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, 2001 or [ ] Transition Report
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the
transition period from to Commission File Number: 1-7234
GP STRATEGIES CORPORATION
(Exact Name of Registrant as Specified in its Charter)
Delaware 13-1926739
- -------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
9 West 57th Street, New York, NY 10019
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(Address of principal executive offices) (Zip code)
(212) 826-8500
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(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 6, 2001:
Common Stock 12,695,046 shares
Class B Capital 900,000 shares
GP STRATEGIES CORPORATION AND SUBSIDIARIES
TABLE OF CONTENTS
Page No.
Part I. Financial Information
Consolidated Condensed Balance Sheets -
September 30, 2001 and December 31, 2000 1
Consolidated Condensed Statements of Operations -
Three Months and Nine Months Ended September 30,
2001 and 2000 3
Consolidated Condensed Statements of Cash Flows -
Nine Months Ended September 30, 2001 and 2000 4
Notes to Consolidated Condensed Financial
Statements 6
Management's Discussion and Analysis of Financial
Condition and Results of Operations 16
Part II. Other Information 23
Signatures 24
PART I. FINANCIAL INFORMATION
GP STRATEGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(in thousands)
September 30, December 31,
2001 2000
------------- ---------
ASSETS unaudited) *
Current assets
Cash and cash equivalents $ 3,858 $ 2,487
Trading securities 8,830
Accounts and other receivables 43,542 46,388
Inventories 1,892 1,688
Costs and estimated earnings
in excess of billings on uncompleted contracts 10,426 12,515
Prepaid expenses and other current assets 5,324 3,955
--------- ----------
Total current assets 65,042 75,863
--------- ---------
Investments, advances and marketable securities 27,642 62,093
--------- ---------
Property, plant and equipment, net 9,392 9,787
--------- --------
Intangible assets, net of accumulated amortization
of $34,303 and $31,618 58,224 59,992
--------- ----------
Deferred tax asset 6,011 -
--------- --------------
Other assets 4,336 4,843
--------- -----------
$170,647 $212,578
======== ========
* The Consolidated Condensed Balance Sheet as of December 31, 2000 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)
September 30, December 31,
2001 2000
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY (unaudited) *
Current liabilities:
Current maturities of long-term debt $ 1,442 $ 1,311
Short-term borrowings 32,477 36,162
Accounts payable and accrued expenses 19,367 25,234
Billings in excess of costs and estimated
earnings on uncompleted contracts 8,886 11,322
--------- --------
Total current liabilities 62,172 74,029
-------- ---------
Long-term debt less current maturities 11,337 16,301
-------- --------
Deferred tax - 6,504
---------- ---------
Other non-current liabilities 2,678 3,226
--------- ---------
Stockholders' equity
Common stock 127 125
Class B capital stock 8 8
Additional paid in capital 181,407 179,955
Accumulated deficit (85,657) (86,994)
Accumulated other comprehensive income 6,388 27,237
Note receivable from stockholder (4,095) (4,095)
Treasury stock, at cost (3,718) (3,718)
---------- ----------
Total stockholders' equity 94,460 112,518
---------- ---------
$170,647 $212,578
======== ========
* The Consolidated Condensed Balance Sheet as of December 31, 2000 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 Nine months
ended September 30, ended September 30,
--------------------- ---------------------
2001 2000 2001 2000
------- ------ ------- ---------
Sales $ 44,713 $ 50,786 $144,174 $148,914
Cost of sales 40,030 45,965 126,158 134,782
-------- -------- -------- ---------
Gross margin 4,683 4,821 18,016 14,132
Selling, general & administrative expenses (3,576) (11,009) (15,072) (23,879)
Interest expense (1,111) (1,454) (3,666) (4,114)
Investment and other income (loss), net 342 (2,373) 1,123 (2,092)
Gain on marketable securities 1,049 20,780 1,476 21,248
Asset impairment charge - (771) - (19,245)
Restructuring reversals (charges) 206 (8,600) 606 (8,600)
--------- ---------- --------- ---------
Income (loss) before income taxes 1,593 1,394 2,483 (22,550)
Income tax (expense) benefit (746) 5,155 (1,146) 4,780
--------- --------- --------- --------
Net income (loss) $ 847 $ 6,549 $ 1,337 $(17,770)
======== ======== ======== ========
Net income (loss) per share:
Basic and diluted $ .06 $ .52 $ .10 $ (1.44)
========= ========== ========== ========
Dividends per share none none none none
======== ========== ======== =========
See accompanying notes to the consolidated condensed financial statements.
