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, 1998
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period from to
Commission File Number: 1-7234
GP STRATEGIES CORPORATION
(Exact Name of Registrant as Specified in its Charter)
Delaware 13-1926739
(State 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 12, 1998:
Common Stock 10,812,785 shares
Class B Capital 256,250 shares
GP STRATEGIES CORPORATION AND SUBSIDIARIES
TABLE OF CONTENTS
Page No.
Part I. Financial Information
Consolidated Condensed Balance Sheets -
September 30, 1998 and December 31, 1997 1
Consolidated Condensed Statements of Operations-
Three Months and Nine Months Ended September 30,
1998 and 1997 3
Consolidated Condensed Statements of Cash Flows -
Nine Months Ended September 30, 1998 and 1997 5
Notes to Consolidated Condensed Financial
Statements 7
Management's Discussion and Analysis of Financial
Condition and Results of Operations 14
Qualification Relating to Financial Information 21
Part II. Other Information 22
Signatures 23
PART I. FINANCIAL INFORMATION
GP STRATEGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(in thousands)
September 30, December 31,
1998 1997
ASSETS (unaudited) (a)
Current assets
Cash and cash equivalents $ 7,504 $ 12,375
Marketable securities 1,350
Accounts and other receivables 60,495 42,720
Inventories 2,104 24,842
Costs and estimated earnings in excess of billings
on uncompleted contracts 11,199 7,726
Prepaid expenses and other current assets 4,775 3,565
---------- ---------
Total current assets 86,077 92,578
---------- ---------
Investments and advances 25,825 28,093
---------- ---------
Property, plant and equipment, at cost 41,753 39,759
Less accumulated depreciation (26,467) (30,027)
--------- ----------
15,286 9,732
---------- ---------
Intangible assets, net of amortization of
$34,478 and $32,184 78,573 55,725
---------- ---------
Deferred tax asset 2,411 1,101
---------- ---------
Other assets 4,374 3,383
---------- ---------
$212,546 $190,612
======== ========
(a) The Consolidated Condensed Balance Sheet as of December 31, 1997 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,
1998 1997
LIABILITIES AND STOCKHOLDERS' EQUITY (unaudited) (a)
Current liabilities:
Current maturities of long-term debt $ 2,967 $ 342
Short-term borrowings 34,223 23,945
Accounts payable and accrued expenses 26,982 25,515
Billings in excess of costs and estimated
earnings on uncompleted contracts 11,195 7,979
---------- ---------
Total current liabilities 75,367 57,781
--------- --------
Long-term debt less current maturities 16,680 6,246
---------- ---------
Minority interests and other 2 2
------------- ------------
Stockholders' equity
Common stock 110 108
Class B capital stock 1 1
Capital in excess of par value 160,835 158,676
Deficit (39,849) (37,336)
Net unrealized gain on
available-for-sale securities 1,839 6,630
Treasury stock, at cost (2,439) (1,496)
---------- ----------
Total stockholders' equity 120,497 126,583
---------- ---------
$212,546 $190,612
======== ========
(a) The Consolidated Condensed Balance Sheet as of December 31, 1997 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,
1998 1997 1998 1997
Sales $ 86,182 $ 62,711 $219,951 $178,061
Costs of goods sold 74,672 53,324 188,313 151,265
-------- -------- -------- --------
Gross margin 11,510 9,387 31,638 26,796
Selling, general & administrative (7,819) (8,059) (23,587) (23,623)
--------- -------- --------- --------
Operating income 3,691 1,328 8,051 3,173
---------- ---------- ---------- -----------
Interest expense (1,291) (982) (3,137) (3,157)
Investment and other income, net 204 785 985 2,203
Minority interests 25
Loss on sale of assets (6,225) (6,225)
Loss on investment (3,067) (3,067)
Gain (loss) on trading securities 435 820 1,707 (24)
--------- ------- -------- ---------
Income (loss) before income taxes (6,253) 1,951 (1,686) 2,220
Income tax benefit (expense) (313) 3 (827) 381
---------- ----------- ---------- ---------
Net income (loss) $ (6,566) $ 1,954 $ (2,513) $ 2,601
========= ======== ========= ========
GP STRATEGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (Continued)
(Unaudited)
(in thousands, except per share data)
