10-Q 1 gp10q602.txt GP STRATEGIES 2ND QTR 10-Q 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, 2002 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 12, 2002: Common Stock 15,173,504 shares Class B Capital 1,200,000 shares TABLE OF CONTENTS GP STRATEGIES CORPORATION AND SUBSIDIARIES Page No. Part I. Financial Information Consolidated Condensed Balance Sheets - June 30, 2002 and December 31, 2001 1 Consolidated Condensed Statements of Operations - Three Months and Six Months Ended June 30, 2002 and 2001 3 Consolidated Condensed Statements of Cash Flows - Six Months Ended June 30, 2002 and 2001 4 Notes to Consolidated Condensed Financial Statements 6 Management's Discussion and Analysis of Financial Condition and Results of Operations 19 Part II. Other Information 25 Signatures 26 PART I. FINANCIAL INFORMATION GP STRATEGIES CORPORATION AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEETS (in thousands) June 30, December 31, 2002 2001 --------- ----------- ASSETS (unaudited) * Current assets -------------- Cash and cash equivalents $ 2,270 $ 1,705 Accounts and other receivables 36,330 41,610 Inventories 1,516 1,734 Costs and estimated earnings in excess of billings on uncompleted contracts 11,609 8,579 Prepaid expenses and other current assets 4,733 3,780 --------- --------- Total current assets 56,458 57,408 --------- --------- Investments, advances and marketable securities 19,713 30,400 --------- --------- Property, plant and equipment, net 8,083 8,718 --------- --------- Intangible assets, net of accumulated amortization of $35,096 and $35,031 57,257 56,846 --------- --------- Deferred tax asset 7,703 4,289 --------- --------- Other assets 5,900 6,230 --------- --------- $155,114 $163,891 ======== ======== * The Consolidated Condensed Balance Sheet as of December 31, 2001 has been summarized from the Company's audited Consolidated Balance Sheet as of that date. Certain amounts in the Balance Sheet as of December 31, 2001 and notes thereto, have been reclassified to conform to 2002 classifications. 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, 2002 2001 --------- ---------- LIABILITIES AND STOCKHOLDERS' EQUITY (unaudited) * Current liabilities: Current maturities of long-term debt $ 3,223 $ 637 Short-term borrowings 24,125 32,338 Accounts payable and accrued expenses 16,254 17,089 Billings in excess of costs and estimated earnings on uncompleted contracts 6,822 10,094 --------- -------- Total current liabilities 50,424 60,158 -------- --------- Long-term debt less current maturities 3,291 6,226 --------- --------- Other non-current liabilities 1,196 1,564 --------- --------- Stockholders' equity Common stock 152 128 Class B capital stock 12 9 Additional paid in capital 189,756 180,078 Accumulated deficit (87,671) (87,939) Accumulated other comprehensive income 2,651 8,364 Note receivable from stockholder (4,095) (4,095) Treasury stock, at cost (602) (602) ----------- ------------ Total stockholders' equity 100,203 95,943 --------- ---------- $155,114 $163,891 ======== ======== * The Consolidated Condensed Balance Sheet as of December 31, 2001 has been summarized from the Company's audited Consolidated Balance sheet as of that date. Certain amounts in the Balance Sheet as of December 31, 2001 and notes thereto, have been reclassified to conform to 2002 classifications. 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, ---------------- ------------------------ 2002 2001 2002 2001 ------- ------ ------- --------- Sales $ 39,242 $ 50,347 $ 79,468 $ 99,461 Cost of sales 34,337 43,373 69,115 86,128 -------- -------- ------- --------- Gross margin 4,905 6,974 10,353 13,333 Selling, general & administrative expenses (4,737) (6,997) (9,277) (11,469) Interest expense (675) (1,155) (1,429) (2,555) Investment and other (loss) income, net (303) 291 (738) 781 Gain on marketable securities 846 2,203 1,286 427 Restructuring charge reversal 140 354 373 --------- ------------- --------- ---------- Income before income taxes 176 1,316 549 890 Income tax expense (113) (582) (281) (400) ---------- ---------- --------- --------- Net income $ 63 $ 734 $ 268 $ 490 =========== ========== ========= ========= Net (loss) income per share: Basic and diluted $ (.01) $ .06 $ - $ .04 ========= =========== ============ ========== 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, 2002 2001 ------- ------- Cash flows from operations: Net income $ 268 $ 490 Adjustments to reconcile net income to net cash (used in) provided by operating activities: Depreciation and amortization 1,320 3,042 Issuance of stock for profit incentive plan 394 607 Non-cash compensation and consultant fees 240 523 Loss (income) on equity investments 1,086 (296) Restructuring charge reversal (354) (373) Gain on marketable securities (1,286) (427) Changes in other operating items (2,142) (2,806) -------- -------- Net cash (used in) provided by operating activities (474) 760 -------- --------- Cash flows from investing activities: Proceeds from sale of marketable securities 1,883 9,395 Additions to property, plant & equipment (344) (1,077) (Increase) reduction of investments and other assets, net (880) 416 --------- --------- Net cash provided by investing activities 659 8,734 -------- -------- Cash flows from financing activities: Net proceeds from sale of Common Stock 7,950 Net proceeds from sale of Class B Stock 1,260 Proceeds from MXL mortgage 1,680 Repayment of short-term borrowings (8,213) (6,069) Repayment of long-term debt (349) (5,682) -------- -------- Net cash provided by (used in) financing activities 648 (10,071) -------- ------- Effect of exchange rate changes on cash and cash equivalents (268) 243 --------- ---------
