried at cost and as long-term available-for-sale equity securities carried at
market value. In 1996, the share of ISI's loss included in Investment and other
income, net was $1,464,000.
In 1995, the Company realized a $2,775,000 gain on issuance of stock by this
affiliate, primarily as the result of the issuance of 3,000,000 shares of Common
Stock by ISI at $4.80 per share in August and September 1995.
All shares and per share information of ISI have been restated to reflect the
one for four reverse stock split of ISI effective on March 21, 1997.
Information relating to the Company's investment in ISI is as follows (in
thousands):
1997 1996
- -------------------------------------------------------------------------------
Included in Investments and advances:
Number of shares 608 490
Available-for-sale equity securities, at market $ 5,284 $ 3,251
Number of shares 1,246 1,364
Securities held for long-term
investment, at cost $ 2,841 $ 3,109
Total carrying amount $ 8,125 $ 6,360
Total number of shares owned 1,854 1,854
Market value of shares $16,107 $ 12,285
- -------------------------------------------------------------------------------
5. American Drug Company
The Company owns approximately 54% of the outstanding common stock of American
Drug Company (ADC), which was organized in 1993 as a wholly-owned subsidiary of
the Company to initiate marketing activities for American generic pharmaceutical
and medical pharmaceuticals in Russia and the Commonwealth of Independent States
(the "CIS"). ADC's subsidiary, NPD Trading (USA), Inc. provides consulting
services to Western businesses in Russia and Eastern Europe. ADC sells
American-made generic pharmaceutical and health care products under its own
label in Russia and the CIS.
At the end of 1997, the Company made the decision to concentrate on the
marketing and sales of medical equipment and related products, such as hospital
furniture and laboratory supplies and to withdraw from the generic
pharmaceutical and over-the-counter (OTC) healthcare product business because of
significantly declining sales of generic products. Sales activity with respect
to generic drugs will be undertaken solely through a Russian company.
In August 1994, pursuant to a Transfer and Distribution Agreement, the Company
distributed 46% of its interest in ADC to the Company's shareholders. In
addition, ADC issued warrants to the Company's shareholders to purchase its
stock for a period of two years, which were extended for an additional two
years, subject to cancellation under certain circumstances.
In July 1996, ADC issued convertible notes in the principal amount of $1,000,000
in a private offering. In connection with these notes, the Company issued
warrants to purchase 82,306 shares of its common stock provided that the
warrants may only be exercised utilizing the Notes (See Note 11(g)).
6. GSE Systems, Inc.
In March 1994, General Physics and a subsidiary of the Company contributed
assets to a newly formed, multi party joint venture, GSE Systems, Inc. (GSES).
GSES designs, develops and delivers business and technology solutions by
applying process control, data acquisition, simulation, and business software,
systems and services to the energy, process and manufacturing industries
worldwide. On August 1, 1995, GSES completed an initial public offering of
1,725,000 shares (including an over-allotment option) of its common stock at $14
per share. As a result of the offering, the Company recognized a gain on
issuance of stock by an affiliate of approximately $3,137,000 and at December
31, 1997, controls approximately 22% of GSES. The Company accounts for its
investment in GSES on the equity basis.
Information relating to the Company's investment in GSES is as follows (in
thousands):
1997 1996
- ----------------------------------------------------------------------------
Included in Investments and advances:
Underlying assets $ 3,750 $ 5,484
Goodwill 4,238 4,384
Total carrying amount 7,988 9,868
Number of shares controlled 1,125 1,125
Market value of shares $ 5,906 $10,406
Equity in income (loss) included in Investment
and other income (expenses), net (1,880) 924
- ----------------------------------------------------------------------------
Condensed financial information for GSES is as follows as of December 31, 1997
and 1996 and for the years then ended (in thousands):
1997 1996
- ----------------------------------------------------------------------------
Current assets $31,714 $37,876
Non current assets 16,610 13,130
Current liabilities 30,031 23,733
Non current liabilities 2,369 2,580
Stockholders' equity 15,924 24,693
Revenue 79,711 96,033
Gross profit 21,385 32,354
Net income (loss) (8,703) 4,143
- ----------------------------------------------------------------------------
7. Inventories
Inventories, consisting of material, labor and overhead, are classified as
follows (in thousands):
December 31, 1997 1996
- ----------------------------------------------------------------------------
Raw materials $ 619 $ 793
Work in process 252 210
Finished goods 23,971 22,190
- ----------------------------------------------------------------------------
$ 24,842 $ 23,193
- ----------------------------------------------------------------------------
8. Property, plant and equipment
Property, plant and equipment consists of the following (in thousands):
December 31, 1997 1996
- ----------------------------------------------------------------------------
Land $ 173 $ 173
Buildings and improvements 1,374 1,374
Machinery and equipment 12,824 11,656
Furniture and fixtures 18,120 15,745
Leasehold improvements 7,268 7,097
- ----------------------------------------------------------------------------
39,759 36,045
Accumulated depreciation and amortization (30,027) (26,767)
- ----------------------------------------------------------------------------
$ 9,732 $ 9,278
- ----------------------------------------------------------------------------
9. Short-term borrowings
Short-term borrowings are as follows (in thousands):
December 31, 1997 1996
- ---------------------------------------------------------------------------
Line of Credit Agreement (a) $ 16,894 $15,581
Revolving Credit Agreement (b) 7,051 4,700
- ---------------------------------------------------------------------------
$ 23,945 $ 20,281
- ---------------------------------------------------------------------------
9. Short-term borrowings (Continued)
(a) In April 1993, Five Star Group, Inc. (Five Star) and MXL Industries, Inc.
(MXL) each entered into a revolving credit and term loan agreement (the "Five
Star Loan Agreement" and "MXL Loan Agreement"), which was amended on October 23,
1995 and September 30, 1996. The September 30, 1996 amendment extended the
Agreements to September 30, 1997. The Five Star Loan Agreement provided for a
$20,000,000 revolving credit facility (the "Five Star Revolving Credit
Facility"). The Five Star Revolving Credit Facility was a committed facility
which allowed Five Star to borrow amounts up to 50% of Eligible Inventory (as
defined) and 80% of Eligible Receivables (as defined) at an interest rate of 1%
in excess of the prime rate.
On August 18, 1997, the Company's wholly-owned subsidiary, Five Star entered
into a three year Loan Agreement with a syndicate of three banks. The Loan
Agreement replaces the previous Five Star Loan Agreement. The Loan Agreement
provides for a $22,000,000 revolving credit facility, which allows Five Star to
borrow based upon a formula of up to 50% of eligible inventory and 80% of
eligible accounts receivables, as defined. The Loan Agreement bears interest at
2.25% over LIBOR for up to $11,000,000 of the loan (at the Company's option) and
the prime rate of interest plus .625% for the remaining balance. At December 31,
1997, there was $16,894,000 outstanding under the Loan Agreement, and an
additional $818,000 was available to be borrowed.