Three months Nine months
ended September 30, ended September 30,
1998 1997 1998 1997
Net income (loss) per share:
Basic $ (.60) $ .18 $ (.23) $ .25
--------- -------- -------- --------
Diluted $ (.60) $ .18 $ (.23) $ .25
--------- -------- -------- ---------
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,
1998 1997
Cash flows from operations:
Net income (loss) $ (2,513) $ 2,601
Adjustments to reconcile net income
to net cash provided by (used for)
operating activities:
Depreciation and amortization 4,263 4,096
Issuance of stock for profit incentive plan 967 639
Loss on sale of assets 6,225
Loss on investment 3,067
Equity loss on investments 1,210 625
Proceeds from sale of trading securities 2,365
Deferred income taxes (258)
Unrealized loss (gain) on trading securities (1,707)
Change in other operating items (21,866) (3,698)
--------- -------
Net cash provided by (used for) operations (7,989) 4,005
--------- ------
Cash flows from investing activities:
Acquisition of Learning Technologies (24,292)
Acquisition of Deltapoint (6,280)
Proceeds from sale of stock of an affiliate 1,529
Additions to property, plant & equipment (4,013) (2,633)
Additions to intangible assets (1,516) (5,132)
Increase in investments and other assets, net (460) (582)
---------- --------
Net cash used for investing activities $ (36,561) $ (6,818)
---------- --------
See accompanying notes to the consolidated condensed financial statements.
GP STRATEGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Continued)
(Unaudited)
(in thousands)
Nine months
ended September 30,
1998 1997
------- -------
Cash flows from financing activities:
Proceeds from short-term borrowings $ 41,273 $ 1,121
Repayments of short-term borrowings (14,519)
Proceeds from issuance of long-term debt 15,000
Reduction of long-term debt (1,393) (7,072)
Exercise of common stock options and warrants 261 68
Repurchase of treasury stock (943) (852)
--------- --------
Net cash (used for) provided by
financing activities 39,679 (6,735)
-------- --------
Net decrease in cash and cash equivalents (4,871) (9,548)
Cash and cash equivalents at the
beginning of the periods 12,375 22,677
--------- ---------
Cash and cash equivalents at the
end of the periods $ 7,504 $ 13,129
======== ========
Supplemental disclosures of cash
flow information:
Cash paid during the periods for:
Interest $ 3,419 $ 3,711
======== ========
Income taxes $ 849 $ 736
========= =========
Supplemental schedule of non-cash transactions:
Issuance of common stock related to the
acquisition of General Physics Corporation $(25,228)
Additions to intangible assets 15,154
Reduction of minority interest 10,074
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
In the fourth quarter of 1997, the Company adopted the provisions of
Statement of Financial Accounting Standards No. 128, "Earnings per Share" (SFAS
128), as required, and restated the previously reported earnings per share in
conforming with SFAS 128.
Earnings per share (EPS) for the periods ended September 30, 1998 and
1997 are as follows (in thousands, except per share amounts):
Three months Nine months
ended September 30, ended September 30,
1998 1997 1998 1997
Basic EPS
Net income (loss) $ (6,566) $ 1,954 $(2,513) $ 2,601
Weighted average shares
outstanding 10,883 10,704 10,808 10,374
Basic earnings (loss) per share $ (.60) $ .18 $ (.23) $ .25
Diluted EPS
Net income (loss) $(6,566) $ 1,954 $(2,513) $2,601
Weighted average shares
outstanding 10,883 10,704 10,808 10,374
Dilutive effect of stock options
and warrants 374 125
----------- --------- ----------- ---------
Weighted average shares
outstanding, diluted 10,883 11,078 10,808 10,499
Diluted earnings (loss) per share $ (.60) $ .18 $ (.23) $ .25
Basic earnings per share are based upon the weighted average number of
common shares outstanding, including Class B common shares, during the period.
Class B common stockholders have the same rights to share in profits and losses
and liquidation values as common stock holders. Diluted earnings per share are
based upon the weighted average number of common shares outstanding during the
period, assuming the issuance of common shares for all dilutive potential common
shares outstanding.
