-----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, FeHQBY4A4N+d8MC/pZtNcB+oYka9ROvzIhasw04v2vU+XWejq/nzoM3bv/d+6jnd EorlT6yGkUyce4OeM/GZ/A== 0000070415-03-000005.txt : 20030415 0000070415-03-000005.hdr.sgml : 20030415 20030415115437 ACCESSION NUMBER: 0000070415-03-000005 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 13 CONFORMED PERIOD OF REPORT: 20021231 FILED AS OF DATE: 20030415 FILER: COMPANY DATA: COMPANY CONFORMED NAME: GP STRATEGIES CORP CENTRAL INDEX KEY: 0000070415 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-EDUCATIONAL SERVICES [8200] IRS NUMBER: 131926739 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-07234 FILM NUMBER: 03649887 BUSINESS ADDRESS: STREET 1: 777 WESTCHESTER AVENUE STREET 2: FOURTH FLOOR CITY: WHITE PLAINS STATE: NY ZIP: 10604 BUSINESS PHONE: 914-249-9700 MAIL ADDRESS: STREET 1: 777 WESTCHESTER AVENUE STREET 2: FOURTH FLOOR CITY: WHITE PLAINS STATE: NY ZIP: 10604 FORMER COMPANY: FORMER CONFORMED NAME: NATIONAL PATENT DEVELOPMENT CORP DATE OF NAME CHANGE: 19920703 10-K 1 gp10k02.txt GP STRATEGIES 10K 2002 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended December 31, 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 of Incorporation) (I.R.S. Employer Identification No.) 777 Westchester Avenue, White Plains, NY 10604 - ---------------------------------------- ------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (914) 249-9700 Securities registered pursuant to Section 12(b) of the Act: Title of Each Class Name of each exchange on which registered: Common Stock, $.01 Par Value New York Stock Exchange, Inc. Securities registered pursuant to Section 12(g) of the Act: None 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 Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. / / Indicate by check mark whether the registrant is an accelerated filer. Yes No X ------- --- The aggregate market value of the outstanding shares of the Registrant's Common Stock, par value $.01 per share and Class B Capital Stock, par value $.01 per share held by non-affiliates as of June 28, 2002 was approximately $60,129,448, and $1,540,313, respectively, based on the closing price of the Common Stock on the New York Stock Exchange on June 28, 2002. The number of shares outstanding of each of the Registrant's Common Stock and Class B Stock as of March 19, 2003: Class Outstanding at March 19, 2003 Common Stock, par value $.01 per share 15,401,566 shares Class B Capital Stock, par value $.01 per share 1,200,000 shares DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's definitive Proxy Statement for its 2003 Annual Meeting of Stockholders are incorporated herein by reference into Part III hereof. TABLE OF CONTENTS Page PART I Item 1. Business 1 Item 2. Properties 16 Item 3. Legal Proceedings 17 Item 4. Submission of Matters to a Vote of Security Holders 18 PART II Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters 19 Item 6. Selected Financial Data 21 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 22 Item 7A. Quantitative and Qualitative Disclosures About Market Risk 35 Item 8. Financial Statements and Supplementary Data 36 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 87 PART III Item 10. Directors and Executive Officers of the Registrant 88 Item 11. Executive Compensation 88 Item 12. Security Ownership of Certain Beneficial Owners and Management 88 Item 13. Certain Relationships and Related Transactions 88 Item 14. Controls and Procedures 88 PART IV Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 89 Cautionary Statement Regarding Forward-Looking Statements This report contains certain forward-looking statements which reflect the Company's 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 the Company, including, but not limited to those risks and uncertainties detailed in the Company's periodic reports and registration statements filed with the Securities and Exchange Commission. PART I ITEM 1. BUSINESS General Development of Business GP Strategies Corporation (the "Company"), a global workforce development company, which provides training, e-Learning solutions, management consulting and engineering services, was incorporated in Delaware in 1959. The Company is a New York Stock Exchange listed company traded under the symbol GPX. The Company's principal operating subsidiary is General Physics Corporation ("General Physics"). The Company has three operating business segments. Two of these segments, the Manufacturing & Process Segment and the Information Technology Segment, are managed through the Company's principal operating subsidiary General Physics. The third segment is the Optical Plastics Segment, comprised of the Company's subsidiary MXL Industries, Inc. ("MXL"). General Physics is a workforce development company that improves the effectiveness of organizations by providing training, management consulting, e-Learning solutions and engineering services that are customized 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 companies, and other commercial and governmental customers. Additional information about General Physics may be found at www.gpworldwide.com. MXL is a specialist in the manufacture of polycarbonate parts requiring strict adherence to optical quality specifications, and in the application of abrasion and fog resistant coatings to those parts. Products include shields, face masks and non-optical plastic products. In addition, the Company holds a number of investments in publicly held companies, including Millennium Cell Inc., Five Star Products, Inc. and GSE Systems, Inc., and an investment in a private company, Hydro Med Sciences, Inc., and also owns certain real estate. The Company's annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports will be made available free of charge through the Investor/Shareholder section of the Company's internet website (http://www.gpstrategies.com/) as soon as practicable after such material is electronically filed with, or furnished to, the Securities and Exchange Commission. Recent Developments In July 2002, the Company announced that it was actively considering a spin-off of certain of its non-core assets into a separate corporation to be named National Patent Development Corporation ("NPDC"). On November 14, 2002, the Company filed a ruling request with the Internal Revenue Service (the "IRS"), which if approved, would enable the Company to do a tax-free spin-off of certain non-core assets, including MXL. Each holder of the Company's common stock would receive one share of NPDC common stock for each share of the Company's common stock held and each holder of the Company's class B capital stock would receive one share of NPDC common stock for each share of Class B capital stock held. On March 21, 2003, the IRS issued a favorable tax ruling, however, the spin-off is still subject to certain conditions, including the consent of the Company's lenders and certain SEC filings. After the spin-off, the Company's business would be its training and workforce development business operated by General Physics. NPDC would be a stand- alone public company holding all of the stock of MXL, which would operate the optical plastics business and hold certain of the other non-core assets. GENERAL PHYSICS CORPORATION Organization and Operations General Physics, with 1,343 employees in offices worldwide, provides performance improvement services and products to multinational companies in manufacturing and process industries, electric power utilities, and other commercial and governmental customers. General Physics believes it is a global leader in performance improvement, with over three decades of experience in providing solutions to optimize work force performance. Since 1966, General Physics has provided clients with the products and services they need to successfully integrate their people, processes and technology, the elements most critical to the successful realization of any organization's goal to improve its effectiveness. General Physics provides a broad range of services and products on a global scale that are oriented toward improving the performance of individuals and organizations throughout their productive lives. General Physics' instruction delivery capabilities include traditional classroom, structured on-the-job training (OJT), just-in-time methods, electronic performance support systems (EPSS), and the full spectrum of e-learning technologies. For businesses, government agencies and other organizations, General Physics offers services and products spanning the entire lifecycle of production facilities; plant equipment and process launch assistance from both workforce training and engineering perspectives; operations and maintenance practice training and consulting services; curriculum development and delivery; facility and enterprise change and configuration management; lean enterprise consulting; plant and process engineering review and re-design; learning resource management; e-learning consulting and systems implementation; and development and delivery of information technology (IT) training on an enterprise-wide scale. General Physics' personnel bring a wide variety of professional, technical and military backgrounds together to create cost-effective solutions for modern business and governmental challenges. General Physics was incorporated in 1966 to provide technical consulting services in the field of nuclear science and engineering services to nuclear power companies and government agencies. General Physics expanded its operations in the late 1960's to provide, among other things, training and technical support services to the commercial nuclear power industry. General Physics expanded its markets even further in the late 1980's to provide training and technical support services to United States Government nuclear weapons production and waste processing facilities, and environmental services to governmental and commercial clients. In 1994, General Physics further expanded it range of capabilities, as well as its clients, by acquiring the design engineering, seismic engineering, systems engineering, materials management and safety analysis businesses of Cygna Energy Services, and by acquiring the management and technical training and engineering consulting businesses of GPS Technologies, Inc. During 1998, General Physics embarked upon a strategy to expand globally, further diversify its clientele, and acquire additional performance improvement capabilities through acquisitions. General Physics acquired businesses operated by United Training Services, Inc., a provider of training and consulting services to the U.S. automotive industry and to other commercial customers; Specialized Technical Services Limited, a provider of technical training services and language services to commercial and governmental customers in the United Kingdom; SHL Learning Technologies, a computer technology training and consulting organization with a network of offices and training facilities in Canada and the United Kingdom; and the Deltapoint Corporation, a management consulting firm focused on large systems change and lean enterprise, with primarily Fortune 500 clients operating in the aerospace, pharmaceutical, manufacturing, healthcare and telecommunications industries. In 1999 General Physics refocused its international strategy to leverage its success with multinational clients by following those clients into new venues, then expand its client base to include local suppliers and related parties. Proposed locations were evaluated for political stability and potential receptiveness to General Physics' products and services. General Physics has applied this strategy to Canada, the United Kingdom, Mexico and Brazil. During 1999, General Physics adopted restructuring plans, primarily related to its IT business, to change the focus of the IT Segment from open enrollment IT training courses to project oriented work. In connection with the restructuring, General Physics closed, downsized, or consolidated offices in the United States, Canada and in the United Kingdom (UK), and terminated the employment of approximately 160 employees. General Physics 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 Segment to return to profitability in the last six months of 2000. However, in July 2000, as a result of the continued operating losses incurred by its IT Segment, General Physics determined that it could not bring the IT Segment to profitability unless it closed its open enrollment IT business in the UK and Canada. During the third quarter of 2000, the open enrollment IT business was closed and substantially all of the open enrollment facilities in the UK and Canada were surrendered in connection with negotiated lease terminations, subleased or turned over to brokers for disposition. General Physics terminated the employment of substantially all of the remaining employees associated with the IT open enrollment business in the UK and Canada. Subsequent to the changes, the IT project work returned to profitability in 2001. Also in 2000, General Physics began an upgrade to its financial, accounting and human resources systems by contracting with an application service provider for the use of an Enterprise Resource Planning software package to better integrate those functions and streamline support for its business operations. The system became operational in the first quarter of 2002. During the second half of 2001, the Company's operations were negatively impacted by the downturn in the economy, in particular the manufacturing sectors. This resulted in decreased revenue that was offset by cost cutting efforts, including a reduction in the use of consultants, a program to reduce indirect expenses, and a reduction in employees. Effective September 4, 2002, John C. McAuliffe resigned as President of General Physics and Douglas Sharp was appointed President of General Physics. Mr. McAuliffe and General Physics entered into a Separation Agreement pursuant to which, inter alia, he agreed to remain available to General Physics as a consultant for a six-month period (see Note 15, Restructuring and other Charges in the Notes to the Consolidated Financial Statements for a discussion of Mr. McAuliffe's Separation Agreement). The decrease in revenue that began in 2001 continued in 2002 and was primarily attributable to the continued downturn in the economy and included reductions in sales from automotive, e-Learning and certain high technology clients. During 2002, General Physics continued its efforts to reduce costs, including terminating facility leases, subleasing facilities, reducing the number of employees and taking other steps to bring its costs more in line with its reduced revenues. In the second half of 2002, General Physics formed a multi-disciplinary team to focus on providing fully integrated solutions for governmental agencies and commercial clients to combat potential terrorist threats in the area of homeland security. General Physics has over 20 years of experience in meeting the challenges caused by the threat of terrorism, including projects for the Departments of Defense, Energy, Justice and the American Red Cross. The Company's homeland security services will help organizations assess their vulnerability and risks, prevent or deter occurrences, plan for incidents, respond adequately to an event and mitigate the short and long term consequences caused by terrorism incidents. In February 2003 General Physics transferred a portion of its business into SkillRight, Inc., a wholly-owned subsidiary whose principal purpose is to provide services to organized labor, both by contracting directly with labor unions and by contracting with companies whose workforces are represented by labor unions. General Physics' performance is significantly affected by the timing of performance on contracts. Results of operations for the first three quarters of the year are generally not seasonal, since contracts are performed throughout the year, however, the fourth quarter results may be negatively impacted by plant shutdowns and fewer workdays as a result of holidays. In addition, demand for services may fluctuate with and can be related to general levels of economic activity and employment in the United States, Canada and the UK. A significant economic downturn or recession in either the United States or the UK could have a material adverse effect on General Physics' business, financial condition and results of operations, as was the case in the latter half of 2001 and continuing into 2002. Customers General Physics currently provides services to more than 500 customers. Significant customers include multinational automotive manufacturers, such as General Motors Corporation, Ford Motor Company, Mercedes-Benz and Daimler Chrysler Corporation; commercial electric power utilities, such as Consolidated Edison Company of New York, Public Service Electric & Gas Company, Entergy Operations, Inc., Alliant Energy Corporation, Midwest Generation, New Brunswick Power, and First Energy; governmental agencies, such as the U.S. Departments of Defense, Energy and Treasury, the U.S. Postal Service, and various Canadian governments; U.S. government prime contractors, such as Northrop-Grumman, Lockheed Martin, Westinghouse Savannah River Company and The Johns Hopkins University Applied Physics Laboratory; pharmaceutical companies, such as Pfizer, Inc., Merck & Co., Pharmacia-Upjohn and Eli Lily; communications companies, such as SBC Communications; computer, electronics, and semiconductor companies, such as IBM Corporation and Applied Materials; food and beverage companies, such as Anheuser-Busch Company and The Coca-Cola Company; petro-chemical companies, such as ExxonMobil and Lyondell-Citgo; steel producers, such as USX Corporation, Ameristeel Corporation and Dofasco Steel; and other large multinational companies, such as Fluor Daniel, General Electric Company and Computer Sciences Corporation. Revenue from the United States Government accounted for approximately 32% of General Physics' revenue for the year ended December 31, 2002. Revenue was derived from many separate contracts and subcontracts with a variety of Government agencies and contractors that are regarded by General Physics as separate customers. In 2002, revenue from the Department of the Army, which is included in United States Government revenue accounted for approximately 17% of General Physics' revenue and General Motors Corporation accounted for approximately 5% of General Physics' revenue. No other customers accounted for 10% or more of General Physics' revenue. General Physics' Operating Segments General Physics provides services and sells products within a structure that is integrated both vertically and horizontally. Vertically, General Physics is organized into Strategic Business Units (SBUs), Business Units (BUs), and Groups focused on providing a wide range of products and services to clients and prospective clients predominantly within targeted markets. Horizontally, General Physics is organized across SBUs, BUs and Groups to integrate similar service lines, technology, information, work products, client management and other resources. As a result, General Physics has evolved into a matrixed organization in which resources can be coordinated to meet the needs of General Physics' clients or to respond quickly and mobilize resources for new opportunities. Communications and market research, accounting, finance, legal, human resources and other administrative services are organized at the corporate level. Business development and sales resources are aligned with operating units to support existing customer accounts and new customer development. General Physics manages its business in two business segments: Manufacturing & Process and Information Technology. Manufacturing & Process The Manufacturing & Process Segment 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, and focuses on developing long-term relationships with Fortune 500 companies, their suppliers and agencies of the government. General Physics builds these relationships by gaining a thorough understanding of a client's competitive strategies and business objectives, analyzing their human, technical, and organization issues and recommending viable human performance and learning resource management solutions to clients to help them improve performance, increase efficiency and reduce risk. Through this segment General Physics provides training, Learning Resource Management (LRM) training outsourcing, engineering and technical support services to clients, whether involving workforce development, product, process and plant launch, modification of existing facilities and systems or regulatory compliance. The company then works with its customers in implementing the recommended solutions, moving the organization toward achieving business objectives and improving competitive advantage. This segment frequently supports the introduction of new work practices associated with lean manufacturing, self-directed work teams and engineering. Adult learning delivery capabilities include traditional classroom, structured on-the-job training (OJT), just in time methods, electronic performance support systems (EPSS), and the full spectrum of e-Learning technologies. In addition, with over thirty years of training, applied engineering and management experience in helping clients improve performance, increase efficiency and reduce risk, General Physics is called upon to help its clients meet global competitive challenges, especially when that challenge requires significant capital investment in plants and facilities and presents a potential risk to the workplace and the environment. Included are e-Learning services, which function as a single-source e-learning solution provider through its integration services, the development and provisioning of proprietary content and the aggregation and distribution of third party content. A representative list of General Physics' customers falling within this segment and allowing disclosure includes: General Motors Corporation, Ford Motor Company, Lockheed Martin, USX, Ameristeel Corporation, Nalco Chemical Co., Anheuser-Busch, Pepsi-Cola, CN Rail, SBC Communications, Applied Materials, the U.S. Postal Service, Royal Mail Consignia, the U.S. Army, Navy and Air Force, Merck & Co., ExxonMobil, Omnitrans, Pharmacia-Upjohn, General Electric, Pennsylvania Power & Light, Consolidated Edison, Commonwealth Edison, Fluor Daniel and New Brunswick Power. Information Technology The Information Technology Segment provides information technology (IT) training programs and solutions, including Enterprise Solution and comprehensive career training and transition programs. Specific services include software applications training, change management, and courseware development. This segment has operations in the United States and Canada. A representative list of customers includes: Pfizer, Eli Lilly and Company, Department of Defense, Anheuser-Busch, Fluor Daniel, CN Rail, Accu-Sort Systems, Inc., and Computer Sciences Corporation. As a result of the continued operating losses incurred by the IT Segment in 1999 and 2000, General Physics closed its open enrollment IT business in the UK and Canada during the third quarter of 2000. Subsequent to these changes, the IT business returned to profitability in 2001, but experienced declining revenue as a result of the downturn of the economy that continued in 2002 resulting in inconsistent quarterly profitability. However, as a result of recent contract awards, the Company believes that the operating results of the IT Segment should return to profitability in 2003. International General Physics conducts its business outside the United States and Canada primarily through its wholly-owned subsidiaries General Physics (UK) Ltd., General Physics Corporation Mexico, S.A. de C.V., General Physics (Malaysia) Sdn Bhd and GP Strategies do Brasil Ltda. Through these companies, General Physics is capable of providing substantially the same services and products as are available to clients in the United States, although modified as appropriate to address the language, business practices and cultural factors unique to each client and country. In combination with its subsidiaries, General Physics is able to coordinate the delivery to multi-national clients of services and products that achieve consistency on a global, enterprise-wide basis. General Physics Products and Services Training. Each of General Physics' segments provides training services and products to support existing, as well as the launch of new plants, products, equipment, technologies and processes. The range of services includes fundamental analysis of a client's training needs, curriculum design, instructional material development (in hard copy, electronic/software or other format), information technology service support, and delivery of training using an instructor-led, on-the-job, computer-based, web-based, video-based or other technology-based method. General Physics focuses on developing long-term relationships with its customers. It builds these relationships by gaining a thorough understanding of a customer's competitive strategies and business objectives and analyzing their human performance and learning resource management solutions. General Physics then works with its customers in implementing the recommended solutions, moving the organization toward achieving business objectives and improving competitive advantage. General Physics has available an existing curriculum of business and technical courses and also is involved in the management of the training business operations at several of its customers. Training products include instructor and student training manuals, instructional material on CD-ROM and PC-based simulators. Training services include the following: o General Physics has contracts to provide Learning Resource Management services, including training administration, development and delivery, to multinational companies headquartered in the United States and Canada. o General Physics provides management and training services to Ford Motor Company's North American Training and Development Organization. o General Physics operates the United States Army's chemical weapons demilitarization program training center in Edgewood, Maryland for personnel who operate and maintain demilitarization plants in the United States. o In support of the Clara Barton Center(TM) for Domestic Preparedness at Pine Bluff Arsenal, Pine Bluff, Arkansas, General Physics developed a curriculum of courses dealing with issues that the Red Cross will encounter in their support of a disaster involving weapons of mass destruction, as well as staffing and operating the Clara Barton Center(TM) since it became operational in mid-2001. o Through its iLearning Portal, General Physics offers a web-based curriculum of training courses to hundreds of power plants worldwide, along with web-based training administration. Consulting. Consulting services are available from General Physics and include not only training-related consulting services, but also more traditional business management, engineering and other disciplines. General Physics is able to provide high-level lean enterprise consulting services, as well as training in the concept, methods and application of lean enterprise and other quality practices, organizational development and change management. General Physics also provides engineering consulting services to support regulatory and environmental compliance, modification of facilities and processes, reliability-centered maintenance practices, and plant start-up activities. Consulting products include copyrighted training and reference materials. Consulting projects have included: o Assisting a medical device manufacturer to reduce raw-material-to-shipment manufacturing time from 32 days to 2 days. o Reducing the delay between receipt of customer request to order confirmation from 21 days to 1 day for a metals industry manufacturer. o Streamlining procedures, developing work standards and creating an implementation process to consolidate 105 separate customer support centers into 1 for a national telecommunications company, saving $15 million of implementation cost. o Evaluating training administration processes and making recommendations for improved efficiencies and cost-savings for a global pharmaceutical company. Technical Support and Engineering. General Physics is staffed and equipped to provide engineering and technical support services and products to clients. Technical support services include procedure writing and configuration control for capital intensive facilities, plant start-up assistance, logistics support (e.g., inventory management and control), implementation and engineering assistance for facility or process modifications, facility management for high technology training environments, staff augmentation, and help-desk support for standard and customized client desktop applications. Technical support products include EtaPro(TM) and PDMS(TM) General Physics software applications. General Physics has provided: o Engineering and construction management services to support the construction or modification of liquefied natural gas (LNG) and compressed natural gas (CNG) refueling stations. o Help-desk support for standard and proprietary desktop software applications. o Design, analysis, inspection and test services for rocket engine systems and equipment. o Its proprietary EtaPro(TM) software tool to enable electric power producers to monitor and improve the performance of power generating equipment. Contracts General Physics is currently performing under time-and-materials, fixed-price and cost-reimbursable contracts. General Physics' subcontracts with the United States Government have predominantly been cost-reimbursable contracts and fixed-price contracts. General Physics is required to comply with the Federal Acquisition Regulations and the Government Cost Accounting Standards with respect to services provided to the United States Government and agencies thereof. These Regulations and Standards govern the procurement of goods and services by the United States Government and the nature of costs that can be charged with respect to such goods and services. All such contracts are subject to audit by a designated government audit agency, which in most cases is the Defense Contract Audit Agency (the "DCAA"). The DCAA has audited General Physics' contracts through 1999 without any material disallowances. The following table illustrates the percentage of total revenue of General Physics attributable to each type of contract for the year ended December 31, 2002: Fixed-Price...............................67% Time and Materials........................19 Cost-Reimbursable.........................14 -- Total Revenue.......................100% ==== General Physics' fixed-price contracts provide for payment to General Physics of pre-determined amounts as compensation for the delivery of specific products or services, without regard to the actual cost incurred by General Physics. General Physics bears the risk that increased or unexpected costs required to perform the specified services may reduce General Physics' profit or cause General Physics to sustain a loss, but General Physics has the opportunity to derive increased profit if the costs required to perform the specified services are less than expected. Fixed-price contracts generally permit the client to terminate the contract on written notice; in the event of such termination, General Physics would typically, at a minimum, be paid a proportionate amount of the fixed price. No significant terminations of General Physics' fixed-price contracts have occurred over the last five years. General Physics' time-and-materials contracts generally provide for billing of services based upon the hourly billing rates of the employees performing the services and the actual expenses incurred multiplied by a specified mark-up factor up to a certain aggregate dollar amount. General Physics' time-and-materials contracts include certain contracts under which General Physics has agreed to provide training, engineering and technical services at fixed hourly rates (subject to adjustment for labor costs). Time-and-materials contracts generally permit the client to control the amount, type and timing of the services to be performed by General Physics and to terminate the contract on written notice. If a contract is terminated, General Physics typically is paid for the services provided by it through the date of termination. While General Physics' clients often modify the nature and timing of services to be performed, no significant terminations of General Physics' time-and-materials contracts have occurred over the last five years. General Physics' cost-reimbursable contracts provide for General Physics to be reimbursed for its actual costs plus a specified fee. These contracts also are generally subject to termination at the convenience of the client. If a contract is terminated, General Physics typically would be reimbursed for its costs to the date of termination, plus the cost of an orderly termination, and paid a proportionate amount of the fee. No significant terminations of General Physics' cost-reimbursable contracts have occurred over the last five years. Competition General Physics' services and products face a highly competitive environment. The principal competitive factors are the experience and capability of service personnel, performance, quality and functionality of products, reputation and price. Consulting services such as those provided by General Physics are performed by many of the customers themselves, large architectural and engineering firms that have expanded their range of services beyond design and construction activities, large consulting firms, major suppliers of equipment and independent service companies similar to General Physics. A significant factor determining the business available to General Physics and its competitors is the ability of customers to use their own personnel to perform services provided by General Physics and its competitors. Another factor affecting the competitive environment is the existence of small, specialty companies located at or near particular customer facilities and dedicated solely to servicing the needs of those particular facilities. The training industry is highly fragmented and competitive, with low barriers to entry and no single competitor accounting for a significant market share. The Company's competitors include several large publicly traded and privately held companies, vocational and technical training schools, information technology companies, degree-granting colleges and universities, continuing education programs and thousands of small privately held training providers and individuals. In addition, many of General Physics' clients maintain internal training departments. Some of General Physics' competitors offer services and products that are similar to those of General Physics at lower prices, and some competitors have significantly greater financial, managerial, technical, marketing and other resources than does General Physics. Moreover, General Physics expects that it will face additional competition from new entrants in the training and performance improvement market due, in part, to the evolving nature of the market and the relatively low barriers to entry. There can be no assurance that General Physics will be successful against such competition. Personnel General Physics' principal resource is its personnel. General Physics' future success depends to a significant degree upon its ability to continue to attract, retain and integrate into its operations instructors, technical personnel and consultants who possess the skills and experience required to meet the needs of its clients. In order to initiate and develop client relationships and execute its growth strategy, General Physics also must retain and continue to hire qualified salespeople. As of December 31, 2002, General Physics employed 1,343 employees and over 200 adjunct instructors. General Physics' personnel have backgrounds and industry experience in mechanical, electrical, chemical, civil, nuclear and human factors engineering; in technical education and training; in power plant design, operation and maintenance; in weapons systems design, operation and maintenance; in organizational change management; in instructional technology and e-learning technologies; in enterprise-wide resource planning and software training; and in toxicology, industrial hygiene, health physics, chemistry, microbiology, ecology and mathematical modeling. Many of General Physics' employees perform multiple functions depending upon changes in the mix of demand for the services provided by General Physics. General Physics utilizes a variety of methods to attract and retain personnel. General Physics believes that the compensation and benefits offered to its employees are competitive with the compensation and benefits available from other organizations with which it competes for personnel. In addition, General Physics maintains and continuously improves the professional development of its employees, both internally via General Physics University (the Company's internal training organization) and through third parties, and also offers tuition reimbursement for job-related educational costs. General Physics encourages its employees to further their education, continuously update their marketable skills and deliver services and products that equal or exceed client expectations. General Physics recognizes and rewards business success and outstanding individual performance. Competition for qualified personnel can be intense, and General Physics competes for personnel with its clients as well as its competitors. There can be no assurance that qualified personnel will continue to be available to General Physics in sufficient numbers. Any failure to attract or retain qualified instructors, technical personnel, consultants and salespeople in sufficient numbers could have a material adverse effect on General Physics' business, financial condition, and results of operations. As of December 31, 2002, none of General Physics' employees was represented by a labor union. However, SkillRight, Inc., a wholly-owned subsidiary of General Physics, in 2003 recognized the United Auto Workers union as the representative of a portion of its workforce. General Physics generally has not entered into employment agreements with its employees, but has entered into employment agreements with certain executive officers and other employees. General Physics believes its relations with its employees are good. Marketing General Physics has approximately 41 employees dedicated primarily to marketing its services and products through Business Development initiatives at both the Group and Business Unit levels. Group level marketing is directed at long-term strategic business development with specific customers and with multinational businesses. General Physics markets its services to existing customers primarily through its technical personnel who have regular direct client contact, sales personnel and by using senior management to aid in the planning of marketing strategies and evaluating current and long-term marketing opportunities and business directions. General Physics uses attendance at trade shows, presentations of technical papers at industry and trade association conferences, press releases, public courses and workshops given by General Physics personnel to serve an important marketing function. General Physics also does selective advertising and sends a variety of sales literature, including a catalog of course listings, to current and prospective clients whose names are maintained in a computerized database that is updated periodically. The goal of General Physics' marketing process is to obtain awards of new contracts and expansion of existing contracts. By staying in contact with clients and looking for opportunities to provide further services, General Physics sometimes obtains contract awards or extensions without having to undergo competitive bidding. In other cases, clients request General Physics to bid competitively. In both cases, General Physics submits proposals to the client for evaluation. The period between submissions of a proposal to final award can range from 30 days or less (generally for non-competitive, short-term contracts), to a year or more (generally for large, competitive multi-year contracts with governmental clients). General Physics maintains a site on the World Wide Web located at http://www.gpworldwide.com from which prospective customers can obtain additional information about General Physics and find out how to contact General Physics to discuss employment or business opportunities. Backlog General Physics' backlog for services under signed contracts and subcontracts as of December 31, 2002 was approximately $72,500,000, compared to $90,637,000 as of December 31, 2001. General Physics anticipates that most of its backlog as of December 31, 2002 will be recognized as revenue during fiscal year 2003, however, the rate at which services are performed under certain contracts, and thus the rate at which backlog will be recognized, is at the discretion of the client, and most contracts are, as mentioned above, subject to termination by the client upon written notice. Insurance By providing services to the commercial electric power industry, in the area of alternative fuel construction management and to the United States Armed Forces, General Physics is engaged in industries in which there are substantial risks of potential liability. General Physics' insurance is combined with the Company's insurance in a consolidated insurance program (including general liability coverage). However, certain liabilities associated with General Physics' business are not covered by these insurance policies. In addition, such liabilities may not be covered by Federal legislation providing a liability protection system for licensees of the Nuclear Regulatory Commission (typically utilities) for certain damages caused by nuclear incidents, since General Physics is not such a licensee. Finally, few of General Physics' contracts with clients contain a waiver or limitation of liability. Thus, to the extent a risk is neither insured nor indemnified against nor limited by an enforceable waiver or limitation of liability, General Physics could be materially adversely affected by a nuclear incident. Certain other environmental risks, such as liability under the Comprehensive Environmental Response, Compensation and Liability Act, as amended (Superfund), also may not be covered by General Physics' insurance. Environmental Statutes and Regulations General Physics provides environmental engineering services to its clients, including the development and management of site environmental remediation plans. Due to the increasingly strict requirements imposed by Federal, state and local environmental laws and regulations (including, without limitation, the Clean Water Act, the Clean Air Act, Superfund, the Resource Conservation and Recovery Act and the Occupational Safety and Health Act), General Physics' opportunities to provide such services may increase. General Physics' activities in connection with providing environmental engineering services may also subject General Physics itself to such Federal, state and local environmental laws and regulations. Although General Physics subcontracts most remediation construction activities and all removal and offsite disposal and treatment of hazardous substances, General Physics could still be held liable for clean-up or violations of such laws as an "operator" or otherwise under such Federal, state and local environmental laws and regulations with respect to a site where it has provided environmental engineering and support services. General Physics believes, however, that it is in compliance in all material respects with such environmental laws and regulations. Properties General Physics' principal executive offices are located at 6095 Marshalee Drive, Suite 300, Elkridge, Maryland 21075, and its telephone number is (410) 379-3600. General Physics leases approximately 27,300 square feet of an office building at that address, and approximately 283,000 square feet of office space at other locations in the United States, Canada, the United Kingdom, Mexico, Brazil and Malaysia. General Physics has 47 offices worldwide. Various locations in the United States and the United Kingdom contain classrooms or other specialized space to support General Physics' instructor-led and distance-learning training programs. General Physics believes that its facilities are adequate to carry on its business as currently conducted. Optical Plastics MXL is a specialist in the manufacture of polycarbonate parts requiring strict adherence to optical quality specifications, and in the application of abrasion and fog resistant coatings to those parts at its Lancaster, Pa. facility. Polycarbon is the most impact resistant plastic utilized in optical quality molded parts. Products include shields, face masks and non-optical plastic products. Additionally, at its Woodland Mold and Tool Division, located in the Chicago area, MXL has the capability to design and construct injection molds for a variety of applications (optical and non-optical) and to mold, decorate, assemble and ship a wide range of products from start to finish. As the market for optical injection molding, tooling and coating is focused, MXL believes that the principal strengths of its business are its state-of-the-art injection molding equipment, advanced production technology, high quality standards, and on time deliveries. MXL believes that the combination of its proprietary "Anti-Fog" coating, precise processing of the "Anti-Scratch" coatings, and precise molding and proprietary grinding and polishing methods for its injection tools will provide it with the opportunity to expand into related products. MXL's sales and marketing effort concentrates on industry trade shows. In addition, MXL employs one marketing and sales executive and one sales engineer. MXL uses only polycarbonate resin to manufacture shields, face masks and lenses for over 50 clients in the safety, recreation and military industries. For its manufacturing work as a subcontractor in the military industry, MXL is required to comply with various federal regulations including Military Specifications and Federal Acquisition Regulations for military end use applications. At its Lancaster, Pa. facility, molding machines are housed in a climate controlled clean environment designed and built by MXL. MXL's largest three customers accounted for approximately 44% of MXL's total sales in 2002 and MXL's largest customer comprised approximately 23% of this segment's sales. Additional information about MXL may be found at http://www.mxl-industries.com/ Investments Over the last several years, the Company has taken significant steps to focus primarily on becoming a global workforce development company and has divested many of its non-core assets. However, the Company still has investments in the common stock of a private and certain publicly traded corporations and also owns certain real estate (see Note 3). Hydro Med Sciences, Inc. ("HMS") is a specialty pharmaceutical company engaged in the development and commercialization of prescription pharmaceuticals principally utilizing HMS' patented Hydron drug delivery technology. Prior to June 2000, HMS operated as a division of the Company, however, in connection with an offering of the Company's 6% Convertible Subordinated Exchangeable Notes due 2003, (the "HMS Notes"), HMS was incorporated as a separate company and became a wholly-owned subsidiary of the Company. The HMS Notes, at the option of the holders, may be exchanged for 19.9% of the outstanding common stock of HMS on a fully diluted basis or into shares of the Company's common stock. On December 27, 2001 HMS completed a $7 million private placement of HMS Series A Convertible Preferred Stock (the "Preferred Stock") to certain institutional investors. The Company currently owns 100% of HMS's common stock but no longer has financial and operating control of HMS. As a condition of the private placement, the Company contractually gave up operating control over HMS through an Investors Rights Agreement. Therefore, through December 27, 2001, the operating results of HMS were consolidated within the Consolidated Statements of Operations. However, subsequent to that date, the Company accounts for its investment in HMS under the equity method. Due to HMS's operating losses during 2002, the Company's investment in HMS as of December 31, 2002 was written down to zero. The Preferred Stock is convertible at any time at the option of holder into approximately 41% of HMS's common stock and participates in dividends with HMS common stock on an as converted basis. Certain of the Preferred Stock holders hold the HMS Notes which may be exchanged for 19.9% of the outstanding common stock of HMS common stock on a fully diluted basis. If such holders exercise the exchange right and the Preferred Stock is converted to common stock of HMS, the Company's ownership of HMS would then be reduced to approximately 47% (see Note 3). Millennium Cell Inc. ("Millennium") is a development-stage company that has created a proprietary technology to safely generate and store hydrogen or electricity from environmentally friendly raw materials. The Company owns approximately 8% of the outstanding common stock of Millennium as of December 31, 2002, with a market value of $5,552,000. GSE Systems, Inc. ("GSES") provides simulation solutions and services to the nuclear and fossil electric utility industry, as well as process industries such as the chemical and petrochemical industries. At December 31, 2002, the Company's investment in GSES was approximately $1,794,000 and the Company owned approximately 19.5% of the outstanding shares of common stock of GSES. Additionally, pursuant to the extension of the Company's guarantee of GSES debt in March 2003, the Company received an additional 150,000 shares of GSES common stock. Although the Company owns approximately 19.5% of the common stock of GSES as of December 31, 2002, the Company has accounted for its investment in GSES using the equity method of accounting based upon management's conclusion that the Company has significant influence with respect to the operations of GSES. Five Star Products, Inc. ("FSP") is engaged in the wholesale distribution of home decorating, hardware and finishing products. At December 31, 2002, the Company's investment in FSP was approximately $6,317,000, including the $4,500,000 Five Star Note described below. The Company currently owns approximately 47.3% of the outstanding common stock of FSP and would own approximately 50% if certain stock options beneficially owned by the Company's officers were exercised. As of December 31, 2002, three officers of the Company served on the board of FSP (out of a total of seven directors), one of whom resigned effective March 27, 2003. However, effective August 1998, the Company entered into a Voting Agreement which limits its operating and financial control of FSP. Pursuant to an amendment of such agreement, the Company agreed that until June 30, 2004, it would vote its shares of common stock of FSP (i) such that not more than 50% of FSP's directors will be officers or directors of the Company and (ii) in the same manner and in the same proportion as the remaining stockholders of FSP vote on all matters presented to a vote of stockholders, other than the election of directors. Therefore, the Company accounts for its investment in FSP under the equity method. FSP is currently indebted to the Company in the amount of $4,500,000 pursuant to an 8% senior unsecured note due September 30, 2004, as amended (the "Five Star Note"). On August 2, 2002, the Company converted $500,000 of the original $5,000,000 Five Star Note into 2,272,727 shares of common stock of FSP at a price of $.22 per share, which was at a premium to the open market value of $0.17 at the time. As a result of this transaction, the Company's ownership of FSP increased to approximately 47.3% from approximately 37%. All other terms of the Five Star Note remain unchanged. The Five Star Note also provides that the Company can receive quarterly payments of principal from FSP, if FSP achieves certain financial performance benchmarks. Employees At December 31, 2002, the Company and its subsidiaries employed 1,427 persons, including 11 in the Company's headquarters, 1,343 at General Physics and 73 at MXL. The Company considers its employee relations to be good. Financial Information about the Foreign and Domestic operations and Export Sales For financial information about the foreign and domestic operations and export sales, see Note 12 to Notes to Consolidated Financial Statements. Foreign operations and export sales represent less than 10% of the Company's total net sales. Item 2. Properties The following information describes the material physical properties owned or leased by the Company and its subsidiaries. The Company leases approximately 10,000 square feet of space for its White Plains, New York principal executive offices. General Physics leases approximately 27,300 square feet for an office building in Elkridge, Maryland and approximately 283,000 square feet of office space at various other locations throughout the United States, Canada, the United Kingdom, Mexico, Brazil and Malaysia. MXL owns 50,200 square feet of warehouse and office space in Lancaster, PA and 55,000 square feet of warehouse and office space in Westmont, IL, both of which are subject to mortgages. The facilities owned or leased by the Company are considered to be suitable and adequate for their intended uses and are considered to be well maintained and in good condition. ITEM 3. LEGAL PROCEEDINGS On January 3, 2001, the Company commenced an action alleging that MCI Communications Corporation, Systemhouse, and Electronic Data Systems Corporation, as successor to Systemhouse, committed fraud in connection with the Company's 1998 acquisition of Learning Technologies from the defendants for $24.3 million. The Company seeks actual damages in the amount of $117.9 million plus interest, punitive damages in an amount to be determined at trial, and costs. 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 the 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 had not yet been completed, defendants made a motion for summary judgment, which was submitted in April 2002. The motion was denied by the court due to the MCI bankruptcy (described below), but with leave granted to the other defendants to renew. One of the defendants, MCI, filed for bankruptcy protection in July 2002. As a result, the action is stayed as to MCI. The Company and General Physics both filed timely Proofs of Claim in the United States Bankruptcy Court against MCI and WorldCom, Inc., et al. The other defendants made an application to the Court to stay the action until a later-commenced arbitration, alleging breach of the acquisition agreement, is concluded. The motion, which the Company has opposed, is under judicial consideration. The parties have engaged in non-binding mediation. At the latest mediation conference, EDS stated that it did not intend to file a motion for summary judgment following the close of discovery on February 28, 2003, and intended to try the case if a settlement was not reached. On March 14, 2003, the Company filed a Note of Issue which places the case on the trial calendar. The Company is not a party to any legal proceeding, the outcome of which is believed by management to have a reasonable likelihood of having a material adverse effect upon the financial condition of the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year covered by this report. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's Common Stock, $.01 par value, is traded on the New York Stock Exchange. The following table presents its high and low market prices for the last two years. During the periods presented below, the Company has not paid any dividends. Quarter High Low 2002 First $4.00 $3.23 Second 5.75 3.50 Third 5.04 4.20 Fourth 5.10 3.60 Quarter High Low 2001 First $5.00 $3.50 Second 5.39 3.20 Third 5.14 3.05 Fourth 4.10 2.40 The number of shareholders of record of the Common Stock as of March 19, 2003 was 1,385 and the closing price of the Common Stock on the New York Stock Exchange on that date was $5.12. Equity Compensation Plan Information as of December 31, 2002 - ------------------------------- ---------------------------- ---------------------------- ----------------------------