GP STRATEGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
Nine months
ended September 30,
2001 2000
-------- ------
Cash flows from operations:
Net income (loss) $ 1,337 $(17,770)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 4,516 4,986
Proceeds from sale of trading securities 10,827 684
Gain on trading securities (1,476) (21,248)
Issuance of stock for profit incentive plan 1,141 1,027
Equity (income) loss on investments (309) 2,959
Non-cash compensation (income) expense (3,047) 6,163
Non-cash consultancy charge 500 -
Asset impairment charge - 19,245
Restructuring (reversals) charges (606) 8,600
Deferred tax benefit (expense) 732 (5,535)
Changes in other operating items (1,793) 2,050
-------- ---------
Net cash provided by operating activities 11,822 1,161
-------- ---------
Cash flows from investing activities:
Additions to property, plant & equipment (1,221) (562)
Additions to intangible assets, net (917) (454)
Proceeds from disposal of fixed assets - 507
(Increase) decrease of investments and other assets, net 91 (1,215)
-------- ---------
Net cash used for investing activities (2,047) (1,724)
-------- ---------
GP STRATEGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Continued)
(Unaudited)
(in thousands)
Nine months
ended September 30,
2001 2000
----------- -------
Cash flows from financing activities:
Repayment of short-term borrowings (3,685) (2,671)
Proceeds from sale of Class B Stock - 1,200
Proceeds from subordinated convertible debentures - 2,640
Proceeds from mortgages 2,930 -
Repayment of long-term debt (7,763) (1,258)
Exercise of common stock options and warrants - 189
--------- --------
Net cash (used in) provided by financing activities (8,518) 100
-------- --------
Effect of exchange rate changes on
Cash and cash equivalents 114 285
--------- --------
Net increase (decrease) in cash and cash equivalents 1,371 (178)
Cash and cash equivalents at the beginning of the periods 2,487 4,068
-------- --------
Cash and cash equivalents at the end of the periods $ 3,858 $ 3,890
======== ========
Cash paid during the periods for:
Interest $ 3,118 $ 4,253
======== ========
Income taxes $ 289 $ 361
========= =========
See accompanying notes to the consolidated condensed financial statements.
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 2001 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, 2001 and 2000
are as follows (in thousands, except per share amounts):
Three months Nine months
ended September 30, ended September 30,
-------------------- -----------------------
2001 2000 2001 2000
---- ---- ---- ----
Basic and Diluted EPS
Net income (loss) $ 847 $ 6,549 $ 1,337 $ (17,770)
Weighted average shares
outstanding basic 13,169 12,692 13,087 12,302
Weighted average shares
outstanding, diluted 13,193 12,747 13,111 12,564
Basic and diluted net income
(loss) per share $ .06 $ .52 $ .10 $ (1.44)
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. For the nine months ended
September 30, 2000, diluted earnings per share is the same as basic earnings per
share as the effect of potentially dilutive securities is anti-dilutive.
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,
2001 2000
--------- ----------
Term loan (See Note 5) $ 5,723 $13,313
Mortgages on MXL facilities 2,849
Senior subordinated debentures 670 758
Subordinated convertible note 2,640 2,640
Other 897 901
--------- -----------
12,779 17,612
Less current maturities (1,442) (1,311)
-------- ----------
$11,337 $16,301
======= =======
On March 8, 2001, MXL Industries, Inc. ("MXL"), a wholly owned subsidiary of the
Company entered into a loan secured by a mortgage covering the real estate and
fixtures on its property in Pennsylvania in the amount of $1,680,000. The loan
requires monthly repayments of $8,333 plus accrued interest at 2.5% above the
one month LIBOR rate and matures on March 8, 2011, when the remaining amount
outstanding of approximately $680,000 is due in full. The loan is guaranteed by
the Company. The proceeds of the loan were used to repay a portion of the
Company's short-term borrowings pursuant to its Amended and Restated Agreement
described below in Note 5.
