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 September 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
(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
November 9, 2000:
Common Stock 12,114,837 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 -
September 30, 2000 and December 31, 1999 1
Consolidated Condensed Statements of Operations -
Three Months and Nine Months Ended September 30,
2000 and 1999 3
Consolidated Condensed Statements of Cash Flows -
Nine Months Ended September 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)
September 30, December 31,
2000 1999
-------------- --------
ASSETS (unaudited) *
Current assets
Cash and cash equivalents $ 3,890 $ 4,068
Marketable securities 22,000
Accounts and other receivables 47,826 55,385
Inventories 1,672 1,888
Costs and estimated earnings
in excess of billings on uncompleted contracts 14,863 14,238
Prepaid expenses and other current assets 8,358 3,853
---------- --------
Total current assets 98,609 79,432
--------- ------
Investments and advances 124,125 16,557
Property, plant and equipment, net 9,090 13,658
Intangible assets, net of accumulated amortization
of $41,557 and $38,986 60,884 79,818
Deferred tax asset - 3,990
Other assets 4,396 3,663
---------- --------
$297,104 $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 BALANCE SHEETS (Continued)
(in thousands)
September 30, December 31,
2000 1999
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY unaudited) *
Current liabilities:
Current maturities of long-term debt $ 1,383 $ 3,668
Short-term borrowings 37,607 40,278
Accounts payable and accrued expenses 36,788 25,634
Billings in excess of costs and estimated
earnings on uncompleted contracts 10,911 9,998
--------- ---------
Total current liabilities 86,689 79,578
-------- ---------
Long-term debt less current maturities 16,372 14,822
Deferred tax liability 34,194 -
Other non-current liabilities 3,659 2,736
Stockholders' equity
Common stock 122 115
Class B capital stock 8 5
Additional paid in capital 180,794 170,011
Accumulated deficit (84,728) (61,602)
Accumulated other comprehensive income (loss) 69,001 (817)
Note receivable from stockholder (4,094) (2,817)
Treasury stock, at cost (4,913) (4,913)
--------- --------
Total stockholders' equity 156,190 99,982
---------- --------
$297,104 $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 Nine months
ended September 30, ended September 30,
--------------------- ---------------------
2000 1999 2000 1999
------- ------ ----- ------
<S> <C> <C> <C> <C>
Sales $ 50,786 $ 53,258 $148,914 $175,953
Cost of sales 45,965 46,022 134,782 153,946
-------- -------- -------- ---------
Gross margin 4,821 7,236 14,132 22,007
Selling, general & administrative expenses (11,009) (7,013) (23,879) (21,429)
Interest expense (1,454) (1,144) (4,114) (3,205)
Investment and other income (loss), net (2,373) (1,332) (2,092) (590)
Gain on trading securities 12,000 693 12,468 1,257
Asset impairment charge (771) (19,245)
Restructuring charges (8,600) (8,600) (6,312)
---------- ------------- --------- ---------
Loss before income taxes (7,386) (1,560) (31,330) (8,272)
Income tax (expense) benefit 8,579 (262) 8,204 (1,119)
--------- ---------- --------- ---------
Net income (loss) $ 1,193 $ (1,822) $(23,126) $ (9,391)
======== ======== ======== ========
Net income (loss) per share:
Basic and diluted $ .09 $ (.16) $ (1.88) $ (.82)
========== ========= ======== ========
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)
Nine months
ended September 30,
2000 1999
------ ------
Cash flows from operations:
Net loss $(23,126) $ (9,391)
Adjustments to reconcile net loss to net cash
provided by (used for) operating activities:
Depreciation and amortization 4,986 5,274
Proceeds from sale of trading securities 684 3,577
Gain on trading securities (12,468) (1,257)
Issuance of stock for profit incentive plan 1,027 1,001
Equity loss on investments 2,959 1,302
Non-cash compensation expense 6,163
Asset impairment charge 19,245
Restructuring charge 8,600 6,312
Deferred tax benefit (8,959)
Changes in other operating items 2,050 (11,027)
-------- --------
Net cash provided by (used for) operating activities 1,161 (4,209)
-------- ---------
Cash flows from investing activities:
Additions to property, plant & equipment (562) (2,828)
Additions to intangible assets, net (454) (744)
Proceeds from disposal of fixed assets 507
(Increase) decrease of investments and other assets, net (1,215) 527
-------- --------
Net cash (used for) provided by investing activities (1,724) 3,045
-------- ---------
<PAGE>
GP STRATEGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Continued)
(Unaudited)
(in thousands)
Nine months
ended September 30,
2000 1999
--------- -------