GP STRATEGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
2. Inventories
Inventories are valued at the lower of cost or market, principally
using the first-in, first-out (FIFO) method. Inventories consisting of material,
labor, and overhead are classified as follows (in thousands):
September 30, December 31,
1998 1997
Raw materials $ 816 $ 619
Work in process 269 252
Finished goods 1,019 23,971
-------- --------
$ 2,104 $24,842
======= =======
3 Long-term debt
Long-term debt consists of the following (in thousands):
September 30, December 31,
1998 1997
8% Swiss bonds due 2000 $ 2,328 $ 2,158
5% Convertible bonds due 1999 1,821 1,786
Term loan (Note 5) 15,000
7% Convertible note 1,000
Other 498 1,644
--------- ---------
19,647 6,588
Less current maturities 2,967 342
--------- ---------
$ 16,680 $ 6,246
========= ========
GP STRATEGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
(Unaudited)
4. Acquisitions
(a) On June 16, 1998, General Physics Corporation (General Physics), a
wholly-owned subsidiary of the Company, completed its acquisition of the
Learning Technologies business of Systemhouse (an MCI company) (Learning
Technologies). Learning Technologies is a computer technology training and
consulting organization, with offices and classrooms in Canada, the United
States and the United Kingdom. General Physics and the Sellers have also entered
into a Preferred Provider Agreement under which, subject to certain exceptions,
General Physics is the provider of educational training products and services to
the Sellers for its customers during the term of such agreement. General Physics
purchased Learning Technologies for approximately $24,000,000 in cash. The cash
consideration of the purchase price was derived from funds borrowed by the
Company and General Physics, pursuant to the Company's credit agreement dated
June 15, 1998. (See Note 5). Learning Technologies had annual revenues in 1997
of approximately $50,000,000, with the majority of these sales attributable to
operations in Canada and the United Kingdom. For the quarter ended September 30,
1998, Learning Technologies had revenues of approximately $14,152,000. The
Company has accounted for this transaction as a purchase, and has recorded
approximately $22,939,000 of goodwill. The allocation of the purchase price and
the goodwill related to the transaction is subject to final adjustment. The
Company believes that any adjustments will not be significant. The results of
operations for Learning Technologies have been consolidated with the Company
since June 16, 1998.
GP STRATEGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
(Unaudited)
4. Acquisitions (Continued)
(b) On July 13, 1998, General Physics completed its acquisition of substantially
all of the operations, assets, properties, rights and business of The Deltapoint
Corporation (Deltapoint) and assumed certain of the liabilities of Deltapoint.
Deltapoint is a Seattle, Washington based management consulting firm focused on
large systems change and lean-enterprise, with 500 clients primarily operating
in the aerospace, pharmaceutical, manufacturing, health care and
telecommunications industries. General Physics purchased Deltapoint for
approximately $6,300,000 in cash and a future earnout, as described in the Asset
Purchase Agreement. Pursuant to the terms of the future earnout, General Physics
agreed to pay Deltapoint a percentage of revenues received for each of the three
years following closing, so long as minimum revenue and earnings goals are
achieved. Assuming that those goals are reached in each year, then the
additional consideration for each such year would equal $1,333,440; in addition
they would earn a percentage of revenues received in excess of the goal. The
$6,300,000 cash consideration of the purchase price was derived from funds
borrowed by the Company and General Physics, pursuant to the Company's Credit
Agreement dated as of June 15, 1998 (see Note 5). The Company has recorded
approximately $4,580,000 of goodwill, subject to final adjustment. The results
of operations for Deltapoint have been consolidated with the Company since July
14, 1998.
(c) The following information shows on a pro-forma basis, the results of
operations for the Company for the year ended December 31, 1997, as if the
acquisition of Deltapoint and sale of certain assets of Five Star (See Note 6)
had occurred on January 1, 1997 (in thousands, except per share data):
Sales $162,337
Net income 4,455
Earnings per share:
Basic .43
Diluted .41
GP STRATEGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
(Unaudited)
5. Credit agreement and term loan
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 Key
Bank, N.A., Mellon Financial Services Corporation, Summit Bank (Summit), The
Dime Savings Bank of New York, FSB (Dime), and Fleet Bank, National Association
(Fleet), as Agent, as Issuing Bank and as Arranger, providing for a secured
credit facility of $80,000,000 (the Credit Facility) comprised of a revolving
credit facility of $65,000,000 for the Company expiring on June 15, 2001 and a
five-year term loan of $15,000,000. The Company terminated its existing credit
facility with Fleet, Dime and Summit, dated as of March 26, 1997, as amended.
