UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the quarter ended June 30, 1999
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
August 10, 1999:
Common Stock 11,006,422 shares
Class B Capital 450,000 shares
GP STRATEGIES CORPORATION AND SUBSIDIARIES
TABLE OF CONTENTS
Page No.
Part I. Financial Information
Consolidated Condensed Balance Sheets -
June 30, 1999 and December 31, 1998 1
Consolidated Condensed Statements of Operations -
Three Months and Six Months Ended June 30,
1999 and 1998 3
Consolidated Condensed Statements of Cash Flows -
Six Months Ended June 30, 1999 and 1998 4
Notes to Consolidated Condensed Financial
Statements 6
Management's Discussion and Analysis of Financial
Condition and Results of Operations 14
Part II. Other Information 21
Signatures 22
PART I. FINANCIAL INFORMATION
GP STRATEGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(in thousands)
June 30, December 31,
1999 1998
ASSETS (unaudited) *
Current assets
Cash and cash equivalents $ 7,156 $ 6,807
Marketable securities 741
Accounts and other receivables 59,510 55,531
Inventories 2,032 2,362
Costs and estimated earnings in excess
of billings on uncompleted contracts 23,049 15,395
Prepaid expenses and other current assets 5,105 5,344
---------- ----------
Total current assets 96,852 86,180
--------- ---------
Investments and advances 19,941 23,071
--------- ----------
Property, plant and equipment, net 14,842 14,474
--------- ----------
Intangible assets, net of amortization of $36,648
and $34,967 80,326 81,358
--------- ---------
Deferred tax asset 3,189 3,290
---------- ----------
Other assets 2,387 2,532
---------- ----------
$217,537 $210,905
======== ========
* The Consolidated Condensed Balance Sheet as of December 31, 1998 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)
June 30, December 31,
1999 1998
LIABILITIES AND STOCKHOLDERS' EQUITY (unaudited) *
Current liabilities:
Current maturities of long-term debt and
notes payable $ 5,257 $ 3,180
Short-term borrowings 35,538 30,723
Accounts payable and accrued expenses 33,363 24,089
Billings in excess of costs and estimated
earnings on uncompleted contracts 11,248 14,199
--------- ----------
Total current liabilities 85,406 72,191
--------- ---------
Long-term debt less current maturities 14,782 18,379
--------- ----------
Other liabilities 3,440
--------- ------------
Stockholders' equity
Common stock 114 111
Class B capital stock 4 3
Capital in excess of par value 167,230 164,217
Accumulated deficit (46,966) (39,397)
Accumulated other comprehensive income 178 99
Note receivable from stockholder (1,805) (1,742)
Treasury stock, at cost (4,846) (2,956)
---------- ----------
Total stockholders' equity 113,909 120,335
--------- ---------
$217,537 $210,905
======== ========
* The Consolidated Condensed Balance Sheet as of December 31, 1998 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 Six months
ended June 30, ended June 30,
---------------- ----------------
1999 1998 1999 1998
------- ------ ------- ---------
Sales $ 56,766 $ 70,910 $122,695 $133,769
Cost of sales 51,852 60,247 107,924 113,641
-------- -------- -------- ---------
Gross margin 4,914 10,663 14,771 20,128
Selling, general & administrative expenses (8,398) (8,078) (14,416) (15,768)
Interest expense (1,110) (958) (2,061) (1,846)
Investment and other income, net 263 339 742 782
Gain on trading securities 539 533 564 1,272
Restructuring charges (6,312) (6,312)
---------- ------------- --------- -------------
Income (loss) before income taxes (10,104) 2,499 (6,712) 4,568
Income tax expense (77) (236) (857) (514)