Cash flows from financing activities:
(Repayment of) proceeds from short-term borrowings (2,671) 7,523
Proceeds from sale of Class B Stock 1,200
Proceeds from subordinated convertible debentures 2,640
Repayment of long-term debt (1,258) (2,272)
Exercise of common stock options and warrants 189 910
Repurchase of treasury stock - (1,129)
-------- -------
Net cash provided by financing activities 100 5,032
-------- -------
Effect of exchange rate changes on
Cash and cash equivalents 285 317
-------- --------
Net decrease in cash and cash equivalents (178) (1,905)
Cash and cash equivalents at the beginning of the periods 4,068 6,807
-------- --------
Cash and cash equivalents at the end of the periods $ 3,890 $ 4,902
======== ========
Cash paid during the periods for:
Interest $ 4,253 $ 3,930
======== ========
Income taxes $ 361 $ 955
========= =========
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
Income (loss) per share (EPS) for the periods ended September 30, 2000
and 1999 are as follows (in thousands, except per share amounts):
<TABLE>
<CAPTION>
Three months Nine months
ended September 30, ended September 30,
-------------------- ---------------------
2000 1999 2000 1999
---- ---- ---- ----
Basic and Diluted EPS
<S> <C> <C> <C> <C>
Net income (loss) $ 1,193 $ (1,822) $(23,126) $(9,391)
Weighted average shares
outstanding 12,692 11,287 12,302 11,407
Basic and diluted net income
(loss) per share $ .09 $ (.16) $ (1.88) $ (.82)
</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 for the nine months
ended September 30, 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. For the quarter ended September 30, 2000, weighted
average shares outstanding assuming dilution is 12,747,000 shares.
<PAGE>
GP STRATEGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
(Unaudited)
3. Long-term debt
Long-term debt consists of the following (in thousands):
September 30, December 31,
2000 1999
-------- ------
8% Swiss bonds due 2000* $ $ 2,175
Subordinated convertible debentures 2,640
Senior subordinated debentures 762 844
Term loan 13,500 14,063
Other 853 1,408
--------- --------
17,755 18,490
Less current maturities (1,383) (3,668)
--------- --------
$16,372 $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 and interest due
of the Company's 8% Swiss bonds.
On July 7, 2000, the Company, in a private placement transaction (the "Private
Placement") with two institutional investors, received $2,640,000 in exchange
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 Notes, 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 Notes. 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 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
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
(Unaudited)
4. Comprehensive income (loss)
The following are the components of comprehensive income (loss) (in thousands):
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
---------------------------------------------------
2000 1999 2000 1999
------- -------- ------- ---------
<S> <C> <C> <C> <C>
Net income (loss) $ 1,193 (1,822) $(23,126) $ (9,391)
--------- ------ --------- --------
Other comprehensive income
(loss) before tax:
Net unrealized gain (loss) on
available-for-sale-securities 112,681 (391) 113,280 (567)
Foreign currency translation adjustment 670 122 795 317
---------- ---------- ---------- ---------
Other comprehensive income (loss),
before tax 113,351 (269) 114,075 (250)
Income tax benefit (expense) relating to
items of other comprehensive income (44,213) 133 (44,257) 193
--------- --------- --------- ----------
Comprehensive income (loss), net of tax $ 70,331 $ (1,958) $ 46,692 $ (9,448)
======== ======== ======== ========
</TABLE>
The components of accumulated other comprehensive income (loss) are as follows:
September 30, December 31,
2000 1999
--------- -------
Net unrealized gain (loss) on
available-for-sale-securities $113,225 $ (55)
Foreign currency translation adjustment 36 (759)
-------- --------
Accumulated other comprehensive income
(loss) before tax 113,261 (814)
Accumulated income tax expense related to
items of other comprehensive income (loss) (44,260) (3)
-------- -----------
Accumulated other comprehensive
income (loss), net of tax $ 69,001 $ (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
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 restructuring charges, operating losses and asset impairment charges in
2000, primarily related to General Physics' IT Group, the Company was not in
compliance with respect to the financial covenants in the Credit Agreement as of
September 30, 1999, December 31, 1999, March 31, 2000 and June 30, 2000. 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 at each of
those four dates.