The Five Star Loan Agreement is secured by all of the assets of Five Star and
339,844 shares of common stock of ISI, which was contributed to Five Star in
connection with the forgoing transactions.
The amended MXL Loan Agreement provided for a $4,500,000 term loan, which was
adjusted to a balance of $3,960,000 at November 1, 1995 (the "MXL Term Loan").
The MXL Revolving Credit Facility was terminated by the September 30, 1996
amendment. As of December 31, 1996, the balance of the MXL Term Loan was
$2,722,000 (see Note 11).
9. Short-term borrowings (Continued)
(b) On April 7, 1995, the Company and General Physics entered into a three year
$20,000,000 secured revolving credit agreement with a commercial bank,
terminating a previous credit agreement. Borrowings under the credit agreement
bare interest at the prime rate or 1.75% over LIBOR whichever rate was elected
by General Physics.
At December 31, 1996, $4,700,000 was borrowed under the credit agreement.
On March 26, 1997, the Company and its wholly-owned subsidiaries, General
Physics and MXL Industries, Inc. (MXL), entered into a three year secured
$25,000,000 Revolving Credit Agreement, with a syndicate of three banks. The
Agreement replaces the MXL Loan Agreement, the General Physics Revolving Credit
Agreement and the Company's Term Loan Agreement. The Agreement bears interest at
the prime rate or 1.75% over LIBOR. The borrowing formula is based upon eligible
accounts receivable of General Physics and MXL, as well as various corporate
assets. The Agreement contains certain covenants which, among other things,
limit the amount and nature of certain expenditures by General Physics and MXL,
and require the maintenance of certain financial ratios. At December 31, 1997,
the Company is in violation of its fixed asset additions covenant. The Company
has received a waiver for this violation. Under the Agreement, the full
$25,000,000 of the Revolving Credit Agreement would be available to the Company
and/or General Physics and/or MXL. At December 31,1997, the amount outstanding
was approximately $7,051,000 and an additional $17,949,000 was available to be
borrowed.
10. Accounts payable and accrued expenses
Accounts payable and accrued expenses are comprised of the following (in
thousands):
December 31, 1997 1996
- --------------------------------------------------------------------------
Accounts payable $ 15,133 $ 12,893
Payroll and related costs 5,063 5,012
Interest 309 211
Other 5,010 4,763
- --------------------------------------------------------------------------
$ 25,515 $ 22,879
- --------------------------------------------------------------------------
11. Long-term debt
Long-term debt is comprised of the following (in thousands):
December 31, 1997 1996
- ------------------------------------------------------------------------------
8% Swiss Bonds, due 2000 (a) $ 2,158 $ 2,189
5% Convertible Bonds due 1999 (b) 1,786 1,755
12% Subordinated Debentures due 1997 (c) 6,732
Term loan with banks (Note 9(a)) 2,722
Senior Subordinated Debentures (d) 842 811
Notes payable in connection with settlement
of litigation (e) 273
Term loan with bank (f) 4,000
7% Convertible Notes (g) 1,000 1,000
Equipment lease obligations (*) 802 634
- ------------------------------------------------------------------------------
6,588 20,116
Less current maturities 342 9,309
- ------------------------------------------------------------------------------
$ 6,246 $ 10,807
- ------------------------------------------------------------------------------
(*) Secured by assets held under capital lease obligations.
(a) In June 1995, the Company exchanged for various Swiss debt obligations an
aggregate of SFr. 3,604,000 of 8% Swiss Bonds, due June 28, 2000 (the "8%
Bonds"). The 8% Bonds were valued at $2,340,000, at the then exchange rate
(after an original issue discount of 25%). The principal and interest on the 8%
Bonds are payable either in cash or in shares of common stock of the Company, at
the option of the Company.
(b) As a result of an exchange offer on July 12, 1993, the Company issued
$3,340,080 principal amount of 5% Bonds which are convertible into shares of the
Company's Common Stock. The Company recorded an original issue discount on the
5% Bonds of 10%. At December 31, 1997, $1,879,000 of the 5% Bonds were
outstanding and convertible into 107,989 of the Company's Common Stock.
11. Long-term debt (Continued)
(c) During the third quarter of 1987, the Company issued $12,500,000 of
Subordinated Debentures (Debentures) which matured in 1997. On September 30,
1997, the Company repaid in full the remaining outstanding Debentures.
(d) In August 1994, General Physics, as a result of the acquisition of
substantially all the assets of SGLG issued $15 million of 6% Senior
Subordinated Debentures, which have a carrying value of $12,032,000, net of a
debt discount of $2,968,000. The debentures are unsecured and require payments
of interest only on a quarterly basis through June 30, 1999, quarterly principal
installments of $525,000 plus interest through June 30, 2004 and the balance of
$4.5 million on June 30, 2004. The debentures are subordinated to borrowings
under the line of credit agreement. At December 31, 1997, the carrying value of
the debentures held by the Company was $11,190,000, which was eliminated in
consolidation, and the remaining $842,000 of debentures were held by the public.
(e) Under the terms of an 1987 settlement agreement, the Company agreed to a
series of payments in either cash or Common Stock of the Company. The final
payment was made in January 1997.
(f) On March 26, 1997, the Company entered into a new Revolving Credit
Agreement, replacing the Term Loan Agreement (see Note 9(b)).
(g) In July 1996, ADC issued convertible notes (the "Notes") in the principal
amount of $1,000,000 in a private offering (the "Offering"). ADC received net
proceeds of $950,000 from the Offering. The Notes mature on June 30, 2001, bear
interest at the rate of 7% per annum, and are convertible into shares of common
stock of ADC at a conversion price of $.25 per share. In connection with the
Offering, the Company issued warrants to purchase an aggregate of 82,306 shares
of the Company's common stock, exercisable at a price of $12.15 per share,
provided that the warrants may only be exercised utilizing the Notes. In the
event that the closing price of the common stock of ADC is at least $1.00 per
share for at least 20 consecutive trading days, the Notes shall be subject to
redemption at the election of ADC, at a redemption price of 100% of the
principal amount called for redemption, together with accrued interest.
The Company and ADC have agreed that (i) if the Notes are used to exercise the
warrants prior to a default on the Notes, the Company will receive from ADC, in
exchange for the Notes shares of ADC's common stock at a price equal to 60% of
its then current market value, and (ii) if the Notes are used to exercise the
warrants after a default on the Notes, the Company will receive from ADC, in
exchange for the Notes shares of ADC's common stock at a price equal to 25% of
its then current market value.
