UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the quarter ended June 30, 2000
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the transition period from to Commission File Number: 1-7234
GP STRATEGIES CORPORATION
(Exact Name of Registrant as Specified in its Charter)
Delaware 13-1926739
-------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
9 West 57th Street, New York, NY 10019
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(Address of principal executive offices) (Zip code)
(212) 826-8500
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange act of 1934 during
the preceding 12 months (or for such shorter period) that the registrant was
required to file such reports and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--------
Number of shares outstanding of each of issuer's classes of common stock as of
August 9, 2000:
Common Stock 11,971,813 shares
Class B Capital 800,000 shares
<PAGE>
GP STRATEGIES CORPORATION AND SUBSIDIARIES
TABLE OF CONTENTS
Page No.
Part I. Financial Information
Consolidated Condensed Balance Sheets -
June 30, 2000 and December 31, 1999 1
Consolidated Condensed Statements of Operations -
Three Months and Six Months Ended June 30,
2000 and 1999 3
Consolidated Condensed Statements of Cash Flows -
Six Months Ended June 30, 2000 and 1999 4
Notes to Consolidated Condensed Financial
Statements 6
Management's Discussion and Analysis of Financial
Condition and Results of Operations 18
Part II. Other Information 26
Signatures 27
<PAGE>
PART I. FINANCIAL INFORMATION
GP STRATEGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
-------- --------
ASSETS unaudited) *
Current assets
<S> <C> <C>
Cash and cash equivalents $ 2,600 $ 4,068
Accounts and other receivables 47,875 55,385
Inventories 1,602 1,888
Costs and estimated earnings
in excess of billings on uncompleted contracts 13,884 14,238
Prepaid expenses and other current assets 7,009 3,853
---------- ----------
Total current assets 72,970 79,432
--------- ------
Investments and advances 16,867 16,557
Property, plant and equipment, net 9,745 13,658
Intangible assets, net of accumulated amortization
of $40,754 and $38,986 61,784 79,818
Deferred tax asset 3,990 3,990
Other assets 3,471 3,663
-------- -----------
$168,827 $197,118
======== ========
</TABLE>
* The Consolidated Condensed Balance Sheet as of December 31, 1999 has been
summarized from the Company's audited Consolidated Balance Sheet as of that
date.
See accompanying notes to the consolidated condensed financial statements.
<PAGE>
GP STRATEGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS (Continued)
(in thousands)
June 30, December 31,
2000 1999
-------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY (Unaudited) *
Current liabilities:
Current maturities of long-term debt $ 1,377 $ 3,668
Short-term borrowings 37,261 40,278
Accounts payable and accrued expenses 23,973 25,634
Billings in excess of costs and estimated
earnings on uncompleted contracts 8,940 9,998
--------- ----------
Total current liabilities 71,551 79,578
-------- ---------
Long-term debt less current maturities 14,176 14,822
Other non-current liabilities 2,218 2,736
Stockholders' equity
Common stock 122 115
Class B capital stock 8 5
Additional paid in capital 175,818 170,011
Accumulated deficit (85,921) (61,602)
Accumulated other comprehensive loss (137) (817)
Note receivable from stockholder (4,095) (2,817)
Treasury stock, at cost (4,913) (4,913)
---------- ----------
Total stockholders' equity 80,882 99,982
-------- ---------
$168,827 $197,118
======== ========
* The Consolidated Condensed Balance Sheet as of December 31, 1999 has been
summarized from the Company's audited Consolidated Balance sheet as of that
date.
See accompanying notes to the consolidated condensed financial statements.
<PAGE>
GP STRATEGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three months Six months
ended June 30, ended June 30,
---------------- ----------------
2000 1999 2000 1999
------- ----- ------ -------
<S> <C> <C> <C> <C>
Sales $ 50,328 $ 56,766 $98,128 $122,695
Cost of sales 45,379 51,852 88,817 107,924
-------- -------- ------- ---------
Gross margin 4,949 4,914 9,311 14,771
Selling, general & administrative expenses (7,579) (8,398) (12,870) (14,416)
Interest expense (1,370) (1,110) (2,660) (2,061)
Investment and other income (loss), net (50) 263 281 742
Gain on trading securities 137 539 468 564
Asset impairment charge (18,474) (18,474)
Restructuring charges (6,312) (6,312)
---------- --------- ----------- ---------
Loss before income taxes (22,387) (10,104) (23,944) (6,712)
Income tax expense (179) (77) (375) (857)
----------- --------- -------- ---------
Net loss $(22,566) $(10,181) $ (24,319) $ (7,569)
======== ======== ========= ========
Net loss per share:
Basic and diluted $ (1.85) $ (.90) $ (2.02) $ (.67)
=========== ========= =========== =========
Dividends per share none none none none
========= ========== ======== ========
</TABLE>
See accompanying notes to the consolidated condensed financial statements.
