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, 1998
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 15, 1999, 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 $204,498,843 based on the closing
price of the Common Stock on the New York Stock Exchange on March 15, 1999. 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 15, 1999 Common Stock, par value $.01 per share
10,976,146 shares Class B Capital Stock, par value $.01 per share 356,250 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.
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TABLE OF CONTENTS
Page
PART I
Item 1. Business 1
Item 2. Properties 15
Item 3. Legal Proceedings 15
Item 4. Submission of Matters to a Vote of
Security Holders 15
PART II
Item 5. Market for the Registrant's Common
Equity and Related Stockholder Matters 16
Item 6. Selected Financial Data 17
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations 18
Item 7A. Quantitative and Qualitative Disclosures About
Market Risk 28
Item 8. Financial Statements and Supplementary Data 29
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 73
PART III
Item 10. Directors and Executive Officers of the
Registrant* 73
Item 11. Executive Compensation* 73
Item 12. Security Ownership of Certain
Beneficial Owners and Management* 73
Item 13. Certain Relationships and Related Transactions* 73
PART IV
Item 14. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K 74
*to be incorporated by reference from the Proxy Statement for the Registrant's
1999 Annual Meeting of Stockholders.
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PART I
ITEM 1. BUSINESS
(a) General Development of Business
GP Strategies Corporation (the "Company") over the last two years has
taken significant steps to focus almost entirely on becoming a full-service
performance improvement and training company, through its wholly-owned
subsidiary, General Physics Corporation ("General Physics"), and has divested
many of its non-core assets. On September 30,1998 the Company sold substantially
all operating assets of Five Star Group, Inc. ("Five Star"), a distributor of
home decorating, hardware and finishing products in the northeast to American
Drug Company ("ADC").
The Company's has two operating business segments: Performance Improvement
and Optical Plastics. General Physics, (the Performance Improvement Group), with
approximately 2,100 employees in 75 offices worldwide, assists productivity
driven organizations to maximize workforce performance by integrating people,
processes and technology. In addition to General Physics, the Company's other
operating subsidiary is MXL Industries, Inc. ("MXL"), (the Optical Plastics
Group), which manufactures and distributes coated and molded plastic products,
such as shields and face masks and non-optical plastics.
The Company was incorporated in Delaware in 1959 and is a New York Stock
Exchange listed company.
(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
PERFORMANCE IMPROVEMENT GROUP
GENERAL PHYSICS CORPORATION
Organization and Operations
General Physics, with approximately 2,100 employees in 75 offices
worldwide, provides performance improvement services and products to
multinational companies in manufacturing and process industries, electric power
utilities, and other commercial and governmental customers.
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General Physics believes it is a global leader in performance improvement,
and has over three decades of experience in providing solutions to optimize
workforce 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 to improve its effectiveness.
General Physics provides a broad range of services and products on a
global scale that are oriented toward improving individual and organizational
performance throughout their productive lives. For individuals, General Physics
provides instructional courses and self-paced learning products, ranging from
traditional instructor led classes to computer-based or web-based training. For
businesses, government agencies and other organizations, General Physics offers
services and products spanning the entire lifecycle of production facilities:
plant launch assistance from both workforce training and engineering
perspectives; operations and maintenance practice training and consulting
services; curriculum development and delivery; facility and enterprise change
and configuration management; lean enterprise consulting; plant and process
engineering review and re-design; outsourcing of workforce training; and
development and delivery of information technology (IT) training on an
individual and enterprise-wide scale. General Physics' personnel bring a wide
variety of professional, technical and military backgrounds together to create
cost-effective solutions for modern business and governmental challenges.
Operationally, General Physics is organized globally into vertically and
horizontally integrated functional and administrative units, with the goal of
achieving a level of adaptability to match rapidly changing business conditions
and opportunities. Reorganizations involving the reshuffling of people, products
and business units occur at least annually, and one of General Physics' goals is
to expose each of its clients to the full menu of services and products that
General Physics offers.
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 its range of capabilities, as
well as its 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 24, 1997, stockholders of each of the Company and General
Physics approved 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"). Under the terms of the Merger
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Agreement, holders of General Physics Common Stock received shares of the
Company's Common Stock in exchange for their shares of General Physics common
stock.
During 1998, General Physics embarked upon a strategy to expand globally,
further diversify its clientele, and acquire additional performance improvement
capabilities through the acquisitions described below.
Effective January 1, 1998, General Physics acquired substantially all of
the assets and operations of United Training Services, Inc. ("UTS"), a provider
of training and consulting services to the U.S. automotive industry and to other
commercial customers, including Ford Motor Company, DaimlerChrysler Corporation
and IBM Corporation, some of whom were not previously clients of General
Physics.
Effective March 28, 1998, General Physics acquired the training and
language services business of Specialized Technical Services Limited ("STS"), a
provider of technical training services and language services to commercial and
governmental customers in the United Kingdom. The acquisition gave General
Physics an immediate substantial presence in Europe, and a platform for selling
General Physics' services and products to prospective European customers and
U.S. multinational companies with operations in Europe. The acquisitions of UTS
and STS were not considered material to the Company's financial position or
results of operations.
Effective June 16, 1998, General Physics acquired the Learning
Technologies business of SHL Systemhouse Co. (an MCI Company). Learning
Technologies, a leading computer technology training and consulting
organization, strengthened General Physics' depth in providing information
technology-related services and products, brought to General Physics an
established network of offices and training facilities in Canada and the United
Kingdom, and further established General Physics as a global company. It also
brought customers to General Physics such as British Telecom, National Power
PLC, Systemhouse, Canada Post and Canadian National Railways.
Effective July 1, 1998, General Physics acquired substantially all of the
operations and assets of The Deltapoint Corporation ("Deltapoint"), a Seattle,
Washington, based management consulting firm focused on large systems change and
lean enterprise, with primarily Fortune 500 clients operating in the aerospace,
pharmaceutical, manufacturing, healthcare and telecommunications industries. The
acquisition further diversified General Physics' performance improvement
capabilities and clientele by its consulting practice which is now marketed
under the name GP Deltapoint.
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. However, demand for open enrollment
courses may fluctuate with student demand, and General Physics' revenues and
profitability are related to general levels of economic activity and employment
in the United States, Canada and the United Kingdom. A significant economic
downturn or recession in one or more of these countries could have a material
adverse effect on General Physics' business, financial condition and results of
operations.
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Customers
General Physics currently provides services to more than 800 customers,
exclusive of individual students who attend General Physics' open enrollment
courses. Significant customers include multinational automotive manufacturers,
such as General Motors Corporation, Ford Motor Company and DaimlerChrysler
Corporation; commercial electric power utilities, such as Consolidated Edison
Company of New York, Public Service Electric & Gas Company, Commonwealth Edison
Company, Entergy Operations, Inc., National Power PLC, Alberta Transportation
and Utilities, Ontario Hydro and National Power Corporation (Philippines);
governmental agencies, such as the U.S. Departments of Defense and Energy,
Canada Post, the U.S. Postal Service, Revenue Canada and various Canadian
provincial governments; U.S. government prime contractors, such as
Northrop-Grumman, Lockheed Martin and Westinghouse Savannah River Company;
pharmaceutical companies, such as Pfizer, Inc.and Merck & Co., communications
companies, such as British Telecom PLC, Electronic Data Systems and PageNet;
software vendors, such as Oracle Corporation, The Baan Company, PeopleSoft Inc.,
Microsoft Corporation and Novell Inc.; aerospace companies, such as Boeing
Corporation; food and beverage companies, such as Anheuser-Busch Company,
PepsiCo Inc, and Coca-Cola Company; petro-chemical companies, such as Imperial
Oil Limited, and Huntsman Chemical; steel producers, such as AK Steel, USX
Corporation, Inspat Inland Steel, National Steel, and Dofasco Steel; and other
large multinational companies, such as Fluor Daniel, IBM Corporation, Xerox
Corporation, PPG Industries, Inc., PriceWaterhouseCoopers, Barclays Bank PLC,
General Electric Company, Westinghouse Electric Company and Kimberly Clark Corp.
Revenue from the United States Government accounted for approximately 28%
of General Physics' revenue for the year ended December 31, 1998. 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 1998, except for General Motors Corporation, which
accounted for approximately 10% of General Physics' revenue, no other customer
accounted for 10% or more of General Physics' revenue.
General Physics' Services and Products
General Physics provides services and sells products within a structure
that is integrated both vertically and horizontally. Vertically, General Physics
is organized into Strategic Business Units (SBUs), Business Units (BUs), and
Groups focused on providing a wide range of products and services to clients and
prospective clients predominantly within targeted markets. Horizontally, General
Physics is organized across SBUs, BUs and Groups to integrate similar service
lines, technology, information, work products, client management and other
resources. As a result, General Physics has evolved into a matrixed organization
in which resources can be coordinated to meet the needs of General Physics
clients or to respond quickly and mobilize resources for new opportunities.
Corporate marketing, advertising, sales and accounting and other general and
administrative services are organized outside the SBUs, BUs and Groups in order
to support the corporation as whole. Sales and marketing activities are
complemented by similar capabilities within operations.
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Training. Each of General Physics' business Groups provides training services
and products. The range of services runs from fundamental analysis of a client's
training needs, to curriculum design, instructional material development (in
hard copy, electronic/software or other format) to delivery of training using an
instructor-led, on-the-job, computer-based, web-based, video-based or other
technology-based method. Solutions are developed to meet the needs and desires
of each client, subject to the client's financial and organizational commitment.
General Physics also provides an extensive existing curriculum of business and
technical courses through the General Physics Training Institute (GPTI), as well
as an equally extensive list of computer software courses using its network of
offices and classrooms in Canada and the United Kingdom, as well as the United
States. Training products include instructor and student training manuals,
instructional material on CD-ROM, Taskmaster(TM) software and PC-based
simulators. Examples of current training projects include:
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 and administered 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
DaimlerChrysler Corporation and Ford Motor Company as well as many of
the automotive supplier companies
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.
General Physics is providing training services to an approximately 6,000
employee company in support of an initiative to adopt a standard
corporate computer desktop including Microsoft Office applications, as
well as some client proprietary applications. Services encompass
training material development and classroom instruction on a national
basis.
Consulting. Consulting services are available from all of General Physics'
Groups and include not only training-related consulting services, but also more
traditional business management, engineering and other disciplines. Through the
integration of GP Deltapoint's resources, General Physics is able to provide
high-level lean enterprise consulting services, as well as training in the
concept, methods and application of lean enterprise practices, organizational
development and change management. General Physics also provides engineering
consulting services to support regulatory and environmental compliance,
modification of facilities and processes, reliability-centered maintenance
practices, and plant start-up activities. Consulting products include
copyrighted training and reference materials. Examples of recent consulting
projects include:
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A national wireless services company with more than 5,000 employees
spread over 100 offices needed a dramatic increase in their operational
efficiencies along with a decrease in cost. The solution they devised
involved upgrading their IT systems and integrating the key operations
functions into Centers of Excellence while reducing headcount and square
footage by approximately 50%. A major problem was that the offices were
operating in a relatively independent manner and did not have common
processes. General Physics helped them define the major processes that
would be transferred to the Centers of Excellence, develop a plan to
document the processes, improve process efficiency, and transition the
processes to the new Centers of Excellence. This was accomplished in
three months.
A department of the finance organization supporting a multinational
manufacturer's dealerships and customers sought to restructure to be
more effective, build a new image, redesign processes and procedures,
and improve morale in conjunction with a leadership change in the
organization. General Physics designed and developed a Value-Based
Strategic Plan to identify organizational issues, develop a strategy to
address them, and implement the strategy as designed.
General Physics provides Enterprise Resource Planning in the form of
change management, documentation, end-user training and maintenance
engineering support related to Enterprise Wide Software Applications,
including support for products developed by The Baan Company and Oracle
Corp. General Physics is a Baan Education Alliance Program member.
Technical Support and Engineering. General Physics' business Groups are each
staffed and equipped to provide technical support services and products to
clients. Technical support services include procedure writing and configuration
control for capital intensive facilities, plant start-up assistance, logistics
support (e.g., inventory management and control), implementation and engineering
assistance for facility or process modifications, facility management for high
technology training environments, and help-desk support for standard and
customized client desktop applications. Technical support products include
EtaPro(TM) and PDMS(TM) General Physics software applications, and General
Physics' patented Level Monitor System for fluid level monitoring. Examples of
projects include:
General Physics has provided technical support services to virtually all
of the commercial nuclear power plants in the United States, including
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.
General Physics is currently providing help-desk support to a
multinational pharmaceutical company for its standard and proprietary
desktop software applications.
General Physics provides facility management services in Canada to
ensure the availability and readiness of modern high technology training
equipment and classrooms for a major software vendor providing end-user
training, as well as providing training to General Physics' own computer
technology training customers.
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Contracts
General Physics is currently performing under approximately 1,500
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 1996 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,
1998:
Year ended December 31, 1998
Fixed Price 54%
Time and Material 32
Cost Reimbursable 14
Total Revenue 100%
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. Increasingly,
General Physics contracts have been fixed price based on a percentage of total
revenue. 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 four years.
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
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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' 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
General Physics' services and products face a highly competitive
environment. The principal competitive factors are the experience and capability
of service personnel, performance, quality and functionality of products,
reputation and price. Consulting services such as those provided by General
Physics are performed by many of the customers themselves, large architectural
and engineering firms that have expanded their range of services beyond design
and construction activities, 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. 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 needs of
those particular facilities.
The training industry is highly fragmented and competitive, with low
barriers to entry and no single competitor accounting for a significant market
share. General Physics' competitors include several large publicly traded and
privately held companies, vocational and technical training schools,
degree-granting colleges and universities, information technology companies,
continuing education programs and thousands of small privately held training
providers and individuals. In addition, many of General Physics' clients
maintain internal training departments. Some of General Physics' competitors
offer services and products that are similar to those of General Physics at
lower prices, and some competitors have significantly greater financial,
managerial, technical, marketing and other resources than General Physics.
Moreover, General Physics expects that it will face additional competition from
new entrants into the training and performance improvement market due, in part,
to the evolving nature of the market and the relatively low barriers to entry.
There can be no assurance that General Physics will be successful against such
competition.
Personnel
General Physics' principal resource is its personnel. General Physics'
future success depends to a significant degree upon its ability to continue to
attract, retain and integrate into its operations instructors, technical
personnel and consultants who possess the skills and experience required to meet
the needs of its clients. In order to initiate and develop client relationships
and execute its growth strategy, General Physics also must retain and continue
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to hire qualified salespeople. As of March 1, 1999, General Physics employed
approximately 2,100 employees and adjunct instructors.
General Physics' personnel have backgrounds and industry experience in
mechanical, electrical, chemical, civil, nuclear and human factors engineering;
in technical education and training; in power plant design, operation and
maintenance; in weapons systems design, operation and maintenance; in
organizational change management; in instructional technology and computer-based
training; in enterprise-wide resource planning and software training; and in
toxicology, industrial hygiene, health physics, chemistry, microbiology, ecology
and mathematical modeling. 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 utilizes a variety of methods to attract and retain
personnel. General Physics believes that the compensation and benefits offered
to its employees are competitive with the compensation and benefits available
from other organizations with whom it competes for personnel. In addition,
General Physics maintains and continuously improves the training available to
its employees, both internally and through third parties, and reimburses its
employees for job-related educational costs. General Physics encourages its
employees to further their education, continuously update their marketable
skills and deliver services and products that equal or exceed client
expectations. General Physics recognizes and rewards business success and
outstanding individual performance.
Competition for qualified personnel can be intense, and General Physics
competes for personnel with its clients was well as its competitors. There can
be no assurance that qualified personnel will continue to be available to
General Physics in sufficient numbers, and any failure to attract or retain
qualified instructors, technical personnel, consultants and salespeople in
sufficient numbers could have a material adverse effect on General Physics'
business, financial condition, and results of operations.
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 40 employees dedicated primarily to
marketing its services and products through Corporate Sales and Business
Development initiatives at both the corporate and Business Unit level. In
addition, the Company has approximately 60 commissioned salespeople focused on
selling its products and services worldwide. Salespeople in Canada and the
United Kingdom are compensated on a commission basis. Corporate level marketing
is directed at long-term strategic business development with specific customers
and with multinational businesses. General Physics markets its services to
existing customers primarily through its technical personnel who have regular
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direct client contact, dedicated sales personnel and client managers, and by
using senior management to aid in the planning of marketing strategies and
evaluating current and long-term marketing opportunities and business
directions. General Physics uses attendance at trade shows, presentations of
technical papers at industry and trade association conferences, public courses
and workshops given by General Physics personnel to serve an important marketing
function. General Physics also advertises extensively in Canada and the United
Kingdom, and sends a variety of sales literature, including an extensive catalog
of course listings, 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/ from which prospective customers can obtain
additional information about General Physics, experience web-based training, and
find out how to contact General Physics to discuss employment or business
opportunities.
Backlog
General Physics' backlog for services under signed contracts and
subcontracts as of December 31, 1998 was approximately $127,000,000. This amount
does not meaningfully reflect the training services anticipated to be provided
to students who enroll in General Physics' open enrollment courses, since
enrollment occurs throughout the year and the period between enrollment and
course completion is generally relatively short.
General Physics anticipates that most of its backlog as of December 31,
1998 will be recognized as revenue during fiscal year 1999; 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 the Company'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
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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 530,000 square feet of office
space at other locations in the United States, Canada, the United Kingdom,
Mexico, Brazil and Malaysia. General Physics has 75 offices worldwide, including
32 offices in the United States, 19 offices spread across six provinces in
Canada, and 20 offices in the United Kingdom, approximately half of which are
small offices oriented towards directing clients to General Physics' training
facilities, as well as small satellite offices in Kuala Lumpur, Sao Paulo and
Mexico City. Various locations in the United States, Canada and the United
Kingdom contain classrooms or other specialized space to support General
Physics' instructor-led and distance-learning training programs. General Physics
believes that its facilities are adequate to carry on its business as currently
conducted.
DISTRIBUTION GROUP
FIVE STAR GROUP, INC.
On September 30, l998, the Company sold substantially all operating assets
of Five Star, which formerly comprised the Distribution Group, to ADC for
<PAGE>
$16,476,000, which was used to repay existing short-term borrowings, and a
five-year $5,000,000 unsecured senior note, with interest payable quarterly at
the rate of 8%. Immediately prior to this transaction, the Company sold an
approximate 16.5% interest in ADC to the management of Five Star. As a result of
such transactions, as of September 30, 1998, the Company no longer consolidates
the balance sheet and results of operations of ADC and it subsidiaries, but
accounts for ADC as an equity investment.
Five Star is a leading distributor in the U.S. of home decorating,
hardward and finishing products. Five Star has two strategically located
warehouse distribution centers 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 Maryland.
Five Star offers products from leading manufacturers such as Cabot Stain,
William Zinsser & Company, Dap, General Electric Corporation, American Tool,
Stanley Tools, Minwax, Minnesota Mining Company and USG. 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 1998 and its 10 largest customers accounted for approximately 45% of such
sales. No other customer accounted for in excess of 10% of Five Star's sales in
the first nine months in 1998. 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 TruServ
as well as smaller regional distributors, all of whom offer similar products and
services, other than paint sundry item distributors, Five Star faces stiff
competition from Home Depot, which purchases directly from manufacturers and
dealer-owned distributors, such as Ace and TruServ. 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
<PAGE>
MXL INDUSTRIES, INC.
MXL Industries, Inc. ("MXL") is engaged in the manufacture and
distribution 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's largest customer accounted for approximately 23% of MXL's total
sales and 3 other customers accounted for approximately 45% of MXL's sales in
1998. MXL's 10 largest customers accounted for approximately 82% 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 that develops, manufactures, markets and sells proprietary, implantable,
controlled release drug delivery products, which release drugs directly into the
circulatory system, for human and veterinary applications. These products and
based upon HMS's unique group of Hydron(TM) polymer biomaterials. HMS's lead
product in development is a patented, subcutaneous retrievable hydrogel
reservoir drug delivery device (the "Hydron(TM) Implant") designed to allow
reliable, sustained release of a broad spectrum of therapeutic compounds
continuously, at constant, predetermined rates over at least a 12-month period.