---------- --------- -------- ---------
Net income (loss) $(10,181) $ 2,263 $ (7,569) $ 4,054
======== ======== ======== ========
Net income (loss) per share:
Basic $ (.90) $ .21 $ (.67) $ .38
========== ========= ========== =========
Diluted $ (.90) $ .18 $ (.67) $ .33
========== ========= ========== =========
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)
Six months
ended June 30,
1999 1998
Cash flows from operations:
Net income (loss) $(7,569) $4,054
Adjustments to reconcile net income (loss)
to net cash used for operating activities:
Depreciation and amortization 3,583 2,936
Issuance of stock for profit incentive plan 672 617
Equity loss on investments 234 780
Proceeds from sale of trading securities 2,639 1,319
Restructuring charge 6,312
Gain on trading securities (564) (1,272)
Changes in other operating items (6,828) (18,818)
------- ---------
Net cash used for operating activities (1,521) (10,384)
------- ----------
Cash flows from investing activities:
Acquisition of Learning Technologies (24,292)
Additions to property, plant & equipment (2,270) (2,593)
Additions to intangible assets, net (649) (862)
Reduction of (increase to) investments and other assets, net 1,146 (899)
------ ---------
Net cash used for investing activities (1,773) (28,646)
------- --------
Cash flows from financing activities:
Repayment of short-term borrowings (14,519)
Proceeds from short-term borrowings 4,815 36,147
Proceeds from issuance of long-term debt 15,000
Repayment of long-term debt (1,020) (270)
Exercise of common stock options and warrants 910 261
Repurchase of treasury stock (1,062) (240)
------- ---------
Net cash provided by (used for) financing activities 3,643 (36,379)
-------- ---------
GP STRATEGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Continued)
(Unaudited)
(in thousands)
Six months
ended June 30,
1999 1998
Net increase (decrease) in cash and cash equivalents 349 (2,651)
Cash and cash equivalents at the beginning of the periods 6,807 12,375
------ --------
Cash and cash equivalents at the end of the periods $ 7,156 $ 9,724
======== ========
Cash paid during the periods for:
Interest $ 2,569 $ 2,211
========= ========
Income taxes $ 862 $ 784
========== ========
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 1999
interim period are not necessarily indicative of results to be expected for the
entire year.
2. Earnings per share
Earnings (loss) per share (EPS) for the periods ended June 30, 1999 and
1998 are as follows (in thousands, except per share amounts):
Three months Six months
ended June 30, ended June 30,
1999 1998 1999 1998
Basic EPS
Net income (loss) $ (10,181) $ 2,263 $ (7,569) $ 4,054
Weighted average shares
outstanding 11,320 10,815 11,297 10,775
Basic earnings (loss) per share $ (.90) $ .21 $ (.67) $ .38
Diluted EPS
Net income (loss) $ (10,181) $ 2,263 $ (7,569) $ 4,054
Weighted average shares
outstanding 11,320 10,815 11,297 10,775
Dilutive effect of stock options
and warrants 1,573 1,462
------------- --------- ------------ ---------
Weighted average shares
outstanding, diluted 11,320 12,388 11,297 12,237
Diluted earnings (loss)
per share $ (.90) $ .18 $ (.67) $ .33
GP STRATEGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
(Unaudited)
2. Earnings per share (Continued)
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. In 1998, 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. In 1999, even though the Company still has
stock options and warrants outstanding, diluted earnings per share is not
presented due to the Company's net loss, which makes the effect of the
potentially dilutive securities anti-dilutive.