Plan category Number of securities Weighted-average Number of securities to be issued upon exercise price of remaining available Non-Qualified exercise of outstanding options, for future issuance Stock Option Plan outstanding options, warrants and rights under equity warrants and rights compensation plans (excluding securities reflected in column (a) (a)(i) (b)(i) (c) (ii) - ------------------------------- ---------------------------- ---------------------------- ---------------------------- - ------------------------------- ---------------------------- ---------------------------- ---------------------------- Equity compensation plans not approved by security holders 2,612,997 $6.76 899,777 - ------------------------------- ---------------------------- ---------------------------- ----------------------------
(i) Does not include warrants to purchase 300,000 shares of Common Stock issued to a financial consulting firm at an exercise price of $4.60 per share. (ii) Does not include shares of Common Stock that may be issued to directors of the Company as director's fees. For a description of the material terms of the Company's Non-Qualified Stock Option Plan, see Note 11 to the Notes to the Consolidated Financial Statements. Directors of the Company who are not employees of the Company or its subsidiaries receive an annual fee of $5,000, payable quarterly, equally in cash and Common Stock of the Company. In addition, the directors receive $1,000 for each meeting of the Board of Directors attended, and generally do not receive any additional compensation for service on the committees of the Board of Directors other than the Audit Committee. Employees of the Company or its subsidiaries do not receive additional compensation for serving as directors. GP STRATEGIES CORPORATION AND SUBSIDIARIES Item 6. Selected Financial Data Operating Data (in thousands, except per share data)
- ------------------------------------------------------------------------------------------------------------------------------ Years ended December 31, 2002 2001 2000 1999 1998 - ------------------------------------------------------------------------------------------------------------------------------ Sales $152,233 $186,611 $197,467 $224,810 $284,682 Gross margin 17,465 22,577 19,789 26,379 41,993 Interest expense 2,770 4,733 5,616 4,922 3,896 (Loss) income before taxes (6,047) 1,570 (34,265) (21,293) (695) Net loss (5,228) (945) (25,392) (22,205) (2,061) - ------------------------------------------------------------------------------------------------------------------------------- Loss per share: Basic (.34) (.09) (2.04) (1.95) (.19) Diluted (.34) (.09) (2.04) (1.95) (.19) - ------------------------------------------------------------------------------------------------------------------------------ Balance Sheet Data December 31, 2002 2001 2000 1999 1998 - ------------------------------------------------------------------------------------------------------------------------------ Cash, cash equivalents and trading securities $1,516 $ 1,705 $ 11,317 $ 4,068 $ 7,548 Short-term borrowings 22,058 32,338 36,162 40,278 30,723 Working capital (deficit) 780 (2,750) 1,834 (146) 13,989 Total assets 144,905 160,824 212,578 197,118 210,905 Long-term debt 6,912 6,863 17,612 18,490 21,559 Stockholders' equity 92,982 95,943 112,518 99,982 120,335 - ------------------------------------------------------------------------------------------------------------------------------
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS: RESULTS OF OPERATIONS Overview The Company's primary operating entity is General Physics, a global workforce development company that improves the effectiveness of organizations by providing training, management consulting, e-Learning solutions and engineering services that are customized to meet the specific needs of clients. Clients include Fortune 500 companies, manufacturing, process and energy companies, and other commercial and governmental customers. General Physics' operations were resegmented in 2000 to two segments: the Manufacturing & Process Segment and the IT Segment. In addition to General Physics, the Company has a third segment, Optical Plastics (MXL), which manufactures molded and coated optical products. The Company also holds a number of investments in publicly held companies, including Millennium Cell, Inc. ("Millennium"), GSE Systems ("GSES") and Five Star Products ("FSP"), and a private company Hydro Med Sciences ("HMS") and owns certain real estate. 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. The Company currently owns approximately 47.3% of the outstanding common stock of FSP and would own approximately 50% if certain stock options beneficially owned by the Company's officers were exercised. As of December 31, 2002, three officers of the Company served on the board of FSP (out of a total of seven directors), one of whom resigned effective March 27, 2003. However, effective August 1998, the Company entered into a Voting Agreement which limits its operating and financial control of FSP. Pursuant to an amendment of such agreement, the Company agreed that until June 30, 2004, it would vote its shares of common stock of FSP (i) such that not more than 50% of FSP's directors will be officers or directors of the Company and (ii) in the same manner and in the same proportion as the remaining stockholders of FSP vote on all matters presented to a vote of stockholders, other than the election of directors. Therefore, the Company accounts for its investment in FSP under the equity method. In the third quarter of 2002, the Company announced significant cost reductions to reduce its future operating costs by over $7,000,000 on an annualized basis, primarily as a result of personnel reductions at General Physics which were substantially completed in the third quarter of 2002. In addition, the Company is currently modifying its employee benefit program and considering other measures to reduce expenses. It is anticipated that the full impact of the $7,000,000 of cost reductions will be reflected in 2003. Furthermore, the Company has continued to reduce its debt outstanding under its revolving credit facility from approximately $49,500,000 at December 31, 2000 to approximately $22,100,000 at December 31, 2002. In 2002, the Company had a loss before income taxes of $6,047,000 compared to income before income taxes of $1,570,000 in 2001. The decrease in income before income taxes in 2002, as compared to 2001, was primarily due to a reduced gross margin due to lower sales volume, severance and related expenses of $2,214,000, non-cash equity losses of $1,401,000 on HMS and $1,210,000 on GSES, respectively, and lower gains on sales of marketable securities, partially offset by lower interest expense due to reduced debt levels and interest rates. Additionally, effective January 1, 2002, the Company no longer amortizes goodwill in accordance with SFAS No. 142, Goodwill and Other Intangible Assets. In 2002, the Company had a net gain of $2,267,000 on marketable securities, primarily relating to the Company's sale of 1,286,000 shares of Millennium, which were held as available-for-sale. The Company received gross proceeds of $3,833,000 from these sales. In addition, the Company recorded a $1,211,000 credit to compensation expense related to the Company's Millennium Cell Deferred Compensation Plan offered to certain of its employees, which is included as a credit to selling, general and administrative expense (see Note 3), and restructuring charge reversals of $368,000 primarily relating to favorable settlements on certain lease and contractual obligations. These items were offset by equity losses of $2,611,000 of which $1,401,000 related to HMS and $1,210,000 to GSES. The Company recorded charges of approximately $700,000 relating to financial and consulting fees and incurred approximately $800,000 of legal fees relating to the Company's ongoing litigation against MCI Communications, Systemhouse and Electronic Data Systems Corporation, as successor to Systemhouse (see Note 18). In 2001, the Company had a net gain of $4,294,000 on marketable securities, primarily relating to the Company's sale of 2,081,000 shares of Millennium, 861,000 of which were trading securities and 1,220,000 of which were available for sale. The Company received gross proceeds of $14,624,000 from these sales. In addition, the Company recorded a $2,370,000 credit to compensation expense related to the Company's Millennium Cell Deferred Compensation Plan , which is included as a credit to selling, general and administrative expense (see Note 3). The Company had restructuring charge reversals of $1,174,000 primarily relating to favorable settlements on certain lease and contractual obligations, offset by an operating loss from HMS of approximately $3,400,000 and a $320,000 write-down on investments, of which $200,000 related to FSP. In addition, the Company recorded charges of approximately $1,050,000 relating to financial consulting services (of which $750,000 is a non-cash stock based award) and $400,000 relating to a potential new credit agreement which was not consummated. The Company also incurred in excess of $500,000 relating to legal fees relating to the Company's litigation against MCI Communications Corporation, Systemhouse and Electronic Data System Corporation, as successor to Systemhouse (see Note 18). Sales
Years ended December 31, (in thousands) 2002 2001 2000 - ------------------------------------------------------------------------------------------ Manufacturing & Process 134,255 $164,361 161,859 Information Technology 7,982 11,061 24,593 Optical Plastics 9,996 11,184 10,998 HMS 5 17 - ---------------------------------------------------------------------------------------- $152,233 $186,611 197,467 - ----------------------------------------------------------------------------------------
The decreased sales of $30,106,000 by the Manufacturing & Process Segment in 2002 were primarily attributable to a reduction in sales from the automotive and e-Learning divisions, as well as from advanced manufacturing clients and reduced sales from a contract with Westinghouse Savannah River. The decrease in sales of $3,079,000 in the IT Segment in 2002 was primarily due to the continued downturn in the economy. The increased sales of $2,502,000 achieved by the Manufacturing & Process Segment in 2001 compared to 2000 was the result of increased sales in the government sector, offset by decreased sales in the automotive, telecommunications and advanced manufacturing sectors. These decreases were due to the continued downturn in the economy compounded by the effects of the events of September 11, 2001. The decrease in sales of $13,532,000 in the IT Segment in 2001 was primarily the result of the shut-down of the open enrollment IT business in the third quarter of 2000. In 2002, the Optical Plastics Segment (MXL) sales decreased by 11% primarily as a result of the effects of the continued downturn in the economy. In 2002, MXL's major customer comprised 23% of the segment's net sales and in 2001, MXL's major customer comprised 27% of the segment's net sales. Gross margin
Years ended December 31, (in thousands) 2002 2001 2000 - ----------------------------------------------------------------------------------------------------------- % % % --- --- --- Manufacturing & Process $15,158 11.3 $18,551 11.3 $22,277 13.8 Information Technology 208 2.6 1,781 16.1 (4,645) - --------- ----- ------- ------ ------- ----- General Physics 15,366 10.8 20,332 11.6 17,632 9.5 ------- ------ ------ Optical Plastics 2,099 21.0 2,816 25.2 2,888 26.3 HMS (571) - (731) - - ---------------------------------------------------------------------------------------------------------- $17,465 11.5 $22,577 12.1 $19,789 10.0 - ----------------------------------------------------------------------------------------------------------
General Physics total gross margin decreased from $20,332,000 to $15,366,000 from 2001 to 2002. This decrease occurred within both segments of General Physics as a result of decreased sales in 2002 compared to 2001. The gross margin of $15,158,000 by the Manufacturing & Process Segment in 2002, decreased by $3,393,000 when compared to 2001. This decrease was due to the continued downturn in the economy as well as a reduction in higher value-added services primarily provided to customers in the automotive division and advanced manufacturing clients. However, the gross margin percentage for the Manufacturing & Process Segment remained unchanged as a result of the Company's efforts to monitor and control costs. The gross margin of $18,551,000 by the Manufacturing & Process Segment in 2001 decreased both in terms of dollars and percent of sales as compared to 2000. This decrease was due to the continued downturn in the higher margin automotive and advanced manufacturing sectors. This decrease was offset by an increase in revenues for the lower margin government sectors. In addition, there was increased investment in the e-Learning business and increased expenses due to staff reduction in the third and fourth quarters due to the events of September 11, 2001 and the continued downturn in the economy. The decrease in the IT Segment gross margin in 2002 compared to 2001 was the result of the continued downturn in the economy. The reduction in the gross profit percentage in 2002 was due to the inability to reduce certain overhead costs in proportion to the decline in sales. The increase in the IT Segment gross margin in 2001 was due to the Company's renewed focus on its contract IT operations. Selling, general, and administrative expenses The decrease in SG&A of $508,000 in 2002 as compared to 2001 was primarily attributable to a reduction in SG&A expenses of HMS of $2,841,000 due to the deconsolidation of HMS at December 27, 2001 and goodwill and other intangible asset amortization expense of $1,410,000, which is not recorded in the current year in accordance with SFAS 142, Goodwill and Other Intangible Assets. This decrease was offset by severance and related expenses of $2,214,000, and a decrease in the non-cash credit to compensation expense of $1,159,000 relating to the Company's Millennium Cell Deferred Compensation Plan due to fluctuations in the share price of Millennium. The decrease in SG&A of $4,050,000 in 2001 as compared to 2000 was primarily attributable to a deferred compensation credit of $2,370,000 in 2001 as opposed to a charge of $3,809,000 in 2000 due to fluctuations in the share price of Millennium. However, this decrease was partially offset by increased SG&A expenses at HMS as a result of increased costs incurred by HMS for phase III clinical trials of its prostate cancer product. Interest expense Interest expense was $2,770,000 in 2002, $4,733,000 in 2001 and $5,616,000 in 2000. The reduction in interest expense in 2002 and 2001 was attributable to both a decrease in the Company's outstanding indebtedness and a reduction in variable interest rates. Investment and other income (loss), loss on investments, and gains on marketable securities, net, Years ended December 31, (in thousands) 2002 2001 2000 ---------------------------------------------------------------------------- Investment and other income, (loss) $(1,814) $ 496 $(1,306) Loss on investments (153) (320) (3,400) Gains on marketable securities, net 2,267 4,294 10,111 ----------------------------------------------------------------------------- The investment and other income (loss) for 2002 was related to the Company's equity losses on GSES of $1,210,000 and HMS of $1,401,000 offset by equity income on FSP of $162,000, $584,000 of interest income on loans receivable and $51,000 from other income. The investment and other income (loss) for 2001 was primarily related to $701,000 of interest income on loans receivable offset by a loss of $205,000 from equity investments and other miscellaneous losses. The investment and other income (loss) for 2000 was due to equity losses of $2,216,000 relating to the Company's equity investments offset by $910,000 of interest income on loans receivable. The loss on investments for 2002 was due to the write off of an investment. The loss on investments for 2001 and 2000 was due to write downs of $320,000 and $3,400,000, respectively, based upon the Company's impairment assessment in the carrying value of the Company's equity investments. The gains on marketable securities, net in 2002, 2001, and 2000 was primarily due to the Company's disposal of securities of Millennium. Income taxes Income tax benefit (expense) for 2002, 2001 and 2000 was $819,000, $(2,515,000) and $8,873,000, respectively. For the year ended December 31, 2002, the current income tax provision represents state taxes of $370,000, and foreign taxes of $361,000. The deferred income tax benefit of $1,550,000 primarily represents a benefit relating to the Company's federal net operating losses. For the year ended December 31, 2001, the current income tax provision of $723,000 represents state taxes of $537,000, and foreign taxes of $186,000. The deferred income tax expense of $1,792,000 represents future estimated federal and state taxes. The Company had an effective tax rate of 14% for the year ended December 31, 2002. This rate was primarily due to certain nondeductible items, net losses from foreign operations for which no tax benefit has been provided, and the tax treatment for financial statement purposes of the sale by the Company in 2002 of certain shares of available-for-sale securities accounted for pursuant to SFAS 115 "Accounting for Certain Investments in Debt and Equity Securities." The Company had an effective tax rate of 160% for the year ended December 31, 2001. This rate was primarily due to the tax treatment for financial statement purposes of the sale by the Company in 2001 of certain shares of available-for-sale securities accounted for pursuant to SFAS 115 "Accounting for Certain Investments in Debt and Equity Securities." At December 31, 2002, the Company had a net deferred tax asset of $10,846,000, which management believes will more likely than not be realized. Liquidity and capital resources At December 31, 2002, the Company had cash and cash equivalents totaling $1,516,000. The Company believes that cash generated from operations, borrowing availability under its credit agreement and cash generated from its sale of marketable securities will be sufficient to fund the working capital and other needs of the Company. The Company entered into an amended three-year $40 million Revolving Credit Facility in December 2001 with a syndicate of three banks (the "Amended Agreement"). The commitment under the facility was reduced to $35 million as a result of asset sales by the Company, but the Amended Agreement provides that the commitment can not be reduced below $35 million as a result of any additional asset sales. The Company was not in compliance with certain financial covenants of its Amended Agreement for the year ended December 31, 2002. The Company entered into a First Amendment and Limited Waiver to the Amended Agreement with various banks as of March 31, 2003 (the "First Amendment"). The First Amendment provided for a waiver of certain financial covenants in the Amended Agreement and provided certain revised financial covenants for periods beginning after December 31, 2002. The First Amendment further reduced the commitment under the Amended Agreement to $30 million from $35 million and limited the availability of borrowings under the revolving loan commitment to $27 million for the period commencing March 31, 2003 through May 31, 2003 (the "First Test Period") and $26 million for the period commencing on June 1, 2003 and ending on delivery of the Company's compliance certificate for the quarter ending September 30, 2003 (the "Second Test Period"; and together with the First Test Period, the "Test Periods"). The Company does not anticipate needing to borrow in excess of $27 million or $26 million, respectively during the Test Periods. The First Amendment provides that the available revolving commitment amount may be increased to $30 million after the Second Test Period, provided that no default or event of default has occurred and is continuing under the Amended Agreement, as amended by the First Amendment. The First Amendment also added a new financial covenant with respect to minimum consolidated EBITDA effective March 31, 2003. The Company is currently negotiating with certain other lenders with respect to obtaining a new facility for its future financing requirements. At March 31, 2003, there is approximately $4,600,000, available under the facility, as amended (see Note 5). The following table summarizes long term debt, capital lease commitments and operating lease commitments as of December 31, 2002 (in thousands):
Balance at Payments Due In December 31 2002 2003 2004-05 2006-07 after 2007 ---------------- ---- ------- ------- ---------- Long term debt $ 6,082 $3,088 $ 670 $1,319 $1,005 Capital lease commitments 830 522 306 2 - Operating lease commitments 12,959 3,620 3,742 1,953 3,644 ------ ----- ----- ----- ----- Total $19,871 $7,230 $4,718 $3,274 $4,649 ======= ====== ====== ====== ======
On March 23, 2000, the Company agreed to guarantee up to $1,800,000 of GSES's debt pursuant to GSES's credit facility. In consideration for such guarantee, the Company received warrants to purchase 150,000 shares of GSES common stock at an exercise price of $2.38 per share, which expire on August 17, 2003. GSES's credit facility, originally scheduled to expire on March 23, 2003, was extended until March 31, 2004. As part of such extension, the Company was required to extend its $1,800,000 limited guarantee. In consideration for the extension of the guarantee, the Company received 150,000 shares of GSES common stock (see Note 17). The Company has guaranteed the leases for FSP's New Jersey and Connecticut warehouses, totaling approximately $1,589,000 per year through the first quarter of 2007, and an aggregate of $455,000 for certain equipment leases through April 2004. The Company's guarantee of such leases was in effect when FSP was a wholly-owned subsidiary of the Company. In 1998, the Company sold substantially all of the operating assets of Five Star Group to the predecessor company of FSP. As part of this transaction, the landlord of the New Jersey and Connecticut facilities and the lessor of the equipment did not consent to the release of the Company's guarantee (see Note 17). The following table summarizes the estimated expiration of financial guarantees outstanding as of December 31, 2002 (in thousands): Estimated Expiration Per Period
Total 2003 2004 2005 Thereafter ----- ---- ---- ---- ---------- GSES debt $1,800 $ - $1,800 $ - $ - FSP warehouse leases 6,753 1,589 1,589 1,589 1,986 FSP equipment leases 455 339 116 - - ------ ------- ---------- ----------- -------- Total $9,008 $1,928 $3,505 $1,589 $ 1,986 ====== ====== ====== ====== ======
The Company does not have any off-balance sheet financing, other than operating leases entered into in the normal course of business and disclosed above. The Company also does not use leveraged derivatives or derivatives for trading purposes. For the year ended December 31, 2002, the Company's working capital increased by $3,530,000 to net working capital of $780,000. The working capital increase was primarily due to decreases in short-term borrowings of $10,280,000, billings in excess of costs and estimated earnings of $3,167,000, accounts and other receivables of $3,294,000, and costs and estimated earnings in excess of billings of $2,610,000, partially offset by increases in current maturities of long term debt of $2,973,000 and accounts payable and accrued expenses of $463,000. In addition, of the remaining restructuring charges of $1,141,000, $221,000 is currently due. In connection with the reserves established for the restructuring charges, $1,217,000 has been utilized and $368,000 has been reversed during the year ended December 31, 2002 (see Note 15). The decrease in cash and cash equivalents of $189,000 for the year ended December 31, 2002 resulted from cash used in financing activities of $1,849,000 offset by cash provided by operations of $829,000 and cash provided by investing activities of $903,000. Net cash provided by investing activities of $903,000 includes the proceeds from the sale of marketable securities of $3,833,000 offset by $1,916,000 of additions to property, plant and equipment, $1,503,000 of additions to intangible assets, and a $489,000 decrease to investments and other assets. Net cash used in financing activities consisted primarily of repayments of short-term borrowings, offset by net proceeds from sales of Common and Class B common stock. Management discussion of critical accounting policies The preparation of our financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Our estimates, judgments and assumptions are continually evaluated based on available information and experience. Because of the use of estimates inherent in the financial reporting process, actual results could differ from those estimates. Certain of our accounting policies require higher degrees of judgment than others in their application. These include contract revenue and cost recognition, valuation of accounts receivables, accounting for investments, impairment of long-lived and intangible assets and income tax recognition of deferred tax items which are summarized below. In addition, Note 1 to the Consolidated Financial Statements includes further discussion of our significant accounting policies. Contract revenue and cost recognition. The Company provides services under time-and-materials, cost-plus-fixed fee and fixed-price contracts. Each contract has different terms based on the scope, deliverables and complexity of the engagement, requiring the Company to make judgments and estimates about recognizing revenue. In general, revenue is recognized on these arrangements as the services are performed. Under time-and-material contracts, as well as certain cost-plus-fixed fee and certain fixed-price contracts, the contractual billing schedules are based on the specified level of resources the Company is obligated to provide. As a result, on those "level of effort" contracts, the contractual billing amount for a given period acts as a measure of performance and, therefore, revenue is recognized in that amount. For other fixed price contracts, the contractual billing schedules are not based on the specified level of resources the Company is obligated to provide. These arrangements typically do not have milestones or other reliable measures of performance. As a result, revenue on these arrangements is recognized using the percentage-of-completion method based on the relationship of costs incurred to total estimated costs expected to be incurred over the term of the contract. The Company believes this methodology provides a reasonable measure of performance on these arrangements since performance primarily involves personnel costs and the customer is required to pay the Company for the proportionate amount of work and cost incurred in the event of contract termination. Revenue for unpriced change orders is not recognized until the customer agrees with the changes. Costs and estimated earnings in excess of billings on uncompleted contracts are recorded as a current asset. Billings in excess of costs and estimated earnings on uncompleted contracts are recorded as a current liability. Generally contracts provide for the billing of costs incurred and estimated earnings on a monthly basis. Risks relating to service delivery, usage, productivity and other factors are considered when making estimates of total contract cost, contract profitability, and progress towards completion. If sufficient risk exists, a reduced-profit methodology is applied to a specific client contract's percentage-of-completion model whereby the amount of revenue recognized is limited to the amount of costs incurred until such time as the risks have been partially or wholly mitigated through performance. The Company's estimates of total contract cost and contract profitability change periodically in the normal course of business, occasionally due to modifications of contractual arrangements. In addition, the implementation of cost saving initiatives and achievement of productivity gains generally results in a reduction of estimated total contract expenses on affected client contracts. Such changes in estimate are recognized in the period the changes are determined. For all client contracts, provisions for estimated losses on individual contracts are made in the period in which the loss first becomes apparent. As part of the Company's on-going operations to provide services to its customers, incidental expenses, which are commonly referred to as "out-of-pocket" expenses, are billed to customers. Out-of-pocket expenses include expenses such as airfare, mileage, hotel stays, out-of-town meals, and telecommunication charges. The Company's policy provides for these expenses to be recorded as both revenue and direct cost of services in accordance with the provisions of EITF 01-14, "Income Statement Characterization of Reimbursements Received for `Out-of-Pocket' Expenses Incurred." Valuation of accounts receivables Provisions for allowance for doubtful accounts are made based on historical loss experience adjusted for specific credit risks. Measurement of such losses requires consideration of the Company's historical loss experience, judgments about customer credit risk, and the need to adjust for current economic conditions. The allowance for doubtful accounts as a percentage of total gross trade receivables was 3.2% and 1.8% at December 31, 2002 and 2001, respectively. Impairment of long-lived tangible and intangible assets Impairment of long-lived tangible and intangible assets with finite lives result in a charge to operations whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of long-lived tangible assets to be held and used is measured by a comparison of the carrying amount of the asset to future undiscounted net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by determining the amount by which the carrying amount of the assets exceeds the fair value of the asset. The measurement of the future net cash flows to be generated is subject to management's reasonable expectations with respect to the Company's future operations and future economic conditions which may affect those cash flows. In accordance with SFAS No. 142, which the Company adopted in 2002, goodwill is no longer amortized, but instead tested for impairment at least annually. The first step of the goodwill impairment test is a comparison of the fair value of each reporting unit to its carrying value. The Company conducted a transitional goodwill impairment test upon adoption of SFAS No. 142 as of January 1, 2002, and its annual goodwill impairment test as of December 31, 2002. The goodwill impairment test requires the Company to identify its reporting units and obtain estimates of the fair values of those units as of the testing date. The Company estimates the fair values of its reporting units using discounted cash flow valuation models. The Company estimates these amounts by evaluating historical trends, current budgets, operating plans and industry data. The estimated fair value of each reporting unit exceeded its respective carrying value in both tests conducted in 2002 indicating the underlying goodwill of each unit was not impaired at the respective testing dates. The timing and frequency of our goodwill impairment tests are based on an ongoing assessment of events and circumstances that would more than likely reduce the estimated fair value of a reporting unit below its carrying value. The Company will continue to monitor its goodwill for impairment and conduct formal tests when impairment indicators are present. A decline in the fair value of any reporting units below its carrying value is an indicator that the underlying goodwill of the unit is potentially impaired. This situation would require the second step of the goodwill impairment test to determine whether the unit's goodwill is impaired. The second step of the goodwill impairment test is a comparison of the implied fair value of a reporting unit's goodwill to its carrying value. An impairment loss is required for the amount which the carrying value of a reporting unit's goodwill exceeds its implied fair value. The implied fair value of the reporting unit's goodwill would become the new cost basis of the unit's goodwill. The following table presents goodwill balances at December 31, 2002 and operating income for the years ended December 31, 2002, 2001 and 2000 for each of our reportable segments (in thousands):
Goodwill at Operating Income December 31, For the Years Ended December 31 -------------------------------- 2002 2002 2001 2000 -------- -------- ------ ------- Manufacturing & Process $51,020 $1,712 $ 8,679 $10,870 Information Technology 6,269 (182) 1,596 (7,331) Optical Plastics 202 429 1,192 1,272 --------- ------- -------- ------- $57,491 $1,959 $11,467 $ 4,811 ======= ====== ======= =======
Accounting for investments At December 31, 2002 and 2001, the Company owned approximately 47.3% and 37%, respectively of FSP and accounts for its investment in FSP using the equity method. At December 31, 2002, the Company's investment in FSP was $6,317,000, including a $4,500,000 senior unsecured 8% note. The Company currently owns approximately 47.3% of the outstanding common stock of FSP and would own approximately 50% if certain stock options beneficially owned by the Company's officers were exercised. As of December 31, 2002, three officers of the Company served on the board of FSP (out of a total of seven directors), one of whom resigned effective March 27, 2003. However, effective August 1998, the Company entered into a Voting Agreement which limits its operating and financial control of FSP. Pursuant to an amendment of such agreement, the Company agreed that until June 30, 2004, it would vote its shares of common stock of FSP (i) such that not more than 50% of FSP's directors will be officers or directors of the Company and (ii) in the same manner and in the same proportion as the remaining stockholders of FSP vote on all matters presented to a vote of stockholders, other than the election of directors. Therefore, the Company accounts for its investment in FSP under the equity method. At December 31, 2002 and 2001, the Company owned approximately 19.5% and 20.2%, respectively, of GSES with a carrying value of $1,794,000 and $3,004,000, respectively, and accounts for its investment in GSES using the equity method. Although the Company owns approximately 19.5% of the common stock of GSES as of December 31, 2002, the Company has accounted for its investment in GSES using the equity method of accounting based upon management's conclusion that the Company has significant influence with respect to the operations of GSES. The Company currently owns 100% of HMS's common stock but no longer has financial and operating control of HMS. As a condition of a private placement of preferred stock in December 2001, the Company contractually gave up operating control over HMS through an Investors Rights Agreement. Therefore, through December 27, 2001, the operating results of HMS were consolidated within the Consolidated Statements of Operations. However, subsequent to that date the Company accounts for its investment in HMS under the equity method. Due to HMS's operating losses during 2002, the Company's investment in HMS as of December 31, 2002 was written down to zero. Income tax recognition The Company accounts for income taxes using the asset and liability method. Deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and for operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered. In assessing the realizability of the deferred tax assets, the Company considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of the deferred tax assets is dependent upon the generation of future taxable income during the periods in which temporary differences are deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based upon these factors, management believes it is more likely than not that the Company will realize the benefits of deferred tax assets, net of the valuation allowance. The valuation allowance primarily relates to foreign net operating loss carryforwards for which the Company does not believe the benefits will be realized. Restructuring reserves The Company adopted restructuring plans, primarily related to its open enrollment IT business, in 2000 and 1999. In order to identify and calculate the associated costs to exit this business, management made assumptions regarding estimates of future liabilities for operating leases and other contractual obligations, severance costs and the net realizable value of assets. Management believes its estimates, which are reviewed quarterly, to be reasonable and considers its knowledge of the industry, its previous experience in exiting activities and valuations from independent third parties if necessary, in calculation of such estimates. Recent accounting pronouncements In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations" ("SFAS No. 143"). SFAS No. 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. This statement requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. This statement is effective for the Company in fiscal 2003. The Company has evaluated SFAS No. 143 and does not anticipate that the impact of the new pronouncement would have a material impact on the Company's consolidated financial statements. During April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections" ("SFAS No. 145"). Among other items, SFAS No. 145 updates and clarifies existing accounting pronouncements related to reporting gains and losses from the extinguishment of debt and certain lease modifications that have economic effects similar to sale-leaseback transactions. The provisions of SFAS No. 145 are generally effective for fiscal years beginning after May 15, 2002, with earlier adoption of certain provisions encouraged. The application of SFAS No. 145 did not have and is not expected to have a material impact o the Company's Consolidated Financial Statements. In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities" ("SFAS No. 146"). This Statement requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. The Company is required to adopt the provisions of SFAS No. 146 for exit or disposal activities, if any, initiated after December 31, 2002. Although the Company believes the adoption of SFAS No. 146 will not impact the consolidated financial position or results of operations, it can be expected to impact the timing of liability recognition associated with future exit activities, if any. SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure - an amendment of SFAS No. 123" ("SFAS No. 148"), was issued in December 2002 and the transition guidance and annual disclosure provisions are effective for the Company for the quarterly interim periods beginning in 2003. SFAS No. 148 amends SFAS Statement No. 123 ("SFAS No. 123"), "Accounting for Stock-Based Compensation" and provides alternative methods of transition for a voluntary change to the fair value method of accounting for stock-based employee compensation. In addition, the statement amends the disclosure requirements of SFAS No. 123 to require more prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based compensation and the effect of the method used. The Company continues to account for stock-based compensation using APB Opinion No. 25 and has not adopted the recognition provisions of SFAS No. 123, as amended by SFAS No. 148. The Company has adopted the disclosure provisions for the current fiscal year and has included this information in Note 1 to the Company's Consolidated Financial Statements. In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees Including Indirect Guarantees of Indebtedness of Others" ("FIN No. 45"). FIN No. 45 elaborates on the disclosures for interim and annual reports regarding obligations under certain guarantees issued by a guarantor. Under FIN No. 45, the guarantor is required to recognize a liability for the fair value of the obligation undertaken in issuing the guarantee at the inception of a guarantee. The recognition and measurement provisions of FIN No. 45 are applicable on a prospective basis to guarantees issued or modified after December 31, 2002. The disclosure requirements for FIN No. 45 are effective for interim and annual financial statements issued after December 15, 2002. The Company has evaluated FIN No. 45 and does not anticipate that the impact of the new pronouncement would have a material impact on the Company's Consolidated Financial Statements. In January 2003, the FASB issued Interpretation No. 46, "Consolidation of Variable Interest Entities" ("FIN No. 46"). FIN No. 46 explains how to identify variable interest entities and how an enterprise assesses its interests in a variable interest entity to decide whether to consolidate that entity. FIN No. 46 requires existing unconsolidated variable interest entities to be consolidated by their primary beneficiaries if the entities do not effectively disperse risks among parties involved. The provisions of FIN No. 46 are effective immediately for all entities with variable interests in variable interest entities created after December 31, 2002. The provisions of FIN No. 46 are effective for public entities with a variable interest in a variable interest entity created prior to January 1, 2003 no later than the end of the first annual reporting period beginning after June 15, 2003. The Company is in the process of evaluating its interests in certain entities to determine if any such entity will require consolidation under FIN No. 46. If it is determined that the Company should consolidate any such entity, the Company would recognize certain assets and debt on its consolidated balance sheet and a cumulative adjustment for the accounting change in the consolidated statement of operations. In November 2002, the EITF reached a consensus on Issue No. 00-21, "Accounting for Revenue Arrangements with Multiple Deliverables." This Issue provides guidance on when and how to separate elements of an arrangement that may involve the delivery or performance of multiple products, services and rights to use assets into separate units of accounting. The guidance in the consensus is effective for revenue arrangements entered into in fiscal periods beginning after June 15, 2003. The transition provision allows either prospective application or a cumulative effect adjustment upon adoption. The Company is currently evaluating the impact of adopting this guidance. Item 7A. Quantitative and Qualitative Disclosures About Market Risk The Company is exposed to the impact of interest rate, market risks and currency fluctuations. In the normal course of business, the Company employs internal processes to manage its exposure to interest rate, market risks and currency fluctuations. The Company's objective in managing its interest rate risk is to limit the impact of interest rate changes on earnings and cash flows and to lower its overall borrowing costs. The Company is exposed to the impact of currency fluctuations because of its international operations. As of December 31, 2002, the Company had approximately $24,120,000 of variable rate borrowings. The Company estimates that for every 1% fluctuation in general interest rates, assuming debt levels at December 31, 2002, interest expense would vary by $241,200. The Company's net investment in its foreign subsidiaries, including intercompany balances, at December 31, 2002 was approximately $2,639,000, and accordingly, fluctuations in foreign currency do not have a material impact on the Company's financial position. The Company revenues and profitability are related to general levels of economic activity and employment in the United States and the United Kingdom. As a result, any significant economic downturn or recession in one or both of those countries could harm our business and financial condition. A significant portion of the Company's revenues are derived from Fortune 500 level companies and their international equivalents, which historically have adjusted expenditures for external training during economic downturns. If the economies in which these companies operate weaken in any future period, these companies may not increase or may reduce their expenditures on external training, which could adversely affect the Company's business and financial condition. Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Page INDEX TO CONSOLIDATED FINANCIAL STATEMENTS FINANCIAL STATEMENTS OF GP STRATEGIES CORPORATION AND SUBSIDIARIES: Independent Auditors' Report 37 Consolidated Balance Sheets - December 31, 2002 and 2001 38 Consolidated Statements of Operations - Years ended December 31, 2002, 2001, and 2000 40 Consolidated Statements of Changes in Stockholders' Equity - Years ended December 31, 2002, 2001, and 2000 41 Consolidated Statements of Cash Flows - Years ended December 31, 2002, 2001, and 2000 42 Notes to Consolidated Financial Statements 44 SUPPLEMENTARY DATA (Unaudited) Selected Quarterly Financial Data 86 INDEPENDENT AUDITORS' REPORT The Board of Directors and Stockholders GP Strategies Corporation: We have audited the consolidated financial statements of GP Strategies Corporation and subsidiaries as listed in the accompanying index. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of GP Strategies Corporation and subsidiaries as of December 31, 2002 and 2001, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States of America. As discussed in Note 2 to the consolidated financial statements, the Company adopted Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets", effective January 1, 2002. KPMG LLP New York, New York April 9, 2003 GP STRATEGIES CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands, except shares and par value per share)