<PAGE>
GP STRATEGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
Six months
ended June 30,
2000 1999
------- ------
Cash flows from operations:
<S> <C> <C>
Net loss $ (24,319) $ (7,569)
Adjustments to reconcile net loss to net cash
provided by (used for) operating activities:
Depreciation and amortization 3,583 3,583
Issuance of stock for profit incentive plan 754 672
Equity loss on investments 229 234
Proceeds from sale of trading securities 616 2,639
Non-cash compensation expense 1,600
Asset impairment charge 18,474
Restructuring charge 6,312
Gain on trading securities (468) (564)
Changes in other operating items 208 (6,828)
------ --------
Net cash provided by (used for) operating activities 677 (1,521)
------ ---------
Cash flows from investing activities:
Additions to property, plant & equipment (294) (2,270)
Additions to intangible assets, net (649)
Proceeds from disposal of fixed assets 507
Reduction of investments and other assets, net 96 951
----- ------
Net cash provided by (used for) investing activities 309 (1,968)
----- --------
Cash flows from financing activities:
(Repayment of) proceeds from short-term borrowings (3,017) 4,815
Proceeds from sale of Class B Stock 1,200
Repayment of long-term debt (762) (1,020)
Exercise of common stock options and warrants 910
Repurchase of treasury stock (1,062)
-------- --------
Net cash provided by (used for) financing activities (2,579) 3,643
--------- --------
Effect of exchange rate changes on
Cash and cash equivalents 125 195
--------- ---------
</TABLE>
<PAGE>
GP STRATEGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Continued)
(Unaudited)
(in thousands)
<TABLE>
Six months
<CAPTION>
ended June 30,
2000 1999
-------- -------
<S> <C> <C>
Net (decrease) increase in cash and cash equivalents (1,468) 349
Cash and cash equivalents at the beginning of the periods 4,068 6,807
-------- --------
Cash and cash equivalents at the end of the periods $ 2,600 $ 7,156
======== ========
Cash paid during the periods for:
Interest $ 2,980 $ 2,569
======== ========
Income taxes $ 311 $ 862
======== =========
</TABLE>
See accompanying notes to the consolidated condensed financial statements.
<PAGE>
GP STRATEGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
1. Qualification relating to financial information
The financial information included herein is unaudited. In addition,
the financial information does not include all disclosures required under
generally accepted accounting principles because certain note information
included in the Company's Annual Report has been omitted; however, such
information reflects all adjustments (consisting solely of normal recurring
adjustments) which are, in the opinion of management, necessary to a fair
statement of the results for the interim periods. The results for the 2000
interim period are not necessarily indicative of results to be expected for the
entire year.
2. Earnings per share
Loss per share (EPS) for the periods ended June 30, 2000 and 1999 are
as follows (in thousands, except per share amounts):
<TABLE>
<CAPTION>
Three months Six months
ended June 30, ended June 30,
-------------------------- ---------------------------
2000 1999 2000 1999
---- ---- ---- ----
Basic and Diluted EPS
<S> <C> <C> <C> <C>
Net loss $(22,566) $ (10,181) $ (24,319) $ (7,569)
Weighted average shares
outstanding 12,178 11,320 12,043 11,297
Basic and diluted loss per share $ (1.85) $ (.90) $ (2.02) (.67)
</TABLE>
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 stockholders. In 1999 and 2000, even though the
Company still has stock options and warrants outstanding, diluted earnings per
share is not presented due to the Company's net loss, which makes the effect of
the potentially dilutive securities anti-dilutive.
<PAGE>
GP STRATEGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
3. Long-term debt
Long-term debt consists of the following (in thousands):
June 30, December 31,
2000 1999
-------- ------
8% Swiss bonds due 2000* $ $ 2,175
Senior subordinated debentures 755 844
Term loan 13,688 14,063
Other 1,110 1,408
-------- --------
15,553 18,490
Less current maturities (1,377) (3,668)
-------- --------
$ 14,176 $14,822
======== =======
*On June 28, 2000, the Company issued 443,097 shares of its Common Stock at a
value of $5.1625 per share, in exchange for the total principal due of the
Company's 8% Swiss bonds.
<PAGE>
GP STRATEGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
4. Comprehensive income (loss)
The following are the components of comprehensive income (loss) (in thousands):
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
------------------------------- ---------------------
2000 1999 2000 1999
------- -------- ------- ---------
<S> <C> <C> <C> <C>
Net loss $(22,566) (10,181) $ (24,319) $ (7,569))
-------- ------- ----------- --------
Other comprehensive income (loss) before tax:
Net unrealized gain (loss) on
available-for-sale-securities (665) (376) 599 (176)
Foreign currency translation adjustment (120) 223 125 195
----------- ---------- ---------- -------
Other comprehensive income (loss),
before tax (785) (153) 724 19
---------- --------- ----------- ----------
Income tax benefit (expense) relating to
items of other comprehensive income 13 127 (44) 60
----------- --------- ------------ ----------
Comprehensive loss, net of tax $(23,338) $( 10,207) $ (23,639) $ (7,490)
======== ========= ========== =========
</TABLE>
The components of accumulated other comprehensive income (loss) are as follows:
June 30, December 31,
2000 1999
--------- -------
Net unrealized gain (loss) on
available-for-sale-securities $ 544 $ (55)
Foreign currency translation adjustment (634) (759)
--------- --------
Accumulated other comprehensive loss
before tax (90) (814)
Accumulated income tax expense related to
items of other comprehensive loss ( 47) (3)
-------- ----------
Accumulated other comprehensive loss,
net of tax $ (137) (817)
=========== ========
<PAGE>
GP STRATEGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
(Unaudited)
5. Credit agreement
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.