The lead application of the Hydron(TM) Implant, which is implanted below the
skin (subcutaneously) in the upper arm, delivers a luteinizing hormone releasing
<PAGE>
hormone ("LHRH") analog, for the treatment of prostate cancer for a six-or 12
month period. HMS and its licensee, Roberts Laboratories, Inc. ("Roberts"), are
presently compiling data from Phase I/II clinical studies for this drug delivery
system for the treatment of prostate cancer. HMS's sales currently comprise less
than 1% of the Company's revenues.
INVESTMENTS
Over the last two years, the Company has taken significant steps to focus
almost entirely on becoming a full-service performance improvement company and
has divested many of its non-core assets. The Company still has investments in
the stock of certain publicly traded companies.
GSE Systems, Inc. ("GSES") designs, develops and delivers business and
technology solutions by applying high technology-related process control, high
fidelity simulation, systems and services into applications for worldwide
industries including energy and process manufacturing. As of December 31, 1998,
the Company owned approximately 22% of the outstanding shares of common stock of
GSES.
GTS Duratek, Inc. ("Duratek") implements technologies and provides
services, many of which are related to managing remediation and treating
radioactive and hydrocarbon waste. As of December 31, 1998, the Company owned
approximately 7% of the outstanding shares of common stock of Duratek.
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. As of December 31, 1998,
the Company owned approximately 7% of the outstanding shares of common stock of
ISI.
On September 30, 1998, the Company sold substantially all operating assets
of its wholly-owned subsidiary Five Star to ADC. At December 31, 1998, the
Company's investment in ADC was $3,893,000 and also a $5,000,000 senior
unsecured 8% Note. The Note is due in five years, with interest due quarterly.
For the nine months ended September 30, 1998, Five Star had revenues of
$64,148,000. The purchase by ADC of these assets has changed the focus of ADC.
ADC plans to focus its efforts on growing the distribution business through Five
Star and significantly reduced its international operations from both a business
and cost perspective. In addition, the Company has a management services
agreement with ADC pursuant to which the Company receives $10,000 a month for
services provided by the Company, such as management, legal, tax, accounting,
insurance and employee benefit administration services.
Employees
At December 31, 1998, the Company and its subsidiaries employed
approximately 2,200 persons, including 16 in the Company's headquarters, 2,100
in the Physical Science Group, 264 in the Distribution Group, (111 of which are
union employees) and 86 in the Optical Plastics Group. Of these, 5 persons were
engaged in research and development. The Company considers its employee
relations to be good.
1
<PAGE>
(d) Financial Information about the Foreign and Domestic Operations and Export
Sales.
The Company's revenue from foreign operations, primarily in the United Kingdom
and Canada, was approximately $31,429,000 for the year ended December 31, 1998.
In addition, at December 31, 1998, assets located in all foreign countries were
less than 10% of the Company's total assets and were located primarily in the
United Kingdom and Canada. The Company had deminimis foreign assets and
operations as of and for the years ended December 31, 1997 and 1996.
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 and leases approximately 15,000 square
feet in New Jersey. The Company's Physical Sciences Group leases approximately
32,470 square feet of an office building in Columbia, Maryland and approximately
530,000 square feet of office space at various other locations throughout the
United States, Canada, the United Kingdom, Mexico, Brazil and Malaysia.
The Distribution Group leases 250,000 square feet in New Jersey pursuant
to a lease which expires in March 2007 and has annual lease payments of
approximately $860,000 and 110,000 square feet in Connecticut pursuant to a
lease which expires on 2001 and has annual lease payments of approximately
$380,000. The Company guarantees both leases.
The Optical Plastics Group owns 50,200 square feet of warehouse and office
space in Lancaster, PA and 55,000 square feet of warehouse and 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.
<PAGE>
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
1998 First $17.38 $12.25
Second 17.69 14.13
Third 14.69 9.13
Fourth 15.38 9.38
1997 First 9.00 6.00
Second 8.44 5.50
Third 13.00 7.75
Fourth 15.50 11.75
The number of shareholders of record of the Common Stock as of March 15,
1999 was 3,112. On March 15, 1999, the closing price of the Common Stock on the
New York Stock Exchange was $19.00.
<PAGE>
GP STRATEGIES CORPORATION AND SUBSIDIARIES
<TABLE>
Item 6. Selected Financial Data
Operating Data (in thousands, except per share data)
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Years ended December 31, 1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------------------------------------------
Sales $284,682 $234,801 $203,800 $185,025 $204,774
Gross margin 41,993 35,229 30,242 28,322 32,559
Interest expense 3,896 4,075 4,358 5,019 6,458
Income (loss) before discontinued operation and extraordinary items (2,061) 3,423 11,380 4,032 (11,397)
Net income (loss) (2,061) 3,423 11,380 1,012 (13,971)
- --------------------------------------------------------------------------------------------------------------------
Earnings (loss) per share before discontinued
operation and extraordinary items:
Basic $(.19) $ .33 $1.55 $.60 $(2.10)
Diluted (.19) .31 1.54 .60 (2.10)
Earnings (loss) per share:
Basic (.19) .33 1.55 .15 (2.57)
Diluted (.19) .31 1.54 .15 (2.57)
- -------------------------------------------------------------------------------------------------------------------
Cash dividends declared per share
Balance Sheet Data
- --------------------------------------------------------------------------------------------------------------------
December 31, 1998 1997 1996 1995 1994
Cash, cash equivalents and marketable securities $ 7,548 $13,725 $25,927 $11,657 $10,075
Short-term borrowings 30,723 23,945 20,281 18,043 31,060
Working capital 13,989 34,797 41,691 32,949 25,823
Total assets 210,905 190,612 176,027 151,720 175,546
Long-term debt 21,559 6,588 20,116 23,932 31,213
Stockholders' equity 120,335 126,583 94,029 70,998 65,165
- --------------------------------------------------------------------------------------------------------------------
Notes: (a) GTS Duratek, Inc., (Duratek) results of operations were consolidated with the
results of the Company from January 1, 1994 through December 31, 1994. The balance sheets
of Duratek were consolidated with the Company at December 31, 1994. 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, 1998, 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.
(b) American Drug Company's (ADC) and its subsidiaries have been accounted for the equity
basis since September 30, 1998. Prior to that, their results of operations and balance
sheets were consolidated with those of the Company.
See Management's discussion and analysis of financial condition and results operations for further details.
</TABLE>
<PAGE>
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS:
RESULTS OF OPERATIONS
Overview
In 1998, GP Strategies Corporation (the Company) completed its transformation
into a performance improvement and training company. On September 30,1998 the
Company sold substantially all the operating assets of the Five Star Group, Inc.
(Five Star) to American Drug Company (ADC) (see Note 5 to the Consolidated
Financial Statements). The Company currently owns approximately 37% of ADC and
no longer consolidates the operating results and balance sheet of ADC and its
subsidiaries. General Physics Corporation (General Physics), the Company's
principal operating subsidiary, is a performance improvement company that
assists productivity driven organizations to maximize workforce performance by
integrating people, processes and technology. General Physics is a total
solutions provider for strategic training, engineering, consulting and technical
support services to Fortune 500 companies, government, utilities and other
commercial customers. In June 1998 and July 1998, General Physics completed two
acquisitions of a computer technology training and consulting company, as well
as a management consulting organization focused on large system change and lean
manufacturing (see Note 2 to the Consolidated Financial Statements). As a result
of the above transactions, excluding the sales of Five Star for the first nine
months of 1998, approximately 95% of the Company's sales would have been
attributable to General Physics. The Company plans to continue to invest in the
future long-term growth of General Physics in 1999. In 1998, loss before income
taxes was $695,000 as compared to income before income taxes of $2,730,000 in
1997. The loss in 1998 was due to several non-recurring items, partially offset
by a 72% increase in operating profits generated by the Performance Improvement
Group, which is General Physics. The Company recognized a $6,225,000 loss on the
sale of substantially all the assets of Five Star to ADC on September 30, 1998
as well as a Loss on investments of $4,624,000 for the year ended December 31,
1998. The Loss on investments resulted from a $3,067,000 and $1,557,000
write-down of the Company's investments in Interferon Sciences, Inc. (ISI) and
GSE Systems, Inc. (GSES), respectively. The write downs were caused by the
significant decrease in the market value of the stocks, resulting in an other
than temporary impairment of the Company's investments (see Notes 4 and 6 to the
Consolidated Financial Statements). In addition, the Company recognized a
$1,500,000 expense during the fourth quarter of 1998, resulting from a
termination agreement with an executive of the Company (see Note 19 to the
Consolidated Financial Statements). The above non-recurring losses and expense
were also partially offset by a $2,205,000 net gain recognized on trading
securities in 1998, compared to a $689,000 gain recorded in 1997. In addition,
the Company had reduced Investment and other income, net in 1998, due to reduced
consulting fees earned by ADC for the nine months ended September 30, 1998, and
reduced other income earned by Five Star, since its results of operations were
only consolidated for the first nine months of 1998, partially offset by reduced
equity losses recognized during the year.
<PAGE>
In 1998, the Performance Improvement Group achieved a $6,542,000 or 72% increase
in operating profit as a result of both increased sales and gross margin
percentage. The Optical Plastics Group, which is MXL Industries, Inc (MXL), the
Company's injection molding and coating subsidiary, had reduced operating
profits of $364,000 due to reduced gross margin percentages earned in 1998. The
Distribution Group, which consisted of Five Star, a distributor of home
decorating, hardware and finishing products, had a $515,000 decrease in
operating profits in 1998, as a result of the sale of substantially all the
operating assets of Five Star to ADC on September 30, 1998. Therefore, the
results of operations of Five Star were only consolidated with the Company for
the first three quarters of the year.
In 1997, income before income taxes was $2,730,000, as compared to $11,244,000
in 1996. The reduced income in 1997 was 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 Performance Improvement Group achieved a $2,539,000 increase in operating
profits or 39% 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
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 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% owned investment GSES, compared to income of $924,000
recognized in 1996.
Sales
Consolidated sales from continuing operations increased by $31,001,000 from
$203,800,000 in 1996 to $234,801,000 in 1997 and increased by $49,881,000 to
$284,682,000 in 1998. In 1997, the Company had increased sales within the
Performance Improvement, Distribution and Optical Plastics Groups. The
Performance Improvement's sales increased from $117,183,000 in 1996 to
$140,620,000 in 1997 and to $208,840,000 in 1998. The increased sales of
$23,437,000 during 1997 was 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
3
<PAGE>
as electric power utilities and other commercial and governmental customers. The
increased sales of $68,220,000 in 1998 were attributable to $37,927,000 of sales
resulting from the acquisitions of Learning Technologies and Deltapoint (see
Note 2 to the Consolidated Financial Statements), as well as the continued
growth of business and the scope of services with General Physics' commercial
customers, which grew at a 38% rate.
The Distribution Group sales increased from $76,102,000 in 1996 to $82,300,000
in 1997 and decreased to $64,148,000 in 1998. 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 replaced the
majority of these sales volume in 1998 with both new customers, as well as
increased sales within its existing customer base. The reduced sales in 1998
were the result of the sale of substantially all the operating assets of Five
Star to ADC on September 30, 1998. For the nine months ended September 30, 1998,
Five Star had sales of $64,148,000 as compared to sales of $66,363,000 for the
nine months ended September 30, 1997.
The Optical Plastics Group sales increased from $8,781,000 in 1996 to
$10,362,000 in 1997 and increased to $10,581,000 in 1998. 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. In 1998, MXL had reduced
sales from their major customer, offset by increased sales to new and existing
customers. In 1998, MXL's major customer comprised 23% of sales as compared to
34% of sales in 1997.
Gross margin
Consolidated gross margin was $30,242,000 or 14.8% in 1996, $35,229,000 or 15%
in 1997 and $41,993,000 or 14.8% of net sales in 1998. The increased gross
margin of $4,987,000 in 1997 was the result of increased gross margins achieved
within all operating Groups of the Company. The increased gross margin in 1998
is the result of increased gross margin achieved within the Performance
Improvement Group, partially offset by reduced gross margins generated by the
Distribution and Optical Plastics Groups.
The Performance Improvement Group gross margin increased from $14,309,000 or
12.2% of net sales in 1996 and to $17,945,000 or 12.8% of net sales in 1997, and
to $28,190,000 or 13.5% of net sales in 1998. 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 with the government. The increased
gross margin dollars and percentage in 1997 was achieved 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
4
<PAGE>
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 increased gross margin of $10,245,000 in 1998 was the
result of increased sales as well as the continued improvement in the gross
margin percentage. The increased gross margin percentage resulted from the
continued focus on the commercial side of the business, as well as positive
contributions generated by General Physics investments in both international
markets and the enterprise wide solutions market in 1997. In addition, the
acquisition of Deltapoint in 1998, contributed to higher gross margin
percentages due to the historically higher gross margins earned by Deltapoint's
consulting business.
The Distribution Group gross margin increased from $12,313,000 or 16.2% of net
sales in 1996 to $13,722,000 or 16.5% of net sales in 1997 and decreased to
$10,454,000 or 16.3% of net sales in 1998. 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 reduced gross margin in 1998 was the result of the sale of substantially all
the operating assets of Five Star to ADC on September 30, 1998. For the nine
months ended September 30, 1997, Five Star had gross margin of $10,617,000.
The Optical Plastics Group gross margin increased from $2,913,000 or 33.2% of
net sales in 1996 to $3,449,000 or 33.3% of net sales in 1997 and decreased to
$2,894,000 or 27.4% of net sales in 1998. In 1997 the increased gross margin was
the result of increased sales. The reduced gross margin of $555,000 in 1998 was
the result of the reduced gross margin percentage. MXL had a reduced gross
margin percentage in 1998 as a result of a change in their customer mix. In
1998, MXL had reduced sales from their major customer, which historically
generates higher gross margins than the remaining customer base.
Investment and other income, net
Investment and other income, net was $3,756,000 in 1996, $2,364,000 in 1997 and
$1,735,000 in 1998. 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 ADC, the
Company's then 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 reduced Investment and other income, net in 1998 was
primarily due to a reduction in consulting revenue earned by ADC, as well
reduced marketing income of $530,000 earned by Five Star in 1998, due to the
sale of substantially all the operating assets of Five Star to ADC on September
30, 1998. The reduced income was partially offset by reduced equity losses
recorded in Investment and other income, net relating to the Company's equity
investments.
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, 1998. Accordingly, the Company has not hedged such risk at December
31, 1998 and will review this policy on a continuing basis.
5
<PAGE>
At December 31, 1998 and 1997, the Company's Investments and advances of
$23,071,000 and $28,093,000 consisted primarily of its investments in ADC,
Duratek, ISI and GSES, which were $8,893,000, $3,535,000, $661,000, $6,738,000
in 1998 and $0, $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 $30,788,000
in 1996 to $31,502,000 in 1997 and to $31,883,000 in 1998. 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 uncollectible accounts due to the
bankruptcy and the subsequent ceasing of operations of a major retail chain in
the fourth quarter of 1997. The Performance Improvement 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 $381,000 in SG&A in 1998 was the result of
increased costs incurred by the Performance Improvement Group, partially offset
by reduced costs within the Distribution Group. The increased costs incurred by
the Performance Improvement Group were primarily the result of costs directly
attributable to the acquisitions of Learning Technologies and Deltapoint, which
had combined sales of $37,927,000 in 1998. The reduced costs within the
Distribution Group are the result of the sale of substantially all the operating
assets of Five Star to ADC on September 30, 1998. In addition, included in SG&A
is a $1,500,000 expense relating to the termination agreement with an executive
of the Company(see Note 19 to the Consolidated Financial Statements). In 1998,
the Company continued to reduce SG&A expenses at the corporate level.
Interest expense
Interest expense aggregated $4,358,000 in 1996, $4,075,000 in 1997 and
$3,896,000 in 1998. The reduced interest expense in 1997 was the result of 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. In 1998, the
reduced interest expense was the result of reduced long-term debt at the
corporate level and reduced interest expense related to the repayment of Five
Star's Line of Credit Agreement (see Note 9(C) to the Consolidated Financial
Statements) in September 1998. These reductions were partially offset by
increased interest expense due to short-term borrowings and long-term debt
relating to the acquisitions by General Physics of Deltapoint and Learning
Technologies.
Income taxes
Income tax (expense) benefit from operations for 1996, 1997 and 1998 was
$136,000, $693,000 and $(1,366,000), respectively.
In 1998, the Company recorded an income tax expense of $1,366,000. The current
income tax provision of $1,271,000 represents the estimated state taxes for the
<PAGE>
year ended December 31, 1998. The deferred income tax expense of $95,000
represents future estimated state taxes payable by the Company. The increase of
$954,000 in the valuation allowance in 1998 was attributable primarily to the
decrease in the Company's deferred tax liability with respect to Investments in
partially owned companies.
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.
As of December 31, 1998, the Company has approximately $12,173,000 of
consolidated net operating losses available for Federal income tax purposes.
Recent accounting pronouncements
In June of 1997, the FASB issued Statement of Financial Accounting Standard No.
131, (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 required information has been
reflected in the Company's December 31, 1998 financial statements.
In June 1998, the FASB issued Statement of Financial Accounting Standard No. 133
(SFAS 133), "Accounting for Derivative Instruments and Hedging Activities." This
Statement establishes accounting and reporting standards for derivatives as
either assets or liabilities in the activities. It requires that an entity
recognize all derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. This Statement
is effective for all fiscal quarters of fiscal years beginning after June 15,
1999. The Company will adopt SFAS 133 by January 1, 2000.
Going forward, the Company is still evaluating its position with respect to the
use of derivative instruments.
<PAGE>
Year 2000
The Company is aware of the issues associated with the programming code in
existing computer systems as the millennium (Y2K) approaches. The "Y2K" 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 Y2K compliance. General Physics, the
Company's principal operating subsidiary, has evaluated its computer systems
over the past six months and believes that its business applications are Y2K
compliant, except as noted below. It has also identified various ancillary
programs that need to be updated and has contracted with third parties for this
work to be completed within the next six months. It is expected that the cost of
these modifications will be approximately $50,000.
In addition, the information systems and technology management group of General
Physics is examining their exposure to the Y2K in other areas of technology.
These areas include telephone and E-mail systems, operating systems and
applications in free standing personal computers, local area networks and other
areas of communication. A failure of these systems, which may impact the ability
of General Physics to service their customers could have a material effect on
their results of operations. These issues are being handled by the information
and technology team at General Physics by identifying the problems and obtaining
from vendors and service providers either the necessary modifications to the
software or assurances that the systems will not be disrupted. General Physics
believes that the cost of the programming and equipment upgrades will not exceed
$300,000. In addition, certain personal computers and other equipment that is
not Y2K compliant will be upgraded or replaced through General Physics' normal
process of equipment upgrades. General Physics believes that the evaluation and
implementation process will be complete no later than the third quarter of 1999.
Over the next year, General Physics intends to continue to plan and implement
other information technology projects in the ordinary course of business.
General Physics expects to finance these expenditures from a combination of
working capital and operating leases for a portion of the new computer
equipment. Therefore, General Physics does not expect the Y2K issue to have a
material adverse impact on its financial position or results of operations.
The other operations of the Company, including MXL and the corporate office,
will be Y2K compliant by the second quarter of 1999. The Company believes only
material application that is not Y2K compliant at this time is MXL's
manufacturing system. MXL anticipates that they will be Y2K compliant by June
30, 1999. The cost will be approximately $25,000.
