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 March 31, 2000 [ ] 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 April 25, 2000: Common Stock 11,305,713 shares Class B Capital 800,000 shares GP STRATEGIES CORPORATION AND SUBSIDIARIES TABLE OF CONTENTS Page No. Part I. Financial Information Consolidated Condensed Balance Sheets - March 31, 2000 and December 31, 1999 1 Consolidated Condensed Statements of Operations- Three Months Ended March 31, 2000 and 1999 3 Consolidated Condensed Statements of Cash Flows - Three Months Ended March 31, 2000 and 1999 4 Notes to Consolidated Condensed Financial Statements 6 Management's Discussion and Analysis of Financial Condition and Results of Operations 16 Qualification Relating to Financial Information 22 Part II. Other Information 23 Signatures 24 24 PART I. FINANCIAL INFORMATION GP STRATEGIES CORPORATION AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEETS (in thousands) March 31, December 31, 2000 1999 -------- -------- ASSETS (unaudited) * Current assets Cash and cash equivalents $ 4,213 $ 4,068 Accounts and other receivables 45,201 55,385 Inventories 2,073 1,888 Costs and estimated earnings in excess of billings on uncompleted contracts 14,624 14,238 Prepaid expenses and other current assets 3,160 3,853 -------- -------- Total current assets 69,271 79,432 -------- -------- Investments and advances 17,714 16,557 -------- -------- Property, plant and equipment, net 12,430 13,658 Intangible assets, net of accumulated amortization of $40,000 and $38,986 78,804 79,818 -------- -------- Deferred tax asset 3,990 3,990 -------- -------- Other assets 3,548 3,663 -------- -------- $185,757 $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. GP STRATEGIES CORPORATION AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEETS (Continued) (in thousands) March 31, December 31, 2000 1999 -------- ----------- LIABILITIES AND STOCKHOLDERS' EQUITY (unaudited) * Current liabilities Current maturities of long-term debt $ 3,501 $ 3,668 Short-term borrowings 34,755 40,278 Accounts payable and accrued expenses 20,451 25,634 Billings in excess of costs and estimated earnings on uncompleted contracts 8,848 9,998 -------- -------- Total current liabilities 67,555 79,578 -------- --------- Long-term debt less current maturities 14,520 14,822 -------- --------- Other non-current liabilities 2,437 2,736 Stockholders' equity Common stock 115 115 Class B capital stock 8 5 Additional paid in capital 172,850 170,011 Accumulated deficit (63,355) (61,602) Accumulated other comprehensive income (loss) 635 (817) Note receivable from stockholder (4,095) (2,817) Treasury stock, at cost (4,913) (4,913) -------- --------- Total stockholders' equity 101,245 99,982 -------- --------- $185,757 $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. GP STRATEGIES CORPORATION AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (Unaudited) (in thousands, except per share data) Three months ended March 31, -------------------------- 2000 1999 --------- ------- Sales $ 47,800 $ 65,929 Costs of sales 43,438 56,072 --------- -------- Gross margin 4,362 9,857 Selling, general and administrative expenses (5,291) (6,018) Interest expense (1,290) (951) Investment and other income, net 331 479 Gain on trading securities 331 25 ---------- ---------- Income (loss) before income taxes (1,557) 3,392 Income tax expense (196) (780) ---------- ---------- Net income (loss) $ (1,753) $ 2,612 ========== ========= Net income (loss) per share Basic $ (.15) $ .23 ---------- ----------- Diluted (.15) .21 ---------- ----------- See accompanying notes to the consolidated condensed financial statements. GP STRATEGIES CORPORATION AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Unaudited) (in thousands) Three months ended March 31, ---------------------------- 2000 1999 -------- ------- Cash flows from operating activities: Net income (loss) $(1,753) $ 2,612 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Issuance of stock for profit incentive plan 364 321 Depreciation and amortization 1,949 1,771 Gain on trading securities (331) (25) Equity gain on investments (25) (335) Proceeds from sale of trading securities 429 50 Changes in other operating items 3,674 (10,484) ------- ------- Net cash provided by (used in) operating activities 4,307 (6,090) ------- ------- Cash flows from investing activities: Additions to property, plant and equipment (127) (1,501) Proceeds from disposal of fixed assets 507 Reduction in (additions to) investments and other assets, net 5 2,290 ------- ------- Net cash provided by investing activities 385 789 ------- ------- Cash flows from financing activities: Net (repayments of) proceeds from short-term borrowings (5,523) 7,000 Proceeds from note receivable 828 Payments of long-term debt (469) (345) Exercise of common stock options and warrants 814 Proceeds from sale of Class B Stock 1,200 Repurchase of treasury stock (1,087) ------- -------- Net cash (used in) provided by financing activities (4,792) 7,210 ------- -------- Effect of exchange rate changes on cash and cash equivalents 245 (28) ------- -------- GP STRATEGIES CORPORATION AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Continued) (Unaudited) (in thousands) Three months ended March 31, 2000 1999 -------- ------ Net increase in cash and cash equivalents $ 145 $ 1,881 Cash and cash equivalents at the beginning of the periods 4,068 6,807 ------- ------ Cash and cash equivalents at the end of the periods $ 4,213 $ 8,688 ------- ------ Supplemental disclosures of cash flow information: Cash paid during the periods for: Interest $ 1,502 1,197 ======= ===== Income taxes $ 168 $ 439 ======= ====== See accompanying notes to the consolidated condensed financial statements. GP STRATEGIES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited) 1. Earnings per share Earnings (loss) per share (EPS) for the periods ended March 31, 2000 and 1999 are as follows (in thousands, except per share amounts): Three months ended March 31, 2000 1999 -------- ------ Basic EPS Net income (loss) $ (1,753) $ 2,612 Weighted average shares outstanding 11,813 11,237 Basic earnings (loss) per share $ (.15) $ .23 -------- -------- Diluted EPS Net income (loss) $ (1,753) $ 2,612 Weighted average shares outstanding 11,813 11,237 Dilutive effect of stock options and warrants 1,469 ---------- -------- Weighted average shares outstanding, diluted 11,813 12,706 ------- ------- Diluted earnings (loss) per share $ (.15) $ .21 -------- ---------- Basic earnings per share is based upon the weighted average number of common shares outstanding, including Class B common shares, during the period. Class B common stockholders have the same rights to share in profits and losses and liquidation values as common stock holders. Diluted earnings per share is based upon the weighted average number of common shares outstanding during the period, assuming the issuance of common shares for all dilutive potential common shares outstanding. In 2000, even though the Company still has stock options and warrants outstanding, diluted earnings per share is the same as basic earnings per share due to the Company's net loss, which makes the effect of such securities anti-dilutive. GP STRATEGIES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued) (Unaudited) 2. Long-term debt Long-term debt consists of the following (in thousands): March 31, December 31, 2000 1999 --------- ------- 8% Swiss bonds due June 2000 $ 2,125 $ 2,175 Term loan 13,875 14,063 Senior subordinated debentures 817 844 Other 1,204 1,408 --------- --------- 18,021 18,490 Less current maturities (3,501) (3,668) --------- ---------- $ 14,520 $ 14,822 ======== ======== 3. Comprehensive income (loss) The following are the components of comprehensive income (loss) (in thousands): Three months ended March 31, March 31, 2000 1999 --------- ------- Net income (loss) $ (1,753) $ 2,612 -------- -------- Other comprehensive income (loss) before tax: Net unrealized gain (loss) on available-for-sale-securities 1,264 200 Foreign currency translation adjustment 245 (28) ---------- --------- Other comprehensive income (loss), before tax 1,509 172 --------- -------- Income tax expense relating to items of other comprehensive income (57) (67) ----------- --------- Comprehensive income (loss), net of tax $ (301) $ 2,717 ========== ======== GP STRATEGIES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued) (Unaudited) 3. Comprehensive income (loss) (Continued) The components of accumulated other comprehensive income (loss) are as follows: March 31, December 31, 2000 1999 --------- ------- Net unrealized gain (loss) on available-for-sale-securities $ 1,209 $ (55) Foreign currency translation adjustment (514) (759) --------- --------- Accumulated other comprehensive income (loss) before tax 695 (814) Accumulated income tax expense related to items of other comprehensive income (60) (3) ---------- ----------- Accumulated other comprehensive income (loss), net of tax $ 635 $ (817) ========= ========= GP STRATEGIES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued) (Unaudited) 4. 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 loss in the first quarter of 2000, the Company is in default with respect to the financial covenants in its credit agreement. The Company and its lenders entered into an agreement dated as of April 12, 2000, providing for waivers of compliance with such covenants as of September 30, 1999, December 31, 1999 and March 31, 2000. Effective April 12, 2000, the Company and its lenders entered into a binding commitment to enter into an Amended and Restated Credit Agreement (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 $13,875,000. 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 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. If the Amended Agreement had been in effect at March 31, 2000, the Company would have had approximately $7,000,000 available to be borrowed under the Amended Agreement, as opposed to the $30,245,000 available at March 31, 2000 under the original agreement. GP STRATEGIES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued) (Unaudited) 5. 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. GP STRATEGIES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued) (Unaudited) 5. 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 March 31, 2000 1999 --------- ------- Sales Manufacturing Services $15,860 $19,491 Process & Energy 21,134 26,898 Information Technology 7,748 16,606 Optical Plastics 2,958 2,729 Other 100 205 ------- --------- $47,800 $65,929 ------- ------- Gross margin Manufacturing Services $ 1,822 $ 4,047 Process & Energy 2,677 4,018 Information Technology ( 818) 954 Optical Plastics 794 716 Other (113) 122 ------- --------- $ 4,362 $ 9,857 ------- ------- GP STRATEGIES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued) (Unaudited) 5. 