3. 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):
June 30, December 31,
1999 1998
Raw materials $ 768 $ 811
Work in process 300 272
Finished goods 964 1,279
---------- --------
$ 2,032 $ 2,362
======== ========
4. Long-term debt
Long-term debt consists of the following (in thousands):
June 30, December 31,
1999 1998
8% Swiss bonds due 2000 $ 2,208 $ 2,359
5% Convertible bonds due August 31, 1999 1,358 1,858
Term loan 14,438 14,813
Other 2,035 2,529
-------- --------
20,039 21,559
Less current maturities (5,257) (3,180)
-------- --------
$14,782 $18,379
======= =======
GP STRATEGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
(Unaudited)
5. Comprehensive income
The following are the components of comprehensive income (loss) (in thousands):
Three months ended Six months ended
June 30, June 30,
1999 1998 1999 1998
Net income (loss) $(10,181) $ 2,263 $ (7,569) $ 4,054
-------- -------- --------- --------
Other comprehensive income (loss) before tax:
Net unrealized loss on
available-for-sale-securities (376) (2,549) (176) (2,911)
Foreign currency translation adjustment 223 195
---------- -------------- ---------- ------------
Other comprehensive income (loss),
before tax (153) (2,549) 19 (2,911)
---------- --------- ----------- --------
Income tax benefit relating to items
of other comprehensive income 127 867 60 990
----------- ----------- ----------- ----------
Comprehensive income (loss),
net of tax $(10,207) $ 581 $ (7,490) $ 2,133
======== ========== ========= ========
The components of accumulated other comprehensive income are as follows:
June 30, December 31,
1999 1998
Net unrealized gain on
available-for-sale-securities $ 1,522 $ 1,698
Foreign currency translation adjustment (643) (838)
--------- ---------
Accumulated other comprehensive income
before tax 879 860
Accumulated income tax expense related to
items of other comprehensive income (701) (761)
--------- ---------
Accumulated other comprehensive income,
net of tax $ 178 $ 99
========= ==========
GP STRATEGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
(Unaudited)
6. Business segments
The operations of the Company currently consist of the following four
business segments, by which the Company is managed.
The Company's principal operating subsidiary is General Physics
Corporation (GP). GP is a performance improvement company that assists
productivity driven organizations to maximize workforce performance by
integrating people, processes and technology. GP is a total solutions provider
for strategic training, engineering, consulting and technical support services
to Fortune 500 companies, government, utilities and other commercial customers.
GP, which through December 31, 1998 comprised the Performance Improvement Group,
has been resegmented during 1999 and now 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 and 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. For the six months ended June 30, 1998, the Company
also had the Distribution Group, which included the operations of the Five Star
Group, Inc. (Five Star), a distributor of home decorating, hardware and
finishing products. At June 30, 1998, the "Other" segment consisted of the
operations of American Drug Company (ADC) and the Company's Hydro Med Science
division. On September 30, 1998, the Company sold substantially all the
operating assets of Five Star to American Drug Company (ADC). Prior to the above
transaction, the Company sold a 16.5% interest in ADC to the management of Five
Star, bringing its interest in ADC to approximately 38%. Therefore as of
September 30, 1998, the Company no longer consolidated the balance sheet and
results of operations of ADC but instead accounts for ADC as an equity
investment. Accordingly, effective September 30, 1998, the "Other" segment
consists solely of the operations of the Company's Hydro Med Sciences division.