Like other companies, the Company relies on its customers for revenues and on
its vendors for various products and services; these third parties all face the
8
<PAGE>
Y2K issue. An interruption in the ability of any of them to provide goods or
services, or to pay for goods or services provided to them, or an interruption
in the business operations of its customers causing a decline in demand for
services, could have a material adverse effect on the Company in turn. In
addition, the Company has significant equity investments which all face the Y2K
issue as well. An interruption in their ability to operate could cause a
significant impact on their market value, which in turn would have a material
adverse effect on the Company. In the event of non-remediation of the Y2K issues
by the Company or certain of its vendors, the worst case scenario would be
disruption of the Company's operations, possibly impacting the provision of
services to customers and the Company's ability to bill or collect revenues.
The Company's business units are communicating with their principal customers
and vendors about their Y2K readiness, and expect this process to be completed
no later than the third quarter of 1999. None of the responses received to date
suggests that any significant customer or vendor expects the Y2K issue to cause
an interruption in its operations, which would have a material adverse impact on
the Company. However, because so many firms are exposed to the risk of failure
not only of their own systems, but of the systems of other firms, the ultimate
effect of the Y2K issue is subject to a very high degree of uncertainty.
Management believes that the Company's efforts to mitigate its Y2K risks will
avoid significant business interruptions. Contingency planning is an ongoing
process. While the Company's overall Y2K contingency plan is now being
developed, existing disaster recovery documentation and procedures remain the
first line of defense. Some Y2K specific plans have been developed and are being
reviewed and tested. The principal Y2K operational contingency plans are
expected to be completed and tested by June 1999.
In addition, there is a risk, the probability of which the Company is not in a
position to estimate, that the transition to the Y2K will cause wholesale,
perhaps prolonged, failures of electrical generation, banking,
telecommunications or transportation systems in the United States or abroad,
disrupting the general infrastructure of business and the economy at large. The
effect of such disruptions on the Company could be material.
The statements in this section regarding the effect of the Y2K and the Company's
responses to it are forward-looking statements. They are based on assumptions
that the Company believes to be reasonable in light of its current knowledge and
experience. A number of contingencies could cause actual results to differ
materially from those described in forward-looking statements made by or on
behalf of the Company.
Adoption of a Common European Currency
On January 1, 1999, eleven European countries adopted the Euro as their common
currency. From that date until January 1, 2002, debtors and creditors may choose
to pay or to be paid in Euros or in the former national currencies.
On and after January 1, 2002, the former national currencies will cease to be
legal tender.
<PAGE>
The Company is currently reviewing its information technology systems and
upgrading them as necessary to ensure that they will be able to convert among
the former national currencies and the Euro, and process transactions and
balances in Euros, as required. The Company has sought and received assurances
from the financial institutions with which it does business that beginning in
1999 they will be capable of receiving deposits and making payments both in
Euros and in the former national currencies. The Company does not expect that
adapting its information technology systems to the Euro will have a material
impact on its financial condition or results of operations. The Company is also
reviewing contracts with customers and vendors calling for payments in
currencies that are to be replaced by the Euro, and intends to complete in a
timely way any required changes to those contracts.
Adoption of the Euro is likely to have competitive effects in Europe, as prices
that had been stated in different national currencies become directly comparable
to one another. In addition, the adoption of a common monetary policy throughout
the countries adopting the Euro can be expected to have an effect on the economy
of the region. These competitive and economic effects cannot be predicted with
certainty, and there can be no assurance that they will not have a material
effect on the Company's business in Europe.
The forward-looking statements contained herein reflect GP Strategies'
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, all of which are difficult to predict and many
of which are beyond the control of GP Strategies, including, but not limited to,
the risk that qualified personnel will not continue to be available,
technological risks, risks associated with the Company's acquisition strategy
and its ability to manage growth, risks associated with changing economic
conditions, risks of conducting international operations, the risk that the
Company's preparations with respect to the risks presented by the year 2000
issue will not be adequate, the Company's ability to comply with financial
covenants in connection with various loan agreements and those risks and
uncertainties detailed in GP Strategies' periodic reports and registration
statements filed with the Securities and Exchange Commission.
<PAGE>
Liquidity and capital resources
At December 31, 1998, the Company had cash, cash equivalents and marketable
securities totaling $7,548,000. 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, 1998, approximately
$34,277,000 was available to the Company under its credit agreements (see Note 9
to the consolidated financial statements). At December 31, 1998, the Company had
classified 150,000 shares of Duratek stock valued at $741,000 as marketable
securities due to the Company's intention to sell these shares promptly in 1999.
For the year ended December 31, 1998, the Company's working capital decreased by
$20,806,000 to $13,989,000, reflecting the effect of reduced cash, cash
equivalents, marketable securities and inventories and increased current
maturities of long-term debt and short-term borrowings, partially offset by
increased accounts and other receivables. Consolidated cash and cash equivalents
decreased by $5,568,000 to $6,807,000 at December 31, 1998.
The decrease in cash and cash equivalents of $5,568,000 in 1998 resulted from
cash used for operations of $3,241,000,and investing activities of $39,436,000,
partially offset by cash provided by financing activities of $37,109,000. The
cash used by investing activities was primarily for the acquisitions of
Deltapoint and Learning Technologies as well as additions to property, plant and
equipment and intangible assets. Cash provided by financing activities consisted
primarily of proceeds from 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. The Company
does not anticipate having to replace major facilities in the near term. As of
December 31, 1998, the Company has not contractually committed itself for any
major capital expenditures.
<PAGE>
Item 7A. Quantitative and Qualitative Disclosures About
Market Risk
The Company is exposed to the impact of interest rate, market risks
and currency fluctuations. In the normal course of business, the Company employs
internal processes to manage its exposure to interest rate, market risks and
currency fluctuations. The Company's objective in managing its interest rate
risk is to limit the impact of interest rate changes on earnings and cash flows
and to lower its overall borrowing costs. To achieve these objectives, the
Company refinances debt when advantageous and maintains fixed rate debt on a
majority of its borrowings. The Company is exposed to the impact of currency
fluctuations because of its international operations. At the present time, the
Company does not swap or hedge its foreign currency obligations, but will review
its policy on hedging on a continuous basis. The Company does not hold or issue
derivative or other financial instruments for trading purposes.
<PAGE>
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS OF GP STRATEGIES CORPORATION
AND SUBSIDIARIES:
Page
Independent Auditors' Report 30
Consolidated Balance Sheets - December 31, 1998 and 1997 31
Consolidated Statements of Operations - Years ended December 31,
1998, 1997, and 1996 33
Consolidated Statements of Changes in Stockholders' Equity - Years
ended December 31, 1998, 1997, and 1996 34
Consolidated Statements of Cash Flows - Years ended December 31,
1998, 1997, and 1996 36
Notes to Consolidated Financial Statements 39
SUPPLEMENTARY DATA (Unaudited)
Selected Quarterly Financial Data 72
<PAGE>
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, 1998 and 1997, and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 1998, in conformity with generally accepted accounting
principles.
KPMG LLP
New York, New York
March 1, 1999
<PAGE>
GP STRATEGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
December 31, 1998 1997
- -------------------------------------------------------------------------
Assets
Current assets
Cash and cash equivalents $ 6,807 $ 12,375
Marketable securities 741 1,350
Accounts and other receivables (of which
$5,146 and $10,246 are from government
contracts) less allowance for doubtful
accounts of $1,733 and $2,782 55,531 42,720
Inventories 2,362 24,842
Costs and estimated earnings in excess of billings on
uncompleted contracts, of which $1,942 and $649
relate to government contracts 15,395 7,726
Prepaid expenses and other current assets 5,344 3,565
- ------------------------------------------------------------------------
Total current assets 86,180 92,578
- ------------------------------------------------------------------------
Investments and advances 23,071 28,093
- ------------------------------------------------------------------------
Property, plant and equipment, net 14,474 9,732
- ------------------------------------------------------------------------
Intangible assets, net of accumulated
amortization of $34,967 and $32,184
Goodwill 77,961 54,528
Patents, licenses and deferred charges 3,397 1,197
- ------------------------------------------------------------------------
81,358 55,725
Deferred tax asset 3,290 1,101
- ------------------------------------------------------------------------
Other assets 2,532 3,383
- ------------------------------------------------------------------------
$210,905 $190,612
See accompanying notes to consolidated financial statements.
<PAGE>
GP STRATEGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Continued)
(in thousands, except shares and par value per share)
December 31, 1998 1997
- -------------------------------------------------------------------------
Liabilities and stockholders' equity
Current liabilities
Current maturities of long-term debt $ 3,180 $ 342
Short-term borrowings 30,723 23,945
Accounts payable and accrued expenses 24,089 25,517
Billings in excess of costs and estimated
earnings on uncompleted contracts 14,199 7,979
- ------------------------------------------------------------------------
Total current liabilities 72,191 57,783
- ------------------------------------------------------------------------
Long-term debt less current maturities 18,379 6,246
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 11,102,767 and
10,810,644 shares (of which 276,075 and 152,667
shares are held in treasury) 111 108
Class B common stock, authorized 2,800,000 shares, par
value $.01 per share, issued and outstanding 256,250
and 62,500 shares 3 1
Additional paid-in capital 164,217 158,676
Accumulated deficit (39,397) (37,336)
Accumulated other comprehensive income 99 6,630
Note receivable from stockholder (1,742)
Treasury stock at cost (2,956) (1,496)
- ------------------------------------------------------------------------
Total stockholders' equity 120,335 126,583
- ------------------------------------------------------------------------
$210,905 $190,612
See accompanying notes to consolidated financial statements.
<PAGE>
GP STRATEGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
Years ended December 31, 1998 1997 1996
- -------------------------------------------------------------------------------
Sales $284,682 $234,801 $203,800
Cost of goods sold 242,689 199,572 173,558
- ------------------------------------------------------------------------------
Gross margin 41,993 35,229 30,242
- ------------------------------------------------------------------------------
Selling, general and administrative (31,883) (31,502) (30,788)
Interest expense (3,896) (4,075) (4,358)
Investment and other income,
net (including interest income of $335,
$621 and $906) 1,735 2,364 3,756
Loss on investments (4,624) (4,000)
Loss on sale of assets (6,225)
Gains on trading securities, net 2,205 689 3,314
Gain on disposition of stock of
an affiliate 12,200
Gain on issuance of stock by a
subsidiary and an affiliate 2,168
Minority interests 25 (1,290)
- -------------------------------------------------------------------------------
Income (loss) before income taxes (695) 2,730 11,244
Income tax benefit (expense) (1,366) 693 136
- ------------------------------------------------------------------------------
Net income (loss) $ (2,061) $ 3,423 $ 11,380
- ------------------------------------------------------------------------------
Net income (loss) per share
Basic $ (.19) $.33 $1.55
Diluted (.19) .31 1.54
- ------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
<PAGE>
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity
Years ended December 31, 1998, 1997, and 1996
(in thousands, except for par value per share)
<TABLE>
<CAPTION>
Accumulated - Note
Class B other receivable Treasury Total
Common common Additional compre- Compre- from stock stock-
stock stock paid-in Accumulated hensive hensive stock- at holders'
($.01 Par) ($.01 Par) capital deficit income income holder cost equity
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995 $ 68 $ 1 $125,419 $(52,139) $(2,351) $ $ $ $70,998
- -----------------------------------------------------------------------------------------------------------------
Other comprehensive
income 5,675 5,675 5,675
Net income 11,380 11,380 11,380
- ---------------------------------------------------------------------------------------------------------------
Total comprehensive income 17,055 17,055
Issuance and sale of
common stock and
common stock warrants 7 5,969 5,976
- ---------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 75 1 131,388 (40,759) 3,324 94,029
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity (Continued)
Years ended December 31, 1998, 1997, and 1996
(in thousands , except for par value per share)
<TABLE>
<CAPTION>
Accumulated
Class B other Note Treasury Total
Common common Additional compre- Compre- receivable stock stock-
stock stock paid-in Accumulated hensive hensive from at holders'
($.01 Par)($.01 Par) capital deficit income income stockholder cost equity
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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
Other comprehensive income 3,306 3,306 3,306
Net income 3,423 3,423 3,423
- ---------------------------------------------------------------------------------------------------------------
Total comprehensive income 6,729 6,729
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
- ---------------------------------------------------------------------------------------------------------------
Other comprehensive income (6,531) (6,531) (6,531)
Net loss (2,061) (2,061) (2,061)
- ---------------------------------------------------------------------------------------------------------------
Total comprehensive income (8,592) (8,592)
Issuance and sale of common
stock 3 2 5,541 (1,742) 3,804
Purchase of treasury stock (1,460) (1,460)
- ---------------------------------------------------------------------------------------------------------------
Balance at December 31, 1998 $111 $ 3 $164,217 $(39,397) $ 99 $ $(1,742) $(2,956) $120,335
- ---------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
GP STRATEGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
- ------------------------------------------------------------------------
Years ended December 31, 1998 1997 1996
- -------------------------------------------------------------------------
Cash flows from operations:
Net income (loss) $ (2,061) $ 3,423 $ 11,380
Adjustments to reconcile net income (loss)
to net cash (used in) provided by operating activities:
Depreciation and amortization 5,452 5,867 4,069
Issuance of stock for profit incentive plan
and other 1,675 777
Gain on disposition of stock of
an affiliate (12,200)
Gain on issuance of stock by
a subsidiary and an affiliate (2,168)
Gains on trading securities, net (2,205) (689) (3,314)
Loss on investments 4,624 700 4,000
Loss on sale of assets 6,225
Loss on equity investments and other 936 1,880 540
Deferred income taxes (2,028) (1,860)
Proceeds from sale of trading securities 3,964 2,589 4,425
Changes in other operating items,
net of effect of acquisitions and
disposals:
Accounts and other receivables (23,470) (2,087) (2,167)
Inventories 997 (1,649) (2,749)
Costs and estimated earnings in excess of
billings on uncompleted contracts (7,669) 1,740 (348)
Prepaid expenses and other current assets (3,062) (103) 178
Accounts payable and accrued expenses 5,133 388 3,297
Billings in excess of costs and estimated
earnings on uncompleted contracts 6,220 (542) 220
- ------------------------------------------------------------------------
Net cash (used in) provided by operations$ (3,241) $ 10,266 $ 3,303
- ------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
<PAGE>
GP STRATEGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(in thousands)
- ------------------------------------------------------------------------
Years ended December 31, 1998 1997 1996
- -------------------------------------------------------------------------
Cash flows from investing activities:
Acquisitions of businesses, net $(31,632) $ (4,533)$
Additions to property, plant and
equipment, net (4,484) (3,714) (2,678)
Additions to intangible assets (2,985) (1,233) (2,446)
Proceeds from sale of stock of a subsidiary 13,275
Reduction of (increase to) investments
and other assets (335) (156) 1,158
- ------------------------------------------------------------------------
Net cash (used in) provided by
investing activities (39,436) (9,636) 9,309
- ------------------------------------------------------------------------
Cash flows from financing activities:
Repayments of short-term borrowings (14,519) (4,124)
Proceeds from short-term borrowings 37,773 1,313 2,238
Proceeds from issuance of long-term debt 15,000 531 1,400
Repayment of long-term debt (281) (7,333) (4,213)
Proceeds from issuance of
common stock 2,546
Exercise of common stock
options and warrants 596 177
Repurchase of treasury stock (1,460) (1,496)
- ------------------------------------------------------------------------
Net cash (used in) provided by
financing activities 37,109 (10,932) 1,971
- ------------------------------------------------------------------------
Net (decrease) increase in cash and
cash equivalents (5,568) (10,302) 14,583
Cash and cash equivalents at
beginning of year 12,375 22,677 8,094
- ------------------------------------------------------------------------
Cash and cash equivalents at end of year$ 6,807 $ 12,375 $ 22,677
- ------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
<PAGE>
GP STRATEGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(in thousands)
Years ended December 31, 1998 1997 1996
- -------------------------------------------------------------------------
Supplemental disclosures of
cash flow information:
Cash paid during the year for:
Interest $ 3,704 $ 3,961 $ 4,200
Income taxes $ 1,194 $ 946 $ 1,301
See accompanying notes to consolidated financial statements.
<PAGE>
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
1. Description of business and summary of significant accounting policies
Description of business. GP Strategies Corporation (the "Company") has two
operating business segments: Performance Improvement (formerly Physical
Science), and Optical Plastics. In addition, the Company owns approximately 37%
of the outstanding shares of common stock of the American Drug Company (ADC)
(see Note 5). On September 30, 1998, the Company sold substantially all the
operating assets of the Five Star Group, Inc. (Five Star), which formerly
comprised the Distribution Group, to ADC. Prior to the above transaction, the
Company sold 16.5% interest in ADC to the management of Five Star. As a result
of these transactions, as of September 30, 1998, the Company no longer
consolidates the balance sheet and results of operations of ADC and its
subsidiaries. Five Star is engaged in the wholesale distribution of home
decorating, hardware and finishing products. The Company also has an
approximately 7% investment in Interferon Sciences, Inc. (ISI) (see Note 4), a
7% investment in GTS Duratek, Inc. (Duratek) (see Note 3) and owns approximately
22% of GSE Systems, Inc. (GSES) (see Note 6). The Company's Performance
Improvement 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 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.
<PAGE>
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
1. Description of business and summary of significant accounting policies
(Continued)
Marketable securities. Marketable securities at December 31, 1998 and 1997
consist of U.S. corporate equity securities. The Company classifies its
marketable securities (investments of less than 20%), as trading or
available-for-sale long-term investments. Investments with restrictions on the
amount the Company is able to sell within a one-year period are classified as
long-term investments. When an other than temporary impairment of long-term
investments is identified, the Company reduces the investment to its estimated
fair value and recognizes a loss on the investment. Gains and losses are derived
using the average cost method for determining the cost of securities sold.
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 in Accumulated other comprehensive income, net of tax,
until realized. Long-term investments, not available-for-sale, are carried at
cost. 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, 1998. During the years ended December 31, 1998, 1997 and 1996, the Company
realized foreign currency transaction gains (losses) of $(75,000), $131,000 and
$340,000, respectively. These amounts are included in Investment and other
income, net.
Foreign currency translation. The functional currency of the Company's
international operations is the applicable local currency. The translation of
the applicable foreign currency into U.S. dollars is performed for balance sheet
accounts using current exchange rates in effect at the balance sheet date and
for revenue and expense accounts using the weighted-average rates of exchange
prevailing during the year. The unrealized gains and losses resulting from such
translation are included as a separate component of shareholders' equity in
Accumulated other comprehensive income.
<PAGE>
1. Description of business and summary of significant accounting policies
(Continued)
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.
Comprehensive income. On January 1, 1998, the Company adopted SFAS No. 130,
Reporting Comprehensive Income. SFAS No. 130 establishes standards for reporting
and presentation of comprehensive income and its components in a full set of
financial statements. Comprehensive income consists of net income, net
unrealized gains (losses) on securities and foreign currency translation
adjustment and is presented in the consolidated statements of stockholders'
equity as well as Note 14 which presents comprehensive income. The Statement
requires only additional disclosures in the consolidated financial statements;
it does not affect the Company's financial position or results of operations.
Prior year financial statements have been reclassified to conform to the
requirements of SFAS No. 130 (see Note 14).
Property, plant and equipment. Property, plant and equipment are carried at
cost. Major additions and improvements are capitalized while maintenance and
repairs which do not extend the lives of the assets are expensed as incurred.
Gain or loss on the disposition of property, plant and equipment is recognized
in operations when realized.
Depreciation. 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
<PAGE>
1. Description of business and summary of significant accounting policies
(Continued)
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 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.
Stock option plan. Effective 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. As permitted under SFAS No. 123 the Company elected
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 and, accordingly, no compensation cost
has been recognized for its stock options in the financial statements.
Sales of subsidiary stock. The Company recognizes gains and losses on sales of
subsidiary stock in its Consolidated Statements of Operations.
<PAGE>
1. Description of business and summary of significant accounting
policies (Continued)
Income taxes. Income taxes are accounted for under the asset and liability
method. Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and for operating loss and tax credit carryforwards. Deferred tax assets
and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
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.
Reclassification. Certain prior year amounts in the financial statements and
notes thereto have been reclassified to conform to 1998 classifications.
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 10% 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., American Drug Company
and GSE Systems, Inc. (See Notes 3, 4, 5 and 6).