On July 3, 2001, MXL entered into a loan secured by a mortgage covering the real
estate and fixtures on its property in Illinois in the amount of $1,250,000. The
loan requires monthly payments of principal and interest in the amount of
$11,046 with interest at a fixed rate of 8.75% per annum and matures on June 26,
2006, when the remaining amount outstanding of approximately $1,100,000 is due
in full. The loan is guaranteed by the Company. The proceeds of the loan were
used to repay a portion of the Company's term loan pursuant to its Amended and
Restated Agreement described below in Note 5.
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):
Three months ended Nine months ended
September 30, September 30,
--------------------------------------------------------
2001 2000 2001 2000
-------- --------- -------- ------------
Net income (loss) $ 847 $ 6,549 $ 1,337 $(17,770)
--------- -------- --------- --------
Other comprehensive (loss) income before tax:
Net unrealized gain (loss) on
available-for-sale-securities (34,374) 103,901 (34,183) 104,500
Foreign currency translation adjustment (129) 670 114 795
---------- ---------- ---------- ---------
Other comprehensive (loss) income,
before tax (34,503) 104,571 (34,069) 105,295
Income tax benefit (expense) relating to
items of other comprehensive income 13,351 (40,789) 13,220 (40,833)
--------- --------- --------- ---------
Comprehensive (loss) income, net of tax $ (20,305) $ 70,331 $ (19,512) $ 46,692
========= ======== ========= ========
The components of accumulated other comprehensive income are as follows:
September 30, December 31,
2001 2000
--------- ---------
Net unrealized gain on
available-for-sale-securities $ 11,429 $ 45,612
Foreign currency translation adjustment (567) (681)
---------- --------
Accumulated other comprehensive income
before tax 10,862 44,931
Accumulated income taxes related to
items of other comprehensive income (4,474) (17,694)
--------- --------
Accumulated other comprehensive
income, net of tax $ 6,388 $ 27,237
======== ========
GP STRATEGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
(Unaudited)
5. Short-term borrowings
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, as amended and restated as of August 31,
2000 (the "Amended and Restated Agreement") with various banks. As of June 15,
2001, the Company and GP Canada entered into the Third Amendment to the Amended
and Restated Agreement (the "Third Amendment"), which among other things, (i)
extended the maturity date of the revolving credit notes to October 15, 2001,
(ii) reduced the amount available under the revolving credit loan to
$42,000,000, (iii) amended the interest rate from LIBOR plus 2.50% to LIBOR plus
2.95% and (iv) amended certain financial covenants. The Third Amendment required
certain mandatory asset sales and refinancings by August 30, 2001, which
condition has been satisfied by the Company.
As of October 15, 2001, the Company and GP Canada entered into the Fourth
Amendment to the Amended and Restated Agreement with the various banks (the
"Fourth Amendment"), which among other things, (i) extended the maturity date of
the revolving credit notes to December 14, 2001, and (ii) required that the
Company sign a commitment letter for a new credit facility on or before October
22, 2001. The Company satisfied this requirement by signing a commitment letter
for a three year $49.5 million revolving credit and term loan agreement with a
financial institution.
The Company utilized proceeds from asset sales and refinancings to reduce its
term loan from $13,313,000 at December 31, 2000 to $5,723,000 at September 30,
2001. The term loan is payable in quarterly installments of $187,500, with a
final payment due on June 15, 2003.
At September 30, 2001, the amount outstanding under the revolving credit
facility is $32,477,000 and is included in Short-term borrowings in the
Consolidated Condensed Balance Sheet. At September 30, 2001, the Company had
approximately $8,000,000 available to be borrowed under the Credit Agreement and
was in compliance with all of its financial covenants.