Due to the Company's restructuring charges and operating losses in 1999
and the operating losses and asset impairment charge in 2000, primarily related
to General Physics' IT Group, the Company was not in compliance with respect to
the financial covenants in its credit agreement. The Company and its lenders
entered into agreements dated as of April 12, 2000 and July 31, 2000, providing
for waivers of compliance with such covenants as of September 30, 1999, December
31, 1999, March 31, 2000 and June 30, 2000. Effective April 12, 2000, the
Company and its lenders entered into a binding commitment (the "Prior Commitment
Letter") to enter into an Amended and Restated Credit Agreement (the "Amended
Agreement"). The Prior Commitment Letter and the term sheet attached to the
Prior Commitment Letter were replaced in their entirety by an amended commitment
letter and term sheet dated July 31, 2000 between the Company and its lenders
(the "Amended Commitment Letter") which sets forth the lenders commitment to
enter into the Amended Agreement on the terms and conditions described below.
The Amended Agreement will reduce the commitment pursuant to the revolving
facility to $50,000,000 (subject to borrowing base limitations specified in the
Amended Agreement), however the Amended Agreement did not change the payment
terms or expiration date of the Company's current outstanding term loan in the
amount of $13,688,000. The interest rates increased on both the revolving
facility and the term loan to prime plus 1.25% (increased from .50%) and
Eurodollar plus 2.75% (increased from 2.00%). The Amended Agreement provides for
additional security consisting of certain real property, personal property and
all marketable securities owned by the Company and its subsidiaries. The Amended
Agreement contains certain restrictive covenants, including the prohibition on
future acquisitions, and provides for mandatory prepayment upon the occurrence
of certain events. The Amended Agreement contains revised minimum net worth,
fixed charge coverage, EBITDA and consolidated liabilities to tangible net worth
covenants. Although there can be no assurance, the Company anticipates that it
will satisfy the revised covenants in the future. If the Amended Agreement had
been in effect at June 30, 2000, the Company would have had approximately
$6,300,000 available to be borrowed under the revolving facility included in the
Amended Agreement.
<PAGE>
GP STRATEGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
6. Business segments
The operations of the Company currently consist of the following four
business segments, by which the Company is managed.
The Company's principal operating subsidiary is General Physics
Corporation (GP). GP is a performance improvement company that assists
productivity driven organizations to maximize workforce performance by
integrating people, processes and technology. GP is a total solutions provider
for strategic training, engineering, consulting and technical support services
to Fortune 500 companies, government, utilities and other commercial customers.
GP operates in three business segments. The Manufacturing Services Group
provides technology based training to leading companies in the automotive, steel
and food and beverage industries, as well as to the government sector. The
Process & Energy Group provides engineering, consulting and technical training
to the power, chemical, energy and pharmaceutical industries as well as
government facilities. The Information Technology Group provides information
training programs and solutions, including Enterprise Solutions and
comprehensive career training and transition programs.
The Optical Plastics Group, which is the Company's wholly-owned
subsidiary MXL Industries, Inc. (MXL), manufactures and distributes coated and
molded plastic products.
The management of the Company does not allocate the following items by
segment: Investment and other income, net, interest expense, selling, general
and administrative expenses, depreciation and amortization expense, income tax
expense, significant non-cash items and long-lived assets. There are deminimis
inter-segment sales. The reconciliation of gross margin to net income (loss) is
consistent with the presentation on the Consolidated Condensed Statements of
Operations.
<PAGE>
GP STRATEGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
6. Business segments (Continued)
The following tables set forth the sales and gross margin of each of
the Company's operating segments (in thousands):
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
---------------------- ------------------
2000 1999 2000 1999
------- -------- ------- -------
Sales
<S> <C> <C> <C> <C>
Manufacturing Services $ 18,950 $18,299 $ 34,810 $ 37,790
Process and Energy 21,139 21,224 42,273 48,122
Information Technology 7,241 14,484 14,989 31,090
Optical Plastics 2,958 2,476 5,916 5,205
Other 40 283 140 488
---------- ---------- ----------- -----------
$ 50,328 $ 56,766 $98,128 $122,695
-------- -------- ------- --------
Gross margin
Manufacturing Services $ 2,675 $ 2,998 $ 4,497 $ 7,045
Process and Energy 2,782 2,334 5,459 6,352
Information Technology (1,187) (1,256) (2,005) (302)
Optical Plastics 807 685 1,601 1,401
Other (128) 153 (241) 275
------------- -------- ---------- ---------
$ 4,949 $ 4,914 $ 9,311 $14,771
--------- -------- ------- -------
</TABLE>
<PAGE>
GP STRATEGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
(Unaudited)
6. Business segments (continued)
Information about the Company's net sales in different geographic regions, which
are attributed to countries based on location of customers, is as follows (in
thousands):
Three months ended Six months ended
June 30, June 30,
---------------------- --------------------
2000 1999 2000 1999
--------- ------- -------- -------
United States $ 43,072 $ 43,628 $ 83,100 $ 94,898
Canada 2,922 6,916 6,027 15,245
United Kingdom 3,123 4,221 6,761 9,005
Latin America 1,211 2,001 2,240 3,547
-------- --------- -------- --------
$ 50,328 $ 56,766 $ 98,128 $122,695
-------- -------- -------- --------
Information about the Company's identifiable assets in different geographic
regions, is as follows (in thousands):
June 30, December 31,
2000 1999
------------ ----------------
United States $ 157,632 $180,057
Canada 5,862 9,533
United Kingdom 3,129 5,087
Latin America 2,204 2,441
---------- --------
$168,827 $197,118
-------- --------
<PAGE>
GP STRATEGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
(Unaudited)
7. Asset impairment charge
The operations of the Information Technology (IT) Group are primarily
comprised of the operations of Learning Technologies, which was purchased by the
Company in June 1998. As a result of the purchase of Learning Technologies, the
Company recorded $23,216,000 of goodwill, which is being amortized over 30
years.