GP STRATEGIES CORPORATION AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Continued) (Unaudited) (in thousands)
Six months ended June 30, ---------------------- 2002 2001 --------- --------- Net increase (decrease) in cash and cash equivalents $ 565 $ (334) Cash and cash equivalents at the beginning of the period 1,705 2,487 -------- -------- Cash and cash equivalents at the end of the period $ 2,270 $ 2,153 ======== ======== Cash paid during the periods for: Interest $ 1,066 $ 2,172 ======== ======== Income taxes $ 228 $ 212 ========= =========
See accompanying notes to the consolidated condensed financial statements. GP STRATEGIES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited) 1. Earnings per share Income per share (EPS) for the three and six month periods ended June 30, 2002 and 2001 are as follows (in thousands, except per share amounts):
Three months Six months ended June 30, ended June 30, -------------------------- --------------------------- 2002 2001 2002 2001 ---- ---- ---- ---- Basic and Diluted EPS Net income $ 63 $ 734 $ 268 $ 490 Weighted average shares outstanding basic 15,035 13,089 14,444 13,046 Weighted average shares outstanding diluted 15,189 13,141 14,599 13,098 Basic and diluted net (loss) income per share $ (.01) $ .06 $ - $ .04
Basic and diluted 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. At June 30, 2002, the Company had a put option obligation of $495,000. This amount has been recorded in additional paid in capital in the Consolidated Condensed Balance Sheets. The addition to the liability of $225,000 and $255,000 in the three and six months ended June 30, 2002, respectively, are deemed to be a dividend for purposes of the basic and diluted (loss) income per share calculation. GP STRATEGIES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued) (Unaudited) 2. Long-term debt Long-term debt consists of the following (in thousands): June 30, December 31, 2002 2001 --------- ---------- Mortgage on MXL Pennsylvania facility $ 1,555 $ 1,605 Mortgage on MXL Illinois facility 1,225 1,237 Senior subordinated debentures 563 641 Subordinated convertible note 2,640 2,640 Other 531 740 --------- --------- 6,514 6,863 Less current maturities (3,223) (637) --------- -------- $ 3,291 $ 6,226 ======== ======== On March 8, 2001, MXL Industries, Inc. ("MXL"), a wholly owned subsidiary of the Company entered into a loan secured by a mortgage covering the real estate and fixtures on its property in Pennsylvania in the amount of $1,680,000. The loan requires monthly repayments of $8,333 plus interest at 2.5% above the one month LIBOR rate and matures on March 8, 2011. The loan is guaranteed by the Company. The proceeds of the loan were used to repay a portion of the Company's short-term borrowings pursuant to its amended agreement described below in Note 4. On July 3, 2001, MXL entered into a loan in the amount of $1,250,000, secured by a mortgage covering the real estate and fixtures on its property in Illinois. The loan requires monthly payments of principal and interest of $11,046 with interest at a fixed rate of 8.75% per annum, and matures on June 26, 2006, when the remaining amount outstanding of approximately $1,100,000 is due in full. The loan is guaranteed by the Company. The proceeds of the loan were used to repay a portion of the Company's term loan pursuant to its Amended Agreement described in Note 4. GP STRATEGIES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued) (Unaudited) 3. Comprehensive (loss) income The following are the components of comprehensive (loss) income (in thousands):
Three months ended Six months ended June 30, June 30, ------------------------ ----------------------- 2002 2001 2002 2001 ------- -------- ------- --------- Net income $ 63 $ 734 $ 268 $ 490 --------- -------- --------- -------- Other comprehensive (loss) income before tax: Net unrealized (loss ) gain on available-for-sale-securities (3,900) 14,406 (8,904) 191 Foreign currency translation adjustment (415) 50 (268) 243 ---------- ---------- ---------- -------- Other comprehensive (loss) income, before tax (4,315) 14,456 (9,172) 434 --------- --------- --------- -------- Income tax benefit (expense) relating to items of other comprehensive income 1,524 (5,663) 3,459 (131) --------- --------- --------- --------- Comprehensive (loss) income, net of tax $ (2,728) $ 9,527 $ (5,445) $ 793 ======== ======== ======== ========