11. Long-term debt (Continued)
Aggregate annual maturities of long-term debt outstanding at December 31, 1997
for each of the next five years are as follows (in thousands):
1998 $ 342
1999 2,086
2000 2,426
2001 1,261
2002 263
12. Employee benefit plans
(a) Effective December 31, 1991, the Plan participants would no longer accrue
benefits under its Defined Benefit Pension Plan, but became eligible to
participate in the Company's Savings Plan. During 1997, the Company announced
its intention to terminate the Defined Benefit Pension Plan (the Plan). The Plan
was terminated effective October 31, 1996, and settled in 1997. The termination
was a "standard termination" as defined by the Pension Benefit Guaranty
Corporation (the "PBGC"). In order to terminate the Plan in a standard
termination, Plan assets must be sufficient to provide all benefit obligations
under the Plan.
The Company provided additional funding to the Plan such that Plan assets were
sufficient to satisfy all benefit liabilities under the Plan, with respect to
each participant and each beneficiary of a deceased participant. This was
accomplished by the purchase of irrevocable annuity contracts from an insurer,
or by an alternative form of distribution provided for under the Plan.
The Company paid $1,500,000 to the Plan Sponsor in July 1997 to fully fund the
Plan to satisfy its benefit obligations.
The pension expense amounted to $278,000, $400,000 and $26,000 for 1997, 1996,
1995, respectively.
12. Employee benefit plans (Continued)
The following table sets forth the funded status of the plan and the amount
recognized in the Company's Consolidated Financial Statements (in thousands):
December 31, 1996 1995
- ------------------------------------------------------------------------------
Actuarial present value of benefit plan obligations:
Accumulated benefit obligation (including
vested benefits of $5,549 and $5,365) $ (5,549) $(5,890)
- ------------------------------------------------------------------------------
Projected benefit obligation for service
rendered to date $ (5,549) $(5,890)
Plan assets at fair value 4,482 4,353
- ------------------------------------------------------------------------------
Projected benefit obligation in excess
of plan assets (1,067) (1,537)
Unrecognized net loss from past experience
different from that assumed 911
Minimum pension liability (911)
Accrued pension cost included in
accounts payable and accrued expenses
in the consolidated balance sheets $ (1,067) $(1,537)
- ------------------------------------------------------------------------------
The net periodic pension expense is as follows:
Service cost-benefits earned $ $
Interest cost on projected benefit obligations 376 420
Actual return on plan assets (320) (424)
Net amortization and deferral and other 344 30
- ------------------------------------------------------------------------------
Net periodic pension expense $ 400 $ 26
- ------------------------------------------------------------------------------
The Company's assumptions used as of December 31, 1996 and 1995 in determining
the pension cost and pension cost liability shown above were as follows:
1996 1995
-----------------------
Percent
Discount rate 7.25 7.25
Long-term rate of return on assets 10.00 10.00
(b) Effective March 1, 1992, the Company adopted the 1992 401(k) Savings Plan
(the Savings Plan).
12. Employee benefit plans (Continued)
The Company's Savings Plan is available to employees who have completed one year
of service.
The Savings Plan permits pre-tax contributions to the Savings Plan by
participants pursuant to Section 401(k) of the Internal Revenue Code of 2% to 6%
of base compensation. The Company matches 40% of the participants' eligible
contributions based on a formula set forth in the Savings Plan. Participants are
fully vested in their contributions and may withdraw such contributions at time
of employment termination, or at age 59 1/2 or earlier in the event of financial
hardship. Amounts otherwise are paid at retirement or in the event of death or
disability. Employer contributions vest at a rate of 20% per year.
The Savings Plan is administered by a trustee appointed by the Board of
Directors of the Company and all contributions are held by the trustee and
invested at the participants' direction in various mutual funds. The Company's
expense associated with the Savings Plan was $201,000, $246,000 and $223,000 in
1997, 1996 and 1995, respectively.
(c) General Physics maintains a Profit Investment Plan (the Plan) for employees
who have completed ninety days of service with General Physics. The Plan permits
pre-tax contributions to the Plan by participants pursuant to Section 401(k) of
the Internal Revenue Code of 1% to 14% of base compensation. General Physics
matches participants' contributions up to a specific percentage of the first 7%
of base compensation contributed for employees who have completed one year of
service with General Physics and may make additional matching contributions. On
April 20, 1995, the Company and General Physics agreed to exchange shares of
General Physics' common stock or other consideration, for shares of the common
stock of the Company upon terms which would permit General Physics to match
participants' contributions in shares of the Company's common stock up to 57% of
monthly employee salary deferral contributions. Previously, General Physics had
made contributions of its own common stock to the Plan equal to approximately
50% of monthly employee salary deferral contributions. During 1996 and 1995, the
exchange included 245,126 and 176,171 shares, respectively, of General Physics'
common stock and 116,591 and 98,251 shares, respectively of the common stock of
the Company. On January 24, 1997, the Company acquired the remaining 48% of
General Physics, and contributed 122,290 shares of the Company's common stock
directly to the Plan during 1997. All contributions are held by a trustee and
invested at the participant's direction in various mutual funds. Participants
are fully vested in their own contributions and may withdraw such contributions
at age 59 1/2 or earlier in the event of financial hardship. Amounts will
otherwise be paid at retirement or in the event of death or disability. Employer
contributions vest at a rate of 20% per year. The Company made matching
contributions to the Plan for employees of the Company of approximately
$1,121,000, $1,065,000 and $1,097,000 for the years ended December 31, 1997,
1996 and 1995, respectively.
13. Income taxes
For U.S. Federal income tax purposes, a parent corporation with an 80% or
greater equity interest in its subsidiary may file a consolidated tax return.
Accordingly, the Company and its greater than 80% owned subsidiaries will file a
consolidated Federal income tax return for the year ended December 31, 1997. The
subsidiaries in which the Company has an equity ownership between 50% and 80%,
are consolidated for financial reporting purposes, but file separate U.S.
Federal income tax returns for the year ended December 31, 1997.
The components of pretax income (loss) are as follows (in thousands):
Years ended December 31, 1997 1996 1995
- -------------------------------------------------------------------------------
Continuing operations $ 2,730 $ 11,244 $ 5,819
Discontinued operation (2,941)
The Company does not have any material foreign operations.
The components of income tax expense (benefit) from continuing operations are as
follows (in thousands):
Years ended December 31, 1997 1996 1995
- -------------------------------------------------------------------------------
Current
State and local $ 1,200 $ 315 $ 221
Federal tax expense 135 1,409 37
- -------------------------------------------------------------------------------
1,335 1,724 258
- -------------------------------------------------------------------------------
Deferred
State and local 11 39 206
Federal tax expense (benefit) (2,039) (1,899) 1,323
- -------------------------------------------------------------------------------
(2,028) (1,860) 1,529
- -------------------------------------------------------------------------------
$ (693) $(136) $ 1,787
- -------------------------------------------------------------------------------
The deferred provision excludes activity in the net deferred tax assets relating
to tax on appreciation in securities available-for-sale, which is recorded to
stockholders' equity in the approximate amounts of $1,400,000 and $1,300,000 for
the years ended December 31, 1997 and 1996, respectively.