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 1000
companies, government, utilities and other commercial customers. GP operates in
two business segments. The Manufacturing & Process Group provides technology
based training, engineering, consulting and technical services to leading
companies in the automotive, steel, power, oil and gas, chemical, energy,
pharmaceutical and food and beverage industries, as well as to the government
sector. The Information Technology Group provides IT training programs and
solutions, including Enterprise Solutions and comprehensive career training and
transition programs.
The Optical Plastics Group, which consists of MXL, manufactures and distributes
coated and molded plastic products.
The Hydro Med Group consists of Hydro Med Sciences, a drug delivery company
which is engaged in Phase III clinical trials for the treatment of prostate
cancer.
Financial information for the three and nine months ended September 30, 2000 has
been restated to show all information for the Manufacturing Services Group and
Process and Energy Group that were combined into the Manufacturing and Process
Group.
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)
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,
---------------------- ---------------------
2001 2000 2001 2000
------- -------- ------- -------
Sales
Manufacturing and Process $ 39,458 $42,298 $126,791 $119,379
Information Technology 2,495 6,125 8,601 21,117
Optical Plastics 2,758 2,363 8,777 8,278
Hydro Med and Other 2 - 5 140
----------- ------------ ------------ -----------
$ 44,713 $ 50,786 $144,174 $148,914
-------- -------- -------- --------
Gross margin
Manufacturing and Process $ 3,682 $ 6,080 $ 14,888 $ 16,036
Information Technology 535 (1,666) 1,303 (3,671)
Optical Plastics 608 587 2,268 2,188
Hydro Med and Other (142) (180) (443) (421)
---------- --------- ---------- ----------
$ 4,683 $ 4,821 $ 18,016 $ 14,132
--------- -------- -------- --------
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,
------------------------- -----------------------
2001 2000 2001 2000
--------- --------- --------- -------
United States $ 41,293 $ 44,787 $133,418 $127,887
Canada 506 2,131 2,462 8,158
United Kingdom 1,739 2,706 5,139 9,467
Latin America 1,175 1,162 3,155 3,402
--------- ---------- --------- ----------
$ 44,713 $ 50,786 $144,174 $148,914
-------- -------- -------- --------
Information about the Company's identifiable assets in different geographic
regions, is as follows (in thousands):
September 30, December 31,
2001 2000
--------- ----------------
United States $162,785 $205,797
Canada 3,720 3,371
United Kingdom 2,866 1,928
Latin America 1,276 1,482
-------- --------
$170,647 $212,578
-------- --------
GP STRATEGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
(Unaudited)
7. Asset impairment charge and restructuring charge
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 recorded a charge of $7,374,000 in 1999.
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. Additionally there had
been further impairment to intangible and other assets. In July 2000, as a
result of the continued operating losses incurred by the IT Group, as well as
the determination that revenues would not increase to profitable levels, the
Company decided to close its open enrollment IT business in the third quarter of
2000. As a result, the Company recorded asset impairment charges of $19,245,000
during the nine months ended September 30, 2000, related to write-offs of
intangible assets, property, plant and equipment, and other assets of the IT
Group.
In addition, the Company recorded an $8,600,000 restructuring charge, net of
reversals, in 2000. During the period ended September 30, 2001 and the year
ended December 31, 2000, the Company utilized $2,454,000 (including current
period adjustments of $288,000) and $3,884,000, respectively, and reversed
$894,000 and $180,000, respectively. Of the remaining $3,805,000 balance at
September 30, 2001 and $6,865,000 at December 31, 2000, $1,667,000 and
$3,639,000, respectively, were included in Accounts payable and accrued expenses
and $2,138,000 and $3,226,000, respectively, were included in Other non-current
liabilities in the Consolidated Condensed Balance Sheet.