Effective as of August 29, 2000, the Company and certain of its
wholly-owned subsidiaries entered into an Amended and Restated secured
$63,500,000 Revolving Credit and Term Agreement (the "Amended Agreement") which
amended in its entirety the Company's Credit Agreement described above. The
Amended Agreement reduced the commitment pursuant to the revolving credit
agreement to $50,000,000 (subject to borrowing base limitations specified in the
Amended Agreement), however the Amended Agreement did not change the payment
terms of the term loan which currently has an outstanding balance of $13,500,000
as well as the expiration date on both the credit facility and the term loan.
The interest rates increased on both the revolving credit agreement 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 substantially all
marketable securities owned by the Company and its subsidiaries and contains
certain restrictive covenants, including the prohibition on future acquisitions,
and provides for mandatory prepayment upon the occurrence of certain events. The
Amended Agreement also 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. At September 30, 2000, the Company had
approximately $10,600,000 available to be borrowed under the Amended Agreement.
<PAGE>
GP STRATEGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
(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 (loss), 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 (Continued)
(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):
Three months ended Nine months ended
September 30, September 30,
---------------------- -----------------
2000 1999 2000 1999
------- -------- ------ -------
Sales
Manufacturing Services $ 21,185 $20,277 $ 55,994 $ 67,018
Process and Energy 21,113 17,254 63,385 56,571
Information Technology 6,125 13,290 21,117 44,234
Optical Plastics 2,363 2,432 8,278 7,637
Other - 5 140 493
-------- ----------- --------- --------
$ 50,786 $ 53,258 $148,914 $175,953
-------- -------- -------- --------
Gross margin
Manufacturing Services $ 3,067 $ 3,717 $ 7,564 $ 11,356
Process and Energy 3,013 2,857 8,472 8,137
Information Technology (1,666) 228 (3,671) 404
Optical Plastics 587 622 2,188 2,023
Other (180) (188) (421) 87
-------- --------- ---------- ----------
$ 4,821 $ 7,236 $ 14,132 $ 22,007
-------- -------- -------- --------
<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 Nine months ended
September 30, September 30,
------------------------ -----------------------
2000 1999 2000 1999
--------- --------- --------- -------
United States $ 44,787 $ 41,603 $127,887 $136,501
Canada 2,131 5,889 8,158 21,134
United Kingdom 2,706 4,285 9,467 13,290
Latin America 1,162 1,481 3,402 5,028
-------- ---------- --------- ----------
$ 50,786 $ 53,258 $148,914 $175,953
-------- -------- -------- --------
Information about the Company's identifiable assets in different geographic
regions, is as follows (in thousands):
September 30, December 31,
2000 1999
--------- ----------------
United States $286,851 $180,057
Canada 4,317 9,533
United Kingdom 2,884 5,087
Latin America 3,052 2,441
-------- --------
$297,104 $197,118
-------- --------
<PAGE>
GP STRATEGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
(Unaudited)
7. Asset impairment charge and restructuring 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 was 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 was consistent with the focus of
General Physics Corporation's (GP) current business. In connection with the
restructuring, the Company closed, downsized, or consolidated 7 offices in the
United States, 10 offices in Canada and 5 offices in the United Kingdom (UK),
and terminated approximately 156 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 determined that it could no
longer bring the open enrollment IT business to profitability, and additionally
there had been an impairment to intangible and other assets.
In July 2000, as a result of the continued operating losses incurred by
its IT Group, as well as the determination that revenues would not increase to
profitable levels, the Company closed its open enrollment business in the UK and
Canada.