December 31, 2002 2001 - ---------------------------------------------------------------------------------------- Assets Current assets Cash and cash equivalents $ 1,516 $ 1,705 Accounts and other receivables (of which $4,865 and $3,637 are from government contracts) less allowance for doubtful accounts of $854 and $529 26,708 30,002 Inventories 1,380 1,734 Costs and estimated earnings in excess of billings on uncompleted contracts 14,177 16,787 Prepaid expenses and other current assets 4,079 4,113 - --------------------------------------------------------------------------------------- Total current assets 47,860 54,341 - --------------------------------------------------------------------------------------- Investments, marketable securities and note receivable 14,130 30,400 - --------------------------------------------------------------------------------------- Property, plant and equipment, net 8,299 8,718 - --------------------------------------------------------------------------------------- Intangible assets Goodwill 57,491 55,988 Patents and licenses, net of accumulated amortization of $593 and $490 755 858 - --------------------------------------------------------------------------------------- 58,246 56,846 Deferred tax asset 10,846 4,289 - --------------------------------------------------------------------------------------- Other assets 5,524 6,230 - --------------------------------------------------------------------------------------- $144,905 $160,824 - ---------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. GP STRATEGIES CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Continued) (in thousands, except shares and par value per share)
December 31, 2002 2001 - ---------------------------------------------------------------------------------------------------------- Liabilities and stockholders' equity Current liabilities Current maturities of long-term debt $3,610 $ 637 Short-term borrowings 22,058 32,338 Accounts payable and accrued expenses 17,552 17,089 Billings in excess of costs and estimated earnings on uncompleted contracts 3,860 7,027 - ---------------------------------------------------------------------------------------------------------- Total current liabilities 47,080 57,091 - ---------------------------------------------------------------------------------------------------------- Long-term debt less current maturities 3,302 6,226 Other non-current liabilities 1,541 1,564 Stockholders' equity Preferred stock, authorized 10,000,000 shares, par value $.01 per share, none issued Common stock, authorized 25,000,000 shares, par value $.01 per share, issued 15,361,437 and 12,788,743 shares (of which 33,417 and 54,323 shares are held in treasury) 154 128 Class B common stock, authorized 2,800,000 shares, par value $.01 per share, issued and outstanding 1,200,000 and 900,000 shares 12 9 Additional paid-in capital 189,988 180,078 Accumulated deficit (93,167) (87,939) Accumulated other comprehensive income 460 8,364 Notes receivable from stockholder (4,095) (4,095) Treasury stock at cost (370) (602) - ----------------------------------------------------------------------------------------------------------- Total stockholders' equity 92,982 95,943 - ----------------------------------------------------------------------------------------------------------- $144,905 $160,824 - -----------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. GP STRATEGIES CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share data)
Years ended December 31, 2002 2001 2000 - ------------------------------------------------------------------------------------------- Sales $152,233 $186,611 $197,467 Cost of sales 134,768 164,034 177,678 - ------------------------------------------------------------------------------------------- Gross margin 17,465 22,577 19,789 - ------------------------------------------------------------------------------------------- Selling, general and administrative (21,410) (21,918) (25,968) Interest expense (2,770) (4,733) (5,616) Investment and other income (loss) (including interest income of $584, $701 and $910) (1,814) 496 (1,306) Loss on investments (153) (320) (3,400) Gains on marketable securities, net 2,267 4,294 10,111 Asset impairment charge (19,245) Restructuring reversal (charge) 368 1,174 (8,630) - -------------------------------------------------------------------------------------------- Income (loss) before income taxes (6,047) 1,570 (34,265) Income tax benefit (expense) 819 (2,515) 8,873 - ------------------------------------------------------------------------------------------- Net loss $ (5,228) $ (945) (25,392) - -------------------------------------------------------------------------------------------- Net loss per share Basic $ (.34) $ (.09) $ (2.04) Diluted (.34) (.09) (2.04) - -------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. GP STRATEGIES CORPORATION AND SUBSIDIARIES Consolidated Statements of Changes in Stockholders' Equity Years ended December 31, 2002, 2001, and 2000 (in thousands, except for par value per share)
Accumulated other Notes Class B compre- Compre- receivable Treasury Total Common common Additional hensive hensive from stock stock- stock stock paid-in Accumulated income income stock- at holders' ($.01 Par) ($.01 Par) capital deficit (loss) (loss) holder cost equity - ----------------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1999 $115 $ 5 $170,011 $(61,602) $ (817) $ $ (2,817) $(4,913) $ 99,982 - ----------------------------------------------------------------------------------------------------------------------------------- Other comprehensive income 28,054 28,054 28,054 Net loss (25,392) (25,392) (25,392) - ----------------------------------------------------------------------------------------------------------------------------------- Total comprehensive income 2,662 2,662 Issuance and sale of common stock 10 3 5,430 (1,278) 4,165 Issuance of treasury stock 1,195 1,195 Issuance of stock by equity investee 4,514 4,514 - ----------------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 2000 $125 $ 8 $179,955 $(86,994) $ 27,237 $ $ (4,095) $ (3,718) $112,518 - ----------------------------------------------------------------------------------------------------------------------------------- Other comprehensive loss (18,873) (18,873) (18,873) Net loss (945) (945) (945) - ------------------------------------------------------------------------------------------------------------------------------------ Total comprehensive loss (19,818) (19,818) Issuance and sale of common stock and warrants 3 3 2,924 313 3,243 Issuance of treasury stock in exchange for Class B common stock (2) (2,801) 2,803 - ----------------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 2001 $128 $ 9 $180,078 $(87,939) $ 8,364 $ $ (4,095) $ (602) $ 95,943 - ----------------------------------------------------------------------------------------------------------------------------------- Other comprehensive loss (7,904) (7,904) (7,904) Net loss (5,228) (5,228) (5,228) - ------------------------------------------------------------------------------------------------------------------------------------ Total comprehensive loss (13,132) (13,132) Issuance and sale of common stock 26 3 9,910 232 10,171 - ----------------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 2002 $154 $12 $189,988 $(93,167) $ 460 $ $ (4,095) $ (370) $ 92,982 - -----------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. GP STRATEGIES CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands) - ---------------------------------------------------------------------------------------------------------- Years ended December 31, 2002 2001 2000 - ------------------------------------------------------------------------------------------------------------ Cash flows from operations: Net loss $(5,228) $ (945) $(25,392) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization 3,304 5,902 6,628 Issuance of stock for retirement savings plan 1,065 1,780 1,668 Restructuring reversal (368) (1,174) 8,630 Gains on marketable securities (2,267) (4,294) (10,111) Loss on investments 153 320 3,400 Non-cash consultant fees 240 750 Non-cash compensation (1,211) (2,370) 3,809 Loss on equity investments and other, net 2,450 7 2,389 Deferred income taxes (1,839) 1,112 (9,649) Asset impairment charge 19,245 Proceeds from sale of trading securities 9,141 2,031 Changes in other operating items, net of effect of acquisitions and disposals: Accounts and other receivables 3,195 4,285 8,997 Inventories 354 (197) (177) Costs and estimated earnings in excess of billings on uncompleted contracts 2,584 3,936 1,723 Prepaid expenses and other current assets (330) (74) 1,030 Accounts payable and accrued expenses 1,901 (5,764) (12,899) Billings in excess of costs and estimated earnings on uncompleted contracts (3,174) (1,228) 1,324 - ---------------------------------------------------------------------------------------------------------- Net cash provided by operations $ 829 $11,187 $ 2,646 - ----------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. GP STRATEGIES CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(in thousands) - ---------------------------------------------------------------------------------------------------------- Years ended December 31, 2002 2001 2000 - ---------------------------------------------------------------------------------------------------------- Cash flows from investing activities: Additions to property, plant and equipment, net $(1,916) $ (1,451) $ (1,040) Additions to intangible assets (1,503) (822) (429) Proceeds from sale of marketable securities 3,833 5,567 668 Deconsolidation of HMS (6,700) Decrease (increase) to investments and other 489 (482) (2,119) - ----------------------------------------------------------------------------------------------------------- Net cash provided by (used in) investing activities 903 (3,888) (2,920) - ----------------------------------------------------------------------------------------------------------- Cash flows from financing activities: Proceeds from sale of Common Stock 7,850 Proceeds from issuance of Class B Stock 1,260 900 1,200 Net proceeds from issuance of HMS Preferred Stock 6,700 Repayment of short-term borrowings (10,280) (3,824) (4,116) Deferred financing costs (728) (1,132) Proceeds from issuance of long-term debt 890 3,131 2,640 Repayment of long-term debt (841) (13,880) (1,343) Exercise of common stock options and warrants 234 - ---------------------------------------------------------------------------------------------------------- Net cash used in financing activities (1,849) (8,105) (1,385) - ----------------------------------------------------------------------------------------------------------- Effect of exchange rate changes on cash and cash equivalents (72) 24 78 - ---------------------------------------------------------------------------------------------------------- Net decrease in cash and cash equivalents (189) (782) (1,581) Cash and cash equivalents at beginning of year 1,705 2,487 4,068 - ---------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of year $1,516 $ 1,705 $ 2,487 - ---------------------------------------------------------------------------------------------------------- Supplemental disclosures of cash flow information: Cash paid during the year for: Interest $1,942 $ 3,958 $ 5,447 Income taxes $ 434 $ 407 $ 557
See accompanying notes to consolidated financial statements. GP STRATEGIES CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements 1. Description of business and summary of significant accounting policies Description of business. GP Strategies Corporation (the "Company") currently has three operating business segments. The Company's principal operating subsidiary is General Physics Corporation (GP or General Physics). GP is a global workforce development company that improves the effectiveness of organizations by providing training, management consulting, e-Learning solutions and engineering services that are customized to meet the needs of specific clients. Clients include Fortune 500 companies, manufacturing, process and energy companies, and other commercial and governmental customers. GP operates in two business segments. The Manufacturing & Process Segment 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 Segment provides information technology (IT) training programs and solutions, including Enterprise Solutions and comprehensive career training and transition programs. The Company's third operating segment is the Optical Plastics Segment comprised of the Company's wholly owned subsidiary MXL Industries, Inc. (MXL). MXL is a specialist in the manufacture of polycarbonate parts requiring strict adherence to optical quality specifications, and in the application of abrasion and fog resistant coatings to these parts. Products include shields, and face masks and non-optical plastic products. In addition, as of December 31, 2002, the Company has investments in Millennium Cell Inc. (Millennium), Hydro Med Sciences (HMS), Five Star Products, Inc. (FSP), GSE Systems, Inc. (GSES) and owns certain real estate (see Note 3). Principles of consolidation and investments. The consolidated financial statements include the operations of the Company and, except for HMS as discussed below, its majority-owned subsidiaries. Investments in 20% - 50% owned companies are generally accounted for by the equity method of accounting. All significant intercompany balances and transactions have been eliminated. GP STRATEGIES CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) 1. Description of business and summary of significant accounting policies (Continued) The Company owns approximately 19.5% of the common stock of GSES as of December 31, 2002, however, the Company has accounted for its investment in GSES using the equity method of accounting based upon management's conclusion that the Company has significant influence with respect to the operations of GSES. The Company owns 100% of the common stock of HMS, however, it no longer has financial and operating control of the entity and accordingly, effective December 27, 2001, the Company has accounted for its investment in HMS under the equity method. The Company owns approximately 47.3% of the outstanding common stock of FSP and would own approximately 50% if certain stock options beneficially owned by the Company's officers were exercised. However, effective August 1998, the Company entered into a Voting Agreement which limits its operating and financial control of FSP, and therefore, the Company accounts for its investment in FSP under the equity method. Cash and cash equivalents. Cash and cash equivalents of $1,516,000 and $1,705,000 at December 31, 2002 and 2001, respectively, consist of cash and highly liquid debt instruments with original maturities of three months or less. Marketable securities. Marketable securities at December 31, 2002 and 2001 consist of U.S. corporate equity securities. The Company classifies its marketable securities as available-for-sale investments. A decline in the market value of any available-for-sale security below cost that is deemed to be other than temporary results in a reduction in carrying amount to fair value. The impairment is charged to earnings, and a new cost basis is established. Gains and losses are derived using the average cost method for determining the cost of securities sold. Trading securities are those securities which are generally expected to be sold within one year. Available-for-sale securities are included in Investments, marketable securities and notes receivable on the Consolidated Balance Sheet. Trading and available-for-sale securities are recorded at their fair value. Trading securities are held principally for the purpose of selling them in the near term. Unrealized holding gains and losses on trading securities are included in earnings. Unrealized holding gains and losses on available-for-sale securities are excluded from earnings and are reported as a separate component of stockholders' equity in accumulated other comprehensive income, net of the related tax effect, until realized. Inventories. Inventories are valued at the lower of cost or market, using the first-in, first-out (FIFO) method. 1. Description of business and summary of significant accounting policies (Continued) Foreign currency translation. The functional currency of the Company's international operations is the applicable local currency. The translation of the applicable foreign currency into U.S. dollars is performed for balance sheet accounts using current exchange rates in effect at the balance sheet date and for revenue and expense accounts using the weighted-average rates of exchange prevailing during the year. The unrealized gains and losses resulting from such translation are included as a separate component of stockholders' equity in accumulated other comprehensive income. Contract revenue and cost recognition. The Company provides services under time-and-materials, cost-plus-fixed fee and fixed-price contracts. Each contract has different terms based on the scope, deliverables and complexity of the engagement, requiring the Company to make judgments and estimates about recognizing revenue. In general, revenue is recognized on these arrangements as the services are performed. Under time-and-material contracts, as well as certain cost-plus-fixed fee and certain fixed-price contracts, the contractual billing schedules are based on the specified level of resources the Company is obligated to provide. As a result, on those "level of effort" contracts, the contractual billing amount for a given period acts as a measure of performance and, therefore, revenue is recognized in that amount. For other fixed price contracts, the contractual billing schedules are not based on the specified level of resources the Company is obligated to provide. These arrangements typically do not have milestones or other reliable measures of performance. As a result, revenue on these arrangements is recognized using the percentage-of-completion method based on the relationship of costs incurred to total estimated costs expected to be incurred over the term of the contract. The Company believes this methodology provides a reasonable measure of performance on these arrangements since performance primarily involves personnel costs and the customer is required to pay the Company for the proportionate amount of work and cost incurred in the event of contract termination. Revenue for unpriced change orders is not recognized until the customer agrees with the changes. Costs and estimated earnings in excess of billings on uncompleted contracts are recorded as a current asset. Billings in excess of costs and estimated earnings on uncompleted contracts are recorded as a current liability. Generally contracts provide for the billing of costs incurred and estimated earnings on a monthly basis. Risks relating to service delivery, usage, productivity and other factors are considered when making estimates of total contract cost, contract profitability, and progress towards completion. If sufficient risk exists, a reduced-profit methodology is applied to a specific client contract's percentage-of-completion model whereby the amount of revenue recognized is limited to the amount of costs incurred until such time as the risks have been partially or wholly mitigated through performance. The Company's estimates of total contract cost and contract profitability change periodically in the normal course of business, occasionally 1. Description of business and summary of significant accounting policies (Continued) due to modifications of contractual arrangements. In addition, the implementation of cost saving initiatives and achievement of productivity gains generally results in a reduction of estimated total contract expenses on affected client contracts. Such changes in estimate are recognized in the period the changes are determined. For all client contracts, provisions for estimated losses on individual contracts are made in the period in which the loss first becomes apparent. As part of the Company's on-going operations to provide services to its customers, incidental expenses, which are commonly referred to as "out-of-pocket" expenses, are billed to customers. Out-of-pocket expenses include expenses such as airfare, mileage, hotel stays, out-of-town meals, and telecommunication charges. The Company's policy provides for these expenses to be recorded as both revenue and direct cost of services in accordance with the provisions of EITF 01-14, "Income Statement Characterization of Reimbursements Received for `Out-of-Pocket' Expenses Incurred." Comprehensive income. Comprehensive income consists of net income (loss), net unrealized gains (losses) on available-for-sale securities and foreign currency translation adjustments. Property, plant and equipment. Property, plant and equipment are carried at cost. Major additions and improvements are capitalized while maintenance and repairs which do not extend the lives of the assets are expensed as incurred. Gain or loss on the disposition of property, plant and equipment is recognized in operations when realized. Depreciation. The Company provides for depreciation of property, plant and equipment primarily on a straight-line basis over the following estimated useful lives: CLASS OF ASSETS USEFUL LIFE Buildings and improvements 5 to 40 years Machinery, equipment and furniture and fixtures 3 to 7 years Leasehold improvements Shorter of asset life or term of lease Recoverability of Long-Lived Assets. Effective January 1, 2002, the Company adopted Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, which addresses financial accounting and reporting for the impairment or disposal of long-lived assets. While Statement No. 144 supersedes FASB Statement No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, it retains many of the fundamental provisions of that Statement. 1. Description of business and summary of significant accounting policies (Continued) The recoverability of long-lived assets, other than goodwill and intangible assets with indefinite lives, is assessed whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable through future undiscounted net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment is measured by determining the amount by which the carrying value of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value, less costs to sell. The Company has investments in land of approximately $2.6 million, included in other assets in the Consolidated Balance Sheet, which are currently held for sale. Management believes the fair value of these investments exceed their carrying value. Intangible assets. The excess of cost over the fair value of net assets of businesses acquired is recorded as goodwill and through December 31, 2001, was amortized on a straight line basis over periods ranging from 5 to 40 years. The Company capitalizes costs incurred to obtain and maintain patents and licenses. Patent costs are amortized over the lesser of 17 years or the remaining lives of the patents, and license costs over the lives of the licenses. The Company also capitalizes costs incurred to obtain long-term debt financing. Such costs are amortized on a straight line basis over the terms of the related debt and such amortization is classified as interest expense in the Consolidated Statements of Operations. Effective January 1, 2002, the Company adopted SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized but instead tested for impairment at least annually. SFAS No. 142 also requires that intangible assets with definite useful lives be amortized over their respective estimated useful lives to their estimated residual values. The Company periodically assesses the recoverability of goodwill and intangible assets with indefinite lives by a comparison of the estimated fair value of each reporting unit to its carrying value. The estimated fair value of each reporting unit exceeded the carrying value of each respective reporting unit. The Company will perform its annual impairment review as of the end of each fiscal year. As of the date of adoption (January 1, 2002), the Company had unamortized goodwill in the amount of approximately $56 million and unamortized identifiable intangible assets in the amount of approximately $1.4 million, all of which will be subject to the transition provisions of Statement 142. Amortization expense related to goodwill was $2.7 million and $2.8 million for the years ended December 31, 2001 and 2000, respectively. 1. Description of business and summary of significant accounting policies (Continued) Sales of subsidiary stock. The Company recognizes gains and losses on sales of subsidiary stock in its Consolidated Statements of Operations, except in circumstances where the realization of the gain is not reasonably assured or the sale relates to issuance of preferred stock. Income taxes. Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and for operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Income (loss) per share. Basic earnings (loss) per share is based upon the weighted average number of common shares outstanding, including Class B common stock, during the period. Diluted earnings (loss) per share is based upon the weighted average number of common shares outstanding during the period assuming the issuance of common stock for all dilutive potential common stock equivalents outstanding. 1. Description of business and summary of significant accounting policies (Continued) Loss per share (EPS) for the years ended December 31, 2002, 2001 and 2000 are as follows (in thousands, except per share amounts): 2002 2001 2000 ---- ---- ---- Basic and Diluted EPS Net loss $ (5,228) $ (945) $(25,392) Weighted average shares outstanding, basic and diluted 15,370 13,209 12,468 Basic loss per share $ (.34) $ (.09) $ (2.04) Diluted loss per share (a) $ (.34) $ (.09) $ (2.04) Basic loss 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. Diluted loss per share are based upon the weighted average number of common shares outstanding during the period, assuming the issuance of common shares for all dilutive potential common shares outstanding. (a) For the years ended December 31, 2002, 2001 and 2000, presentation of the dilutive effect of stock options, warrants and convertible notes, which totaled 612,000, 376,000 and 556,000 shares, respectively, are not included since they are anti-dilutive. Stock based compensation. The Company applies the intrinsic value-based method of accounting prescribed by Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations, in accounting for its fixed plan stock options. As such compensation expense would be recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. The difference between the quoted market price as of the date of the grant and the contractual purchase price of shares is charged to operations over the vesting period. No compensation cost has been recognized for fixed stock options with exercise prices equal to the market price of the stock on the dates of grant and shares acquired by employees under the Company's non-qualified stock option plan. SFAS No. 123, "Accounting for Stock-Based Compensation," established accounting and disclosure requirements using a fair value-based method of accounting for stock-based employee compensation plans. As allowed by SFAS No. 123, the Company has elected to continue to apply the intrinsic value-based method of accounting described above, and has adopted the disclosure requirements of SFAS No. 123. 1. Description of business and summary of significant accounting policies (Continued) SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure - an amendment of SFAS No. 123" ("SFAS No. 148"), was issued in December 2002 and is effective for the Company for the quarterly interim periods beginning in 2003. SFAS No. 148 amends SFAS No. 123 and provides alternative methods of transition for a voluntary change to the fair value method of accounting for stock-based employee compensation. In addition, the statement amends the disclosure requirements of SFAS No. 123 to require more prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based compensation and the effect of the method used. Pro forma net income and earnings per share disclosures as if the Company recorded compensation expense based on the fair value for stock-based awards have been presented in accordance with the provisions of SFAS No. 123, are as follows for the years ended December 31, 2002, 2001 and 2000 (in thousands, except per share amounts):
2002 2001 2000 ---- ---- ---- Net loss As reported $(5,228) $ (945) $(25,392) Proforma $(6,723) $(3,388) $(27,137) Basic loss per share As reported $ (.34) $ (.09) $ (2.04) Proforma $ (.44) $ (.27) $ (2.18) Diluted loss per share As reported $ (.34) $ (.09) $ (2.04) Proforma $ (.44) $ (.27) $ (2.18)
Pro forma net loss reflects only options granted since 1995. Therefore, the full impact of calculating compensation cost for stock options under SFAS No. 123 is not reflected in the pro forma net loss amounts presented above because compensation cost is reflected over the options' vesting period and compensation cost for options granted prior to January 1, 1995 is not considered. At December 31, 2002, 2001 and 2000, the per share weighted-average fair value of stock options granted was $2.78, $2.98 and $2.82, respectively, on the date of grant using the modified Black Scholes option-pricing model with the following weighted-average assumptions: 2002 - expected dividend yield 0%, risk-free interest rate of 4.30%, expected volatility of 72.84% and an expected life of 6.16 years; 2001 - expected dividend yield 0%, risk-free interest rate of 4.78%, expected volatility of 66.13% and an expected life of 3.7 years; 2000 - - expected dividend yield 0%, risk-free interest rate of 6.45%, expected volatility of 57.11% and an expected life of 4.7 years. 1. Description of business and summary of significant accounting policies (Continued) Use of estimates. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. Concentrations of credit risk. Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash investments and accounts receivable. The Company places its cash investments with high quality financial institutions and limits the amount of credit exposure to any one institution. With respect to accounts receivable, approximately 22% are related to United States government contracts, and the remainder are dispersed among various industries, customers and geographic regions. In addition, the Company has investments in various public and private equity securities, including HMS, Millennium, ISI, FSP and GSES. Reclassifications. Certain prior year amounts in the financial statements and notes thereto have been reclassified to conform to 2002 classifications. Recent accounting pronouncements: In June 2001, the FASB issued Statement No. 143, Accounting for Asset Retirement Obligations, which addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. This Statement applies to all entities that have legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development or normal use of the asset. This statement requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. This statement is effective for the Company in fiscal 2003. The Company has evaluated SFAS No. 143 and does not anticipate that the impact of the new pronouncement would have a material impact on the Company's consolidated financial statements. Statement No. 144 also supersedes the accounting and reporting provisions of APB Opinion No. 30, Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions, for the disposal of a segment of a business. However, it retains the requirement in Opinion 30 to report separately discontinued operations and extends that reporting to a component of an entity that either has been disposed of (by sale, abandonment, or in a distribution to owners) or is classified as held for sale. By broadening the presentation of discontinued operations to include more disposal transactions, the FASB has enhanced management's ability to provide information that helps financial statement users to assess the effects of a disposal transaction on the ongoing operations of an entity. Statement No. 144 is effective for fiscal years beginning after December 15, 2001. The implementation of SFAS No. 144 did not have an impact on the Company's consolidated financial statements. 1. Description of business and summary of significant accounting policies (Continued) During April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections ("SFAS No. 145"). Among other items, SFAS No. 145 updates and clarifies existing accounting pronouncements related to reporting gains and losses from the extinguishment of debt and certain lease modifications that have economic effects similar to sale-leaseback transactions. The provisions of SFAS No. 145 are generally effective for fiscal years beginning after May 15, 2002, with earlier adoption of certain provisions encouraged. The application of SFAS No. 145 did not have and is not expected to have a material impact o the Company's consolidated financial statements. In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities ("SFAS No. 146"). This Statement requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. The Company is required to adopt the provisions of SFAS No. 146 for exit or disposal activities, if any, initiated after December 31, 2002. Although the Company believes the adoption of SFAS No. 146 will not impact the consolidated financial position or results of operations, it can be expected to impact the timing of liability recognition associated with future exit activities, if any. In November 2002, the FASB issued Interpretation No. 45, Guarantor's Accounting and Disclosure Requirements for Guarantees Including Indirect Guarantees of Indebtedness of Others ("FIN No. 45"). FIN No. 45 elaborates on the disclosures for interim and annual reports regarding obligations under certain guarantees issued by a guarantor. Under FIN No. 45, the guarantor is required to recognize a liability for the fair value of the obligation undertaken in issuing the guarantee at the inception of a guarantee. The recognition and measurement provisions of FIN No. 45 are applicable on a prospective basis to guarantees issued or modified after December 31, 2002. The disclosure requirements for FIN No. 45 are effective for interim and annual financial statements issued after December 15, 2002. The Company has evaluated FIN No. 45 and does not anticipate that the impact of the new pronouncement would have a material impact on the Company's consolidated financial statements. In January 2003, the FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities ("FIN No. 46"). FIN No. 46 explains how to identify variable interest entities and how an enterprise assesses its interests in a variable interest entity to decide whether to consolidate that entity. FIN No. 46 requires existing unconsolidated variable interest entities to be consolidated by their primary beneficiaries if the entities do not effectively disperse risks among parties involved. The provisions of FIN No. 46 are effective immediately for all entities with 1. Description of business and summary of significant accounting policies (Continued) variable interests in variable interest entities created after December 31, 2002. The provisions of FIN No. 46 are effective for public entities with a variable interest in a variable interest entity created prior to January 1, 2003 no later than the end of the first annual reporting period beginning after June 15, 2003. The Company is in the process of evaluating its interests in certain entities to determine if any such entity will require consolidation under FIN No. 46. If it is determined that the Company should consolidate any such entity, the Company would recognize certain assets and debt on its consolidated balance sheet and a cumulative adjustment for the accounting change in the consolidated statement of operations. In November 2002, the EITF reached a consensus on Issue No. 00-21, "Accounting for Revenue Arrangements with Multiple Deliverables." This Issue provides guidance on when and how to separate elements of an arrangement that may involve the delivery or performance of multiple products, services and rights to use assets into separate units of accounting. The guidance in the consensus is effective for revenue arrangements entered into in fiscal periods beginning after June 15, 2003. The transition provision allows either prospective application or a cumulative effect adjustment upon adoption. The Company is currently evaluating the impact of adopting this guidance. 2. Goodwill and intangible assets 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. 144, Accounting for the Impairment or Disposed of Long-Lived Assets. As of December 31, 2002, the Company had unamortized goodwill in the amount of $57,491,000. The Company did not recognize any impairment as a result of the adoption of this statement. 2. Goodwill and intangible assets (Continued) The components of goodwill and intangible assets as of December 31, 2002 and 2001 are as follows (in thousands):
Original Cost or Accumulated Carrying Value Additions Amortization Total 2002: Amortizing intangible assets: Patents and licenses $1,348 $ - $593 $755 ------ ---------- ---- ---- Non-amortizing intangible assets: Goodwill 55,988 1,503 - 57,491 ------ ----- -------- ------ 2001: Amortizing intangible assets: Patents and licenses 1,348 - 490 858 Goodwill 89,838 822 34,672 55,988 ------ --- ------ ------ $91,186 $822 $35,162 $56,846 ======= ==== ======= =======
Amortization expense for patents and licenses was $103,000 in 2002, $126,000 in 2001, and $162,000 in 2000. The weighted average amortization period as of December 31, 2002 is seven years. Amortization expense for the next five years is estimated to be approximately $100,000 per year. Goodwill increased in 2002 and 2001 due to additional contingent payments made for previous acquisitions as well as the impact of foreign currency fluctuations. 2. Goodwill and intangible assets (Continued) The following is a summary of proforma net income and earnings (loss) per share for the years ended December 31, 2001 and 2000, as adjusted to remove the amortization of goodwill and intangible assets with indefinite useful lives (in thousands, except per share amounts): 2001 2000 ---- ---- Net Income (loss) As Reported $(945) $(25,392) Proforma $ 488 $(23,685) Basic and Diluted Earnings (loss) Per Share As Reported $ (.09) $ (2.04) Proforma $ .02 $ (1.90) 3. Investments, marketable securities and notes receivable Investments and note receivable At December 31, 2002 and 2001, Investments and notes receivable were comprised of the following: December 31, 2002 2001 ---------- ---------- Five Star Products, Inc. $6,317 $ 6,238 GSE Systems, Inc. 1,794 3,004 Hydro Med Sciences, Inc. 1,296 Other 422 419 ------- -------- $8,533 $10,957 ====== ======= (a) Five Star Products, Inc. FSP is a distributor of home decorating, hardware and finishing products in the northeast. The Company currently owns approximately 47.3% of the outstanding common stock of FSP and would own approximately 50% if certain stock options beneficially owned by the Company's officers were exercised. As of December 31, 2002, three officers of the Company served on the board of FSP (out of a total of seven directors), one of whom resigned effective March 27, 2003. However, effective August 1998, the Company entered into a Voting Agreement which limits its operating and financial control of FSP. Pursuant to an amendment of such agreement, the Company agreed that until June 30, 2004, it would vote its shares of common stock of FSP (i) such that not more than 50% of FSP's directors will be officers or directors of the Company and (ii) in the same manner and in the same proportion as the remaining stockholders of FSP vote on all matters presented to a vote of stockholders, other than the election of directors. Therefore, the Company accounts for its investment in FSP under the equity method. 3. Investments, marketable securities and notes receivable (Continued) FSP is currently indebted to the Company in the amount of $4,500,000 pursuant to an 8% senior unsecured note due September 30, 2004, as amended (the "Note"). On August 2, 2002, the Company converted $500,000 of the original $5,000,000 Note into 2,272,727 shares of common stock of FSP at a price of $.22 per share, which was at a premium to the open market value of $0.17 at the time. As a result of this transaction, the Company's ownership of FSP increased to approximately 47.3% from approximately 37%. All other terms of the Note remain unchanged. The Note, as amended, is due in 2004, with interest due quarterly. The amendment, which extended the due date of the Note until September 30, 2004, also provides that the Company can receive quarterly payments of principal from FSP, if FSP achieves certain financial performance benchmarks. At December 31, 2002, the Company owned approximately 47.3% of FSP and accounts for its investment in FSP using the equity method. At December 31, 2002, the Company's investment in FSP was $6,317,000, including the $4,500,000 senior unsecured 8% note. The Company recorded a write down on its investment of $200,000 and $2,400,000 in 2001 and 2000, respectively, which are included in Loss on investments. The Company's excess of its investment in FSP over its basis of the underlying net assets, was approximately $265,000 at December 31, 2002. In 1994 Jerome Feldman, Chairman and CEO of the Company was granted options to purchase 250,000 shares of FSP from the Company at an exercise price of $.50. These options expire in 2004. Information relating to the Company's investment in FSP is as follows (in thousands): 2002 2001 - ------------------------------------------------------------------------- Long-term note receivable $ 4,500 $ 5,000 Number of shares 7,103 4,830 Carrying amount of shares $1,817 $ 1,238 Equity income included in Investment and other income, net $162 $ 155 - ------------------------------------------------------------------------- 3. Investments, marketable securities and notes receivable (Continued) Condensed financial information for FSP as of December 31, 2002 and 2001 and for the years then ended is as follows (in thousands): 2002 2001 - ----------------------------------------------------------------------- Current assets $34,191 $35,045 Non current assets 1,142 1,139 Current liabilities 27,552 28,762 Non current liabilities 4,500 5,000 Stockholders' equity 3,281 2,422 Sales 94,074 94,908 Gross profit 16,613 16,054 Net income 391 417 (b) GSE Systems, Inc. GSES designs, develops and delivers business and technology solutions by applying high technology-related process control, data acquisition, simulation, and business software, systems and services to the energy, process and manufacturing industries worldwide. At December 31, 2002 and 2001, the Company owned approximately 19.5% and 20.2%, respectively of GSES and accounts for its investment in GSES using the equity method. Although the Company owns approximately 19.5% of the common stock of GSES as of December 31, 2002, the Company has accounted for its investment in GSES using the equity method of accounting based upon management's conclusion that the Company has significant influence with respect to the operations of GSES. Pursuant to the Company's guarantee of GSES debt through March 23, 2003, the Company received a warrant to purchase 150,000 shares of GSES common stock at an exercise price of $2.08 per share, which expires on August 17, 2003. Additionally, pursuant to the extension of the Company's guarantee of GSES debt in March 2003 (see Note 17), the Company received 150,000 shares of GSES common stock. The Company recorded a write-down on investments of $1,000,000 during 2000 which is included in Loss on Investments. The Company's excess of its investment in GSES over its basis of the underlying net assets of GSES was approximately $212,000 at December 31, 2002. Information relating to the Company's investment in GSES is as follows (in thousands): 2002 2001 - ------------------------------------------------------------------------------ Number of shares 1,159 1,159 Carrying amount $ 1,794 $ 3,004 Equity (loss) income included in Investment and other income, net $(1,210) $ 83 - ------------------------------------------------------------------------------ 3. Investments, marketable securities and notes receivable (Continued) Condensed financial information for GSES as of December 31, 2002 and 2001 and for the years then ended is as follows (in thousands): - ------------------------------------------------------------------------------ 2002 2001 - ------------------------------------------------------------------------------ Current assets $17,202 $19,622 Non current assets 11,692 14,052 Current liabilities 11,116 12,604 Non current liabilities 9,617 7,218 Stockholders' equity 8,111 13,852 Revenue 43,116 50,331 Gross profit 11,315 13,950 Net (loss) income (5,943) 259 - ------------------------------------------------------------------------------ (c) Hydro Med Sciences, Inc. HMS is a specialty pharmaceutical company engaged in the development and commercialization of prescription pharmaceuticals principally utilizing HMS's patented Hydron drug delivery technology. Prior to June 2000, HMS operated as a division of the Company, however, in connection with an offering of the Company's convertible subordinated exchangeable notes (see Note 7(a)), HMS was incorporated as a separate company and became a wholly-owned subsidiary of the Company. On December 27, 2001, HMS completed a $7 million private placement of HMS Series A Convertible Preferred Stock (the "Preferred Stock") to certain institutional investors. The Company currently owns 100% of HMS's common stock but no longer has financial and operating control of HMS. As a condition of the private placement, the Company contractually gave up operating control over HMS through an Investors Rights Agreement. Therefore, through December 27, 2001, the operating results of HMS are consolidated within the Consolidated Statements of Operations. However, subsequent to that date the Company accounts for its investment in HMS under the equity method. Due to HMS's operating losses during 2002, the Company's investment in HMS as of December 31, 2002 was written down to zero. 3. Investments, marketable securities and notes receivable (Continued) The Preferred Stock is convertible at any time at the option of the holder into approximately 41% of HMS's common stock and participates in dividends with HMS common stock on an as converted basis. Certain of the Preferred Stock holders hold the HMS Notes which can be exchanged for 19.9% of the outstanding common stock of HMS common stock on a fully diluted basis or into shares of the Company's common stock. If such holders exercise the exchange right and the Preferred Stock is converted to common stock of HMS, the Company's ownership of HMS would then be reduced to approximately 47%. Marketable securities At December 31, 2002 and 2001, Marketable securities were comprised of the following: December 31, 2002 2001 ------ ------- Millennium Cell Inc. $5,552 $19,341 Other 45 102 ------ -------- $5,597 $19,443 ====== ======= (a) Millennium Cell Inc. Millennium Cell Inc. ("Millennium") is a development-stage company that has created a proprietary technology to safely generate and store hydrogen or electricity from environmentally friendly raw materials. As of December 31, 2002 and 2001, the Company had an 8% and 14% ownership interest, respectively, in Millennium, representing approximately 2,325,000 and 3,703,000 shares, including approximately 349,000 and 445,000 shares of common stock subject to options which were granted to the Company's employees to acquire Millennium shares from the Company's holdings. The Company's shares (excluding the 349,000 shares subject to options) have been pledged to its bank to secure its credit facility. On August 14, 2000, Millennium completed an IPO of 3,000,000 shares of common stock at a price of $10 per share. Based upon the consummation of the IPO, which reduced the Company's holdings in Millennium from approximately 27% to approximately 22%, and certain organizational changes, including lack of board representation, the Company believed that it did not have significant influence on the operating and financial policies of Millennium and as such believed that it was appropriate to account for this investment under the cost method of accounting. 3. Investments, marketable securities and notes receivable (Continued) On August 23, 2000, the Company entered into an agreement to sell 1,000,000 shares of Millennium. As the Company intended to dispose of these shares within the near term, the Company classified these shares as trading securities. During the fourth quarter of 2000, the Company sold 138,500 shares of Millennium. As a result of the sale of the shares, the Company recognized a gain of $1,818,434. Therefore, at December 31, 2000, the Company owned 861,500 shares included in trading securities. In 2001, the Company sold the remaining 861,500 shares for proceeds of $9,141,440. In addition, the Company sold approximately 1,220,000 shares from available for sale securities for $5,482,216. For the year ended December 31, 2001, the Company has recognized a net gain of $4,294,000, which is included in gain on marketable securities, net. The approximately 3,703,000 shares remaining were classified as available for sale securities. At December 31, 2001, these shares had a fair value of approximately $19,341,000. In 2002, the Company sold approximately 1,286,000 shares from available for sale securities for $3,833,000. For the year ended December 31, 2002, the Company has recognized a net gain of $2,267,000 which is included in gain on marketable securities, net. The approximately 2,325,000 shares remaining are classified as available for sale securities at December 31, 2002. These shares had a fair value of approximately $5,552,000. On February 11, 2000, the Company granted options to certain of its employees pursuant to the GP Strategies Corporation Millennium Cell, LLC Option Plan (the "Millennium Option Plan") to purchase an aggregate of approximately 547,000 of its shares of Millennium common stock, of which there are currently approximately 349,000 options outstanding. These options vest over either a one year or two year period and expire on June 30, 2003, as amended. The Company may receive approximately $500,000 (of which approximately $177,000 was received in 2001 and 2002) upon exercise of all options pursuant to the Millennium Option Plan. At December 31, 2001, the Company recorded net deferred compensation of $30,000, to be amortized over the remaining vesting period of the options, and a liability to employees of $767,000 and $2,008,000 at December 31, 2002 and December 31, 2001, respectively. These amounts are included in prepaid expenses and other current assets and as accounts payable and accrued expenses, respectively, in the accompanying Consolidated Balance Sheets. Pursuant to the vesting provisions of the Millennium Option Plan, the Company recorded a non-cash compensation (credit) expense of $(1,211,000), $(2,370,000), and $3,809,000 for the years ended December 31, 2002, 2001, and 2000, respectively, which is included in selling, general and administrative expenses in the accompanying Consolidated Statement of Operations. 