During 1999, the Company adopted restructuring plans, primarily related
to its IT Business segment. The Company took steps in order to change the focus
of the IT group from open enrollment information technology training courses to
project oriented work for corporations, which is consistent with the focus of
General Physics Corporation's (GP) current business. In connection with the
restructuring, the Company closed, downsized, or consolidated 6 offices in the
United States, 6 offices in Canada and 5 offices in the United Kingdom (UK), and
terminated approximately 100 employees.
The Company believed at that time that the strategic initiatives and
cost cutting moves taken in 1999 and the first quarter of 2000 would enable the
IT Group to return to profitability in the last six months of 2000. However,
those plans were not successful, and the Company now believes that there has
been an impairment to intangible assets related to the IT Group.
In July 2000, as a result of the continued operating losses incurred by
its IT Group, as well as the belief that revenues would not increase to
profitable levels, the Company decided to close or sell its open enrollment
business in Canada and close or sell all its offices in the UK.
As a result, for the quarter and six months ended June 30, 2000, the
Company has recorded an asset impairment charge of $18,474,000 related to the IT
Group. The charge is comprised of a write-off of goodwill of $16,056,000, as
well as write-offs of Property, plant and equipment and other assets relating to
the offices to be closed, totaling $2,418,000. The Company believes that the
remaining unamortized goodwill of $5,485,000, which relates to the US and
Canadian IT project business, is recoverable from future operations. However, in
the event that the Company's plans are not successful, and the remaining IT
operations do not achieve profitable operating results, there can be no
assurance that a further impairment charge will not be required.
The Company anticipates recording a restructuring charge in the third
quarter of 2000, related to the IT Group. The restructuring will include
severance and the costs associated with the offices to be closed.
<PAGE>
GP STRATEGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
(Unaudited)
8. Restructuring
As discussed in Note 7, during 1999, the Company adopted restructuring
plans which primarily related to its Information Technology (IT) business
segment.
In connection with the restructuring, the Company recorded a
restructuring charge of $7,374,000 in 1999, of which $6,312,000 was incurred
through June 30, 1999. During the period ended June 30, 2000 and the year ended
December 31, 1999, the Company expended $1,640,000 and $2,754,000, respectively.
Of the remaining unexpended amount at June 30, 2000 and December 31, 1999,
$762,000 and $1,884,000, respectively, was included in Accounts payable and
accrued expenses and $2,218,000 and $2,736,000, respectively, was included in
Other non-current liabilities in the Consolidated Balance Sheet. The components
of the restructuring charge are as follows (in thousands):
<TABLE>
<CAPTION>
Severance Present Value Other facility
and related of future lease related
benefits costs costs Total
----------- --------------- ------------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance December 31, 1999 $ 289 $ 4,206 $ 125 $ 4,620
Utilization (184) (1,451) (5) (1,640)
------- ---------- ---------- -------
Balance
June 30, 2000 $ 105 $ 2,755 $ 120 $ 2,980
======== ======= ======== =======
</TABLE>
Remaining amounts that have been accrued for severance and related
benefits will be expended by September 30, 2000. The present value of future
lease obligations is net of assumed sublets. Other facility-related costs will
be expended through the remainder of 2000.
<PAGE>
GP STRATEGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
(Unaudited)
9. Termination of merger agreement
On February 11, 2000, the Company terminated its previously announced
merger agreement with VS&A Communications Partners III, L.P. ("VS&A"), an
affiliate of Veronis, Suhler & Associates Inc., pursuant to which holders of
outstanding shares of the Company would have received $13.75 per share, payable
in cash.
VS&A had informed the Company that it believed that the Company
suffered a material adverse change in the fourth quarter of 1999 and that the
conditions to VS&A's obligation to consummate the merger contemplated by the
merger agreement therefore may not be fulfilled. VS&A also said that it did not
intend to waive the conditions to its obligation. Since certain members of the
Company's management were participating in the proposed VS&A merger, the Special
Negotiating Committee of the Board of Directors, which evaluated and recommended
the proposed VS&A merger, was empowered to consider the Company's options.