GP STRATEGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
(Unaudited)
6. Business segments (continued)
Financial information for the six months ended June 30, 1998, has been
restated to show all sales from the Performance Improvement segment reclassified
to the Manufacturing Services, Process and Energy, and Information Technology
segments. The management of the Company does not allocate the following items by
segment: Investment and other income, 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 is
consistent with the presentation on the Consolidated Condensed Statements of
Operations. The following tables set forth the sales and gross margin of each of
the Company's operating segments (in thousands):
Three months ended Six months ended
June 30, June 30,
------------------------ --------------------
1999 1998 1999 1998
--------- --------- --------- ---------
Sales
Manufacturing Services $ 22,241 $21,311 $ 46,741 $ 40,052
Process and Energy 17,424 19,343 39,317 36,896
Information Technology 14,342 5,243 30,944 8,149
Optical Plastics 2,476 2,826 5,205 5,611
Distribution 21,897 42,328
Other 283 290 488 733
-------- ------- -------- --------
$ 56,766 $ 70,910 $122,695 $133,769
-------- -------- -------- --------
Gross margin
Manufacturing Services $ 3,469 $ 3,367 $ 7,639 $ 5,787
Process and Energy 2,191 2,612 5,280 5,105
Information Technology (1,584) 115 176 408
Optical Plastics 685 824 1,401 1,649
Distribution 3,602 6,873
Other 153 143 275 306
-------- -------- -------- --------
$ 4,914 $ 10,663 $ 14,771 $ 20,128
-------- -------- ------- --------
GP STRATEGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
(Unaudited)
6. Business segments (continued)
Information about the Company's net sales in different geographic regions, which
are attributed to countries based on location of customers, is as follows (in
thousands):
Three months ended Six months ended
June 30, June 30,
----------------------- ----------------------
1999 1998 1999 1998
------- ------- ------- -------
United States $ 43,628 $ 67,043 $ 94,898 $129,448
Canada 6,916 1,144 15,245 1,144
United Kingdom 4,221 2,049 9,005 2,049
Latin America 2,001 674 3,547 1,128
-------- ---------- --------- ----------
$ 56,766 $ 70,910 $122,695 $133,769
-------- -------- -------- --------
Information about the Company's long-lived assets in different geographic
regions, is as follows (in thousands):
June 30, December 31,
1999 1998
United States $ 11,749 $ 10,704
Canada 2,674 1,989
United Kingdom 366 1,731
Latin America 53 50
---------- ---------
$ 14,842 $ 14,474
-------- --------
GP STRATEGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
(Unaudited)
7. Restructuring
On June 1, 1999, the Company adopted a restructuring plan, which
primarily relates 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 6 offices in the United States, 6 offices in Canada and 5 offices
in the United Kingdom (UK), and has terminated approximately 100 employees.
In connection with the restructuring, the Company has recorded a
restructuring charge of $6,312,000. The current portion of the charge totaling
$2,872,000 is included in Accounts payable and accrued expenses and the
remainder of $3,440,000 is set forth as Other liabilities in the Consolidated
Condensed Balance Sheet. The components are as follows (in thousands):
Severance and related benefits $1,201
Present value of future lease obligations 4,487
Other facility related obligations 624
--------
$6,312
The amounts that have been accrued for severance and related benefits
will be expended in the quarter ending September 30, 1999. The present value of
future lease obligations is net of assumed sublets, and will be expended through
2015. For the remainder of 1999, approximately $1,062,000 will be expended
related to the lease obligations, $818,000 in the year 2000, and remaining
balance through 2015. Other facility-related costs, totaling $624,000 will be
expended through the remainder of 1999 and 2000.
In connection with the restructuring, the Company has incurred
write-offs of inventory and other assets related to certain revenue producing
activities which are being exited as part of the restructuring ($1,002,000),
which are included in Cost of sales in the Consolidated Condensed Statement of
Operations. In addition, GP has incurred charges related to write-offs of assets
related to certain revenue producing activities which are being exited as a
result of the restructuring ($1,594,000), which are included in Selling, general
and administrative expenses in the Consolidated Condensed Statement of
Operations.
GP STRATEGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
(Unaudited)
7. Restructuring (Continued)
Due to the Company's significant restructuring charge taken during the
quarter ended June 30, 1999, the Company is currently in discussions with its
banks to determine if a technical default exists with respect to certain
financial covenants in its loan agreements. Based on those discussions with such
banks, the Company believes that the loan agreements will be amended so that
such technical defaults if determined to exist are eliminated.
8. Related party transaction
On January 11, 1999, in conjunction with the purchase of an aggregate
of 100,000 shares of Class B Common Stock, the Company received a note
receivable from a senior executive officer for $891,000. As of December 31, 1998
the Company also had a note receivable of $1,742,000 from this senior executive
officer. On March 15, 1999, such senior executive officer repaid $828,267 of
such loans using proceeds from the sale of 43,593 shares of Common Stock to the
Company. As of June 30, 1999, the aggregate amount of indebtedness outstanding
was $1,805,000. The loans accrue interest at the prime rate and all principal
and interest are due and payable on October 28, 1999 and January 11, 2000,
respectively. The loans are secured by the shares of Class B Common Stock
acquired as well as certain other assets of the senior executive officer.