The components of accumulated other comprehensive income (loss) are as follows: June 30, December 31, 2002 2001 --------- --------- Net unrealized gain on available-for-sale-securities $ 5,906 $14,810 Foreign currency translation adjustment (925) (657) ------- -------- Accumulated other comprehensive income before tax 4,981 14,153 Accumulated income tax expense related to items of other comprehensive income (2,330) (5,789) ------- --------- Accumulated other comprehensive income, net of tax $ 2,651 $ 8,364 ======= ======= GP STRATEGIES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued) (Unaudited) 4. Short-term borrowings The Company and certain of its wholly owned subsidiaries entered into an Amended and Restated secured $40,000,000 Revolving Credit Agreement (the "Amended Agreement") with various banks on December 14, 2001 which amended in its entirety the Company's former credit facility as discussed below. The Amended Agreement reduced the commitment pursuant to the revolving facility to $40,000,000 (subject to borrowing base limitations specified in the Amended Agreement). The interest rates on the revolving credit facility are currently at prime plus 1.50% and Eurodollar plus 3.00%, at the Company's option. Based upon the financial performance of the Company, the interest rates can be reduced. The Amended Agreement is secured by all of the receivables and inventory of the Company as well as the common stock of the Company's material domestic subsidiaries and 65% of the common stock of the Company's foreign subsidiaries. The Amended Agreement also provides for additional security consisting of certain real property, personal property and substantially all marketable securities owned by the Company and its subsidiaries. The Amended Agreement contains revised minimum consolidated net worth, fixed charge coverage, leverage ratio and interest coverage ratio. The Amended Agreement also contains certain restrictive covenants, including the prohibition on future acquisitions, and provides for mandatory prepayment upon the occurrence of certain events. At June 30, 2002, the amount outstanding under the revolving credit facility is $24,125,000 and is included in short-term borrowings in the Consolidated Condensed Balance Sheet. At June 30, 2002, the Company had $10,635,000 available to be borrowed under the Credit Agreement and was in compliance with all financial covenants. 5. Business segments Effective January 1, 2002, the operations of the Company consist of three business segments, by which the Company is managed. The Company's principal operating subsidiary is General Physics Corporation (GP). GP is a workforce development company that improves the effectiveness of organizations by providing training, management systems and engineering services to meet the specific needs of clients. Programs have been developed for service managers and executives, engineers, sales associates, plant operators, the maintenance and purchasing workforces and information technology professionals in the public and private sectors in North and South America, Europe and Asia. Clients include Fortune 500 companies, manufacturing, process and energy industries, and other commercial and government customers. GP operates in two business segments. GP STRATEGIES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued) (Unaudited) 5. Business segments (continued) The Manufacturing & Process Group provides technology based training, engineering, consulting and technical services to leading companies in the automotive, steel, power, oil and gas, chemical, energy, pharmaceutical and food and beverage industries, as well as to the government sector. The Information Technology Group provides IT training programs and solutions, including Enterprise Solutions and comprehensive career training and transition programs. The Optical Plastics Group, which consists of MXL, manufactures and distributes coated and molded plastic products. The Hydro Med Group consisted of Hydro Med Sciences (HMS), a drug delivery company, which is engaged in Phase III clinical trials for the treatment of prostrate cancer. As part of a private placement transaction of preferred stock that was completed on December 27, 2001, the Company no longer has financial and operational control of HMS. Therefore, for the year ended December 31, 2001 the operating results of HMS were consolidated within the Consolidated Condensed Statement of Operations. However, effective January 1, 2002 and as a result of this private placement transaction, the Hydro Med Group no longer exists as a business segment of the Company. Effective December 27, 2001, the Company accounts for its investment in HMS under the equity method. 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 is consistent with the presentation on the Consolidated Condensed Statements of Operations. GP STRATEGIES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued) (Unaudited) 5. Business segments (continued) The following tables set forth the sales and gross margin of each of the Company's operating segments (in thousands):