The Committee and its advisors attempted to negotiate an alternative
transaction with VS&A, but were unable to do so on acceptable terms. The
Committee also determined that prompt action was necessary to preserve value for
the Company's stockholders and that it would be imprudent to continue with the
proposed VS&A merger given that there would be no assurance that VS&A would have
an obligation to close. Therefore, the Committee unanimously recommended that
the proposed VS&A merger be terminated. The Board of Directors agreed that this
was the best course of action for the Company's stockholders, and believed that
this early termination enabled senior management and the Board of Directors to
focus their efforts on improving core operations, as well as continuing sales of
non-core assets.
To induce VS&A to agree to the immediate termination of the merger
agreement and to give the Company a general release, on February 11, 2000, the
Company issued to VS&A, as partial reimbursement of the expenses incurred by it
in connection with the merger agreement, 83,333 shares of the Company's Common
Stock and an 18-month warrant to purchase 83,333 shares of the Company's Common
Stock at a price of $6.00 per share. The consideration was valued at $686,000,
and was included in the December 31, 1999 consolidated statement of operations.
<PAGE>
GP STRATEGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
(Unaudited)
10. Class B Capital Stock
On February 11, 2000, an affiliate of Andersen, Weinroth & Co., L.P.
("Andersen Weinroth") purchased 200,000 shares of the Company's Class B Capital
Stock for $6.00 per share pursuant to a subscription agreement for an aggregate
cost of $1,200,000. In addition, G. Chris Andersen joined the Board of Directors
of the Company. Mr. Andersen is a general partner of Andersen Weinroth.
11. Related party transaction
During the first quarter of 2000, the Company made loans to an officer
who is the President and Chief Executive Officer and a director of the Company
in the amount of approximately $1,278,000 to purchase an aggregate of 150,000
shares of Class B Capital Stock. In addition, at December 31, 1999, the Company
had loans receivable from such officer in the amount of approximately
$2,817,000. The officer primarily utilized the proceeds of the prior loans to
exercise options to purchase an aggregate of 408,512 shares of Class B Capital
Stock. Such loans bear interest at the prime rate of Fleet Bank and are secured
by the purchased Class B Capital Stock and certain other assets. All principal
on the loans and accrued interest ($330,000 at June 30, 2000) are due on May 31,
2004. In prior years, the Company made unsecured loans to such officer in the
amount of approximately $480,000, which unsecured loans primarily bear interest
at the prime rate of Fleet Bank.
12. Investments
As of June 30, 2000, the Company had an approximately $250,000
investment in Millennium Cell Inc. (Millennium). Millennium is an emerging
technology company engaged in the development of a patented alternative energy
source based on boron chemistry. On August 14, 2000, Millennium completed an
initial public offering of 3,000,000 shares of common stock at a price of $10.00
per share. Based on the initial public offering price, the value of the
Company's shares not subject to the Option Plan defined below is in excess of
$55,000,000. The Company's shares of common stock in Millennium are subject to a
lock-up provision until February 9, 2001, and accordingly cannot be sold by the
Company before that date, unless the provision is waived by the underwriter.
<PAGE>
GP STRATEGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
(Unaudited)
On February 11, 2000, the Company granted options to purchase an
aggregate of approximately 567,000 of its shares of Millennium common stock to
certain of its employees pursuant to the GP Strategies Corporation Millennium
Cell, LLC Option Plan (the "Millennium Option Plan"), which options vest over
either a one year or two year period and expire on May 11, 2002. The Company
will receive approximately $516,000 upon exercise of all options pursuant to the
Millennium Option Plan. As a result of the Millennium Option Plan, the Company
recorded net deferred compensation of $3,250,000, to be amortized over the
remaining vesting period of the options, and a liability to employees of
$4,850,000 at June 30, 2000. These amounts are included in Prepaid expenses and
other current assets and Accounts payable and accrued expenses, respectively, on
the Consolidated Condensed Balance Sheets. Pursuant to the vesting provisions of
the Millennium Option Plan, the Company recorded a non-cash compensation expense
of $1,600,000 for the quarter and six months ended June 30, 2000, which is
included in Selling, general and administrative expenses in the Consolidated
Condensed Statement of Operations.
13. Subsequent event
On July 7, 2000, the Company, in a private placement transaction (the
"Private Placement") with two institutional investors, received $2,640,000 in
aggregate principal amount for 6% Convertible Exchangeable Notes due June 30,
2003 (the "Notes"). The Notes, at the option of the holders, may be exchanged
for 19.99% of the outstanding capital stock of Hydro Med, Inc. ("Hydro Med"), a
newly formed, wholly-owned subsidiary, on a fully diluted basis, as defined in
the Note, or into shares of the Company's Common Stock at a conversion rate of
$7.50 per share, subject to adjustment, as provided in the Note. The holders of
the Notes can convert or exchange at any time prior to June 30, 2003. In
connection with the Private Placement, the Company transferred the assets of its
Hydro Med Sciences division to Hydro Med, a wholly owned subsidiary of the
Company, and granted the holders of the Notes a security interest in
approximately 19.99% of the capital stock of Hydro Med to secure payment of the
Notes.
Hydro Med 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 and is focusing its efforts to obtain Food and Drug
Administration Approval for its prostate cancer drug delivery system.