3. Investments, marketable securities and notes receivable (Continued) Information relating to the Company's investment in Millennium is as follows at December 31, 2002 and 2001 (in thousands): - ---------------------------------------------------------------------------- 2002 2001 - ---------------------------------------------------------------------------- Number of shares 2,325 3,703 Available-for-sale equity securities, at market $5,552 $19,341 - ---------------------------------------------------------------------------- (b) Interferon Sciences, Inc. ISI is a biopharmaceutical company in which the Company owns 181,201 shares at December 31, 2002 and 2001 with a market value of $9,000 and $8,000, respectively. In an agreement dated March 25, 1999, the Company agreed to lend ISI $500,000 (the "ISI Debt"). In return, ISI granted the Company (i) a first mortgage on ISI's real estate, (ii) a two-year option to purchase ISI's real estate, provided that ISI has terminated its operations and certain other specified ISI debt has been repaid, and (iii) a two-year right of first refusal in the event ISI desires to sell its real estate. ISI issued the Company 500,000 shares of ISI common stock and a five-year warrant to purchase 500,000 shares of ISI common stock at a price of $1 per share as a loan origination fee. Pursuant to the agreement, as amended, ISI issued a Note due March 15, 2002, to the Company for $500,000 of which approximately $300,000 and $400,000 is outstanding as of December 31, 2002 and 2001, respectively which is included in accounts and other receivables on the Consolidated Balance Sheets. Interest accrues at the rate of 6% per annum. In March 2003, the Company and ISI entered into an agreement pursuant to which the Company agreed until May 31, 2003, to forbear from exercising its rights as a result of defaults by ISI under the terms of the ISI Debt. In exchange for such forbearance, the Company agreed to receive shares of common stock of Hemispherx Biopharma Inc. ("HEB") with a market value of $425,000 (the "Guaranteed Shares") in full settlement of all of ISI's obligations, however, the Company retains all of its rights in the collateral under the ISI Debt until its receipt of the Guaranteed Shares. The Agreement obligates HEB to register the Guaranteed Shares, sets periodic limits on the amount of shares the Company may sell and requires HEB to pay the Company an amount equal to the product received by multiplying (i) the number of Guaranteed Shares unsold on September 11, 2005 and (ii) $1.59. 4. Property, plant and equipment Property, plant and equipment consists of the following (in thousands): December 31, 2002 2001 - ------------------------------------------------------------------------ Land $ 915 $ 915 Buildings and improvements 3,525 3,515 Machinery and equipment 11,884 12,849 Furniture and fixtures 14,929 16,111 Leasehold improvements 2,649 4,147 - ------------------------------------------------------------------------ 33,902 37,537 Accumulated depreciation and amortization (25,603) (28,819) - ------------------------------------------------------------------------ $ 8,299 $ 8,718 - ------------------------------------------------------------------------ As of December 31, 2002, the Company wrote off certain fully depreciated assets as a result of its General Physics and Corporate office relocations of approximately $5,100,000. 5. Short-term borrowings The Company and certain of its wholly owned subsidiaries entered into an Amended and Restated secured $40 million Revolving Credit (the "Amended Agreement") with various banks on December 14, 2001 which amended in its entirety the Company's former credit facility discussed below. The Amended Agreement reduced the commitment pursuant to the revolving facility to $40 million (subject to borrowing base limitations specified in the Amended Agreement). The commitment has been reduced to $35 million as a result of asset sales by the Company, but the Amended Agreement provides that the commitment cannot be reduced below $35 million as a result of any additional assets sales. The current amount outstanding under the revolving credit agreement is $22,058,000. 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 March 31, 2003, there is $4,600,000 available under the facility, as amended. 5. Short-term borrowings (Continued) The Company was not in compliance with certain financial covenants of its Amended Agreement for the year ended December 31, 2002. The Company entered into a First Amendment and Limited Waiver to the Amended Agreement with various banks as of March 31, 2003 (the "First Amendment"). The First Amendment provided for a waiver of certain financial covenants in the Amended Agreement and provided certain revised financial covenants for periods beginning after December 31, 2002. The First Amendment further reduced the commitment under the Amended Agreement to $30 million from $35 million and limited the availability of borrowings under the revolving loan commitment to $27 million for the period commencing March 31, 2003 through May 31, 2003 (the "First Test Period") and $26 million for the period commencing on June 1, 2003 and ending on delivery of the Company's compliance certificate for the quarter ending September 30, 2003 (the "Second Test Period"; and together with the First Test Period, the "Test Periods"). The Company does not anticipate needing to borrow in excess of $27 million or $26 million, respectively during the Test Periods. The First Amendment provides that the available revolving commitment amount may be increased to $30 million after the Second Test Period, provided that no default or event of default has occurred and is continuing under the Amended Agreement, as amended by the First Amendment. The First Amendment also added a new financial covenant with respect to minimum consolidated EBITDA effective March 31, 2003. The Company is currently negotiating with certain other lenders with respect to obtaining a new facility for its future financing requirements. The Company and General Physics Canada Ltd. (GP Canada), a wholly-owned subsidiary of General Physics, had previously entered into a credit agreement, dated as of June 15, 1998, 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 was payable in quarterly installments of $187,500 commencing on October 1, 1998 with a final payment of $11,250,000 due on June 15, 2003. All amounts outstanding under the term loan were repaid in 2001 in connection with the Company's Amended Agreement. 6. Accounts payable and accrued expenses Accounts payable and accrued expenses are comprised of the following (in thousands): December 31, 2002 2001 - ----------------------------------------------------------------------------- Accounts payable $6,324 $ 6,661 Payroll and related costs 4,617 2,340 Restructuring reserve 221 1,162 Other 6,390 6,926 - ----------------------------------------------------------------------------- $ 17,552 $ 17,089 - ----------------------------------------------------------------------------- 7. Long-term debt Long-term debt is comprised of the following (in thousands): December 31, 2002 2001 - ---------------------------------------------------------------------------- 6% Convertible Exchangeable Notes (a) $2,640 $2,640 Senior Subordinated Debentures (b) 558 641 MXL Pennsylvania Mortgage (c) 1,505 1,605 MXL Illinois Mortgage (d) 1,212 1,237 Other (e) 997 740 - ---------------------------------------------------------------------------- $6,912 $6,863 Less current maturities (3,610) (637) - ---------------------------------------------------------------------------- $3,302 $6,226 - ---------------------------------------------------------------------------- 7. Long-term debt (Continued) (a) In July 2000, the Company in a private placement transaction with two institutional investors, received $2,640,000 for 6% Convertible Exchangeable Notes due June 30, 2003 (the "HMS Notes"). The HMS Notes, at the option of the holders, may be exchanged for 19.9% of the outstanding capital stock of HMS on a fully diluted basis, as defined in the HMS Notes, 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 HMS Notes. The holders of the HMS Notes can convert or exchange at any time prior to June 30, 2003. The HMS Notes are subordinated to borrowings under the Amended Agreement. (b) In 1994, GP issued $15 million of 6% Senior Subordinated Debentures of which the Company owned approximately 92.7%. The Debentures are subordinated to borrowings under the Amended Agreement. During the fourth quarter of 2000, the Company converted its portion of GP's Senior Subordinated Debentures to stockholder's equity of GP. At December 31, 2002, the remaining carrying value of the Debentures outstanding was $558,000 and are repayable through 2004. (c) On March 8, 2001, MXL entered into a loan in the amount of $1,680,000, secured by a mortgage covering the real estate and fixtures on its property in Pennsylvania. 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, when the remaining amount outstanding of approximately $680,000 is due in full. The loan is guaranteed by the Company. The proceeds of the loan were used to repay a portion of the Company's short-term borrowings pursuant to the Amended Agreement described in Note 5. (d) 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 in the amount of $11,046 with interest at a fixed rate of 8.75% per annum, and matures on June 26, 2006, when the remaining amount outstanding of approximately $1,100,000 is due in full. The loan is guaranteed by the Company. The proceeds of the loan were used to repay a portion of the Company's term loan pursuant to the Amended Agreement described in Note 5. (e) Represents primarily capital lease obligations for certain equipment. 7. Long-term debt (Continued) Aggregate annual maturities of long-term debt at December 31, 2002 are as follows (in thousands): 2003 $ 3,610 2004 802 2005 174 2006 1,221 2007 100 Thereafter 1,005 8. Employee benefit plans GP (including the Company's employees) maintains a Retirement Savings Plan (the Plan) for employees who have completed ninety days of service with GP. The Plan permits pre-tax contributions to the Plan by participants pursuant to Section 401(k) of the Internal Revenue Code of 1% to 14% of base compensation. GP matches participants' contributions up to a specific percentage of the first 7% of base compensation contributed for employees who have completed one year of service with GP and may make additional matching contributions at its discretion. In 2001, 2000 and 1999 the Company did not make any discretionary matching contributions. The Company matches participants' contributions in shares of the Company's Common Stock up to 57% of monthly employee salary deferral contributions. In 2002, 2001, and 2000 the Company contributed 270,000 shares, 291,185 shares and 308,000 shares of the Company's common stock directly to the Plan with a value of approximately $1,058,000, $1,151,000 and $1,340,000, respectively. 9. Income taxes The components of income tax expense (benefit) are as follows (in thousands): Years ended December 31, 2002 2001 2000 - -------------------------------------------------------------------------------- Current State and local 370 $ 537 $ 717 Foreign 361 186 198 - ------------------------------------------------------------------------------ Total current 731 723 915 - ------------------------------------------------------------------------------ Deferred Federal (1,420) 1,392 (9,322) State and local (130) 400 (459) Foreign (7) - ------------------------------------------------------------------------------- Total deferred (1,550) 1,792 (9,788) - ------------------------------------------------------------------------------- Total income tax expense (benefit) $ (819) $ 2,515 $ (8,873) - ------------------------------------------------------------------------------- 9. Income taxes (Continued) The deferred expense (benefit) excludes activity in the net deferred tax assets relating to tax on appreciation (depreciation) in available-for-sale securities, which is recorded directly to stockholders' equity. The difference between the expense (benefit) for income taxes computed at the statutory rate and the reported amount of tax expense (benefit) is as follows:
- ----------------------------------------------------------------------------------------------------------- December 31, 2002 2001 2000 - ----------------------------------------------------------------------------------------------------------- Federal income tax rate (35.0%) 35.0% (35.0%) Foreign, State and local taxes net of Federal benefit 6.8 32.6 1.0 Items not deductible - primarily meals and entertainment 3.0 23.8 2.0 Valuation allowance adjustment (6.9) (13.7) Net losses from foreign operations for which no tax benefit has been provided 1.7 41.2 18.9 Tax effect recorded in stockholders' equity for sale of available for sale securities 9.2 32.0 Other 0.8 2.5 0.9 - ----------------------------------------------------------------------------------------------------------- Effective tax rate expense (benefit) (13.5%) 160.2% (25.9%) - -----------------------------------------------------------------------------------------------------------
In 2002, the Company recorded an income tax benefit of $819,000. The current income tax provision of $731,000 represents estimated state taxes of $370,000 and foreign taxes of $361,000. The deferred income tax benefit of $1,550,000 primarily represents a benefit for the future utilization of the Company's domestic net operating losses. In 2001, the Company recorded income tax expense of $2,515,000. The current income tax provision of $723,000 represents estimated state taxes of $537,000 and foreign taxes of $186,000. In 2000, the deferred income tax benefit of $9,788,000 primarily represents a benefit for the future utilization of the Company's domestic net operating losses. The Company had an effective tax rate of 14% for the year ended December 31, 2002. This rate was primarily due to certain nondeductible items, net losses from foreign operations for which no tax benefit has been provided, and the tax treatment for financial statement purposes of the sale by the Company in 2002 of certain shares of available-for-sale securities accounted for pursuant to SFAS No.115 "Accounting for Certain Investments in Debt and Equity Securities." 9. Income taxes (Continued) The Company had an effective tax rate of 160% for the year ended December 31, 2001. This rate was primarily due to the tax treatment for financial statement purposes of the sale by the Company in 2001 of certain shares of available-for-sale securities accounted for pursuant to SFAS No.115. The Company had an effective tax rate of 26% for the year ended December 31, 2000, which was primarily due to net losses from foreign operations for which no tax benefit has been provided. As of December 31, 2002, the Company has approximately $25,063,000 of Federal net operating loss carryforwards. These carryforwards expire in the years 2005 through 2020. Foreign net operating losses at December 31, 2002 were approximately $34,835,000. In addition, the Company has approximately $987,000 of available credit carryovers of which approximately $15,000 expires in 2003, and approximately $972,000 may be carried over indefinitely. The tax effects of temporary differences between the financial reporting and tax bases of assets and liabilities that are included in the net deferred tax (liability) asset are summarized as follows (in thousands): December 31, 2002 2001 Deferred tax assets: Allowance for doubtful accounts $ 337 $ 208 Accrued liabilities 883 1,071 Net Federal and Foreign operating loss carryforwards 20,221 18,425 Tax credit carryforwards 987 1,492 Restructuring reserves 484 1,032 - ----------------------------------------------------------------------------- Deferred tax assets 22,912 22,228 - ----------------------------------------------------------------------------- Deferred tax liabilities: Property and equipment, principally due to difference in depreciation and amortization 1,049 249 Investment in partially owned companies 556 6,825 - ----------------------------------------------------------------------------- Deferred tax liabilities 1,605 7,074 - ----------------------------------------------------------------------------- Net deferred tax assets 21,307 15,154 Less valuation allowance (10,461) (10,865) - ----------------------------------------------------------------------------- Net deferred tax (liability) asset $10,846 $4,289 - ----------------------------------------------------------------------------- In 2002, the valuation allowance decreased by $404,000 attributable primarily to the expiration of tax credit carryforwards. In 2001, the valuation allowance increased by $533,000, and was attributable to foreign net operating losses for which no tax benefit has been provided. 3 9. Income taxes (Continued) In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of the deferred tax assets is dependent upon the generation of future taxable income during the periods in which temporary differences are deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based upon these factors, management believes it is more likely than not that the Company will realize the benefits of deferred tax assets, net of the valuation allowance. The valuation allowance primarily relates to foreign net operating loss carryforwards for which the Company does not believe the benefits will be realized. As of December 31, 2002, the Company has recorded a net deferred tax asset of $10,846,000. 10. Comprehensive income (loss) The following are the components of comprehensive income (loss) (in thousands): Year ended December 31,
----------------------------------------------- 2002 2001 2000 ----------- --------- --------- Net loss $ (5,228) $ (945) $(25,392) Other comprehensive (loss) income, before tax: Net unrealized gain (loss) on available-for-sale-securities (12,130) (30,802) 45,667 Foreign currency translation adjustment (492) 24 78 ---------- ------------ ----------- Comprehensive (loss) income before tax (11,622) (31,723) 20,353 Income tax benefit (expense) related to items of other comprehensive income (loss) 4,718 11,905 (17,691) --------- -------- -------- Comprehensive income (loss), net of tax $(13,132) $(19,818) $ 2,662 ========= ======== ======== The components of accumulated other comprehensive income (loss) are as follows: December 31, 2002 2001 2000 - ---------------------------------------------------------------------------------------------------------- Net unrealized gain (loss) on available-for-sale-securities $ 2,680 $ 14,810 $ 45,612 Foreign currency translation adjustment (1,149) (657) (681) ------- --------- --------- Accumulated other comprehensive income (loss) before tax 1,531 14,153 44,931 Accumulated income tax expense related to items of other comprehensive loss (1,071) (5,789) (17,694) ---------- --------- --------- Accumulated other comprehensive income (loss), net of tax $ 460 $ 8,364 $ 27,237 ====== ======== ========
11. Common Stock, stock options and warrants (a) Under the Company's non-qualified stock option plan, employees and certain other parties may be granted options to purchase shares of common stock. Although the Plan permits options to be granted at a price not less than 85% of the fair market value, the Plan options primarily are granted at the fair market value of the common stock at the date of the grant and are exercisable over periods not exceeding ten years from the date of grant. Shares of common stock may also be reserved for issuance pursuant to other agreements. Changes in options and warrants outstanding during 2000, 2001 and 2002, and options and warrants exercisable and shares reserved for issuance at December 31, 2002, 2001, and 2000 are as follows:
Options and warrants Price Range Number Weighted-Average outstanding per share of shares Exercise Price - ------------------------------------------------------------------------------------------------------------------- December 31, 1999 $4.59 - 24.00 2,806,015 $9.21 - ------------------------------------------------------------------------------------------------------------------- Granted 3.375 - 6.00 666,133 4.66 Exercised 3.375 - (69,200) 3.38 Terminated 5.375 - 17.25 (897,600) 10.46 - ------------------------------------------------------------------------------------------------------------------- December 31, 2000 3.375 - 24.00 2,505,348 7.74 - ------------------------------------------------------------------------------------------------------------------- Granted 3.00 - 4.61 452,000 4.47 Terminated 4.61 - 24.00 (166,683) 7.85 - ------------------------------------------------------------------------------------------------------------------- December 31, 2001 3.00 - 15.375 2,790,665 7.37 - ------------------------------------------------------------------------------------------------------------------- Granted 3.60 - 4.75 845,800 4.13 Exercised 3.60 - 4.61 (1,233) 4.08 Terminated 3.60 - 14.625 (722,235) 7.87 - ------------------------------------------------------------------------------------------------------------------- December 31, 2002 3.00 15.375 2,912,997 6.57 - ------------------------------------------------------------------------------------------------------------------- Options and warrants exercisable December 31, 2000 4.59 - 24.00 1,464,106 7.64 - ------------------------------------------------------------------------------------------------------------------- December 31, 2001 3.00 - 15.375 2,058,096 7.12 - ------------------------------------------------------------------------------------------------------------------- December 31, 2002 3.00 - 15.375 2,096,199 6.39 - ------------------------------------------------------------------------------------------------------------------- Shares reserved for issuance December 31, 2000 3,816,571 - ------------------------------------------------------------------------------------------------------------------- December 31, 2001 3,938,303 - ------------------------------------------------------------------------------------------------------------------- December 31, 2002 3,937,070 - -------------------------------------------------------------------------------------------------------------------
At December 31, 2002, the weighted average remaining contractual life of all outstanding options was 4.2 years. 11. Common Stock, stock options and warrants (Continued) The following table summarizes information about the Plan's options outstanding at December 31, 2002:
Weighted Range Number Average Weighted Of Outstanding Years Average Exercise Prices Remaining Exercise Price - ------------------------------------------------------------------------------------------------------------------- $3.00 - $ 7.75 1,885,497 5.2 $5.30 $8.00 - $10.41 545,000 1.6 $8.14 $11.15 - $15.375 182,500 2.0 $14.55 - ------------------------------------------------------------------------------------------------------------------- $ 3.00 - $15.375 2,612,997 4.2 $ 6.76 - -------------------------------------------------------------------------------------------------------------------
The following table summarizes the Class B Common Stock options as follows: Options Price Range Number Weighted-Average outstanding per share of shares Exercise Price - ---------------------------------------------------------------------------- December 31, 2000 8.69 350,000 8.69 - ---------------------------------------------------------------------------- Terminated 8.69 (350,000) 8.69 - ---------------------------------------------------------------------------- December 31, 2001 -0- - ---------------------------------------------------------------------------- December 31, 2002 -0- - ---------------------------------------------------------------------------- Options exercisable December 31, 2000 8.69 350,000 8.69 - ---------------------------------------------------------------------------- December 31, 2001 -0- - ---------------------------------------------------------------------------- December 31, 2002 -0- - ---------------------------------------------------------------------------- The holders of Common Stock are entitled to one vote per share and the holders of Class B Common Stock are entitled to ten votes per share on all matters without distinction between classes, except when approval of a majority of each class is required by statute. The Class B Common Stock is convertible at any time, at the option of the holders of such stock, into shares of common stock on a share-for-share basis. At December 31, 2002, 2001, and 2000, shares reserved for issuance of common stock were primarily related to options and warrants and the conversion of long-term debt. The Company reserved 950,000 shares of its Common Stock for issuance upon conversion of Class B Common Stock at December 31, 2000. The Company reserved an additional 300,000 shares for a private placement transaction (see Note 11(b)) bringing the total to 1,250,000 shares reserved for issuance upon conversion of Class B Common Stock at December 31, 2002 and 2001. At December 31, 2002, 2001, and 2000, options outstanding included options for 353,623, 239,498 and 239,498 shares, respectively, for certain executive officers. 11. Common Stock, stock options and warrants (Continued) (b) Pursuant to an agreement dated as of October 19, 2001 (the "Stock Purchase Agreement"), the Company sold to Bedford Oak Partners, LP (the "Bedford Oak") in a private placement transaction, 300,000 shares of Class B Common Stock (the "Bedford Class B Shares") for $900,000. Upon the disposition of any of the Bedford Class B Shares (other than to an affiliate of Bedford Oak who agrees to be bound by the provisions of the Stock Purchase Agreement) or at the request of the Board of Directors of the Company, Bedford Oak is required to exercise the right to convert all of the Bedford Class B Shares then owned by Bedford Oak into an equal number of shares of common stock of the Company (the "Bedford Underlying Shares"). The Company was required to file a registration statement to register the resale of the Bedford Underlying Shares by Bedford Oak, which registration statement was declared effective as of August 13, 2002. On any date prior to October 19, 2003 during which Bedford Oak was not able to resell the Bedford Underlying Shares pursuant to the registration statement, Bedford Oak had the right to require the Company to purchase all, but not less than all, of the Shares and the Bedford Underlying Shares then held by Bedford Oak for a purchase price as specified in the Stock Purchase Agreement. The put option obligation expired upon the effectiveness of the registration statement on August 13, 2002 covering the Bedford Underlying Shares. At December 31, 2001, the Company had a put option obligation of $240,000 relating to the above-described Bedford transaction, however, the put option obligation expired in August 2002. This amount had been recorded in additional paid in capital in the accompanying Consolidated Balance Sheet and was deemed to be a dividend for purposes of the basic and diluted loss per share calculation. Pursuant to an agreement dated May 3, 2002, the Company agreed to sell to Bedford Oak in a private placement transaction 1,200,000 shares of Common Stock (the "Bedford Common Shares") of the Company for an aggregate purchase price of $4,200,000. Harvey Eisen, the managing member of Bedford Oak Advisors, LLC, the investment manager of Bedford Oak, was elected a director of the Company in July 2002. Pursuant to an agreement dated May 3, 2002, the Company sold 100,000 shares of Common Stock for $350,000 to Marshall Geller (the "Geller Shares"), a director of the Company, in a private placement transaction. Pursuant to an agreement dated May 3, 2002 ( the "EGI Agreement"), 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 Common Stock (the "EGI Class B Shares") for $1,260,000. Mark Radzik, a designee of EGI, was elected a director of the Company in July 2002. 11. Common Stock, stock options and warrants (Continued) 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 convert all of the 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. 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. On August 13, 2002, a registration statement covering the resale of the Bedford Underlying Shares, the Bedford Common Shares, the EGI Common Shares, the EGI Underlying Shares and the Geller Shares was declared effective by the SEC. (c) In June 2001, the Company entered into an agreement with a financial consulting firm to provide certain services for which the Company, in addition to cash payments, agreed to issue warrants to purchase 300,000 shares of the Company's common stock at an exercise price of $4.60 per share. In connection with the issuance of these warrants, the Company recorded an expense of $750,000 in 2001 for these warrants which is included in selling, general and administrative expense in the Consolidated Statement of Operations. (d) On February 11, 2000, an affiliate of Andersen, Weinroth & Co., L.P. ("Andersen Weinroth") purchased 200,000 shares of Class B Common Stock for $1,200,000. In addition, a general partner of Andersen Weinroth joined the Board of Directors of the Company. On October 11, 2001, this general partner resigned from the Board of Directors of the Company and pursuant to an agreement dated as of February 11, 2000, on October 11, 2001, this general partner converted the 200,000 shares of Class B Common Stock into an equal number of shares of Common Stock. 12. Business segments The operations of the Company currently consist of the following three business segments, by which the Company is managed. The Company's principal operating subsidiary is GP. GP operates in two business segments. The Manufacturing & Process Segment 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 Segment provides IT training programs and solutions, including Enterprise Solutions and comprehensive career training and transition programs. The Optical Plastics Segment, which consists of MXL, manufactures coated and molded plastic products. Effective January 1, 2002, HMS no longer exists as a business segment (see Note 3). Information presented for Corporate & Other includes financial information for the operations and assets of the HMS subsidiary as of and for the years ended December 31, 2001 and 2000 prior to its treatment as an equity investment. The management of the Company does not allocate the following items by segment: Investment and other income, interest expense, selling, general and administrative expenses, depreciation and amortization expense, income tax expense, significant non-cash items and long-lived assets. Inter-segment sales are not significant. 12. Business segments (Continued) The following tables set forth the sales and operating results attributable to each line of business and includes a reconciliation of the segments sales to consolidated sales and operating results to consolidated income (loss) before income taxes (in thousands):
Years ended December 31, 2002 2001 2000 - -------------------------------------------------------------------------------------------- Sales Manufacturing & Process $134,255 $164,361 $161,859 Information Technology 7,982 11,061 24,593 Optical Plastics 9,996 11,184 10,998 Corporate & Other 5 17 - ------------------------------------------------------------------------------------------ $152,233 $186,611 $197,467 - ------------------------------------------------------------------------------------------ Operating results Manufacturing & Process $1,712 $ 8,679 $ 10,870 Information Technology (182) 1,596 (7,331) Optical Plastics 429 1,192 1,272 Corporate & Other (5,506) (3,285) (2,131) - ------------------------------------------------------------------------------------------- Total operating profit (3,547) 8,182 2,680 Interest expense (2,770) (4,733) (5,616) Corporate general and administrative expenses, amortization of goodwill, and Investment and other income, net 270 (1,879) (31,329) - ------------------------------------------------------------------------------------------- (Loss) income from operations before income taxes $ (6,047) $ 1,570 $ (34,265) - -------------------------------------------------------------------------------------------
Operating profits represent sales less operating expenses. In computing operating profits, none of the following items have been added or deducted: general corporate expenses at the holding company level, restructuring charges, foreign currency transaction gains and losses, investment income, loss on investments, loss on sale of assets, amortization of goodwill and interest expense. General corporate expenses at the holding company level, which are primarily salaries, occupancy costs, professional fees and costs associated with being a publicly traded company, totaled approximately $4,882,000 (net of a non-cash credit to compensation expense of $1,211,000 relating to a deferred compensation plan), $3,033,000 (net of a non-cash credit to compensation expense of $2,370,000) and $7,632,000 (including a non cash charge to compensation expense of $3,809,000) for the years ended December 31, 2002, 2001 and 2000, respectively. For the years ended December 31, 2002, 2001 and 2000, sales to the United States government and its agencies represented approximately 32%, 29% and 24%, respectively, of sales and are included in the Manufacturing & Process and Information Technology Segments. 12. Business segments (Continued) Additional information relating to the Company's business segments is as follows (in thousands): December 31, 2002 2001 2000 - ------------------------------------------------------------------------------- Identifiable assets Manufacturing & Process $ 61,896 $ 67,156 $ 78,761 Information Technology 8,978 8,787 9,283 Optical Plastics 9,818 9,929 9,807 Corporate & Other 64,213 74,952 114,727 - ------------------------------------------------------------------------------- 144,905 $160,824 $212,578 - ------------------------------------------------------------------------------- Years ended December 31, 2002 2001 2000 - -------------------------------------------------------------------------------- Additions to property, plant, and equipment, net Manufacturing & Process $1,523 $ 557 $ 530 Information Technology 38 58 Optical Plastics 368 693 255 Corporate & Other 25 163 197 - ------------------------------------------------------------------------------- $ 1,916 $ 1,451 $ 1,040 - ------------------------------------------------------------------------------- Years ended December 31, 2002 2001 2000 - -------------------------------------------------------------------------------- Depreciation and Amortization Manufacturing & Process $1,397 $ 1,322 $1,432 Information Technology 18 231 835 Optical Plastics 510 474 489 Corporate & Other 216 81 115 - ------------------------------------------------------------------------------- $2,141 $ 2,108 $2,871 - ------------------------------------------------------------------------------- Identifiable assets by industry segment are those assets that are used in the Company's operations in each segment. Corporate and other assets are principally cash and cash equivalents, marketable securities and intangible assets, including goodwill. Depreciation and amortization excludes amortization of goodwill. 12. 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): Year ended December 31, 2002 2001 2000 ---- ---- ---- United States $139,831 $173,008 $174,462 Canada 1,421 2,756 7,181 United Kingdom 7,258 6,962 11,028 Latin America and other 3,723 3,885 4,796 -------- ---------- ---------- $152,233 $186,611 $197,467 -------- -------- -------- Information about the Company's identifiable assets in different geographic regions is as follows (in thousands): December 31, 2002 2001 2000 ---- ---- ---- United States $137,303 $152,627 $205,797 Canada 3,076 3,653 3,371 United Kingdom 3,301 2,821 1,928 Latin America and other 1,225 1,723 1,482 ----- ---------- --------- $144,905 $160,824 $212,578 -------- -------- -------- All corporate intangible assets of the Company, as well as other corporate assets, are assumed to be in the United States. 13. Fair value of financial instruments The carrying value of financial instruments including cash and cash equivalents, marketable securities, accounts receivable, accounts payable and short-term borrowings approximate estimated market values because of short maturities and interest rates that approximate current rates. The carrying values of investments, other than those accounted for on the equity basis, approximate fair values based upon quoted market prices. The investments for which there is no quoted market price are not significant. 13. Fair value of financial instruments (Continued) The estimated fair value for the Company's debt is as follows (in thousands): December 31, 2002 December 31, 2001 Carrying Estimated Carrying Estimated amount fair value amount fair value Long term debt 6,912 6,912 6,863 6,863 Limitations. Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. 14. Accounting for certain investments in equity securities The gross unrealized holding gains (losses) and fair value for available-for-sale securities (primarily Millennium Cell) were as follows (in thousands):
Gross Unrealized Holding Cost Gains Losses Fair Value Available-for-sale equity securities: December 31, 2002 $ 2,917 $ 2,680 $ - $ 5,597 - ------------------------------------------------------------------------------------------------- December 31, 2001 $ 4,633 $14,810 $ - $ 19,443 - ------------------------------------------------------------------------------------------------- December 31, 2000 $ 6,136 45,619 $ (7) $ 51,748 - -------------------------------------------------------------------------------------------------
Differences between cost and market, net of taxes, of $1,609,000, $9,021,000, and $27,918,000 at December 31, 2002, 2001 and 2000, respectively, were credited to a separate component of stockholders' equity called accumulated other comprehensive income (loss). 15. Restructuring and other charges During 1999, the Company adopted restructuring plans, primarily related to its IT Segment. The Company took steps in order to change the focus of the IT Segment from open enrollment information technology training courses to project oriented work for corporations, which was consistent with the focus of GP's current business. In connection with the restructuring, the Company recorded a charge of $7,374,000 in 1999, of which $2,754,000 had been utilized through December 31, 1999. During 2000, the Company utilized $2,501,000 of the reserve and reversed $180,000. 15. Restructuring and other charges (Continued) During 2001, the Company utilized $663,000 of the reserve and reversed $202,000. As of December 31, 2001, $330,000 is included in accounts payable and accrued expenses and $744,000 is included in other non-current liabilities in the accompanying Consolidated Balance Sheet. During 2002, the Company utilized $528,000 of the reserve. As of December 31, 2002, $104,000 is included in accounts payable and accrued expenses and $442,000 is included in other non-current liabilities in the accompanying Consolidated Balance Sheet. The Company believed at the time the restructuring plan was adopted that the strategic initiatives and cost cutting moves taken in 1999 and the first quarter of 2000 would enable the IT Segment to return to profitability in the last six months of 2000. However, those plans were not successful, and the Company determined that it could no longer bring the open enrollment IT business to profitability. Additionally there had been further impairment to intangible and other assets. In July 2000, as a result of the continued operating losses incurred by the IT Segment, as well as the determination that revenues would not increase to profitable levels, the Company decided to close its open enrollment IT business in the third quarter of 2000. As a result, for the year ended December 31, 2000, the Company recorded asset impairment charges of $19,245,000 related to the IT Segment. The charges are comprised of a write-off of intangible assets of $16,663,000 as well as write-offs of property, plant and equipment and other assets relating to the closed offices, totaling $2,582,000. In addition, the Company recorded an $8,630,000 restructuring charge, net of a $180,000 reversal of the 1999 restructuring plan, in 2000. Of this charge, $3,884,000 had been utilized through December 31, 2000. During 2001, the Company utilized $2,302,000 of the reserve and reversed $972,000 as a result of favorable settlements on certain leases and contractual obligations. As of December 31, 2001 $832,000 is included in accounts payable and accrued expenses and $820,000 is included in other non-current liabilities in the Consolidated Balance Sheet. During 2002, the Company utilized $689,000 of the reserve and reversed $368,000. As of December 2002, $117,000 is included in accounts payable and accrued expenses and $478,000 is included in other non-current liabilities in the accompanying Consolidated Balance Sheet. 15. Restructuring and other charges (Continued The components of the 2000 restructuring charge are as follows (in thousands):
Severance Lease Other facility and related and related Contractual related benefits obligations obligations costs Total - -------------------------------------------------------------------------------------------------------------------- Restructuring charges during 2000 $ 1,825 $ 5,185 $ 1,590 $ 210 $ 8,810 Utilization 1,683 1,826 165 210 3,884 - -------------------------------------------------------------------------------------------------------------------- Balance December 31, 2000 $ 142 $ 3,359 $ 1,425 $ - $ 4,926 - -------------------------------------------------------------------------------------------------------------------- Utilization 142 1,484 676 2,302 Reversal of Restructuring charges during 2001 575 397 972 - -------------------------------------------------------------------------------------------------------------------- Balance December 31, 2001 $ - $ 1,300 $ 352 $ - $ 1,652 - -------------------------------------------------------------------------------------------------------------------- Utilization 337 352 689 Reversal of Restructuring charges during 2002 368 368 - -------------------------------------------------------------------------------------------------------------------- Balance December 31, 2002 $ - $595 $ - $ - $ 595 - --------------------------------------------------------------------------------------------------------------------
The components of the 1999 restructuring charge are as follows (in thousands):
Severance Lease Other facility and related and related related benefits obligations costs Total - --------------------------------------------------------------------------------------------------------- Balance December 31, 1999 $ 289 $ 4,206 $ 125 $ 4,620 Utilization 184 2,264 53 2,501 Reversal of restructuring charges during 2000 105 3 72 180 - --------------------------------------------------------------------------------------------------------- Balance December 31, 2000 $ - $ 1,939 $ - $ 1,939 - --------------------------------------------------------------------------------------------------------- Utilization 663 663 Reversal of Restructuring charges during 2001 202 202 - --------------------------------------------------------------------------------------------------------- Balance December 31, 2001 $ - $ 1,074 $ - $ 1,074 - --------------------------------------------------------------------------------------------------------- Utilization 528 528 Balance December 31, 2002 $ - $ 546 $ - $ 546 - ---------------------------------------------------------------------------------------------------------
Lease and related obligations are presented at their present value, net of assumed sublets. 15. Restructuring and other charges (Continued) Effective September 4, 2002, John C. McAuliffe resigned as President of GP. Mr. McAuliffe and GP entered into a Separation Agreement pursuant to which Mr. McAuliffe will be a consultant to GP for a six-month period. In consideration for such services, GP agreed to pay Mr. McAuliffe the sum of $350,000, $300,000 in equal installments over the course of the consultancy period and $50,000 in September 2005. In addition, GP agreed to pay Mr. McAuliffe severance of $1,200,000 payable in equal installments on the following dates (i) September 2002, (ii) March 2003, and (iii) January 2, 2004. The Company recorded an expense of approximately $1,440,000, including $125,000 of related legal fees, which is recorded in selling, general and administrative expense in the Consolidated Statements of Operations for the year ended December 31, 2002. 16. Related party transactions In 2002, the Company and Redstorm Scientific, Inc. ("RSS") entered into an agreement pursuant to which the Company agreed to provide general business and administrative support to RSS. RSS is a privately held computational drug design company focused on utilizing bio-informatics and computer aided molecular design to assist pharmaceutical and biotechnology companies. The Company performed and completed all necessary services for RSS during the third quarter of 2002. In consideration for such services, RSS agreed to grant the Company a five-year option to purchase shares of RSS common stock. The Company also has an option to purchase additional equity in RSS upon the occurrence of certain events. Michael Feldman is the Chief Executive Officer of RSS and owns approximately 25.5% of the outstanding common stock of RSS. Michael Feldman is the son of Jerome Feldman, Chief Executive Officer of the Company. Jerome Feldman owns less than 1% of the outstanding common stock of RSS. In addition, Roald Hoffmann, a director of the Company, is a director of RSS and has options to purchase shares of RSS common stock. In 2000, the Company made loans to Jerome Feldman totaling approximately $1,278,000 to purchase an aggregate of 150,000 shares of Class B Common Stock. At December 31, 2002 and 2001, the Company had total loans receivable from Mr. Feldman in the amount of approximately $4,095,000, the proceeds of which were used to purchase an aggregate of 537,500 shares of Class B Common Stock. Such loans bear interest at the prime rate of Fleet Bank and are secured by the purchased Class B Common Stock and certain other assets. All principal on the loans and accrued interest, totaling $1,075,000, $881,000 and $594,000 at December 31, 2002, 2001, and 2000, respectively, are due on May 31, 2007. 16. Related party transactions (Continued) The Compensation Committee approved an Incentive Compensation Agreement (the "Incentive Agreement") with Mr. Feldman on April 1, 2002. The Incentive Agreement provides that Mr. Feldman is eligible to receive from the Company up to five payments in an amount of $1 million each, based on the closing price of the Company's common stock sustaining increasing specified levels over periods of at least 10 consecutive trading days. In the event that the higher specified thresholds are attained prior to the lower specified thresholds being attained, the lower thresholds automatically become payable as well. To the extent there are any outstanding loans from the Company to Mr. Feldman at the time an incentive payment is payable, the Company will set off the payment of such incentive payment against the outstanding principal and interest under such loans. The Incentive Agreement will terminate on the earlier of (a) May 3, 2007 or (b) the date of termination of Mr. Feldman's employment with the Company (other than termination by (i) the Company in breach of Mr. Feldman's Employment Agreement or (ii) Mr. Feldman for Good Reason). In prior years, the Company made unsecured loans to Mr. Feldman in the amount of approximately $334,000, which unsecured loans primarily bear interest at the prime rate of Fleet Bank. For a description of certain transactions pursuant to which the Company received proceeds from the sale of Common Stock and Class B Common Stock to certain related parties, see Note 11. On May 16, 2001, the Company sold 200,000 shares of Millennium common stock at $8.50 per share and on September 28, 2001, the Company sold 300,000 shares of its Millennium common stock at $3.50 per share, to an affiliated entity of Liberty Wanger Asset Management L.P., a 5% stockholder of the Company. 17. Commitments and contingencies (a) The Company has various noncancellable leases for real property and machinery and equipment. Such leases expire at various dates with, in some cases, options to extend their terms. Lease commitments related to facilities closed as part of the restructuring (see Note 15) are not included below. Minimum rentals under long-term operating leases are as follows (in thousands): Real Machinery & property equipment Total - ---------------------------------------------------------------------------- 2003 $ 2,726 $ 894 $ 3,620 2004 1,708 464 2,172 2005 1,368 202 1,570 2006 1,097 105 1,202 2007 675 76 751 Thereafter 3,644 3,644 - ---------------------------------------------------------------------------- Total $11,218 $1,741 $12,959 - ---------------------------------------------------------------------------- Several of the leases contain provisions for rent escalation based primarily on increases in real estate taxes and operating costs incurred by the lessor. Rent expense was approximately $4,041,861, $5,349,547 and $9,565,038 for 2002, 2001 and 2000, respectively. (b) On March 23, 2000, the Company agreed to guarantee up to $1,800,000 of GSES's debt pursuant to GSES's credit facility. In consideration for such guarantee, the Company received warrants to purchase 150,000 shares of GSES common stock at an exercise price of $2.38 per share, which warrants expire on August 17, 2003. GSES's credit facility would have expired on March 23, 2003, however, this facility was extended until March 31, 2004. As part of such extension, the Company was required to extend its $1,800,000 limited guarantee. In consideration for the extension of the guarantee, the Company received 150,000 shares of GSES common stock. (c) The Company has guaranteed the leases for FSP's New Jersey and Connecticut warehouses, totaling approximately $1,589,000 per year through the first quarter of 2007, and an aggregate of $455,000 for certain equipment leases through April 2004. The Company's guarantee of such leases was in effect when FSP was a wholly-owned subsidiary of the Company. In 1998, the Company sold substantially all of the operating assets of Five Star Group to the predecessor company of FSP. As part of this transaction, the landlord of the New Jersey and Connecticut facilities and the lessor of the equipment did not consent to the release of the Company's guarantee. 17. Commitments and contingencies (Continued) (d) The Company is party to several lawsuits and claims incidental to its business, including a claim regarding an environmental matter. Management believes that the ultimate liability, if any, of these lawsuits and claims will not have a material adverse effect on the Company's consolidated financial statements. 18. Litigation On January 3, 2001, the Company commenced an action alleging that MCI Communications Corporation, Systemhouse, and Electronic Data Systems Corporation, as successor to Systemhouse, committed fraud in connection with the Company's 1998 acquisition of Learning Technologies from the defendants for $24.3 million. The Company seeks actual damages in the amount of $117.9 million plus interest, punitive damages in an amount to be determined at trial, and costs. 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 the 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 had not yet been completed, defendants made a motion for summary judgment, which was submitted in April 2002. The motion was denied by the court due to the MCI bankruptcy (described below), but with leave granted to the other defendants to renew. One of the defendants, MCI, filed for bankruptcy protection in July 2002. As a result, the action is stayed as to MCI. The Company and General Physics both filed timely Proofs of Claim in the United States Bankruptcy Court against MCI and WorldCom, Inc., et al. The other defendants made an application to the Court to stay the action until a later-commenced arbitration, alleging breach of the acquisition agreement, is concluded. The motion, which the Company has opposed, is under judicial consideration. The parties have engaged in non-binding mediation. At the latest mediation conference, EDS stated that it did not intend to file a motion for summary judgment following the close of discovery on February 28, 2003, and intended to try the case if a settlement was not reached. On March 14, 2003, the Company filed a Note of Issue which places the case on the trial calendar. The Company is not a party to any legal proceeding, the outcome of which is believed by management to have a reasonable likelihood of having a material adverse effect upon the financial condition of the Company. GP STRATEGIES CORPORATION AND SUBSIDIARIES GP Strategies Supplementary Data Corporation and Subsidiaries SELECTED QUARTERLY FINANCIAL DATA (unaudited) (in thousands, except per share data) three months ended