As a result, for the quarter and nine months ended September 30, 2000,
the Company has recorded asset impairment charges of $771,000 and $19,245,000,
respectively, related to the IT Group. The charges are comprised of a write-off
of intangible assets of $16,663,000 (of which $16,056,000 was recorded during
the six months ended June 30, 2000), as well as write-offs of property, plant
and equipment and other assets relating to the offices to be closed, totaling
$2,582,000 (of which $2,418,000 was recorded during the six months ended June
30, 2000).
The Company believes that the remaining unamortized goodwill of
approximately $5,400,000, which relates to the US and Canadian IT project
business, is recoverable from future operations. However, if the remaining IT
operations do not achieve profitable operating results, there can be no
assurance that a further impairment charge will not be required.
<PAGE>
GP STRATEGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
(Unaudited)
7. Asset impairment charge and restructuring charge (Continued)
In addition, in connection with the restructuring, the Company recorded
a restructuring charge of $8,600,000, net of a reversal of the 1999
restructuring charge of $768,000 during the quarter ended September 30, 2000.
The components of the 2000 restructuring charges are as follows (in thousands):
<TABLE>
<CAPTION>
Severance Lease and Other facility
and related related Contractual related
benefits obligations obligations costs Total
-----------------------------------------------------------------------------------------------------------------
Restructuring
<S> <C> <C> <C> <C> <C> <C>
charges during 2000 $ 1,825 $ 5,290 $ 2,043 $ 210 $ 9,368
Utilization 847 296 39 1,182
-----------------------------------------------------------------------------------------------------------------
Balance September 30, 2000 $ 978 $ 4,994 $ 2,043 $ 171 $ 8,186
-----------------------------------------------------------------------------------------------------------------
</TABLE>
The Company anticipates recording an additional charge in the fourth
quarter of 2000, related to the IT Group due to continuing exit costs associated
with the offices and operations closed.
In connection with the Company's 1999 restructuring, the Company
recorded a restructuring charge of $7,374,000 in 1999. During the period ended
September 30, 2000 and the year ended December 31, 1999, the Company utilized
$2,043,000 and $2,754,000, respectively.
The components of the 1999 restructuring charges are as follows (in thousands):
<TABLE>
<CAPTION>
Severance Lease and Other facility
and related related related
benefits obligations costs Total
---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance December 31, 1999 $ 289 $ 4,206 $ 125 $ 4,620
---------------------------------------------------------------------------------------------------------
Utilization 184 1,806 53 2,043
Reversal of restructuring charges
during 2000 768 768
---------------------------------------------------------------------------------------------------------
Balance September 30, 2000 $ 105 $ 1,632 $ 72 $ 1,809
---------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
GP STRATEGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
(Unaudited)
7. Asset impairment charge and restructuring charge (Continued)
The remaining amounts that have been accrued for severance and related
benefits will be expended by December 31, 2000. Lease obligations are presented
at their present value are net of assumed sublets. Other facility related costs
will be expended through 2001. Of the remaining unexpended amounts at September
30, 2000 and December 31, 1999, $6,336,000 and $1,884,000, respectively, was
included in Accounts payable and accrued expenses and $3,659,000 and $2,736,000,
respectively, was included in Other non-current liabilities in the Consolidated
Balance Sheet.
8. 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. 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.
9. 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 for a total 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.
<PAGE>
GP STRATEGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
(Unaudited)
10. Related party transactions
During the first quarter of 2000, the Company made loans to an officer
who is the President and Chief Executive Officer as well as a director of the
Company totalling approximately $1,277,000 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 ($430,000 at September 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.
11. Investments
Millennium Cell Inc. ("Millennium") is a development stage company
which is engaged in the development of a patented and proprietary chemical
process that converts sodium borohydride to hydrogen. As of June 30, 2000, the
Company had a 27% ownership interest (prior to the completion of the Initial
Public Offering ("IPO") described below) representing approximately 6,000,000
shares including approximately 550,000 shares of common stock subject to options
given to the Company's employees to acquire Millennium shares from the Company's
holdings. The Company accounted for this investment under the equity method of
accounting.