Three months ended Six months ended June 30, June 30, --------------------- ---------------------- 2002 2001 2002 2001 ------- -------- ------- ------- Sales Manufacturing and Process $34,401 $44,496 $69,566 $87,333 Information Technology 2,127 2,888 4,432 6,106 Optical Plastics 2,714 2,962 5,470 6,019 Hydro Med 1 3 ------------ ---------- ------------ ----------- $39,242 $50,347 $79,468 $99,461 ------- ------- ------- ------- Gross margin Manufacturing and Process $ 4,259 $ 5,848 $ 8,849 $11,206 Information Technology (54) 449 258 768 Optical Plastics 700 822 1,246 1,660 Hydro Med (145) (301) ----------- ---------- ----------- ---------- $ 4,905 $ 6,974 $10,353 $13,333 ------- ------- ------- -------
Information about the Company's 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, ------------------------ --------------------- 2002 2001 2002 2001 ------- --------- -------- ------- United States $36,367 $46,740 $73,946 $92,125 Canada 432 890 731 1,956 United Kingdom 1,845 1,641 3,618 3,400 Latin America 598 1,076 1,173 1,980 --------- --------- ------- ---------- $39,242 $50,347 $79,468 $99,641 ------- ------- ------- ------- GP STRATEGIES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued) (Unaudited) 5. Business segments (Continued) Information about the Company's identifiable assets in different geographic regions, is as follows (in thousands): June 30, December 31, 2002 2001 ------------ ----------- United States $145,795 $154,844 Canada 3,869 3,653 United Kingdom 3,208 2,821 Latin America and other 2,242 2,573 ---------- -------- $155,114 $163,891 -------- -------- 6. Restructuring charges During 1999 and 2000, the Company adopted restructuring plans, primarily related to its IT business segment. During the six month period ended June 30, 2002 the Company utilized $863,000 of the restructuring reserve and reversed $354,000. Of the remaining total restructuring reserve balance of $1,509,000 at June 30, 2002 and $2,726,000 at December 31, 2001, $313,000 and $1,162,000, respectively, were included in accounts payable and accrued expenses and $1,196,000 and $1,564,000, respectively, were included in other non-current liabilities in the Consolidated Condensed Balance Sheet. The components of the restructuring charge reserve are as follows (in thousands): Lease and related Contractual obligations obligations Total ------------------------------------------------------------------------------- Balance December 31, 2001 $ 2,374 $ 352 $ 2,726 ------------------------------------------------------------------------------- Utilization (511) (352) (863) Reversal of restructuring charges (354) (354) ------------------------------------------------------------------------------- Balance June 30, 2002 $ 1,509 $ $ 1,509 ------------------------------------------------------------------------------- Lease obligations are presented at their present value, net of assumed sublets. GP STRATEGIES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued) (Unaudited) 7. Recently adopted accounting standards Effective January 1, 2002, the Company adopted FASB Statement No. 141, Business Combinations, and Statement No. 142, Goodwill and Other Intangible Assets. Statement No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001 as well as all purchase method business combinations completed after June 30, 2001. Statement No. 141 also specifies criteria intangible assets acquired in a purchase method business combination must meet to be recognized and reported apart from goodwill, noting that any purchase price allocable to an assembled workforce may not be accounted for separately. Statement No. 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized but instead tested for impairment at least annually in accordance with the provisions of Statement No. 142. Statement No. 142 also requires that intangible assets with definite useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of. The Company had unamortized goodwill in the amount of $56,000,000. The Company did not recognize any impairment as a result of the adoption of this statement. 7. Recently adopted accounting standards (continued) The changes in the carrying amount of acquired intangible assets for the six-month period ended June 30, 2002 are as follows:
Manufacturing & Information Optical Process Technology Plastics Corporate Total ------------------------------------------------------------------------------------------------------------ Intangible assets: Balance as of: December 31, 2001 $25,411 $ 7,471 $ 394 $35,358 $68,634 Additions 306 306 Other 207 207 ------------------------------------------------------------------------------------------------------------ June 30, 2002 $25,717 $ 7,678 $ 394 $35,358 $69,147 ------------------------------------------------------------------------------------------------------------