<PAGE>
GP STRATEGIES CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Overview
The Company has four operating business segments. Three of the
Company's segments are managed through the Company's principal operating
subsidiary, GP, and the fourth through its operating subsidiary MXL Industries,
Inc. (MXL). In addition, the Company holds a number of investments in public and
privately held companies.
GP is a performance improvement company that assists productivity
driven organizations to maximize workforce performance by integrating people,
processes and technology. GP is a total solution provider for strategic
training, engineering, consulting and technical support services to Fortune 500
companies, government, utilities and other commercial customers. GP consists of
three segments: the Information Technology (IT) Group, the Manufacturing
Services Group and the Process & Energy Group. The Optical Plastics Group, which
comprises MXL, manufactures molded and coated optical products, such as shields
and face masks and non-optical plastic products.
The Company had a net loss before income taxes of $22,387,000 and
$23,944,000 for the quarter and six months ended June 30, 2000 compared to a net
loss before income taxes of $10,104,000 and $6,712,000 for the quarter and six
months ended June 30, 1999. The operating loss in 2000 and 1999 was primarily
due to an Asset impairment charge of $18,474,000 taken in the second quarter of
2000 and a $6,312,000 Restructuring charge taken in the second quarter of 1999.
These charges were the result of the continuing operating losses incurred by the
IT Group, due to the trend of reduced revenue on a quarterly basis which began
in 1999, and has continued through 2000. In addition, in 1999 the Company
experienced a higher than normal level of expenses incurred relative to revenues
generated during the period of facility closure of the activities that the
Company exited in the second quarter ended June 30, 1999. These charges were
included in Cost of sales and Selling, general and administrative expenses, and
included such items as: payroll and related benefits, facility-related costs,
write-offs of abandoned and other assets and losses on contracts. For the
quarter and six months ended June 30, 2000, the Company also recorded a
$1,600,000 non-cash compensation expense related to a compensation plan offered
to certain of its employees which is included in selling, general and
administrative expenses (See Note 12 to the Consolidated Condensed Financial
Statements).
<PAGE>
The Manufacturing Services Group also had reduced operating profits due
to reduced sales and gross margin percentage in the six months ended June 30,
2000, compared to the six months ended June 30, 1999. For the quarter ended June
30, 2000, the Manufacturing Group had reduced operating profit due to reduced
gross margin percentages.
The Process and Energy Group had reduced operating profit for the six
months ended June 30, 2000, as compared to the prior year, due to reduced sales
and gross profit percentage. For the quarter ended June 30, 2000, the Process
and Energy Group has slightly improved operating results due to increased gross
margin percentages earned. In addition, the Process & Energy and Manufacturing
Services Groups had increased investments in internal training and business
development during the first six months of 2000. The Company is focusing its
business development activities in 2000 on a major branding campaign, to
increase the name recognition of GP, as well as plant launch services,
e-Learning and the area of learning resource management. The Company believes
that these investments in business development are an integral part of its
effort to increase its revenues and gross margin percentage.
Asset impairment charge
The operations of the Information Technology (IT) Group are primarily
comprised of the operations of Learning Technologies, which was purchased by the
Company in June 1998. As a result of the purchase of Learning Technologies, the
Company recorded $23,216,000 of goodwill, which is being amortized over 30
years.
During 1999, the Company adopted restructuring plans, primarily related
to its IT Business segment. The Company took steps in order to change the focus
of the IT group from open enrollment information technology training courses to
project oriented work for corporations, which is consistent with the focus of
General Physics Corporation's (GP) current business. In connection with the
restructuring, the Company closed, downsized, or consolidated 6 offices in the
United States, 6 offices in Canada and 5 offices in the United Kingdom (UK), and
terminated approximately 100 employees.
The Company believed at that time that the strategic initiatives and
cost cutting moves taken in 1999 and the first quarter of 2000 would enable the
IT Group to return to profitability in the last six months of 2000. However,
those plans were not successful, and the Company now believes that there has
been an impairment to intangible assets related to the IT Group.
In July 2000, as a result of the continued operating losses incurred by
its IT Group, as well as the belief that revenues would not increase to
profitable levels, the Company decided to close or sell its open enrollment
business in Canada and close or sell all its offices in the UK.
<PAGE>
As a result, for the quarter and six months ended June 30, 2000, the
Company has recorded an asset impairment charge of $18,474,000 related to the IT
Group. The charge is comprised of a write-off of goodwill of $16,056,000, as
well as write-offs of Property, plant and equipment and other assets relating to
the offices to be closed, totaling $2,418,000. The Company believes that the
remaining unamortized goodwill of $5,485,000, which relates to the US and
Canadian IT project business, is recoverable from future operations. However, in
the event that the Company's plans are not successful, and the remaining IT
operations do not achieve profitable operating results, there can be no
assurance that a further impairment charge will not be required.
The Company anticipates recording a restructuring charge in the third
quarter of 2000, related to the IT Group. The restructuring will include
severance and the costs associated with the offices to be closed.