9. Treasury stock
On May 5, 1999, the Company announced that its Board of Directors had
authorized the purchase of up to 500,000 shares of the Company's common stock.
During the quarter ended June 30, 1999, the Company repurchased 84,259 shares of
its Common Stock.
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 $10,104,000 and
$6,712,000 for the quarter and six months ended June 30, 1999, as compared with
income of $2,499,000 and $4,568,000 for the corresponding periods of 1998. The
change in the Company's results is due to a Restructuring charge totaling
$6,312,000, primarily related to the Company's Information Technology (IT)
business segment as well as charges and a higher than normal level of expenses
incurred relative to revenues generated during the period of facility closure of
the activities that the Company is exiting in the second quarter ended June 30,
1999. These charges were included in Cost of sales and Selling, general and
administrative expenses, and included such items as: payroll and related
benefits, facility-related costs, write-offs of abandoned and other assets and
losses on contracts. The Restructuring charge is comprised of expenses related
to the severance and related benefit costs.
The Company's restructuring plan, which was adopted on June 1, 1999,
primarily relates to its 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 General Physics Corporation's (GP) current
business. In connection with the restructuring, the Company closed, downsized,
or consolidated 6 offices in the United States, 6 offices in Canada and 5
offices in the United Kingdom (UK), and has terminated approximately 100
employees.
The Information Technology Group is part of the Company's principal
operating subsidiary, 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, and technical support services to
commercial customers, utilities and the government.
In addition, for the quarter and six months ended June 30, 1999, the Company
recorded a $539,000 and $564,000 gain on certain trading securities as compared
to a $533,000 and $1,272,000 gain on certain trading securities recorded for the
quarter and six months ended June 30, 1998, respectively.
Sales
For the quarter ended June 30, 1999, consolidated sales decreased by
$14,144,000 to $56,766,000 from the $70,910,000 recorded in the corresponding
quarter of 1998. For the six months ended June 30, 1999, consolidated sales
decreased by $11,074,000 to $122,695,000 from the $133,769,000 recorded for the
six months ended June 30, 1998. The decreased sales were primarily the result of
the sale of substantially all the operating assets of the Five Star Group, Inc.
(Five Star) to American Drug Company (ADC) on September 30, 1998 partially
offset by increased sales generated by GP in all segments of its business (see
Note 6 to the Consolidated Condensed Financial Statements). GP's net sales for
the quarter and six months ended June 30, 1999, included sales from companies
acquired in June and July 1998.
For the quarter and six months ended June 30, 1998, net sales were
$21,897,000 and $42,328,000 for Five Star, which comprised the Distribution
Group through September 30, 1998. On September 30,1998, the Company sold
substantially all the operating assets of Five Star to ADC. Prior to the above
transaction, the Company sold a 16.5% interest in ADC to the management of Five
Star, bringing its interest in ADC to approximately 38%. Therefore as of
September 30, 1998, the Company no longer consolidated the balance sheet and
results of operations of ADC but instead accounts for ADC as an equity
investment. The acquisition of Learning Technologies (currently included in the
Information Technology Group) had only a minor effect on the results for the
quarter and six months ended June 30, 1998, since the acquisition took place on
June 16, 1998.