13. Income taxes (Continued)
The difference between the provision for income taxes computed at the statutory
rate and the reported amount of tax expense attributable to consolidated
earnings from continuing operations is as follows:
December 31, 1997 1996 1995
- ------------------------------------------------------------------------------
Federal income tax rate 35.0% 35.0% 35.0%
State and local taxes net of Federal benefit 28.8 2.0 4.8
Items not deductible - primarily
amortization of goodwill 25.4 4.8 14.0
Net operating loss utilization (82.6) (25.0)
Valuation allowance adjustment (32.9) (19.0) (22.6)
General Physics acquisition of SGLG 33.0
Other .9 1.0 (.5)
- ------------------------------------------------------------------------------
Effective tax rate (25.4)% (1.2%) 30.7%
- ------------------------------------------------------------------------------
In 1995, the Company recorded an income tax expense of $1,787,000. The current
income tax provision of $258,000 reflected above, represents the estimated taxes
payable by the Company for the year ended December 31, 1995. The deferred income
tax provision of $1,529,000 represents the deferred taxes of General Physics,
the Company's then 51% owned subsidiary.
In 1996, the Company recorded an income tax benefit of $136,000. The current
income tax provision of $1,724,000 reflected above, represents the estimated
taxes payable by General Physics, the Company's then 52% owned subsidiary. The
deferred income tax benefit of $1,860,000 results from utilization of net
operating loss carryovers and a reduction in the valuation allowance, among
other factors. The decrease of $2,673,000 in the valuation allowance in 1996 was
attributable in part to the utilization of the Company's net operating loss
carryforwards, and to the Company's expectation of generating sufficient taxable
income that will allow for the realization of a portion of its deferred tax
assets.
In 1997, the Company recorded an income tax benefit of $693,000. The current
income tax provision of $1,335,000 reflected above, represents the estimated
taxes payable by the Company for the year ended December 31, 1997. The deferred
income tax benefit of $2,028,000 results primarily from the utilization of net
operating loss carryovers and a reduction in the valuation allowance. The
decrease of $3,153,000 in the valuation allowance in 1997 was attributable in
part to the utilization of the Company's net operating loss carryforwards, and
to the Company's expectation of generating sufficient taxable income that will
allow for the realization of a portion of its deferred tax assets.
13. Income taxes (Continued)
As of December 31, 1997, the Company has approximately $13,657,000 of net
operating loss carryovers consisting of $9,644,000 with respect to net operating
losses generated from the Company's consolidated tax return and $4,013,000
generated by ADC as a separate tax filer for Federal income tax return purposes.
These carryovers expire in the years 2005 through 2012. In addition, the Company
has approximately $3,800,000 of available credit carryovers of which
approximately $2,800,000 expire in the years 1998 through 2003, and
approximately $1,100,000 of which may be carried over indefinitely. The tax
effects of temporary differences between the financial reporting and tax bases
of assets and liabilities that are included in the net deferred tax assets are
summarized as follows:
December 31, 1997 1996
- -----------------------------------------------------------------------------
Deferred tax assets:
Accounts receivable, principally due
to allowance for doubtful accounts $ 827 $ 663
Inventory 127 165
Lawsuit settlements 117
Accrued expenses 505 495
Net operating loss carryforwards 5,259 7,037
Tax credit carryforwards 3,808 3,627
- -----------------------------------------------------------------------------
Deferred tax assets 10,526 12,104
- -----------------------------------------------------------------------------
Deferred tax liabilities:
Property and equipment, principally due to
differences in depreciation 1,361 1,088
Unrealized exchange gain 1,323 1,272
Prepaid expenses 22 157
Unrealized marketable security gain 484 2,404
Investment in partially owned companies 3,813 1,109
- -----------------------------------------------------------------------------
Deferred tax liabilities 7,003 6,030
- -----------------------------------------------------------------------------
Net deferred tax assets 3,523 6,074
- -----------------------------------------------------------------------------
Less valuation allowance (2,422) (5,575)
- -----------------------------------------------------------------------------
Net deferred tax asset $ 1,101 $ 499
- -----------------------------------------------------------------------------
Included in the balance sheets as:
Current liabilities * $ $ (344)
Deferred tax asset 1,101 843
- -----------------------------------------------------------------------------
$ 1,101 $ 499
- -----------------------------------------------------------------------------
* Relates to General Physics, a 52% owned subsidiary at December 31, 1996, not
included in the Company's consolidated Federal income tax return in 1996.
13. Income taxes (Continued)
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of the deferred tax assets
is dependent upon the generation of future taxable income during the periods in
which temporary differences are deductible. Management considers the scheduled
reversal of deferred tax liabilities, projected future taxable income, and tax
planning strategies in making this assessment. Based upon the Company's
projection of future taxable income, attributable in part to the merger with
General Physics (see Note 2) which will allow General Physics to be included in
the consolidated tax return of the Company, and to unrealized gains on the
Company's investments expected to be realized in the future, management believes
it is more likely than not that the Company will realize the benefits of
deferred tax assets of $1,101,000, and has recorded this amount as an asset as
of December 31, 1997.
14. Discontinued operation
In December 1994, the Company decided to sell its Eastern Electronics
Manufacturing Corporation (Eastern) subsidiary, which was the only company in
the Electronics segment. As a result of the decision to sell Eastern, the
Company reflected Eastern as a discontinued operation. The total loss for
discontinued operation recognized in 1994 was $2,574,000, of which $1,789,000,
which included an $800,000 write-down of inventories, was from operations and
$785,000 was a loss on disposal, which was comprised of: (a) a $200,000
write-down of property and equipment; (b) a $485,000 write-off of goodwill
relating to Eastern; (c) $100,000 for expected losses through the date of
disposal. In 1995, the Company recognized a loss from discontinued operation of
$2,941,000, of which a total of $2,610,000 was a loss on disposal incurred on
the sale of inventory ($1,550,000), write-offs of accounts receivable ($360,000)
and sales of fixed assets ($700,000). At the time the Company adopted a plan of
disposal in December 1994, the Company was in negotiations to sell a substantial
portion of its specific use inventory. These negotiations subsequently broke off
and the Company therefore fully reserved this inventory in 1995.
The December 31, 1994 estimated net realizable value of Eastern's fixed assets
was based upon a prior appraisal, but the actual sale in 1995 resulted in less
proceeds than prior estimates. Receivable write-offs in 1995 were caused when
the Company liquidated its assets rather than selling its inventory as part of a
continuing business, therefore making it more difficult to collect the
outstanding receivables. In addition, $331,000 in operating expenses were
incurred during 1995. The Company sold or otherwise liquidated substantially all
of Eastern's assets during 1995 and 1996.