The Credit Facility is secured by the receivables and inventory of the
Company, GP Canada and the material domestic subsidiaries of the Company, as
well as all of the issued and outstanding stock of the Company's material
domestic subsidiaries and 65% of the issued and outstanding stock of the
Company's foreign subsidiaries. At the option of the Company or GP Canada, as
the case may be, the interest rate on any loan under the Credit Facility may be
based on an adjusted prime rate or Eurodollar rate, as described in the Credit
Agreement. The Agreement contains certain covenants which requires among other
things, the maintenance of certain financial ratios. At September 30, 1998, the
Company was in compliance with the covenants. At September 30, 1998 $49,223,000
was borrowed under the Credit Facility and $30,777,000 was available to be
borrowed.
GP STRATEGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
(Unaudited)
6. Five Star Group, Inc.
On September 30, 1998, the Company sold certain operating assets of its
wholly-owned subsidiary, the Five Star Group, Inc. (Five Star) to American Drug
for $16,476,000, which was used to repay existing short-term borrowings, thereby
reducing the Company's consolidated debt, and a $5,000,000 unsecured senior
note. Five Star is a leading distributor of home decorating, hardware and
finishing products in the northeast. In addition, the Company sold approximately
16.5% of its interest in American Drug to the management of Five Star, bringing
its interest in American Drug to 37.5%. As a result of the transaction, the
Company will no longer consolidate the balance sheet and operating results of
Five Star and American Drug, but will instead account for American Drug and its
wholly-owned subsidiary Five Star as an equity investment. At September 30,
1998, the Company's investment in American Drug was $8,752,000, including a
$5,000,000 Senior unsecured 8% Note. The Note is due in five years, with
interest due quarterly. In addition, the Company recognized a $6,225,000 loss on
the transaction. For the nine months ended September 30, 1998, Five Star had
revenues of $64,118,000. Upon completion of the transaction, Five Star changed
its name to JL Distributors, Inc.
7. Comprehensive income
The Company has adopted Statement of Financial Accounting Standards
("SFAS") No. 130. "Reporting Comprehensive Income", which establishes standards
for the reporting and display of comprehensive income and its components in
general purpose financial statements for the year ending December 31, 1998. The
following are the components of comprehensive income (in thousands):
Nine Months Ended
September 30, September 30,
1998 1997
--------- -------
Net income (loss) $ (2,513) $ 2,601
Other comprehensive income (loss), net of tax:
Net unrealized gain (loss) on
available-for-sale-securities (4,791) 1,966
-------- ---------
Comprehensive income (loss) $ (7,304) $ 4,567
======== ========
GP STRATEGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
(Unaudited)
7. Comprehensive income (Continued)
The components of accumulated other comprehensive income, net of related tax are
as follows:
September 30, December 31,
1998 1997
Net unrealized gain on
available-for-sale-securities $ 1,839 $ 6,630
-------- --------
Accumulated other comprehensive income $ 1,839 $ 6,630
======== ========
8. Interferon Sciences, Inc.
As of September 30, 1998, the Company recognized a permanent impairment
of its investment in Interferon Sciences, Inc. (ISI) as result of the
significant decrease in the market value of ISI's common stock. The Company
recorded a loss of $3,067,000 during the quarter ended September 30, 1998.
The Company accounts for its investment in ISI as a combination of
long-term available-for-sale equity securities and long-term investments.
9. Treasury stock
On August 26, 1998, the Company announced that its Board of Directors
had authorized the purchase of up to 500,000 shares of the Company's common
stock. Under this program, through September 30, 1998, the Company purchased
44,003 shares of its common stock at a cost of $449,000.
