-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Bfx0SSu/K9gIgPZ4PNT9OyH+Dv6MGMKvF4ZEJXuQsGnfPKMWP0F3aJIDOjRIeBWK fHAY5fRN1j6eUHVk/OQbPg== /in/edgar/work/20000814/0000070415-00-000037/0000070415-00-000037.txt : 20000921 0000070415-00-000037.hdr.sgml : 20000921 ACCESSION NUMBER: 0000070415-00-000037 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20000630 FILED AS OF DATE: 20000814 FILER: COMPANY DATA: COMPANY CONFORMED NAME: GP STRATEGIES CORP CENTRAL INDEX KEY: 0000070415 STANDARD INDUSTRIAL CLASSIFICATION: [8200 ] IRS NUMBER: 131926739 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-07234 FILM NUMBER: 697309 BUSINESS ADDRESS: STREET 1: 9 W 57TH ST STREET 2: STE 4170 CITY: NEW YORK STATE: NY ZIP: 10019 BUSINESS PHONE: 2122309500 MAIL ADDRESS: STREET 1: 9 WEST 57TH STREET STREET 2: STE 4107 CITY: NEW YORK STATE: NY ZIP: 10019 FORMER COMPANY: FORMER CONFORMED NAME: NATIONAL PATENT DEVELOPMENT CORP DATE OF NAME CHANGE: 19920703 10-Q 1 0001.txt 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, 2000 or [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from to Commission File Number: 1-7234 GP STRATEGIES CORPORATION (Exact Name of Registrant as Specified in its Charter) Delaware 13-1926739 - ------------------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 9 West 57th Street, New York, NY 10019 - ------------------------------------------------------------------------------- (Address of principal executive offices) (Zip code) (212) 826-8500 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange act of 1934 during the preceding 12 months (or for such shorter period) that the registrant was required to file such reports and (2) has been subject to such filing requirements for the past 90 days. Yes X No -------- Number of shares outstanding of each of issuer's classes of common stock as of August 9, 2000: Common Stock 11,971,813 shares Class B Capital 800,000 shares GP STRATEGIES CORPORATION AND SUBSIDIARIES TABLE OF CONTENTS Page No. Part I. Financial Information Consolidated Condensed Balance Sheets - June 30, 2000 and December 31, 1999 1 Consolidated Condensed Statements of Operations - Three Months and Six Months Ended June 30, 2000 and 1999 3 Consolidated Condensed Statements of Cash Flows - Six Months Ended June 30, 2000 and 1999 4 Notes to Consolidated Condensed Financial Statements 6 Management's Discussion and Analysis of Financial Condition and Results of Operations 18 Part II. Other Information 26 Signatures 27 PART I. FINANCIAL INFORMATION GP STRATEGIES CORPORATION AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEETS (in thousands)
June 30, December 31, 2000 1999 -------- -------- ASSETS unaudited) * Current assets Cash and cash equivalents $ 2,600 $ 4,068 Accounts and other receivables 47,875 55,385 Inventories 1,602 1,888 Costs and estimated earnings in excess of billings on uncompleted contracts 13,884 14,238 Prepaid expenses and other current assets 7,009 3,853 ---------- ---------- Total current assets 72,970 79,432 --------- ------ Investments and advances 16,867 16,557 Property, plant and equipment, net 9,745 13,658 Intangible assets, net of accumulated amortization of $40,754 and $38,986 61,784 79,818 Deferred tax asset 3,990 3,990 Other assets 3,471 3,663 -------- ----------- $168,827 $197,118 ======== ========
* The Consolidated Condensed Balance Sheet as of December 31, 1999 has been summarized from the Company's audited Consolidated Balance Sheet as of that date. See accompanying notes to the consolidated condensed financial statements. GP STRATEGIES CORPORATION AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEETS (Continued) (in thousands) June 30, December 31, 2000 1999 -------- ----------- LIABILITIES AND STOCKHOLDERS' EQUITY (Unaudited) * Current liabilities: Current maturities of long-term debt $ 1,377 $ 3,668 Short-term borrowings 37,261 40,278 Accounts payable and accrued expenses 23,973 25,634 Billings in excess of costs and estimated earnings on uncompleted contracts 8,940 9,998 --------- ---------- Total current liabilities 71,551 79,578 -------- --------- Long-term debt less current maturities 14,176 14,822 Other non-current liabilities 2,218 2,736 Stockholders' equity Common stock 122 115 Class B capital stock 8 5 Additional paid in capital 175,818 170,011 Accumulated deficit (85,921) (61,602) Accumulated other comprehensive loss (137) (817) Note receivable from stockholder (4,095) (2,817) Treasury stock, at cost (4,913) (4,913) ---------- ---------- Total stockholders' equity 80,882 99,982 -------- --------- $168,827 $197,118 ======== ======== * The Consolidated Condensed Balance Sheet as of December 31, 1999 has been summarized from the Company's audited Consolidated Balance sheet as of that date. See accompanying notes to the consolidated condensed financial statements. GP STRATEGIES CORPORATION AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (Unaudited) (in thousands, except per share data)
Three months Six months ended June 30, ended June 30, ---------------- ---------------- 2000 1999 2000 1999 ------- ----- ------ ------- Sales $ 50,328 $ 56,766 $98,128 $122,695 Cost of sales 45,379 51,852 88,817 107,924 -------- -------- ------- --------- Gross margin 4,949 4,914 9,311 14,771 Selling, general & administrative expenses (7,579) (8,398) (12,870) (14,416) Interest expense (1,370) (1,110) (2,660) (2,061) Investment and other income (loss), net (50) 263 281 742 Gain on trading securities 137 539 468 564 Asset impairment charge (18,474) (18,474) Restructuring charges (6,312) (6,312) ---------- --------- ----------- --------- Loss before income taxes (22,387) (10,104) (23,944) (6,712) Income tax expense (179) (77) (375) (857) ----------- --------- -------- --------- Net loss $(22,566) $(10,181) $ (24,319) $ (7,569) ======== ======== ========= ======== Net loss per share: Basic and diluted $ (1.85) $ (.90) $ (2.02) $ (.67) =========== ========= =========== ========= 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, 2000 1999 ------- ------ Cash flows from operations: Net loss $ (24,319) $ (7,569) Adjustments to reconcile net loss to net cash provided by (used for) operating activities: Depreciation and amortization 3,583 3,583 Issuance of stock for profit incentive plan 754 672 Equity loss on investments 229 234 Proceeds from sale of trading securities 616 2,639 Non-cash compensation expense 1,600 Asset impairment charge 18,474 Restructuring charge 6,312 Gain on trading securities (468) (564) Changes in other operating items 208 (6,828) ------ -------- Net cash provided by (used for) operating activities 677 (1,521) ------ --------- Cash flows from investing activities: Additions to property, plant & equipment (294) (2,270) Additions to intangible assets, net (649) Proceeds from disposal of fixed assets 507 Reduction of investments and other assets, net 96 951 ----- ------ Net cash provided by (used for) investing activities 309 (1,968) ----- -------- Cash flows from financing activities: (Repayment of) proceeds from short-term borrowings (3,017) 4,815 Proceeds from sale of Class B Stock 1,200 Repayment of long-term debt (762) (1,020) Exercise of common stock options and warrants 910 Repurchase of treasury stock (1,062) -------- -------- Net cash provided by (used for) financing activities (2,579) 3,643 --------- -------- Effect of exchange rate changes on Cash and cash equivalents 125 195 --------- ---------
GP STRATEGIES CORPORATION AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Continued) (Unaudited) (in thousands) Six months
ended June 30, 2000 1999 -------- ------- Net (decrease) increase in cash and cash equivalents (1,468) 349 Cash and cash equivalents at the beginning of the periods 4,068 6,807 -------- -------- Cash and cash equivalents at the end of the periods $ 2,600 $ 7,156 ======== ======== Cash paid during the periods for: Interest $ 2,980 $ 2,569 ======== ======== Income taxes $ 311 $ 862 ======== =========
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 2000 interim period are not necessarily indicative of results to be expected for the entire year. 2. Earnings per share Loss per share (EPS) for the periods ended June 30, 2000 and 1999 are as follows (in thousands, except per share amounts):
Three months Six months ended June 30, ended June 30, -------------------------- --------------------------- 2000 1999 2000 1999 ---- ---- ---- ---- Basic and Diluted EPS Net loss $(22,566) $ (10,181) $ (24,319) $ (7,569) Weighted average shares outstanding 12,178 11,320 12,043 11,297 Basic and diluted loss per share $ (1.85) $ (.90) $ (2.02) (.67)
Basic earnings per share are based upon the weighted average number of common shares outstanding, including Class B common shares, during the period. Class B common stockholders have the same rights to share in profits and losses and liquidation values as common stockholders. In 1999 and 2000, even though the Company still has stock options and warrants outstanding, diluted earnings per share is not presented due to the Company's net loss, which makes the effect of the potentially dilutive securities anti-dilutive. GP STRATEGIES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited) 3. Long-term debt Long-term debt consists of the following (in thousands): June 30, December 31, 2000 1999 -------- ------ 8% Swiss bonds due 2000* $ $ 2,175 Senior subordinated debentures 755 844 Term loan 13,688 14,063 Other 1,110 1,408 -------- -------- 15,553 18,490 Less current maturities (1,377) (3,668) -------- -------- $ 14,176 $14,822 ======== ======= *On June 28, 2000, the Company issued 443,097 shares of its Common Stock at a value of $5.1625 per share, in exchange for the total principal due of the Company's 8% Swiss bonds. GP STRATEGIES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited) 4. Comprehensive income (loss) The following are the components of comprehensive income (loss) (in thousands):
Three months ended Six months ended June 30, June 30, ------------------------------- --------------------- 2000 1999 2000 1999 ------- -------- ------- --------- Net loss $(22,566) (10,181) $ (24,319) $ (7,569)) -------- ------- ----------- -------- Other comprehensive income (loss) before tax: Net unrealized gain (loss) on available-for-sale-securities (665) (376) 599 (176) Foreign currency translation adjustment (120) 223 125 195 ----------- ---------- ---------- ------- Other comprehensive income (loss), before tax (785) (153) 724 19 ---------- --------- ----------- ---------- Income tax benefit (expense) relating to items of other comprehensive income 13 127 (44) 60 ----------- --------- ------------ ---------- Comprehensive loss, net of tax $(23,338) $( 10,207) $ (23,639) $ (7,490) ======== ========= ========== =========