Manufacturing & Information Optical Process Technology Plastics Corporate Total ------------------------------------------------------------------------------------------------------------ Accumulated Amortization: Balance as of: December 31, 2001 $ 6,219 $ 1,337 $ 207 $ 4,025 $11,788 Amortization expense 42 5 9 56 Other 46 46 ------------------------------------------------------------------------------------------------------------ June 30, 2002 $ 6,261 $ 1,383 $ 212 $ 4,034 $11,890 ------------------------------------------------------------------------------------------------------------ Balance as of June 30, 2002 $19,456 $ 6,295 $ 182 $31,324 $57,257 ============================================================================================================
GP STRATEGIES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued) (Unaudited) 7. Recently adopted accounting standards (continued) The components of acquired intangible assets as of June 30, 2002 are as follows:
Manufacturing & Information Process Technology Optical Plastics Corporate Gross Gross Gross Gross Gross Carrying Accumulated Carrying Accumulated Carrying Accumulated Carrying Accumulated Amount Amortization Amount Amortization Amount Amortization Amount Amortization ----------------------------------------------------------------------------------------------------------------------------------- Goodwill $24,527 $ 5,846 $7,678 $1,383 $394 $212 $35,200 $3,903 Other $ 1,190 $ 415 158 131 ----------------------------------------------------------------------------------------------------------------------------------- Balance as of June 30, 2002 $25,717 $6,261 $7,678 $1,383 $394 $212 $35,358 $4,034 ===================================================================================================================================
GP STRATEGIES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued) (Unaudited) 7. Recently Adopted Accounting Standards (Continued) Summarized below is pro forma net income and earnings per share for the three and six months ended June 30, 2001 as adjusted for amortization expense that is no longer recorded in accordance with Statement No. 142 and net of the related income tax effect is as follows:
Three Months Six Months ended June 30, 2001 ended June 30, 2001 ------------------------------ ------------------------------ Net Basic & Diluted Net Basic & Diluted Income EPS Income EPS ------------ --------------- -------------- --------------- Reported $ 734 $0.06 $ 490 $0.04 Add: amortization adjustment $ 360 $0.02 $ 710 $0.05 ------- ----- ------- ----- Adjusted $1,094 $0.08 $1,200 $0.09 ====== ===== ====== =====
8. Litigation On January 3, 2001, the Company commenced an action alleging that MCI Communications Corporation ("MCI"), Systemhouse, and Electronic Data Systems Corporation, as successor to Systemhouse, committed fraud in connection with the Company's 1998 acquisition of Learning Technologies from the defendants for $24.3 million. The Company seeks actual damages in the amount of $117.9 million plus interest, punitive damages in an amount to be determined at trial and costs. The complaint, which is pending in the New York State Supreme Court, alleges that the defendants created a doctored budget to conceal the poor performance of the United Kingdom operation of Learning Technologies. The complaint also alleges that the defendants represented that Learning Technologies would continue to receive business from Systemhouse even though defendants knew that the sale of Systemhouse to EDS was imminent and that such business would cease after such sale. In February 2001, the defendants filed answers denying liability. No counterclaims against the plaintiffs have been asserted. Although, discovery has not yet been completed, defendants have made a motion for summary judgment, which was submitted on April 15, 2002. The motion is under judicial consideration. GP STRATEGIES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued) (Unaudited) 8. Litigation (Continued) One of the defendants, MCI, filed for bankruptcy protection in July 2002. As a result, the action is stayed as to MCI. The other defendants have made an application to the Court to stay the action until a later-commenced arbitration is concluded. The motion, which the Company has opposed, has not yet been submitted to the Court. 9. Stockholders' equity During the second quarter ended June 30, 2002, the Company received an aggregate of $9.3 million from the sale of Common and Class B Stock Shares as summarized below. The Company sold 1,200,000 shares of Common Stock for $4,200,000 to Bedford Oak in a private placement transaction. The Company sold 100,000 shares of Common Stock for $350,000 to Marshall Geller, a director of the Company, in a private placement transaction. The Company sold to Equity Group Investments, L.L.C ("EGI") in a private placement transaction 1,000,000 shares of Common Stock (the "EGI Common Shares") for $3,500,000 and 300,000 shares of Class B Stock (the "EGI Class B Shares") for $1,260,000. Upon the disposition of any of the EGI Class B Shares (other than to an affiliate of EGI or to a transferee approved by the Board who in each case agrees to be bound by the provisions of the EGI Agreement), EGI is required to exercise the right to convert all of its EGI Class B Shares into an equal number of shares of Common Stock (the "EGI Underlying Shares"). Until May 3, 2003, the