GP STRATEGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
(Unaudited)
7. Asset impairment charge and restructuring charge (Continued)
The components of the 2001 and 2000 restructuring charges are as follows (in
thousands):
Severance Lease and
and related related Contractual Other
benefits obligations obligations costs Total
- --------------------------------------------------------------------------------------------------------------------
Balance December 31, 2000 $ 142 $ 5,298 $ 1,425 $ - $ 6,865
- --------------------------------------------------------------------------------------------------------------------
Utilization (205) (1,745) (295) (209) (2,454)
Reversal of restructuring
charges during 2001 (495) (399) (894)
Other Adjustments
during 2001 77 - 2 209 288
- --------------------------------------------------------------------------------------------------------------------
Balance September 30, 2001 $ 14 $ 3,058 $ 733 $ - $ 3,805
- --------------------------------------------------------------------------------------------------------------------
The remaining amounts that had been accrued for severance and related benefits
and contractual obligations will be expended by December 31, 2002. Lease
obligations are presented at their present value, net of assumed sublets.
8. Litigation
On January 4, 2001, the Company commenced an action alleging that MCI
Communications Corporation, Systemhouse, and Electronic Data Systems
Corporation, as successor to Systemhouse, committed fraud in connection with the
Company's 1998 acquisition of Learning Technologies from the defendants for
$24.3 million. The Company seeks actual damages in the amount of $117.9 million
plus interest, punitive damages in an amount to be determined at trial, and
costs. In February 2001, the defendants filed answers denying liability. No
counterclaims against the plaintiffs have been asserted. The case is currently
in discovery.
The complaint, which is pending in the New York State Supreme Court, alleges
that the defendants created a doctored budget to conceal the poor performance of
the United Kingdom operation of Learning Technologies. The complaint also
alleges that the defendants represented that Learning Technologies would
continue to receive business from Systemhouse even though defendants knew that
the sale of Systemhouse to EDS was imminent and that such business would cease
after such sale.
GP STRATEGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
(Unaudited)
9. Subsequent event
Pursuant to an agreement dated as of October 19, 2001 (the "Stock Purchase
Agreement"), the Company has sold to an institutional investor (the "Investor")
300,000 shares (the "Shares") of Class B Capital Stock of the Company for an
aggregate purchase price of $900,000. Upon the disposition of any of the Shares
(other than to an affiliate of the Investor who agrees to be bound by the
provisions of the Stock Purchase Agreement) or at the request of the Board of
Directors of the Company, the Investor is required to exercise the right to
convert all of the Shares then owned by the Investor into an equal number of
shares of Common Stock of the Company (the "Underlying Shares").
The Company is required, at its expense, to file not later than January 15, 2002
a registration statement to register under the Securities Act of 1933 (the
"Securities Act") the resale by the Investor of the Underlying Shares, and to
use its commercially reasonable efforts to cause such registration statement to
become effective under the Securities Act on the earliest possible date. On any
date prior to October 19, 2003 during which the Investor is not able to resell
the Underlying Shares pursuant to such registration statement, the Investor has
the right to require the Company to purchase from the Investor all, but not less
than all, of the Shares and Underlying Shares then held by the Investor for a
purchase price (the "Put Price") equal to the product of (i) the number of
Shares and Underlying Shares owned by the Investor and (ii) the current market
price per share of Common Stock of the Company. The Company may pay the Put
Price by delivering to the Investor, at the option of the Company, (i) cash,
(ii) shares of Millennium Cell Inc. (the "Millennium Cell Shares") owned by the
Company with a current market price equal to the Put Price, or (iii) a
combination of cash and Millennium Cell Shares.
GP STRATEGIES CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Overview
During the first three quarters of 2000, the Company had five operating business
segments. However, in the fourth quarter of 2000, as a result of organizational
and operational changes at General Physics and the shut down of the IT open
enrollment business in the third quarter of 2000, the Company combined the
Manufacturing Services Group with the Process and Energy Group. The discussion
and disclosure that follows reflects that the Manufacturing Services Group and
the Process & Energy segments being combined as of January 1, 2000 to form the
Manufacturing & Process Group. The Manufacturing & Process Group and the IT
Group, are managed through the Company's principal operating subsidiary General
Physics, the third segment through its operating subsidiary MXL Industries and
the fourth through its subsidiary Hydro Med Sciences. In addition, the Company
holds a number of investments in publicly held companies, including publicly
traded stock in Millennium Cell Inc.