The components of accumulated other comprehensive income (loss) are as follows: June 30, December 31, 2000 1999 --------- ------- Net unrealized gain (loss) on available-for-sale-securities $ 544 $ (55) Foreign currency translation adjustment (634) (759) --------- -------- Accumulated other comprehensive loss before tax (90) (814) Accumulated income tax expense related to items of other comprehensive loss ( 47) (3) -------- ---------- Accumulated other comprehensive loss, net of tax $ (137) (817) =========== ======== GP STRATEGIES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued) (Unaudited) 5. Credit agreement The Company and General Physics Canada Ltd. (GP Canada), an Ontario corporation and a wholly-owned subsidiary of General Physics, entered into a new credit agreement, dated as of June 15, 1998 (the Credit Agreement), with various banks providing for a secured credit facility of $80,000,000 (the Credit Facility) comprised of a revolving credit facility of $65,000,000 expiring on June 15, 2001 and a five-year term loan of $15,000,000. The five year term loan is payable in 20 quarterly installments of $187,500 commencing on October 1, 1998 with a final payment of $11,250,000 due on June 15, 2003. Due to the Company's restructuring charges and operating losses in 1999 and the operating losses and asset impairment charge in 2000, primarily related to General Physics' IT Group, the Company was not in compliance with respect to the financial covenants in its credit agreement. The Company and its lenders entered into agreements dated as of April 12, 2000 and July 31, 2000, providing for waivers of compliance with such covenants as of September 30, 1999, December 31, 1999, March 31, 2000 and June 30, 2000. Effective April 12, 2000, the Company and its lenders entered into a binding commitment (the "Prior Commitment Letter") to enter into an Amended and Restated Credit Agreement (the "Amended Agreement"). The Prior Commitment Letter and the term sheet attached to the Prior Commitment Letter were replaced in their entirety by an amended commitment letter and term sheet dated July 31, 2000 between the Company and its lenders (the "Amended Commitment Letter") which sets forth the lenders commitment to enter into the Amended Agreement on the terms and conditions described below. The Amended Agreement will reduce the commitment pursuant to the revolving facility to $50,000,000 (subject to borrowing base limitations specified in the Amended Agreement), however the Amended Agreement did not change the payment terms or expiration date of the Company's current outstanding term loan in the amount of $13,688,000. The interest rates increased on both the revolving facility and the term loan to prime plus 1.25% (increased from .50%) and Eurodollar plus 2.75% (increased from 2.00%). The Amended Agreement provides for additional security consisting of certain real property, personal property and all marketable securities owned by the Company and its subsidiaries. The Amended Agreement contains certain restrictive covenants, including the prohibition on future acquisitions, and provides for mandatory prepayment upon the occurrence of certain events. The Amended Agreement contains revised minimum net worth, fixed charge coverage, EBITDA and consolidated liabilities to tangible net worth covenants. Although there can be no assurance, the Company anticipates that it will satisfy the revised covenants in the future. If the Amended Agreement had been in effect at June 30, 2000, the Company would have had approximately $6,300,000 available to be borrowed under the revolving facility included in the Amended Agreement. GP STRATEGIES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited) 6. Business segments The operations of the Company currently consist of the following four business segments, by which the Company is managed. The Company's principal operating subsidiary is General Physics Corporation (GP). GP is a performance improvement company that assists productivity driven organizations to maximize workforce performance by integrating people, processes and technology. GP is a total solutions provider for strategic training, engineering, consulting and technical support services to Fortune 500 companies, government, utilities and other commercial customers. GP operates in three business segments. The Manufacturing Services Group provides technology based training to leading companies in the automotive, steel and food and beverage industries, as well as to the government sector. The Process & Energy Group provides engineering, consulting and technical training to the power, chemical, energy and pharmaceutical industries as well as government facilities. The Information Technology Group provides information training programs and solutions, including Enterprise Solutions and comprehensive career training and transition programs. The Optical Plastics Group, which is the Company's wholly-owned subsidiary MXL Industries, Inc. (MXL), manufactures and distributes coated and molded plastic products. The management of the Company does not allocate the following items by segment: Investment and other income, 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 (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 Six months ended June 30, June 30, ---------------------- ------------------ 2000 1999 2000 1999 ------- -------- ------- ------- Sales Manufacturing Services $ 18,950 $18,299 $ 34,810 $ 37,790 Process and Energy 21,139 21,224 42,273 48,122 Information Technology 7,241 14,484 14,989 31,090 Optical Plastics 2,958 2,476 5,916 5,205 Other 40 283 140 488 ---------- ---------- ----------- ----------- $ 50,328 $ 56,766 $98,128 $122,695 -------- -------- ------- -------- Gross margin Manufacturing Services $ 2,675 $ 2,998 $ 4,497 $ 7,045 Process and Energy 2,782 2,334 5,459 6,352 Information Technology (1,187) (1,256) (2,005) (302) Optical Plastics 807 685 1,601 1,401 Other (128) 153 (241) 275 ------------- -------- ---------- --------- $ 4,949 $ 4,914 $ 9,311 $14,771 --------- -------- ------- -------
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, ---------------------- -------------------- 2000 1999 2000 1999 --------- ------- -------- ------- United States $ 43,072 $ 43,628 $ 83,100 $ 94,898 Canada 2,922 6,916 6,027 15,245 United Kingdom 3,123 4,221 6,761 9,005 Latin America 1,211 2,001 2,240 3,547 -------- --------- -------- -------- $ 50,328 $ 56,766 $ 98,128 $122,695 -------- -------- -------- -------- Information about the Company's identifiable assets in different geographic regions, is as follows (in thousands): June 30, December 31, 2000 1999 ------------ ---------------- United States $ 157,632 $180,057 Canada 5,862 9,533 United Kingdom 3,129 5,087 Latin America 2,204 2,441 ---------- -------- $168,827 $197,118 -------- -------- GP STRATEGIES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued) (Unaudited) 7. Asset impairment charge The operations of the Information Technology (IT) Group are primarily comprised of the operations of Learning Technologies, which was purchased by the Company in June 1998. As a result of the purchase of Learning Technologies, the Company recorded $23,216,000 of goodwill, which is being amortized over 30 years. During 1999, the Company adopted restructuring plans, primarily related to its IT Business segment. The Company took steps in order to change the focus of the IT group from open enrollment information technology training courses to project oriented work for corporations, which 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 terminated approximately 100 employees. The Company believed at that time that the strategic initiatives and cost cutting moves taken in 1999 and the first quarter of 2000 would enable the IT Group to return to profitability in the last six months of 2000. However, those plans were not successful, and the Company now believes that there has been an impairment to intangible assets related to the IT Group. In July 2000, as a result of the continued operating losses incurred by its IT Group, as well as the belief that revenues would not increase to profitable levels, the Company decided to close or sell its open enrollment business in Canada and close or sell all its offices in the UK. As a result, for the quarter and six months ended June 30, 2000, the Company has recorded an asset impairment charge of $18,474,000 related to the IT Group. The charge is comprised of a write-off of goodwill of $16,056,000, as well as write-offs of Property, plant and equipment and other assets relating to the offices to be closed, totaling $2,418,000. The Company believes that the remaining unamortized goodwill of $5,485,000, which relates to the US and Canadian IT project business, is recoverable from future operations. However, in the event that the Company's plans are not successful, and the remaining IT operations do not achieve profitable operating results, there can be no assurance that a further impairment charge will not be required. The Company anticipates recording a restructuring charge in the third quarter of 2000, related to the IT Group. The restructuring will include severance and the costs associated with the offices to be closed. GP STRATEGIES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued) (Unaudited) 8. Restructuring As discussed in Note 7, during 1999, the Company adopted restructuring plans which primarily related to its Information Technology (IT) business segment. In connection with the restructuring, the Company recorded a restructuring charge of $7,374,000 in 1999, of which $6,312,000 was incurred through June 30, 1999. During the period ended June 30, 2000 and the year ended December 31, 1999, the Company expended $1,640,000 and $2,754,000, respectively. Of the remaining unexpended amount at June 30, 2000 and December 31, 1999, $762,000 and $1,884,000, respectively, was included in Accounts payable and accrued expenses and $2,218,000 and $2,736,000, respectively, was included in Other non-current liabilities in the Consolidated Balance Sheet. The components of the restructuring charge are as follows (in thousands):
Severance Present Value Other facility and related of future lease related benefits costs costs Total ----------- --------------- ------------- -------- Balance December 31, 1999 $ 289 $ 4,206 $ 125 $ 4,620 Utilization (184) (1,451) (5) (1,640) ------- ---------- ---------- ------- Balance June 30, 2000 $ 105 $ 2,755 $ 120 $ 2,980 ======== ======= ======== =======