March 31, June 30, Sept. 30, Dec. 31, March 31, June 30, Sept. 30, Dec. 31, 2002 2002 2002 2002 2001 2001 2001 2001 - ----------------------------------------------------------------------------------------------------------------------------------- Sales $40,226 $39,242 $36,616 $36,149 $49,114 $50,347 $44,713 $42,437 Gross margin 5,448 4,905 3,426 3,686 6,359 6,974 4,683 4,561 Net income (loss) 205 63 $(3,887) $(1,609) (244) 734 847 (2,282) Net income (loss) per share: Basic .01 (.01) (.24) (.10) (.02) .06 .06 (.19) Diluted .01 (.01) (.24) (.10) (.02) .06 .06 (.19) - -----------------------------------------------------------------------------------------------------------------------------------
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information with respect to the directors and executive officers of the Company is incorporated herein by reference to the Company's definitive proxy statement pursuant to Regulation 14A, which proxy statement will be filed not later than 120 days after the end of the fiscal year covered by this Report. ITEM 11. EXECUTIVE COMPENSATION Information with respect to the Executive Compensation of the Company is incorporated herein by reference to the Company's definitive proxy statement pursuant to Regulation 14A, which proxy statement will be filed not later than 120 days after the end of the fiscal year covered by this Report. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS Information with respect to the security ownership of certain beneficial owners and management of the Company is incorporated herein by reference to the Company's definitive proxy statement pursuant to Regulation 14A, which proxy statement will be filed not later than 120 days after the end of the fiscal year covered by this Report. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information with respect to the certain relationships and related transactions of the Company is incorporated herein by reference to the Company's definitive proxy statement pursuant to Regulation 14A, which proxy statement will be filed not later than 120 days after the end of the fiscal year covered by this Report. ITEM 14. CONTROLS AND PROCEDURES Within the 90-day period prior to the filing of this report, the Company's management, including the Chief Executive Officer and the President and Chief Financial Officer, conducted an evaluation of the effectiveness of the design and operation of the Company's disclosure controls and procedures as defined in Exchange Act Rule 13a-14(c). Based on that evaluation, the Chief Executive Officer and the President and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective as of the date of that evaluation. There have been no significant changes in internal controls, or in factors that could significantly affect internal controls, subsequent to the date the Chief Executive Officer and the President and Chief Financial Officer completed their evaluation. PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K: (a)(1) The following financial statements are included in Part II, Item 8. Financial Statements and Supplementary Data: FINANCIAL STATEMENTS OF GP STRATEGIES CORPORATION AND SUBSIDIARIES: Page Independent Auditors' Report 37 Financial Statements: Consolidated Balance Sheets - December 31, 2002 and 2001 38 Consolidated Statements of Operations - Years ended December 31, 2002, 2001 and 2000 40 Consolidated Statements of Changes in Stockholders' Equity - Years ended December 31, 2002, 2001 and 2000 41 Consolidated Statements of Cash Flows - Years ended December 31, 2002, 2001 and 2000 42 Notes to Consolidated Financial Statements 44 (a)(2) Financial Statement Schedules Schedule II - Validation and Qualifying Accounts i Independent Auditors' Report on Schedule ii (a)(3) Exhibits * Consent of KPMG LLP, Independent Auditors (b) There were no reports filed on Form 8-K by the Registrant during the last quarter covered by this report. * Filed herewith SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. GP STRATEGIES CORPORATION Jerome I. Feldman Chief Executive Officer Dated: April 14, 2003 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Signatures Title Jerome I. Feldman Chief Executive Officer and Director (Principal Executive Officer) Scott N. Greenberg President and Chief Financial Officer and Director Ogden R. Reid Director Harvey P. Eisen Director Roald Hoffmann Director CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO RULE 13a-14 OF THE SECURITIES EXCHANGE ACT OF 1934 I, Jerome I. Feldman, Chief Executive Officer of GP Strategies Corporation, certify that: 1. I have reviewed this annual report on Form 10-K of GP Strategies Corporation; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: April 14, 2003 Jerome I. Feldman CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO RULE 13a-14 OF THE SECURITIES EXCHANGE ACT OF 1934 I, Scott N. Greenberg, President and Chief Financial Officer of GP Strategies Corporation, certify that: 1. I have reviewed this annual report on Form 10-K of GP Strategies Corporation; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: April 14, 2003 Scott N. Greenberg GP STRATEGIES CORPORATION AND SUBSIDIARIES SCHEDULE II Valuation and qualifying accounts (in thousands)
Additions Balance at Charged to Balance at Beginning Costs & End of of Period Expenses Deductions(a) Period Year ended December 31, 2002: Allowance for doubtful accounts (a) $ 529 $ 823 $ (498) $ 854 Year ended December 31, 2001: Allowance for doubtful accounts (b) $ 859 $ 102 $ (432) $ 529 Year ended December 31, 2000: Allowance for doubtful accounts (b) $ 2,905 $ 139 $(2,185) $ 859
(a) Write-off of uncollectible accounts, net of recoveries. (b) Deducted from related asset on Balance Sheet. INDEPENDENT AUDITORS' REPORT The Board of Directors and Stockholders GP Strategies Corporation Under date of April 11, 2003, we reported on the consolidated balance sheets of GP Strategies Corporation and subsidiaries as of December 31, 2002 and 2001, and the related consolidated statements of operations, changes in stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 2002, as contained in the Annual Report on Form 10-K for the year ended December 31, 2002. In connection with our audits of the aforementioned consolidated financial statements, we also have audited the related financial statement schedule as listed in Item 15. This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on this financial statement schedule based on our audits. In our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. KPMG LLP New York, New York April 11, 2003 The following is a list of all exhibits filed as part of this Report. SEQUENTIAL EXHIBIT NO. DOCUMENT PAGE NO. 3.1 Amendment to the Registrant's Restated Certificate of Incorporation filed on March 5, 1998. Incorporated herein by reference to Exhibit 3.1 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1998. 3.2 Amended and Restated By-Laws of the Registrant. Incorporated herein by reference to Exhibit 1 of the Registrant's Form 8-K filed on September 1, 1999. 10.1 1973 Non-Qualified Stock Option Plan of the Registrant, as amended on June 26, 2000. Incorporated herein by reference to Exhibit 10.1 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 2000. 10.2 GP Strategies' Millennium Cell, LLC Option Plan. Incorporated herein by reference to Exhibit 10.2 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 2001. 10.3 Employment Agreement, dated as of June 1, 1999, between the Registrant and Jerome I. Feldman. Incorporated herein by reference to Exhibit 10 of the Registrant's Form 10-Q for the second quarter ended June 30, 1999. 10.4 Incentive Compensation Agreement dated as of May 3, 2002 between the Registrant and Jerome I. Feldman.* 10.5 Employment Agreement, dated as of July 1, 1999, between the Registrant and Scott N. Greenberg. Incorpo-rated herein by reference to Exhibit 10.1 of the Registrant's Form 10-Q for the third quarter ended September 30, 1999 10.6 Separation Agreement, dated as of September 3, 2002, between the General Physics Corporation and John C. McAuliffe. Incorporated herein by reference to Exhibit 10 of the Registrant's Form 8-K filed on September 4, 2002. 10.7 Employment Agreement dated as of May 1, 2001 between the Registrant and Andrea D. Kantor. Incorporated herein by reference to Exhibit 10 of the Registrant's Form 10-Q for the second quarter ended June 30, 2001. 10.8 Termination of Merger Agreement, dated February 11, 2000, to the Agreement and Plan of Merger dated as of October 6, 1999, by and among the Registrant, VS&A Communica- tions Partners III, L.P., VS&A Communications Parallel Partners III, L.P., VS&A-GP, L.L.C. and VS&A-GP Acquisitions, Inc. Incorporated herein by reference to Exhibit 10 of the Registrants Form 8-K filed on February 14, 2000. 10.9 Registrant's 401(k) Savings Plan, dated January 29, 1992, effective March 1, 1992. Incorporated herein by reference to Exhibit 10.12 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1991. 10.10 Asset Purchase Agreement, dated as of June 3, 1998, by and among SHL Systemhouse Co., MCI Systemhouse Corp., SHL Computer Innovations Inc., SHL Technology Solutions Limited and General Physics Corporation. Incorporated herein by reference to Exhibit 10.1 of the Registrant's Form 8-K dated June 29, 1998. 10.11 Preferred Provider Agreement, dated as of June 3, 1998, by and among SHL Systemhouse Co., MCI Systemhouse Corp., SHL Computer Innovations Inc., SHL Technology Solutions Limited and General Physics Corporation. Incorporated herein by reference to Exhibit 10.2 of the Registrant's Form 8-K dated June 29, 1998. 10.12 Second Amended and Restated Credit Agreement dated as of December 14, 2001, by and among the Registrant, General Physics Corporation, as the Borrowers, LaSalle Business Credit Inc. and Dime Savings Bank of New York, FSB, the Lenders and Fleet National Bank, as Agent, as Issuing Bank and as Lead Arranger. Incorporated herein by reference to Exhibit 10.11 to the Registrant's Form 10-K for the year ended December 31, 2001 10.13 Asset Purchase Agreement dated as of July 13, 1998, between the Registrant's wholly-owned subsidiary, General Physics Corporation and The Deltapoint Corporation. Incorporated herein by reference to the Registrant's Form 8-K dated July 27, 1998. 10.14 Rights Agreement, dated as of June 23, 1997, between National Patent Development Corporation and Computershare Investor Services LLC, as Rights Agent, which includes, as Exhibit A thereto, the Resolution of the Board of Directors with respect to Series A Junior Participating Preferred Stock, as Exhibit B thereto, the form of Rights Certificate and as Exhibit C thereto the form of Summary of Rights. Incorporated herein by reference to Exhibit 4.1 of the Registrant's Form 8-K filed on July 17, 1997. 10.15 Amendment, dated as of July 30, 1999, to the Rights Agreement dated as of June 23, 1997, between the Computershare Investor Services LLC, as Rights Agent. Incorporated herein by reference to Exhibit 4.2 of the Registrant's report on Form 8-A12B/A filed on August 2, 1999. 10.16 Amendment, dated as of December 16, 1999, to the Rights Agreement dated as of June 23, 1997, between the Registrant and Computershare Investor Services LLC, as Rights Agent. Incorporated herein by reference to Exhibit 4.2 of the Company's report on From 8-A12B/A filed on December 17, 1999. 10.17 Consulting and Severance Agreement dated December 29, 1998 between the Registrant and Martin M. Pollak. Incorporated herein by reference to Exhibit 10.10 of the Registrant's Form 10K for the year ended December 31, 1998. 10.18 Agreement dated, December 29, 1998, among the Registrant, Jerome I. Feldman and Martin M. Pollak. . Incorporated herein by reference to Exhibit 10.11 of the Registrant's Form 10K for the year ended December 31, 1998. 10.19 Amendment No. 1, dated March 22, 1999, to Agreement dated December 29, 1998 among the Registrant, Jerome I. Feldman and Martin M. Pollak. Incorporated herein by reference to Exhibit 10.12 of the Registrant's Form 10K for the year ended December 31, 1998. 10.20 Agreement dated September 22, 1999 among GP Strategies Corporation, Jerome I. Feldman and Martin M. Pollak. Incorporated herein by reference to Exhibit 9 of Jerome I. Feldman's Amendment No. 1 to Schedule 13D filed on September 27, 1999. 10.21 Stockholders Agreement dated February 11, 2000, among the Registrant, Andersen Weinroth & Co., L.P. and Jerome I. Feldman. Incorporated herein by reference to Exhibit 16 of Jerome I. Feldman's Amendment No. 5 to Schedule 13D filed on February 23, 2000 10.22 Subscription Agreement dated as of October 19, 2001 between the Registrant and Bedford Oak Partners, L.P. Incorporated herein by reference to Exhibit 10.21 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 2001. 10.23 Subscription Agreement dated as of May 3, 2002 by and between the Registrant and Bedford Oak Partners, L.P. Incorporated herein by reference to Exhibit 10.3 to the Registrant's Form 10-Q for the second quarter ended March 31, 2002. 10.24 Investor Rights Agreement dated as of December 27, 2001 among the Registrant, Hydro Med Sciences and certain Institutional Investors. Incorporated herein by reference to Exhibit 10.23 to the Registrants Annual Report on Form 10-K for the year ended December 31, 2001. 10.25 Stock Purchase Agreement dated as of December 27, 2001 among the Registrant, Hydro Med Sciences and certain Institutional Investors. Incorporated herein by reference to Exhibit 10.24 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 2001. 10.26 Right of First Refusal Co-Sale Agreement dated as of December 27, 2001 among the Registrant, Hydro Med Sciences and certain Institutional Investors. Incorporated herein by reference to Exhibit 10.25 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 2001. 10.27 Termination Agreement dated as of December 21, 2001 between Hydro med Sciences and Shire US Inc. Incorporated herein by reference to Exhibit 10.26 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 2002. 10.28 Amended Note dated August 2, 2002 in the amount of $4,500,000 payable by Five Star Products, Inc. to JL Distributors, a wholly owned subsidiary of the Registrant.* 10.29 Voting Agreement dated as of June 30, 2002 between the Registrant and Five Star Products, Inc.* 10.30 Stock Purchase Agreement dated as of May 3, 2002 by and between the Registrant and EGI-Fund(02)04 Investors, L.L.L. Incorporated herein by reference to Exhibit 10.1 to the Registrant's Form 10-Q for the second quarter ended March 31, 2002. 10.31 Advisory Services Agreement dated as of May 3, 2002 by and between the Registrant and Equity Group Investments, L.L.C. Incorporated herein by reference to Exhibit 10.2 to the Registrant's Form 10-Q for the second quarter ended March 31, 2002. 10.32 Subscription Agreement dated as of May 3, 2002 by and between the Registrant and Marshall Geller. Incorporated herein by reference to Exhibit 10.4 to the Registrant's Form 10-Q for the second quarter ended March 31, 2002. 10.33 Form of Officer's Pledge Agreement* 10.34 Form of Officer's Promissory Note* 10.35 Sublease Agreement dated as of December 13, 2002 between the Registrant and Austin Nichols & Company, Inc.* 10.36 Lease Agreement dated as of July 5, 2002 between the Registrant's wholly-owned subsidiary, General Physics Corporation and Riggs Company.* 10.37 First Amendment and Limited Waiver to Credit Agreement dated as of March 31, 2003 by and among the Registrant and General Physics Corporation as the Borrower and Fleet National Bank as agent for the Lenders.** 18 Not Applicable 19 Not Applicable 20 Not Applicable 21 Subsidiaries of the Registrant* 22 Not Applicable 23 Consent of KPMG LLP, Independent Auditors* 28 Not Applicable 99.1 Certification Pursuant to Section 18 U.S.C. Section 1350 of Chief Executive Officer.* 99.2 Certification Pursuant to Section 18 U.S.C. Section 1350 of Chief Financial Officer.* * Filed herewith. EX-10 3 ex104.txt INCENTIVE COMPENSATION PLAN Exhibit 10.4 INCENTIVE COMPENSATION AGREEMENT Agreement, dated as of May 3, 2002, between GP Strategies Corporation, a Delaware corporation with principal executive offices at 9 West 57th Street, Suite 4170, New York, New York 10019 (the "Company"), and Jerome I. Feldman, residing at 145 West Patent Road, Bedford Hills, New York 10507 ("Employee"). WHEREAS, Employee is a founder of the Company and has for many years been Chairman of the Board and Chief Executive Officer of the Company; WHEREAS, Section 5(b) of the Employment Agreement, dated as of June 1, 1999, as amended (the "Employment Agreement"), between the Company and Employee provides that the Company and Employee will negotiate in good faith to formulate an annual incentive based compensation arrangement based on the Company achieving certain financial milestones which will be fair and equitable to Employee and the Company and its stockholders; and WHEREAS, the Company desires to provide incentive compensation to Employee in a manner that will closely align the amount of such compensation to the interests of the Company's stockholders and the enhancement of stockholder value. NOW, THEREFORE, intending to be legally bound, and for and in consideration of the mutual covenants set forth herein, the parties hereto agree as follows: 1. Incentive Compensation. Employee shall be eligible to receive from the Company up to five payments (each, an "Incentive Payment"). The Company will pay Employee an Incentive Payment in an amount equal to $1 million on the first date that each of the following events occurs: (a) the closing price of the common stock, par value $0.01 per share, of the Company on the New York Stock Exchange (the "Closing Price") equals or exceeds, for at least 10 consecutive trading days, $5.40 (the "First Incentive Payment"); provided that if the First Incentive Payment does not become payable prior to the second anniversary of this Agreement, the First Incentive Payment shall be paid on the date, if any, that the Second Incentive Payment (as defined below) is paid; (b) the Closing Price equals or exceeds, for at least 10 consecutive trading days, $6.30 (the "Second Incentive Payment"); provided that if the Second Incentive Payment does not become payable prior to the fourth anniversary of this Agreement, the Second Incentive Payment shall be paid on the date, if any, that the Third Incentive Payment (as defined below) is paid; (c) the Closing Price equals or exceeds, for at least 10 consecutive trading days, $7.20 (the "Third Incentive Payment"); (d) the Closing Price equals or exceeds, for at least 10 consecutive trading days, $8.10; and (e) the Closing Price equals or exceeds, for at least 10 consecutive trading days, $9.00. 2. Set-off Against Loans. To the extent there are any outstanding loans from the Company to Employee at the time an Incentive Payment is payable, the Company will set off the payment of such Incentive Payment against the outstanding principal and interest under such loans. 3. Termination. This Agreement will terminate on the earlier to occur of (a) the fifth anniversary of the date hereof and (b) the date of termination of Employee's employment with the Company (other than termination by (i) the Company in breach of the Employment Agreement or (ii) Employee for Good Reason (as defined in the Employment Agreement)). Notwithstanding anything set forth in this Agreement to contrary, no Incentive Payment shall be payable after the termination of this Agreement. 4. Employment. Notwithstanding anything set forth in this Agreement to the contrary, nothing in this Agreement shall be construed as an agreement by the Company to employ the Employee for any period of time and, except as provided in the Employment Agreement, the Company shall have the right at any time to terminate the Employee with or without cause. 5. Miscellaneous. (a) The dollar amounts in Section 1 shall be equitably adjusted for stock splits, stock dividends, and similar transactions. (b) This Agreement shall not be assignable, in whole or in part, by either party without the prior written consent of the other party, and any attempted assignment without such prior written consent shall be void. (c) This Agreement constitutes the entire agreement between the parties pertaining to the subject matter hereof, and supersedes all prior and contemporaneous agreements, representations and understandings, written or oral, of the parties. (d) This Agreement may not be modified, amended, or supplemented except by a writing signed by each of the parties hereto. (e) This Agreement may be executed in counterparts each of which shall be deemed an original but both of which together shall constitute one and the same instrument. (f) This Agreement shall be governed by and interpreted under the internal laws of the State of New York, without regard to conflicts of laws principles. IN WITNESS WHEREOF, the parties have signed this Agreement on the date first set forth above. GP STRATEGIES CORPORATION Scott N. Greenberg President and Chief Financial Officer Jerome I. Feldman EX-10 4 ex1028.txt PROMISSORY NOTE Exhibit 10.28 PROMISSORY NOTE $4,500,000.00 New York, New York August 2, 2002 The undersigned, FIVE STAR PRODUCTS, INC., hereby promises to pay to the order of JL DISTRIBUTORS, INC. ("Payee"; Payee, and any subsequent holder[s] hereof, being hereinafter referred to collectively as "Holder") on September 30, 2004, at the offices of Holder or at such other place or places as Holder may from time to time designate in writing, in lawful money of the United States of America, the principal amount of Four Million Five Hundred Thousand and no/100 Dollars ($4,500,000.00), with interest at the rate of 8% per annum from the date hereof, payable on September 30, 2002 and quarterly on each December 31, March 31, June 30 and September 30, thereafter, until the entire principal amount hereof has been paid. 1. Prepayment. The undersigned may at any time or from time to time prepay all or any part of the principal amount of this Note, with accrued interest on the amount prepaid to the date of prepayment, but without penalty or premium. 2. Events of Default. If any of the following events (each, an "Event of Default") shall occur: (a) The undersigned shall default in the payment of any installment of interest on this Note when due, and such default shall continue for a period of ten (10) days after written notice thereof shall have been sent to the undersigned by Holder; or (b) A voluntary case in bankruptcy shall be begun by the undersigned or any order for relief against the undersigned shall be entered in an involuntary case in bankruptcy; or (c) The undersigned shall fail, or admit in writing its inability, to pay its debts as they mature, by acceleration or otherwise; or make a settlement with or general assignment for the benefit or creditors; or a committee of creditors shall be appointed for the undersigned or a receiver or receivers or a custodian or custodians shall be appointed for or shall take possession of all or a substantial part of the undersigned's property; then (i) in the case of an Event of Default described in clause (b) or (c) above, the outstanding principal of this Note and all accrued interest thereon shall become immediately due and payable, without presentment, demand, protest or notice of any kind, all of which are expressly waived; and (ii) in the case of an Event of Default described in clause (a) above, Holder may at any time (unless all defaults theretofore shall have been remedied), by written notice to the undersigned, declare the principal of and the accrued interest on this note to be due and payable without presentment, demand, protest or further notice, all of which are expressly waived. 3. Change of Control. At any time after a change of control of the undersigned (as defined below) has occurred, Holder may, by written notice to the undersigned, declare the principal of and the accrued interest on this Note to be due and payable without presentment, demand, protest or further notice, all of which are expressly waived. For purposes of this Note, a "change of control of the undersigned" shall mean (a) a change of control of the undersigned of a nature that would be required to be reported in response to Item 1(a) of Current Report on Form 8-K pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (the "Exchange Act"), other than a change of control of the undersigned resulting in control by Holder or a group including Holder, (b) any "person" (as such term is used in Sections 13(d) and 14(d) of the Exchange Act), other than Holder or a group including Holder, is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the undersigned representing 20% or more of the combined voting power of the undersigned's then outstanding securities, or (c) at any time individuals who were either nominated for election by the Board of Directors of the undersigned or were elected by the Board of Directors of the undersigned cease for any reason to constitute at least a majority of the Board of Directors of the undersigned. 4. Governing Law. This Note shall be construed in accordance with and governed by the laws of the State of New York. FIVE STAR PRODUCTS, INC. Charles Dawson President EX-10 5 ex1029.txt VOTING AGREEMENT (GP STRATEGIES CORPORATION LETTERHEAD) Exhibit 10.29 June 30, 2002 Five Star Products, Inc. 9 West 57th Street New York, NY 10019 Ladies and Gentlemen: GP Strategies Corporation ("GP Strategies") hereby agrees, for a period commencing on the date hereof and ending June 30, 2004. (a) GP Strategies shall vote all of the shares of Five Star Products, Inc. ("FSP") common stock, par value $0.01 per share (the "Common Stock") owned by it, directly or indirectly, in a manger such that not more than 50% of the members of the Board of Directors of FSP shall be officers or directors of GP Strategies; and (b) On all other matters submitted to a vote of stockholders of FSP, GP Strategies shall vote its shares of FSP Common Stock in the same manner and in the same proportion as the remaining stockholders of FSP. Very truly yours, GP STRATEGIES CORPORATION BY: Scott N. Greenberg, President and Chief Financial Officer EX-10 6 ex1033.txt FORM OF PLEDGE AGREEMENT Exhibit 10.33 FORM OF PLEDGE AGREEMENT This PLEDGE AGREEMENT is made and entered into as of _____________ by _________________ (the "Pledgor") in favor of GP STRATEGIES CORPORATION ("GP" and, together with any assignee of the Note hereafter referred to, the "Secured Party"). WHEREAS, on the date hereof, GP is lending the Pledgor the amount of $____________, evidenced by a promissory note, dated the date hereof (the "Note"); WHEREAS, the Pledgor will use such funds to pay a portion of the purchase price for ________ shares (the "Pledged Shares") of the Class B Capital Stock of GP; and WHEREAS, as a condition to the making of such loan, GP has required the Pledgor to pledge the Pledged Shares as security for the indebtedness represented by the Note; NOW, THEREFORE, in consideration of the foregoing premises and to induce the Lender to loan the amount referred to above, and for other good and valuable consideration the receipt and sufficiency of which are hereby acknowledged, the Pledgor hereby agrees with the Secured Party as follows: Section 1. Pledge. As security for the payment and performance when due (whether upon demand or otherwise) of the indebtedness represented by, and any other amounts payable by Pledgor under or in connection with, the Note, the Pledgor hereby pledges, assigns, transfers and grants to the Secured Party a lien on and security lien in and to all of the right, title and interest of the Pledgor in and to the following property, in each case whether now existing or hereafter acquired (collectively, the "Pledged Collateral"): (a) the Pledged Shares, including the certificates representing the Pledged Shares and any interest of the Pledgor in the entries on the books of any financial intermediary pertaining to the Pledged Shares; (b) all dividends, cash, options, warrants, rights, instruments, distributions, returns of capital, income, profits and other property, interests or proceeds from time to time received, receivable or otherwise distributed to the Pledgor in respect of or in exchange for any or all of the Pledged Shares (collectively, "Distributions"); and (c) all proceeds (as defined under the Uniform Commercial Code as in effect in any relevant jurisdiction (the "UCC") or under other relevant law) of any and all of the foregoing. Section 2. No Release. Nothing set forth in this Agreement shall relieve the Pledgor from the performance of any term, covenant, condition or agreement on the Pledgor's part to be performed or observed under or in respect of any of the Pledged Collateral or from any liability to any individual, corporation, partnership or other legal entity ("Persons") under or in respect of any of the Pledged Collateral or shall impose any obligation on the Secured Party to perform or observe any such term, covenant, condition or agreement on the Pledgor's part to be so performed or observed or shall impose any liability on the Secured Party for any act or omission on the part of the Pledgor relating thereto or for any breach of any representation or warranty on the part of the Pledgor contained in this Agreement or the Note or under or in respect of the Pledged Collateral or made in connection herewith or therewith. Section 3. Delivery of Pledged Collateral. All certificates, agreements or instruments representing or evidencing the Pledged Collateral, to the extent not previously delivered to the Secured Party, shall immediately upon receipt thereof by the Pledgor be delivered to and held by or on behalf of the Secured Party pursuant hereto. All Pledged Collateral shall be in suitable form for transfer by delivery or shall be accompanied by duly executed instruments of transfer or assignment in blank (with signatures appropriately guaranteed), all in form and substance satisfactory to the Secured Party. The Secured Party shall have the right, at any time upon the occurrence and during the continuance of an Event of Default (as defined in the Note) and without notice to the Pledgor, to endorse, assign or otherwise transfer to or to register in the name of the Secured Party or any of its nominees any or all of the Pledged Collateral. In addition, upon the occurrence and during the continuance of an Event of Default, the Secured Party shall have the right at any time to exchange certificates representing or evidencing Pledged Collateral for certificates of smaller or larger denominations. Section 4. Supplements, Further Assurances. The Pledgor agrees that at any time and from time to time, at the sole cost and expense of the Pledgor, the Pledgor shall promptly execute and deliver all further instruments and documents, including, without limitation, supplemental or additional UCC-1 financing statements, and take all further action that may be necessary or that the Secured Party may reasonably request, in order to perfect and protect the pledge, security interest and lien granted or purported to be granted hereby or to enable the Secured Party to exercise and enforce its rights and remedies hereunder with respect to any Pledged Collateral. Section 5. Representations and Warranties. The Pledgor represents and warrants as follows: (a) No Liens. The Pledgor is, and at the time of any delivery of any Pledged Collateral to the Secured Party pursuant to Section 3 will be, the sole legal and beneficial owner of the Pledged Collateral, and all such Pledged Collateral is on the date hereof, and will be, so owned by the Pledgor free and clear of any lien except for the lien created by this Agreement. (b) Authorization, Enforceability. The Pledgor has full authority and legal right to pledge and grant a security interest pursuant to this Agreement in all the Pledged Collateral, and this Agreement constitutes the legal, valid and binding obligation of the Pledgor, enforceable against the Pledgor in accordance with its terms. (c) No Consents, etc. No consent of any party and no consent, authorization, approval, or other action by, and no notice to or filing with, any governmental authority or regulatory body or other Person is required for (i) the pledge by the Pledgor of the Pledged Collateral pursuant to this Agreement or the execution, delivery or performance of this Agreement by the Pledgor, (ii) the exercise by the Secured Party of the voting or other rights provided for in this Agreement, or (iii) the exercise by the Secured Party of the remedies in respect of the Pledged Collateral pursuant to this Agreement. (d) Delivery of Pledged Collateral; Filings. The delivery to the Secured Party of all certificates representing the Pledged Shares creates a valid and perfected first priority security interest in all of the Pledged Collateral securing the payment of the Secured Obligations pursuant to the UCC in effect in each applicable jurisdiction. Section 6. Voting Rights; Distributions; etc. (a) So long as no Event of Default shall have occurred and be continuing: (i) The Pledgor shall be entitled to exercise any and all voting and other consensual rights pertaining to the Pledged Shares or any part thereof for any purpose not inconsistent with the terms or purpose of this Agreement or the Note; provided, that the Pledgor shall not exercise such rights in any manner which may have an adverse effect on the value of the Pledged Collateral or the security intended to be provided by this Agreement. (ii) The Pledgor shall be entitled to receive and retain, and to utilize free and clear of the lien of this Agreement, any and all cash Distributions, provided, that any and all such Distributions other than cash shall be, and shall be forthwith delivered to the Secured Party to hold as, Pledged Collateral and shall, if received by the Pledgor, be received in trust for the benefit of the Secured Party, be segregated from the other property or funds of the Pledgor, and be forthwith delivered to the Secured Party as Pledged Collateral in the same form as so received (with any necessary endorsement). (iii) The Secured Party shall be deemed without further action or formality to have granted to the Pledgor all necessary consents relating to voting rights and shall, if necessary, upon written request of the Pledgor and at the Pledgor's sole cost and expense, from time to time execute and deliver (or cause to be executed and delivered) to the Pledgor all such instruments as the Pledgor may reasonably request in order to permit the Pledgor to exercise the voting and other rights which it is entitled to exercise pursuant to Section 6(a)(i) hereof and to receive the Distributions which it is authorized to receive and retain pursuant to Section 6(a)(ii) hereof. (b) Upon the occurrence and during the continuance of an Event of Default: (i) All rights of the Pledgor to exercise the voting and other consensual rights it would otherwise be entitled to exercise pursuant to Section 6(a)(i) hereof without any action or the giving of any notice shall cease, and all such rights shall thereupon become vested in the Secured Party, which shall thereupon have the sole right to exercise such voting and other consensual rights. (ii) Subject to Section 9(a) hereof, all rights of the Pledgor to receive Distributions which it would otherwise be authorized to receive and retain pursuant to Section 6(a)(ii) hereof shall cease and all such rights shall thereupon become vested in the Secured Party, which shall thereupon have the sole right to receive and hold as Pledged Collateral such Distributions. (c) The Pledgor shall, at the Pledgor's sole cost and expense, from time to time execute and deliver to the Secured Party appropriate instruments as the Secured Party may request in order to permit the Secured Party to exercise the voting and other rights which it may be entitled to exercise pursuant to Section 6(b)(i) hereof and to receive all Distributions which it may be entitled to receive under Section 6(b)(ii) hereof. (d) All Distributions which are received by the Pledgor contrary to the provisions of Section 6(b)(ii) hereof shall be received in trust for the benefit of the Secured Party, shall be segregated from other funds of the Pledgor and shall immediately be paid over to the Secured Party as Pledged Collateral in the same form as so received (with any necessary endorsement). Section 7. Transfers and Other liens; Principal Office. The Pledgor agrees that it shall not (a) sell, convey, assign or otherwise dispose of, or grant any option, right or warrant with respect to, any of the Pledged Collateral or (b) create or permit to exist any lien upon or with respect to any Pledged Collateral other than the lien and security interest granted to the Secured Party under this Agreement. Section 8. Reasonable Care. The Secured Party shall be deemed to have exercised reasonable care in the custody and preservation of the Pledged Collateral in its possession if such Pledged Collateral is accorded treatment substantially equivalent to that which the Secured Party, in its individual capacity, accords its own property consisting of similar instruments or interests, it being understood that the Secured Party shall not have responsibility for (a) ascertaining or taking action with respect to calls, conversions, exchanges, maturities, tenders or other matters relating to any Pledged Collateral, whether or not the Secured Party has or is deemed to have knowledge of such matters, or (b) taking any necessary steps to preserve rights against any Person with respect to any Pledged Collateral. Section 9. Remedies Upon Event of Default; Decisions Relating to Exercise of Remedies. (a) If an Event of Default shall occur and be continuing, the Secured Party shall have the right, in addition to other rights and remedies provided for herein or otherwise available to it to be exercised from time to time, (i) to retain and apply the Distributions to the Secured Obligations as provided in Section 10 hereof, and (ii) to exercise all the rights and remedies of a secured party on default under the Uniform Commercial Code in effect in the State of New York at that time, and the Secured Party may also in its sole discretion, without notice except as specified below, sell the Pledged Collateral or any part thereof in one or more parcels at public or private sale, at any exchange, broker's board or at any of the Secured Party's offices or elsewhere, for cash, on credit or for future delivery, and at such price or prices and upon such other terms as the Secured Party may deem commercially reasonable. The Secured Party or any of its affiliates may be the purchaser of any or all of the Pledged Collateral at any such sale and shall be entitled, for the purpose of bidding and making settlement or payment of the purchase price for all or any portion of the Pledged Collateral sold at such sale, to use and apply any of the Secured Obligations owed to such Person as a credit on account of the purchase price of any Pledged Collateral payable by such Person at such sale. Each purchaser at any such sale shall acquire the property sold absolutely free from any claim or right on the part of the Pledgor, and the Pledgor hereby waives (to the fullest extent permitted by law) all rights of redemption, stay and/or appraisal which it now has or may at any time in the future have under any rule of law or statute now existing or hereafter enacted. The Pledgor acknowledges and agrees that, to the extent notice of sale shall be required by law, five days notice to the Pledgor of the time and place of any public sale or the time after which any private sale is to be made shall constitute reasonable notification. The Secured Party shall not be obligated to make any sale of Pledged Collateral regardless of notice of sale having been given. The Secured Party may adjourn any public or private sale from time to time by announcement at the time and place fixed therefor, and such sale may, without further notice, be made at the time and place to which it was so adjourned. The Pledgor hereby waives any claims against the Secured Party arising by reason of the fact that the price at which any Pledged Collateral may have been sold at such a private sale was less than the price which might have been obtained at a public sale, even if the Secured Party accepts the first offer received and does not offer such Pledged Collateral to more than one offeree. (b) The Pledgor acknowledges that, by reason of certain prohibitions contained in the Securities Act of 1933, as amended (the "Securities Act"), and applicable state securities laws, the Secured Party may be compelled, with respect to any sale of all or any part of the Pledged Collateral, to limit purchasers to Persons who will agree, among other things, to acquire the Pledged Collateral for their own account, for investment and not with a view to the distribution or resale thereof. The Pledgor further acknowledges that any such private sales may be at prices and on terms less favorable to the Secured Party than those obtainable through a public sale without such restrictions (including, without limitation, a public offering made pursuant to a registration statement under the Securities Act), and, notwithstanding such circumstances, agrees that any such private sale shall be deemed to have been made in a commercially reasonable manner and that the Secured Party shall have no obligation to engage in public sales and no obligation to delay the sale of any Pledged Collateral for the period of time necessary to permit the issuer thereof to register it for a form of public sale requiring registration under the Securities Act or under applicable state securities laws, even if such issuer would agree to do so. (c) If the Secured Party determines to exercise its right to sell any or all of the Pledged Collateral, upon written request, the Pledgor shall from time to time furnish to the Secured Party all such information as the Secured Party may request in order to determine the number of securities included in the Pledged Collateral which may be sold by the Secured Party as exempt transactions under the Securities Act and the rules of the Securities and Exchange Commission thereunder, as the same are from time to time in effect. (d) In addition to any of the other rights and remedies hereunder, the Secured Party shall have the right to institute a proceeding seeking specific performance in connection with any of the agreements or obligations hereunder. Section 10. Application of Proceeds. All Distributions held from time to time by the Secured Party and all cash proceeds received by the Secured Party in respect of any sale of, collection from, or other realization upon all or any part of the Pledged Collateral pursuant to the exercise by the Secured Party of its remedies as a secured creditor as provided in Section 9 hereof shall be applied, together with any other sums then held by the Secured Party pursuant to this Agreement, promptly by the Secured Party as follows: First, to the payment of all reasonable costs and expenses, fees, commissions and taxes of such sale, collection or other realization, including, without limitation, compensation to the Secured Party and its agents and counsel, and all expenses, liabilities and advances made or incurred by the Secured Party in connection therewith, together with interest on each such amount at the Prime Rate (as defined in the Note) from and after the date such amount is due, owing or unpaid until paid in full; and Second, to the payment of all other fees, expenses, principal of and interest on the Note, other amounts owing to the Secured Party under the Note, together with interest on each such amount at the Prime Rate from and after the date such amount is due, owing or unpaid until paid in full. Section 11. Expenses. The Pledgor will upon demand pay to the Secured Party the amount of any and all expenses, including the reasonable fees and expenses of its counsel and, after the occurrence of an Event of Default, the allocated costs of the Secured Party's internal counsel and the reasonable fees and expenses of any experts and agents which the Secured Party may incur in connection with (a) the collection of the Secured Obligations, (b) the enforcement and administration of this Agreement, (c) the custody or preservation of, or the sale of, collection from, or other realization upon, any of the Pledged Collateral, (d) the exercise or enforcement of any of the rights of the Secured Party hereunder or (e) the failure by the Pledgor to perform or observe any of the provisions hereof. All amounts payable by the Pledgor under this Section 11 shall be due upon demand and shall be part of the Secured Obligations. Section 12. No Waiver; Cumulative Remedies. (a) No failure on the part of the Secured Party to exercise, no course of dealing with respect to, and no delay on the part of the Secured Party in exercising, any right, power or remedy hereunder shall operate as a waiver thereof; nor shall any single or partial exercise of any such right, power or remedy hereunder preclude any other or further exercise thereof or the exercise of any other right, power or remedy. The remedies herein provided are cumulative and are not exclusive of any remedies provided by law. (b) In the event the Secured Party shall have instituted any proceeding to enforce any right, power or remedy under this instrument by foreclosure, sale, entry or otherwise, and such proceeding shall have been discontinued or abandoned for any reason or shall have been determined adversely to the Secured Party, then and in every such case, the Pledgor, the Secured Party and each holder of any of the Secured Obligations shall be restored to their respective former positions and rights hereunder with respect to the Pledged Collateral, and all rights, remedies and powers of the Secured Party shall continue as if no such proceeding had been instituted. Section 13. Secured Party May Perform; Secured Party Appointed Attorney-in-Fact. If the Pledgor shall fail to do any act or thing that it has covenanted to do hereunder or any warranty on the part of the Pledgor contained herein shall be breached, the Secured Party may (but shall not be obligated to) upon three business days notice to the Pledgor specifying the action to be taken, do the same or cause it to be done or remedy any such breach, and may expend funds for such purpose. Any and all amounts so expended by the Secured Party shall be paid by the Pledgor promptly upon demand therefor, with interest at the Prime Rate during the period from and including the date on which such funds were so expended to the date of repayment. The Pledgor hereby appoints the Secured Party its attorney-in-fact with an interest, with full authority in the place and stead of the Pledgor and in the name of the Pledgor, or otherwise, from time to time in the Secured Party's discretion to take any action and to execute any instrument consistent with the terms of this Agreement and the Note which the Secured Party may deem necessary or advisable to accomplish the purposes of this Agreement. The foregoing grant of authority is a power of attorney coupled with an interest and such appointment shall be irrevocable for the term of this Agreement. The Pledgor hereby ratifies all that such attorney shall lawfully do or cause to be done by virtue hereof. Section 14. Indemnity. (a) Indemnity. The Pledgor agrees to indemnify, pay and hold harmless the Secured Party and the officers, directors, employees, agents, and affiliates of the Secured Party (collectively, the "Indemnitees") from and against any and all other liabilities, obligations, losses, damages, penalties, actions, judgments, suits, claims, and reasonable costs (including, without limitation, settlement costs), expenses or disbursements of any kind or nature whatsoever (including, without limitation, the reasonable fees and disbursements of counsel for such Indemnities in connection with any investigative, administrative or judicial proceeding commenced or threatened, whether or not such Indemnitee shall be designated a party thereto), which may be imposed on, incurred by, or asserted against that Indemnitee, in any manner (i) relating to or arising out of this Agreement or the Note (including, without limitation, any misrepresentation by the Pledgor in this Agreement or the Note) or (ii) arising out of a subpoena or document production request against an Indemnified Party from a legal proceeding relating to the Pledgor or affiliate thereof whether or not the Indemnified Party is a party thereto or target thereof (collectively, the "indemnified liabilities"); provided, that the Pledgor shall have no obligation to an Indemnitee hereunder with respect to indemnified liabilities if it has been determined by a final decision (after all appeals and the expiration of time to appeal) by a court of competent jurisdiction that such indemnified liability arose from the gross negligence or willful misconduct of that Indemnitee. To the extent that the undertaking to indemnify, pay and hold harmless set forth in the preceding sentence may be unenforceable because it is violative of any law or public policy, the Pledgor shall contribute the maximum portion which it is permitted to pay and satisfy under applicable law, to the payment and satisfaction of all indemnified liabilities incurred by the Indemnities or any of them. (b) Reimbursement. Any amounts paid by any Indemnitee as to which such Indemnitee has the right to reimbursement shall constitute Secured Obligations secured by the Pledged Collateral. Section 15. Modification in Writing. No amendment, modification, supplement, termination or waiver of or to any provision of this Agreement, nor consent to any departure by the Pledgor therefrom, shall be effective unless in writing and signed by the Secured Party. Any amendment, modification or supplement of or to any provision of this Agreement, any waiver of any provision of this Agreement, and any consent to any departure by the Pledgor from the terms of any provision of this Agreement, shall be effective only in the specific instance and for the specific purpose for which made or given. Except where notice is specifically required by this Agreement or the Note, no notice to or demand on the Pledgor in any case shall entitle the Pledgor to any other or further notice or demand in similar or other circumstances. Section 16. Release. Upon the payment in full in cash of all Secured Obligations, the Secured Party shall, upon the request and at the sole cost and expense of the Pledgor, forthwith assign, transfer and deliver to the Pledgor, against receipt and without recourse to or warranty by the Secured Party, such of the Pledged Collateral of the Pledgor as may be in the possession of the Secured Party and as shall not have been sold or otherwise applied pursuant to the terms hereof, on the order of and at the sole cost and expense of the Pledgor, and such proper instruments and/or agreements (including UCC termination statements on Form UCC-3) as may be reasonably requested by the Pledgor acknowledging the termination of this Agreement and/or the release of such Pledged Collateral. Section 17. Notices. Any notice or other communication herein required or permitted to be given shall be given in the manner set forth in the Note. Section 18. Continuing Security Interest; Assignment. This Agreement shall create a continuing security interest in the Pledged Collateral and shall (a) be binding upon the Pledgor, its successors and assigns, and (b) inure, together with the rights and remedies of the Secured Party hereunder, to the benefit of the Secured Party and its successors, transferees and assigns; no other Persons (including, without limitation, any other creditor of the Pledgor) shall have any interest herein or any right or benefit with respect hereto. Section 19. Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAWS, EXCEPT TO THE EXTENT THAT THE VALIDITY OR PERFECTION OF THE SECURITY INTEREST HEREUNDER, OR REMEDIES HEREUNDER, IN RESPECT OF ANY PARTICULAR PROPERTY ARE GOVERNED BY THE LAWS OF A JURISDICTION OTHER THAN THE STATE OF NEW YORK. Section 20. Consent to Jurisdiction and Service of Process; Waiver of Jury Trial. (a) The Pledgor HEREBY IRREVOCABLY AND UNCONDITIONALLY: (i) SUBMITS FOR ITSELF AND ITS PROPERTY IN ANY LEGAL ACTION OR PROCEEDING RELATING TO THIS AGREEMENT AND THE OTHER LINE DOCUMENTS TO WHICH IT IS A PARTY, OR FOR RECOGNITION AND ENFORCEMENT OF ANY JUDGMENT IN RESPECT THEREOF, TO THE NON-EXCLUSIVE GENERAL JURISDICTION OF THE COURTS OF THE STATE OF NEW YORK, THE COURTS OF THE UNITED STATES OF AMERICA FOR THE SOUTHERN DISTRICT OF NEW YORK AND APPELLATE COURTS FROM ANY THEREOF; (ii) CONSENTS THAT ANY SUCH ACTION OR PROCEEDING MAY BE BROUGHT IN SUCH COURTS AND WAIVES ANY OBJECTION THAT IT MAY NOW OR HEREAFTER HAVE TO THE VENUE OF ANY SUCH ACTION OR PROCEEDING IN ANY SUCH COURT OR THAT SUCH ACTION OR PROCEEDING WAS BROUGHT IN AN INCONVENIENT COURT AND AGREES NOT TO PLEAD OR CLAIM THE SAME; (iii) AGREES THAT SERVICE OF PROCESS IN ANY SUCH ACTION OR PROCEEDING MAY BE EFFECTED BY MAILING A COPY THEREOF BY REGISTERED OR CERTIFIED MAIL (OR ANY SUBSTANTIALLY SIMILAR FORM OF MAIL), POSTAGE PREPAID, TO THE BORROWER AT ITS ADDRESS AS PROVIDED IN SECTION 17 HEREOF OR AT SUCH OTHER ADDRESS OF WHICH THE SECURED PARTY SHALL HAVE BEEN NOTIFIED PURSUANT THERETO; (iv) AGREES THAT NOTHING HEREIN SHALL AFFECT THE RIGHT TO EFFECT SERVICE OF PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR SHALL LIMIT THE RIGHT TO SUE IN ANY OTHER JURISDICTION; AND (v) WAIVES THE RIGHT TO ASSERT ANY SETOFF, COUNTERCLAIM OR CROSS-CLAIM IN RESPECT OF, AND ALL STATUTES OF LIMITATIONS WHICH MAY BE RELEVANT TO, SUCH ACTION OR PROCEEDING. (b) THE PLEDGOR AND THE SECURED PARTY EACH HEREBY WAIVE ANY RIGHT TO A TRIAL BY JURY IN ANY ACTION OR PROCEEDING ARISING OUT OF THIS AGREEMENT, THE NOTE, OR ANY OTHER AGREEMENTS OR TRANSACTIONS RELATED HERETO OR THERETO. Section 21. Severability of Provisions. Any provision of this Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof or affecting the validity or enforceability of such provision in any other jurisdiction. Section 22. Execution in Counterparts. This Agreement and any amendments, waivers, consents or supplements hereto may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed to be an original, but all such counterparts together shall constitute one and the same agreement. Section 23. Headings. The Section headings used in this Agreement are for convenience of reference only and shall not affect the construction of this Agreement. Section 24. Obligations Absolute. All obligations of the Pledgor hereunder shall be joint and several and absolute and unconditional irrespective of: (a) any bankruptcy, insolvency, reorganization, arrangement, readjustment, composition, liquidation or the like of the Pledgor; (b) any change in the time, manner or place of payment of, or in any other term of, all or any of the Secured Obligations, or any other amendment or waiver of or any consent to any departure from the Note or any other agreement or instrument relating thereto; (c) any exchange, release or non-perfection of any other collateral, or any release or amendment or waiver of or consent to any departure from any guarantee, for all or any of the Secured Obligations; (d) any exercise or non-exercise, or any waiver of any right, remedy, power or privilege under or in respect of this Agreement or the Note except as specifically set forth in a waiver granted pursuant to the provisions of Section 15 hereof; or (e) any other circumstances which might otherwise constitute a defense available to, or a discharge of, the Pledgor. Section 25. Survival of Provisions. All representations, warranties and covenants of the Pledgor contained herein shall survive the execution and delivery of this Agreement, and shall terminate only upon the full and indefeasible payment in cash and performance of all of the Secured Obligations. Section 26. Entire Agreement. THIS WRITTEN AGREEMENT, TOGETHER WITH THE OTHER AGREEMENTS REFERRED TO HEREIN, REPRESENTS THE FINAL AGREEMENT BETWEEN THE PARTIES WITH RESPECT TO THE MATTERS COVERED HEREBY AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS BY THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. IN WITNESS WHEREOF, the Pledgor has duly executed and delivered this Agreement as of the date first above written. By: ------------------------------- EX-10 7 ex1034.txt FORM OF PROMISSORY NOTE Exhibit 10.34 Form of Promissory Note $____________ Original Issue Date: __________ New York, New York _______________________, with an address at ______________________________(the "Maker"), for value received, hereby promises to pay to GP Strategies Corporation, with an address at 777 Westchester Avenue,, White Plains, NY 10604, or registered assigns (the "Holder"), the principal amount of ____________________________________________________________ (_______________), together with interest on the unpaid principal balance hereof at the Prime Rate (as hereinafter defined), all as hereafter further provided. 1. Payments. -------- (a) All amounts of principal and interest on this Note shall be due and payable on ___________. (b) Interest on this Note shall accrue daily on the unpaid principal balance from the most recent date to which interest has been paid or, if no interest has been paid on this Note, from the Original Issue Date, to but excluding the next date of payment. Interest shall accrue at the prime lending rate announced by Fleet Bank, N.A. (or its successor) from time to time (the "Prime Rate"). Notwithstanding the foregoing, in no event shall any interest to be paid hereunder exceed the maximum rate permitted by law and, in any such event, this Note shall automatically be deemed amended to permit interest charges at an amount equal to, but no greater than, the maximum rate permitted by law. (c) The Maker may, at his option, prepay all or any part of the principal of this Note, without payment of any premium or penalty. All payments on this Note shall be applied first to accrued interest hereon and the balance to the payment of principal hereof. (d) Payments of principal and interest on this Note shall be made by check sent to the Holder's address set forth above or to such other address as the Holder may designate for such purpose from time to time by written notice to the Maker, in such coin or currency of the United States of America as at the time of payment shall be legal tender for the payment of public and private debts. (e) The obligations to make the payments provided for in this Note are absolute and unconditional and not subject to any defense, set-off, counterclaim, rescission, recoupment or adjustment whatsoever. The Maker hereby expressly waives demand and presentment for payment, notice of nonpayment, notice of dishonor, protest, notice of protest, bringing of suit and diligence in taking any action to collect any amount called for hereunder, and shall be directly and primarily liable for the payment of all sums owing and to be owing hereon, regardless of and without any notice, diligence, act or omission with respect to the collection of any amount called for hereunder. 2. Security This Note is secured by a pledge by the Maker of certain shares of common stock of GP pursuant to a Pledge Agreement, dated the Original Issue Date, between the Maker and GP, and is entitled to the benefits thereof. 3. Events of Default. ----------------- The occurrence of any of the following events shall constitute an event of default (an "Event of Default"): (a) A default in the payment of any installment of principal or interest on this Note, when and as the same shall become due and payable. (b) The entry of a decree or order by a court having jurisdiction adjudging the Maker a bankrupt or insolvent, or approving a petition seeking reorganization, arrangement, adjustment or composition of or in respect of the Maker, under federal bankruptcy law, as now or hereafter constituted, or any other applicable federal or state bankruptcy, insolvency or other similar law, and the continuance of any such decree or order unstayed and in effect for a period of 60 days; or the commencement by the Maker of a voluntary case under federal bankruptcy law, as now or hereafter constituted, or any other applicable federal or state bankruptcy, insolvency, or other similar law, or the consent by him to the institution of bankruptcy or insolvency proceedings against him, or the filing by him of a petition or answer or consent seeking reorganization or relief under federal bankruptcy law or any other applicable federal or state law, or the consent by him to the filing of such petition or to the appointment of a receiver, liquidator, assignee, trustee, sequestrator or similar official of the Maker or of any substantial part of his property, or the making by him of an assignment for the benefit of creditors, or the admission by him in writing of his inability to pay its debts generally as they become due, or the taking of action by the Maker in furtherance of any such action. 4. Remedies Upon Default. --------------------- (a) Upon the occurrence of an Event of Default, the principal amount then outstanding of, and the accrued interest on, this Note shall automatically become immediately due and payable without presentment, demand, protest or other formalities of any kind, all of which are hereby expressly waived by the Maker. (b) The Holder may institute such actions or proceedings in law or equity as it shall deem expedient for the protection of its rights and may prosecute and enforce its claims against all assets of the Maker, and in connection with any such action or proceeding shall be entitled to receive from the Maker payment of the principal amount of this Note plus accrued interest to the date of payment plus reasonable expenses of collection including, without limitation, attorney's fees and expenses. 5. Miscellaneous. ------------- (a) Any notice or other communication required or permitted to be given hereunder shall be in writing and shall be mailed by certified mail, return receipt requested, or by Federal Express, Express Mail or similar overnight delivery or courier service or delivered (in person or by telecopy, telex or similar telecommunications equipment) against receipt to the party to whom it is to be given, at the address set forth in the first paragraph hereof, or to such other address as the party shall have furnished in writing in accordance with the provisions of this Section 5(a). Notice to the estate of any party shall be sufficient if addressed to the party as provided in this Section 5(a). Any notice or other communication given by certified mail shall be deemed given at the time of certification thereof, except for a notice changing a party's address which shall be deemed given at the time of receipt thereof. Any notice given by other means permitted by this Section 5(a) shall be deemed given at the time of receipt thereof. (b) Upon receipt of evidence reasonably satisfactory to the Maker of the loss, theft, destruction or mutilation of this Note (and upon surrender of this Note if mutilated), the Maker shall execute and deliver to the Holder a new Note of like date, tenor and denomination. (c) No course of dealing and no delay or omission on the part of the Holder in exercising any right or remedy shall operate as a waiver thereof or otherwise prejudice the Holder's rights, powers or remedies. No right, power or remedy conferred by this Note upon the Holder shall be exclusive of any other right, power or remedy referred to herein or now or hereafter available at law, in equity, by statute or otherwise, and all such remedies may be exercised singly or concurrently. (d) This Note may be amended only by a written instrument executed by the Maker and the Holder. Any amendment shall be endorsed upon this Note, and all future Holders shall be bound thereby. (e) This Note shall be governed by and construed in accordance with the laws of the State of New York, without giving effect to conflict of laws. IN WITNESS WHEREOF, the Maker has caused this Note to be executed and dated the day and year first above written. By: -------------------------------------- EX-10 8 ex1035.txt SUBLEASE - WHITE PLAINS, NY Exhibit 10.35 AGREEMENT OF SUBLEASE Between AUSTIN NICHOLS & COMPANY, INC., Sublessor And GP STRATEGIES CORPORATION, Sublessee Sublet Premises: Portion of 4th Floor at 777 Westchester Avenue White Plains, New York Dated December __, 2002 SUBLEASE THIS SUBLEASE (this "Sublease") is made as of the _____ day of _______________, 2002, by and between AUSTIN NICHOLS & COMPANY, INC., a New York corporation, having an address at 777 Westchester Avenue, Westchester, New York, 10604 ("Sublessor") and GP STRATEGIES CORPORATION, a Delaware corporation, having an address at 9 West 57th Street, Suite 4170, New York, New York, 10019 ("Sublessee"). Background Facts A. By Lease Agreement dated as of September 21, 2001 (the "Original Lease"), as modified by that certain First Amended Agreement dated as of February, 2002 (the "First Amendment"), both by and between Eastridge Properties I Corporation, a New York corporation ("Overlandlord") and Sublessor (with the Original Lease, including all exhibits and schedules thereto, as modified by that certain First Amendment, and as may also hereafter be amended and supplemented from time to time in accordance with the terms hereof, being referred to hereinafter as the "Overlease"), Overlandlord leased to Sublessor certain space (the "Original Premises"), as more accurately described in the Overlease, within the building located at 777 Westchester Avenue, White Plains, New York (the "Building"). B. Sublessor has delivered to Sublessee, and Sublessee hereby acknowledges receipt of, a copy of the Overlease. C. Sublessee desires to now sublease from Sublessor a portion of the Original Premises within the Building consisting of a portion of the fourth (4th) floor containing approximately 10,312 rentable square feet (the "Sublet Premises"), as more accurately described and set forth on Exhibit "A" attached to this Sublease, and to enter into this Sublease upon the terms, covenants and conditions hereinafter set forth. NOW, THEREFORE, in consideration of the mutual covenants contained herein and for other good and valuable consideration, the receipt and adequacy of which is hereby acknowledged, it is agreed as follows: Terms and Conditions 1. Background Facts. The parties acknowledge that the above Background Facts are true and correct and are hereby made a part of this Sublease. 2. Sublease Term. (a) Sublessor hereby subleases to Sublessee, and Sublessee hereby hires from Sublessor, during the "Sublease Term" (as defined below), the Sublet Premises upon the terms, covenants and conditions hereinafter contained, and subject and subordinate in all respects to the Overlease. Unless otherwise authorized by Sublessor, Sublessee may not occupy all or any part of the Sublet Premises prior to the date upon which the "Overlandlord Consent" (as defined below) is delivered. (b) The term of this Sublease (the "Sublease Term") shall commence on the earlier to occur of (i) the date Sublessee, or any party claiming by or through Sublessee, occupies all, or any part, of the Sublet Premises, or (ii) the date the Overlandlord Consent is obtained (with such earlier date being referred to as the "Sublease Commencement Date") and shall end on the date (the "Sublease Expiration Date") which shall be the earlier of (a) the end of the forty-eighth (48th) month following the date upon which the Sublease Commencement Date occurs, or (b) the earlier expiration or earlier termination or cancellation of the Overlease, or (c) the date upon which the Sublease Term may sooner expire or be cancelled or terminated pursuant to any of the terms, covenants or conditions of this Sublease or pursuant to law. Notwithstanding anything to the contrary which may be contained elsewhere in this Sublease, under no circumstances shall Sublessee have the right to renew or extend the Sublease Term or have any right or option to lease or sublease any additional space. 3. Basic Rent/Additional Rent. (a) Sublessee covenants to pay an annual fixed rent (the "Basic Rent") equal to Two Hundred Sixteen Thousand Five Hundred Fifty-Two Dollars And No/100 ($216,552.00) ($18,046.00 per month) for and during the period commencing on the Sublease Commencement Date and continuing thereafter throughout the Sublease Term, which annual Basic Rent shall be payable by Sublessee to Sublessor in equal monthly installments, in advance, on the first day of each and every calendar month during the Sublease Term without notice, demand, offset, reduction or abatement (other than as expressly provided in Subsection (e) below), except that the first monthly installment of Basic Rent due shall be paid on the date that Sublessee executes this Sublease. (b) Sublessee also covenants to pay to Sublessor 31.0% of the "Taxes" payable under the Overlease during the Sublease Term and 31.0% of the "Cost of Operation" payments payable under the Overlease during the Sublease Term, all within the time period(s) set forth in this Sublease, except that for the purpose of calculating Sublessee's share of the payment for Taxes, Sublessee's "Tax Base Year" shall be deemed to be the fiscal tax year commencing July 1, 2002 and ending June 30, 2003. Sublessee's obligations with respect to these payments shall expressly survive the termination or expiration of this Sublease and, in no event, shall Sublessor's failure to timely insist or demand any such payment(s) in one or more instances ever act as a waiver of any such payment(s) obligation. Anything to the contrary notwithstanding, in the event the space demised under the Overlease shall be enlarged or reduced during the Sublease Term, there shall be an equitable recalculation of the Sublessee's percentage set forth in this Subsection 3(b) to reflect such change in the ratio between the area of the Sublet Premises and the area of the space demised under the Overlease from time to time. Sublessee shall pay the payments discussed in subsection (b) above within ten (10) days after the presentation of statements therefor by Sublessor to Sublessee (together with, if applicable, a copy of the corresponding statement from Overlandlord to Sublessor). Any failure or delay by Sublessor in billing any sum set forth in this Paragraph 3 shall not constitute a waiver of Sublessee's obligation to pay the same in accordance with the terms of this Sublease. In the event that Sublessor receives a refund (or credit against future payments) of any Taxes or Cost of Operations Payments made already by Sublessee pursuant to this Sublease which relate to the Sublease Term, Sublessor will promptly pay to Sublessee 31.0% of such portion of such applicable refund (or credit), which obligation shall expressly survive the termination or expiration of this Sublease. (c) All sums of money (except for Basic Rent) which shall become due from and payable by Sublessee hereunder shall be deemed "Additional Rent." All Basic Rent and Additional Rent shall be paid to Sublessor at its main office at 777 Westchester Avenue, White Plains, New York 10604, Attn: Accounting Dept., or such other place or to such agent and at such place, as Sublessor may designate by notice to Sublessee, in lawful money of the United States of America, without notice, demand, offset, reduction or abatement whatsoever (other than as expressly provided in Subsection (e) below). (d) If the Sublease Commencement Date is not the first (lst) day of a calendar month, the monthly installment of Basic Rent payable for the month in which the Sublease Commencement Date occurs shall be prorated. (e) In the event that Sublessor receives a reduction or abatement in "Fixed Minimum Rent" or Additional Rent under the Overlease which relates to the Sublet Premises during the Sublease Term, Sublessee shall be entitled to a corresponding reduction or abatement in Basic Rent or Additional Rent hereunder. 4. Overlease. (a) Sublessee hereby acknowledges that it has reviewed a copy of the Overlease, a copy of which is attached hereto as Exhibit "B" (which by this reference is made a part hereof), and is fully familiar with the provisions thereof. During the Sublease Term, Sublessee shall perform, observe, comply with and be subject to, all of the terms, covenants, and conditions of the Overlease on the part of the "Tenant" therein named to be performed with respect to the Sublet Premises, and all of the terms, covenants and conditions of the Overlease, except to the extent that the same are inconsistent with, or modified by the terms of this Sublease, are hereby incorporated herein by reference with the same force and effect as if herein set forth in full, and neither Sublessor nor Sublessee shall do or permit anything to be done which would result in a default under or cause the Overlease to be terminated or forfeited (and wherever the terms "Tenant", "Landlord", "this Lease" and "Demised Premises" occur in the Overlease, the same shall be deemed to refer to Sublessee, Sublessor, this Sublease and the Sublet Premises, respectively, herein). Nothing set forth above, however, shall preclude Sublessor from exercising any of its express rights set forth in the Overlease. Notwithstanding the foregoing, and without limiting subsection (b) below, the following numbered Articles and Sections of the Overlease are expressly deleted for the purposes of incorporation by reference in this Sublease: 4; 5; 11; 14; 21.01; 22; 25.02; 27; 28; 32; 33; and all of the provisions of the First Amendment. (b) With respect to the Sublet Premises, Sublessee shall be entitled to receive from Overlandlord the same rights as Sublessor is entitled, as such tenant, under the Overlease; provided, however, in no event shall Sublessee ever be entitled to (i) modify or terminate the Overlease, or otherwise, or any part thereof, (ii) exercise any rights under the Overlease which would or could in any way increase Sublessor's obligations or liability, or decrease Sublessor's rights, under the Overlease, without first obtaining Sublessor's written consent (which may be given or withheld in Sublessor's sole discretion), (iii) exercise, or be entitled to any of, "Tenant's" rights (all of which rights are hereby reserved by Sublessor) (a) pursuant to the Overlease to terminate the Overlease, and/or to extend the term, and/or with respect to the expansion, as applicable (including, without limitation, pursuant to Article 32 and/or Article 33 of the Overlease), or (b) to increase the current electric requirements at the Sublet Premises, or exercise any other "Tenant" rights, pursuant to Article 21 of the Overlease, or otherwise (other than as expressly provided in Article 3(e) above), or (c) to install, maintain and operate a supplementary air conditioning system or to tap into any condenser water line (if any), or otherwise, or (d) with respect to any signage or listing rights pursuant to the Overlease (including without limitation, Section 18.04 of the Overlease) provided, however, to the extent permitted by the Overlandlord, Sublessee shall be entitled to ten (10) lines on the Building's directory and wall signage (whose style and content is approved in advance by Sublessor and Overlandlord) at the entrance to the Sublet Premises, or (e) pursuant to Section 26.02 of the Overlease with respect to parking (except that Sublessee shall be permitted to use twenty (20) parking spaces in the common parking lot in accordance with Section 26.02 to the extent permitted by the Overlandlord under the Overlease), (iv) receive any abatement, free rent, or allowance (other than as expressly provided in Article 3(e) above), and/or (v) receive any reimbursements, credits or payments by Overlandlord under the Overlease which are not exclusively attributable to actual payments made by Sublessee during Sublessee's period of occupancy during the Sublease Term. To the extent Overlandlord fails or refuses to perform its obligations under the Overlease, or Overlandlord breaches or has breached any of its representations, warranties or covenants under the Overlease, Sublessor shall not be obligated to perform such obligations and shall not be liable or responsible for such breaches. (c) Notwithstanding anything contained in this Sublease to the contrary, if there exists a breach by Sublessor of any of its obligations under this Sublease, and concurrently a corresponding breach by Overlandlord under the Overlease of its obligations under the Overlease, then, and in any such event, Sublessee's sole remedy against Sublessor in the event of any breach of Sublessor's obligations under this Sublease shall be the right to pursue a claim in the name of Sublessor against Overlandlord (provided Sublessee has first obtained Sublessor's written consent (not to be unreasonably withheld) and has also provided Sublessor with written notice and 30-days to cure such Sublessor default under this Sublease), and Sublessor agrees that it will cooperate with Sublessee in the pursuit of such claim provided, however, that (i) such claim shall be prosecuted at Sublessee's sole cost and expense (and without cost or expense to Sublessor), (ii) Sublessee shall indemnify and hold harmless Sublessor from any and all costs, expenses, claims, and liabilities (including, without limitation, reasonable attorney's fees) which may arise out of or relate to such claim, (iii) Sublessee shall not have any claim against Sublessor by reason of the Overlandlord's failure or refusal to comply with any of the provisions of the Overlease, (iv) this Sublease shall remain in full force and effect during the Sublease Term (subject to the provisions hereof) as long as the Overlease is in full force and effect, notwithstanding the Overlandlord's failure or refusal to comply with any such provisions of the Overlease, and (v) Sublessee shall pay all Basic Rent and Additional Rent provided for herein without notice, demand, abatement, reduction or setoff whatsoever (other than as expressly provided in Article 3(e) above). (d) In all provisions of the Overlease requiring the approval or consent of the "Landlord", Sublessee shall be required to obtain the approval or consent of the Overlandlord and Sublessor (and, after proper receipt of written request for approval by Sublessee, Sublessor shall request the approval of the Overlandlord to the extent Sublessor's consent would otherwise be forthcoming); in all provisions of the Overlease requiring that notice be given to the "Landlord", Sublessee shall be required to give notice to the Overlandlord and to Sublessor; and in all provisions of the Overlease requiring "Tenant" to pay the costs and expenses of the "Landlord" (other than any costs related to obtaining the "Overlandlord Consent," as defined below), Sublessee shall be required to pay the costs and expenses of the Overlandlord and Sublessor. The time limits provided in the Overlease for the giving of notice, making demands, performance of any act, condition or covenants, or the exercise of any right, remedy or option, are changed for the purpose of this Sublease, by lengthening or shortening the same in each instance by five (5) days, as appropriate, so that notices may be given, demands made, or any act, condition or covenants performed, or any right, remedy or option exercised, by Sublessor or Sublessee, as the case may be (and each party covenants that it will do so) within the time limit relating thereto contained in the Overlease. (e) Sublessor shall not enter into any modification or amendment with respect to the Sublet Premises to the Overlease, or take any other affirmative action with respect to the Sublet Premises which results in the modification, surrender or cancellation of the Overlease, if such modification, surrender or cancellation decreases any of Sublessee's rights under this Sublease, or increases any of Sublessee's obligations or remedies under this Sublease, to a material degree, without the prior written consent of the Sublessee, which consent shall not be unreasonably withheld, conditioned or delayed. Without limiting the above, Sublessee expressly acknowledges, however, that its consent shall never be required in connection with an amendment to the Overlease which modifies the size of the Original Premises (and the terms related thereto). Any modification, amendment, agreement, surrender or cancellation made without such consent shall have no effect on the rights or obligations of the Sublessee under this Sublease. (f) Sublessor shall provide copies of all correspondence or statements delivered to or received from Overlandlord in connection with the Overlease which are applicable to the Sublet Premises, if any, hereafter occurring under the Overlease or this Sublease (except with respect to payment of Basic Rent). (g) Sublessor hereby represents to Sublessee that (i) the copy of the Overlease attached hereto as Exhibit "B" is true, correct and complete in all respects and has not been modified or amended in any way, (ii) the Overlease is in full force and effect, and (iii) Sublessor has received no written notice of default from the Overlandlord which default remains uncured on the date hereof. (h) Sublessor covenants throughout the term of this Sublease to (i) timely pay when due all rent payable by Sublessor under the Overlease, and (ii) perform its covenants and obligations under the Overlease which are not otherwise to be performed by Sublessee under this Sublease. 5. Inspection. Sublessee acknowledges that it has made a full and complete inspection of the Sublet Premises and is thoroughly familiar with the condition thereof. Sublessee shall accept possession and take occupancy of the Sublet Premises on the Sublease Commencement Date, in its then "As Is" condition and the taking of occupancy or possession of the whole or any part of the Sublet Premises, by or on behalf of Sublessee shall be conclusive evidence, as against Sublessee, that at the time such possession or occupancy was so taken, Sublessee accepted possession thereof and that the Sublet Premises were in good and satisfactory condition. 6. As Is. Sublessee hereby acknowledges and agrees that Sublessor is not responsible for any construction or alterations to the Sublet Premises or otherwise and, in this regard, Sublessee is taking the Sublet Premises in "AS IS" condition. Once the Commencement Date is established, each party shall promptly execute an instrument upon demand by the other party confirming such date. 7. Electricity Amount/ Additional HVAC. (a) Commencing on the Sublease Commencement Date and continuing until the Sublease Expiration Date, Sublessee shall also pay to Sublessor, as Additional Rent, an amount ("Electricity Amount") equal to Twenty Five Thousand Seven Hundred Eighty Dollars And No/100 Dollars ($25,780.00) per annum (as such sum may from time to time be increased, as provided below), which payments shall be made to Sublessor, as Additional Rent, in equal monthly installments on the first day of every month, or as may otherwise be directed by Sublessor, without notice, demand, offset, reduction or abatement, as indicated below, which the parties have agreed is the reasonable value to Sublessee of normal electric service for lighting and normal use of ordinary electric fixtures, appliances and normal office equipment during "Regular Business Hours" (as defined in the Overlease) ("Operating Hours") (excluding all periods in which electric service is not provided pursuant to the Overlease and excluding all local, state and federal holidays). Sublessor shall not be liable in any way to Sublessee for any interruption, failure or defect in supply or character of electric current furnished to the Sublet Premises, or for any other reason. Sublessee shall use said electric current only for lighting and in accordance with the terms of the Overlease, all of which are hereby incorporated, and insofar as the facilities are not burdened thereby and applicable laws and insurance regulations permit and the same are permitted under the Overlease, for operation of ordinary electric fixtures, appliances and office equipment as is normally used in connection with the operation of a business office during such Operating Hours. Sublessee's use of electric current in the Sublet Premises shall not at any time exceed the capacity of any of the electrical conductors and equipment in or otherwise serving the Sublet Premises or be in violation of the provisions set forth in the Overlease. Sublessee shall not make or perform, or permit the making or performing of, any alterations to wiring installations or other electrical facilities in or serving the Sublet Premises or any additions to the business machines, office equipment or other appliances in the Sublet Premises which utilize electrical energy. If any tax is imposed upon Sublessor or Overlandlord in connection with the furnishing of electric current to Sublessee by any federal, state or local government subdivision or authority, or as provided in the Overlease, Sublessee shall also pay such party an amount equal to such tax, where permitted by law, upon demand. If, subsequent to the Sublease Commencement Date, the public utility rate schedule or any portion of the charge for the supply of electric current to the Building is increased, or such rate schedule is superseded by another rate schedule, or if a survey is conducted or a consultant obtained pursuant to the terms of the Overlease which results, in any such event, and regardless of the reason (other than as a result of increased consumption or demand caused solely by Sublessor at the Original Premises), in an increase payable by "Tenant" pursuant to the terms of the Overlease, or otherwise, then, in any such event, the Electricity Amount shall be increased by the percentage of increase in the cost for purchasing electricity for the Building (or by the percentage increase attributable to the survey or consultant, as applicable), provided, however, that in no event shall the Electricity Amount ever be less than $2.50 per rentable square foot per annum. Whenever the amount of any such adjustment is so determined, the parties shall execute and exchange an agreement supplementary hereto to reflect such adjustment in the amount of the Electricity Amount payable hereunder, effective from the effective date of such increase in such rate schedule or charge, but such adjustment shall be effective from such date whether or not a supplementary agreement is executed. In addition, the Electricity Amount is based upon Sublessor's assumption that Sublessee will use electrical energy only during Operating Hours in connection with lighting and normal use of ordinary electric fixtures, appliances and office equipment at the Sublet Premises. Accordingly, if Sublessee makes material use of electricity during hours other than Operating Hours, or in connection with other than ordinary electric fixtures, appliances and normal office equipment at the Sublet Premises, the Electricity Amount shall from time to time be equitably adjusted to reflect the resulting increase in such use. Sublessor shall furnish a statement of Sublessor's determination as to the amount of the adjustment, and the same shall become binding upon the parties unless, within twenty-five (25) days, Sublessee notifies Sublessor that it disputes the amount of such adjustment, in which event the parties shall in good faith make reasonable attempts to come to agreement, and, if Sublessor and Sublessee cannot agree thereon, the amount of such adjustment shall be determined, based on standard practices, by an independent electrical consultant selected by Sublessor (acting reasonably). Sublessee shall permit such consultant to have access to the Sublet Premises and Sublessee's electrical facilities for the foregoing purpose at all reasonable times. The fee of such consultant shall be paid by Sublessee unless such consultant finds that Sublessee's use does not justify an increase in the Electricity Amount, in which case the fee shall be paid by Sublessor. When the amount of such adjustment is so determined, Sublessor and Sublessee shall execute a supplementary agreement to reflect such adjustment, which shall be effective from the date of the increase of such usage as determined by such electrical consultant and be made retroactively, if necessary. Any adjustment shall be effective even if such supplementary agreement is not executed and delivered. Pending the determination of the adjustment, Sublessee shall pay to Sublessor the amount of such adjustment as specified in Sublessor's statement. Finally, Sublessor, in its sole discretion, shall have the option, subject in all respects to any approval rights under the Overlease which Overlandlord has, of installing submeters at Sublessor's expense to measure Sublessee's consumption of electrical energy. If Sublessor exercises such option, the Electricity Amount payment shall be discontinued effective as of the commencement of the operation of such submeters and, commencing at such time, Sublessee shall pay to Sublessor, as Additional Rent, on demand made from time to time but no more frequently than monthly, for its use of electrical energy in the Sublet Premises, based upon both consumption and demand factors, at the seasonally adjusted rate then payable by Sublessor to the utility company, plus an amount equal to five (5%) percent thereof to reimburse Sublessor for its overhead, administration and supervision in connection therewith. For the purpose of this Section, the rate to be paid by Sublessee in the event of submetering shall include any taxes, energy charges, demand charges, fuel adjustment charges, rate adjustment, charges, or other charges actually imposed in connection therewith. If any tax is imposed upon Sublessor's receipts from the sale or resale of electrical energy to Sublessee by any federal, state, city or local authority, the share of such tax allocable to the electrical energy service received by Sublessee shall be passed on to, and paid by, Sublessee, as Additional Rent, if and to the extent permitted by law. (b) In addition, if Sublessee wishes for HVAC to be provided to the Sublet Premises (which shall be at temperatures and in such amounts as provided in the Overlease and, also, subject in all respects to the terms of the Overlease, as well as Section 12 of this Sublease below) during hours other than "Regular Business Hours" (as such term is defined in the Overlease), Sublessee shall comply with such advance notice and other requirements as may be set forth in the Overlease and/or which Sublessor (acting reasonably) and/or Overlandlord may from time to time impose. In addition to all other sums payable by Sublessee under this Sublease, Sublessee shall also pay to Sublessor, as Additional Rent, an amount ("Additional HVAC Amount") equal to the amount payable by "Tenant" under the Overlease (including, without limitation, Article 18 of the Overlease) (plus all applicable taxes and charges) to the utility company, Overlandlord, or any other party in connection with HVAC being provided to the Sublet Premises outside of Regular Business Hours. Such rate may be adjusted upward by Sublessor from time to time to account for increases in rates passed through to Sublessor pursuant to the Overlease. Sublessor shall furnish a statement of Sublessor's determination as to the amount of the payment or the adjustment. Sublessee's obligations with respect to these payments shall expressly survive the termination or expiration of this Sublease and, in no event, shall Sublessor's failure to timely insist or demand any such payment(s) in one or more instances ever act as a waiver of any such payment(s) obligation. Sublessee shall pay Sublessor the Additional HVAC Amount payments discussed above within five (5) days after such service was provided to Sublessee or as may otherwise be directed by Sublessor, without notice, demand, offset, reduction or abatement. Any failure or delay by Sublessor in billing any sum set forth in this Section shall not constitute a waiver of Sublessee's obligation to pay the same in accordance with the terms of this Sublease. If any tax is imposed upon Sublessor or Overlandlord in connection with the furnishing of HVAC to Sublessee by any federal, state or local government subdivision or authority, or as provided in the Overlease, Sublessee shall also pay such party an amount equal to such tax, where permitted by law, upon demand. Sublessee shall not make or perform, or permit the making or performing of, any alterations to wiring installations or other HVAC facilities in or serving the Sublet Premises. Sublessee further agrees that neither Sublessee, nor its agents, employees, contractors or invitees shall at any time tamper with, adjust or touch or otherwise in any manner affect such mechanical installations or thermostat(s), if any. 8. Notices. Any notice, statement, demand or other communication required or permitted to be given, rendered or made by either party to the other, pursuant to this Sublease or pursuant to any applicable law or requirement of public authority, shall be in writing (whether or not so stated elsewhere in this Sublease) and shall be delivered by (i) reputable overnight courier, or (ii) by registered or certified mail, return receipt requested addressed to the other party at the addresses (or fax numbers) set forth below: If to Sublessor: Austin Nichols & Company, Inc. 777 Westchester Avenue White Plains, New York 10640 Attention: Thomas R. Lalla, Jr., General Counsel Facsimile: (914) 539-4670 If to Sublessee: GP Strategies Corporation 9 West 57th Street, Suite 4170 New York, New York 10019 Attention: President With a copy to: Duane Morris LLP 380 Lexington Avenue New York, New York 10184 Attention: Robert Hasday, Esq. All notices, statements, demands or other communication shall be deemed to have been given, rendered or made upon the first (1st) business day after delivery to a reputable overnight courier service or upon the third (3rd) day after so mailed. Either party may, by notice as aforesaid, designate a different address or addresses for notices, statements, demand or other communications intended for it. 9. Broker. Sublessor and Sublessee covenant, warrant and represent to the other that there were no brokers or finders instrumental in consummating this Sublease, except for Newmark & Company Real Estate, Inc. (the "Broker") and that no conversations or negotiations were had by Sublessor or Sublessee with any broker, other than the Broker, concerning the renting of the Sublet Premises to the Sublessee. Sublessor will pay the Broker its commission pursuant to the currently existing separate written agreement with Broker. Sublessee agrees to indemnify and hold Sublessor harmless from and against (a) any and all claims for brokerage commissions or fees by any person or company (other than the Broker) which is based in whole or part on any dealings or communications by Sublessee with such person or company, and (b) all expenses, including reasonable attorneys' fees and court costs, arising out of any such claims. Sublessor agrees to indemnify and hold Sublessee harmless from and against (x) any and all claims for brokerage commissions or fees by any person or company (including the Broker) which is based in whole or part on any dealings or communications by Sublessor with such person or company, and (y) all expenses, including reasonable attorneys' fees and court costs, arising out of any such claims. The provisions of this Paragraph 9 shall survive the expiration or termination of this Sublease. 10. Sublessee Default. In the event that Sublessee shall be in default of any covenant of, or shall fail to honor or perform any obligation under, this Sublease after the lapse of any applicable notice and grace periods, Sublessor shall have available to it all of the remedies available under this Sublease, at law and/or in equity, as well as all rights and remedies available to Overlandlord under the Overlease in the event of a like default or failure on the part of the "Tenant." In addition, Sublessor shall be entitled to receive and/or to exercise any and all rights and remedies available to Overlandlord under Paragraph 13 of the Overlease (i.e., concerning Bankruptcy), in connection with a like or similar situation involving Sublessee. 11. No Recourse. No property or assets of any partner (general, limited or otherwise), member, shareholder, officer, or director of Sublessor, disclosed or undisclosed, shall be subject to levy, execution, or other enforcement procedure for the satisfaction of Sublessee's remedies, and said parties shall have no personal liability, under or with respect to this Sublease, the relationship of Sublessor and Sublessee hereunder, or Sublessee's use or occupancy of the Sublet Premises. Notwithstanding anything contained in this Sublease or the Overlease to the contrary, Sublessee shall look solely to the estate and interest of Sublessor in the Overlease (subject, however, to the rights of the Overlandlord and the holder of any mortgage or the lessor under any ground lease, now or hereafter affecting the Sublet Premises) for the satisfaction of any right of Sublessee, for the collection of any judgment or other judicial process or arbitration award requiring the payment of money by Sublessor in the event of any default or breach by Sublessor under this Sublease (provided, however, Sublessee shall be entitled to pursue collection against Sublessor with respect to a final judgment which it may obtain against Sublessor in connection with a default by Sublessor of Sublessor's obligations under this Sublease, up to a maximum amount not to exceed, collectively, $100,000.00). 12. Services. Notwithstanding anything contained in this Sublease or in the Overlease to the contrary, Sublessor shall have no obligation to maintain, repair or restore, or make any alterations or improvements to, the Sublet Premises under any circumstances. In addition, Sublessor shall not be required to provide any services or do any act or thing or make any payment with respect to the Sublet Premises, except as may be expressly provided in this Sublease. Also, in addition to those limitations provided elsewhere in this Sublease, Sublessor shall have no obligation whatsoever to provide utilities or services to the Sublet Premises and shall have no liability whatsoever if utilities or services are interrupted or not so provided. 