GP STRATEGIES CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The Company realized a loss before income taxes of $(6,253,000) and
$(1,686,000) for the quarter and nine months ended September 30, 1998, as
compared with income of $1,951,000 and $2,220,000 for the corresponding periods
of 1997. The change in the Company's results is due to several factors. On
September 30, 1998, the Company sold certain operating assets of its
wholly-owned subsidiary, the Five Star Group, Inc. (Five Star) to the American
Drug Company (American Drug) (a 37.5% owned affiliate at September 30, 1998).
The Company recognized a $6,225,000 loss on this transaction for the quarter and
nine months ended September 30, 1998. The results of operations for Five Star
have been included in the Consolidated Statement of Operations through September
30, 1998, and in the future will be accounted for with the Company's portion of
the equity income of American Drug. In addition, the Company recorded a
$3,067,000 loss for the quarter and nine months ended September 30, 1998
resulting from the write down of its investment in the common stock of
Interferon Sciences, Inc. (ISI) as a result of the significant decrease in the
market value of ISI's common stock. For the quarter and nine months ended
September 30, 1998, the Company recorded gains of $435,000 and $1,707,000,
respectively on trading securities, compared to an $820,000 gain and a $24,000
loss recognized for the quarter and nine months ended September 30, 1997. For
the quarter and nine months ended September 30, 1998, the Company also earned
Investment and other income, net of $204,000 and $985,000, respectively,
compared to $785,000 and $2,203,000 for the corresponding periods of 1997, which
included realized losses on equity investments of $430,000 and $1,210,000 for
the quarter and nine months ended September 30, 1998, respectively, compared to
losses on equity investments of $100,000 and $625,000 for the corresponding
periods of 1997.
The Company had improved operating results for the quarter and nine months
ended September 30, 1998, primarily due to significantly increased profits
achieved by the Company's principal operating subsidiary General Physics
Corporation (General Physics). For the quarter and nine months ended September
30, 1998, General Physics operating income increased by $3,027,000 and
$4,238,000, respectively.
Sales
For the quarter ended September 30, 1998, consolidated sales increased by
$23,471,000 to $86,182,000 from the $62,711,000 recorded in the corresponding
quarter of 1997. For the nine months ended September 30, 1998, consolidated
sales increased by $41,890,000 to $219,951,000 from $178,061,000 recorded for
the nine months ended September 30, 1997. The increased sales for the quarter
and nine months ended September 30, 1998, were primarily the result of increased
sales achieved by General Physics. The increased sales by General Physics were
primarily the result of $17,252,000 of sales attributable to the acquisition of
Deltapoint Corporation (Deltapoint) on July 13, 1998 and the Learning
Technologies business of SHL Systemhouse Co. on June 18, 1998. In addition,
General Physics continued to generate increased revenues from its business with
commercial clients.
Gross margin
Consolidated gross margin of $11,510,000, or 13%, for the quarter ended
September 30, 1998, increased by $2,123,000 when compared to the consolidated
gross margin of $9,387,000, or 15%, for the quarter ended September 30, 1997.
For the nine months ended September 30, 1998, consolidated gross margin of
$31,638,000 or 14% of consolidated sales increased by $4,842,000 when compared
to $26,796,000 or 15% of consolidated sales earned in the nine months ended
September 30, 1997. These increases were principally the result of increased
gross margin generated by General Physics, as a result of increased sales due to
growth and acquisitions.
Selling, general and administrative expenses
For the quarter and nine months ended September 30, 1998, selling, general
and administrative expenses (SG&A) of $7,819,000 and $23,587,000 were $240,000
and $36,000 lower than the $8,059,000 and $23,623,000 of SG&A expenses incurred
during the quarter and nine months ended September 30, 1997. The decrease in
SG&A for the quarter ended September 30, 1998, was principally the result of
reduced costs at the corporate level partially offset by increased costs
incurred by General Physics in connection with the acquisition of Deltapoint and
Learning Technologies.
Investment and other income, net
Investment and other income, net of $204,000 and $985,000 for the
quarter and nine months ended September 30, 1998 decreased by $581,000 and
$1,218,000, respectively, as compared to $785,000 and $2,203,000 for the
corresponding periods of 1997. The reduced Investment and other income, net for
the periods is due to several factors. The decrease in Investment and other
income, net for the nine months ended September 30, 1998, was the result of
consulting revenue earned by American Drug in 1997. In addition, for the quarter
and nine months ended September 30, 1998, the Company realized losses on equity
investments of $430,000 and $1,210,000, respectively, compared to losses on
equity investments of $100,000 and $625,000 for the corresponding periods of
1997 and for the quarter ended September 30, 1998 a $220,000 foreign currency
transaction loss.