Remaining amounts that have been accrued for severance and related benefits will be expended by September 30, 2000. The present value of future lease obligations is net of assumed sublets. Other facility-related costs will be expended through the remainder of 2000. GP STRATEGIES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued) (Unaudited) 9. Termination of merger agreement On February 11, 2000, the Company terminated its previously announced merger agreement with VS&A Communications Partners III, L.P. ("VS&A"), an affiliate of Veronis, Suhler & Associates Inc., pursuant to which holders of outstanding shares of the Company would have received $13.75 per share, payable in cash. VS&A had informed the Company that it believed that the Company suffered a material adverse change in the fourth quarter of 1999 and that the conditions to VS&A's obligation to consummate the merger contemplated by the merger agreement therefore may not be fulfilled. VS&A also said that it did not intend to waive the conditions to its obligation. Since certain members of the Company's management were participating in the proposed VS&A merger, the Special Negotiating Committee of the Board of Directors, which evaluated and recommended the proposed VS&A merger, was empowered to consider the Company's options. The Committee and its advisors attempted to negotiate an alternative transaction with VS&A, but were unable to do so on acceptable terms. The Committee also determined that prompt action was necessary to preserve value for the Company's stockholders and that it would be imprudent to continue with the proposed VS&A merger given that there would be no assurance that VS&A would have an obligation to close. Therefore, the Committee unanimously recommended that the proposed VS&A merger be terminated. The Board of Directors agreed that this was the best course of action for the Company's stockholders, and believed that this early termination enabled senior management and the Board of Directors to focus their efforts on improving core operations, as well as continuing sales of non-core assets. To induce VS&A to agree to the immediate termination of the merger agreement and to give the Company a general release, on February 11, 2000, the Company issued to VS&A, as partial reimbursement of the expenses incurred by it in connection with the merger agreement, 83,333 shares of the Company's Common Stock and an 18-month warrant to purchase 83,333 shares of the Company's Common Stock at a price of $6.00 per share. The consideration was valued at $686,000, and was included in the December 31, 1999 consolidated statement of operations. GP STRATEGIES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued) (Unaudited) 10. Class B Capital Stock On February 11, 2000, an affiliate of Andersen, Weinroth & Co., L.P. ("Andersen Weinroth") purchased 200,000 shares of the Company's Class B Capital Stock for $6.00 per share pursuant to a subscription agreement for an aggregate cost of $1,200,000. In addition, G. Chris Andersen joined the Board of Directors of the Company. Mr. Andersen is a general partner of Andersen Weinroth. 11. Related party transaction During the first quarter of 2000, the Company made loans to an officer who is the President and Chief Executive Officer and a director of the Company in the amount of approximately $1,278,000 to purchase an aggregate of 150,000 shares of Class B Capital Stock. In addition, at December 31, 1999, the Company had loans receivable from such officer in the amount of approximately $2,817,000. The officer primarily utilized the proceeds of the prior loans to exercise options to purchase an aggregate of 408,512 shares of Class B Capital Stock. Such loans bear interest at the prime rate of Fleet Bank and are secured by the purchased Class B Capital Stock and certain other assets. All principal on the loans and accrued interest ($330,000 at June 30, 2000) are due on May 31, 2004. In prior years, the Company made unsecured loans to such officer in the amount of approximately $480,000, which unsecured loans primarily bear interest at the prime rate of Fleet Bank. 12. Investments As of June 30, 2000, the Company had an approximately $250,000 investment in Millennium Cell Inc. (Millennium). Millennium is an emerging technology company engaged in the development of a patented alternative energy source based on boron chemistry. On August 14, 2000, Millennium completed an initial public offering of 3,000,000 shares of common stock at a price of $10.00 per share. Based on the initial public offering price, the value of the Company's shares not subject to the Option Plan defined below is in excess of $55,000,000. The Company's shares of common stock in Millennium are subject to a lock-up provision until February 9, 2001, and accordingly cannot be sold by the Company before that date, unless the provision is waived by the underwriter. GP STRATEGIES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued) (Unaudited) On February 11, 2000, the Company granted options to purchase an aggregate of approximately 567,000 of its shares of Millennium common stock to certain of its employees pursuant to the GP Strategies Corporation Millennium Cell, LLC Option Plan (the "Millennium Option Plan"), which options vest over either a one year or two year period and expire on May 11, 2002. The Company will receive approximately $516,000 upon exercise of all options pursuant to the Millennium Option Plan. As a result of the Millennium Option Plan, the Company recorded net deferred compensation of $3,250,000, to be amortized over the remaining vesting period of the options, and a liability to employees of $4,850,000 at June 30, 2000. These amounts are included in Prepaid expenses and other current assets and Accounts payable and accrued expenses, respectively, on the Consolidated Condensed Balance Sheets. Pursuant to the vesting provisions of the Millennium Option Plan, the Company recorded a non-cash compensation expense of $1,600,000 for the quarter and six months ended June 30, 2000, which is included in Selling, general and administrative expenses in the Consolidated Condensed Statement of Operations. 13. Subsequent event On July 7, 2000, the Company, in a private placement transaction (the "Private Placement") with two institutional investors, received $2,640,000 in aggregate principal amount for 6% Convertible Exchangeable Notes due June 30, 2003 (the "Notes"). The Notes, at the option of the holders, may be exchanged for 19.99% of the outstanding capital stock of Hydro Med, Inc. ("Hydro Med"), a newly formed, wholly-owned subsidiary, on a fully diluted basis, as defined in the Note, or into shares of the Company's Common Stock at a conversion rate of $7.50 per share, subject to adjustment, as provided in the Note. The holders of the Notes can convert or exchange at any time prior to June 30, 2003. In connection with the Private Placement, the Company transferred the assets of its Hydro Med Sciences division to Hydro Med, a wholly owned subsidiary of the Company, and granted the holders of the Notes a security interest in approximately 19.99% of the capital stock of Hydro Med to secure payment of the Notes. Hydro Med is a drug delivery company that develops, manufactures, markets and sells proprietary, implantable, controlled release drug delivery products, which release drugs directly into the circulatory system, for human and veterinary applications and is focusing its efforts to obtain Food and Drug Administration Approval for its prostate cancer drug delivery system. GP STRATEGIES CORPORATION AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS Overview The Company has four operating business segments. Three of the Company's segments are managed through the Company's principal operating subsidiary, GP, and the fourth through its operating subsidiary MXL Industries, Inc. (MXL). In addition, the Company holds a number of investments in public and privately held companies. GP is a performance improvement company that assists productivity driven organizations to maximize workforce performance by integrating people, processes and technology. GP is a total solution provider for strategic training, engineering, consulting and technical support services to Fortune 500 companies, government, utilities and other commercial customers. GP consists of three segments: the Information Technology (IT) Group, the Manufacturing Services Group and the Process & Energy Group. The Optical Plastics Group, which comprises MXL, manufactures molded and coated optical products, such as shields and face masks and non-optical plastic products. The Company had a net loss before income taxes of $22,387,000 and $23,944,000 for the quarter and six months ended June 30, 2000 compared to a net loss before income taxes of $10,104,000 and $6,712,000 for the quarter and six months ended June 30, 1999. The operating loss in 2000 and 1999 was primarily due to an Asset impairment charge of $18,474,000 taken in the second quarter of 2000 and a $6,312,000 Restructuring charge taken in the second quarter of 1999. 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 has continued through 2000. In addition, in 1999 the Company experienced a higher than normal level of expenses incurred relative to revenues generated during the period of facility closure of the activities that the Company exited 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. For the quarter and six months ended June 30, 2000, the Company also recorded a $1,600,000 non-cash compensation expense related to a compensation plan offered to certain of its employees which is included in selling, general and administrative expenses (See Note 12 to the Consolidated Condensed Financial Statements). The Manufacturing Services Group also had reduced operating profits due to reduced sales and gross margin percentage in the six months ended June 30, 2000, compared to the six months ended June 30, 1999. For the quarter ended June 30, 2000, the Manufacturing Group had reduced operating profit due to reduced gross margin percentages. The Process and Energy Group had reduced operating profit for the six months ended June 30, 2000, as compared to the prior year, due to reduced sales and gross profit percentage. For the quarter ended June 30, 2000, the Process and Energy Group has slightly improved operating results due to increased gross margin percentages earned. In addition, the Process & Energy and Manufacturing Services Groups had increased investments in internal training and business development during the first six months of 2000. The Company is focusing its business development activities in 2000 on a major branding campaign, to increase the name recognition of GP, as well as plant launch services, e-Learning and the area of learning resource management. The Company believes that these investments in business development are an integral part of its effort to increase its revenues and gross margin percentage. Asset impairment charge The operations of the Information Technology (IT) Group are primarily comprised of the operations of Learning Technologies, which was purchased by the Company in June 1998. As a result of the purchase of Learning Technologies, the Company recorded $23,216,000 of goodwill, which is being amortized over 30 years. During 1999, the Company adopted restructuring plans, primarily related to its IT Business segment. The Company took steps in order to change the focus of the IT group from open enrollment information technology training courses to project oriented work for corporations, which 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 terminated