15. Common Stock, stock options, warrants and other shares reserved
(a) Under the Company's non-qualified stock option plan, employees and certain
other parties may be granted options to purchase shares of common stock. The
options may be granted at a price not less than 85% of the fair market value of
the common stock on the date of grant and are exercisable over periods not
exceeding ten years from the date of grant. Shares of common stock are also
reserved for issuance pursuant to other agreements, as described below. Changes
in options and warrants outstanding during 1995, 1996, and 1997, options and
warrants exercisable and shares reserved for issuance at December 31, 1995,
1996, and 1997 are as follows:
Common Stock
Options and warrants Price Range Number Weighted-Average
outstanding per share of share Exercise Price
- --------------------------------------------------------------------------------
December 31, 1994 $9.00 - 24.00 1,077,055
- --------------------------------------------------------------------------------
Granted 8.375- 8.50 451,239 $ 8.41
Exercised
Terminated 9.00 - 20.50 (651,182) 12.16
- --------------------------------------------------------------------------------
December 31, 1995 8.375- 24.00 877,072 9.03
- --------------------------------------------------------------------------------
Granted 7.69 - 10.00 551,657 9.31
Exercised 8.375- 9.00 (800) 8.51
Terminated 8.375- 22.50 (232,536) 9.55
- --------------------------------------------------------------------------------
December 31, 1996 7.69 - 24.00 1,195,393 9.05
- --------------------------------------------------------------------------------
Granted 4.68 - 11.15 1,578,715 7.85
Exercised 4.68 - 9.00 (21,573) 8.17
Terminated 7.75 - 12.00 (144,026) 8.87
- -------------------------------------------------------------------------------
December 31, 1997 4.68 - 24.00 2,608,509 8.35
- -------------------------------------------------------------------------------
Options and warrants
exercisable December 31, 1995 8.37 - 24.00 770,685 9.07
- -------------------------------------------------------------------------------
December 31, 1996 8.375- 24.00 1,023,158 8.85
- -------------------------------------------------------------------------------
December 31, 1997 4.68 - 24.00 1,234,984 8.72
- -------------------------------------------------------------------------------
Shares reserved for issuance
December 31, 1995 2,106,665
- -------------------------------------------------------------------------------
December 31, 1996 3,523,960
- -------------------------------------------------------------------------------
December 31, 1997 2,756,853
- -------------------------------------------------------------------------------
15. Common Stock, stock options, warrants and other shares reserved (Continued)
Class B Common Stock
Options and warrants Price Range Number Weighted-Average
outstanding per share of shares Exercise Price
- -------------------------------------------------------------------------------
December 31, 1994 $9.00 387,500
- -------------------------------------------------------------------------------
Granted 8.50 125,000 $8.50
Exercised
Terminated
- ----------
December 31, 1995 8.50 -9.00 512,500 8.88
- -------------------------------------------------------------------------------
Granted 8.69 375,000 8.69
Exercised
Terminated
- ----------
December 31, 1996 8.50 -9.00 887,500 8.80
- -------------------------------------------------------------------------------
Granted
Exercised
Terminated
- ----------
December 31, 1997 8.50 -9.00 887,500 8.80
- -------------------------------------------------------------------------------
Options and warrants
exercisable December 31, 1995 8.50 -9.00 512,500 8.91
- -------------------------------------------------------------------------------
December 31, 1996 8.50 -9.00 595,625 8.87
- -------------------------------------------------------------------------------
December 31, 1997 8.50 -9.00 762,250 8.82
- -------------------------------------------------------------------------------
Shares reserved for
issuance December 31, 1995 512,500
- -------------------------------------------------------------------------------
December 31, 1996 950,000
- -------------------------------------------------------------------------------
December 31, 1997 950,000
- -------------------------------------------------------------------------------
At December 31, 1997, the weighted average remaining contractual life of all
outstanding options was 6 years.
15. Common Stock, stock options, warrants and other shares reserved (Continued)
At December 31, 1997, 1996, and 1995, options outstanding included 829,334,
629,334 and 629,334 shares for two officers who are principal shareholders of
the Company.
Class B Common stock aggregating 887,500, 887,500 and 512,500 shares at December
31, 1997, 1996 and 1995, respectively, were reserved for issuance to these same
two officers in 1995 and for three officers of the Company, two of whom are
principal shareholders of the Company, at December 31, 1997 and 1996.
The holders of common stock are entitled to one vote per share and the holders
of Class B Common stock are entitled to ten votes per share on all matters
without distinction between classes, except when approval of a majority of each
class is required by statute. The Class B Common stock is convertible at any
time, at the option of the holders of such stock, into shares of common stock on
a share-for-share basis. Common shares reserved for issuance at December 31,
1997, 1996, and 1995 include 950,000, 950,000 and 512,500 shares, respectively
in connection with Class B shares. At December 31, 1997, 1996, and 1995, shares
reserved for issuance were primarily related to shares reserved for options,
warrants and the conversion of long-term debt.
(b) Prior to January 1, 1996, the Company accounted for its stock option plan in
accordance with the provisions of Accounting Principles Board ("APB") Opinion
No. 25, Accounting for Stock Issued to Employees, and related interpretations.
As such, compensation expense would be recorded on the date of grant only if the
current market price of the underlying stock exceeded the exercise price. On
January 1, 1996, the Company adopted SFAS No. 123, Accounting for Stock-Based
Compensation, which permits entities to recognize as expense over the vesting
period the fair value of all stock-based awards on the date of grant.
Alternatively, SFAS No. 123 also allows entities to continue to apply the
provisions of APB Opinion No. 25 and provide pro forma net income and pro forma
earnings per share disclosures for employee stock option grants made in 1995 and
future years as if the fair-value-based method defined in SFAS No. 123 had been
applied. The Company has elected to continue to apply the provisions of APB
Opinion No. 25 in accounting for its Plan and, accordingly, no compensation cost
has been recognized for its stock options in the financial statements.
15. Common Stock, stock options, warrants and other shares reserved (Continued)
Had the Company determined compensation cost based on the fair value at the
grant date for its stock options under SFAS No. 123, the Company's net income
would have been reduced to the pro forma amounts indicated below (in thousands,
except per share amount):
1997 1996 1995
---- ---- ----
Net income As reported $ 3,423 $11,380 $1,012
Pro forma 1,344 9,927 (416)
Basic earnings (loss)
per share
As reported .33 1.55 .15
Pro forma .13 1.35 (.06)
Diluted earnings (loss)
per share
As reported .31 1.54 .15
Pro forma .12 1.34 (.06)
Pro forma net income reflects only options granted since 1995. Therefore, the
full impact of calculating compensation cost for stock options under SFAS No.
123 is not reflected in the pro forma net income amounts presented above because
compensation cost is reflected over the options' vesting period and compensation
cost for options granted prior to January 1, 1995 is not considered.