Income tax expense
For the quarter and nine months ended September 30, 1998, the Company
recorded an income tax expense of $313,000 and $827,000, respectively, which
represents primarily state and local income taxes. The Company has not recorded
Federal income tax expense for the quarter and nine months ended September 30,
1998, due to the availability of net operating losses.
For the quarter and nine months ended September 30, 1997, the Company had an
income tax benefit of $3,000 and $381,000, respectively. The deferred income tax
benefit for the periods resulted from a reduction in the valuation allowance
among other factors. The decrease in the valuation allowance in 1997 was
attributable in part to the expected utilization of the Company's net operating
loss carryforwards, and to the Company's expectation of generating sufficient
taxable income that will allow for the realization of a portion of its deferred
tax assets. In 1997, this benefit was partially offset by state and local income
tax expense.
Recent accounting pronouncements
In June of 1997, the FASB issued Statement of Financial Accounting
Standard No. 131, (SFAS 131) "Disclosures About Segments of an Enterprise and
Related Information". SFAS 131 requires disclosure of certain information about
operating segments and about products and services, geographic areas in which a
company operates, and their major customers. The required information will be
reflected in the Company's December 31, 1998 financial statements.
In June 1998, the FASB issued Statement of Financial Accounting Standard
No. 133 (SFAS 133), "Accounting for Derivative Instruments and Hedging
Activities." This Statement establishes accounting and reporting standards for
derivative instruments and for hedging activities. It requires that an entity
recognize all derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. This Statement
is effective for all fiscal quarters of fiscal years beginning after June 15,
1999. The Company will adopt SFAS 133 by January 1, 2000. The Company's adoption
of SFAS 133 will not have a material impact on the consolidated financial
statements.
Year 2000
The Company is aware of the issues associated with the programming code
in existing computer systems as the millennium (year 2000) approaches. The "year
2000" problem is pervasive and complex as virtually every computer operation
will be affected in some way by the rollover of the two digit year value to 00.
The issue is whether computer systems will properly recognize date sensitive
information when the year changes to 2000. Systems that do not properly
recognize such information could generate erroneous data or cause a system to
fail.
The Company is utilizing both internal and external resources to
identify, correct or reprogram and test systems for year 2000 compliance.
General Physics, the Company's principal operating subsidiary, has evaluated its
computer systems over the past six months and has determined that its basic
operating system is year 2000 compliant. It has also identified various
ancillary programs that need to be updated and has contracted with third parties
for this work to be completed within the next six months. It is expected that
the cost of these modifications will be approximately $25,000.
In addition, the information systems and technology management group of
General Physics is examining their exposure to the year 2000 in other areas of
technology. These areas include telephone and E-mail systems, operating systems
and applications in free standing personnel computers, local area networks and
other areas of communication. A failure of these systems, which may impact the
ability of General Physics to service their customers could have a material
effect on their results of operations. These issues are being handled by the
information and technology team at General Physics by identifying the problems
and obtaining from vendors and service providers either the necessary
modifications to the software or assurances that the systems will not be
disrupted. General Physics believes that the cost of the programming and
equipment upgraded will not be in excess of $250,000. In addition , certain
personal computers and other equipment that is not year 2000 compliant will be
upgraded through General Physics normal process of equipment upgrades. General
Physics believes that the evaluation and implementation process will be complete
no later than the second quarter of 1999. Over the next year, General Physics
also plans to continue to plan and implement other information technology
projects in the ordinary course of business.
General Physics expects to finance these expenditures from a
combination of working capital and operating leases for a portion of the new
computer equipment. Therefore, General Physics does not expect the year 2000
issue to have a material adverse impact on its financial position or results of
operations.
The other operations of the Company, including MXL Industries,
Inc.(MXL) and the corporate office, will be year 2000 compliant by the first
quarter of 1999. The only material application that is not year 2000 compliant
at this time is MXL's manufacturing system. MXL anticipates that they will be
year 2000 compliant by March 31, 1999, at a cost of approximately $15,000. The
cost will not have a material impact upon the Company.