General Physics is a performance improvement company that assists productivity
driven organizations to maximize workforce performance by integrating people,
processes and technology. General Physics is a total solution provider for
strategic training, engineering, consulting and technical support services to
Fortune 1000 companies, government, utilities and other commercial customers.
General Physics consists of two segments: the Manufacturing & Process Group and
the IT Group.
For the quarter ended September 30, 2001, the Company had income before income
taxes of $1,593,000 compared to net income before taxes of $1,394,000 for the
quarter ended September 30, 2000. The income in the third quarter of 2001 was
attributable to the $1,049,000 gain primarily from the sale of securities of
Millennium Cell Inc. and a non-cash credit of $2,774,000 relating to the
Company's Deferred Compensation Plan (which fluctuates based on the market value
of the Millennium Cell shares). This was partially offset by approximately
$550,000 (of which $250,000 was non-cash) relating to fees and options granted
to a financial consultant and a loss at the Company's Hydro Med Sciences
subsidiary of approximately $884,000. For the quarter ended September 30, 2000,
the Company had income before income taxes of $1,394,000. This was primarily
attributed to income of $20,780,000 on the Company marketable shares of
Millennium Cell offset by a $771,000 asset impairment charge, $8,600,000
Restructuring Charge, a $4,563,000 non-cash compensation expense related to the
Company's deferred compensation plan and the continued operating losses of the
Company IT open enrollment business which was closed in the third quarter of
2000.
For the nine months ended September 30, 2001, the Company had income before
income taxes of $2,483,000 compared to a loss before income taxes of $22,550,000
for the nine months ended September 30, 2000. The nine months ended September
30, 2001 included a $1,476,000 gain from marketable securities and a non-cash
credit of $3,047,000 relating to the Company's Deferred Compensation Plan offset
by a loss of approximately $2,500,000 relating to the Company's Hydro Med
Sciences Division.
The operating loss for the nine months ended September 30, 2000, was primarily
due to an Asset impairment charge of $19,245,000 and a $8,600,000 Restructuring
charge. 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 nine months ended September 30, 2000, the Company also
recorded a $6,163,000 non-cash compensation expense related to a deferred
compensation plan offered to certain of its employees which is included in
selling, general and administrative expenses.
Three months ended Nine months ended
September 30, September 30,
---------------------- ------------------------
2001 2000 2001 2000
------- -------- ------- -------
Sales
Manufacturing and Process $ 39,458 $ 42,298 $126,791 $119,379
Information Technology 2,495 6,125 8,601 21,117
Optical Plastics 2,758 2,363 8,777 8,278
Hydro Med and Other 2 - 5 140
-------- ---------- ------------ -----------
$ 44,713 $ 50,786 $144,174 $148,914
-------- -------- -------- --------
For the quarter and nine months ended September 30, 2001, sales decreased by
$6,073,000 to $44,713,000 from $50,786,000 and $4,740,000 from $148,914,000 to
$144,174,000, respectively, from the corresponding periods in 2000. The
decreased sales in the third quarter of 2001 within the Manufacturing & Process
Group was primarily due to decreased sales in the Company's manufacturing
services and was compounded by the effects of the events of September 11, 2001.
In addition, for the quarter and nine months ended September 30, 2001, revenues
were affected by reduced sales in the IT Group resulting from the Company's
decision to close the open enrollment business in the third quarter of 2000 and
focus on providing training for Fortune 1000 manufacturing and process clients.