At December 31, 1997, 1996 and 1995, the per share weighted-average fair value
of stock options granted was $4.32, $3.64 and $3.94, respectively on the date of
grant using the modified Black Scholes option-pricing model with the following
weighted-average assumptions: 1997 - expected dividend yield 0%, risk-free
interest rate of 6.37%, expected volatility of 43.1 % and an expected life of
7.7 years; 1996 - expected dividend yield 0%, risk-free interest rate of 6%,
expected volatility of 39.1%, and an expected life of 4.5 years; 1995 - expected
dividend yield 0%, risk-free interest rate of 5.9%, expected volatility of
44.9%, and an expected life of 4.5 years.
(c) In the fourth quarter of 1997, the Company adopted the provisions of
Statement of Financial Accounting Standards No. 128, "Earning per Share". (SFAS
128), as required, and restated the previously reported earnings per share in
conforming with SFAS 128. The new standard specifies the computation,
presentation and disclosure requirements for earnings per share.
15. Common Stock, stock options, warrants and other shares reserved (Continued)
Earnings per share (EPS) for the years ended December 31, 1997, 1996 and 1995
are as follows (in thousands, except per share amounts):
1997 1996 1995
---- ---- ----
Basic EPS
Net income $ 3,423 $ 11,380 $ 1,012
Weighted average shares
outstanding 10,457 7,339 6,638
Basic earnings per share $ .33 $ 1.55 $ .15
Diluted EPS
Net income $ 3,423 $ 11,380 $ 1,012
Weighted average shares
outstanding 10,457 7,339 6,638
Dilutive effect of stock options
and warrants 430 69
---------- --------- --------
Weighted average shares
outstanding, diluted 10,887 7,408 6,638
Diluted earnings per share $ .31 $ 1.54 $ .15
Basic earnings per share are based upon the weighted average number of common
shares outstanding, including Class B common shares, during the period. Class B
common stockholders have the same rights to share in profits and losses and
liquidation values as common stock holders. Diluted earnings per share are based
upon the weighted average number of common shares outstanding during the period,
assuming the issuance of common shares for all dilutive potential common shares
outstanding.
For the year ended December 31, 1995, the Company had basic and diluted loss per
share from discontinued operation of $(.44) and basic and diluted loss from
extraordinary item of $(.01).
16. Business segments
The operations of the Company consist of the following business segments:
Physical Science Group - performance improvement services to Fortune 500
companies, manufacturing and process industries, electric power utilities and
other commercial and governmental customers; Distribution Group - wholesale
distribution of home decorating, hardware and finishing products; Optical
Plastics Group - the manufacture and distribution of coated and molded plastic
products.
The following tables set forth the sales and operating results attributable to
each line of business and include a reconciliation of the groups' sales to
consolidated sales and operating results to consolidated income from operations
before income taxes, discontinued operation and extraordinary item for the
periods presented (in thousands):
Years ended December 31, 1997 1996 1995
- -----------------------------------------------------------------------------
Sales
Physical Science $140,620 $117,183 $107,549
Distribution 82,300 76,102 65,098
Optical Plastics 10,362 8,781 10,949
Other (principally ADC) 1,519 1,734 1,429
- -----------------------------------------------------------------------------
$234,801 $203,800 $185,025
- -----------------------------------------------------------------------------
Operating results
Physical Science $ 9,603 $ 6,504 $ 4,854
Distribution 2,230 1,767 1,374
Optical Plastics 1,864 1,485 2,661
Other (principally ADC) (691) (1,287) (1,575)
- -----------------------------------------------------------------------------
Total operating profit 13,006 8,469 7,314
Interest expense (4,075) (4,358) (5,019)
Corporate general and administrative
expenses and Investment and other
income, net (6,201) 7,133 3,524
- -----------------------------------------------------------------------------
Income from operations before
income taxes, discontinued operation
and extraordinary item $ 2,730 $ 11,244 $ 5,819
- -----------------------------------------------------------------------------
16. Business segments (Continued)
Operating profits represent gross revenues less operating expenses. In computing
operating profits, none of the following items have been added or deducted;
general corporate expenses at the holding company level, foreign currency
transaction gains and losses, investment income and interest expense. General
corporate expenses at the holding company level, which are primarily salaries,
occupancy costs, professional fees and costs associated with being a publicly
traded company, totaled approximately $5,246,000, $6,170,000 and $6,173,000 for
the years ended December 31, 1997, 1996 and 1995 respectively. For the years
ended December 31, 1997, 1996 and 1995, sales to the United States government
and its agencies represented approximately 26%, 27% and 31%, respectively, of
sales.
Additional information relating to the Company's business segments is as follows
(in thousands):
December 31, 1997 1996 1995
- ------------------------------------------------------------------------------
Identifiable assets
Physical Science $100,548 $ 83,414 $ 82,022
Distribution 41,530 47,243 44,400
Optical Plastics 10,197 12,453 12,267
Corporate and other 38,337 32,917 12,681
Assets relating to discontinued operation 350
- ------------------------------------------------------------------------------
$190,612 $176,027 $151,720
- ------------------------------------------------------------------------------
Years ended December 31, 1997 1996 1995
- ------------------------------------------------------------------------------
Additions to property,
plant, and equipment, net
Physical Science $ 2,307 $ 1,976 $ 1,555
Distribution 275 522 352
Optical Plastics 939 201
Corporate and other 193 (21) 39
Discontinued operation, net (505)
- ------------------------------------------------------------------------------
$ 3,714 $ 2,678 $ 2,006
- ------------------------------------------------------------------------------
Years ended December 31, 1997 1996 1995
- ------------------------------------------------------------------------------
Depreciation and amortization
Physical Science $ 3,121 $ 2,404 $ 1,785
Distribution 1,195 1,125 1,069
Optical Plastics 488 66 788
Corporate and other 1,063 474 674
Discontinued operation
- ------------------------------------------------------------------------------
$ 5,867 $ 4,069 $ 4,316
- ------------------------------------------------------------------------------
17. Fair value of financial instruments
Identifiable assets by industry segment are those assets that are used in the
Company's operations in each segment. Corporate and other assets are principally
cash and cash equivalents, marketable securities and unallocated intangibles.
The carrying value of financial instruments including cash, short-term
investments, accounts receivable, accounts payable and short-term borrowings
approximate estimated market values because of short maturities and interest
rates that approximate current rates.
The carrying values of investments, other than those accounted for on the equity
basis, approximate fair values based upon quoted market prices. The investments
for which there is no quoted market price are not significant.
The estimated fair value for the Company's major long-term debt components are
as follows (in thousands):
December 31, 1997 December 31, 1996
Carrying Estimated Carrying Estimated
amount fair value amount fair value
8% Swiss Bonds due 2000 $ 2,158 $ 1,942 $ 2,189 $ 1,883
5% Convertible Bonds 1,786 1,661 1,755 1,632
12% Subordinated Debentures 6,732 5,386
7% Convertible Note 1,000 1,000 1,000 1,000
Other long-term debt 1,644 1,644 8,440 8,440
Limitations. Fair value estimates are made at a specific point in time, based on
relevant market information and information about the financial instrument.