On August 14, 2000, Millennium completed an IPO of 3,000,000 shares of
common stock at a price of $10 per share. Based upon the consummation of the IPO
which reduced the Company's holdings in Millennium from approximately 27% to
approximately 22.2% and certain organizational changes including lack of Board
representation, in Millennium, the Company believes that it does not have
significant influence on the operating and financial policies of Millennium and
as such now believes that it is appropriate to account for this investment under
the cost method of accounting.
The majority of 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. In addition, the Company's shares (excluding the 550,000 shares
subject to options) have been pledged to its bank to secure its credit facility.
<PAGE>
GP STRATEGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
(Unaudited)
11. Investments (Continued)
As the Company intends to dispose of 1,000,000 shares within the near
term the underwriter has agreed to waive the lock-up provisions on these shares.
Accordingly, the Company has classified these shares as trading securities. At
September 30, 2000, these shares had a value of approximately $22,000,000.
The approximately 5,000,000 shares remaining are not expected to be
sold within the near term and, as such are classified as available for sale
securities. At September 30, 2000, these shares had a value of approximately
$111,000,000.
In connection with the IPO the Company recorded an increase of
approximately $7,300,000 in its investment in Millennium which was credited, net
of taxes, to additional paid-in capital in accordance with Staff Accounting
Bulletin 51.
On February 11, 2000, the Company granted options to purchase an
aggregate of approximately 550,000 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 $500,000 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 $5,039,000, to be amortized over the
remaining vesting period of the options, and a liability to employees of
$11,702,000 at September 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 Sheet. Pursuant to the
vesting provisions of the Millennium Option Plan, the Company recorded a
non-cash compensation expense of $4,563,000 and $6,163,000 for the quarter and
nine months ended September 30, 2000, which is included in Selling, general and
administrative expenses in the Consolidated Condensed Statement of Operations.
<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 facemasks and non-optical plastic products.
The Company had a net loss before income taxes of $7,386,000 and
$31,330,000 for the quarter and nine months ended September 30, 2000 compared to
a net loss before income taxes of $1,560,000 and $8,272,000 for the quarter and
nine months ended September 30, 1999. The operating loss in 2000 was primarily
due to an Asset impairment charge of $19,245,000, of which $18,474,000 was taken
in the second quarter and $771,000 was taken in the third quarter of 2000 and a
$8,600,000 Restructuring charge taken in the third quarter of 2000. 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 continued through 2000, and as such the IT open enrollment businesses
in UK and Canada were closed in the third quarter of 2000.
In addition, for the quarter and nine months ended September 30, 2000,
the Company also recorded a $4,563,000 and $6,163,000 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 11 to the
Consolidated Condensed Financial Statements).
For the third quarter of 2000 the Company had a gain of $12,000,000 for
the quarter and $12,468,000 for the nine months ended September 30, 2000 on
trading securities primarily relating to 1,000,000 shares of Millennium Cell
stock, which are classified as trading securities. In addition, the Company had
<PAGE>
equity losses of $2,847,000 for the quarter and $2,959,000 for the nine months
ended September 30, 2000 which were primarily the result of the Company writing
down its investment in the Five Star Group by approximately $2,400,000 in the
third quarter of 2000 due to an "other than temporary" decline in the value of
this investment.
The Company had a loss before income taxes of $1,560,000 and $8,272,000
for the quarter and nine months ended September 30, 1999. The loss for the nine
months ended September 30, 1999 was primarily due to a Restructuring charge
recorded in the quarter ended June 30, 1999 totaling $6,312,000, principally
related to the Company's IT business segment as well as other costs incurred by
the IT group in exiting certain activities. 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
other assets and losses on contracts.
The Manufacturing Services Group also had reduced operating profits due
to reduced sales and gross margin percentage in the nine months ended September
30, 2000, compared to the nine months ended September 30, 1999. For the quarter
ended September 30, 2000, the Manufacturing Group had reduced operating profit
due to reduced gross margin percentages.