Gross margin
Consolidated gross margin of $4,914,000, or 9%, for the quarter ended June
30, 1999, decreased by $5,749,000 when compared to the consolidated gross margin
of $10,663,000, or 15%, for the quarter ended June 30, 1998. For the six months
ended June 30, 1999, consolidated gross margin of $14,771,000 or 12% of
consolidated sales decreased by $5,357,000 when compared to $20,128,000 or 15%
of consolidated sales earned in the six months ended June 30, 1998. The reduced
gross margin was due to two factors. In the quarter and six months ended June
30, 1998, Five Star earned $3,602,000 and $6,873,000 of gross margin. In
addition, the Information Technology Group had a gross margin of $176,000 on
sales of $30,944,000 for the six months ended June 30, 1999 and a negative gross
margin of $1,584,000 on sales of $14,342,000 for the quarter ended June 30,
1999. This was principally caused by charges related to (1) losses on contracts
($875,000), (2) write-offs of inventory and other assets related to certain
revenue producing activities which are being exited as a result of the
restructuring ($1,002,000), and (3) lower utilization of employees which led to
the termination of approximately 100 people (approximately $1,200,000).
Selling, general and administrative expenses
For the quarter and six months ended June 30, 1999, selling, general and
administrative expenses (SG&A) of $8,398,000 and $14,416,000 was $320,000 higher
and $1,352,000 lower, respectively, than the $8,078,000 and $15,768,000 of SG&A
expenses incurred during the quarter and six months ended June 30, 1998. The
increase in SG&A for the quarter ended June 30, 1999, was principally the result
of charges incurred by GP in connection with write-offs of assets related to
certain revenue producing activities which are being exited as a result of the
restructuring ($1,594,000) and costs related to facility costs and other
operating costs incurred in the second quarter, which were higher than normal
relative to revenue generated (approximately $900,000). These costs, which were
primarily related to the IT Group, and the increased cost incurred due to
growth, were partially offset by the decrease in SG&A resulting from the sale of
substantially all the operating assets of Five Star to ADC on September 30,
1998. For the quarter and six months ended June 30, 1998, Five Star had SG&A
expenses of $3,357,000 and $6,362,000, respectively. The decrease in SG&A for
the six months ended June 30, 1999 was the result of the sale of substantially
all the operating assets of Five Star to ADC on September 30, 1998, partially
offset by increased costs incurred by GP due to growth and the items discussed
above.
Investment and other income, net
Investment and other income, net of $263,000 and $742,000 for the quarter
and six months ended June 30, 1999 decreased by $76,000 and $40,000,
respectively, as compared to $339,000 and $782,000 for the corresponding periods
of 1998. The Company recognized losses of $569,000 and $234,000 for the quarter
and six months ended June 30, 1999, on the Company's equity investments compared
to losses of $350,000 and $780,000 recognized for the corresponding periods in
1998.
Income tax expense
For the quarter and six months ended June 30, 1999, the Company recorded an
income tax expense of $77,000 and $857,000, respectively, which represents the
applicable federal, state and local income taxes. The Company has not recorded
Federal income tax expense for the quarter and six months ended June 30, 1998,
due to the availability of net operating losses.
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 in the activities. 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.
Year 2000
The Company is aware of the issues associated with the programming code
in existing computer systems as the millennium (Y2K) approaches. The "Y2K"
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 Y2K compliance. GP, the
Company's principal operating subsidiary, has evaluated its computer systems and
believes that its business applications are Y2K compliant, except as noted
below. 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 three months. It is expected that the cost of these modifications will be
approximately $60,000.
In addition, the information systems and technology management group of
GP is examining their exposure to the Y2K in other areas of technology. These
areas include telephone and E-mail systems, operating systems and applications
in free standing personal computers, local area networks and other areas of
communication. A failure of these systems, which may impact the ability of GP 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 GP 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. GP believes that the cost of the programming
and equipment upgrades will not exceed $300,000. In addition, certain personal
computers and other equipment that is not Y2K compliant will be upgraded or
replaced through GP's normal process of equipment upgrades. GP believes that the
evaluation and implementation process will be complete no later than the third
quarter of 1999. Over the next year, GP intends to continue to plan and
implement other information technology projects in the ordinary course of
business.
GP expects to finance these expenditures from a combination of working
capital and operating leases for a portion of the new computer equipment.