approximately 100 employees. The Company believed at that time that the strategic initiatives and cost cutting moves taken in 1999 and the first quarter of 2000 would enable the IT Group to return to profitability in the last six months of 2000. However, those plans were not successful, and the Company now believes that there has been an impairment to intangible assets related to the IT Group. In July 2000, as a result of the continued operating losses incurred by its IT Group, as well as the belief that revenues would not increase to profitable levels, the Company decided to close or sell its open enrollment business in Canada and close or sell all its offices in the UK. As a result, for the quarter and six months ended June 30, 2000, the Company has recorded an asset impairment charge of $18,474,000 related to the IT Group. The charge is comprised of a write-off of goodwill of $16,056,000, as well as write-offs of Property, plant and equipment and other assets relating to the offices to be closed, totaling $2,418,000. The Company believes that the remaining unamortized goodwill of $5,485,000, which relates to the US and Canadian IT project business, is recoverable from future operations. However, in the event that the Company's plans are not successful, and the remaining IT operations do not achieve profitable operating results, there can be no assurance that a further impairment charge will not be required. The Company anticipates recording a restructuring charge in the third quarter of 2000, related to the IT Group. The restructuring will include severance and the costs associated with the offices to be closed. Sales Three months ended Six months ended June 30, June 30, ------------------------ -------------------- 2000 1999 2000 1999 --------- --------- --------- ------- Manufacturing Services $ 18,950 $18,299 $ 34,810 $ 37,790 Process and Energy 21,139 21,224 42,273 48,122 Information Technology 7,241 14,484 14,989 31,090 Optical Plastics 2,958 2,476 5,916 5,205 Other 40 283 140 488 -------- ---------- -------- -------- $ 50,328 $ 56,766 $98,128 $122,695 -------- -------- ------- -------- For the quarter and six months ended June 30, 2000, consolidated sales decreased by $6,438,000 and $24,567,000, respectively, compared to the corresponding periods of 1999. The reduced sales occurred primarily within the IT Group due to the continuing erosion of the Canadian and UK IT training business. The reduced sales within the Process & Energy Group, which occurred primarily in the first quarter of 2000, were the result of reduced product sales to utilities, due to the effect of the consolidation within the utility industry, as well as the transition of the Group's business model from OSHA and regulatory work, to GP's core business focus of workforce development and training. The reduced sales of the Manufacturing Services Group for the six months ended June 30, 2000, was the result of revenue generated for several large jobs in 1999, that were not replaced with jobs of similar dollar value in the first quarter of 2000. The increased sales within the Manufacturing Services Group from the first quarter of 2000 to the second quarter of 2000 was primarily the result of growth within the Company's automotive sector. Gross margin
Three months ended Six months ended June 30, June 30, ------------------------------------ -------------------------------------- 2000 % 1999 % 2000 % 1999 % --------- --- --------- --- ---------- -- --------- -- Manufacturing Services $ 2,675 14.1 $ 2,998 16.4 $ 4,497 12.9 $ 7,045 18.6 Process and Energy 2,782 13.2 2,334 11.0 5,459 12.2 6,352 13.2 Information Technology (1,187) ( 1,256) ( 2,005) ( 302) Optical Plastics 807 27.3 685 27.7 1,601 27.1 1,401 26.9 Other (128) 153 54.1 (241) 275 .56 ------- --------- ------- --------- $ 4,949 9.8 $ 4,914 8.7 $ 9,311 9.5 $14,771 12.0 -------- ------- ------- -------
The reduced gross margin of $5,460,000 for the six months ended June 30, 2000 occurred within all segments of GP, as a result of reduced sales and gross margin percentage. The gross margin for the quarter ended June 30, 2000 was $35,000 higher than the gross margin achieved for the quarter ended June 30, 1999. The negative gross margin incurred by the IT Group in 2000 was the result of the continued decrease in sales, and the resulting inability of the segment to cover its infrastructure and operating costs. The reduced gross margin percentage in the Process & Energy Group for the six months ended June 30, 2000 was primarily the result of a change in the mix of services provided, including reduced product sales, which historically generate higher gross margin percentages. The Manufacturing Services Group has a reduced gross margin percentage in 2000 compared to the second quarter and six months of 1999, due to the lack of plant launch and other large projects, which have historically generated higher gross margins. Selling, general and administrative expenses For the quarter and six months ended June 30, 2000, selling, general and administrative (SG&A) expenses were $7,579,000 and $12,870,000 compared to $8,398,000 and $14,416,000 incurred in the quarter and six months ended June 30, 1999. The reduced SG&A in 2000 is primarily attributable to reduced costs incurred by GP due to the savings resulting from the restructuring plans which occurred in 1999, partially offset by $1,600,000 of non-cash compensation expense related to a compensation plan offered to certain of its employees recorded in the quarter and six months ended June 30, 2000 (See Note 12 to the Consolidated Condensed Financial Statements). In addition, the Company continued to reduce SG&A at the corporate level. Interest expense For the quarter and six months ended June 30, 2000, interest expense was $1,370,000 and $2,660,000 compared to $1,110,000 and $2,061,000 for the quarter and six months ended June 30, 1999. The increased interest expense in 2000 was primarily attributable to increased interest rates in the current period. Investment and other income, net Investment and other income (loss), net of ($50,000) and $281,000 for the quarter and six months ended June 30, 2000 decreased by $313,000 and $461,000, respectively, as compared to $263,000 and $742,000 for the corresponding periods of 1999. The Company recognized losses of $254,000 and $229,000 for the quarter and six months ended June 30, 2000, on the Company's equity investments compared to losses of $569,000 and $234,000 recognized for the corresponding periods in 1999. Income tax expense In the quarter and six months ended June 30, 2000, the Company recorded income tax expense of $179,000 and $375,000, respectively, which represents primarily state and local and foreign income taxes. In the quarter ended and six months ended June 30, 1999, the Company recorded income tax expense of $77,000 and $857,000, respectively, which represents primarily federal, state and local and foreign tax expense for the quarter ended June 30, 2000 and the applicable federal, state and local foreign tax expense for the six months ended June 30, 1999. Liquidity and capital resources At June 30, 2000, the Company had cash and cash equivalents totaling $2,600,000. 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. The decrease in cash and cash equivalents of $1,468,000 for the quarter ended June 30, 2000 resulted from cash used in financing activities of $2,579,000, partially offset by cash provided by operations of $677,000, and investing activities of $309,000. Cash used for financing activities consisted primarily of repayments of short-term borrowings and long-term debt, partially offset by proceeds from the sale of stock. Due to the Company's restructuring charges and operating losses in 1999 and the operating losses and asset impairment charge in the first and second quarter of 2000 primarily related to General Physics' IT Group, the Company was not in compliance with respect to the financial covenants in its credit agreement. The Company and its lenders entered into agreements dated as of April 12, 2000 and July 31, 2000, providing for waivers of compliance with such covenants as of September 30, 1999, December 31, 1999, March 31, 2000 and June 30, 2000. Effective April 12, 2000, the Company and its lenders entered into a binding commitment (the "Prior Commitment Letter") to enter into the Amended and Restated Credit Agreement (the "Amended Agreement"). The Prior Commitment Letter and the term sheet attached to the Prior Commitment Letter were replaced in their entirety by an amended commitment letter and term sheet dated July 31, 2000 between the Company and its lenders (the "Amended Commitment Letter") which sets forth the lenders commitment to enter into an Amended Agreement on the terms and conditions described below. The Amended Agreement will reduce the commitment pursuant to the revolving facility to $50,000,000 (subject to borrowing base limitations specified in the Amended Agreement), however the Amended Agreement did not change the payment terms or expiration date of the Company's current outstanding term loan in the amount of $13,688,000. The interest rates increased on both the revolving facility and the term loan to prime plus 1.25% (increased from .50%) and Eurodollar plus 2.75% (increased from 2.00%). The Amended Agreement provides for additional security consisting of certain real property, personal property and all marketable securities owned by the Company and its subsidiaries. The Amended Agreement contains certain restrictive covenants, including the prohibition on future acquisitions, and provides for mandatory prepayment upon the occurrence of certain events. The Amended Agreement contains revised minimum net worth, fixed charge coverage, EBITDA and consolidated liabilities to tangible net worth covenants in the future. Although there can be no assurance, the Company anticipates that it will satisfy the revised covenants. If the Amended Agreement had been in effect at June 30, 2000, the Company would have had approximately $6,300,000 available to be borrowed under the revolving facility included in the Amended Agreement. The Company believes that cash generated from operations and borrowing availability under its credit agreement will be sufficient to fund the working capital needs of the Company. Recent accounting pronouncements In June 1998, the FASB issued Statement of Financial Accounting Standard No. 133 (SFAS 133), "Accounting for Derivative Instruments and Hedging Activities." This Statement establishes accounting and reporting standards for derivatives as either assets or liabilities. It requires that an entity recognizes all derivatives as either assets or liabilities in the statement of financial position and measures those instruments at fair value. This Statement as amended by SFAS 137 and 138 is effective for all fiscal quarters of fiscal years beginning after June 15, 2000. The Company will adopt SFAS 133, when effective, which is