Three months ended Nine months ended
September 30, September 30,
------------------------------------ --------------------------------
2001 % 2000 % 2001 % 2000 %
------- ----- -------- ----- ------- ----- ------- -----
Gross margin
Manufacturing and Process $ 3,682 9.3 $ 6,080 14.4 $14,888 11.7 $16,036 13.4
Information Technology 535 21.4 (1,666) - 1,303 15.1 (3,671) -
Optical Plastics 608 22.0 587 24.8 2,268 25.8 2,188 26.4
Hydro Med and Other (142) - (180) - (443) - (421) -
-------- ------ ---------------- ------- ------ -------- -------
$ 4,683 10.5 $ 4,821 9.5 $18,016 12.5 $14,132 9.5
------- ---- ------- ---- ------- ---- ------- ----
Consolidated gross margin of $4,683,000 or 10.5% of sales, for the quarter ended
September 30, 2001, decreased by $138,000 compared to the consolidated gross
margin of $4,821, or 9.5% of sales, for the quarter ended September 30, 2000.
The decreased gross margin for the quarter ended September 30, 2001 occurred as
a result of the slow down in the automotive sector of the Management and Process
Group as well as the impact of the effects of September 11, 2001. For the nine
months ended September 30, 2001, gross margin increased by $3,884,000 from
$14,132,000 to $18,016,000. The increased gross margin for the nine months ended
September 30, 2001 occurred as a result of the negative margin in the IT Group
in 2000 which was offset by the impact of the effects of September 11, 2001 and
a slow down in the automotive sector of the business in 2001.
Selling, general and administrative expenses
For the quarter ended September 30, 2001, Selling, general and administrative
(SG&A) expenses were $3,576,000 compared to $11,009,000 in the third quarter
ended September 30, 2000. The reduction in SG&A of $7,433,000 in 2001 is
attributable to the closing of the Company's open enrollment IT operations in
the third quarter of 2000, and a credit of $2,774,000 (as compared to a
$4,563,000 charge for the quarter ended September 30, 2000) relating to the
Company's Deferred Compensation Plan. For the nine months ended September 30,
2001, Selling, general and administrative expenses decreased by $8,807,000 from
$23,879,000 to $15,072,000 resulting from a $3,047,000 credit for the period
ended September 30, 2001 (as compared to a charge of $6,163,000 for the period
ended September 30, 2000) relating to the Company's Deferred Compensation Plan,
offset by costs attributable to the closing of the open enrollment IT
operations.
Interest expense
For the quarter ended September 30, 2001, interest expense was $1,111,000
compared to $1,454,000 for the quarter ended September 30, 2000. The decreased
interest expense in 2001 was attributable to both a decrease in the Company's
outstanding indebtedness and a reduction in variable interest rates. For the
nine months ended September 30, 2001, there was a decrease in interest expenses
of $448,000 from $4,114,000 to $3,666,000 due to the reduction of indebtedness
in the second quarter of 2001.
Investment and other income (loss), net
For the three and nine months ended September 30, 2001, investment and other
income (loss), net was $342,000 and $1,123,000 as compared to $(2,373,000) and
$(2,092,000) for the quarter and nine months ended September 30, 2000. The
increase in investment and other income was primarily attributable to increased
equity income recognized on investments in 20% to 50% owned companies. The
quarter and nine months ended 2000 had a $2,400,000 write-down of the Company's
investment in the Five Star Group.
Income tax expense
For the quarter and nine months ended September 30, 2001, the Company recorded
an income tax expense of $746,000 and $1,146,000, which represents the Company's
estimated effective federal, state and local, and foreign tax rate. In the
quarter and nine months ended September 30, 2000, the Company recorded an income
tax benefit of $5,155,000 and $4,780,000, respectively, which represents 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 Cell in 2000, the
Company anticipated that it had the ability to utilize net operating loss
carryforwards. As such the Company anticipated that it had the ability to
utilize approximately $11,000,000 and net deferred tax assets consisting
primarily of domestic net operating loss carryforwards against which a valuation
allowance was previously provided.