Therefore, GP does not expect the Y2K issue to have a material adverse impact on
its financial position or results of operations.
The other operations of the Company, including MXL and the corporate
office, will be Y2K compliant by September 1, 1999. The Company believes that
the only material application that is not Y2K compliant at this time is MXL's
manufacturing system. MXL anticipates that they will be Y2K compliant by
September 1, 1999. The cost will be approximately $20,000.
Like other companies, the Company relies on its customers for revenues
and on its vendors for various products and services; these third parties all
face the Y2K 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 its 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 Y2K 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 the event of non-remediation of the Y2K issues
by the Company or certain of its vendors, the worst case scenario would be
disruption of the Company's operations, possibly impacting the provision of
services to customers and the Company's ability to bill or collect revenues.
The Company's business units are communicating with their principal
customers and vendors about their Y2K 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
Y2K 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 Y2K issue is subject to a very high
degree of uncertainty.
Management believes that the Company's efforts to mitigate its Y2K
risks will avoid significant business interruptions. Contingency planning is an
ongoing process. While the Company's overall Y2K contingency plan is now being
developed, existing disaster recovery documentation and procedures remain the
first line of defense. Some Y2K specific plans have been developed and are being
reviewed and tested. The principal Y2K operational contingency plans are
expected to be completed and tested by September 1999.
In addition, there is a risk, the probability of which the Company is
not in a position to estimate, that the transition to the Y2K 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 statements in this section regarding the effect of the Y2K 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 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 risk that the
Company's preparations with respect to the risks presented by the year 2000
issue will not be adequate, 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.
At June 30, 1999, the Company had cash and cash equivalents totaling
$7,156,000. 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. At
June 30, 1999, approximately $29,462,000 was available to the Company under its
credit agreements.
For the six months ended June 30, 1999, the Company's working capital
decreased by $2,543,000 to $11,446,000, reflecting the effect of increased
accounts payable and short-term borrowings, partially offset by increased
accounts receivables and costs and estimated earnings in excess of billings on
uncompleted contracts.
The increase in cash and cash equivalents of $349,000 in 1999 resulted
from cash provided by financing activities of $3,643,000, partially offset by
cash used for operations of $1,521,000 and cash used in investing activities of
$1,773,000. Cash provided by financing activities consisted primarily of
proceeds from short-term borrowings partially offset by repayments of long-term
debt and repurchases of treasury stock. Net cash used in investing activities
includes $2,270,000 of additions to property, plant and equipment partially
offset by proceeds from the sale of equity and other investments.
Due to the Company's significant restructuring charge taken during the
quarter ended June 30, 1999, the Company is currently in discussions with its
banks to determine if a technical default exists with respect to certain
financial covenants in its loan agreements. Based on those discussions with such
banks, the Company believes that the loan agreements will be amended so that
such technical defaults, if determined to exist, are eliminated.
The Company does not anticipate having to replace major facilities in
the near term. As of June 30, 1999, the Company has not contractually committed
itself for any major capital expenditures.
GP STRATEGIES CORPORATION AND SUBSIDIARIES
PART II. OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
4.2 Amendment, dated as of July 30, 1999, to the Rights
Agreement, dated as of June 23, 1997, between the Company
and Harris Trust Company of New York, as Rights Agreement.
Incorporated herein by reference to Exhibit 4.2 of the
Company's report on Form 8-A/A filed on August 2, 1999.
10 Employment Agreement, dated as of June 1, 1999, between the
Company and Jerome I. Feldman. Filed herewith
(b) Reports on Form 8-K
None
GP STRATEGIES CORPORATION AND SUBSIDIARIES
June 30, 1999
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed in its behalf by the
undersigned thereunto duly authorized.
GP STRATEGIES CORPORATION
DATE: August 13, 1999 BY: Scott N. Greenberg
Executive Vice President and
Chief Financial Officer
DATE: August 13, 1999 BY: Jerome I. Feldman
President and
Chief Executive Officer