currently anticipated to be by January 1, 2001. The Company is still evaluating its position with respect to the use of derivative instruments. FASB Interpretation No. 44, "Accounting for Certain Transactions Involving Stock Compensation" (FIN No. 44") provides guidance for applying APB Opinion No. 25, "Accounting for Stock Issued to Employees." With certain exceptions, FIN No. 44 applies prospectively to new awards, exchanges of awards in a business combination, modifications to outstanding awards and changes in grantee status on or after July 1, 2000. The Company does not believe that the implementation of FIN No. 44 will have a significant effect on its results of operations. In December 1999, the SEC issued Staff Accounting Bulleting No.101, "Revenue Recognition in Financial Statements" ("SAB No. 101") which summarizes certain of the SEC staff's views in applying generally accepted accounting principles to revenue recognition in financial statements. SAB No. 101, amended by SAB 101A issued on March 24, 2000, requires registrants to adopt the accounting guidance contained therein by no later than the second fiscal quarter of the fiscal year beginning after December 15, 1999. On June 26, 2000, the SEC issued SAB No. 101B which postponed the implementation of SAB No. 101 until the quarter beginning October 1, 2000. The Company is currently assessing the financial impact of complying with SAB No. 101 and has not yet determined whether applying the accounting guidance of SAB No. 101 will have a material effect on its financial position or results of operations. Adoption of a Common European Currency On January 1, 1999, eleven European countries adopted the Euro as their common currency. From that date until January 1, 2002, debtors and creditors may choose to pay or to be paid in Euros or in the former national currencies. On and after January 1, 2002, the former national currencies will cease to be legal tender. The Company is currently reviewing its information technology systems and upgrading them as necessary to ensure that they will be able to convert among the former national currencies and the Euro, and process transactions and balances in Euros, as required. The Company has sought and received assurances from the financial institutions with which it does business that they are capable of receiving deposits and making payments both in Euros and in the former national currencies. The Company does not expect that adapting its information technology systems to the Euro will have a material impact on its financial condition or results of operations. The Company is also reviewing contracts with customers and vendors calling for payments in currencies that are to be replaced by the Euro, and intends to complete in a timely way any required changes to those contracts. Adoption of the Euro is likely to have competitive effects in Europe, as prices that had been stated in different national currencies become directly comparable to one another. In addition, the adoption of a common monetary policy throughout the countries adopting the Euro can be expected to have an effect on the economy of the region. These competitive and economic effects cannot be predicted with certainty, and there can be no assurance that they will not have a material effect on the Company's business in Europe. The Company anticipates recording a restructuring charge in the third quarter of 2000, related to the IT Group. The restructuring will include severance and the cost associated with the offices to be closed. Forward-looking statements The forward-looking statements contained herein reflect GP Strategies' management's current views with respect to future events and financial performance. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements, all of which are difficult to predict and many of which are beyond the control of GP Strategies, including, but not limited to, the risk that qualified personnel will not continue to be available, technological risks, risks associated with the Company's acquisition strategy and its ability to manage growth, risks associated with changing economic conditions, risks of conducting international operations, the Company's ability to comply with financial covenants in connection with various loan agreements and those risks and uncertainties detailed in GP Strategies' periodic reports and registration statements filed with the Securities and Exchange Commission. GP STRATEGIES CORPORATION AND SUBSIDIARIES PART II. OTHER INFORMATION Item 6. EXHIBITS AND REPORTS ON FORM 8-K a. Exhibits 10. Commitment Letter dated July 31, 2000 by and between the Company and its Lenders and the Term Sheet attached thereto as Annex A. b. Reports None GP STRATEGIES CORPORATION AND SUBSIDIARIES June 30, 2000 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed in its behalf by the undersigned thereunto duly authorized. GP STRATEGIES CORPORATION DATE: August 14, 2000 BY: Jerome I. Feldman President and Chief Executive Officer DATE: August 14, 2000 BY: Scott N. Greenberg Executive Vice President and Chief Financial Officer EX-27 2 0002.txt
5 0000070415 GP STRATEGIES CORPORATION 6-MOS DEC-31-2000 JUN-30-2000 2,600 0 45,360 2,515 1,602 72,970 44,137 34,392 168,827 71,551 14,176 0 0 122 80,760 168,827 98,128 98,128 88,817 12,870 0 0 2,660 (23,944) (375) (24,319) 0 0 0 (24,319) (2.02) (2.02)
EX-10 3 0003.txt July 31, 2000 GP Strategies Corporation General Physics Canada, Ltd. 9 West 57th Street Suite 4170 New York, New York 10019 Ladies and Gentlemen: Reference is made to (i) the Credit Agreement dated as of June 15, 1998 and amended as of July 21, 1998, December 31, 1998, May 7, 1999 and December 17, 1999, by and among GP Strategies Corporation, General Physics Canada Ltd., the Lenders party thereto and Fleet Bank, National Association, as Agent, Issuing Bank and Arranger (as so amended, the "Existing Credit Agreement"), (ii) a commitment letter dated April 12, 2000 among the parties to the Existing Credit Agreement (the "Prior Commitment Letter") and (iii) a letter from the Agent to you dated June 13, 2000 (the "Supplemental Letter"). Capitalized terms appearing herein and in the term sheet attached hereto as Exhibit A (the "Term Sheet") and not otherwise defined herein or in the Term Sheet are used as defined in the Existing Credit Agreement. Pursuant to the Prior Commitment Letter, you, the Agent and the Lenders agreed to amend the Existing Credit Agreement to restructure the credit facility contemplated thereby on the terms and conditions set forth in the Prior Commitment Letter. However, subsequent to the execution of the Prior Commitment Letter you advised the Agent and the Lenders that you desired certain changes thereto. The Agent and the Lenders are agreeable to certain changes, but solely to the extent they are set forth in this amended and restated commitment letter (this "Amended Commitment Letter"). Consequently, this Amended Commitment Letter and the Term Sheet amends, restates and replaces in its entirety the Prior Commitment Letter, the term sheet attached to the Prior Commitment Letter and the Supplemental Letter and in connection herewith (i) the Prior Commitment Letter, the term sheet attached thereto and the Supplemental Letter are each hereby terminated and of no further force or effect and (ii) the Agent and the Lenders are pleased to advise you of their commitment to enter into an Amended and Restated Credit Agreement on the terms and conditions set forth below and in the Term Sheet. You agree to provide Fleet and the other Lenders, promptly upon request, with all information reasonably deemed necessary by them to complete successfully the Amended and Restated Credit Agreement. You represent and warrant and covenant that (i) all information which has been or is hereafter made available to the Agent and/or the Lenders by you or any of your representatives in connection with the transactions contemplated hereby is and will be complete and correct in all material respects with respect to the matters such information purports to cover and does not and will not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements contained therein not materially misleading in light of the circumstances under which such statements have been or will be made and (ii) all financial projections that have been or are hereafter prepared by you and made available to the Agent and/or the Lenders or any other participants in the credit facilities contemplated by the Amended and Restated Credit Agreement have been or will be prepared in good faith based upon reasonable assumptions. The terms and conditions of this commitment and undertaking may be modified only by an agreement in writing signed by the Borrowers, the Required Lenders and the Agent. Those matters that are not covered or made clear herein or in the attached Term Sheet are subject to mutual agreement of the parties. In addition, this commitment and undertaking is subject to: (a) the preparation, execution and delivery of mutually acceptable loan documentation, including an Amended and Restated Credit Agreement incorporating substantially the terms and conditions outlined herein and in the Term Sheet (A) on or before August 31, 2000 with respect to the Amended and Restated Credit Agreement, (B) promptly upon the Borrowers' acceptance of this Amended Commitment Letter with respect to the collateral set forth in subparagraph (ii) of the penultimate paragraph of this Amended Commitment Letter and (C) on or before September 15, 2000 with respect to all other loan documentation, (b) the accuracy and completeness of all written representations that you make to us and all information that you furnish to us in connection with this commitment and undertaking (in the case of projections, limited to the most recent projections delivered to the Agent prior to the date hereof) and your compliance with the terms of this Amended Commitment Letter, (c) no development or change occurring after the date hereof, and no information becoming known after the date hereof, that (i) results in or could reasonably be expected to result in a material change in, or material deviation from, the information previously delivered by you or could reasonably be expected to be materially adverse to you or any of your subsidiaries or to the Agent or the Lenders or (ii) has had or could reasonably be expected to have a material adverse change in the business, condition (financial or otherwise), operations, performance, properties or prospects of Strategies and Physics and their respective subsidiaries, each taken as a whole and (d) no Event of Default occurring under the Existing Credit Agreement (but only after giving effect to the amendments thereto that are contemplated by this Amended Commitment Letter and Term Sheet, including, specifically, the amendments to the financial covenants that are provided under "Financial Covenants" in the Term Sheet). If the foregoing conditions are not satisfied