Sales
Three months ended Six months ended
June 30, June 30,
------------------------ --------------------
2000 1999 2000 1999
--------- --------- --------- -------
Manufacturing Services $ 18,950 $18,299 $ 34,810 $ 37,790
Process and Energy 21,139 21,224 42,273 48,122
Information Technology 7,241 14,484 14,989 31,090
Optical Plastics 2,958 2,476 5,916 5,205
Other 40 283 140 488
-------- ---------- -------- --------
$ 50,328 $ 56,766 $98,128 $122,695
-------- -------- ------- --------
For the quarter and six months ended June 30, 2000, consolidated sales
decreased by $6,438,000 and $24,567,000, respectively, compared to the
corresponding periods of 1999. The reduced sales occurred primarily within the
IT Group due to the continuing erosion of the Canadian and UK IT training
business. The reduced sales within the Process & Energy Group, which occurred
primarily in the first quarter of 2000, were the result of reduced product sales
to utilities, due to the effect of the consolidation within the utility
industry, as well as the transition of the Group's business model from OSHA and
regulatory work, to GP's core business focus of workforce development and
training. The reduced sales of the Manufacturing Services Group for the six
months ended June 30, 2000, was the result of revenue generated for several
large jobs in 1999, that were not replaced with jobs of similar dollar value in
the first quarter of 2000. The increased sales within the Manufacturing Services
Group from the first quarter of 2000 to the second quarter of 2000 was primarily
the result of growth within the Company's automotive sector.
<PAGE>
Gross margin
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
------------------------------------ --------------------------------------
2000 % 1999 % 2000 % 1999 %
--------- --- --------- --- ---------- -- --------- --
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Manufacturing Services $ 2,675 14.1 $ 2,998 16.4 $ 4,497 12.9 $ 7,045 18.6
Process and Energy 2,782 13.2 2,334 11.0 5,459 12.2 6,352 13.2
Information Technology (1,187) ( 1,256) ( 2,005) ( 302)
Optical Plastics 807 27.3 685 27.7 1,601 27.1 1,401 26.9
Other (128) 153 54.1 (241) 275 .56
------- --------- ------- ---------
$ 4,949 9.8 $ 4,914 8.7 $ 9,311 9.5 $14,771 12.0
-------- ------- ------- -------
</TABLE>
The reduced gross margin of $5,460,000 for the six months ended June
30, 2000 occurred within all segments of GP, as a result of reduced sales and
gross margin percentage. The gross margin for the quarter ended June 30, 2000
was $35,000 higher than the gross margin achieved for the quarter ended June 30,
1999. The negative gross margin incurred by the IT Group in 2000 was the result
of the continued decrease in sales, and the resulting inability of the segment
to cover its infrastructure and operating costs. The reduced gross margin
percentage in the Process & Energy Group for the six months ended June 30, 2000
was primarily the result of a change in the mix of services provided, including
reduced product sales, which historically generate higher gross margin
percentages. The Manufacturing Services Group has a reduced gross margin
percentage in 2000 compared to the second quarter and six months of 1999, due to
the lack of plant launch and other large projects, which have historically
generated higher gross margins.
Selling, general and administrative expenses
For the quarter and six months ended June 30, 2000, selling, general
and administrative (SG&A) expenses were $7,579,000 and $12,870,000 compared to
$8,398,000 and $14,416,000 incurred in the quarter and six months ended June 30,
1999. The reduced SG&A in 2000 is primarily attributable to reduced costs
incurred by GP due to the savings resulting from the restructuring plans which
occurred in 1999, partially offset by $1,600,000 of non-cash compensation
expense related to a compensation plan offered to certain of its employees
recorded in the quarter and six months ended June 30, 2000 (See Note 12 to the
Consolidated Condensed Financial Statements). In addition, the Company continued
to reduce SG&A at the corporate level.
Interest expense
For the quarter and six months ended June 30, 2000, interest expense
was $1,370,000 and $2,660,000 compared to $1,110,000 and $2,061,000 for the
quarter and six months ended June 30, 1999. The increased interest expense in
2000 was primarily attributable to increased interest rates in the current
period.
<PAGE>
Investment and other income, net
Investment and other income (loss), net of ($50,000) and $281,000 for
the quarter and six months ended June 30, 2000 decreased by $313,000 and
$461,000, respectively, as compared to $263,000 and $742,000 for the
corresponding periods of 1999. The Company recognized losses of $254,000 and
$229,000 for the quarter and six months ended June 30, 2000, on the Company's
equity investments compared to losses of $569,000 and $234,000 recognized for
the corresponding periods in 1999.
Income tax expense
In the quarter and six months ended June 30, 2000, the Company recorded
income tax expense of $179,000 and $375,000, respectively, which represents
primarily state and local and foreign income taxes. In the quarter ended and six
months ended June 30, 1999, the Company recorded income tax expense of $77,000
and $857,000, respectively, which represents primarily federal, state and local
and foreign tax expense for the quarter ended June 30, 2000 and the applicable
federal, state and local foreign tax expense for the six months ended June 30,
1999.
Liquidity and capital resources
At June 30, 2000, the Company had cash and cash equivalents totaling
$2,600,000. The Company has sufficient cash and cash equivalents, 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.