13. Assignment, Subletting and Transfer. (a) Sublessee, for itself, its heirs, distributees, executors, administrators, legal representatives, successors and assigns, expressly covenants that it shall not assign, mortgage or encumber this Sublease, nor underlet, nor suffer, nor permit the Sublet Premises or any part thereof to be used or occupied by others, without the prior written consent of Sublessor in each instance (which consent may be given or withheld in Sublessor's sole discretion) and without also fully complying with the terms of and consents of Overlandlord required by the Overlease. In addition, any proposed sublease shall contain the condition and restriction that the sublease shall not be assigned, encumbered or otherwise transferred or the subleased premises further sublet by the sublessee in whole or in part, or any part thereof suffered or permitted by the sublessee to be used or occupied by others, without the prior written consent of Sublessor and Overlandlord in each instance. If this Sublease be assigned, or if the Sublet Premises or any part thereof be underlet or occupied by anybody other than Sublessee, Sublessor may, after default by Sublessee after the lapse of any applicable notice and grace periods, and without limiting any of Sublessor's rights under this Sublease, at law and/or in equity, collect rent from the assignee, undertenant or occupant, and apply the net amount collected to the rent herein reserved, but no assignment, underletting, occupancy or collection shall be deemed a waiver of the provisions hereof, the acceptance of the assignee, undertenant or occupant as tenant, or a release of Sublessee from the further performance by Sublessee of covenants on the part of Sublessee herein contained. The consent by Sublessor or Overlandlord to an assignment or underletting shall not in any way be construed to relieve Sublessee from obtaining the express consent in writing of Sublessor and Overlandlord (as required by the Overlease) to any further assignment or underletting. In no event shall any permitted sublessee assign or encumber its sublease or further sublet all or any portion of its sublet space, or otherwise suffer or permit the sublet space or any part thereof to be used or occupied by others, without Sublessors and Overlandlord's (as required by the Overlease) prior written consent in each instance, which consent may be given or withheld in such parties' sole discretion. Subject to any of Overlandlord's rights under the Overlease (whose rights shall remain superior to the following), Sublessee acknowledges and agrees that one hundred percent (100%) of any sums or any other economic consideration received by Sublessee, or payable to Sublessee, as a result of any assignment, subletting or transfer of this Sublease and/or the Sublessee's interest in or occupancy to the Sublet Premises, or any party thereof, whether denominated rent or otherwise (net of Sublessee's reasonable legal and brokerage costs and expenses in connection with such assignment, sublease or transfer), which exceed, in the aggregate, the total monthly sums which Sublessee is obligated to pay Sublessor under this Sublease (pro rated as to any Sublease to reflect obligations allocable to that portion of Sublet Premises subject to such Sublease) shall be payable monthly to Sublessor, as Additional Rent, under this Sublease without affecting or reducing any other obligation of Sublessee hereunder and without offset, abatement, reduction or demand. Sublessor's failure or delay in timely collecting or being paid any such sums shall never be deemed a waiver of Sublessor's ongoing right to receive the same. (b) Notwithstanding anything contained in this Article to the contrary, but provided this Sublease is in full force and effect, without material or monetary default by Sublessee after the lapse of time for notice and cure, and subject to all of the applicable provisions of this Sublease and the Overlease (which Overlease shall remain superior to this provision), Sublessee may, without Sublessor's prior written consent, assign its entire interest in this Sublease to an Affiliate, provided that (i) at least thirty (30) days prior to the effective date of such assignment, Sublessee furnishes Sublessor with the name of such proposed assignee, together with the certification of Sublessee, and such other proof as Sublessor may reasonably request, that such proposed assignee is an Affiliate, (ii) the proposed assignee has a financial worth of at least Five Million And No/100 Dollars ($5,000,000.00), (iii) the purposes for which such proposed assignee intends to use the Sublet Premises are uses expressly permitted by this Sublease, (iv) Sublessee shall and will automatically be and remain fully liable for the payment of all of the Basic Rent and Additional Rent due and to become due under this Sublease both before and after the date of the assignment, as well as for the performance of all obligations under this Sublease both before and after the date of the assignment, and Sublessee shall not be released from any of its obligations or liabilities under this Sublease, and Sublessee (along with such assignee) shall be fully responsible and liable for all acts or omissions of such proposed assignee, or anyone claiming under or through Sublessee, or such proposed assignee, (v) such transfer is not principally for the purpose of transferring the leasehold estate created hereby, and (vi) such proposed assignee, as of the effective date of such assignment, is an Affiliate of the named Sublessee. For purposes of this subparagraph, the term "Affiliate" shall mean any entity controlling, controlled by or under common control with the named Sublessee hereunder which, for purposes hereof, shall mean (x) ownership by the named Sublessee of more than 51% of the outstanding voting capital stock of a corporation or more than 51% of the beneficial interests of any other entity and (y) the ability to effectively control or direct the business decisions of such corporation or entity. (c) Notwithstanding anything contained in this Article to the contrary, but provided this Sublease is in full force and effect, without material or monetary default by Sublessee after the lapse of time for notice and cure, and subject to all of the applicable provisions of this Sublease and the Overlease (which shall remain superior to this provision), Sublessee may, without Sublessor's prior written consent (but must still obtain Overlandlord's written consent in advance), enter into an occupancy agreement for up to forty percent (40%) of the Sublet Premises to the "Spin-Off" (as defined below), provided that (i) at least fifteen (15) days prior to the effective date of such occupancy agreement, Sublessee notifies Sublessor in writing, together with the certification of Sublessee, and such other proof as Sublessor may reasonably request, that such proposed occupant is the actual Spin-Off and meets the requirements below, (ii) the purposes for which such Spin-Off intends to use the Sublet Premises are uses expressly permitted by this Sublease, (iii) Sublessee shall and will automatically be and remain fully liable for the payment of all of the Basic Rent and Additional Rent due and to become due under this Sublease both before and after the date of the occupancy agreement, as well as for the performance of all obligations under this Sublease both before and after the date of the occupancy agreement, and Sublessee shall not be released from any of its obligations or liabilities under this Sublease, and Sublessee (along with the Spin-Off) shall be fully responsible and liable for all acts or omissions of such Spin-Off, or anyone claiming under or through Sublessee, or such Spin-Off, (iv) such transfer is not principally for the purpose of transferring the leasehold estate created hereby, (v) neither Sublessor or Overlandlord shall ever have any liability to, nor obligations to, the Spin-Off, (vi) the Spin-Off does not ever engage in, or take, any action which would cause either Sublessee to be in default under this Sublease, or Sublessor to be in default under the Overlease, (vii) such Spin-Off shall never have the right to transfer to any other party any rights in, or to, that portion of the Sublet Premises which it occupies, and (viii) such proposed occupancy agreement is with the named Spin-Off. For purposes of this subparagraph, the term "Spin-Off" shall mean National Patent Development Corporation, a Delaware corporation, which company must at all times be a publicly traded company. (d) Notwithstanding anything contained in this Article to the contrary, but provided this Sublease is in full force and effect, without material or monetary default by Sublessee after the lapse of time for notice and cure, and subject to all of the applicable provisions of this Sublease and the Overlease (which shall remain superior to this provision), Sublessee may, without Sublessor's prior written consent (but must still obtain Overlandlord's written consent in advance), enter into an occupancy agreement for up to ten percent (10%) of the Sublet Premises to "Five Star" (as defined below), provided that (i) at least fifteen (15) days prior to the effective date of such occupancy agreement, Sublessee notifies Sublessor in writing, together with the certification of Sublessee, and such other proof as Sublessor may reasonably request, that such proposed occupant is Five Star and meets the requirements below, (ii) the purposes for which Five Star intends to use the Sublet Premises are uses expressly permitted by this Sublease, (iii) Sublessee shall and will automatically be and remain fully liable for the payment of all of the Basic Rent and Additional Rent due and to become due under this Sublease both before and after the date of the occupancy agreement, as well as for the performance of all obligations under this Sublease both before and after the date of the occupancy agreement, and Sublessee shall not be released from any of its obligations or liabilities under this Sublease, and Sublessee (along with Five Star) shall be fully responsible and liable for all acts or omissions of Five Star, or anyone claiming under or through Sublessee, or Five Star, (iv) such transfer is not principally for the purpose of transferring the leasehold estate created hereby, (v) neither Sublessor or Overlandlord shall ever have any liability to, nor obligations to, Five Star, (vi) Five Star does not ever engage in, or take, any action which would cause either Sublessee to be in default under this Sublease, or Sublessor to be in default under the Overlease, (vii) Five Star shall never have the right to transfer to any other party any rights in, or to, that portion of the Sublet Premises which it occupies, and (viii) such proposed occupancy agreement is with Five Star. For purposes of this subparagraph, the term "Five Star" shall mean Five Star Properties, Inc., a Delaware corporation, which company must at all times be a publicly traded company in which Sublessee owns not less than ten percent (10%) of all of the outstanding stock. (e) For the purpose of this paragraph, a sale, assignment, transfer, exchange, new issuance or other disposition of (i) any of the capital stock of Sublessee if Sublessee is a corporation, or of any corporation which directly or indirectly controls Sublessee or of any corporate partner in Sublessee, if Sublessee is a partnership; or (ii) any general partnership interest in Sublessee if Sublessee is a partnership; or (iii) any undivided interest in this Sublease if Sublessee is a co-tenancy, shall be deemed to be an assignment of this Sublease. However, if a sale, assignment, transfer, exchange or new issuance of any capital stock of Sublessee is made over a recognized stock exchange in connection with the fact that Tenant is then a publicly traded company (as defined by Federal Securities Laws), such transfer shall not require Sublessor's consent. (f) Without otherwise limiting those additional restrictions set forth elsewhere in this Sublease and, as required by Section 11.01(c) of the Overlease, Sublessee expressly acknowledges the following provision is set forth thereon: "This sublease/assignment shall, at the option of Landlord or any successor Landlord or lessor under any Superior Lease as hereinafter defined, remain in full force and effect and the subtenant/assignee hereunder shall attorn to and recognize Landlord or successor Landlord as owner and landlord hereunder and shall promptly upon such party's request, execute and deliver all instruments necessary or appropriate to confirm such attornment and recognition. The subtenant/assignee hereunder hereby waives all rights under any present or future laws or otherwise to elect, by reason of the termination of this Lease, any Underlying Lease or any Superior Lease, to terminate this sublease/assignment or surrender possession of the premises demised hereby." 14. Consent To Sublease by Overlandlord. This Sublease, and Sublessor's obligations hereunder, are subject to, and conditioned upon, Sublessor obtaining Overlandlord's written consent (the "Overlandlord Consent") to this Sublease on or before December 20, 2002 (and, in this regard, Sublessee shall fully cooperate with Sublessor, at Sublessor's expense, in obtaining such consent, which cooperation shall include, without limitation, providing reasonable financial information and records which may be requested and/or modifications to this Sublease which do not materially increase Sublessee's obligations or materially decrease its rights hereunder). If, on or before December 20, 2002, Sublessor fails or is unable to obtain such written consent for any reason whatsoever, either party shall have the right to automatically declare this Sublease null and void and of no further force or effect (provided, however, Sublessee shall have this right only if Sublessee has fully cooperated in obtaining such consent, as discussed above). 15. Delivery. Notwithstanding anything contained in this Sublease to the contrary, Sublessor does not warrant or represent that the Sublease Commencement Date will occur (and possession given) by a date certain and, in this regard, Sublessor shall not be subject to any liability for failure to give possession on a particular date and the validity of this Sublease shall not be impaired under such circumstances, nor shall the same be construed in any way to extend the Sublease Term. 16. Taxes and Charges. Sublessee shall pay, on or before the date same is due, any occupancy, sales, use or similar tax, charge or fee that is at any time due or payable with respect to the occupancy or use of the Sublet Premises or the payment of Basic Rent or Additional Rent, and which is attributable to this Sublease and/or the Sublease Term. 17. Use; Compliance. Sublessee shall use and occupy the Sublet Premises for office purposes and related incidental uses, and for no other use or purpose, provided that such uses shall only be maintained as long as the same are permitted under the Overlease and all applicable laws and ordinances. Sublessee also agrees to comply with all reasonable rules nd regulations Sublessor may adopt for the operation of the Sublet Premises. Sublessor has made no representation or warranty that Sublessee may in fact lawfully use and/or occupy the Sublet Premises for any of such uses, nor as to the portion or portions of the Sublet Premises which may lawfully be used for any particular use. Sublessee covenants that, during the Sublease Term, no part of the Sublet Premises shall be used in any manner whatsoever for any purposes in violation of this Sublease or the Overlease or in violation of laws, ordinances, regulations, or orders of the United States, or of the State, County, and/or City or other applicable governmental subdivisions where the Sublet Premises are located. Sublessee shall comply with all such laws, ordinances, regulations and orders now in effect or hereafter enacted or passed during the Sublet Term with respect to the Sublet Premises (including, without limitation, The Americans With Disabilities Act); provided that (a) Sublessee shall not be required to perform any alterations in the Sublet Premises in order to comply with such laws, ordinances, regulations or orders unless the requirement to perform such alterations arises as a result of Tenant's use of the Sublet Premises, (b) Sublessee's obligation to comply with such laws, ordinances, regulations or orders with respect to the Sublet Premises shall not be greater than Sublessor's obligation to comply with such laws, ordinances, regulations or orders with respect to the balance of the Original Premises pursuant to the Overlease, and (c) Sublessee shall not be responsible to cure any violations of any such laws, ordinances, regulations or orders which exist as of the Sublease Commencement Date. 18. Repair. Sublessee shall, at all times during the Sublease Term of this Sublease, at Sublessee's own cost and expense, keep the Sublet Premises and all improvements and facilities located therein, in good operating condition and repair, and in such condition as may be required by the Overlease, by law, or by the terms of the insurance policies furnished pursuant to this Sublease; provided that the foregoing shall not obligate Sublessee to perform any repairs which are not the obligation of Sublessor pursuant to the Overlease. 19. Alterations. Sublessee shall not construct, remove, demolish or alter the Sublet Premises or any improvement located now or hereafter on or in the Sublet Premises without the prior written consent of Sublessor and Overlandlord, which such parties may grant or withhold in its sole discretion; provided, however, to the extent approved in writing by Overlandlord in advance, Sublessee, at Sublessee's sole cost and expense, shall be entitled to erect one partition (the "Partition") in the Sublet Premises provided (i) the same is erected in accordance with plans and specifications (and using a contractor) acceptable in all respects to Sublessor and Overlandlord, and (ii) Sublessee, at Sublessor's option, removes the Partition prior to the expiration or early termination of this Sublease and repairs any damage, all at Sublessee's sole cost and expense. 20. Mechanics' Liens. If, in connection with any work being performed by Sublessee or any subtenant of Sublessee or in connection with any materials being furnished to Sublessee or any subtenant, any mechanic's lien or other lien or charge shall be filed or made against the Sublet Premises or any improvement therein or any part thereof, or if any such lien or charge shall be filed or made against Overlandlord or Sublessor, then Sublessee, at its own cost and expense, within fifteen (15) days after such lien or charge shall have been filed or made, shall cause the same to be cancelled and discharged of record by payment or filing of a bond or otherwise, and shall also defend any action, suit or proceeding which may be brought for the enforcement of such lien or charge, and shall pay any damages, costs and expenses, including reasonable attorneys' fees, suffered or incurred by Sublessor, and shall satisfy and discharge any judgment entered within fifteen (15) days from the entering of such judgment by payment or filing of a bond, or otherwise. If Sublessee fails to timely discharge any lien, charge or judgment required to be paid or discharged by Sublessee, Sublessor may pay such items or discharge such liability by payment or bond or both, and Sublessee will repay to Sublessor, upon demand and as Additional Rent, any and all reasonable amounts paid by Sublessor, or by reason of any liability on any such bond, and also any and all incidental expenses, including reasonable attorneys' fees, incurred by Sublessor. 21. Indemnity. Sublessee will indemnify and save harmless Sublessor and Overlandlord from and against any and all liabilities, losses, damages, expenses, causes of action, suits, interests, fines, penalties, claims and judgments arising from injury, or claim of injury, to person or property of any and every nature, and from any matter or thing, growing out of the occupation, possession, use, construction, alteration, repair, maintenance or control of the Sublet Premises (unless directly resulting from the negligence, misconduct or default of Sublessor), and/or arising out of Sublessee's failure to perform each and every term, covenant, condition and agreement herein provided to be performed by Sublessee. Sublessee, at its own cost and expense, will defend by counsel selected or approved by Sublessor, any and all suits that may be brought, and claims which may be made, against Sublessor, or in which Sublessor may be impleaded with others, whether Sublessor shall be liable or not, upon any such above-mentioned liabilities, losses, damages, expenses, causes of action, suits, interest, fines, penalties, claims and judgments, and shall satisfy, pay and discharge any and all judgments that may be recovered against Sublessor in any such action or actions in which Sublessor may be a party defendant, or that may be filed against the Sublet Premises, the improvements thereon, or any interest therein, and in the event of the failure of Sublessee to pay the sum or sums for which Sublessee shall become liable, then Sublessor may pay such sum or sums, with all interest at the highest rate allowed by law and charges which may have accrued thereon, and the amount paid by Sublessor shall be payable by Sublessee to Sublessor upon demand, as Additional Rent. In addition, all indemnities and insurance coverage running in favor of the Overlandlord in the Overlease shall run from Sublessee in favor of such party plus, also, in favor of Sublessor. 22. Sublessor's Expenses. Sublessee shall reimburse Sublessor upon demand for all reasonable expenses, including, without limitation, reasonable attorneys' fees through the trial and appellate levels, incurred by Sublessor in connection with the collection of any Basic Rent, Additional Rent or other sums due pursuant to this Sublease or the enforcement of any other agreement or obligation of Sublessee pursuant to this Sublease. 23. Hazardous Substances and Environmental Laws. Sublessee shall not cause or permit the Sublet Premises to be used for the generation, handling, storage, transportation, disposal or release of any "Hazardous Substances" (as defined below), except for small quantities which may be used as cleaning supplies in connection with normal office purposes and which are exempted or permitted under applicable federal, state or local laws, ordinances, rules or regulations pertaining to Hazardous Substances or industrial hygiene or environmental conditions ("Environmental Laws"), and Sublessee shall not cause or permit the Sublet Premises, or any activities conducted thereon, to be in violation of any applicable Environmental Laws. Sublessee agrees to indemnify Sublessor and hold Sublessor and its directors, officers, employees, successors and assigns harmless from and against any and all claims, losses, damages (including all foreseeable and unforeseeable consequential damages), liabilities, fines, penalties, charges, interest, administrative or judicial proceedings and orders, judgments, remedial action, requirements, enforcement actions of any kind, and all reasonable costs and expenses incurred in connection therewith (including without limitation reasonable attorneys' fees and expenses), directly or indirectly resulting in whole or in part from the violation of any Environmental Laws applicable to the Sublet Premises or any activity conducted thereon, or from any use, generation, handling, storage, transportation, disposal or release of Hazardous Substances at or in connection with the Sublet Premises, or any contamination, detoxification, closure, cleanup or other remedial measure required under any Environmental Laws. All sums paid and costs incurred by Sublessor with respect to the foregoing matters shall be payable by Sublessee as Additional Rent hereunder. This indemnity shall survive the full payment and performance of all Basic Rent and the expiration or earlier termination of this Agreement. "Hazardous Substances" shall mean, at any time, (i) asbestos and any asbestos containing Material and any substance that is then defined or listed in, or otherwise classified pursuant to, any Environmental Laws or any applicable laws or regulations as a "hazardous substance," "hazardous Material", "hazardous waste", "infectious waste", "toxic substance", "toxic pollutant" or any other formulation intended to define, list, or classify substances by reason of deleterious properties such as ignitability, corrosivity, reactivity, carcinogenicity, toxicity, reproductive toxicity, or "EP toxicity", (ii) any petroleum and drilling fluids, produced waters, and other wastes associated with the exploration, development or production of crude oil, natural gas, or geothermal resources and (iii) petroleum products, polychlorinated biphenyls, urea formaldehyde, radon gas, radioactive matter, and medical waste. Notwithstanding the foregoing, Sublessee shall not be responsible in any way for (and shall not be required to indemnify Sublessor with respect to) any Hazardous Substances which are present in the Sublet Premises as of the Sublease Commencement Date to the extent such Hazardous Substances are not disturbed, in whole or in part, by Sublessee or by any of Sublessee's assignees, sublessees, employees, invitees, licensees, guests, contractors, subcontractors and/or any other party under any such parties' reasonable control or direction. 24. Insurance. At all times during the Sublease Term, Sublessee shall, at Sublessee's own cost and expense, provide and keep in force for the benefit of Sublessor and Overlandlord (i) general liability policies protecting Sublessor against any and all liability occasioned by negligence, occurrence, accident or disaster in or about the Sublet Premises, which policy must be for limits of not less than Three Million Dollars per incident or occurrence, (ii) any and all improvements within the Sublet Premises, insured against loss or damage by fire, lightning, windstorm, hail, explosion, riot, damage from aircraft, smoke damage, war damage (when available) and such other insurable risks, casualties and hazards as Sublessor may from time to time reasonably specify in an amount at least equal to their full insurable value without deduction for depreciation and (iii) all insurance required under the Overlease (including, without limitation, Article 9 of the Overlease, which shall also name Sublessor as an additional insured). Copies of such policies of insurance, together with receipts showing payment of the premiums thereon, shall be delivered to, and left in the possession of, Sublessor and shall be in form reasonably satisfactory to Sublessor. In addition, all insurance to be furnished by Sublessee under this Sublease shall be written by a company or companies reasonably approved by Sublessor, shall name as insured Overlandlord and Sublessor and any fee mortgagee(s), as their interests may appear, shall include a mortgagee clause in standard form if there be a mortgage or mortgagees, shall provide that the proceeds, if any, shall be payable in accordance with the terms of the Overlease and must contain a clause that the insurer will not cancel or change the insurance coverage without first giving Sublessor thirty (30) days advance written notice. 25. Intentionally Deleted. 26. Condition of Sublet Premises/Building. Sublessee represents that Sublessor has made no representations or warranties of any kind (except as expressly set forth herein) and Sublessee further represents that the Sublet Premises, the improvements thereon, sub-surface conditions, title encumbrances and all other matters, and the present tenancies, uses and non-uses thereof, have been examined by Sublessee and that Sublessee accepts the same, without recourse to Sublessor, in the condition or state in which they are now in. In addition, Sublessor and its agents shall not be liable for any injury (including death) or damage to persons or property resulting from fire, explosion, falling plaster, steam, gas, electricity, water, rain, or snow or leaks from any part of the Building, or from the pipes, appliances or plumbing or electrical works, or from the roof, street or subsurface or from any other place, or by dampness, or in connection with the condition of the Building or surrounding areas or by any other cause of whatsoever nature, and Sublessee hereby expressly waives any consequential, punitive or incidental damages. Sublessee also hereby expressly waives any compensation or claims for inconvenience or loss of business, rents or profits as a result of such injury or damage, or for any other reason, in connection with this Sublease. 27. Sublessor's Right of Entry. Sublessor and Sublessor's authorized agents, employees and designees (as well as Overlandlord) shall have the right from time to time, at Sublessor's sole option, to enter and pass through the Sublet Premises and all improvements now or hereafter located thereon at any reasonable time to examine the same, to show them to prospective purchasers, fee mortgagees and others, or to do any acts allowed or required by Sublessor under this Sublease. 28. Surrender. Sublessee shall, on the Sublease Expiration Date, surrender and deliver the Sublet Premises, with the improvements then located thereon and the appurtenances thereto, into the possession and use of Sublessor, without fraud or delay and in good order, condition and repair (ordinary wear and tear and damage by casualty not caused by Sublessee excepted), free and clear of all letting and occupancies, and free and clear of all liens and encumbrances other than those existing on the date of this Sublease or resulting from the actions of Sublessor or Overlandlord without any payment or allowance by Sublessor on account of or for any improvements erected or maintained on the Sublet Premises at the time of the surrender, or for the contents thereof or appurtenances thereto and, also, as may otherwise be required by the Overlease. In the event Sublessee does not timely and fully comply with the terms of this paragraph, and in addition to all other rights and remedies to which Sublessor is entitled as provided in this Sublease, at law and/or in equity, Sublessee will indemnify and hold Sublessor harmless from and against any and all liabilities, losses, damages, expenses, causes of action, claims, fines and judgments made by Overlandlord and/or arising (in whole or in part) under the Overlease (including, without limitation, all sums due or claimed to be due under the Overlease). Also, Sublessee shall remove, at Sublessee's cost, by such date all such fixtures and improvements installed by Sublessee at the Sublet Premises if so required by the Overlease or by Sublessor. 29. Estoppel Certificates. Sublessee agrees to provide Sublessor and/or Overlandlord, promptly upon request, an estoppel certificate evidencing such matters, as the Sublessor (acting reasonably) and/or Overlandlord requests. 30. Rights Cumulative. All the rights and remedies of Sublessor under this Sublease or pursuant to present or future law shall be deemed to be separate, distinct and cumulative and no one or more of them, whether exercised or not, shall be deemed to be in exclusion of, or a waiver of, any of the others, or of any of the rights or remedies which Sublessor may have, and Sublessor shall have, to the fullest extent permitted by law, the right to enforce any rights or remedies separately and to take any lawful action or proceedings to exercise or enforce any right or remedy without thereby waiving or being barred or estopped from exercising and enforcing any other rights and remedies by appropriate action or proceedings. 31. Payments of Money; Interest. All amounts which Sublessee shall be obligated to pay pursuant to this Sublease shall be deemed Basic Rent or Additional Rent, and in the event of the nonpayment by Sublessee of any sum of money which Sublessee shall be obligated to pay to Sublessor under any provision of this Sublease, Sublessor shall have the same rights and remedies by reason of such nonpayment as if Sublessee had failed to pay an installment of Basic Rent. In each instance when Sublessee shall be obligated to make any payment of any sum of money, interest shall accrue thereon and be payable at the highest rate permitted by law, computed from the date which is five (5) days after such payment first became due; provided that Sublessor hereby agrees to waive the payment of interest attributable to one late payment in each calendar year. 32. Sublessor's Self-Help. In addition to Sublessor's rights of self-help set forth elsewhere in this Sublease , if Sublessee at any time fails to perform any of its obligations under this Sublease after the lapse of any applicable notice and grace periods, Sublessor shall have the right but not the obligation, upon giving Sublessee at least three (3) days prior notice of its election to do so (in the event of any emergency no prior notice shall be required) to perform such obligations on behalf of and for the account of Sublessee and to take all such action to perform such obligations. In such event, Sublessor's costs and expenses incurred therein shall be paid for by Sublessee forthwith, with interest (at the highest rate allowed by law). The performance by Sublessor of any obligation shall not constitute a release or waiver of Sublessee therefrom. Sublessee hereby waives any claim and releases Sublessor and Sublessor's agents, contractors and employees from all liability for damage occasioned by any action taken pursuant to this Paragraph. 33. Non-Waiver. No waiver by Sublessor of any breach by Sublessee of any term, covenant, condition or agreement herein, and no failure by Sublessor to exercise any right or remedy in respect of any breach hereunder, shall constitute a waiver or relinquishment for the future of any such term, covenant, condition or agreement or of any subsequent breach of any such term, covenants, condition or agreement, nor bar any right or remedy of Sublessor in respect of any such subsequent breach, nor shall the receipt of any rent, or any portion thereof, by Sublessor, operate as a waiver of the rights of Sublessor to enforce the payment of any other rent then or thereafter in default, or to terminate this Sublease, or to recover the Sublet Premises or to invoke any other appropriate remedy which Sublessor may select as set forth in this Sublease or provided by law. 34. Survival. All rights and obligations of Sublessee which are or may be intended by their nature to be performed and/or complied with after the expiration or earlier termination of this Sublease shall survive such expiration or termination. 35. No Partnership. Sublessor shall not be deemed, in any way or for any purpose, to have become, by the execution of this Sublease or any action taken under this Sublease, a partner of Sublessee, in Sublessee's business or otherwise, or a member of any joint enterprise with Sublessee. 36. Bind and Inure. The terms, covenants, conditions and agreements of this Sublease shall bind and inure to the benefit of the parties to this Sublease and their respective permitted successors and assigns. Any waiver of rights by either party shall be deemed to be a waiver of such rights not only by such party but shall be deemed to be a waiver of such rights for and on behalf of each and every successor and assignee of such party. If any of the provisions of this Sublease, or its application to any situation, shall be invalid or unenforceable to any extent, the remainder of this Sublease, or the application thereof to situations other than that as to which it is invalid or unenforceable, shall not be affected thereby, and every provision of this Sublease shall be valid and enforceable to the fullest extent permitted by law. 37. Waiver. Sublessee expressly waives any right to rescind this Sublease under Section 223-a of the New York Real Property Law or any other present or future law of similar import then in effect and further expressly waives any right to recover any damages which may result from Sublandlord's inability to deliver possession of the Sublet Premises on the Sublease Commencement Date; provided that if Sublessor has not delivered possession of the Sublet Premises on or before December 20, 2002, Sublessee shall have the right to terminate this Sublease at any time thereafter (but prior to the delivery of possession by Sublessor) (provided Sublessee has otherwise fully cooperated with Sublessor in obtaining the Overlandlord Consent, as required above). Sublessee agrees that the provisions of this Article are intended to constitute "an express provision to the contrary" within the meaning of said Section 223-a. 38. Recording. Sublessee shall not record this Sublease or any memorandum hereof. 39. Entire Agreement. This Sublease sets forth the entire agreement between the parties, superceding all prior agreements and understandings, written and oral, and may not be altered or modified except by a writing signed by both parties. 40. Law. This Agreement has been executed in the State of New York and shall be governed by and construed in accordance with the laws of the State of New York. 41. Execution. Submission by Sublessor of this Sublease for execution by Sublessee shall confer no rights nor impose any obligation on Sublessor unless and until (and subject to all other rights and conditions contained elsewhere) both Sublessor and Sublessee shall have executed this Sublease and duplicate originals thereof shall have been delivered by Sublessor and Sublessee to each other. 42. Intentionally Deleted. --------------------- 43. Sublessee's Early Termination Options. As long as the named Sublessee (i.e., GP Strategies Corporation or one of its Affiliate's or one of its permitted occupants) is then in possession of all the Sublet Premises under this Sublease and provided there is no default which remains uncured beyond the applicable notice and cure period at the time Sublessor receives the "First Termination Notice" (as defined below) or at anytime thereafter through the "First Termination Date" (as defined below) (except to the extent Sublessor, in, Sublessor's sole discretion, waives such condition), Sublessee shall have the option (the "First Termination Option"), at Sublessee's discretion, to terminate this Sublease at the end of the twelfth (12th) month following the Sublease Commencement Date of this Sublease (the "First Termination Date"), provided, Sublessor receives written notice (the "First Termination Notice") from Sublessee no later than the end of the tenth (10th) month following the Sublease Commencement Date of this Sublease, time being of the essence, stating that Sublessee is exercising the First Termination Option. In the event Sublessee timely and properly exercises the First Termination Option then, in such event, and in addition to those other Sublessee obligations provided for in this Sublease, (i) Sublessee shall vacate and deliver the Sublet Premises to Sublessor free of all occupants and in the condition required by this Sublease no later than 5:00 P.M. on the First Termination Date, time being of the essence, failing which and in addition to any and all rights and remedies to which Sublessor is entitled under the Sublease, at law and/or in equity, Sublessee shall also be liable to Sublessor for damages (including, without limitation, all consequential damages, as well as all damages and/or costs and/or fines and/or payments Sublessor may incur to a third party as a result of such failure), and (ii) Sublessee shall continue to be responsible for any and all indemnity obligations with respect to the Sublet Premises as provided for under the Sublease, as well as with respect to the acts or omissions of Sublessee and/or Sublessee's employees, guests, invitees, licensees, agents and/or any other party or parties under any such party's or parties' reasonable control prior to the last to occur of the date upon which the First Termination Date occurs or Sublessee properly complies with the requirements set forth in subparagraph (i) directly above. The terms of this Section shall survive the expiration or termination of this Sublease. As long as the named Sublessee (i.e., GP Strategies Corporation or one of its Affiliates or one of its permitted occupants) is then in possession of all the Sublet Premises under this Sublease and provided there is no default which remains uncured beyond the applicable notice and cure period at the time Sublessor receives the "Second Termination Notice" (as defined below) or at anytime thereafter through the "Second Termination Date" (as defined below) (except to the extent Sublessor, in, Sublessor's sole discretion, waives such condition), Sublessee shall have the option (the "Second Termination Option"), at Sublessee's discretion, to terminate this Sublease at the end of the thirty-sixth (36th) month following the Sublease Commencement Date of this Sublease (the "Second Termination Date"), provided, Sublessor receives written notice (the "Second Termination Notice") from Sublessee no later than the end of the thirty-fourth (34th) month following the Sublease Commencement Date of this Sublease, time being of the essence, stating that Sublessee is exercising the Second Termination Option. In the event Sublessee timely and properly exercises the Second Termination Option then, in such event, and in addition to those other Sublessee obligations provided for in this Sublease, (i) Sublessee shall vacate and deliver the Sublet Premises to Sublessor free of all occupants and in the condition required by this Sublease no later than 5:00 P.M. on the Second Termination Date, time being of the essence, failing which and in addition to any and all rights and remedies to which Sublessor is entitled under the Sublease, at law and/or in equity, Sublessee shall also be liable to Sublessor for damages (including, without limitation, all consequential damages, as well as all damages and/or costs and/or fines and/or payments Sublessor may incur to a third party as a result of such failure), and (ii) Sublessee shall continue to be responsible for any and all indemnity obligations with respect to the Sublet Premises as provided for under the Sublease, as well as with respect to the acts or omissions of Sublessee and/or Sublessee's employees, guests, invitees, licensees, agents and/or any other party or parties under any such party's or parties' reasonable control prior to the last to occur of the date upon which the Second Termination Date occurs or Sublessee properly complies with the requirements set forth in subparagraph (i) directly above. The terms of this Section shall survive the expiration or termination of this Sublease. IN WITNESS WHEREOF, the parties hereto have executed this Sublease as of the date and year first above written. SUBLESSOR: AUSTIN NICHOLS & COMPANY, INC. a New York corporation By:_______________________________ Name:_____________________________ Title:______________________________ SUBLESSEE: GP STRATEGIES CORPORATION, a Delaware corporation By:__________________________________________________ Name:_____________________________________________ Title:____________________________________________ \\NY-srv01\LEVINM\854503v04\$BC704!.DOC\27594.010300 A-1 EXHIBIT "A" SUBLET PREMISES B-1 EXHIBIT "B" OVERLEASE EX-10 9 ex1036.txt GP LEASE ELKRIDGE, MD Exhibit 10.36 OFFICE LEASE (LYNDWOOD EXECUTIVE CENTER) THIS LEASE (this "Lease") is made as of June ______, 2002, by and between "Landlord" RIGGS & COMPANY, a division of Riggs Bank N.A., as Trustee of the Multi-Employer Property Trust, a trust organized under 12 C.F.R. Section 9.18 and "Tenant" General Physics Corporation, a Delaware corporation table of contents SECTION 1: DEFINITIONS.....................................................4 Access Laws........................................................4 Additional Rent....................................................4 Additional Tenant Improvements.....................................4 Base Amount Allocable to the Premises..............................4 Base Rent..........................................................4 Basic Tenant Improvements..........................................4 Brokers............................................................4 Building...........................................................4 Business Day.......................................................4 Claims.............................................................4 Commencement Date..................................................4 ERISA..............................................................5 Estimated Operating Costs Allocable to the Premises................5 Events of Default..................................................5 Governmental Agency................................................5 Governmental Requirements..........................................5 Hazardous Substance(s).............................................5 Land 5 Landlord...........................................................5 Landlord's Agents..................................................5 Lease Memorandum...................................................5 Lease Security Deposit.............................................5 Lease Term.........................................................5 Lender.............................................................5 Manager............................................................5 Manager's Address..................................................5 Operating Costs....................................................5 Operating Costs Allocable to the Premises..........................5 Parking Ratio......................................................5 Permitted Use......................................................5 Plans and Specifications...........................................5 Prepaid Rent.......................................................6 Premises...........................................................6 Prime Rate.........................................................6 Project............................................................6 Property Taxes.....................................................6 Punch List Work....................................................6 Relocation Allowance...............................................6 Restrictions.......................................................6 Substantial Completion.............................................6 Telecommunication Facilities.......................................6 Telecommunication Services.........................................7 Tenant.............................................................7 Tenant Alterations.................................................7 Tenant Improvement Allowance.......................................7 Tenant Improvements................................................7 Tenant's Agents....................................................7 Tenant's Pro Rata Share............................................7 Year 7 SECTION 2: PREMISES AND TERM...............................................7 2.1 Lease of Premises.........................................7 2.2 Lease Term................................................7 2.3 Tenant Improvements.......................................7 2.4 Commencement Date.........................................8 2.5 Tenant's Contribution to Tenant Improvement Costs.........9 2.6 Lease Memorandum..........................................9 2.7 Use and Conduct of Business...............................9 2.8 Compliance with Governmental Requirements and Rules and Regulations..........................................10 2.9 Relocation...............................................10 2.10 Renewal..................................................10 2.11 Right of First Offer.....................................12 2.12 Space Reduction Option...................................12 SECTION 3: BASE RENT, ADDITIONAL RENT AND OTHER SUMS PAYABLE UNDER LEASE..13 3.1 Payment of Rental........................................13 3.2 Base Rent................................................13 3.3 Lease Security Provisions................................13 3.4 Additional Rent..........................................13 3.5 Utilities................................................17 3.6 Holdover.................................................18 3.7 Late Charge..............................................18 3.8 Default Rate.............................................18 SECTION 4: MANAGEMENT AND LEASING PROVISIONS..............................19 4.1 Maintenance and Repair by Landlord; Services.............19 4.2 Maintenance and Repair by Tenant.........................19 4.3 Common Areas/Security....................................20 4.4 Tenant Alterations.......................................20 4.5 Tenant's Work Performance................................21 4.6 Surrender of Possession..................................21 4.7 Removal of Property......................................21 4.8 Access...................................................22 4.9 Damage or Destruction....................................22 4.10 Condemnation.............................................23 4.11 Parking..................................................24 4.12 Indemnification..........................................24 4.13 Tenant Insurance.........................................24 4.14 Landlord's Insurance.....................................25 4.15 Waiver of Subrogation....................................26 4.16 Assignment and Subletting by Tenant......................26 4.17 Assignment by Landlord...................................28 4.18 Estoppel Certificates and Financial Statements...........28 4.19 Modification for Lender..................................29 4.20 Hazardous Substances.....................................29 4.21 Access Laws..............................................29 4.22 Quiet Enjoyment..........................................30 4.23 Signs....................................................30 4.24 Subordination............................................31 4.25 Workers Compensation Immunity............................31 4.26 Brokers..................................................31 4.27 Limitation on Recourse...................................31 4.28 Mechanic's Liens and Tenant's Personal Property Taxes....32 4.29 Landlord's Security Interest.............................32 SECTION 5: DEFAULT AND REMEDIES...........................................32 5.1 Events of Default........................................32 5.2 Remedies.................................................33 5.3 Right to Perform.........................................34 5.4 Landlord's Default.......................................35 SECTION 6: MISCELLANEOUS PROVISIONS......................................36 6.1 Notices..................................................36 6.2 Attorney's Fees and Expenses.............................36 6.3 No Accord and Satisfaction...............................36 6.4 Successors; Joint and Several Liability..................36 6.5 Choice of Law............................................36 6.6 No Waiver of Remedies....................................36 6.7 Offer to Lease...........................................37 6.8 Force Majeure............................................37 6.9 Landlord's Consent.......................................37 6.10 Severability; Captions...................................37 6.11 Interpretation...........................................37 6.12 Incorporation of Prior Agreement; Amendments.............37 6.13 Authority................................................37 6.14 Time of Essence..........................................38 6.15 Survival of Obligations..................................38 6.16 Consent to Service.......................................38 6.17 Landlord's Authorized Agents.............................38 6.18 Waiver of Jury Trial.....................................38 LISTING OF EXHIBITS Lease Guaranty Exhibit A.........Legal Description of the Land Exhibit A-1.......Site Plan of Project Exhibit B.........Drawing Showing Location and Configuration of the Premises Exhibit C.........Listing of Plans and Specifications for Tenant Improvements Exhibit D.........Form of Lease Memorandum Exhibit E.........Rules and Regulations Exhibit F.........Description of Permitted Exterior Signs Exhibit G.........Schedule of Cleaning Services Exhibit H.........Communications Equipment SECTION 1: DEFINITIONS ----------------------------- Access Laws. The Americans With Disabilities Act of 1990 (including the Americans with Disabilities Act Accessibility Guidelines for Building and Facilities) and all other Governmental Requirements relating to the foregoing. Additional Rent. Defined in paragraph captioned "Additional Rent." Additional Tenant Improvements. Those alterations or improvements to the Premises that will be part of the initial improvements to the Premises but are in addition to the alterations and improvements described in Exhibit C and as appear and are depicted in the Plans and Specifications. Base Amount Allocable to the Premises. Defined in paragraph captioned "Additional Rent." Base Rent. The rate per rentable square foot per annum and the portion of the Lease Term during which such monthly Base Rent is payable shall be determined from the following table except to the extent the next sentence applies. If the final determination of the rentable square feet for the Premises made about the Commencement Date in accordance with the definition of the term "Premises" and the paragraph entitled "Lease Memorandum" differs from the number of rentable square feet utilized in the following table, the Base Rent shall be recomputed using the annual rental rates specified in the table and the finally determined rentable square feet for the Premises. Base Rent set forth in tabular form in the Lease Memorandum shall be final and conclusive as, when and to the extent specified in the paragraph entitled "Lease Memorandum".