<PAGE>
1. Description of business and summary of significant accounting policies
(Continued)
Impairment of long-lived assets. The Company applies the provisions of SFAS No.
121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of. 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.
2. General Physics Corporation
General Physics is a performance improvement company and a provider of workforce
development. General Physics assists productivity-driven organizations to
maximize workforce performance by integrating people, processes and technology.
General Physics is a total solutions provider for strategic training,
engineering, consulting and technical support services to Fortune 500 companies,
government, and utilities.
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 of additional liabilities in
relation to the purchase. As a result of this transaction, the Company purchased
for a total of $31,276,000 the remaining 48% of the outstanding shares of
General Physics and recorded $21,069,000 of goodwill, which is being amortized
over 30 years.
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
<PAGE>
2. General Physics Corporation (Continued)
The above pro-forma information is not necessarily indicative of the actual
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.
On June 16, 1998, General Physics acquired the Learning Technologies business of
Systemhouse, an MCI company. Learning Technologies is a computer technology
training and consulting organization, with offices and classrooms in Canada, the
United States and the United Kingdom. General Physics purchased Learning
Technologies for $24,000,000 in cash. The cash consideration of the purchase
price was derived from funds borrowed by the Company and General Physics,
pursuant to the Company's credit agreement dated June 15, 1998 (see Note 9).
Learning Technologies had annual revenues in 1997 of approximately $51,000,000,
and revenues totaling approximately $24,687,000 from January 1, 1998 to June
1998, with the majority of these sales attributable to operations in Canada and
the United Kingdom. From June 16, 1998 through December 31, 1998, Learning
Technologies had revenues of approximately $30,706,000. The Company has
accounted for this transaction as a purchase, and has recorded $23,216,000 of
goodwill, which is being amortized over 30 years. The results of operations for
Learning Technologies have been consolidated with the Company since June 16,
1998.
On July 13, 1998, General Physics completed its acquisition of substantially all
of the operations and net assets of The Deltapoint Corporation (Deltapoint).
Deltapoint is a Seattle, Washington based management consulting firm focused on
large systems change and lean-enterprise, with 500 clients primarily operating
in the aerospace, pharmaceutical, manufacturing, health care and
telecommunications industries. General Physics purchased Deltapoint for
approximately $6,300,000 in cash and a future earnout, as described in the Asset
Purchase Agreement. Pursuant to the terms of the future earnout, General Physics
agreed to pay a percentage of revenues earned for each of the three years
following closing, so long as minimum revenue and earnings goals are achieved.
Assuming that those goals are reached in each year, then the additional
consideration for each such year would equal $1,333,440; in addition General
Physics would pay a percentage of revenues received in excess of the goal. These
amounts will be recorded as additional purchase price and as additional goodwill
when incurred. The $6,300,000 cash consideration of the purchase price was paid
from funds borrowed by the Company and General Physics, pursuant to the
Company's Credit Agreement dated as of June 15, 1998 (see Note 9). The Company
has accounted for this transaction as a purchase and has recorded approximately
$4,858,000 of goodwill, subject to final adjustment, which is being amortized
over 20 years. The results of operations for Deltapoint have been consolidated
with the Company since July 14, 1998 and Deltapoint, through December 31, 1998,
had revenues of approximately $7,221,000.
<PAGE>
2. General Physics Corporation (Continued)
The following information shows on a pro-forma basis, the unaudited results of
operations for the Company for the years ended December 31, 1998 and 1997. All
information also gives effect to proforma adjustments which are principally
amortization of goodwill and interest expense (in thousands, except per share
data). The "Proforma with Acquisitions" information considers the effects of the
acquisitions of Deltapoint and Learning Technologies as if the transactions had
occurred on January 1, 1998 and 1997. The "Total Proforma" information considers
the effect of the acquisition of Deltapoint and Learning Technologies as well as
the deconsolidation of ADC and the sale of substantially all the operating
assets of Five Star, as if the transactions had occurred on January 1, 1998 and
1997.
1998 1997
--------------------------------- ---------------------------------
Proforma Total Proforma Total
with acquisitions Proformawith acquisitions Proforma
Sales $315,533 $251,144 $296,825 $213,402
Net income (loss) (1,705) (957) 4,029 4,065
Basic earning (loss) per share (.16) (.09) .39 .39
Diluted earning (loss) per share (.16) (.09) .37 .37
The above pro-forma information is not necessarily indicative of the actual
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.
3. GTS Duratek, Inc.
At December 31, 1998, the Company owned approximately 7% of the outstanding
shares of the common stock of Duratek.
Duratek implements technologies and provides services, many of which are related
to managing remediation and treating radioactive and hydrocarbon waste.
<PAGE>
3. GTS Duratek, Inc. (Continued)
Information relating to the Company's investment in Duratek is as follows (in
thousands):
1998 1997
Included in Marketable securities:
Number of shares 150 100
Value $ 741 $ 1,350
Included in Investments and advances:
Number of shares 655 500
Available-for-sale equity securities,
at market $ 3,232 $ 6,750
Number of shares 186 914
Securities held for long-term
investment, at cost $ 303 $ 1,487
Total carrying amount $4,276 $ 9,587
Total number of shares owned 991 1,514
Market value of shares $ 4,890 $20,442
- ------------------------------------------------------------------
4. Interferon Sciences, Inc.
ISI is approximately 7% owned by the Company at December 31, 1998. ISI is a
biopharmaceutical company engaged in the manufacture and sale of pharmaceutical
products based on its highly purified, natural source multispecies alpha
interferon.
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, however the
amounts disclosed do not reflect the one for five reverse stock split effective
January 1999.
<PAGE>
4. Interferon Sciences, Inc. (Continued)
Information relating to the Company's investment in ISI is as follows (in
thousands):
1998 1997
Included in Investments and advances:
Number of shares 1,509 608
Available-for-sale equity securities,
at market $ 661 $ 5,284
Number of shares 1,246
Securities held for long-term
investment, at cost $ 2,841
Total carrying amount $ 661 $ 8,125
Total number of shares owned 1,509 1,854
Market value of shares $ 661 $16,107
- ------------------------------------------------------------------
5. American Drug Company
On September 30, 1998, the Company sold substantially all operating assets of
its wholly-owned subsidiary, the Five Star Group, Inc. (Five Star) to ADC for
$16,476,000, which was used to repay existing short-term borrowings, and a
$5,000,000 unsecured senior note. Five Star is a leading distributor of home
decorating, hardware and finishing products in the northeast. Prior to the above
transaction, the Company sold 16.5% interest in ADC to the management of Five
Star, bringing its interest in ADC to approximately 37%. In addition, the
Company recognized a $6,225,000 loss on the transaction. As a result of these
transactions, the Company no longer consolidates the balance sheet and operating
results of ADC and its subsidiaries, but will instead account for ADC and its
subsidiaries as an equity investment. At December 31, 1998, the Company's
investment in ADC was $8,893,000, including the $5,000,000 Senior unsecured 8%
Note. The Note is due in five years, with interest due quarterly. The Company is
amortizing the excess of its investment in ADC over its share of ADC's new basis
of underlying net assets, which was approximately $3,674,000 at December 31,
1998. Upon completion of the transaction the Company's wholly-owned subsidiary,
Five Star changed its name to JL Distributors, Inc. (JL).
<PAGE>
5. American Drug Company (Continued)
Information relating to the Company's investment in ADC is as follows (in
thousands):
1998
Included in Investments and advances:
Long-term note receivable $5,000
Number of shares controlled 4,882
Carrying amount of shares $ 3,893
Market value of shares $ 1,850
- ------------------------------------------------------
Condensed unaudited financial information for ADC as of December 31, 1998 and
for the year then ended is as follows (in thousands):
Current assets $32,291
Non current assets 888
Current liabilities 27,596
Non current liabilities 5,000
Stockholders' equity 583
Sales 17,080
Gross profit 3,394
Net loss (664)
6. GSE Systems, Inc.
GSES designs, develops and delivers business and technology solutions by
applying high technology-related process control, data acquisition, simulation,
and business software, systems and services to the energy, process and
manufacturing industries worldwide. At December 31, 1998, the Company owns
approximately 22% of GSES and accounts for its investment in GSES on the equity
basis. As of December 31, 1998, the Company recognized an other than temporary
impairment of its investment in GSES as a result of the significant decrease in
the market value of GSES common stock during 1998. The Company recorded a loss
of $1,557,000, which is included in Loss on investments. The Company is
amortizing the excess of its investment in GSES over its share of GSES's
underlying net assets, which was approximately $2,978,000 and $4,238,000 at
December 31, 1998 and 1997, respectively.
<PAGE>
6. GSE Systems, Inc. (Continued)
Information relating to the Company's investment in GSES is as follows (in
thousands):
1998 1997
Included in Investments and advances:
Number of shares controlled 1,125 1,125
Total carrying amount $ 6,738 $ 7,988
Market value of shares 2,812 5,906
Equity in income (loss) included in Investment
and other income, net 307 (1,880)
- -------------------------------------------------------------------
Condensed unaudited financial information for GSES as of December 31, 1998 and
1997 and for the years then ended is as follows (in thousands):
1998 1997
Current assets $31,079 $31,714
Non current assets 16,381 16,610
Current liabilities 28,121 30,031
Non current liabilities 2,250 2,369
Stockholders' equity 17,089 15,924
Revenue 73,818 79,711
Gross profit 24,004 21,385
Net income (loss) 1,397 (8,703)
- -------------------------------------------------------------------
7. Inventories
Inventories are summarized as follows (in thousands):
December 31, 1998 1997
- -------------------------------------------------------------------
Raw materials $ 811 $ 619
Work in process 272 252
Finished goods 1,279 23,971
- ------------------------------------------------------------------
$ 2,362 $ 24,842
- ------------------------------------------------------------------
<PAGE>
8. Property, plant and equipment
Property, plant and equipment consists of the following (in thousands):
December 31, 1998 1997
- ------------------------------------------------------------------
Land $ 915 $ 173
Buildings and improvements 2,730 1,374
Machinery and equipment 11,767 12,824
Furniture and fixtures 21,965 18,120
Leasehold improvements 4,265 7,268
- ------------------------------------------------------------------
41,642 39,759
Accumulated depreciation and amortization (27,168) (30,027)
$ 14,474 $ 9,732
- ------------------------------------------------------------------
9. Short-term borrowings
Short-term borrowings are as follows (in thousands):
December 31, 1998 1997
- ------------------------------------------------------------------
Revolving Credit Agreement (a) $ $ 7,051
Credit Agreement (b) 30,723
Line of Credit Agreement (C) 16,894
$30,723 $ 23,945
- ------------------------------------------------------------------
(a) 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 bore interest at the prime rate or 1.75% over LIBOR. At December
31,1997, the amount outstanding was approximately $7,051,000. The Company
terminated the Agreement in 1998.
(b) The Company and General Physics Canada Ltd. (GP Canada), an Ontario
corporation and a wholly-owned subsidiary of General Physics, entered into a new
Credit Agreement, dated as of June 15, 1998 (the Credit Agreement), with various
banks providing for a secured credit facility of $80,000,000 (the Credit
Facility) comprised of a revolving credit facility of $65,000,000 expiring on
June 15, 2001 and a five-year term loan of $15,000,000. The five year term loan
is payable in 20 quarterly installments of $187,500 commencing on October 1,
1998 with a final payment of $11,250,000 due on June 15, 2003.
<PAGE>
9. Short-term borrowings (Continued)
The Credit Facility is secured by principally all the receivables and inventory
of the Company as well as all of the common stock of the Company's material
domestic subsidiaries and 65% of the common stock of the Company's foreign
subsidiaries. At the option of the Company or GP Canada, as the case may be, the
interest rate on any loan under the Credit Facility may be based on an adjusted
prime rate or Eurodollar rate, as described in the Credit Agreement. At December
31, 1998, $44,625,000, of which $14,813,000 relates to the five year term-loan,
was borrowed at a weighted average Eurodollar rate of 7.25% and $911,000 was
borrowed at 7.75% or the prime rate of interest. The Agreement contains certain
covenants which requires among other things, the maintenance of certain
financial ratios. At December 31, 1998, the Company was in compliance with the
covenants. At December 31, 1998 $30,723,000 was borrowed under the Credit
Facility and an additional $34,277,000 was available to be borrowed.
(c) On August 18, 1997, JL (formerly Five Star) entered into a three year Loan
Agreement with a syndicate of three banks. The Loan Agreement provided for a
$22,000,000 revolving credit facility bearing interest at 2.25% over LIBOR for
up to $11,000,000 of the loan (at JL's option) and the prime rate of interest
plus .625% for the remaining balance.
On September 30, 1998, the Company sold substantially all the operating assets
of JL to ADC (see Note 5). The Company used the proceeds of the sale to repay
the balance outstanding under the Loan Agreement, and terminated the Loan
Agreement.
10. Accounts payable and accrued expenses
Accounts payable and accrued expenses are comprised of the following (in
thousands):
December 31, 1998 1997
- --------------------------------------------------------------------
Accounts payable $ 13,324 $ 15,135
Payroll and related costs 6,539 5,063
Other 4,226 5,319
- ------------------------------------------------------------------
$ 24,089 $ 25,517
- ------------------------------------------------------------------
<PAGE>
11. Long-term debt
Long-term debt is comprised of the following (in thousands):
December 31, 1998 1997
- --------------------------------------------------------------------
8% Swiss Bonds, due 2000 (a) $ 2,359 $ 2,158
5% Convertible Bonds due 1999 (b) 1,858 1,786
Term loan (Note 9(b)) 14,813
Senior Subordinated Debentures(C) 878 842
7% Convertible Notes (d) 1,000
Other 1,651 802
- ------------------------------------------------------------------
21,559 6,588
Less current maturities 3,180 342
- ------------------------------------------------------------------
$ 18,379 $ 6,246
- ------------------------------------------------------------------
(a) In June 1995, the Company issued 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 holders.
(b) In July 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,
1998, $1,879,000 (face value) of the 5% Bonds were outstanding and convertible
into 107,989 of the Company's Common Stock at the option of the holders.
<PAGE>
11. Long-term debt (Continued)
(c) In August 1994, General Physics, as a result of an acquisition issued $15
million of 6% Senior Subordinated Debentures, which have a carrying value of
$12,540,000, 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,
1998, the carrying value of the debentures held by the Company was $11,662,000,
which was eliminated in consolidation, and the remaining $878,000 of debentures
were held by the public.
(d) 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. On March 17, 1998 and April 2, 1998, ADC
was informed by all holders of the Notes that they had elected to convert the
Notes into 82,306 shares of the Company's common stock. In accordance with the
terms of the agreement, the Company and ADC had agreed that if the Notes were
used to exercise the warrants issued by the Company in connection with the
offering, the Company had the right to 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.
On April 30, l998, the Company and ADC agreed that instead of issuing
additional shares of ADC's common stock, ADC would assign to the Company
expected future payments in the amount of approximately $1,000,000 from ICF
Kaiser International as a success fee in connection with the completion of ADC's
consulting project in the Czech Republic, which is anticipated to be completed
in late l999. Due to the uncertainty of the collection of this fee, the
potential success fee has not been recorded as income or a receivable by the
Company.
Aggregate annual maturities of long-term debt outstanding at December 31, 1998
for each of the next five years are as follows (in thousands):
1999 $3,180
2000 3,941
2001 1,597
2002 1,461
2003 12,630
<PAGE>
12. Employee benefit plans
(a) Effective December 31, 1991, the plan participants would no longer accrue
benefits under the Company's Defined Benefit Pension Plan (the Plan), but became
eligible to participate in the Company's Savings Plan. During 1997, the Company
announced its intention to terminate 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. 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 and $400,000 for 1997 and 1996, respectively.
(b) The Company also has a 401(k) Savings Plan (the Savings Plan) available to
employees who have completed one year of service. The Company's expense
associated with the Savings Plan was $203,000, $201,000 and $246,000 in 1998,
1997 and 1996, 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, the exchange
included 245,126 shares of General Physics' common stock and 116,591 shares of
the common stock of the Company. On January 24, 1997, the Company acquired the
remaining 48% of General Physics, and contributed 99,953 and 122,290 shares of
the Company's common stock directly to the Plan during 1997 and 1996,
respectively. The Company made matching contributions to the Plan for employees
of the Company of approximately $1,157,000, $1,121,000 and $1,065,000 for the
years ended December 31, 1998, 1997 and 1996, respectively.
<PAGE>
13. Income taxes
The components of income tax expense (benefit) are as follows (in thousands):
Years ended December 31, 1998 1997 1996
- -------------------------------------------------------------------------
Current
State and local $ 1,271 $ 1,200 $ 315
Federal tax expense 135 1,409
- ------------------------------------------------------------------------
Total current 1,271 1,335 1,724
- ------------------------------------------------------------------------
Deferred
State and local 95 11 39
Federal tax (benefit) (2,039) (1,899)
- -------------------------------------------------------------------------
Total deferred 95 (2,028) (1,860)
- -------------------------------------------------------------------------
Total income tax provision (benefit) $ 1,366 $ (693) $(136)
- -------------------------------------------------------------------------
The deferred provision excludes activity in the net deferred tax assets relating
to tax on appreciation (depreciation) in securities available-for-sale, which is
recorded to stockholders' equity.
The difference between the provision for income taxes computed at the statutory
rate and the reported amount of tax expense is as follows:
December 31, 1998 1997 1996
- ------------------------------------------------------------------------------
Federal income tax rate (35.0%) 35.0% 35.0%
State and local taxes net of Federal benefit 127.8 28.8 2.0
Items not deductible - primarily
amortization of goodwill 77.1 25.4 4.8
Net operating loss utilization (82.6) (25.0)
Valuation allowance adjustment 29.1 (32.9) (19.0)
Other (2.5) .9 1.0
- ------------------------------------------------------------------------------
Effective tax rate 196.5% (25.4)% (1.2%)
- ------------------------------------------------------------------------------
<PAGE>
13. Income taxes (Continued)
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 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 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 1998, the Company recorded an income tax expense of $1,366,000. The current
income tax provision of $1,271,000 represents the estimated state taxes for the
year ended December 31, 1998. The deferred income tax expense of $95,000
represents future estimated state taxes. The increase of $954,000 in the
valuation allowance in 1998 was attributable primarily to the decrease in the
Company's deferred tax liability with respect to Investments in partially owned
companies.
<PAGE>
13. Income taxes (Continued)
As of December 31, 1998, the Company has approximately $12,173,000 of net
Federal operating loss carryovers. These carryovers expire in the years 2005
through 2013. In addition, the Company has approximately $3,500,000 of available
credit carryovers of which approximately $2,400,000 expire in the years 1999
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, 1998 1997
- -------------------------------------------------------------------
Deferred tax assets:
Accounts receivable, principally due
to allowance for doubtful accounts $ 747 $ 827
Accrued expenses and other 328 632
Net operating loss carryforwards 4,747 5,259
Tax credit carryforwards 3,494 3,808
- ------------------------------------------------------------------
Deferred tax assets 9,316 10,526
- ------------------------------------------------------------------
Deferred tax liabilities:
Property and equipment, principally due to
differences in depreciation 1,579 1,361
Unrealized exchange gain 1,323
Other 40 22
Unrealized marketable securities gain 211 484
Investment in partially owned companies 820 3,813
- ------------------------------------------------------------------
Deferred tax liabilities 2,650 7,003
- ------------------------------------------------------------------
Net deferred tax assets 6,666 3,523
- ------------------------------------------------------------------
Less valuation allowance (3,376) (2,422)
- -------------------------------------------------------------------
Net deferred tax asset $ 3,290 $ 1,101
- ------------------------------------------------------------------
<PAGE>
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, management believes it is more likely than
not that the Company will realize the benefits of deferred tax assets of
$3,290,000, and has recorded this amount as an asset as of December 31, 1998.
14. Comprehensive income
The Company has adopted Statement of Financial Accounting Standards ("SFAS") No.