The decrease in cash and cash equivalents of $1,468,000 for the quarter
ended June 30, 2000 resulted from cash used in financing activities of
$2,579,000, partially offset by cash provided by operations of $677,000, and
investing activities of $309,000. Cash used for financing activities consisted
primarily of repayments of short-term borrowings and long-term debt, partially
offset by proceeds from the sale of stock.
Due to the Company's restructuring charges and operating losses in 1999
and the operating losses and asset impairment charge in the first and second
quarter of 2000 primarily related to General Physics' IT Group, the Company was
not in compliance with respect to the financial covenants in its credit
agreement. The Company and its lenders entered into agreements dated as of April
12, 2000 and July 31, 2000, providing for waivers of compliance with such
covenants as of September 30, 1999, December 31, 1999, March 31, 2000 and June
30, 2000. Effective April 12, 2000, the Company and its lenders entered into a
binding commitment (the "Prior Commitment Letter") to enter into the Amended and
Restated Credit Agreement (the "Amended Agreement"). The Prior Commitment Letter
and the term sheet attached to the Prior Commitment Letter were replaced in
their entirety by an amended commitment letter and term sheet dated July 31,
2000 between the Company and its lenders (the "Amended Commitment Letter") which
sets forth the lenders commitment to enter into an Amended Agreement on the
<PAGE>
terms and conditions described below. The Amended Agreement will reduce the
commitment pursuant to the revolving facility to $50,000,000 (subject to
borrowing base limitations specified in the Amended Agreement), however the
Amended Agreement did not change the payment terms or expiration date of the
Company's current outstanding term loan in the amount of $13,688,000. The
interest rates increased on both the revolving facility and the term loan to
prime plus 1.25% (increased from .50%) and Eurodollar plus 2.75% (increased from
2.00%). The Amended Agreement provides for additional security consisting of
certain real property, personal property and all marketable securities owned by
the Company and its subsidiaries. The Amended Agreement contains certain
restrictive covenants, including the prohibition on future acquisitions, and
provides for mandatory prepayment upon the occurrence of certain events. The
Amended Agreement contains revised minimum net worth, fixed charge coverage,
EBITDA and consolidated liabilities to tangible net worth covenants in the
future. Although there can be no assurance, the Company anticipates that it will
satisfy the revised covenants. If the Amended Agreement had been in effect at
June 30, 2000, the Company would have had approximately $6,300,000 available to
be borrowed under the revolving facility included in the Amended Agreement.
The Company believes that cash generated from operations and borrowing
availability under its credit agreement will be sufficient to fund the working
capital needs of the Company.
Recent accounting pronouncements
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. It requires that an entity
recognizes all derivatives as either assets or liabilities in the statement of
financial position and measures those instruments at fair value. This Statement
as amended by SFAS 137 and 138 is effective for all fiscal quarters of fiscal
years beginning after June 15, 2000. The Company will adopt SFAS 133, when
effective, which is currently anticipated to be by January 1, 2001. The Company
is still evaluating its position with respect to the use of derivative
instruments.
FASB Interpretation No. 44, "Accounting for Certain Transactions
Involving Stock Compensation" (FIN No. 44") provides guidance for applying APB
Opinion No. 25, "Accounting for Stock Issued to Employees." With certain
exceptions, FIN No. 44 applies prospectively to new awards, exchanges of awards
in a business combination, modifications to outstanding awards and changes in
grantee status on or after July 1, 2000. The Company does not believe that the
implementation of FIN No. 44 will have a significant effect on its results of
operations.
<PAGE>
In December 1999, the SEC issued Staff Accounting Bulleting No.101,
"Revenue Recognition in Financial Statements" ("SAB No. 101") which summarizes
certain of the SEC staff's views in applying generally accepted accounting
principles to revenue recognition in financial statements. SAB No. 101, amended
by SAB 101A issued on March 24, 2000, requires registrants to adopt the
accounting guidance contained therein by no later than the second fiscal quarter
of the fiscal year beginning after December 15, 1999. On June 26, 2000, the SEC
issued SAB No. 101B which postponed the implementation of SAB No. 101 until the
quarter beginning October 1, 2000. The Company is currently assessing the
financial impact of complying with SAB No. 101 and has not yet determined
whether applying the accounting guidance of SAB No. 101 will have a material
effect on its financial position or results of operations.
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.
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 they are
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 Company anticipates recording a restructuring charge in the third
quarter of 2000, related to the IT Group. The restructuring will include
severance and the cost associated with the offices to be closed.
<PAGE>
Forward-looking statements
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 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>
GP STRATEGIES CORPORATION AND SUBSIDIARIES
PART II. OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
10. Commitment Letter dated July 31, 2000 by and between the
Company and its Lenders and the Term Sheet attached thereto as Annex A.
b. Reports
None
<PAGE>
GP STRATEGIES CORPORATION AND SUBSIDIARIES
June 30, 2000
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed in its behalf by the
undersigned thereunto duly authorized.
GP STRATEGIES CORPORATION
DATE: August 14, 2000 BY: Jerome I. Feldman
President and
Chief Executive Officer
DATE: August 14, 2000 BY: Scott N. Greenberg
Executive Vice President and
Chief Financial Officer