Company has the right to purchase all, but not less than all, of the EGI Class B Shares then owned by EGI at a price per share equal to the greater of (i) the 90 day trailing average of the closing prices of the Common Stock and (ii) $5.25. If the Company exercises such right, EGI has the right to sell to the Company all or part of the EGI Common Shares then owned by EGI at a price per share of $3.50. If EGI exercises such right and the Company does not then have adequate liquidity, the repurchase of the EGI Common Shares may take place over a period of 21 months. GP STRATEGIES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued) (Unaudited) 9. Stockholders' equity (Continued) The Company and EGI have entered into an advisory services agreement providing that, to the extent requested by the Company and deemed appropriate by EGI, EGI shall assist the Company in developing, identifying, evaluating, negotiating, and structuring financings and business acquisitions. The Company has agreed to pay EGI a transaction fee equal to 1% of the proceeds received by the Company in a financing, or of the consideration paid by the Company in a business acquisition, in respect of which EGI has provided material services. 10. Subsequent event On August 2, 2002, upon approval from its lenders, the Company converted $500,000 of its $5,000,000 senior unsecured 8% note due from Five Star Products, Inc. ("Five Star") into 2,272,727 shares of common stock of Five Star. Five Star has executed a new promissory note to the Company in the amount of $4,500,000. Terms of the promissory note remain unchanged. This conversion increases the Company's ownership in Five Star to approximately 45% from 37% of the outstanding shares of common stock of Five Star. GP STRATEGIES CORPORATION AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations Overview The Company has three operating business segments. Two of these segments, the Manufacturing & Process Group and the IT Group, are managed through the Company's principal operating subsidiary General Physics and the third through its operating subsidiary MXL Industries. In addition, the Company holds a number of investments in publicly held companies, including publicly traded stock in Millennium Cell Inc. and an equity interest in HMS. While the Company currently owns 100% of the Common Stock of HMS, as a result of a private placement transaction of preferred stock that was completed on December 27, 2001, the Company no longer has financial and operational control of HMS. Therefore, for the year ended December 31, 2001, the operating results of HMS were consolidated within the Consolidated Condensed Statement of Operations. However, as a result of this private placement transaction, effective January 1, 2002 the Hydro Med Group no longer exists as a business segment. The Company currently accounts for its investment in HMS under the equity method. GP is a workforce development company that improves the effectiveness of organizations by providing training, management systems and engineering services to meet the specific needs of clients. Programs have been developed for service managers and executives, engineers, sales associates, plant operators, the maintenance and purchasing workforces and information technology professionals in the public and private sectors in North and South America, Europe and Asia. Clients include Fortune 500 companies, manufacturing, process and energy industries, and other commercial and government customers. For the quarter ended June 30, 2002, the Company had income before income taxes of $176,000 compared to $1,316,000 for the quarter ended June 30, 2001. The income in the second quarter of 2002 included a $846,000 gain from the sale shares of Millennium Cell, Inc. and a non-cash credit of $311,000 relating to the Company's Millennium Cell Deferred Compensation Plan, offset by a non-cash equity loss of $596,000 on HMS. Additionally, effective January 1, 2002, and for the quarter ended June 30, 2002, the Company no longer amortizes goodwill in accordance with SFAS No. 142 Goodwill and Other Intangible Assets. The income for the second quarter of 2001 was primarily attributable to a $2,203,000 gain from the sale of securities of Millennium Cell, Inc., offset by a non-cash expense of $872,000 relating to the Company's Millennium Cell Deferred Compensation Plan. The Company's three operating business segments had decreased profits in the quarter ended June 30, 2002, compared to the quarter ended June 30, 2001 due to the Company's decreased sales and gross margin percentage. For the six months ended June 30, 2002, the Company had income before income taxes of $549,000 compared to $890,000 for the six months ended June 30, 2001. The six months ended June 30, 2002 included a $1,286,000 gain primarily from the sale of shares of Millennium Cell, Inc. and a non-cash credit of $868,000 relating to the Company's Millennium Cell Deferred Compensation Plan, offset by a non-cash equity loss of $1,331,000 on HMS. Additionally, effective January 1, 2002, and for the six months ended June 30, 