130 "Reporting Comprehensive Income", which establishes standards for the
reporting and display of comprehensive income and its components in general
purpose financial statements. The following are the components of comprehensive
income (in thousands):
Year ended December 31,
1998 1997 1996
Net income (loss) $ (2,061) $ 3,423 $ 11,380
Other comprehensive income (loss),
before tax:
Net unrealized gain (loss) on
available-for-sale-securities (7,943) 5,009 7,218
Minimum pension liability
adjustment 1,380
Foreign currency translation adjustment (838)
---------- --------------------------
Comprehensive income (loss) before tax(10,842) 8,432 19,978
Income tax benefit (expense) related to
items of other comprehensive income 2,250 (1,703) (2,923)
--------- -------- --------
Comprehensive income (loss), net of tax$ (8,592) $ 6,729 $17,055
======== ======== =======
<PAGE>
14. Comprehensive income (Continued)
The components of accumulated other comprehensive income are as follows:
December 31, 1998 1997 1996
- ---------------------------------------------------------------------
Net unrealized gain on
available-for-sale-securities $ 1,698 $ 9,641 $ 4,632
Foreign currency translation adjustment (838)
Accumulated other comprehensive income
before tax 860 9,641 4,632
Accumulated income tax expense related
to items of other comprehensive income (761) (3,011) (1,308)
--------- ------- --------
Accumulated other comprehensive
income, net of tax $ 99 $ 6,630 $ 3,324
========== ======== ========
<PAGE>
15. Common Stock, stock options and warrants
(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.
Although the Plan permits options to be granted at a price not less than 85% of
the fair market value, the Plan options primarily are granted at the fair market
value of the common stock at the date of the grant and 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. Changes in options
and warrants outstanding during 1996, 1997 and 1998, options and warrants
exercisable and shares reserved for issuance at December 31, 1996, 1997, and
1998 are as follows:
Common Stock
Options and warrants Price Range Number Weighted-Average
outstanding per share of shares Exercise Price
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 4.59 - 11.15 1,578,715 7.85
Exercised 4.59 - 9.00 (21,573) 8.17
Terminated 7.59 - 12.00 (144,026) 8.87
- ------------------------------------------------------------------------------
December 31, 1997 4.59 - 24.00 2,608,509 8.35
- ------------------------------------------------------------------------------
Granted 10.41 - 15.375 383,900 14.44
Exercised 7.69 - 10.41 (69,863) 8.42
Terminated 7.75 - 15.375 (174,056) 9.97
- ------------------------------------------------------------------------------
December 31, 1998 4.59 - 24.00 2,748,490 9.09
- ------------------------------------------------------------------------------
Options and warrants exercisable
December 31, 1996 8.375 - 24.00 1,023,158 8.85
- ------------------------------------------------------------------------------
December 31, 1997 4.59 -24.00 1,234,984 8.72
- ------------------------------------------------------------------------------
December 31, 1998 4.59 -24.00 1,399,454 8.77
- ------------------------------------------------------------------------------
Shares reserved for issuance
December 31, 1996 3,523,960
- ------------------------------------------------------------------------------
December 31, 1997 2,756,853
- ------------------------------------------------------------------------------
December 31, 1998 3,198,590
- ------------------------------------------------------------------------------
At December 31, 1998, the weighted average remaining contractual life of all
outstanding options was 5.1 years.
<PAGE>
15. Common Stock, stock options and warrants (Continued)
The following table summarizes information about the Plan's options outstanding
at December 31, 1998:
Weighted
Range Number Average Weighted
Of Outstanding Years Average
Exercise Prices Remaining Exercise Price
- --------------------------------------------------------------------------------
$4.59 - $7.75 1,543,389 5.9 $7.70
8.00 - 15.38 1,195,101 4.0 10.80
$24.00 10,000 0.4 24.00
- ------------------------------------------------------------------------------
$4.59 - $24.00 2,748,490 5.1 $9.09
- ------------------------------------------------------------------------------
The following table summarizes the Class B Common Stock options as follows:
Class B Common Stock
Options Price Range Number Weighted-Average
outstanding per share of shares
Exercise Price
December 31, 1995 $8.50 -9.00 512,500 $8.88
Granted 8.69 375,000 8.69
- ------------------------------------------------------------------------------
December 31, 1996 8.50 -9.00 887,500 8.80
- -------------------------------------------------------------------------------
December 31, 1997 8.50 -9.00 887,500 8.80
Exercised 9.00 (193,750) 9.00
- ------------------------------------------------------------------------------
December 31, 1998 8.50 - 9.00 693,750 8.74
- -------------------------------------------------------------------------------
Options exercisable
December 31, 1996 8.50 -9.00 595,625 8.87
- ----------------------------------------------------------------------
December 31, 1997 8.50 -9.00 762,250 8.82
- ----------------------------------------------------------------------
December 31, 1998 8.50 -9.00 693,750 8.74
- ----------------------------------------------------------------------
Shares reserved for issuance
December 31, 1996 950,000
- ------------------------------------------------------------------------------
December 31, 1997 950,000
- ------------------------------------------------------------------------------
December 31, 1998 950,000
- ------------------------------------------------------------------------------
At December 31, 1998, the weighted average remaining contractual life of all
outstanding Class B options was less than 1 year.
<PAGE>
15. Common Stock, stock options and warrants (Continued)
At December 31, 1998, 1997, and 1996, options outstanding included options for
829,334, 829,334 and 629,334 shares for two executive officers.
Class B Common stock aggregating 693,750, 887,500 and 887,500 shares at December
31, 1998, 1997 and 1996, respectively, were reserved for three executive
officers of the Company.
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. At December 31, 1998, 1997, and 1996, shares reserved
for issuance were primarily related to shares reserved for options and warrants
and the conversion of long-term debt.
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 amounts):
1998 1997 1996
---- ---- ----
Net income (loss) As reported $ (2,061) $ 3,423 $11,380
Pro forma (3,730) 1,344 9,927
Basic earnings (loss) per share
As reported (.19) .33 1.55
Pro forma (.34) .13 1.35
Diluted earnings (loss) per share
As reported (.19) .31 1.54
Pro forma (.34) .12 1.34
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.
<PAGE>
15. Common Stock, stock options and warrants (Continued)
At December 31, 1998, 1997 and 1996, the per share weighted-average fair value
of stock options granted was $8.32, $4.32 and $3.64, respectively on the date of
grant using the modified Black Scholes option-pricing model with the following
weighted-average assumptions: 1998 - expected dividend yield 0%, risk-free
interest rate of 5.44%, expected volatility of 44.86%, and an expected life of
9.2 years; 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.
(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). The new standard specifies the computation, presentation and disclosure
requirements for earnings per share. Earnings per share (EPS) for the years
ended December 31, 1998, 1997 and 1996 are as follows (in thousands, except per
share amounts):
1998 1997 1996
---- ---- ----
Basic EPS
Net income (loss) $ (2,061) $ 3,423 $ 11,380
Weighted average shares
outstanding 10,867 10,457 7,339
Basic earnings (loss)
per share$ (.19) $ .33 $ 1.55
Diluted EPS
Net income (loss) (2,061) $ 3,423 $ 11,380
Weighted average shares
outstanding 10,867 10,457 7,339
Dilutive effect of stock options
and warrants (a) 430 69
------------- ---------- ----------
Weighted average shares
outstanding, diluted 10,867 10,887 7,408
Diluted earnings (loss)
per share (a) $ (.19) $ .31 $ 1.54
<PAGE>
15. Common Stock, stock options and warrants (Continued)
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.
(a) For the year ended December 31, 1998, presentation of the dilutive effect of
stock options and warrants, which totaled 1,229,000 at December 31, 1998 are not
included since they are anti-dilutive.
16. Business segments
On January 1, 1998, the Company adopted SFAS No. 131, Disclosures About Segments
of an Enterprise and Related Information. This statement does not effect the
Company's financial position or results of operations.
The operations of the Company consist of the following business segments, by
which the Company is managed:
Performance Improvement Group, (formerly the 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. On September
30, 1998, the Company sold substantially all of the operating assets of Five
Star, which formerly comprised the Distribution Group, to ADC (see Note 5).
Prior to the above transaction, the Company sold a 16.5% interest in ADC to the
management of Five Star. As a result of these transactions, as of September 30,
1998, the Company no longer consolidates the balance sheet and results of
operations of ADC and its subsidiaries. Therefore, the sales, operating results
and depreciation and amortization include the results of the operations of Five
Star and the Distribution Group through September 30, 1998.
<PAGE>
16. Business segments (Continued)
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 for the periods presented (in thousands):
Years ended December 31, 1998 1997 1996
- -------------------------------------------------------------------------
Sales
Performance Improvement $208,840 $140,620 $117,183
Distribution 64,148 82,300 76,102
Optical Plastics 10,581 10,362 8,781
Other 1,113 1,519 1,734
- ------------------------------------------------------------------------
$284,682 $234,801 $203,800
- ------------------------------------------------------------------------
Operating results
Performance Improvement $ 15,585 $ 9,043 $ 6,504
Distribution 1,715 2,230 1,767
Optical Plastics 1,500 1,864 1,485
Other (1,000) (691) (1,287)
- -------------------------------------------------------------------------
Total operating profit 17,800 12,446 8,469
Interest expense (3,896) (4,075) (4,358)
Corporate general and administrative
expenses and Investment and other
income, net (14,599) (5,641) 7,133
- ------------------------------------------------------------------------
Income (loss) from operations before
income taxes $ (695) $ 2,730 $ 11,244
- ------------------------------------------------------------------------
The Company's revenue from foreign operations, primarily in the United Kingdom
and Canada, was approximately $31,429,000 for the year ended December 31, 1998.
In addition, at December 31, 1998, assets located in all foreign countries were
less than 10% of the Company's total assets and were located primarily in the
United Kingdom and Canada. The Company had deminimis foreign assets and
operations as of and for the years ended December 31, 1997 and 1996.
<PAGE>
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, loss on investments, loss on
sale of assets 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, $4,250,000, $5,246,000 and $6,170,000 for the years ended
December 31, 1998, 1997 and 1996 respectively. For the years ended December 31,
1998, 1997 and 1996, sales to the United States government and its agencies
represented approximately 20%, 26% and 27%, respectively, of sales and is
included in the Performance Improvement Segment.
Additional information relating to the Company's business segments is as follows
(in thousands):
December 31, 1998 1997 1996
- -------------------------------------------------------------------------
Identifiable assets
Performance Improvement $168,335 $100,548 $ 83,414
Distribution 41,530 47,243
Optical Plastics 10,573 10,197 12,453
Corporate and other 31,542 38,337 32,917
- ------------------------------------------------------------------------
$210,450 $190,612 $176,027
- ------------------------------------------------------------------------
Years ended December 31, 1998 1997 1996
- ------------------------------------------------------------------------
Additions to property,
plant, and equipment, net
Performance Improvement $ 2,199 $ 2,307 $ 1,976
Distribution 87 275 522
Optical Plastics 2,077 939 201
Corporate and other 121 193 (21)
- ------------------------------------------------------------------------
$ 4,484 $ 3,714 $ 2,678
- ------------------------------------------------------------------------
Years ended December 31, 1998 1997 1996
- ------------------------------------------------------------------------
Depreciation and amortization
Performance Improvement $ 4,241 $ 3,681 $ 2,404
Distribution 812 1,195 1,125
Optical Plastics 320 488 66
Corporate and other 79 503 474
- ------------------------------------------------------------------------
$ 5,452 $ 5,867 $ 4,069
- ------------------------------------------------------------------------
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.
<PAGE>
17. Fair value of financial instruments
The carrying value of financial instruments including cash and cash equivalents,
marketable securities, accounts receivable, accounts payable and short-term
borrowings approximate estimated market values because of short maturities and
interest rates that approximate current rates.
The carrying values of investments, 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 long-term debt is as follows (in
thousands):
December 31, 1998 December 31, 1997
Carrying Estimated Carrying Estimated
amount fair value amount fair value
8% Swiss Bonds due 2000 $ 2,359 $ 2,123 $ 2,158 $ 1,942
5% Convertible Bonds 1,858 1,728 1,786 1,661
7% Convertible Note 1,000 1,000
Other long-term debt 2,529 2,529 1,644 1,644
Term Loan 14,813 14,813
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
In July 1996, the Company recognized a $4,000,000 loss on the Company's
investments in American White Cross, (AWC), Inc. due to AWC filing for
protection under Chapter 11 of the United States Bankruptcy Code.
<PAGE>
18. Accounting for certain investments in debt and equity securities (Continued)
In May 1996, the Company realized a $1,938,000 gain on issuance of stock as a
result of the issuance of 2,000,000 shares of common stock by ISI at $8.00 per
share. Effective September 1996, the Company accounts for its investment in ISI
as a combination of long-term investments carried at cost, and for those without
restriction, 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.
During 1998, the Company recognized an other than temporary impairment of its
investment in ISI as a result of the significant decrease in the market value of
ISI's common stock. The Company recorded a Loss on investments of $3,067,000
during 1998.
Pursuant to various agreements, the Company is restricted in its ability to sell
its shares of Duratek. At December 31, 1998, 1997 and 1996, the Company was
permitted to sell approximately 805,000, 600,000 and 250,000 shares,
respectively. As the Company had determined to sell promptly 150,000 shares as
of December 31, 1998, 100,000 shares as of December 31, 1997, and 250,000 shares
at December 31, 1996, such securities have been classified as trading securities
at these dates. The balance of the shares the Company was permitted to sell were
transferred to available-for-sale.
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 1996, the Company transferred 250,000
shares from long-term investments 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.
In 1997, the Company recognized a net $689,000 gain related to Duratek common
stock. 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, which generated net proceeds of $2,755,000.
In 1997, the Company sold 305,750 shares of Duratek common stock, and received
net proceeds of $2,756,000.
In 1998, the Company recognized a net gain of $2,205,000 related to Duratek
common stock. The gain is the result of $1,708,000 realized gain on the sale of
523,900 shares of Duratek common stock, which generated net proceeds of
$3,788,000, and a $497,000 gain on the transfer from long-term investments to
trading securities.
<PAGE>
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, 1998 $ 2,195 $ 2,183 $ (485) $ 3,893
- ------------------------------------------------------------------
December 31, 1997 $ 2,393 9,641 $ $ 12,034
- ------------------------------------------------------------------
December 31, 1996 $ 1,600 4,723 $ (91) $ 6,232
- ------------------------------------------------------------------
Differences between cost and market of $937,000, $6,630,000 and $3,324,000, net
of taxes at December 31, 1998, 1997 and 1996, respectively, were credited to a
separate component of shareholders' equity called Accumulated other
comprehensive income (see Note 14).
19. Related party transactions
In December 1998 the Company incurred a $1,500,000 expense (consisting of cash
and common stock) in connection with a termination agreement between the Company
and a senior executive officer. This amount is included in Selling, general and
administrative expense in the accompanying consolidated statement of operations.
On October 28, 1998, in exchange for the exercise of options to purchase an
aggregate of 193,750 shares of Class B Common Stock, the Company received a note
receivable from another senior executive officer for $1,742,000. The loan
accrues interest at the prime rate and all of principal and interest are due and
payable on October 28, 1999. The loan is secured by the shares of Class B Common
Stock acquired upon exercise of the options as well as certain other assets of
the senior executive officer.
<PAGE>
20. Commitments and contingencies
(a) The Company has several noncancellable leases for 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
1999 $ 9,087 $ 2,828 $11,915
2000 8,505 1,211 9,716
2001 7,613 384 7,997
2002 6,867 303 7,170
2003 3,841 220 4,061
After 2003 14,199 133 14,332
- ----------------------------------------------------------------------
Total $50,112 $ 5,079 $55,191
- ----------------------------------------------------------------------
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 $10,943,000, $7,603,000
and $6,745,000 for 1998, 1997 and 1996, respectively.
(b) Options were issued in 1994 and prior to certain officers of Duratek and the
Company for the purchase of Duratek common stock owned by the Company at prices
ranging from $1.75 to $3.50 per share. At December 31, 1998, 186,000 options are
outstanding and exercisable. These options expire from 1999 through 2001.
(c) The Company has guaranteed $1,800,000 of debt of GSES through June 1999, in
return for warrants to purchase 150,000 shares of GSES common stock, at an
exercise price of $2.38 per share and which expire August 17, 2003. The Company
does not believe its exposure to loss is likely.
(d) The Company has guaranteed the leases for two of ADC's warehouses totaling
approximately $886,000 and $380,000 per year through 2007 and 2001,
respectively.
(e) 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. Management believes that the ultimate
liability, if any, will not have a material adverse effect on the Company's
consolidated financial statements.
<PAGE>
GP Strategies Supplementary Data
Corporation
and Subsidiaries
<TABLE>
SELECTED QUARTERLY FINANCIAL DATA
(unaudited) (in thousands, except per share data)
<CAPTION>
three months ended
March 31, June 30, Sept. 30, Dec. 31, March 31, June 30, Sept. 30, Dec. 31,
1998 1998 1998 1998 1997 1997 1997 1997
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Sales $62,859 $70,910 $86,182 $64,731 $54,760 $60,590 $62,711 $56,740
Gross margin 9,465 10,663 11,510 10,355 8,216 9,193 9,387 8,433
Net income (loss) 1,791 2,263 (6,566) 451 (986) 1,633 1,954 822
Net income (loss) per share:
Basic .17 .21 (.60) .04 (.10) .15 .18 .08
Diluted .15 .18 (.60) .04 (.10) .15 .18 .07
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
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 to 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.
<PAGE>
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 30
Financial Statements:
Consolidated Balance Sheets -
December 31, 1998 and 1997 31
Consolidated Statements of Operations -
Years ended December 31, 1998, 1997 and 1996 33
Consolidated Statements of Changes in Stockholders' Equity -
Years ended December 31, 1998, 1997 and 1996 34
Consolidated Statements of Cash Flows -
Years ended December 31, 1998, 1997 and 1996 36
Notes to Consolidated Financial Statements 39
(a)(2) Financial Statement Schedules
Schedule II - Validation and Qualifying Accounts i
Independent Auditor's Report ii
(a)(3) Exhibits
Consent of KPMG LLP, Independent Auditors *
(b) On October 15, 1998, the Registrant filed a Report on Form 8-K with respect
to the sale to American Drug Company of substantially all of the operating
assets of Five Star Group, Inc. Such report contained pro forma consolidated
statement of operations for the year ended December 31, 1997 and the six months
ended June 30, 1998, as well as the consolidated pro forma balance sheet for the
six months ended June 30, 1998.
* Filed herewith
<PAGE>
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, 1999
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
<PAGE>
GP STRATEGIES CORPORATION AND SUBSIDIARIES
SCHEDULE II
Valuation and qualifying accounts (in thousands)
Additions
Balance at Charged to Balance at
Beginning Costs & End of
of Period Expenses Deductions(a) Period
Year ended December 31, 1998:
Allowance for doubtful
accounts (b) $2,782 $ 879 $(1,928) $1,733
Year ended December 31, 1997:
Allowance for doubtful
accounts (b) $2,155 $1,608 $ (981) $2,782
Year ended December 31, 1996:
Allowance for doubtful
accounts (b) $3,066 $1,036 $(1,947) $2,155
(a) Write-off of uncollectible accounts, net of recoveries and sale of certain
assets.
(b) Deducted from related asset on Balance Sheet.
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
GP Strategies Corporation
Under date of March 1, 1999, we reported on the consolidated balance sheets of
GP Strategies Corporation and subsidiaries as of December 31, 1998 and 1997, and
the related consolidated statements of operations, changes in stockholders'
equity, and cash flows for each of the years in the three-year period ended
December 31, 1998, as contained in the Annual Report on Form 10-K for the year
ended 1998. In connection with our audits of the aforementioned consolidated
financial statements, we also have audited the related financial statement
schedule as listed in Item 14. This financial statement schedule is the
responsibility of the Company's management. Our responsibility is to express an
opinion on this financial statement schedule based on our audits.
In our opinion, the related financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.