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 March 31, 2000 1999 --------- ------- United States $ 40,028 $ 51,270 Canada 3,105 8,329 United Kingdom 3,638 4,784 Latin America and other 1,029 1,546 -------- --------- $ 47,800 $ 65,929 -------- -------- Information about the Company's identifiable assets in different geographic regions, is as follows (in thousands): March 31, December 31, 2000 1999 ----------- --------- United States $171,357 $180,057 Canada 8,608 9,533 United Kingdom 3,642 5,087 Latin America and other 2,150 2,441 -------- --------- $185,757 $197,118 -------- -------- GP STRATEGIES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued) (Unaudited) 6. Restructuring During 1999, the Company adopted restructuring plans which primarily relate to its Information Technology (IT) business segment. The Company has taken the 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 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. In connection with the restructuring, the Company recorded a restructuring charge of $7,374,000 in 1999. During the period ended March 31, 2000 and the year ended December 31, 1999, the Company expended $1,059,000 and $2,754,000, respectively. Of the remaining unexpended amount at March 31, 2000 and December 31, 1999, $1,124,000 and $1,884,000, respectively, was included in Accounts payable and accrued expenses and $2,437,000 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): Severance Present Value Other facility and related of future lease related benefits costs costs Total ----------- --------------- ------------- ----- Balance December 31, 1999 $ 289 $ 4,206 $ 125 $ 4,620 Utilization (183) (876) (1,059) ------- ------- ---------- ------- Balance March 31, 2000 $ 106 $ 3,330 $ 125 $ 3,561 ======== ======= ======== ======= 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. GP STRATEGIES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued) (Unaudited) 7. 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. GP STRATEGIES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued) (Unaudited) 8. 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. 9. 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 of $300,000 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. GP STRATEGIES CORPORATION AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations Overview GP Strategies Corporation (the Company) has four operating business segments. Three of the Company's segments are managed through the Company's principal operating subsidiary, General Physics Corporation (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 $1,557,000 for the quarter ended March 31, 2000 compared to net income before income taxes of $3,392,000 for the quarter ended March 31, 1999. The operating loss was primarily due to 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 the first quarter of 2000. In addition, the Manufacturing Services and Process & Energy Group's also had reduced operating profits due to reduced sales and gross margin percentage in the quarter ended March 31, 2000, compared to the quarter ended March 31, 1999. However, sales within the Manufacturing Services and Process & Energy Groups were slightly higher in the first quarter of 2000, as compared to the fourth quarter of 1999. In addition, the Process & Energy and Manufacturing Services Groups had increased investments in internal training and business development during the first quarter 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 in its effort to increase its revenues and gross margin percentage. The Company believes that the strategic initiatives and cost cutting moves taken in the fourth quarter of 1999 and the first quarter of 2000 will enable the IT Group to return to profitability in the last six months of 2000. If such plans are not successful, the Company may need to take other steps as yet not determined. The Company continues to assess the recoverability of intangible assets and other long-lived assets related to its IT business segment and does not currently believe an impairment has occurred. However, in the event the Company's plans are not successful, there cannot be any assurance that an impairment charge will not be required. Sales Three months ended March 31, 2000 1999 --------- ------- Manufacturing Services $15,860 $19,491 Process & Energy 21,134 26,898 Information Technology 7,748 16,606 Optical Plastics 2,958 2,729 Other 100 205 ------- --------- $47,800 $65,929 ------- ------- For the quarter ended March 31, 2000, consolidated sales decreased by $18,129,000 to $47,800,000 from $65,929,000 in the corresponding quarter of 1999. The reduced sales occurred within all segments of GP. The reduced sales in the IT Group were the result of the continuing softness in the IT training business in Canada and the UK, as well as fewer opportunities within the US ERP practice. The reduced sales within the Process & Energy Group 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 quarter ended March 31, 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. Gross margin Three months ended March 31, ----------------------- 2000 % 1999 % --------- ----- --------- ---- Manufacturing Services $ 1,822 11.5 $ 4,047 20.8 Process & Energy 2,677 12.7 4,018 14.9 Information Technology ( 818) - 954 5.7 Optical Plastics 794 26.8 716 26.2 Other (113) - 122 59.5 ------- ------- $ 4,362 9.1 $ 9,857 15.0 ------- ----- ------- ----- Consolidated gross margin of $4,362,000 or 9.1% of sales, for the quarter ended March 31, 2000, decreased by $5,495,000 compared to the consolidated gross margin of $9,857,000, or 15% of sales, for the quarter ended March 31, 1999. The reduced gross margin in 2000 occurred within all segments of GP, as a result of reduced sales and gross margin percentage. 