2002, the Company no longer amortizes goodwill in accordance with SFAS No. 142 Goodwill and Other Intangible Assets. The income for the six months ended June 30, 2001 was primarily due to a $427,000 gain from the sale of securities and a non-cash credit of $273,000 relating to the Company's Millennium Cell Deferred Compensation Plan. Three months ended Six months ended June 30, June 30, --------------------- --------------------- 2002 2001 2002 2001 ------- -------- ------- ------- Sales Manufacturing and Process $34,401 $44,496 $69,566 $87,333 Information Technology 2,127 2,888 4,432 6,106 Optical Plastics 2,714 2,962 5,470 6,019 Hydro Med 1 3 ------- ------- ------- ------- $39,242 $50,347 $79,468 $99,461 ------- ------- ------- ------- For the quarter and six months ended June 30, 2002, sales decreased by $11,105,000 to $39,242,000 from $50,347,000 and $19,993,000 to $79,468,000 from $99,461,000, respectively, from the corresponding periods in 2001. The decrease in sales was primarily attributable to a continued reduction in sales from the automotive division and e-Learning division of the Manufacturing and Process Group, as well as decreased sales from certain high tech clients. The Information Technology Group's sales continue to decline primarily as a result of the Company's efforts to downsize the division. In addition, the sales decrease in 2002 compared to the second quarter of 2001, was primarily due to the overall continued downturn in the economy and the sales for the second quarter of 2001 were the strongest sales reported by the Company's manufacturing and process group in the past two years.
Three months ended Six months ended June 30, June 30, ------------------------------------ ---------------------------------- 2002 % 2001 % 2002 % 2001 % ------- ----- -------- ------- ------ ----- -------------- Gross margin Manufacturing and Process $ 4,259 12.4 $ 5,848 13.1 $ 8,849 12.7 $11,206 12.8 Information Technology (54) 449 15.5 258 5.8 768 12.6 Optical Plastics 700 25.8 822 27.8 1,246 22.8 1,660 27.6 Hydro Med (145) (301) ------------ ------ -------- -------------------------- ---------- ------ $ 4,905 12.5 $ 6,974 13.9 $10,353 13.0 $13,333 13.4 ------- ----- ------- ----- ------- ---- ------- -----
Consolidated gross margin of $4,905,000 or 12.5% of sales for the quarter ended June 30, 2002, decreased by $2,069,000, compared to the consolidated gross margin of $6,974,000, or 13.9% of sales for the quarter ended June 30, 2001. For the six months ended June 30, 2002, gross margin decreased by $2,980,000 from $13,333,000 to $10,353,000. The decreased gross margin in both the quarter and six months ended June 30, 2002 occurred within all segments of GP, as a result of decreased sales for the period. However, the gross margin percentage for the Manufacturing and Process Group remained relatively unchanged due to the Company's continued efforts to control costs for the period. Selling, general and administrative expenses For the quarter ended June 30, 2002, selling, general and administrative (SG&A) expenses were $4,737,000 compared to $6,997,000 in the second quarter of 2001. The reduction in SG&A of $2,260,000 is primarily attributable to the non-cash credit of $311,000 (as compared to an expense of $872,000 in 2001) relating to the Company's Millennium Cell Deferred Compensation Plan, a reduction in SG&A expense for HMS of $633,000 due to the deconsolidation of HMS at December 27, 2001 and goodwill amortization expense of $538,000 in the prior year which is not recorded in the current year in accordance with SFAS No. 142 Goodwill and Other Intangible Assets. For the six months ended June 30, 2002, SG&A expenses were reduced by $2,192,000 from $11,469,000 to $9,277,000 primarily as a result of an increase in the non-cash credit of $595,000 relating to the Company's Millennium Cell Deferred Compensation Plan, a reduction in SG&A expenses for HMS of $1,034,000 due to the deconsolidation of HMS and goodwill amortization expense of $1,294,000 in the prior year which is not included in current year in accordance with SFAS No. 142 Goodwill and Other Intangible Assets, offset by financial consulting fees and other expenses of approximately $700,000. Interest expense For the quarter ended June 30, 2002, interest expense was $675,000 compared to $1,155,000 for the quarter ended June 30, 2001. For the six months ended June 30, 2002, there was a decrease in interest expense of $1,126,000 from $2,555,000 to $1,429,000. The decreased interest expense in 2002 was attributable to both a decrease in the Company's outstanding indebtedness and a reduction in variable interest rates. Investment and other (loss) income, net For the three and six months ended June 30, 2002, investment and other (loss) income, net was $(303,000) and $(738,000) as compared to $291,000 and $781,000 for the quarter and six months ended June 30, 2001. The decrease was primarily attributable to an equity loss recognized on HMS of $596,000 and $1,331,000 for the three and six months ended June 30, 2002, respectively, and other (loss) income, net on the