Like other companies, the Company relies on its customers for revenues
and on its vendors for products and services of all kinds; these third parties
all face the year 2000 issue. An interruption in the ability of any of them to
provide goods or services, or to pay for goods or services provided to them, or
an interruption in the business operations of our customers causing a decline in
demand for services, could have a material adverse effect on the Company in
turn. In addition, the Company has significant equity investments which all face
the year 2000 issue as well. An interruption in their ability to operate could
cause a significant impact on their market value which in turn would have a
material adverse effect on the Company.
In addition, there is a risk, the probability of which the Company is
not in a position to estimate, that the transition to the year 2000 will cause
wholesale, perhaps prolonged, failures of electrical generation, banking,
telecommunications or transportation systems in the United States or abroad,
disrupting the general infrastructure of business and the economy at large. The
effect of such disruptions on the Company could be material.
The Company's business units will communicate with their principal
customers and vendors about their year 2000 readiness, and expect this process
to be completed no later than the third quarter of 1999. None of the responses
received to date suggests that any significant customer or vendor expects the
year 2000 issue to cause an interruption in its operations which would have a
material adverse impact on the Company. However, because so many firms are
exposed to the risk of failure not only of their own systems, but of the systems
of other firms, the ultimate effect of the year 2000 issue is subject to a very
high degree of uncertainty.
The Company believes that its preparations currently under way are
adequate to assess and manage the risks presented by the year 2000 issue, and
does not have a formal contingency plan at this time.
The statements in this section regarding the effect of the year 2000
and the Company's responses to it are forward-looking statements. They are based
on assumptions that the Company believes to be reasonable in light of its
current knowledge and experience. A number of contingencies could cause actual
results to differ materially from those described in forward-looking statements
made by or on behalf of the Company.
Adoption of a Common European Currency
On January 1, 1999, eleven European countries will adopt 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.
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 the acquisition of The Learning Technologies business of SHL
Systemhouse Co. and The Deltapoint Corporation will not achieve the commercial
advantages anticipated by GP Strategies, such as the production of significant
revenues or profits for GP Strategies, the risk that the Company's preparations
with respect to the risks presented by the year 2000 issue will not be adequate,
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
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1998, the Company had cash and cash equivalents totaling
$7,504,000.
The Company has sufficient cash, cash equivalents and marketable
securities, marketable long-term investments and borrowing availability under
existing and potential lines of credit as well as the ability to obtain
additional funds from its operating subsidiaries in order to fund its working
capital requirements.
The decrease in cash and cash equivalents of $4,871,000 resulted from cash
used in operations of $7,989,000 and cash used in investing activities of
$36,561,000, partially offset by cash provided by financing activities of
$39,679,000. The cash used in investing activities was primarily for the
acquisitions of Learning Technologies and Deltapoint. The cash provided by
financing activities was from increased short-term borrowings and a term loan.
The cash provided was used to fund the acquisitions and the operations of the
Company.
GP STRATEGIES CORPORATION AND SUBSIDIARIES
QUALIFICATION RELATING TO FINANCIAL INFORMATION
September 30, 1998
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 1998 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. Exhibit
1. Asset Purchase Agreement dated as of July 13, 1998,
between General Physics Corporation and the
Deltapoint Corporation. Incorporated herein by
reference to the Registrants Form 8-K dated July 27,
1998.
2. Asset Purchase Agreement dated as of August 31, 1998,
between American Drug Company and Five Star Group,
Inc. Incorporated herein by reference to American
Drug Company's Form 8-K filed on September 15, 1998.
b. Reports on Form 8-K
Form 8-K filed on July 27, 1998 reporting event under
Item 2.
Form 8-K/A to report dated July 27, 1998, filed on
September 28, 1998, reporting Item 7.
Form 8-K filed on October 15, 1998, reporting events
under Items 2 and 7.
GP STRATEGIES CORPORATION AND SUBSIDIARIES
September 30, 1998
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 16, 1998 BY: Jerome I. Feldman
President &
Chief Executive Officer
DATE: November 16, 1998 BY: Scott N. Greenberg
Executive Vice President &
Chief Financial Officer