KPMG LLP
New York, New York
March 1, 1999
<PAGE>
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. Incorporated herein by
reference to Exhibit 3.1 of the
Registrant's Form 10-K for the
year ended December 31, 1998.
3.2 Amended By-Laws of the
Registrant. Incorporated by
reference to Exhibit 3 of the
Registrant's 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 December 29,
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 Asset Purchase Agreement,
dated as of June 3, 1998, by
and among SHL Systemhouse Co.,
MCI Systemhouse Corp., SHL
Computer Innovations Inc., SHL
Technology Solutions Limited
and General Physics
Corporation. Incorporated
herein by reference to Exhibit
10.1 of the Registrant's Form
8-K dated June 29, 1998.
<PAGE>
10.4 Preferred Provider Agreement,
dated as of June 3, 1998, by
and among SHL Systemhouse Co.,
MCI Systemhouse Corp., SHL
Computer Innovations Inc., SHL
Technology Solutions Limited
and General Physics
Corporation. Incorporated
herein by reference to Exhibit
10.2 of the Registrant's Form
8-K dated June 29, 1998.
10.5 Credit Agreement dated as of
June 15, 1998, by an among the
Registrant, General Physics
Canada Ltd., Key Bank, N.A.,
Mellon Financial Services
Corporation, Summit Bank, The
Dime Savings Bank of New York,
FSB, and Fleet Bank, National
Association, as Agent, as
Issuing Bank and as Arranger.
Incorporated herein by
reference to the Registrant's
Form 8-K dated June 29, 1998.
10.6 Asset Purchase Agreement dated
as of July 13, 1998, between
the Registrant's wholly-owned
subsidiary, General Physics
Corporation and The Deltapoint
Corporation. Incorporated
herein by reference to the
Registrant's Form 8-K dated
July 27, 1998.
10.7 Asset Purchase Agreement dated
as of August 31, 1998, between
American Drug Company and Five
Star Group, Inc. Incorporated
herein by reference to Exhibit
10 to American Drug Company's
Form 8-K dated September 15,
1998.
<PAGE>
10.8 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.
10.9 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.
10.10 Consulting and Severance
Agreement dated December 29,
1998 between the Registrant
and Martin M. Pollak.*
<PAGE>
10.11 Agreement dated, December 29,
1998, among the Registrant,
Jerome I. Feldman and Martin
M. Pollak.*
10.12 Amendment No. 1, dated March
22, 1999, to Agreement dated
December 29, 1998 among the
Registrant, Jerome I. Feldman
and Martin M. Pollak.*
18 Not Applicable
19 Not Applicable
20 Not Applicable
21 Subsidiaries of the Registrant*
22 Not Applicable
23 Consent of KPMG LLP,
Independent Auditors*
27 Financial Data Schedule*
28 Not Applicable
* Filed
herewith.
Exhibit 10.1
1973 NON-QUALIFIED STOCK OPTION PLAN
OF
GP STRATEGIES CORPORATION
AS AMENDED
The purpose of the Plan is to aid GP Strategies Corporation (the
"Corporation") and its subsidiaries in attracting, retaining and motivating key
employees, directors and consultants
1. Administration
The Plan shall be administered by a Stock Option Committee (the
"Committee"), consisting of not less than two directors of the Corporation who
shall be appointed by, and serve at the pleasure of, the Board of Directors.
Subject to the provisions of the Plan, the Committee shall have full authority
to interpret the Plan, to establish an amend the rules and regulations relating
to it, and to make all other determinations necessary or advisable for its
administration.
2. Maximum Number of Shares; Source of Shares
Subject to the provisions of Section 6 hereof, the maximum number of
shares of the Corporation's $.01 par value Common Stock ("Common Stock") which
may be purchased pursuant to options granted under the Plan shall be Three
Million Three Hundred and Ninety Six Thousand, Two Hundred and Fifty
(3,396,250). Such shares may be authorized and unissued shares, or issued shares
held in the Treasury of the Corporation, including issued shares reacquired by
the Corporation.
3. Participants; Grant of Options
(a) Participants and Grants. From time to time the Committee shall,
in its sole discretion, select the key employees of the Corporation or its
subsidiaries who shall be granted options under the Plan. The term "employee,"
when used herein shall include, without limitation, officers, directors and
consultants. Upon making such selection, the Committee shall grant to each such
participant an option to purchase such number of shares of Common Stock as may
be determined by the Committee. In the absence of any specific agreements to the
contrary, no grant hereunder to a participant shall affect the right of the
Corporation or its subsidiaries to terminate the participant's employment at any
time, if the employee is an employee of the Corporation or a subsidiary.
(b) Stock Option Agreement
(l) The grant of options by the Committee to any participant shall
be effective as of the date on which the Committee shall authorize the option
for such participant, but prior to the exercise thereof, such participant shall
be required to execute and deliver a Stock Option Agreement (the "Agreement"),
which shall contain such terms and conditions consistent with the Plan as the
Committee shall determine.
(2) The Committee may, in its sole discretion, require that any
employee receiving options hereunder (the "Optionee") shall, upon the granting
of options, agree that as a condition to his acquiring shares thereunder he will
remain in the employ of the Corporation and render to the Corporation or its
Subsidiaries his services for a period not to exceed one year. Such agreement
may require that the period of required services be measures from the date of
grant of the options, from the date such options are exercised, or may require
services during periods, each not to exceed one year, measured from both the
date of grant and the date of exercise of the options granted hereunder.
(3) In any case in which required services are to be rendered after
the date of exercise of any options granted hereunder, the Corporation, subject
to the terms of this Plan, will promptly issue a certificate or certificates for
purchased shares out of either: (i) authorized but unissued shares; or (ii)
shares of its Common Stock held in the Treasury of the Corporation, provided,
however, that the Optionee shall agree to the deposit of such shares with an
escrow agent acceptable to the Corporation for the period during which he is
required, pursuant to this Plan, to render additional services. The employee
shall have all the rights of a shareholder with respect to such shares from the
time they are issued. The escrow agreement shall require the payment to the
Corporation of such amount as the Corporation shall determine is required to be
deposited, or otherwise paid over, to satisfy any withholding liability which
may be imposed upon the Corporation, including any withholding liability which
may arise by reason of the failure of the Corporation to exercise any right it
may have pursuant to Paragraph 4 of this Section 3(b).
(4) In the event that the Optionee fails to satisfy any required
period of service which he has agreed to perform, the Corporation shall have the
right to reacquire the shares deposited in escrow, pursuant to sub-paragraph 3
of this Section 3(b), by notifying the escrow agent of such intention and
tendering, in cash or certified check, an amount equal to: (i) the number of
shares the Corporation desires to reacquire; multiplied by (ii) the option price
per share set forth in the Agreement. Such payment is to be made within 90 days
of the delivery of the notice described herein.
(5) In granting non-qualified options under the Plan to eligible
persons who hold outstanding stock options, issued by the Corporation of any of
its subsidiaries, the Committee, in its sole discretion, may condition the grant
of such non-qualified options under the Optionee's consent to the cancellation
of all or a portion of such other outstanding options.
4. Option
(a) Option Price. The option price per share of each option granted
pursuant to the Plan shall be specified in the Agreement relating to such
option, and shall be not less than 85% of the market value of Common Stock on
the date the option is granted, provided, however, in no event shall the option
price per share be less than the par value thereof.
(b) Option Period. The period during which an option may be
exercised shall not exceed fifteen years from the date such option is granted
and, subject to the foregoing, the Committee may provide that any stock option
may be exercised at such time or times as the Committee may, in its discretion,
determine.
(c) Payment for Stock. An option shall be exercised by written
notice of such exercise to either the Secretary or Treasurer of the Corporation
at its principal office. The notice shall specify the number of shares for which
the option is being exercised (which number shall be not less than twenty-five
shares at any one time) and shall be accompanied by payment in full of the
purchase price of such shares. No certificates for shares so purchased shall be
issued until full payment therefor has been made and a participant shall have
none of the rights of a stockholder with respect to such shares until such
certificates are in fact issued to such participant or to an escrow agent on
such participant's behalf. Payment of the purchase price may be made by cash,
check or in shares of Common Stock, all such shares having been held by the
Employee for at least six months. The shares of Common Stock will be valued
based on their market value, as defined in Section 8 of this Plan.
5. Exercise and Cancellation of Options Upon Termination of Employment
or Death
If an Optionee shall voluntarily or involuntarily leave the employ of
the Company or its subsidiaries, unless authorized by the Committee, the option
of such Optionee shall terminate forthwith, except that the Optionee shall have
until the end of the ninetieth day, following the cessation of employment, and
not longer, to exercise any unexercised option which he could have exercised on
the day on which he left the employ of the Company or its subsidiaries;
provided, however, that such exercise must be accomplished within the term of
such option. Notwithstanding the foregoing, if the cessation of employment or
service is due to retirement on or after attaining the age of 65 or to
disability (to an extent and in a manner as shall be determined in each case by
the Committee in its sole discretion) or to death, the Optionee or the
representatives of the estate of the Optionee shall have the privilege of
exercising any options which the Optionee could have exercised at the time of
such retirement, disability, or death; provided, however, that such exercise
must be accomplished within the terms of such option, and within six months of
the Optionee's retirement, disability or death.
Nothing contained herein or in the options shall be construed to confer
on any employee any right to be continued in the employ of the Company or
derogate from any right of the Company to retire, request the resignation of or
discharge an employee or to lay off or require a leave of absence of such
employee (with or without pay), at any time, with or without cause.
6. Adjustment in Number of Shares
In the event of any subdivision or combination of the outstanding
shares of the Corporation's Common Stock, by reclassification or otherwise, or
in the event of the payment of a stock dividend, a capital reorganization, a
reclassification of shares, a consolidation or merger, the Board of Directors
shall make appropriate adjustment in the aggregate number of shares for which
grants may be made under this Plan. The Committee shall determine the
appropriate adjustment of the kind and number of shares subject to each
outstanding option, or the option price, or both, in the event of any of the
aforementioned changes in the outstanding Common Stock of the Corporation,
provided, however, that no adjustment of the option prices shall permit a
reduction in the option price per share to less than the par value thereof.
7. Non-Assignability
No options granted under the Plan shall be transferable, other than by
will or by the laws of descent and distribution, and then only to the extent
permitted by this Plan. During a participant's lifetime, options shall be
exercisable only by such participant (or in the event of his disability, by his
legal representative). Except to the extent otherwise provided by law, no
benefits under the Plan shall be subject to any legal process to levy upon, or
attach, for payment of any claim against any participant or beneficiary.
8. Definitions
As used herein, the term "subsidiary" shall have the same meaning as
"subsidiary corporation" has under Section 425(f) of the Code, "retirement"
means retirement as that word is used in the Corporation's Employees' Retirement
Plan, and "market value" when used in reference to Common Stock shall mean the
average sale price (as determined by the Committee) of such Common Stock on the
exchange, if any, where the Common Stock is traded, or if there is no other such
exchange, the average between the low-bid and high-asked prices on the date of
grant. For all purposes of the Plan, an approved leave of absence shall not
constitute interruption or termination of employment.
9. General Restrictions
The exercise of each stock option granted under the Plan shall be
subject to the condition that if at any time the Corporation shall determine, in
its sole discretion, that the satisfaction of withholding tax or other
withholding liabilities, or that the listing, registration or qualification of
any shares otherwise deliverable upon such exercise upon any securities exchange
or under any State or Federal law, or the consent or approval of any regulatory
body, is necessary or desirable as a condition of, or in connection with, such
exercise or the delivery or purchase of shares thereunder, then in any such
event such exercise shall not be effective unless such withholding, listing,
registration, qualification, consent or approval shall have been effected or
obtained free of any conditions not acceptable to the Corporation.
10. Amendment and Discontinuance
The Board of Directors at any time may terminate the Plan, or make such
changes in, or additions to the Plan as the Board of Directors, in its
discretion, deems advisable, provided, however, that subject to the provisions
of Section 6 hereof the Board of Directors may not, without further approval by
the holders of shares of the capital stock of the Corporation possessing a
majority of the voting power of such capital stock represented in person or by
proxy at a meeting of shareholders of the Corporation duly called for such
purpose, grant options to any person other than those eligible under Section 3
hereof. No termination or amendment of the Plan may, without consent of the
holders of existing options, materially affect their rights under such options.
11. Duration
Unless this Plan is sooner terminated, options may be granted hereunder
until June 27, 2013.
122998
Exhibit 10.10
CONSULTING AND SEVERANCE AGREEMENT
CONSULTING AND SEVERANCE AGREEMENT, dated December 29, 1998, between GP
Strategies Corporation, a Delaware corporation with an address at 9 West 57th
Street, Suite 4170, New York, New York 10019 (the "Company"), and Martin M.
Pollak with an address at 16 Springwood Path, Syosset, New York 11791
("Pollak").
WHEREAS, Pollak is a founder, and since 1959 has been Executive Vice
President, Treasurer, and a Director, of the Company; and
WHEREAS, Pollak is employed by the Company pursuant to an Employment
Agreement, dated May 19, 1995, as amended, between the Company and Pollak (the
"Employment Agreement"); and
WHEREAS, Pollak wishes to retire from the Company and, in connection
therewith, the Company desires to provide certain severance to Pollak and,
following the expiration of the term of the Employment Agreement, to engage
Pollak to perform services for the Company, and Pollak desires to perform such
services, on the terms and conditions hereinafter set forth;
NOW, THEREFORE, it is hereby agreed as follows:
1. Term. The Company agrees to engage Pollak, and Pollak agrees to serve,
on the terms and conditions of this Agreement for a period commencing on June 1,
1999, and ending May 31, 2004. The period during which Pollak is employed
hereunder is hereinafter referred to as the "Consulting Period."
2. Duties and Services. During the Consulting Period, Pollak shall consult
with the officers and directors of the Company with respect to the business and
finance of the Company, as may be reasonably requested by the Company from time
to time. In performance of his duties, Pollak shall be subject to the direction
of the Board of Directors and the chief executive officer of the Company. Pollak
agrees to his engagement as described in this Section 2 and agrees to devote
such of his time and efforts to the performance of his duties under this
Agreement as shall be reasonably necessary for the performance thereof.
3. Consulting Fee. As compensation for his services hereunder, the Company
shall pay Pollak, during the Consulting Period, a consulting fee payable every
two weeks in equal installments at the annual rate of $200,000. Pollak will be
an independent contractor and, as such, his consulting fee will not be subject
to withholding.
<PAGE>
-6-
4. Stock Grant. As severance and in consideration of services rendered to
the Company, the Company shall, on the Exchange Date (as defined in the
Agreement, dated the date hereof, among Pollak, the Company, and Jerome I.
Feldman (the "Triparty Agreement")), or such later date that such shares are
approved for listing on the New York Stock Exchange, Inc., issue to Pollak a
number of shares of the common stock, par value $.01 per share, of the Company
(rounded to the nearest lesser whole share) having a market value (based on the
Average Closing Price (as defined in the Triparty Agreement) on the Exchange
Date) equal to $700,000. The Company shall use its reasonable best efforts to
obtain as soon as possible the approval of the listing of such shares on the New
York Stock Exchange, Inc. The Company shall issue or cause to be issued a stock
certificate for such shares as promptly as practicable after the date of
issuance. Pollak shall be entitled to certain registration rights with respect
to such shares as provided in the Triparty Agreement.
5. Benefits. (a)(i) As of the date on which the Consulting Period
commences, the Company shall assign to Pollak the life insurance policy
currently maintained by the Company with respect to Pollak in the face amount of
$2,000,000 (the "Assigned Policy"). On the date of such assignment, all premiums
owing on the Assigned Policy shall be paid, there shall be no outstanding loans
against the Assigned Policy, and the Company shall have no claims against Pollak
for premiums paid on the Assigned Policy with respect to the period prior to the
Consulting Period. The Company shall take such actions and execute such
documents as are necessary to effect such assignment.
(ii) During the Consulting Period, the Company shall pay all premiums on
the Assigned Policy. Upon Pollak's death, Pollak's estate or beneficiary shall
repay the Company the amount the Company has paid in premiums on the Assigned
Policy with respect to the Consulting Period (unless Pollak has previously
assigned the Assigned Policy back to the Company in accordance with Section
5(a)(iii)) but not the amount the Company has paid in premiums on the Assigned
Policy with respect to the period prior to the Consulting Period.
(iii) During the Consulting Period, Pollak shall not terminate, surrender,
take a loan against, or take any other action that affects the Assigned Policy.
Pollak shall not assign ownership of the Assigned Policy to any person other
than the Company, whether during or after the Consulting Period. After the end
of the Consulting Period, Pollak shall not terminate, surrender, take a loan
against, or take any other action that affects the Assigned Policy, or fail to
pay the premiums thereon (any such event being a "Surrender"), without providing
the Company 30 days advance notice of intention to Surrender. If Pollak
determines to Surrender the Assigned Policy, the Company may, by notice to
Pollak within such 30-day period, elect to pay the premiums thereafter due on
the Assigned Policy, in which event Pollak shall not Surrender the Assigned
Policy, Pollak's interest in the Assigned Policy shall cease, and Pollak shall
promptly assign ownership of the Assigned Policy back to the Company. If the
Company does not elect to pay such premiums and Pollak Surrenders the Assigned
Policy, Pollak shall repay the Company any amount received by Pollak upon such
Surrender up to the amount the Company has paid in premiums on the Assigned
Policy with respect to the Consulting Period but not the amount the Company has
paid in premiums on the Assigned Policy with respect to the period prior to the
Consulting Period.
<PAGE>
(b) As of the date on which the Consulting Period commences, the Company
will assign to Pollak the life insurance policy currently maintained by the
Company with respect to Pollak in the face amount of $1.435 million if Pollak
pays the Company the then cash surrender value of the policy. If Pollak makes
such payment, the Company shall take such actions and execute such documents as
are necessary to effect such assignment and will have no further interest in
such policy. If Pollak does not make such payment, Pollak will have no further
interest in such policy and the Company will not be required to pay any premiums
on such policy after the commencement of the Consulting Period.
(c) During the Consulting Period, Pollak will be entitled to participate
in the Company's medical, dental, and hospitalization insurance plans or to
receive equivalent coverage at the same expense to him, it being understood that
wherever Pollak determines that it is possible Medicare will be Pollak's primary
coverage.
(d) During the Consulting Period, Pollak shall be entitled to retain the
use of the automobile currently leased by the Company for his use until the end
of the current lease term. After such lease term expires and until the end of
the Consulting Period, the Company shall lease an automobile for Pollak's use,
provided that the new lease costs shall not exceed the costs under the current
lease. The Company shall pay the insurance and operating expenses with respect
to any such automobile on a consistent basis with how such insurance and
operating expenses were paid by the Company pursuant to the Employment
Agreement.
(e) The Company shall provide Pollak the use of his current office and
with secretarial support until the earlier of the end of the Consulting Period
and such date, if any, as the Company shall vacate its current office space.
6. Expenses. Pollak shall be entitled to reimbursement for reasonable
travel and other out-of-pocket expenses necessarily incurred in the performance
of his duties hereunder, upon submission and approval of written statements and
bills in accordance with the then regular procedures of the Company.
7. Representations and Warranties of Pollak. Pollak represents and
warrants to the Company that (a) Pollak is under no contractual or other
restriction or obligation which is inconsistent with the execution of this
Agreement, the performance of his duties hereunder, or the other rights of the
Company hereunder and (b) Pollak is under no physical or mental disability that
would hinder his performance of duties under this Agreement.
8. Confidential Information. All confidential information which Pollak may
now possess, may obtain during or after the Consulting Period, or may create
prior to the end of the period he is engaged by the Company under this Agreement
or otherwise relating to the business of the Company or any of its subsidiaries
or of any customer or supplier of any of them shall not be published, disclosed,
or made accessible by him to any other person, firm, or corporation either
during or after the termination of his engagement or used by him except during
the Consulting Period in the business and for the benefit of the Company, in
each case without prior written permission of the Company. If requested by the
Company, Pollak shall return all tangible evidence of such confidential
information to the Company prior to or at the termination of his engagement.