Company's other investments. Income tax expense For the quarter and six months ended June 30, 2002, the Company recorded an income tax expense of $113,000 and $281,000, which represents the Company's estimated effective federal, state and local, and foreign tax rate. In the quarter and six months ended June 30, 2001, the Company recorded an income tax expense of $582,000 and $400,000, which represents the applicable federal, state and local, and foreign tax expense for these periods. Liquidity and capital resources At June 30, 2002, the Company had cash and cash equivalents totaling $2,270,000. The Company has sufficient cash and cash equivalents, long-term investments and borrowing availability under existing and potential lines of credit as well as the ability to obtain additional funds from its operating subsidiaries in order to fund its working capital requirements. During the six months ended June 30, 2002, the Company received an aggregate of $9,310,000 from the sale of Common Stock Class B Stock (see Note 9). For the six months ended June 30, 2002, the Company's working capital increased by $8,784,000 to a net working capital of $6,034,000, primarily due to proceeds from the sale of Class B and Common Stock which was used to repay $8,200,000 of short-term borrowings and decreases in accounts and other receivables and accounts payable and accrued expenses, offset by an increase in prepaid expenses and other current assets. The increase in cash and cash equivalents of $565,000 for the six months ended June 30, 2002 resulted primarily from cash provided by investing and financing activities of $659,000 and $648,000, respectively, offset by cash used in operations of $474,000. Cash provided by financing activities consisted of proceeds from the sale of Common and Class B Stock offset by repayments of short-term borrowings and long-term debt. Recent accounting pronouncements In August 2001, the FASB issued Statement No. 143, Accounting for Asset Retirement Obligations (SFAS 143), which addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. This Statement applies to all entities that have legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development or normal use of the asset. Enterprises are required to adopt Statement No. 143 for fiscal years beginning after June 15, 2002. The adoption of this statement is not expected to have a material impact on the Company's financial position or results of operation. In July 2002, the FASB issued Statement No. 146, "Accounting for Costs Associated with Exit or Disposal Activities" (SFAS 146") was issued. This Statement addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Task Force Issue ("EITF") 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." The principal difference between SFAS 146 and EITF 94-3, relates to the timing of liability recognition. Under SFAS 146, a liability for a cost associated with an exit or disposal activity is recognized when the liability is incurred. Under EITF 94-3, a liability for an exit cost was recognized at the date of an entity's commitment to an exit plan. The provisions of SFAS 146 are effective for exit or disposal activities that are initiated after December 31, 2002. The adoption of this statement is not expected to have a material impact on the Company's financial position or results of operation. Forward-looking statements The forward-looking statements contained herein reflect GP Strategies' management's current views with respect to future events and financial performance. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements, all of which are difficult to predict and many of which are beyond the control of GP Strategies, including, but not limited to those risks and uncertainties detailed in GP Strategies' periodic reports and registration statements filed with the Securities and Exchange Commission. GP STRATEGIES CORPORATION AND SUBSIDIARIES QUALIFICATION RELATING TO FINANCIAL INFORMATION June 30, 2002 The financial information included herein is unaudited. In addition, the financial information does not include all disclosures required under generally accepted accounting principles because certain note information included in the Company's Annual Report has been omitted; however, such information reflects all adjustments (consisting solely of normal recurring adjustments) which are, in the opinion of management, necessary for a fair statement of the results for the interim periods. The results for the 2002 interim period are not necessarily indicative of results to be expected for the entire year. GP STRATEGIES CORPORATION AND SUBSIDIARIES PART II. OTHER INFORMATION Item 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 99.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Okley Act of 2002. 99.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Okley Act of 2002. b. Reports None GP STRATEGIES CORPORATION AND SUBSIDIARIES June 30, 2002 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, 2002 Scott N. Greenberg President & Chief Financial Officer DATE: August 14, 2002 Jerome I. Feldman Chief Executive Officer