to the satisfaction of the Agent, neither this Amended Commitment Letter nor the Term Sheet shall be enforceable against the Lenders, the Agent or the Issuing Bank. The costs and expenses of the Agent (including, without limitation, the reasonable fees and expenses of its counsel and other reasonable out-of-pocket expenses) in connection with the preparation, execution and delivery of this letter and the definitive financing agreements shall be for your account. You further agree to indemnify and hold harmless the Agent, the Issuing Bank and each Lender and each director, officer, employee and affiliate or control person thereof (each an "indemnified person") from and against any and all actions, suits, proceedings (including any investigations or inquiries), claims, losses, damages, liabilities or expenses of any kind or nature whatsoever which may be incurred by or asserted against or involve the Agent, the Issuing Bank, any Lender or any such indemnified person as a result of or arising out of or in any way related to or resulting from this letter or any extension of credit, and, upon demand, to pay and reimburse the Agent, the Issuing Bank, each Lender and each indemnified person for any legal or other out-of-pocket expenses incurred in connection with investigating, defending or preparing to defend any such action, suit, proceeding (including any inquiry or investigation) or claim (whether or not the Agent, the Issuing Bank, any Lender or any such person is a party to any action or proceeding out of which any such expenses arise); provided, however, that you shall have no obligation to indemnify any indemnified person against any loss, claim, damage, expense or liability which resulted solely from the gross negligence or willful misconduct of such indemnified person. Neither the Agent, the Issuing Bank, any Lender nor any of their affiliates shall be responsible or liable to you for any other person or any damages which may be alleged as a result of this letter. By executing this letter, you acknowledge that this letter is the only agreement among you, the Agent, the Issuing Bank and Lenders with respect to the amended credit facilities and sets forth the entire understanding of the parties with respect thereto. Neither this Amended Commitment Letter nor the Term Sheet may be changed except pursuant to a writing signed by each of the parties hereto. Your obligations under this letter with respect to fees, indemnification, costs and expenses (as set forth herein and/or in the Term Sheet), and confidentiality shall survive the expiration or termination of this letter. This letter shall not be assignable by you without the prior written consent of the Agent. The Agent may assign all or any portion of its obligations hereunder to its affiliates. This letter may be executed in any number of counterparts, each of which shall be an original and all of which, when taken together, shall constitute one agreement. This letter shall be governed by, and construed in accordance with, the laws of the State of New York. In addition to the matters described in this Amended Commitment Letter and the Term Sheet, you agree as follows: (i) The Parent Commitment and the Parent Facility (as defined in the Existing Credit Agreement) are reduced to $50,000,000 effective as of the date hereof; (ii) The Borrowers agree promptly, upon their execution hereof, to execute documentation acceptable to the Agent and the Lenders that grants the Agent, for the ratable benefit of the Lenders and the Issuing Bank, a first lien on (A) the marketable securities (other than the shares in GS Systems owned by SGLG), government receivables and other personal property collateral described in the Term Sheet (B) the life insurance collateral referred to in the Term Sheet; (iii) The provisions in the Term Sheet set forth under the caption "Applicable Margin and Applicable Fee Percentage" and related provisions shall be effective as of April 1, 2000; provided, that, any amounts payable by the Borrowers in excess of that payable pursuant to the terms of the Existing Credit Agreement shall not be payable by the Borrowers until the earlier of (i) a default by any Credit Party under this Amended Commitment Letter, (ii) an Event of Default the Existing Credit Agreement (but only after giving effect to the amendments thereto that are contemplated by this Amended Commitment Letter and Term Sheet) or (iii) the closing of the transactions contemplated by this Amended Commitment Letter and Term Sheet; provided, further, that, upon the earlier of such events all accrued and unpaid such amounts shall be payable by the Borrowers in full; (iv) The Borrowers shall immediately, upon their execution hereof, pay (i) to the Agent, for the pro rata benefit of the Lenders, in consideration of the issuance of the Prior Commitment Letter and this Amended Commitment Letter, the Amendment Fee described in the Term Sheet and (ii) to Emmet, Marvin & Martin, LLP, as counsel to the Agent, all of its accrued and unpaid fees and expenses for the period through July 18, 2000 in connection with its representation of the Agent in transactions involving the Borrowers, including certain accrued and unpaid fees and fees in connection with its preparation and negotiation of the Prior Commitment Letter, a consent letter relating to the transfer of certain assets by Parent and this Amended Commitment Letter and its preparation of initial drafts certain documents in connection with the Prior Commitment Letter and its representation of the Agent in matters subsequent thereto, which fees for the period through July 18, 2000 are approximately $64,050; and (v) With respect to the shares of stock in GSE Systems, Inc. owned by SGLG Corp., Parent shall promptly cause such securities to be transferred into its name and promptly upon such transfer execute such documents and take such action that grants the Agent, for the ratable benefit of the Lenders and the Issuing Bank, a first lien on such securities (which transfer and pledge shall in no event occur later than the closing of the transactions contemplated by this Amended Commitment Letter and Term Sheet). If you are in agreement with the foregoing, please sign and return to the Agent the enclosed copy of this letter no later than 5:00 P.M., New York time, on July __, 2000. This offer shall terminate at such time unless prior thereto we shall have received duly signed and completed copies of such letters. We look forward to working with you on this transaction. Very truly yours, FLEET BANK, NATIONAL ASSOCIATION, as Agent By:___________________________ Name: __________________ Title: __________________ Accepted and agreed to as of the date first above written: GP STRATEGIES CORPORATION By:________________________________ Name: Scott Greenberg Title: Chief Financial Officer GENERAL PHYSICS CANADA LTD. By:________________________________ Name: Scott Greenberg Title: EXHIBIT A AMENDED AND RESTATED CREDIT AGREEMENT TERM SHEET OF PROPOSED CHANGES [THIS TERM SHEET ADDRESSES PROPOSED CHANGES TO THE JUNE 15, 1998 CREDIT AGREEMENT (AS AMENDED). IT IS CONTEMPLATED THAT EXCEPT AS INDICATED IN THIS TERM SHEET, THE TERMS AND CONDITIONS PROVIDED IN THE EXISTING CREDIT AGREEMENT WOULD REMAIN UNCHANGED.] Borrowers: GP Strategies Corporation ("Strategies") and General Physics Canada Ltd. ("Physics"). Guarantors: Same as existing except GP Environmental Services is no longer a Guarantor since it is no longer a subsidiary. Administrative Agent: Fleet Bank, N.A. (individually, "Fleet"). Revolving Credit Facility: Subject to the Borrowing Base limitations herein provided, the maximum amount at any time outstanding ("Maximum RC Commitment") under the Revolving Credit Facility (the "Revolving Facility") shall be reduced to $50,000,000. The reduced facility amount shall be allocated to each Lender according to their existing commitment percentages. All advances will be made by the Lenders ratably in proportion to their respective existing commitment percentages. Applicable Margin and Applicable Fee Percentage: The Applicable Margin and Applicable Fee Percentage shall each be replaced, subject to adjustment only as hereinbelow provided (or as required to be adjusted in the case of an Event of Default), with the percentage 2.75% in the case of the Applicable Margin for Revolving Facility Eurodollar Advances, 1.25% in the case of the Applicable Margin for Revolving Facility ABR Advances, 2.75% in the case of the Applicable Percentage for standby letters of credit and .50% in the case of the Applicable Percentage for the commitment fee. The interest rate applicable to term loan ABR Advances shall be 1.25% per annum above the Alternate Base Rate and the interest rate applicable to term loan Eurodollar Advances shall be 2.75% above the Eurodollar Rate. The interest rate applicable to the term loans shall not be subject to further adjustment other than in the case of an Event of Default. If at the end of any fiscal quarter there is not Minimum Excess Availability, each of the rates set forth above for the Revolving Facility applicable to loans and standby letters of credit shall immediately increase, on a cumulative basis, by .25% from the rate that was theretofore in effect, provided, that, if at the end of any subsequent fiscal quarter there is such Minimum Excess Availability, each of such interest rates applicable to loans and standby letters of credit for the Revolving Facility shall immediately decrease to the initial rates and margins provided in the immediately prior paragraph, subject to further increase (in the manner heretofore provided) at the end of each fiscal quarter thereafter if there is not maintained Minimum Excess Availability. To the extent that there is Prompt Compliance, each of the foregoing interest rates for the Revolving Facility applicable to loans and standby letters of credit shall decrease by .25%, which rates shall be maintained as long as there remains Minimum Excess Availability (when and as required); provided, that, if at any time Minimum Excess Availability is not so maintained, each of such interest rates shall be immediately increased to 3.00% per annum, subject to further increase or decrease, as the case may be, in the manner hereinabove provided, at the end of each fiscal quarter thereafter as a result of adjustments due to the Minimum Excess Availability requirements. Amendment Fee: 25% of each Lender's reduced commitment amount plus .25% of each Lender's outstanding term loans, which fee is to be paid contemporaneously with the Borrowers' acceptance of the Amended Commitment Letter to which this Term Sheet is attached. Security: Collateral will not change except there will be no lien on any assets of the Hydro Med division and (i) Assignments of Government Contracts will be fully perfected and formalized, (ii) a first priority perfected security interest granted to Fleet, as agent for the ratable benefit of the Lenders, in all