These estimates are subjective in nature and involve uncertainties and matters
of significant judgment and therefore cannot be determined with precision.
Changes in assumptions could significantly affect the estimates.
18. Accounting for certain investments in debt and equity securities
A decline in the market value of any available-for-sale security below cost that
is deemed other than temporary is charged to earnings resulting in the
establishment of a new cost basis for the security. In 1995, the Company
recognized a permanent impairment in one of its available-for-sale securities as
a result of receipt of a tender offer at a price below the Company's carrying
cost, and recorded a loss of $785,000 to adjust the carrying amount to the
tender offer price, which loss is included in Investment and other income
(expense), net. In July 1996, the Company recognized a $4,000,000 loss on the
Company's investments in American White Cross, Inc. (AWC) due to AWC filing for
protection under Chapter 11 of the United States Bankruptcy Code.
Realized gains and losses for securities classified as available-for-sale are
included in earnings and are derived using the average cost method for
determining the cost of securities sold.
In April 1996, the Company sold 1,000,000 shares of Duratek common stock,
including 250,000 shares that were included in marketable securities at December
31, 1995. As a result, the Company received proceeds of $17,700,000 and
recognized a gain of $12,200,000. In 1995, the Company recognized a $3,183,000
gain on the transfer of the 250,000 shares of Duratek common stock to marketable
securities, representing the excess of the quoted market value of such shares on
the date of transfer over the Company's cost. In the second half of 1996, the
Company transferred an additional 250,000 shares from long-term investments
available- for- sale, to trading securities, resulting in the recognition of a
$3,314,000 gain, representing the net excess of the quoted market price of such
shares at December 31, 1996, over the Company's cost at the time of transfer and
subsequent changes in market value of these shares. At December 31, 1996, the
Company was permitted to sell approximately 475,000 shares of Common Stock of
Duratek pursuant to various agreements. At December 31, 1996, the Company had
determined to sell promptly 250,000 shares of its Duratek Common Stock in 1997
pursuant to various agreements, and therefore, classified such securities in the
trading category.
In 1997, the Company recognized a net $689,000 gain. The gain is the result of a
$828,000 gain on the transfer from long-term investments to trading securities
partially offset by a $139,000 realized loss on the sale of Duratek common
stock. In 1997, the Company sold 305,750 shares of Duratek common stock, and
received net proceeds of $2,756,000. At December 31, 1997, the Company had
determined to sell promptly 100,000 shares of Duratek common stock in 1998, and
therefore, classified such securities in the trading category. Under the
Company's current bank agreement, it is permitted to sell 600,000 shares of
Duratek common stock in 1998.
18. Accounting for certain investments in debt and equity securities (Continued)
The gross unrealized holding gains (losses) and fair value for
available-for-sale securities were as follows (in thousands):
Gross
unrealized holding
Cost gains (losses) Fair Value
Available-for-sale
equity securities:
December 31, 1997 $2,200 $9,834 $ $12,034
- ------------------------------------------------------------------------------
December 31, 1996 $1,601 4,722 $ (91) $ 6,232
- ------------------------------------------------------------------------------
December 31, 1995 $2,210 $ (1,440) $ 770
- ------------------------------------------------------------------------------
Differences between cost and market of $6,630,000 and $3,324,000, net of taxes
at December 31, 1997 and 1996, respectively, were credited to a separate
component of shareholders' equity called Net unrealized gain on
available-for-sale securities.
Gross realized (losses) gains included in income in 1997 and 1996 were
$(139,000) and $9,150,000, respectively. In 1997 and 1996, the Company did not
have gross realized gains and losses, respectively.
The Company did not realize any gains or losses on available-for-sale securities
for the year ended December 31, 1995.
19. Commitments and contingencies
(a) The Company has several noncancellable leases which cover real property,
machinery and equipment and certain manufacturing facilities. Such leases expire
at various dates with, in some cases, options to extend their terms.
Minimum rentals under long-term operating leases are as follows(in thousands):
Real Machinery &
property equipment Total
1998 $ 4,661 $ 1,627 $ 6,288
1999 3,351 1,418 4,769
2000 3,144 895 4,039
2001 2,310 546 2,856
2002 2,232 408 2,640
After 2002 4,003 147 4,150
- ----------------------------------------------------------------------------
Total $19,701 $5,041 $24,742
- ----------------------------------------------------------------------------
19. Commitments and contingencies (Continued)
Several of the leases contain provisions for rent escalation based primarily on
increases in real estate taxes and operating costs incurred by the lessor. Rent
expense for real and personal property was approximately $7,603,000, $6,745,000
and $5,598,000 for 1997, 1996 and 1995, respectively.
(b) In February 1986, Duratek completed its initial public offering of common
stock. In connection with Duratek's public offering, the Company issued to
certain officers of Duratek and the Company 358,609 options for the purchase of
Duratek common stock owned by the Company at a price equal to the greater of (a)
$1.75 per share or (b) the net book value per share of Duratek's common stock as
of the end of the most recently completed fiscal quarter which ends not less
than 60 days before the date of exercise of such option. In 1991, an additional
270,000 options for the purchase of Duratek common stock owned by the Company at
a price of $1.90 per share were issued to certain employees and officers of the
Company. In 1994, an additional 20,000 options were granted at a price of $3.50
per share. Through December 31, 1997, 322,086 options under the plan were
exercised, 43,723 were canceled, and at December 31, 1997, 278,800 options are
currently exercisable and 282,800 options are currently outstanding. At December
31, 1997, the Company owned 12.3% of Duratek (See Note 3).
(c) The Company is party to several lawsuits and claims incidental to its
business, including claims regarding environmental matters, one of which is in
the early stages of investigation. It is not possible at the present time to
estimate the ultimate legal and financial liability, if any, of the Company in
respect to such litigation and claims; however, management believes that the
ultimate liability, if any, will not have a material adverse effect on the
Company's consolidated financial statements.
GP Strategies Supplementary Data
Corporation
and Subsidiaries
SELECTED QUARTERLY FINANCIAL DATA
(unaudited) (in thousands, except per share data)
three months ended
March 31, June 30, Sept. 30, Dec. 31, March 31, June 30, Sept. 30, Dec. 31,
1997 1997 1997 1997 1996 1996 1996 1996
- ----------------------------------------------------------------------------------------------------------------------------------
Sales $54,760 $60,590 $62,711 $56,740 $48,156 $51,048 $53,332 $51,264
Gross margin 8,216 9,193 9,387 8,433 7,092 7,744 8,077 7,329
Net income (loss) (986) 1,633 1,954 822 83 10,803 752 (258)
Net income (loss)
per share:
Basic (.10) .15 .18 .08 .01 1.46 .10 (.03)
Diluted (.10) .15 .18 .07 .01 1.43 .10 (.03)
- -----------------------------------------------------------------------------------------------------------------------------------
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information with respect to the directors of the Company is
incorporated herein by reference to the Company's definitive proxy statement
pursuant to Regulation 14A, which proxy statement will be filed not later than
120 days after the end of the fiscal year covered by this Report.