The Process and Energy Group had increased operating profit for the
nine months ended September 30, 2000, as compared to the prior year, due to
increased sales. For the quarter ended September 30, 2000, the Process and
Energy Group has slightly improved operating results due to increased sales. In
addition, the Process & Energy and Manufacturing Services Groups had increased
investments in internal training and business development during the first nine
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 and restructuring charge
The operations of the 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 was consistent with the focus of
GP's current business. In connection with the restructuring, the Company closed,
downsized, or consolidated 7 offices in the United States, 10 offices in Canada
and 5 offices in the United Kingdom (UK), and terminated approximately 156
employees.
<PAGE>
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 determined that it could no
longer bring the open enrollment IT business to profitability, and additionally
that there had been an impairment to intangible and other assets.
In July 2000, as a result of the continued operating losses incurred by
its IT Group, as well as the determination that revenues would not increase to
profitable levels, the Company closed its open enrollment business in the UK and
Canada. In the third quarter of 2000, the open enrollment IT business was
closed. The Company recorded a restructuring charge of $8,600,000 in the third
quarter of 2000.
As a result, for the quarter and nine months ended September 30, 2000,
the Company has recorded an asset impairment charge of $771,000 and $19,245,000
related to the IT Group. The charge includes a write-off of intangible assets of
$16,663,000 (of which $16,056,000 was recorded during the six months ended June
30, 2000), as well as write-offs of property, plant and equipment and other
assets relating to the offices to be closed totaling $2,582,000 (of which
$2,418,000 was recorded during the six months ended June 30, 2000).
The Company believes that the remaining unamortized goodwill of
approximately $5,400,000, which relates to the US and Canadian IT project
business, is recoverable from future operations. However, if 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 an additional charge in the fourth
quarter of 2000, due to continuing exit costs associated with the offices and
operations closed related to the IT Group.
Sales
Three months ended Nine months ended
September 30, September 30,
--------------------- --------------
2000 1999 2000 1999
--------- --------- --------- -------
Manufacturing Services $ 21,185 $20,277 $ 55,994 $ 67,018
Process and Energy 21,113 17,254 63,385 56,571
Information Technology 6,125 13,290 21,117 44,234
Optical Plastics 2,363 2,432 8,278 7,637
Other - 5 140 493
-------- ----------- ----------- -----------
$ 50,786 $ 53,258 $148,914 $175,953
-------- -------- -------- --------
For the quarter and nine months ended September 30, 2000, consolidated
sales decreased by $2,472,000 and decreased by $27,039,000, 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
<PAGE>
UK IT training business. The reduced sales of the Manufacturing Services Group
for the nine months ended September 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 third quarter of 1999 was primarily
the result of growth within the Company's automotive sector. The Process and
Energy Group has experienced increased sales for both the quarter and nine
months ended September 30, 2000.
Gross margin
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
---------------------------------- -------------------------
2000 % 1999 % 2000 % 1999 %
------- --- --------- --- ---------- -- --------- --
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Manufacturing Services $ 3,067 14.5 $ 3,717 18.3 $ 7,564 13.5 $11,356 16.9
Process and Energy 3,013 14.3 2,857 16.6 8,472 13.4 8,137 14.4
Information Technology (1,666) 228 17.2 (3,671) 404 .9
Optical Plastics 587 24.8 622 25.6 2,188 26.4 2,023 26.5
Other (180) (188) (421) 87 17.6
------- -------- ------- ---------
$ 4,821 $ 7,236 8.7 $14,132 $22,007
------- ------- ------- -------
</TABLE>
The reduction in gross margin of $7,875,000 for the nine months ended
September 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
September 30, 2000 was $2,415,000 lower than the gross margin achieved for the
quarter ended September 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 and closing costs. The reduced gross margin percentage in the Process &
Energy Group for the nine months ended September 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 third quarter and nine 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 nine months ended September 30, 2000, selling,
general and administrative (SG&A) expenses were $11,009,000 and $23,879,000
compared to $7,013,000 and $21,429,000 incurred in the quarter and nine months
ended September 30, 1999. The increased SG&A in 2000 is primarily attributable
to the $4,563,000 and $6,163,000 of non-cash compensation expense related to a
compensation plan offered to certain of its employees recorded in the quarter
and nine months ended September 30, 2000, which was partially offset by reduced
costs resulting from the restructuring plans which occurred in 1999. In
addition, the Company continued to reduce SG&A at the corporate level.