Liquidity and capital resources
At September 30, 2001, the Company had cash and cash equivalents totaling
$3,858,000. The Company has sufficient cash and cash equivalents, 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 period ended September 30, 2001, the Company's working capital increased
by $1,036,000 to a net working capital of $2,870,000, primarily reflecting the
effect of decreases in Short term Borrowings and Accounts Payable partially
offset by a decrease in marketable securities.
The increase in cash and cash equivalents of $1,371,000 for the nine months
ended September 30, 2001 resulted from cash provided by operations of
$11,822,000 offset by cash used for financing activities of $8,518,000. Cash
used in financing activities consisted primarily of repayments of short-term
borrowings and the long-term debt, partially offset by proceeds from new MXL
mortgages. Although there can be no assurance, based upon the commitment letter
received by the Company from the financial institution as described in Note 5,
the management of the Company believes that its credit facility agreement will
be refinanced on or before December 14, 2001 (See Note 5).
Recent accounting pronouncements
In July 2001, the FASB issued Statement No. 141, Business Combinations, and
Statement No. 142, Goodwill and Other Intangible Assets. Statement 141 requires
that the purchase method of accounting be used for all business combinations
initiated after June 30, 2001 as well as all purchase method business
combinations completed after June 30, 2001. Statement 141 also specifies
criteria intangible assets acquired in a purchase method business combination
must meet to be recognized and reported apart from goodwill, noting that any
purchase price allocable to an assembled workforce may not be accounted for
separately. Statement 142 will require that goodwill and intangible assets with
indefinite useful lives no longer be amortized, but instead tested for
impairment at least annually in accordance with the provisions of Statement 142.
Statement 142 will also require that intangible assets with definite useful
lives be amortized over their respective estimated useful lives to their
estimated residual values, and reviewed for impairment in accordance with SFAS
No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of.
As of the date of adoption, the Company expects to have unamortized goodwill in
the amount of approximately $56,000,000 and unamortized identifiable intangible
assets in the amount of approximately $1,000,000 both of which will be subject
to the transition provisions of Statements 141 and 142. Amortization expense
related to goodwill was approximately $2,800,000 and $2,000,000 for the year
ended December 31, 2000 and the nine months ended September 30, 2001,
respectively. Because of the extensive effort needed to comply with adopting
Statements 141 and 142, it is not practicable to reasonably estimate the impact
of adopting these Statements on the Company's financial statements at the date
of this report, including whether any transitional impairment losses will be
required to be recognized as the cumulative effect of a change in accounting
principle.
In August 2001, the FASB issued Statement No. 143, Accounting for Asset
Retirement Obligations, which addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. This Statement applies to all entities that
have legal obligations associated with the retirement of long-lived assets that
result from the acquisition, construction, development or normal use of the
asset. Enterprises are required to adopt Statement No. 143 for fiscal years
beginning after June 15, 2002. The Company has not yet determined the impact of
adopting this pronouncement on its financial statements.
In October 2001, the FASB issued Statement No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, which addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
While statement No. 144 supersedes FASB Statement No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, it
retains many of the fundamental provisions of that Statement.
Statement No. 144 also supersedes the accounting and reporting provisions of APB
Opinion No. 30, Reporting the Results of Operations--Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions, for the disposal of a segment of a business.
However, it retains the requirement in Opinion 30 to report separately
discontinued operations and extends that reporting to a component of an entity
that either has been disposed of (by sale, abandonment, or in a distribution to
owners) or is classified as held for sale. By broadening the presentation of
discontinued operations to include more disposal transactions, the FASB has
enhanced management's ability to provide information that helps financial
statement users to assess the effects of a disposal transaction on the ongoing
operations of an entity. Statement No. 144 is effective for fiscal years
beginning after December 15, 2001 and interim periods within those fiscal years.
The Company has not yet determined the impact of adopting this pronouncement on
its financial statements.
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 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
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
PART II. OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
None
b. Reports
None
GP STRATEGIES CORPORATION AND SUBSIDIARIES
September 30, 2001
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 14, 2001 Jerome I. Feldman
Chief Executive Officer
DATE: November 14, 2001 Scott N. Greenberg
President &
Chief Financial Officer