ITEM 11. EXECUTIVE COMPENSATION
Information with respect Executive Compensation is incorporated herein
by reference to the Company's definitive proxy statement pursuant to Regulation
14A, which proxy statement will be filed not later than 120 days after the end
of the fiscal year covered by this Report.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information with respect to Security Ownership of Certain Beneficial
Owners is incorporated herein by reference to the Company's definitive proxy
statement pursuant to Regulation 14A, which proxy statement will be filed not
later than 120 days after the end of the fiscal year covered by this Report.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information with respect to Certain Relationships and Related
Transactions is incorporated herein by reference to the Company's definitive
proxy statement pursuant to Regulation 14A, which proxy statement will be filed
not later than 120 days after the end of the fiscal year covered by this Report.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K:
(a)(1)The following financial statements are included in Part II, Item 8.
Financial Statements and Supplementary Data:
FINANCIAL STATEMENTS OF GP STRATEGIES CORPORATION
AND SUBSIDIARIES:
Page
Independent Auditors' Report 31
Financial Statements:
Consolidated Balance Sheets -
December 31, 1997 and 1996 32
Consolidated Statements of Operations -
Years ended December 31, 1997, 1996 and 1995 34
Consolidated Statements of Changes in Stockholders' Equity -
Years ended December 31, 1997, 1996 and 1995 35
Consolidated Statements of Cash Flows -
Years ended December 31, 1997, 1996 and 1995 37
Notes to Consolidated Financial Statements 40
(a)(2) Financial Statement Schedules
Schedules have been omitted and if required will be filed in an
amendment to the Form 10-K
(a)(3) Exhibits
Consent of KPMG Peat Marwick LLP, Independent Auditors
(b) There were no Reports on Form 8-K filed by the Registrant during the last
quarter of the period covered by this report
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
GP STRATEGIES CORPORATION
Jerome I. Feldman
President and Chief
Executive Officer
Dated: March 31, 1998
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated.
Signatures Title
Jerome I. Feldman President, Chief Executive
Officer and Director
(Principal Executive Officer)
Martin M. Pollak Executive Vice President
and Treasurer and Director
Scott N. Greenberg Vice President and Chief
Financial Officer and Director
Ogden R. Reid Director
John C. McAuliffe Director
Herbert R. Silverman Director
5
INDEX TO EXHIBITS
The following is a list of all exhibits filed as part of this
Report.
SEQUENTIAL
EXHIBIT NO. DOCUMENT PAGE NO.
3.1 Amendment to the Registrant's Restated
Certificate of Incorporation filed on March
5, 1998.*
3.2 Amended By-Laws of the Registrant.
Incorporated by reference to Exhibit 3 of
the Registrants Form 10-Q for the third
quarter ended September 30, 1997.
10.1 1973 Non-Qualified Stock Option Plan of the
Registrant, as amended on March 1, 1998.*
10.2 Registrant's 401(k) Savings Plan, dated
January 29, 1992, effective March 1, 1992.
Incorporated herein by reference to Exhibit
10.12 of the Registrant's Annual Report on
Form 10-K for the year ended December 31,
1991.
10.3 Amended and Restated Loan Agreement dated
August 18, 1997 by and among Five Star
Group, Inc., Summit Bank, The Dime Savings
Bank of New York and Fleet Bank, National
Association as Administrative and Collateral
Agent for such banks. Incorporated herein
by reference to Exhibit 2 of the
Registrant's Form 10-Q for the third quarter
ended September 30, 1997.
10.4 $25,000,000 Credit Agreement dated March 26,
1997 by and among GP Strategies Corporation,
General Physics Corporation, GP
Environmental Services, Inc., General
Physics Federal Systems, Inc. and MXL
Industries, Inc. the banks signatory thereto
and Fleet Bank, National Association as
Administrative Agent and Collateral Agent
for such banks. Incorporated herein by
reference to Exhibit 10.13 to the
Registrant's Annual Report on Form 10-K for
the year ended December 31, 1996.
10.5 Stock Purchase Agreement dated as of January
24, 1995 among Carlyle Partners II, L.P.,
Carlyle International Partners III, L.P.,
C/S International Partners, Carlyle-GTSD
Partners, L.P., Carlyle-GTSD Partners II,
L.P. and GTS Duratek, Inc. and the
Registrant. Incorporated herein by
reference to
Exhibit 4.1 to the Registrants Form 8-K
dated January 24, 1995.
10.6 Stockholders Agreement dated as of January
24, 1995 by and among GTS Duratek, Inc.,
Carlyle Partners II, L.P., Carlyle
International Partners III, L.P., C/S
International Partners, Carlyle-GTS
Partners, L.P., and the Registrant.
Incorporated herein by reference to Exhibit
4.2 to the Registrants Form 8-K dated
January 24, 1995.
10.7 Registration Rights Agreement dated as of
January 24, 1995 by and among GTS Duratek,
Inc., Carlyle Partners II, L.P., Carlyle
International Partners III, L.P., C/S
International Partners, Carlyle-GTS
Partners, L.P., and the Registrant.
Incorporated
herein by reference to Exhibit 4.3 to the
Registrants Form 8-K dated January 24, 1995.
10.8 Agreement and Plan of Merger, dated as of
November 19, 1996, among the Registrant,
General Physics Corporation ("GPC") and GPX
Acquisition, Inc. ("GPX"). Incorporated
herein by reference to Exhibit 99.1 to the
Registrant's Form S-4 filed on November 26,
1996.
10.9 Amendment No. 1, dated as of December 18,
1996, to the Agreement and Plan of Merger
dated November 19, 1996 among the
Registrant, GPC and GPX. Incorporated
herein by reference to Exhibit 2.2 to the
Registrant's Form S-4 filed on December 19,
1996.
10.10 Rights Agreement, dated as of June 23, 1997,
between National Patent Development
Corporation and Harris Trust Company of New
York, as Rights Agent, which includes, as
Exhibit A thereto, the Resolution of the
Board of Directors with respect to Series A
Junior Participating Preferred Stock, as
Exhibit B thereto, the form of Rights
Certificate and as Exhibit C thereto the
form of Summary of Rights. Incorporated
herein by reference to Exhibit 4.1 of the
Registrant's Form 8-K filed on July 17, 1997.
13 Not Applicable
18 Not Applicable
19 Not Applicable
21 Subsidiaries of the Registrant*
22 Not Applicable
23 Consent of KPMG Peat Marwick LLP,
Independent Auditors*
27 Not Applicable
28 Not Applicable
* Filed herewith.