<PAGE>
Interest expense
For the quarter and nine months ended September 30, 2000, interest
expense was $1,454,000 and $4,114,000 compared to $1,114,000 and $3,205,000 for
the quarter and nine months ended September 30, 1999. The increased interest
expense in 2000 was primarily attributable to increased interest rates in the
current period.
Investment and other income, net
Investment and other income (loss), net were net losses of $2,373,000
and $2,092,000 for the quarter and nine months ended September 30, 2000
primarily from $2,847,000 and $2,959,000 of equity losses. Of these amounts
$2,400,000 is attributable to the write-down of the Company's investment in the
Five Star Group due to an "other than temporary" decline in the value of this
investment. These amounts were partially offset by other income. For 1999 the
Company recognized a $1,000,000 loss of its investment in GSE Systems, Inc. and
had other losses of $1,332,000 and $590,000 for the quarter and nine months
ended September 30, 1999.
Income tax expense
In the quarter and nine months ended September 30, 2000, the Company
recorded an income tax benefit of $8,579,000 and $8,204,000, respectively, which
represents a federal income tax benefit offset by state, local and foreign
income taxes. Due to the increase in value of the Company's investment in
Millennium, the Company now anticipates it has the ability to utilize current
net operating loss carryforwards. As such the Company now anticipates that it
has the ability to utilize approximately $14,000,000 of net deferred tax assets
consists primarily of domestic net operating loss carryforwards against which a
valuation allowance was previously provided. This deferred tax benefit was
offset by an increase in the valuation allowance of approximately $6,000,000
related to Canadian net operating losses which are not anticipated to be
utilized and have therefore been reserved against. In the quarter and nine
months ended September 30, 1999, the Company recorded income tax expense of
$262,000 and $1,119,000, respectively, which represents primarily state, local
and foreign tax expense.
Liquidity and capital resources
At September 30, 2000, the Company had cash and cash equivalents
totaling $3,890,000. The Company has sufficient cash and cash equivalents,
marketable current and 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 $178,000 for the nine
months ended September 30, 2000 resulted from cash provided in financing
activities of $100,000 and by cash provided by operations of $1,161,000, offset
by cash used in investing activities of $1,724,000. Cash provided by financing
<PAGE>
activities consisted primarily of proceeds from the sale of convertible
debentures and Class B Stock partially offset by repayments of short-term
borrowings and long-term debt.
Due to the Company's restructuring charges and operating losses in 1999
and the operating losses and asset impairment charge in the nine months 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 as of
September 30, 1999, December 31, 1999, March 31, 2000 and June 30, 2000. 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 at each
of those four dates. Effective as of August 29, 2000, the Company and certain of
its wholly owned subsidiaries entered into an Amended and Restated secured
$63,500,000 Revolving Credit and Term Agreement (the "Amended Agreement") which
amended in its entirety the Company's former credit agreement. The Amended
Agreement reduced 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 of
the term loan which currently has an outstanding balance of $13,500,000 as well
as the expiration date on both the credit facility and the term loan. The
interest rates increased on both the revolving credit 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 substantially marketable
securities owned by the Company and its subsidiaries and also 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. At September 30, 2000, the Company had
approximately $10,600,000 available to be borrowed under the Amended Agreement.
The Company believes that cash generated from operations and borrowing
availability under its credit agreement and marketable securities 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.
<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
fourth quarter of 2000. The Company does not believe that the implementation of
SAB No. 101 will have a significant effect on its 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.
<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
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. Amended and Restated Credit Agreement by and among GP Strategies
Corporation, General Physics Canada, Ltd., The Lenders Party hereto, and Fleet
Bank, National Association, as Agent, as Issuing Bank and as Arranger dated as
of June 15, 1998, as amended and restated as of August 29, 2000.
b. Reports
None
<PAGE>
GP STRATEGIES CORPORATION AND SUBSIDIARIES
September 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: November 20, 2000 Jerome I. Feldman
President and Chief Executive Officer
DATE: November 20, 2000 Scott N. Greenberg
Executive Vice President and
Chief Financial Officer