securities owned by Strategies and/or its subsidiaries, (iii) a first mortgage in favor of Fleet, as agent for the ratable benefit of the Lenders, in the following real property (collectively the "Real Property"): all real property owned by MXL Industries, Inc. and all real property owned by the Parent's other direct and indirect subsidiaries' to secure the existing guarantee of MXL Industries, Inc and such subsidiaries, which mortgages shall be immediately recorded except for the mortgage granted by MXL Industries, Inc which shall not be recorded unless, with respect to each such property, either a contract for a sale of such property or a sale/leaseback of such property is not executed on or before August 31, 2000 or the closing of such sale or sale/leaseback is not consummated on or before September 30, 2000, (iv) a first priority perfected security interest granted to Fleet, as agent for the ratable benefit of the Lenders, in all personal property and fixtures of the Parent and each Subsidiary Guarantor, (v) a first priority assignment and lien on all of the registered patents, copyrights and trademarks of Strategies and/or its Subsidiaries and (vi) at the option of Strategies (A) a first priority collateral assignment of the aggregate cash surrender value (as of the date hereof, approximately $400,000) of two life insurance policies in the aggregate amount of $4,000,000 on the life of Jerry Feldman (the "Insurance Policy"), or (B) a first priority perfected security interest in all the proceeds received upon the surrender of the Insurance Policy. Appraisals: The Agent or its designee shall be authorized to obtain an appraisal, at the Borrowers' expense, of all the Real Property, except that with respect to the Real Property owned by MXL Industries, Inc. such an appraisal shall only be obtained if either of the conditions for recording such mortgage have occurred. Reporting Requirements: Separate monthly internally prepared financial statements of Strategies, General Physics Corporation (United States), General Physics Canada Ltd and General Physics Corporation (UK) Limited and a monthly detailed aging and Borrowing Base certificate for all accounts included in the Borrowing Base in a format satisfactory to the Agent. A monthly report in a format satisfactory to the Agent comparing Strategies (on a consolidated and consolidating basis) actual results against its projections, both for the immediately preceding month and year to date. Borrowing Base: The aggregate exposure (loans and letters of credit) outstanding under the Revolving Facility shall not exceed the lesser of (i) the Maximum RC Commitment (as reduced) or (ii) the Borrowing Base, as then in effect. Additional Acquisitions: Availability for further acquisitions will henceforth be prohibited. Mandatory Prepayment Due to Exceeding Limitations: If at any time the aggregate amount of outstanding loans and Letters of Credit under the Revolving Facility exceeds (i) the Maximum Commitment (as reduced) or (ii) the Borrowing Base, within five days of the first day there exists such excess Strategies shall prepay the outstanding loans in an amount sufficient to eliminate such excess (or deposit cash collateral for Letters of Credit if there remains such excess and all such loans outstanding have been prepaid). Mandatory Prepayment and Overadvance Reduction from Certain Sales: As long as the Overadvance Amount is greater than zero, with respect to each Asset Sale, the Required Reduction Amount will each be applied to immediately reduce the Overadvance Amount (and henceforth availability) as herein provided and to the extent that after reducing such Overadvance Amount outstanding extensions of credit exceed the Borrowing Base, mandatory prepayment of the Revolving Facility shall be required. At any time the Overadvance Amount is reduced to zero, with respect to each Asset Sale, the Required Reduction Amount shall at the option of Strategies, be (i) held as cash collateral for the Revolver Facility and the term loans (but excluded from the Borrowing Base), or (ii) applied against the outstanding balance of the term loans until the terms loans have been paid in full, at which time all remaining Required Reduction Amounts shall be held as cash collateral for the Revolver Facility. No Asset Sale shall be permitted unless, in addition to other conditions typically provided in credit agreements restricting the sale of assets, the Borrowers shall have demonstrated pro forma compliance with the Borrowing Base after giving effect to such Asset Sale. Financial Covenants: Unless otherwise indicated, all covenants are applicable to Strategies on a consolidated basis. a.) Total Funded Debt to EBITDA - covenant will be deleted b.) Minimum Net Worth - 95% of Strategies Consolidated Net Worth as at June 30, 2000 (assuming a maximum of $36,000,000 of adjustments and losses from the IT Business is taken in full on or before June 30, 2000, presently estimated at $67,950,000) (95% of such June 30, 2000 consolidated Net Worth is referred to herein as the "Beginning Net Worth Amount"), and as the last day of each fiscal quarter thereafter, the greater of (A) the Minimum Net Worth Amount for such fiscal quarter and (B) the sum of the Beginning Net Worth Amount, plus (i) 80% of the Strategies' Consolidated Net Income for each fiscal quarter commencing September 30, 2000, plus (ii) 80% of the Net Cash Proceeds (on a cumulative basis) resulting from any equity issuance by Strategies or any of its subsidiaries, and then minus (iii) any IT Adjustment occurring after June 30, 2000. c.) Minimum Fixed Charge Coverage Ratio - (Quarterly test) - as to the fiscal quarters ending on the dates set forth below, a proportion not less than that set forth opposite such quarter: Quarter Ratio June 30, 2000 > 1.15 to 1.00 - September 30, 2000 > 1.40 to 1.00 - December 31, 2000 > 1.65 to 1.00 -- March 31, 2001 and thereafter > 1.75 to 1.00 -- d.) Maximum Capital Expenditure Limit - (no change) e.) Minimum EBITDA - with respect to the fiscal quarters ending on the dates set forth below, an amount not less than the amount set forth opposite such quarter: Quarter Amount June 30, 2000 $2,895,300 September 30, 2000 $3,563,200 December 31, 2000 $4,258,300 March 31, 2001 and thereafter $4,500,000 f.) Total Consolidated Liabilities to the sum of Tangible Net Worth plus Subordinated Debt - as to the fiscal quarters ending on the dates set forth below, a proportion not greater than that set forth opposite such quarter: Quarter Ratio June 30, 2000 5.50 to 1.00* September 30, 2000 6.15 to 1.00 December 31, 2000 5.50 to 1.00 March 31, 2001 and thereafter 5.00 to 1.00 (*for purposes of the June 30, 2000 calculation, it shall be assumed that all Subordinated Debt that is outstanding as at the date hereof was outstanding as at June 30, 2000) Hydro Med Issues: Parent shall at all times own shares in Hydro Med Sciences, Inc. that either (A) constitute not less than 51% of the issued and outstanding stock of Hydro Med, Inc. or (B) have a fair market value of not less than $17,500,000. It shall be an additional Event of Default under the Credit Agreement if Hydro Med Sciences, Inc. incurs or permits to exist (i) any indebtedness for borrowed money, excluding trade payables and purchase money indebtedness incurred in connection with capitalized leases in an aggregate amount not in excess of $500,000 or (ii) any lien or encumbrance on any of its assets (other than liens securing the purchase money indebtedness permitted by (i) above). Loans and Advances: Section 8.5 of the existing Credit Agreement shall be revised to, among other things, prohibit any further loans or advances to employees, except additional loans to employees that are not officers of any Credit Party not in excess of $250,000 with respect to all such loans in the aggregate. Loans or advances under the existing basket for cashless Option Loans (as defined in the amendments to the existing Credit Agreement) shall remain. Fees and Expenses: The Borrowers shall pay all the fees and expenses of the Bank, including without limitation fees related to an examination of the Borrowers' books and records, filing, search and recording fees and the fees and expenses of, Emmet, Marvin & Martin, LLP, counsel to the Agent. Definitions Definitions will be supplemented and more fully provided in the Amendment to the Credit Agreement, but generally will incorporate the following: Accounts: Those accounts receivable arising out of the sale or lease of goods or the rendition of services by Strategies, Physics MXL Industries, Inc. or General Physics Corporation (UK) Limited. Accounts Receivable Borrowing Base: 80% of Eligible Accounts of from time to time outstanding, plus the lesser of $3,500,000 or 80% of the Eligible Foreign Accounts of Strategies, Physics, MXL Industries, Inc. and General Physics Corporation (UK) Limited from time to time outstanding. Asset Sales: In addition to those currently applicable under the existing Credit Agreement (i) sales of property and assets of a Borrower or any of its subsidiaries (excluding sales of inventory in the ordinary course of business), (ii) any and all equity offering(s) of any Borrower, Guarantor, or any of their respective subsidiaries, and (iii) the sale of any investment securities owned by any Borrower or its subsidiaries with a fair market value in excess of $100,000 with respect to all such sales in the aggregate. Availability: At any time of determination, the difference between the Borrowing Base at such time and the aggregate amount of the total outstanding exposure (loans and letters of credit) under the Revolving Facility at such time. Borrowing Base: (i) Accounts Receivable Borrowing Base; plus (ii) the Marketable Securities Borrowing Base; plus (iii) the Overadvance Amount (as reduced from time to time). EBITDA: EBITDA shall be amended to be calculated prior to any IT Adjustment (but solely up to the maximum $36,000,000 provided in the definition of IT Adjustment, it being expressly agreed that amounts in excess of such $36,000,000 (whether cash and/or non-cash) shall be included in the calculation of EBITDA). Only cash gains from the sale of marketable securities may be included and, with respect to the EBITDA calculation for any fiscal quarter in any calendar year, the amount of cash gains from the sale of marketable securities that may be included in the calculation of EBITDA shall not exceed an amount that, when added to the amount of cash gains from the sale of marketable securities for all other fiscal quarters in such calendar year (even if prior to the date hereof), exceeds $3,000,000. Eligible Accounts: Accounts (i) which result from services rendered, (ii) which are General Eligible Accounts, (iii) which are owed by account debtors located within the United States of America, (iv) which are due and payable within 90 days from the original date of invoice, except with respect to Government Assigned