<PAGE>
9. Termination. (a) Notwithstanding anything herein contained, if on or
after the date hereof and prior to the end of the Consulting Period, Pollak
shall be convicted of a crime involving moral turpitude, shall commit any act
involving dishonesty, disloyalty, or fraud with respect to the Company, or shall
be grossly negligent or engage in willful misconduct with respect to the
Company, then, and in each such case, the Company shall have the right to give
notice of termination of Pollak's services hereunder as of a date (not earlier
than 10 days from such notice) to be specified in such notice, and this
Agreement shall terminate on the date so specified. In such event, Pollak shall
be entitled to receive only his consulting fees at the rate provided in Section
3 to the date on which termination shall take effect, and the Consulting Period
shall then end.
(b) If Pollak shall die during the Consulting Period, his estate or
beneficiary shall be entitled to receive the consulting fees at the rate
provided in Section 3 to May 31, 2004. If Pollak shall die prior to the
commencement of the Consulting Period, his estate or beneficiary shall be
entitled to receive the consulting fees at the rate provided in Section 3 to the
date which is the fifth anniversary of the date of his death.
10. Modification. This Agreement sets forth the entire understanding of
the parties with respect to the subject matter hereof and supersedes all
existing agreements between them concerning such subject matter, in each case
except as provided in the Triparty Agreement. This Agreement may be modified
only by a written instrument duly executed by each party.
11. Notices. Any notice or other communication required or permitted to be
given hereunder shall be in writing and shall be delivered by Federal Express,
Express Mail, or similar overnight delivery or courier service, or delivered
against receipt to the party to whom it is to be given at the address of such
party set forth in the preamble to this Agreement (or to such other address as
the party shall have furnished in writing in accordance with the provisions of
this Section 11). Notice to the estate of Pollak shall be sufficient if
addressed to Pollak as provided in this Section 11. Any notice shall be deemed
given at the time of receipt thereof.
12. Waiver. Any waiver by either party of a breach of any provision of
this Agreement shall not operate as or be construed to be a waiver of any other
breach of such provision or of any breach of any other provision of this
Agreement. The failure of a party to insist upon strict adherence to any term of
this Agreement on one or more occasions shall not be considered a waiver or
deprive that party of the right thereafter to insist upon strict adherence to
that term or any other term of this Agreement. Any waiver must be in writing.
13. Binding Effect. Pollak's rights and obligations under this Agreement
shall not be transferable by assignment or otherwise, such rights shall not be
subject to commutation, encumbrance, or the claims of Pollak's creditors, and
any attempt to do any of the foregoing shall be void. The provisions of this
Agreement shall be binding upon and inure to the benefit of Pollak and his heirs
and personal representatives, and shall be binding upon and inure to the benefit
of the Company and its successors and assigns.
14. No Third Party Beneficiaries. This Agreement does not create, and
shall not be construed as creating, any rights enforceable by any person not a
party to this Agreement (except as provided in Section 13).
<PAGE>
15. Headings. The headings in this Agreement are solely for the
convenience of reference and shall be given no effect in the construction or
interpretation of this Agreement.
16. Legal Fees. In the event Pollak prevails in any legal action
(including arbitration) relating to this Agreement or any breach or alleged
breach hereof, Pollak shall be entitled to recover from the Company all
reasonable legal fees and expenses incurred by him in connection with such
action.
17. Counterparts; Governing Law. This Agreement may be executed in any
number of counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same instrument. It shall be
governed by and construed in accordance with the laws of the State of New York,
without giving effect to conflict of laws.
18. Arbitration. Any dispute or controversy arising out of or relating to
this Agreement or any breach of this Agreement shall be settled by arbitration
to be held in the City of New York in accordance with the rules then in effect
of the American Arbitration Association or any successor thereto. The arbitrator
may grant injunctions or other relief in such dispute or controversy. The
decision of the arbitrator shall be final, conclusive, and binding on the
parties to the arbitration. Judgment may be entered on the arbitrator's decision
in any court having jurisdiction, and the parties irrevocably consent to the
jurisdiction of the federal and state courts located in the State of New York
courts for this purpose.
IN WITNESS WHEREOF, the parties have duly executed this Agreement as of
the date first above written.
GP STRATEGIES CORPORATION
By
Martin M. Pollak
Exhibit 10.11
AGREEMENT
AGREEMENT, dated December 29, 1998, among GP Strategies Corporation, a
Delaware corporation with an address at 9 West 57th Street, Suite 4170, New
York, New York 10019 (the "Company"), Jerome I. Feldman with an address at 145
West Patent Road, Bedford Hills, New York 10507 ("Feldman"), and Martin M.
Pollak with an address at 16 Springwood Path, Syosset, New York 11791
("Pollak").
WHEREAS, Pollak is a founder, and since 1959 has been Executive Vice
President, Treasurer, and a Director, of the Company; and
WHEREAS, Pollak is employed by the Company pursuant to an Employment
Agreement, dated May 19, 1995, as amended, between the Company and Pollak (the
"Employment Agreement"); and
WHEREAS, Pollak holds certain options (the "Pollak Options") to purchase
shares of the Class B Capital Stock, par value $.01 per share (the "Class B
Capital Stock"), of the Company, including (i) options to purchase 100,000
shares of Class B Capital Stock which are exercisable at a price of $9.00 per
share and expire in December 1998 (the "First Exchanged Pollak Options") and
(ii) options to purchase 93,750 shares of Class B Capital Stock which are
exercisable at a price of $9.00 per share and expire in June 1999 (the "Second
Exchanged Pollak Options" and, collectively with the First Exchanged Pollak
Options, the "Exchanged Pollak Options"), all as more particularly identified on
Schedule A hereto; and
WHEREAS, Feldman holds certain options (the "Feldman Options") to purchase
shares of the Common Stock, par value $.01 per share (the "Common Stock" and,
together with the Class B Capital Stock, the "Company Stock"), of the Company,
as more particularly identified on Schedule B hereto; and
WHEREAS, Pollak wishes to retire from the Company and, in connection
therewith, the parties hereto desire to provide for the disposition of the
Exchanged Pollak Options and for certain related matters;
NOW, THEREFORE, it is hereby agreed as follows:
<PAGE>
13
1. The Employment Agreement shall remain in effect, subject to the terms
of this Agreement, until the scheduled expiration of its term. The parties
confirm that such term shall expire on May 31, 1999. Pollak agrees that from the
date hereof the sole obligation of the Company under the Employment Agreement
is, during the period from the date hereof to the earlier of May 31, 1999 and
the date of Pollak's death, to (a) pay his salary on the same basis as it is
paid on the date hereof and (b) continue his benefits as provided in Section 5
of the Employment Agreement (subject, in the case of the benefits described in
Section 5(e) of the Employment Agreement, to the provisions of the Consulting
Agreement (as defined below)), which obligation shall be unconditional
irrespective of any action or inaction of Pollak or the Company except that the
Company (by not less than 10 days notice to Pollak) may terminate such
obligation if Pollak shall be convicted of a crime involving moral turpitude,
shall commit any act involving dishonesty, disloyalty, or fraud with respect to
the Company, or shall be grossly negligent or engage in willful misconduct with
respect to the Company.
2. On the date hereof, Pollak and the Company are entering into a
consulting and severance agreement (the "Consulting Agreement"), in the form
attached hereto as Exhibit A.
3. Each Permitted Pollak Stockholder (as hereinafter defined) agrees that,
until May 31, 2004, he will vote or (if requested by the Company) execute a
written consent, with respect to all voting shares of the Company beneficially
owned by him, on any matter in accordance with the recommendation of the
Company's Board of Directors; provided, that this voting agreement shall be
effective only during any period commencing on the date any person or group
commences or enters into, or publicly announces an intention to commence or
enter into, and ending on the date such person abandons, a tender offer, proxy
fight, or other transaction that may result in a change in control of the
Company. The Company shall give the Pollak Designated Holder (as hereinafter
defined) prompt written notice of the commencement and end of any period during
which the foregoing voting agreement is in effect. For purposes of the
foregoing, a "change in control" shall have the meaning of such term as used in
Form 8-K promulgated by the Securities and Exchange Commission under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). In furtherance
of the foregoing, and until May 31, 2004, each Permitted Pollak Stockholder
hereby grants to any officer of the Company designated by the Board of Directors
a power of attorney and a proxy, each of which shall be irrevocable and coupled
with an interest, to vote or execute a written consent with respect to all such
shares at any time when the voting agreement provided hereunder is in effect,
and further agrees at the request of the Company to extend or renew such power
and proxy if the same shall expire pursuant to applicable law prior to May 31,
2004.
4. The expiration date of the First Exchanged Pollak Options is hereby
amended to be January 31, 1999.
5. On January 4, 1999, or such earlier date as Pollak and Feldman may
agree (the "Exchange Date"):
(a) Pollak will deliver to Feldman the Exchanged Pollak Options,
together with the original stock option agreements representing the
Exchanged Pollak Options and option transfer powers with respect thereto.
(b) In consideration for the Exchanged Pollak Options, Feldman will
deliver to Pollak:
(i) A portion of the Feldman Options, identified as provided
below (the "Exchanged Feldman Options"), together with the original
stock option agreements representing the Exchanged Feldman Options
and option transfer powers with respect thereto, and
<PAGE>
(ii) a number of shares (the "Exchanged Shares") of Common
Stock equal (to the nearest lesser whole number) to $387,500 divided
by the Average Closing Price (as hereinafter defined) on the
Exchange Date, together with the original stock certificates
representing the Exchanged Shares and stock powers with respect
thereto.
(c) The Exchanged Feldman Options shall be those Feldman Options
with the earliest expiration dates which have an aggregate Spread (as
hereinafter defined) on the Exchange Date equal to the aggregate Spread on
the Exchange Date of the Exchanged Pollak Options.
(d) The "Spread" of any option on any date shall mean an amount
equal to the number of shares of Common Stock or Class B Capital Stock
subject to such option multiplied by the excess of the Average Closing
Price on such date over the exercise price per share of such option.
(e) The "Average Closing Price" on any date shall mean the average
of the closing sales prices of the Common Stock over the seven trading
days prior to such date.
6. If either Feldman or Pollak shall breach his obligations to consummate
the exchange contemplated by Section 5, the other party, in addition to any
other remedies, shall have the right to terminate this Agreement by notice to
the breaching party. In such event, if Pollak is the breaching party, (a) the
Consulting Agreement shall be terminated and void as if never entered into and
(b) the Employment Agreement shall be reinstated in full and the provisions of
Section 1 hereof shall be of no force or effect.
7. All Pollak Options and Feldman Options other than the Exchanged Pollak
Options and Exchanged Feldman Options shall remain in effect, subject to their
terms as currently in effect. Until the Exchange Date, Pollak agrees not to
exercise any of the Exchanged Pollak Options, provided that the Company and
Feldman comply with their obligations hereunder; and, until the Exchange Date,
Feldman agrees not to exercise any of the Feldman Options, provided Pollak
complies with his obligations hereunder.
8. The Company hereby consents to the exchange of Exchanged Pollak Options
for Exchanged Feldman Options and Exchanged Shares, and represents and warrants
that it has taken all such other action (including any amendments to its Stock
Option Plan) as is necessary to permit such exchange. The Company will promptly
issue a new option agreement, in Feldman's or Pollak's name, as the case may be,
representing the Exchanged Pollak Options or Exchanged Feldman Options delivered
to him.
<PAGE>
9. The Company and Pollak hereby agree that any Exchanged Feldman Options,
upon delivery to Pollak in accordance with this Agreement, will be, and
(provided Pollak complies with his obligations hereunder) the options (the
"Amended Options") held by Pollak to purchase 122,167 shares of Common Stock
which expire on June 14, 1999 and December 31, 1999 are (in each case, without
any further action by any party), deemed amended to permit a "cashless" exercise
as follows:
(a) Pollak may make a cashless exercise of any Exchanged Feldman
Option or Amended Option by giving notice (the "Cashless Exercise Notice")
to the Company on or after the Exchange Date and prior to the expiration
date of such Exchanged Feldman Option or Amended Option of a cashless
exercise pursuant to this Section 9.
(b) If Pollak gives a Cashless Exercise Notice with respect to any
Exchanged Feldman Options or Amended Options, then, in settlement of such
Exchanged Feldman Options or Amended Options, the Company, as promptly as
practicable after the date on which such Cashless Exercise Notice is given
(the "Cashless Exercise Date"), shall deliver to Pollak a certificate or
certificates for a number of shares of Common Stock (determined to the
nearest lesser whole share) having a market value (based on the Average
Closing Price on the Cashless Exercise Date) equal to the aggregate Spread
of such Exchanged Feldman Options or Amended Options on the Cashless
Exercise Date.
10.(a) Pollak represents that he is acquiring or will acquire the
Exchanged Shares, any shares of Common Stock issued on exercise or cashless
exercise of Exchanged Feldman Options or Amended Options, and the shares of
Common Stock to be issued to him pursuant to the Consulting Agreement
(collectively, the "Pollak Shares"), for his own account, for investment and not
with a view to the distribution or resale thereof, and that he understands that
he may not sell or otherwise dispose of Pollak Shares in the absence of either a
registration statement under the Securities Act of 1933, as amended (the
"Securities Act"), or an exemption from the registration provisions of the
Securities Act; and he agrees that the certificates representing the Pollak
Shares may contain a legend to the foregoing effect.
(b) Feldman represents that he will acquire any shares of Class B Capital
Stock issued on exercise of Exchanged Pollak Options for his own account, for
investment and not with a view to the distribution or resale thereof, and that
he understands that he may not sell or otherwise dispose of such shares in the
absence of either a registration statement under the Securities Act or an
exemption from the registration provisions of the Securities Act; and he agrees
that the certificates representing such shares may contain a legend to the
foregoing effect.
<PAGE>
11. As promptly as practicable after the date any Pollak Shares are issued
or transferred to Pollak, the Company shall file a registration statement on
Form S-3 covering the resale by Pollak of the Pollak Shares, and shall use its
reasonable best efforts to have such registration statement declared effective
as promptly as practicable thereafter and to maintain the effectiveness of such
registration statement until the earlier of the disposition by Pollak of the
Pollak Shares registered thereunder or the date on which Pollak is eligible to
sell any Pollak Shares registered thereunder still held by him pursuant to Rule
144(k) under the Securities Act (or any successor rule). The Company will file
the registration statement relating to Pollak Shares issued or transferred to
Pollak on the Exchange Date not later than 20 business days after the Exchange
Date. The Company shall pay all expenses of each such registration statement;
provided, that Pollak shall be responsible for any brokerage or underwriting
fees or commissions and any counsel or advisors representing him. Pollak will
give the Company notice at least five business days prior to any sale of Pollak
Shares and will sell all Pollak Shares in an orderly manner so as to minimize
any disruption of the trading market caused by such sales.
12.(a) Each of Pollak and Feldman hereby waives any rights of first
refusal he may have under the agreement, dated March 26, 1986, between them (the
"First Refusal Agreement"), or otherwise, with respect to the transactions
contemplated by this Agreement. Pollak hereby waives any rights of first refusal
he may have, under the First Refusal Agreement or otherwise, with respect to any
future transactions by Feldman or his successors in the Class B Capital Stock or
options to acquire Class B Capital Stock ("Class B Options").
(b)(i) If, at any time or from time to time, any Permitted Pollak
Stockholder shall propose to Dispose Of any Subject Securities other than
pursuant to (A) the exchange with Feldman contemplated by this Agreement, (B)
Section 12(b)(ii), or (C) the conversion of Subject Securities into Common
Stock, such Permitted Pollak Stockholder shall give notice (a "Sale Notice") of
such proposed Disposition to the Feldman Designated Holder describing the
proposed Disposition, accompanied by a copy of a bona fide written offer for the
purchase, for Permitted Consideration, of the Subject Securities proposed to be
Disposed Of. The Feldman Designated Holder shall have the right, by giving
notice (a "Call Notice") to such Permitted Pollak Stockholder within 30 days of
the Sale Notice, to purchase and/or cause the other Permitted Feldman
Stockholders to purchase, on the terms and on the conditions described in the
Sale Notice (subject to the provisions of this Section 12(b)), any or all of the
Subject Securities such Permitted Pollak Stockholder proposed to Dispose Of as
described in the Sale Notice. If the Feldman Designated Holder gives a Call
Notice, a closing of such purchase shall take place at such time, not later than
10 days after the date of the Call Notice, determined by the Feldman Designated
Holder and reasonably convenient to the Permitted Pollak Stockholder. If the
Feldman Designated Holder does not give a Call Notice or gives a Call Notice to
purchase less than all of the Subject Securities such Permitted Pollak
Stockholder proposed to Dispose Of as described in the Sale Notice, such
Permitted Pollak Stockholder may sell, on substantially the terms and conditions
described in the Sale Notice, any or all of the Subject Securities described in
the Sale Notice that are not purchased pursuant to a Call Notice, provided such
sale is consummated not later than 60 days after the date of the Sale Notice.
(ii) Section 12(b)(i) shall not apply to any Disposition to any Permitted
Pollak Stockholder, provided such Permitted Pollak Stockholder agrees in writing
to be bound by the terms of Section 3 and this Section 12(b) and the Feldman
Designated Holder is given notice of such Disposition.
<PAGE>
(iii) All determinations with respect to the exercise or waiver of the
right of first refusal provided by this Section 12(b) shall be exercised by the
Feldman Designated Holder on behalf of all of the Permitted Feldman
Stockholders, and all shall be bound by any such determination. The Feldman
Designated Holder shall have the right to allocate among the Permitted Feldman
Stockholders, in such manner as he determines, any Subject Securities to be
purchased from Permitted Pollak Stockholders under this Section 12(b). The
Feldman Designated Holder shall provide notice to the Pollak Designated Holder
of any such allocation. No Permitted Feldman Stockholder shall transfer any
Subject Securities to any other Permitted Feldman Stockholder unless the
transferee agrees in writing to be bound by the provisions of this Section
12(b)(iii) .
(iv) The rights of first refusal granted by Permitted Pollak Stockholders
herein shall terminate on such date on which no Permitted Feldman Stockholder
holds any Subject Securities, including by conversion of Class B Capital Stock
into Common Stock.
(v) If any Sale Notice provides for Permitted Consideration other than
cash, (A) the Sale Notice shall state the Value thereof as of the date of the
Sale Notice and (B) the Feldman Designated Holder, in the Call Notice, may elect
for the Permitted Feldman Stockholders to pay cash in lieu of all or any part of
such non-cash Permitted Consideration. The amount of cash to be paid in lieu of
any non-cash Permitted Consideration shall be the Value of such non-cash
Permitted Consideration as of the date of the Sale Notice. If any such non-cash
Permitted Consideration is a Secured Note, the Feldman Designated Holder may
elect for the Permitted Feldman Stockholders to provide any collateral with a
Collateral Value as of the date of the Call Notice equal to the Collateral Value
required by Section 12(b)(vii)(H) to secure such Secured Note. Except as so
elected by the Feldman Designated Holder, the Permitted Feldman Stockholders
shall pay for any Subject Securities purchased by them under this Section 12
with the same consideration as proposed to be paid in the Sale Notice.
(vi) The provisions of this Section 12(b) supersede the provisions of the
First Refusal Agreement, which are terminated and of no force or effect.
(vii) The following terms shall have the following meanings:
(A) "Collateral Value" of (I) any collateral (other than Company
Stock) securing a Secured Note shall mean the fair market value of such
collateral on the date of the Sale Notice or (in the case of collateral to
be posted by a Permitted Feldman Stockholder) Call Notice and (II) Company
Stock securing a Secured Note shall mean two-thirds of the fair market
value of such Company Stock on the date of the Sale Notice or (in the case
of collateral to be posted by a Permitted Feldman Stockholder) Call
Notice. The "fair market value" of any collateral may be established by
the trading market price of any collateral which has a readily
ascertainable public trading price; by an appraisal, not more than one
year old, by a qualified independent appraiser, in the case of property
for which there is no readily ascertainable trading market; or by
reference to its face value in the case of a letter of credit or similar
obligation of a bank or other financial institution.