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 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 first quarter 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 three months ended March 31, 2000, selling, general and administrative (SG&A) expenses were $5,291,000 compared to $6,018,000 incurred in the first quarter of 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. In addition, the Company continued to reduce SG&A at the corporate level. Interest expense For the three months ended March 31, 2000, interest expense was $1,290,000 compared to $951,000 for the three months ended March 31, 1999. The increased interest expense in 2000 was primarily attributable to increased interest rates in the current period. Investment and other income, net For the three months ended March 31, 2000, investment and other income, net was $331,000 as compared to $479,000 for the quarter ended March 31, 1999. The decrease was primarily attributable to reduced equity income recognized on investments in 20% to 50% owned investments, partially offset by increased interest income. Income tax expense In the quarter ended March 31, 2000, the Company recorded an income tax expense of $196,000, which represents primarily state and local and foreign income taxes. In the quarter ended March 31, 1999, the Company recorded an income tax expense of $780,000, which represents the applicable federal, state and local and foreign tax expense. Liquidity and capital resources At March 31, 2000, the Company had cash and cash equivalents totaling $4,213,000. 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. For the quarter ended March 31, 2000, the Company's working capital increased by $1,862,000 to $1,716,000, primarily reflecting the effect of reduced Short-term borrowings and Accounts payable and accrued expenses, partially offset by reduced Accounts and other receivables. The increase in cash and cash equivalents of $145,000 for the quarter ended March 31, 2000 resulted from cash provided by operations of $4,307,000, and investing activities of $385,000 partially offset by cash used in financing activities of $4,792,000. 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 loss in the first quarter of 2000, the Company is in default with respect to the financial covenants in its credit agreement. The Company and its lenders entered into an agreement dated as of April 12, 2000, providing for waivers of compliance with such covenants as of September 30, 1999, December 31, 1999 and March 31, 2000. Effective April 12, 2000, the Company and its lenders entered into a binding commitment to enter into an Amended and Restated Credit Agreement (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 $13,875,000. 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 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. If the Amended Agreement had been in effect at March 31, 2000, the Company would have had approximately $7,000,000 available to be borrowed under the Amended Agreement, as opposed to the $30,245,000 available at March 31, 2000 under the original agreement. 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 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. 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 beginning in 1999 they will be capable of receiving deposits and making payments both in Euros and in the former national currencies. The Company does not expect that adapting its information technology systems to the Euro will have a material impact on its financial condition or results of operations. The Company is also reviewing contracts with customers and vendors calling for payments in currencies that are to be replaced by the Euro, and intends to complete in a timely way any required changes to those contracts. Adoption of the Euro is likely to have competitive effects in Europe, as prices that had been stated in different national currencies become directly comparable to one another. In addition, the adoption of a common monetary policy throughout the countries adopting the Euro can be expected to have an effect on the economy of the region. These competitive and economic effects cannot be predicted with certainty, and there can be no assurance that they will not have a material effect on the Company's business in Europe. 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. GP STRATEGIES CORPORATION AND SUBSIDIARIES QUALIFICATION RELATING TO FINANCIAL INFORMATION March 31, 2000 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 for 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. GP STRATEGIES CORPORATION AND SUBSIDIARIES PART II. OTHER INFORMATION Item 6. EXHIBITS AND REPORTS ON FORM 8-K a. Exhibits none B. Reports Form 8-K filed on February 14, 2000 reporting event under Item 5. GP STRATEGIES CORPORATION AND SUBSIDIARIES March 31, 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: May 12, 2000 BY: Jerome I. Feldman President & Chief Executive Officer DATE: May 12, 2000 BY: Scott N. Greenberg Executive Vice President & Chief Financial Officer