Receivables which shall be due and payable within 120 days from the original date of invoice and (v) which do not remain unpaid for more than 30 days past the due date stated in the original invoice. Eligible Foreign Accounts: Accounts (i) which are owed by account debtors located outside of the United States of America, (ii) which are General Eligible Accounts, (iii) which are due and payable within 90 days from the original date of invoice and (iv) which do not remain unpaid for more than 30 days past the due date stated in the original invoice. Eligible Securities Collateral: The following types of marketable securities that are subject to a first priority perfected security interest in favor of the Agent for the benefit of the Lenders and for which there can be obtained a publicly quoted fair market value: U.S. Treasury Obligations; Municipal Bonds; stocks and bonds listed on the New York Stock Exchange; stocks and bonds listed on NASDAQ; and over the counter listed stocks and bonds; provided, however, that (a) no bond shall come within this definition of "Eligible Securities Collateral" unless it is of investment grade; which shall mean such bond has a BBB or better rating from Standard and Poors Corporation or a BAA or better rating from Moody's Investment Services, Inc.; and (b) no stock shall come within this definition of "Eligible Securities Collateral" (i) unless it is publicly traded and has a publicly reported fair market value; (ii) if it is stock of a financial institution or stock of a securities firm (the determination of whether the applicable stock is stock of a financial institution or a securities firm shall be in the sole discretion of the Bank) and (iii) if all or any part of a Loan was made for the purpose of "purchasing" or "carrying" any "margin stock" within the respective meanings of each of the quoted terms under Regulation U of the Board of Governors of the Federal Reserve System as now and from time to time hereafter in effect. Fixed Charge Coverage Ratio:: as of the last day of any fiscal quarter, the ratio of (a) Consolidated EBITDA for such fiscal quarter to (b) Consolidated Fixed Charges plus Capital Expenditures, for such fiscal quarter. General Eligible Accounts: Accounts that have been validly assigned to Fleet as Agent and in which Fleet, as Agent, has a first priority perfected security interest and otherwise comply with all of the terms, conditions, warranties and representations made to Fleet and the Lenders, but General Eligible Accounts shall not include the following: (a) Accounts with respect to which the account debtor is an officer, director, employee, or agent of Strategies or an affiliate of Strategies; (b) Accounts with respect to which the sale is on an installment sale, lease or other extended payment basis (c) all Accounts owing by any account debtor if fifty percent (50%) or more of the Accounts due from such account debtor are deemed not to be General Eligible Accounts hereunder; (d) Accounts with respect to which the account debtor is a subsidiary of, affiliate of, or has common officers or directors with Strategies; (e) Accounts with respect to which Fleet, as Agent, does not for any reason have a perfected first priority lien; (f) Accounts with respect to which Strategies is or may become liable to the account debtor for goods sold or services rendered by the account debtor to Strategies, to the extent of Strategies' existing or potential liability to such account debtor; (g) Accounts with respect to which the account debtor has disputed any liability, or the account debtor has made any claim with respect to any other Account due to Strategies, or the Account is otherwise subject to any right of setoff, deduction, breach of warranty or other defense, dispute or counterclaim by the account debtor; (h) that portion of the Accounts owed by any single account Debtor which exceeds twenty five percent (25%) of all of the Accounts; (i) that portion of any Accounts representing late fees, service charges or interest, but only to the extent of such portion; (j) Accounts of an account debtor where the account debtor is located in Minnesota or New Jersey unless the payee with respect to such account (1) with respect to such state, has received a Certificate of Authority to do business and is in good standing in such state, or (2) has filed a Notice of Business Activities Report with the applicable state authority in such state, as applicable, for the then current year; (k) Accounts owed by any account debtor which is insolvent or is the subject of an insolvency proceeding; (l) that portion or any Accounts represented by contract rights, documents, instruments, chattel paper or general intangibles; (m) any and all Accounts of an account debtor whose creditworthiness is not satisfactory to Fleet in its sole credit judgment based on information available to Fleet; (n) Accounts that have been billed but are not yet earned and (o) Accounts with respect to which the account debtor is a federal, state, local or foreign governmental authority unless such Accounts are Government Assigned Receivables. References to percentages of all Accounts are based on dollar amount of Accounts, and not number of Accounts. Government Assigned Receivables: Accounts where the account debtor is the United States of America or any department, agency or instrumentality of the Untied States and for which Strategies, Physics, MXL Industries, Inc. and General Physics Corporation (UK) Limited, as the case may be, has complied with the Assignment of Claims Act of 1940, as amended (31 U.S.C. Section 203 et seq.). IT Adjustment: Up to a maximum of $36,000,000 on account of reserves, charges, asset write-offs, closure costs, ongoing operating losses and other costs and expenses of Strategies for the fiscal quarter ending June 30, 2000 or any fiscal period thereafter with respect to its sale or closure of the IT Business; provided, that, such $36,000,000 limitation shall apply to all such reserves, charges, asset write-offs, closure costs, ongoing operating losses and other costs and expenses in the aggregate; provided further, that, during the twelve month period from March 31, 2000 through and including March 31, 2001, of such $36,000,000 not more than $8,500,000 shall be in cash (the fact that some portion of the IT Adjustment is permitted to be a cash expense, however, shall not be deemed a waiver or amendment of any other covenant that may be breached as a result of such expense). IT Business: The Borrowers' open enrollment information technology training business operations in Canada and the United Kingdom. Loan Value: Shall apply to only Eligible Securities Collateral, shall be determined based on the publicly quoted fair market value of Eligible Securities Collateral at the time of determination thereof and shall mean the percentages indicated below for the applicable Eligible Securities Collateral based on such publicly quoted fair market value: Type Of Security Loan Value Cash and Cash Equivalents 100% U.S. Treasury Obligations with maturities of less than 1 year 95% U.S. Treasury Obligations with maturities of 1 year or more 90% Municipal Bonds 80% A1/P1 Commercial Paper 80% Bonds listed on the New York Stock Exchange 70% Bonds listed on the American Stock Exchange 70% Publicly Traded Stocks 50% Marketable Securities Borrowing Base: The Loan Value of Eligible Securities Collateral. Maximum Overadvance Amount: During the Periods set forth below, the amount set forth below opposite such period: Period Amount Date hereof through August 30, 2000 $ 8,000,000 August 31, 2000 through September 29, 2000 $ 7,500,000 September 30, 2000 through October 30, 2000 $ 7,000,000 October 31, 2000 through November 29, 2000 $ 6,500,000 November 30, 2000 through December 30, 2000 $ 6,000,000 December 31, 2000 through January 30, 2001 $ 4,500,000 January 31, 2001 through February 27, 2001 $ 3,500,000 February 28, 2001 through March 30, 2001 $ 1,500,000 March 31, 2001 and at all times thereafter Minimum Excess Availability: As at the last day of each fiscal quarter of Strategies, Availability in an amount equal to the lesser of $3,000,000 or the Overadvance Amount (as such Overadvance Amount is reduced from time to time). Minimum Net Worth Amount: As at (i) June 30, 2000, $70,728,000, (ii) September 30, 2000, $70,000,000 and (iii) December 31, 2000 and the last day of each fiscal quarter thereafter, $71,000,000 plus (A) 80% of the Strategies' Consolidated Net Income for each fiscal quarter commencing December 31, 2000 plus (B) 80% of the Net Cash Proceeds (on a cumulative basis) resulting from any equity issuance by Strategies or any of its subsidiaries. Overadvance Amount: The "Overadvance Amount" shall equal the amount advanced in excess of the Accounts Receivable Borrowing Base and the Marketable Securities Borrowing Base which shall in no event exceed the lesser of (i) $8,000,000 minus the aggregate Required Reduction Amounts with respect to all Asset Sales on a cumulative basis for the period from the date hereof through the date of computation and (ii) the Maximum Overadvance Amount for the date of computation. The Overadvance Amount shall be automatically reduced at the end of each month and at the time of each Asset Sale. [THE $8,000,000 BEGINNING OVERADVANCE AMOUNT IS PRESENTLY AN ESTIMATE AND MAY BE REVISED UPON RECEIPT OF MORE CURRENT BORROWING BASE INFORMATION FROM STRATEGIES AND ITS SUBSIDIARIES.] Prompt Compliance: If at September 30, 2000 no Default or Event of Default then exists and Strategies has maintained Minimum Excess Availability as of September 30, 2000 and December 31, 2000. Required Reduction Amount: With respect to Asset Sales of assets sold that were not included in the Borrowing Base, 75% of the Net Cash Proceeds (as defined in the existing credit agreement), and with respect to Asset Sales of assets sold that were included in the Borrowing Base, the amount equal to an amount that when added to the amount of the reduction in the Borrowing Base (as a result of the sold assets no longer being included in the Borrowing Base) equals 75% of the total Net Cash Proceeds (as defined in the existing credit agreement) (for the avoidance of doubt, the Required Reduction Amount is determined in accordance with the following formula: x + reduction in Borrowing Base = (.75)(Net Cash Proceeds)); provided, that, if same would result in a negative number the Required Reduction Amount shall be deemed zero. Total Consolidated Liabilities: Defined and determined in accordance with GAAP. Tangible Net Worth: Consolidated Net Worth as defined in the existing Credit Agreement minus deferred charges, intangibles and treasury stock, all determined in accordance with GAAP and at any time the IT Adjustment is less than $36,000,000, minus the difference between $36,000,000 and the aggregate amount of the IT Adjustments occurring prior to the time of calculation. -----END PRIVACY-ENHANCED MESSAGE-----