(B) "Feldman Designated Holder" shall mean Feldman, so long as
Feldman remains a holder of Subject Securities. If any Feldman Designated
Holder shall transfer all of his Subject Securities, such Feldman
Designated Holder or his executor shall designate one Permitted Feldman
Stockholder who is a holder of Subject Securities as the Feldman
Designated Holder, and shall notify the Pollak Designated Holder of such
designation.
<PAGE>
(C) "Dispose Of" shall mean pledge, hypothecate, give away, sell,
grant an option with respect to, or otherwise transfer, other than
pursuant to a plan of merger or consolidation or similar transaction, to
anyone; and the term "Disposition" shall have a correlative meaning.
(D) "Marketable Securities" shall mean securities traded on any
national securities exchange or listed by the Nasdaq Stock Market, Inc. on
either its National Market or SmallCap system.
(E) "Permitted Consideration" shall mean cash, a Secured Note, or
Marketable Securities, or any combination thereof.
(F) "Permitted Feldman Stockholder" shall mean any of (I) Feldman,
(II) any parent, child, descendant, or sibling of Feldman, (III) the
spouse of any of the foregoing, (IV) any trust established by Feldman or
any of the foregoing persons, or any trustee, custodian, fiduciary, or
foundation, which will hold shares of Company Stock for charitable
purposes or for the benefit of Feldman or any of the persons described in
this Section 12(b)(vii)(F) or any combination thereof, and (V) committees,
guardians, or other legal representatives of Feldman or of any of the
other persons described in this Section 12(b)(vii)(F).
(G) "Permitted Pollak Stockholder" shall mean any of (I) Pollak,
(II) any parent, child, descendant, or sibling of Pollak, (III) the spouse
of any of the foregoing, (IV) any trust established by Pollak or any of
the foregoing persons, or any trustee, custodian, fiduciary, or
foundation, which will hold Subject Securities for charitable purposes or
for the benefit of Pollak or any of the persons described in this Section
12(b)(vii)(G) or any combination thereof, and (V) committees, guardians,
or other legal representatives of Pollak or of any of the other persons
described in this Section 12(b)(vii)(G).
(H) "Secured Note" shall mean a promissory note of a purchaser or
proposed purchaser of Subject Securities, which note (I) provides for full
recourse against the obligor, (II) requires payment in cash on or before a
stated date of a stated amount, and (III) is secured by collateral having
a Collateral Value equal to at least the face amount of such promissory
note.
(I) "Subject Securities" shall mean shares of Class B Capital Stock
and options, warrants, or other rights to acquire Class B Capital Stock.
(J) "Value" on any date of (I) any Marketable Securities shall mean
the average of the closing sales prices for such Marketable Securities, on
the principal market on which such Marketable Securities are listed or
traded, over the five trading days prior to such date, or (II) any Secured
Note shall mean the face amount of such Secured Note.
<PAGE>
13.(a) If, at any time or from time to time, any Permitted Feldman
Stockholder shall propose to Dispose Of any Subject Securities other than
pursuant to (i) the exchange with Pollak contemplated by this Agreement, (ii)
Section 13(b), or (iii) the conversion of Subject Securities into Common Stock,
such Permitted Feldman Stockholder (the "Selling Stockholder") shall give notice
(a "Notice") of such proposed Disposition to the Pollak Designated Holder
describing the proposed Disposition. If such Disposition is a sale of Subject
Securities, then the Pollak Designated Holder shall have the right, by giving
notice (a "Tag-Along Notice") to the Selling Stockholder within 10 days of the
Notice, to sell, and/or cause the other Permitted Pollak Stockholders to sell,
on the terms and to the transferee(s) described in the Notice, a number of each
type of Subject Securities equal to the number of such type of Subject
Securities then held by the Permitted Pollak Stockholders multiplied by a
fraction, the numerator of which is the number of such type of Subject
Securities proposed to be sold by such Selling Stockholder and the denominator
of which is the number of such type of Subject Securities held by all Permitted
Feldman Stockholders at the date of the Notice; and, if the Pollak Designated
Holder gives a Tag-Along Notice, such Selling Stockholder shall not effect such
Disposition unless the Permitted Pollak Stockholders are afforded such
opportunity to sell such portion of their Subject Securities.
(b) Section 13(a) shall not apply to any Disposition to any Permitted
Feldman Stockholder, provided such Permitted Feldman Stockholder agrees in
writing to be bound by the terms of this Section 13 and the Pollak Designated
Holder is given notice of such Disposition.
(c) All determinations with respect to the exercise or waiver of the
tag-along right provided by Section 13(a) shall be exercised by the Pollak
Designated Holder on behalf of all of the Permitted Pollak Stockholders, and all
shall be bound by any such determination. The Pollak Designated Holder shall
have the right to allocate among the Permitted Pollak Stockholders, in such
manner as he determines, any Subject Securities to be sold by the Permitted
Pollak Stockholders under Section 13(a). The Pollak Designated Holder shall
provide notice to the Feldman Designated Holder of any such allocation. No
Permitted Pollak Stockholder shall transfer any Subject Securities to any other
Permitted Pollak Stockholder unless the transferee agrees in writing to be bound
by the provisions of this Section 13(c).
(d) The tag-along rights granted by Permitted Feldman Stockholders herein
shall terminate on such date on which no Permitted Pollak Stockholder holds any
Subject Securities, including by conversion of Class B Capital Stock into Common
Stock.
(e) "Pollak Designated Holder" shall mean Pollak, so long as Pollak
remains a holder of Subject Securities. If any Pollak Designated Holder shall
transfer all of his Subject Securities, such Pollak Designated Holder or his
executor shall designate one Permitted Pollak Stockholder who is a holder of
Subject Securities as the Pollak Designated Holder, and shall notify the Feldman
Designated Holder of such designation.
(f) This Section 13 shall not apply to any Common Stock held by any
Permitted Feldman Stockholder, including any acquired on conversion of any Class
B Capital Stock.
<PAGE>
14. On the date hereof, the parties are exchanging mutual releases in the
forms attached as Exhibit B.
15. The Company represents and warrants that (a) this Agreement and the
transactions contemplated hereby have been approved by all necessary corporate
action, including, without limitation, approval of the transactions contemplated
hereby by the full Board of Directors of the Company, and (b) the execution,
delivery, and performance of this Agreement and the Consulting Agreement by the
Company will not violate, result in a breach of, conflict with, or (with or
without the giving of notice or the passage of time or both) entitle any party
to terminate or call a default under, any contract or agreement to which the
Company is a party.
16. Feldman represents and warrants that, as of the date of this
Agreement, he has not received any currently outstanding offer, orally or in
writing, to purchase any of the Class B Capital Stock held by or to be acquired
by him.
17. At any time and from time to time, each party agrees, without further
consideration, to take such actions and to execute and deliver such documents as
the other parties may reasonably request to effectuate the purposes of this
Agreement.
18. This Agreement and the Exhibits hereto set forth the entire
understanding of the parties with respect to the subject matter hereof,
supersede all existing agreements among them concerning such subject matter, and
may be modified only by a written instrument duly executed by the party to be
charged.
19. Any waiver by any party of a breach of any provision of this Agreement
shall not operate as or be construed to be a waiver of any other breach of such
provision or of any breach of any other provision of this Agreement. The failure
of a party to insist upon strict adherence to any term of this Agreement on one
or more occasions shall not be considered a waiver or deprive that party of the
right thereafter to insist upon strict adherence to that term or any other term
of this Agreement. Any waiver must be in writing.
20. The provisions of this Agreement shall be binding upon and inure to
the benefit of the parties hereto and the successors and assigns of the Company
and the respective assigns, heirs, and personal representatives of the
individual parties hereto.
21. If any provision of this Agreement is invalid, illegal, or
unenforceable, the balance of this Agreement shall remain in effect, and if any
provision is inapplicable to any person or circumstance, it shall nevertheless
remain applicable to all other persons and circumstances.
22. The Company will promptly reimburse Pollak for his reasonable legal
fees and expenses incurred in connection with this Agreement.
23. This Agreement does not create, and shall not be construed as
creating, any rights enforceable by any person not a party to this Agreement
(except as provided in Section 20).
<PAGE>
24. This Agreement may be executed in any number of counterparts, each of
which shall be deemed an original, but all of which together shall constitute
one and the same instrument.
25. Since a breach of the provisions of this Agreement could not
adequately be compensated by money damages, any party shall be entitled, in
addition to any other right or remedy available to him or it, to an injunction
restraining such breach or a threatened breach and to specific performance of
any such provision of this Agreement, and in either case no bond or other
security shall be required in connection therewith, and the parties hereby
consent to the issuance of such injunction and to the ordering of specific
performance.
26. Any notice or other communication required or permitted to be given
hereunder shall be in writing and shall be delivered by Federal Express, Express
Mail, or similar overnight delivery or courier service, or delivered against
receipt to the party to whom it is to be given at the address of such party set
forth in the preamble to this Agreement (or to such other address as the party
shall have furnished in writing in accordance with the provisions of this
Section 26). Notice to the estate of a party shall be sufficient if addressed to
such party as provided in this Section 26. Any notice shall be deemed given at
the time of receipt thereof.
27. This Agreement shall be governed by and construed in accordance with
the laws of the State of New York, without giving effect to conflict of laws.
28. Except as provided in Section 25, any dispute or controversy arising
out of or relating to this Agreement or any breach of this Agreement shall be
settled by arbitration to be held in the City of New York in accordance with the
rules then in effect of the American Arbitration Association or any successor
thereto. The arbitrator may grant injunctions or other relief in such dispute or
controversy. The decision of the arbitrator shall be final, conclusive, and
binding on the parties to the arbitration. Judgment may be entered on the
arbitrator's decision in any court having jurisdiction, and the parties
irrevocably consent to the jurisdiction of the federal and state courts located
in the State of New York courts for this purpose.
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date and year first above written.
GP STRATEGIES CORPORATION
By
Jerome I. Feldman
Martin M. Pollak
<PAGE>
Schedule A
Exchanged Pollak Options
- -------------------------------------------------------------------------------
Grant Date Exercise Price No. of Shares1
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
10/11/90 $9.00 75,000
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
10/11/90 $9.00 25,000
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
10/11/90 $9.00 93,750
- -------------------------------------------------------------------------------
1 All are options to purchase shares of Class B Capital Stock.
<PAGE>
Schedule B
Feldman Options
- -------------------------------------------------------------------------------
Exercise
Grant Date Exp. Date Price No. of Shares1
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
10/11/90 6/14/99 $9.00 25,000
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
12/31/96 12/31/99 $7.69 35,000
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
11/17/95 11/17/00 $8.375 106,250
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
07/01/97 07/01/02 $7.75 40,000
- -------------------------------------------------------------------------------
1 All are options to purchase shares of Common Stock.
Exhibit 10.12
March 22, 1999
Mr. Martin M. Pollak
16 Springwood Path
Syosset, NY 11791
Dear Martin:
Reference is made to the Agreement, dated December 29, 1998 (the
"Agreement"), among GP Strategies Corporation (the "Company"), Jerome I. Feldman
("Feldman") and Martin M. Pollak ("Pollak"). All capitalized terms shall have
the meanings set forth in the Agreement.
The Company, Feldman and Pollak hereby agree as follows:
1. All references to "cashless" exercise in the Agreement are
hereby amended to mean a transaction whereby Pollak shall pay
the exercise price of the options being exercised by
delivering to the Company shares of Common Stock (the
"Delivered Shares") (all such shares having been held by
Pollak for at least six months) with a market value (based on
the Average Closing Price on the Cashless Exercise Date) equal
to the exercise price of the options being exercised and shall
receive the number of shares of Common Stock of the Company
with a market value equal to the sum of (i) the Spread and
(ii) the market value of the Delivered Shares.
2. In the event that the Company commences the process of
preparing a registration statement for a public offering of
its shares (the "Offering") on or prior to April 15, 1999,
which shall be evidenced by an "organizational" meeting (the
"Organizational Meeting") of the working group of lawyers,
accountants, investment bankers and others involved in the
proposed transaction, as well as other customary actions,
then:
a. Within ten business days after the Organizational Meeting,
Pollak shall deliver a written notice to the Company
indicating the number of shares of Common Stock (including
shares of Common Stock issuable upon exercise of options) that
he desires to have included in the Offering, which number
shall be not less than 100,000 shares and not more than 20% of
the number of shares to be sold by the Company in the
Offering. Subject to paragraphs 2b, 2d and 2e, the Company
shall include in the Offering such number of shares of Common
Stock owned by Pollak;
b. In the event that the managing underwriter or underwriters
advise the Company in writing that it is impracticable to
include all shares of Common Stock in the Offering, then any
reduction in the number of shares shall be on pro rata basis
between the Company and Pollak, based on the number of shares
requested to be so included in the Offering by the Company and
Pollak;
c. Pollak shall be entitled to all customary piggy-back
registration rights with respect to the Offering including,
without limitation, receipt of written opinions, comfort
letters and indemnification rights;
d. Pollak shall furnish such customary information and enter into
such customary agreements, including customary "lock-up"
agreements, in connection with the Offering as the Company or
the managing underwriter or underwriters may reasonably
request;
e. The Company shall consummate the Offering on or after July 5,
1999, provided that in the event that the staff of the
Securities and Exchange Commission (the "SEC") chooses not to
review the registration statement and the Company and the
managing underwriter or underwriters jointly determine that
the Offering shall be consummated on or prior to June 15,
1999, then none of Pollak's shares shall be included in the
Offering and Pollak shall have the right to sell to the
Company (the "Put Right"), and the Company shall have the
right to purchase from Pollak (the "Call Right"), on the terms
and conditions set forth below, the number of shares of Common
Stock that Pollak had requested to be included in the Offering
(as provided in Section 2a hereof), subject to any reduction
as provided in Section 2b hereof, at a price per share equal
to the public offering price in the Offering less
underwriter's fees and commissions, provided that the Call
Right may not be exercised by the -------- Company unless the
price per share in the public offering is equal to at least
$15 per share; and
f. During the period of ten business days commencing on the date
the Offering is consummated (the "Offering Consummation
Date"), the Company may exercise the Call Right by written
notice to Pollak, or Pollak may exercise the Put Right by
written notice to the Company, provided that no such exercise
shall take -------- place in violation of applicable law. On
the business day after the day the Put Right or Call Right is
exercised, Pollak shall deliver to the Company original stock
certificates representing the number of shares of Common Stock
subject to the Put Right or Call Right, as the case may be,
and stock powers with respect thereto, and the Company shall
deliver to Pollak the purchase price for such shares in
immediately available funds.
3. In the event that (i) the Company does not hold an
Organizational Meeting to commence the process of preparing a
registration statement prior to April 15, 1999, or (ii) the
Offering Consummation Date is not prior to July 31, 1999, then
the Company shall file with SEC a registration statement on
Form S-3 on or prior to April 16, 1999 (or, August 15, 1999,
in the case of clause (ii)) relating to the resale of 100,000
shares of Common Stock owned by Pollak. At the request of
Pollak, at any time on or after September 1, 1999, the Company
shall also file with the SEC up to two additional registration
statements on Form S-3 relating to shares of Common Stock
owned by Pollak. The Company shall use its reasonable best
efforts to have each such registration statement declared
effective as promptly as practicable after filing and to
maintain the effectiveness of such registration statement
until the earlier of the disposition by Pollak of the Pollak
Shares registered thereunder or the date on which Pollak is
eligible to sell any Pollak Shares registered thereunder still
held by him pursuant to Rule 144(k) under the Securities Act
(or any successor rule). The Company shall pay all expenses of
each such registration statement; provided, that Pollak shall
be responsible for any brokerage or underwriting fees or
commissions and any counsel or -------- advisors representing
him. Pollak will give the Company notice at least five
business days prior to any sale of Pollak Shares and will sell
all Pollak Shares in an orderly manner so as to minimize any
disruption of the trading market caused by such sales. This
provision shall replace Section 11 of the Agreement, which is
hereby deleted in its entirety.
4. The Company represents and warrants that (a) this letter
agreement and the transactions contemplated hereby have been
approved by all necessary corporate action and that the Put
Right and the Call Right have been approved by its Board of
Directors, and (b) the execution, delivery and performance of
this letter agreement by the Company will not violate, result
in a breach of, conflict with, or (with or without the giving
of notice of the passage of time or both) entitle any party to
terminate or call a default under, any agreement to which the
Company is a party. In addition, the Company represents and
warrants that the termination of Pollak's employment with the
Company will not accelerate the expiration date, result in a
termination or otherwise affect any of his options so long as
Pollak remains a consultant with the Company.
5. At any time and from time to time, each party agrees, without
further consideration, to take such actions and to execute and
deliver such documents as the other parties may reasonably
request to effectuate the purposes of this letter agreement.
6. Except as specifically amended hereby, the Agreement shall
remain in full force and effect as originally executed. This
letter agreement may be modified only by a written instrument
duly executed by the party to be charged.
7. Any waiver by any party of a breach of any provision of this
letter agreement shall not operate as or be construed to be a
waiver of any other breach of such provision or of any breach
of any other provision of this letter agreement. The failure
of a party to insist upon strict adherence to any term of this
letter agreement on one or more occasions shall not be
considered a waiver or deprive that party of the right
thereafter to insist upon strict adherence to that term or any
other term of this letter agreement. Any waiver must be in
writing. Pollak hereby waives any and all breaches by the
Company of Section 11 of the Agreement.
8. The provisions of this letter agreement shall be binding upon
and inure to the benefit of the parties hereto and the
successors and assigns of the Company and the respective
assigns, heirs, and personal representatives of the individual
parties hereto.
9. If any provision of this letter agreement is invalid, or
unenforceable, the balance of this letter agreement shall
remain in effect, and if any provision is inapplicable to any
person or circumstance, it shall nevertheless remain
applicable to all other persons and circumstances.
10. The Company will promptly reimburse Pollak for his reasonable
legal fees and expenses incurred in connection with this
letter agreement, as well as reasonable legal fees and
expenses in connection with the Offering, provided that Pollak
shall be obligated to pay all broker or underwriters fees and
commissions in connection with shares sold by him in the
Offering.
11. This letter agreement does not create, and shall not be
construed as creating, any rights enforceable by any person
not a party to this letter agreement (except as provided in
Section 9).
If you are in agreement with the foregoing, please deliver a copy of
this letter to the undersigned, whereupon this letter shall become a
binding agreement between us.
Sincerely,
------------------------------
Jerome I. Feldman
GP STRATEGIES CORPORATION
By:____________________________
The foregoing is hereby Agreed to as of the date hereof:
-----------------------------
Martin M. Pollak
Exhibit 21
SUBSIDIARIES OF THE REGISTRANT
Jurisdiction
f
Name Incorporation
General Physics Corporation Delaware
SGLG, Inc.* Delaware
MXL Industries, Inc. Delaware
*Less than 100% owned by the Registrant
Exhibit 23
CONSENT OF INDEPENDENT AUDITORS
THE BOARD OF DIRECTORS
GP STRATEGIES CORPORATION
We consent to incorporation by reference in the Registration Statements (No.
333-20815) and (No. 33-54407) on Form S-3 and the Registration Statement (No.
33-26261) on Form S-8 of GP Strategies Corporation and subsidiaries of our
report dated March 1, 1999 relating to the consolidated balance sheets of GP
Strategies Corporation as of December 31, 1998 and 1997 and the related
consolidated statements of operations, changes in stockholders' equity, and cash
flows for each of the years in the three-year period ended December 31, 1998,
which report appears in Form 10-K for the year ended December 31, 1998 of GP
Strategies Corporation.
KPMG LLP
New York, New York
March 31, 1999
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<NAME> GP STRATEGIES CORPORATION
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<FISCAL-YEAR-END> DEC-31-1998
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<COMMON> 111,000
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<TOTAL-LIABILITY-AND-EQUITY> 210,905,000
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