Applicable Portion of Lease Term Rate Per/Rentable Annual Base Rent Monthly Base Sq. Ft./ Annum Rent Installment (Annual / 12) Beginning Ending - ----------------------------- ------------------------------ ------------------ ------------------- ------------------ - ----------------------------- ------------------------------ ------------------ ------------------- ------------------ September 1, 2002 August 31, 2005 $21.00 $644,049.00 $53,670.75* September 1, 2005 August 31, 2006 $21.42 $656,930.04 $54,744.17 September 1, 2006 August 31, 2007 $21.85 $670,117.68 $55,843.14 September 1, 2007 August 31, 2008 $22.29 $683,612.04 $56,967.67 September 1, 2008 August 31, 2009 $22.73 $697,413.12 $58,117.76 September 1, 2009 August 31, 2010 $23.19 $711,214.08 $59,267.84 September 1, 2010 August 31, 2011 $23.65 $725,321.88 $60,443.49 September 1, 2011 August 31, 2012 $24.12 $739,736.28 $61,644.69 September 1, 2012 January 31, 2013 $24.60 $754,457.40 $62,871.45
*See Subsection 2.5.1 regarding rent adjustment for thirteenth (13th) month of Lease Term. Basic Tenant Improvements. Those alterations or improvements to the Premises described in Exhibit C and as appear and are depicted in the Plans and Specifications. Brokers. Tenant was represented in this transaction by Colliers Pinkard, a licensed real estate broker. Landlord was represented in this transaction by Trammell Crow Company, a licensed real estate broker. Building. The building located on the Land at 6095 Marshalee Drive, Elkridge, Maryland, in the Project and containing approximately 81,798 rentable square feet. Business Day. Calendar days, except for Saturdays and Sundays and holidays when banks are closed in Washington, D.C. Claims. An individual and collective reference to any and all claims, demands, damages, injuries, losses, liens, liabilities, penalties, fines, lawsuits, actions, other proceedings and expenses (including reasonable attorneys' fees and expenses incurred in connection with the proceeding whether at trial or on appeal). Commencement Date. The earlier to occur of: (a) two weeks after the date of Substantial Completion; or (b) the date on which Tenant takes possession of all or part of the Premises for the purpose of doing business (installing communications equipment, furniture and other activities associated with preparing the Premises for occupancy to conduct business shall not be deemed taking possession of the Premises for the purpose of doing business). ERISA. The Employee Retirement Income Security Act of 1974, as now or hereafter amended, and the regulations promulgated under it. Estimated Operating Costs Allocable to the Premises. Defined in paragraph captioned "Additional Rent". Events of Default. One or more of those events or states of facts defined in the paragraph captioned "Events of Default". Governmental Agency. The United States of America, the state in which the Land is located, any county, city, district, municipality or other governmental subdivision, court or agency or quasi-governmental agency having jurisdiction over the Land and any board, agency or authority associated with any such governmental entity, including the fire department having jurisdiction over the Land. Governmental Requirements. Any and all statutes, ordinances, codes, laws, rules, regulations, orders and directives of any Governmental Agency as now or later amended. Hazardous Substance(s). Asbestos, PCBs, petroleum or petroleum-based chemicals or substances, urea formaldehyde or any chemical, material, element, compound, solution, mixture, sub-stance or other matter of any kind whatsoever which is now or later defined, classified, listed, designated or regulated as hazardous, toxic or radioactive by any Governmental Agency. Land. The land upon which the Building is located in Howard County, State of Maryland, as legally described in Exhibit A attached to this Lease. Landlord. The trust named on the first page of this Lease, or its successors and assigns as provided in paragraph captioned "Assignment by Landlord". Landlord's Agents. The trustee of and consultants and advisors to the Landlord, including the Manager, and employees of the foregoing. Lease Memorandum. Defined in paragraph entitled "Lease Memorandum." Lease Security Deposit. The cash sum of __________None___________________ ($_____-0-__________________). Lease Term. Commencing on the Commencement Date and ending on the last day of (a) that calendar month which is one hundred twenty-five (125) months after the Commencement Date or, if the Lease Term is renewed under Section 2.10, (b) the latest Renewal Term, whichever occurs last. Lender. Defined in paragraph entitled "Landlord's Default." Manager. Trammell Crow Company, or its replacement as specified by written notice from Landlord to Tenant. Manager's Address. Trammell Crow Company, 7 St. Paul Street, Baltimore, Maryland 21202, which address may be changed by written notice from Landlord to Tenant. Operating Costs. Defined in paragraph captioned "Additional Rent". Operating Costs Allocable to the Premises. Defined in paragraph captioned "Additional Rent". Parking Ratio. five (5) parking stalls per 1,000 rentable square feet of the Premises for a total of 151 parking stalls. Permitted Use. General business office uses, including classroom based training, so long as such use is consistent with Governmental Requirements applicable to the Building. Plans and Specifications. (a) Those certain plans and specifications for the Tenant Improvements, if any, as listed in Exhibit C and any modifications to them approved in writing by Landlord and Tenant; or (b) if Exhibit C does not include a complete listing of such plans and specifications, then such plans and specifications shall be prepared by Landlord (the "Preparing Party") and delivered to Tenant (the "Receiving Party") and approved by Landlord and Tenant as set forth in a side letter executed by Landlord and Tenant contemporaneously with this Lease. Prepaid Rent. $______None________, to be applied toward Base Rent for the first full calendar month of the Lease Term or to the first month in which full rent is due. Premises. The portion of the Building designated as Suite 300 and Suite 250, depicted on the plans attached as Exhibit B and agreed by Landlord and Tenant for all purposes under this Lease to consist of approximately 30,669 rentable square feet, comprising the entire third (3rd) floor and a portion of the second (2nd) floor of the Building. Prime Rate. Defined in paragraph captioned "Default Rate." Project. Lyndwood Executive Center, which is comprised of the Land, together with all improvements, including the Building and the companion building on the Land. The Project contains approximately 165,214 rentable square feet. Property Taxes. (a) Any form of ad valorem real or personal property tax or assessment imposed by any Governmental Agency on the Project or any personal property owned by Landlord located on and used in connection with such Project ; (b) any other form of tax or assessment, license fee, license tax, tax or excise on rent or any other levy, charge, expense or imposition made or required by any Governmental Agency on any interest of Landlord in such Project or personal property; (c) any fee for services charged by any Governmental Agency for any services such as fire protection, street, sidewalk and road maintenance, refuse collection, school systems or other services provided or formerly provided to property owners and residents within the general area of the Project; (d) any governmental impositions allocable to or measured by the area of any or all of such Project or personal property or the amount of any base rent, additional rent or other sums payable under any lease for any or all of such Project or personal property; (e) any gross receipts or other excise tax allocable to, measured by or a function of any one or more of the matters referred to in clause (d). Property Taxes shall not include taxes on Landlord's net income. Any special assessments or charges for capital expenditures or infrastructure shall be included in Property Taxes only to the extent it is levied after the Commencement Date and then only based upon that installment thereof (including interest thereon) payable in a particular tax year assuming such special assessment was spread over the longest term available to Landlord by the assessing authority and at the interest rate available from the assessing authority. Punch List Work. Minor items of repair, correction, adjustment or completion as such phrase is commonly understood in the construction industry in the metropolitan area in which the Land is located. Relocation Allowance. The product obtained by multiplying (i) the final determination of the rentable square feet for the Premises on or about the Commencement Date by (ii) (5 x 21.00)/12, which if the size of the Premises is 30,669 rentable square feet is the sum of Two hundred sixty-eight thousand three hundred fifty-three and 75/100 Dollars ($268,353.75) and is to be advanced by Landlord in accordance with Section 3.2. Restrictions. Any covenants, conditions and restrictions applicable to the Land attached as a supplement to Exhibit E. Substantial Completion. The date that the Tenant Improvements have been completed substantially in accordance with the Plans and Specifications, subject only to Punch List Work, and an occupancy certificate has been obtained which permits the Tenant to occupy and conduct business in the Premises. Target Date. September 1, 2002. Telecommunication Facilities. Equipment, facilities, apparatus and other materials utilized for the purpose of electronic telecommunication, including cable, switches, wires, conduit and sleeves. Telecommunication Services. Services associated with electronic telecommunications, whether in a wired or wireless mode. Basic voice telephone services are included within this definition. Tenant. The person or entity(ies) named on the first page of this Lease. Tenant Alterations. Defined in paragraph captioned "Tenant Alterations". Tenant Improvement Allowance. The maximum amount, if any, to be expended by Landlord for the cost of Additional Tenant Improvements (including architectural, engineering, permitting and space planning fees), which maximum shall not exceed One and 25/100 Dollars ($1.25) per rentable square foot. Tenant Improvements. Collectively, the Basic Tenant Improvements and the Additional Tenant Improvements. Tenant's Agents. Any and all officers, partners, contractors, subcontractors, consultants, licensees, agents, concessionaires, subtenants, servants, employees, customers, guests, invitees or visitors of Tenant. Tenant's Pro Rata Share. Eighteen and 56/100 percent (18.56%), which shall be final, conclusive and controlling during the Lease Term for all purposes unless a change occurs in the rentable area of the Premises or the Project (e.g., through exercise of the Space Reduction Option, Recapture or condemnation of all or part of the Premises) or a change otherwise appears in the Lease Memorandum on the measurement of the Premises. Year. A calendar year commencing January 1 and ending December 31 or that portion of the calendar year within the Lease Term. SECTION 2: PREMISES AND TERM 2.1 Lease of Premises. Landlord leases the Premises to Tenant, and Tenant leases the Premises from Landlord, upon the terms and conditions set forth in this Lease. 2.2 Lease Term. The Lease Term shall be for the period stated in the definition of that term, unless earlier terminated as provided in this Lease. 2.3 Tenant Improvements. 2.3.1 Landlord has prepared construction drawings based upon the test fit plan prepared by Arium Architects dated May 3, 2002 for Suite 300 and May 8, 2002 for Suite 250 (the "Space Plan") and the specifications and assumptions attached as Exhibit C. 2.3.2 Landlord shall place the Plans and Specifications out to bid to competitive third-party general contractors and, upon awarding a contract to the general contractor selected by Landlord, shall promptly commence construction work at the Premises. All construction work shall be done in a good and workmanlike manner and in substantial compliance with applicable laws, ordinances, regulations and orders of governmental authorities and shall be under the supervision of Landlord's construction manager. The general contractor and all subcontractors shall be bound by a collective bargaining agreement with a labor organization affiliated with the Building and Construction Trade Department of the AFL-CIO and employ only workers of such labor organization to perform work within their respective jurisdiction. Tenant shall not be charged a construction management fee by Landlord. 2.3.3 If Landlord shall be delayed in substantially completing the Tenant Improvements or in delivering the Premises to Tenant as a result of any act, neglect, failure or omission of Tenant, its employees or agents, including any of the following, such delay shall be deemed a "Tenant Delay": (1) Tenant's failure to provide, or delay in providing, Landlord with any information requested by Landlord for the purpose of completing the Plans and Specifications or the ordering of materials or the letting of bids for the Tenant Improvements; (2) any change orders by Tenant (to the extent such change is approved by Landlord) in the Plans and Specifications or in any other plan, specification or finish information furnished by Tenant, after Landlord has approved the same, to the extent such change order(s) actually cause delay; (3) delay in the completion of work by any person (other than Landlord or the Landlord's contractor) performing work for Tenant; or (4) Long Lead Items (as defined below). In any such event, Landlord shall immediately notify Tenant in writing of any circumstance believed to constitute a Tenant Delay, and such Tenant Delay shall not postpone or defer the Commencement Date, or Tenant's obligation to pay Rent as of the Commencement Date, but the Commencement Date shall occur on the day when it would otherwise have occurred if such Tenant Delay had not occurred, and the Target Date shall be extended for a period of time equal to the number of days of such Tenant Delay. In addition, Tenant shall pay to Landlord, and shall indemnify and hold Landlord harmless from and against, all additional costs, expenses, damages and claims incurred by Landlord resulting from any Tenant Delay, including without limitation delay damages to the contractor under the contract for the construction of the Tenant Improvements. Any costs payable by Tenant to Landlord hereunder shall be deemed to be Additional Rent under this Lease. In the event that any particular item or items of Tenant Improvements (i) is unique to Tenant's operations within the Building, or (ii) is not readily available in reasonable quantities in, or for delivery to, the Baltimore metropolitan market or requires a long term lead time to procure, obtain or install, Landlord's contractor shall notify Tenant or Landlord (who will notify Tenant) of this fact promptly after ascertaining same. In the event a comparable replacement item is readily available as a substitute for the items described above, and Tenant refuses to accept such substitution after receipt of such notice, such unique or unavailable item(s) shall be deemed "Long Lead Items." 2.3.4 Landlord shall permit Tenant and Tenant's Agents to enter the Premises at Tenant's risk upon Substantial Completion (sooner with respect to such activities as may be coordinated with activities of Landlord's Agents and not impede construction) for the purpose of preparing the Premises for occupancy by Tenant. Such permitted activities shall include, but not be limited to, installing Tenant's telephone system, installing furniture and equipment, installing artwork and similar activities. Tenant shall cause its Agents to observe Landlord's reasonable rules governing safety and security while in the Building. 2.4 Commencement Date. 2.4.1 Landlord shall notify Tenant in writing of Substantial Completion. If Tenant believes that Substantial Completion has not occurred, Tenant shall notify Landlord in writing of its objections within five (5) Business Days after its receipt of the Landlord's notice described in the preceding sentence. Landlord shall have a reasonable time after its receipt of Tenant's notice in which to take such action as may be necessary to achieve Substantial Completion, and shall notify Tenant in writing when such has been achieved. Taking of possession by Tenant for the purpose of doing business shall establish the Commencement Date as specified in the definition of that term even if Tenant disputes whether Substantial Completion has occurred or attempts to condition or qualify the taking of possession. Taking of possession for the purpose of doing business shall further establish that the Premises are in good and satisfactory condition on the Commencement Date and any alleged defects or deficiencies are waived by the Tenant except for any latent defects not reasonably discoverable by Tenant and incomplete Punch List Work. Tenant acknowledges that no representations as to the condition of the Premises have been made by Landlord, unless such are expressly set forth in this Lease. In the event of any dispute as to whether Substantial Completion has occurred, the receipt of a temporary certificate of occupancy shall be conclusive unless a temporary certificate of occupancy is unavailable or delayed due to causes that are Tenant's responsibility shall be conclusive. If the parties anticipate that Punch List Work will remain to be completed on the Commencement Date, Landlord and Tenant shall agree on such Punch List Work prior to occupancy by Tenant and Landlord will promptly complete it after the Commencement Date; provided that at Tenant's request Landlord and Tenant will prepare a supplemental list of Punch List Work within thirty (30) days after the Commencement Date to address Punch List Work that the parties inadvertently overlooked prior to the Commencement Date. Damage caused by Tenant's Agents will not be deemed Punch List Work. Landlord will promptly complete such supplemental Punch List Work after Landlord and Tenant agree upon the list. In no event shall Tenant's refusal or failure to agree on the nature and extent of Punch List Work or the existence of items of Punch List Work delay or postpone the occurrence of the Commencement Date. Tenant shall make no changes to the Plans and Specifications or the work reflected in the Plans and Specifications without the consent of Landlord. 2.4.2 Construction Delay. Subject to force majeure delay and Tenant Delay, Landlord shall reimburse Tenant for the hold over portion of Tenant's current rent at its current leased premises at 6700 Alexander Bell Drive, Columbia, Maryland, in the event the Tenant Improvements are not Substantially Completed by the Target Date and Tenant is actually charged such hold over rent. Such reimbursement shall be limited to $25,000.00 per month for any portion of a month Landlord does not deliver the Premises following the Target Date. Landlord shall reimburse Tenant in accordance with this subsection within twenty (20) Business Days after receipt of Tenant's invoice accompanied by reasonably detailed documentation of the actual hold over rent. 2.5 Tenant's Contribution to Tenant Improvement Costs. 2.5.1 Before any construction of Additional Tenant Improvements occurs, Landlord and Tenant shall agree on the cost thereof. If the cost of the Additional Tenant Improvements exceeds the Tenant Improvement Allowance, Tenant shall pay to Landlord such excess within twenty (20) Business Days after receipt of Landlord's demand made from time to time and accompanied by reasonably detailed documentation of the excess cost incurred by Landlord. If Tenant fails to pay to Landlord the cost of any such excess Tenant Improvements as and when due, Landlord may elect to suspend work on the Tenant Improvements pending such timely payment, and the Commencement Date shall be deemed to have occurred on the date that Substantial Completion would have been achieved absent such suspension of work. Any savings or unused portion of the Tenant Improvement Allowance may be applied by Tenant as a credit against the Monthly Base Rent Installment coming due under this Lease on the first day of the thirteenth month of the Lease Term. 2.5.2 All Tenant Improvements, regardless of which party constructed or paid for them, shall become the property of Landlord and shall remain upon and be surrendered with the Premises upon the expiration or earlier termination of this Lease; provided that, at Landlord's election and upon notice to Tenant at the time Landlord gives its consent, Tenant shall be required to remove all or any portion of the Tenant Improvements (including Telecommunication Facilities) constructed after the Commencement Date upon the expiration or earlier termination of this Lease. 2.6 Lease Memorandum. Contemporaneously with Substantial Completion, Landlord shall prepare and submit to the Tenant a Lease Memorandum in the form of Exhibit D, completed in good faith by Landlord, and executed by Landlord. The information inserted on the Lease Memorandum shall be controlling and conclusive, absent manifest error, and shall prevail over any inconsistent provision in this Lease on (a) the mutual execution of the Lease Memorandum by Landlord and Tenant or (b) the lapse of seven (7) Business Days following delivery of the Lease Memorandum to Tenant without Tenant delivering to Landlord a written objection to all or part of the information in the Lease Memorandum. If Tenant does object in good faith to any information set forth in the Lease Memorandum, it shall execute the Lease Memorandum subject to its specifically-stated, written objections. Tenant must explain the reasons for its objections in reasonable detail. That portion of the Lease Memorandum to which no objection was made shall be conclusive and controlling. Pending resolution of any dispute by agreement or a final determination by a court of competent jurisdiction in accordance with this Lease, Landlord's information as inserted in the Lease Memorandum shall be utilized subject to any later adjustment agreed or found to be appropriate. Tenant's refusal or failure to execute a Lease Memorandum shall neither prevent nor delay the occurrence of the Commencement Date. In no event shall the Lease Memorandum be recorded. However, if a party records this Lease or the Lease Memorandum in violation of this Section 2.6, then the party recording the Lease or Lease Memorandum shall pay any and all transfer taxes, recordation taxes and other charges arising in connection therewith. 2.7 Use and Conduct of Business. 2.7.1 The Premises are to be used only for the Permitted Uses, and for no other business or purpose without the prior consent of Landlord. Landlord makes no representation or warranty as to the suitability of the Premises for Tenant's intended use. Except for the initial occupancy permit for the Premises, which shall be obtained by Landlord, Tenant shall, at its own cost and expense, obtain and maintain any and all licenses, permits, and approvals necessary or appropriate for its use, occupation and operation of the Premises for the Permitted Uses. Tenant's inability to obtain or maintain any such license, permit or approval necessary or appropriate for its use, occupation or operation of the Premises shall not relieve it of its obligations under this Lease, including the obligation to pay Base Rent and Additional Rent. 2.7.2 No act shall be done in or about the Premises by Tenant or Tenant's Agents that is unlawful or that will increase the existing rate of insurance on any or all of the Land or Building. Tenant shall not commit or allow to be committed by Tenant's Agents (a) any waste upon the Premises, (b) any public or private nuisance in or about the Project, or (c) any act or condition which disturbs the quiet enjoyment of any other tenant in the Building, violates any of Landlord's contracts affecting any or all of the Land or Building, creates or contributes to any work stoppage, strike, picketing, labor disruption or dispute, unreasonably interferes in any material way with the business of Landlord or any other tenant in the Building or with the rights or privileges of any contractors, subcontractors, licensees, agents, concessionaires, subtenants, servants, employees, customers, guests, invitees or visitors or any other persons lawfully in and upon the Land or Building. 2.7.3 Tenant shall not, without the prior consent of Landlord, which consent Landlord shall not unreasonably withhold, condition or delay, use any apparatus, machinery, device or equipment in or about the Premises which will cause any substantial noise or vibration or any increase in the normal consumption level of electric power. If any of Tenant's apparatus, machinery, devices or equipment should disturb the quiet enjoyment of any other tenant in the Building, then Tenant shall provide, at its sole cost and expense, adequate insulation or take other such action, including removing such apparatus, machinery, devices or equipment, as may be necessary to eliminate the disturbance. No more than five (5) food or beverage dispensing machines, which shall be available for the exclusive use of Tenant's Agents, shall be installed by Tenant in the Premises without the prior written consent of Landlord, which consent shall not be unreasonably withheld, conditioned or delayed. 2.8 Compliance with Governmental Requirements and Rules and Regulations. Tenant shall comply with all Governmental Requirements and Restrictions relating to its use, occupancy and operation of the Premises and shall observe such reasonable rules and regulations as may be adopted and published by Landlord from time to time for the safety, care and cleanliness of the Premises and the Building, and for the preservation of good order in the Building and for the administration and management of the Building. Current Rules and Regulations are attached to this Lease as Exhibit E. Restrictions, if any exist, are attached as a supplement to Exhibit E. The provisions of this Lease shall govern any conflict between this Lease and the Rules and Regulations. 2.9 Relocation. [Intentionally Deleted.] 2.10 Renewal. Tenant shall have two (2) consecutive options to renew the Lease Term for additional periods of three (3) years (each a "Renewal Term" which shall be deemed part of the Lease Term), under the same terms and conditions of this Lease subject to the following: 2.10.1 Tenant shall exercise the option by providing written notice to Landlord of its election to exercise such option no later than two hundred ten days (210) days prior to the expiration of the then effective Lease Term, provided, however, that Tenant's option to renew shall be subject to the condition that no material default shall have occurred and be continuing after applicable notice and cure periods have expired as of the date of Tenant's exercise of such option or as of the date of commencement of the applicable Renewal Term; and provided further, that if Tenant's estate hereunder shall terminate prior to the commencement of the Renewal Term, Tenant's option to renew shall expire upon such termination. Tenant shall have no other right to renew this Lease after the second Renewal Term. Except as otherwise expressly provided in this Lease, all terms, covenants, and conditions of this Lease shall remain in full force and effect during the Renewal Term, except that (1) the Base Rent applicable to the first year of the Renewal Term shall be the then-prevailing market rate of rent in the Columbia, Maryland office market (the "Market Rate") and (2) the Base Rent applicable to the succeeding years of the Renewal Term shall include a market escalation if leases then being entered into for similar office space in comparable buildings include escalation, and (3) Tenant shall receive the economic benefit(s) of such allowances, concessions and incentives as are then being included in then-prevailing Market Rate leases. If Tenant exercises its option hereunder, then within 15 days after Tenant's request, Landlord shall notify Tenant in writing of the rate of Basic Rent to apply during the Renewal Term, as determined by brokers or other professionals selected by Landlord. If Tenant notifies Landlord that Tenant disagrees with Landlord's determination of the Market Rate within 15 days after receipt of Landlord's notification and if Landlord and Tenant fail to reach agreement within thirty (30) days following Tenant's notice to Landlord of Tenant's disagreement (the "Outside Agreement Date"), then each party shall place in a separate sealed envelope its final proposal as to Market Rate and such determination shall be submitted to arbitration in accordance with paragraph (a) through (e) below. Failure of Tenant to so accept or reject in writing such rental within 15 days after receipt of Landlord's determination of the new Basic Rent shall conclusively be deemed Tenant's rejection of the Basic Rent determined by Landlord. (a) Landlord and Tenant shall meet with each other within five (5) Business Days after the Outside Agreement Date and exchange the sealed envelopes and then open such envelopes in each other's presence. If Landlord and Tenant do not mutually agree upon the Market Rate within ten (10) Business Days after the exchange and opening of envelopes, then, within ten (10) Business Days after the exchange and opening of envelopes Landlord and Tenant shall agree upon and jointly appoint a single arbitrator who shall by profession be a real estate appraiser, lawyer or broker who shall have been active over the five (5) year period ending on the date of such appointment in the leasing of comparable commercial properties in the vicinity of the Building. Neither Landlord nor Tenant shall consult with such broker or lawyer as to his or her opinion as to Market Rate prior to the appointment. The determination of the arbitrator shall be limited solely to the issue of whether Landlord's or Tenant's submitted Market Rate for the Premises is the closer to the actual Market Rate for the Premises as determined by the arbitrator, taking into account the requirements of this Section 2.10. Such arbitrator may hold such hearings and require such briefs as the arbitrator, in his or her sole discretion, determines is necessary. In addition, Landlord or Tenant may submit to the arbitrator with a copy to the other party within five (5) Business Days after the appointment of the arbitrator any market data and additional information that such party deems relevant to the determination of Market Rate ("MR Data") and the other party may submit a reply in writing within five (5) Business Days after receipt of such MR Data. (b) The arbitrator shall, within thirty (30) days after his or her appointment, reach a decision as to whether the parties shall use Landlord's or Tenant's submitted Market Rate, and shall notify Landlord and Tenant of such determination. (c) The decision and award of the arbitrator shall be final, conclusive, and binding on the parties, absent settlement by agreement of the parties prior to the rendering by the arbitrator of any such decision and award. If the Market Rate is not finally determined prior to the commencement of the extension term in question, Tenant shall pay Base Rent based upon the higher of Tenant's proposed Base Rent or the Base Rent payable under this Lease immediately prior to the expiration of the initial term of this Lease until the final determination of the Market Rate as provided above. If the final determination of such Market Rate is different from the amount paid by Tenant, Landlord shall credit toward future Rent payments any overpayment of Base Rent from the commencement of the Renewal Term in question until such final determination. (d) If Landlord and Tenant fail to agree upon and appoint an arbitrator, then the appointment of the arbitrator shall be made by any judge having jurisdiction over the parties. Either Landlord or Tenant may petition such judge for such appointment. (e) The cost of arbitration shall be paid by Landlord and Tenant equally. Immediately after the Basic Rent for the Renewal Term is determined pursuant to this Section, Landlord and Tenant shall execute an amendment to the Lease stating the new Basic Rent in effect. 2.10.2 If Tenant fails to give notice exercising the foregoing option by the date required herein, or if at the time Tenant exercises such option or at commencement of the applicable Renewal Term an Event of Default under this Lease has occurred which is not cured, or if this Lease is assigned by Tenant to an assignee that is not a Related Entity or fifty percent (50%) or more of the Premises in the aggregate is sublet for all or substantially all of the remaining Term to one or more sublessees that are not Related Entities, then Tenant's rights and options to renew shall be automatically terminated and of no further force or effect. 2.11 Right of First Offer. Subject to the rights of other tenants that are in existence on the date of this Lease, Tenant shall have a continuous right of first offer to expand into any remaining rentable space in the Building (the "Option Space") that is or becomes available for lease during the Lease Term. For purposes of the preceding sentence, a lease extension or renewal by an existing Building tenant, regardless of whether such extension or renewal is presently contemplated by the terms of such tenant's lease, shall be deemed to be an existing right. When Landlord issues an offer to lease any portion of the Option Space (except to a then existing tenant), Landlord shall simultaneously notify Tenant that such space is available stating the terms upon which Landlord is willing to lease the space to others ("Landlord's Notice"). Tenant shall have five (5) Business Days to notify Landlord in writing of Tenant's election to lease all of such offered space upon all of the terms and conditions stated in Landlord's Notice, including, but not limited to, length of term, size of premises, rental rate, and tenant improvement allowance. If Tenant elects to lease such space, then upon such election, Landlord and Tenant shall enter into an amendment to this Lease whereby Tenant shall lease such space from Landlord in accordance with the economic terms and benefits contained in Landlord's Notice, but otherwise in accordance with the terms and conditions of this Lease. If Tenant does not elect in writing within the five (5) Business Day period to lease such space, Tenant's right of first offer with respect to such space shall be extinguished and Landlord may thereafter lease the space to others without notice to the Tenant; provided however, that Landlord may not enter into a lease with any such third parties on economic terms materially more favorable to such party than the terms offered by Landlord to Tenant pursuant to Landlord's Notice. As used herein, "materially more favorable" means that the rent, including all incentives, offered to the prospective third party is at least ten percent (10%) more favorable to the prospective third party than the comparable terms offered to Tenant. If Landlord negotiates materially more favorable terms with the prospective third party or does not enter into the proposed lease with the prospective third party within 150 days after Tenant fails to exercise its right of first offer, Landlord shall not enter into any lease with respect to such space without again complying with the provisions of this Section 2.11. Notwithstanding anything in this Section 2.11 to the contrary, any rentable space in the Building that is the subject of active negotiations between Landlord and prospective tenants on the date of this Lease shall not be included in Option Space. 2.12 Space Reduction Option. So long as an Event of Default has not occurred which has not been cured, Tenant shall have and is hereby given a one-time right and option to reduce the size of the Premises in accordance with this Section 2.12. Upon at least six (6) months prior written notice from Tenant to Landlord (the "Space Reduction Notice"), Tenant may reduce the size of the Premises by the rentable square footage on the second floor area initially included in the Premises on the date of this Lease (the "Released Space"). If exercised by Tenant, such reduction shall be effective at the end of the sixtieth (60th) month of the Lease Term (the "Space Reduction Date"). Within twenty (20) Business Days after Landlord receives the Space Reduction Notice, Landlord shall give Tenant written notice of the space reduction fee, which will be equal to the then-unamortized value of the sum of all actual costs of constructing the Tenant Improvements (whether paid directly by Landlord or indirectly through the Tenant Improvement Allowance to Tenant), all actual costs of brokerage commissions, and Relocation Allowance, with such amortization to be calculated with interest at the annual rate of 11% over the initial Lease Term and prorated to the Space Reduction Date multiplied by a fraction the numerator of which is the rentable square footage of the Released Space and the denominator of which is the rentable square footage of the initial Premises (the "Space Reduction Fee"). As a condition to the effectiveness of the Space Reduction Notice, Tenant shall pay the Space Reduction Fee to Landlord within twenty (20) Business Days after Tenant receives Landlord's notice of the calculation of the Space Reduction Fee. On the Space Reduction Date, this Lease shall terminate with respect to the Released Space in all respects except for the provisions of the Lease that may by their terms survive termination, Base Rent shall be reduced in the same proportion as the reduction in size of the Premises and Tenant's Pro Rata Share shall be adjusted to reflect the percentage of rentable square feet of the Project which is leased to Tenant immediately following the Space Reduction Date. If Tenant fails to give the Space Reduction Notice timely and in accordance with this paragraph, Tenant shall be deemed to have waived its right to the space reduction and this Lease shall continue in full force and effect with respect to the entire Premises for the duration of the Lease Term. SECTION 3: BASE RENT, ADDITIONAL RENT AND OTHER SUMS PAYABLE UNDER LEASE 3.1 Payment of Rental. Tenant agrees to pay Base Rent, Additional Rent and any other sum due under this Lease to Landlord without demand (except where demand is otherwise required under this Lease), deduction, credit, adjustment or offset of any kind or nature, in lawful money of the United States when due under this Lease, at the offices of Manager at Manager's Address, or to such other party or at such other place as Landlord may from time to time designate in writing. 3.2 Base Rent. On execution of this Lease, Tenant shall pay to Landlord the amount specified in the definition of Prepaid Rent for the month specified in the definition of that term. Tenant agrees to pay the monthly installments of Base Rent to Landlord, without demand and in advance, on or before the first day of each calendar month of the Lease Term. The monthly Base Rent installment for any partial month at the beginning or end of the Lease Term shall be prorated. Base Rent for any partial month at the beginning of the Lease Term shall be paid by Tenant on the Commencement Date. Notwithstanding anything in this Section 3.2 to the contrary, so long as an Event of Default has not occurred under this Lease which has not been cured, Landlord shall credit the Relocation Allowance in five (5) equal installments against the Base Rent due for the first five (5) full months of the Lease Term. In such event, Tenant shall make its first full monthly Base Rent payment on the first day of the sixth (6th) full month of the Lease Term. 3.3 Lease Security Provisions. [Intentionally Deleted] 3.4 Additional Rent. Definitions of certain terms used in this Section 3.4 are set forth in subsection 3.4.6 below. Tenant agrees to pay to Landlord additional rent as computed in this Section (individually and collectively the "Additional Rent"): 3.4.1 Estimated Operating Costs. Commencing January 1, 2004,Tenant shall pay to Landlord as Additional Rent one-twelfth (1/12) of the amount, if any, by which the Estimated Operating Costs Allocable to the Premises exceeds the Base Amount Allocable to the Premises. This sum shall be paid in advance on or before the first day of each calendar month of the Lease Term. Landlord shall furnish Tenant a written statement of Estimated Operating Costs Allocable to the Premises in advance of the commencement of each Year. If such written statement is furnished after the commencement of the Year (or as to the first Year during the Lease Term, after the Commencement Date), Tenant shall also make a retroactive lump-sum payment to Landlord equal to the monthly payment amount, if any, multiplied by the number of months during the Year (or as to the first Year during the Lease Term, after the Commencement Date) for which no payment was paid. Notwithstanding the foregoing, Landlord reserves the right, from time to time during each Year, to revise the Estimated Operating Costs Allocable to the Premises and upon notice to Tenant of such revision, Tenant shall adjust its payment to Landlord under this subsection 3.4.1 accordingly. In determining the Estimated Operating Costs Allocable to the Premises, Landlord shall not include an increase in Controllable Operating Costs of more than five percent (5%) in the aggregate over Controllable Operating Costs for the preceding Year. 3.4.2 Actual Costs. After the close of each Year, Landlord shall deliver to Tenant a written statement setting forth the Operating Costs Allocable to the Premises during the preceding Year; provided that Landlord will not include the portion of Controllable Operating Costs, if any, in excess of a five percent (5%) increase over the Controllable Operating Costs for the preceding Year. If such Operating Costs Allocable to the Premises for any Year exceed the Estimated Operating Costs Allocable to the Premises paid by Tenant to Landlord pursuant to subsection 3.4.1 for such Year, Tenant shall pay the amount of such excess to Landlord within twenty (20) Business Days after receipt of such statement by Tenant. If such statement shows the Operating Costs Allocable to the Premises to be less than the Estimated Operating Costs Allocable to the Premises paid by Tenant to Landlord pursuant to subsection 3.4.1, then the amount of such overpayment shall be paid by Landlord to Tenant within twenty (20) Business Days following the date of such statement or, at Landlord's option, shall be credited towards the installment(s) of Base Rent and Additional Rent next coming due from Tenant. 3.4.3 Determination. The determination of Operating Costs Allocable to the Premises shall be made by Landlord. 3.4.4 Operating Cost Audit. Landlord shall maintain records concerning estimated and actual Operating Costs Allocable to the Premises for no less than thirty-six (36) months following the period covered by the statement or statements furnished Tenant, after which time Landlord may dispose of such records. Provided that Tenant is not then in default of its obligation to pay Base Rent or Additional Rent under this Section 3.4 and that no other uncured Event of Default then exists, Tenant may, at Tenant's sole cost and expense, cause a Qualified Person (defined below) to inspect Landlord's records. Within one hundred twenty (120) calendar days after receipt of Landlord's written statement of Operating Costs Allocable to the Premises for the previous year, Tenant must provide Landlord written notice if Tenant elects to cause a Qualified Person to inspect Landlord's records. Such inspection, if any, shall be conducted no more than once each Year, during Landlord's normal business hours no sooner than twenty (20) calendar days, but no later than sixty (60) calendar days, after Tenant's written notice to Landlord of Tenant's intent to inspect Landlord's records. Any errors disclosed by the review shall be promptly corrected by Landlord; provided, however, that if Landlord disagrees with any such claimed errors, Landlord shall have the right to cause another review to be made by an auditor of Landlord's choice and at Landlord's sole expense. In the event the results of the review of records (taking into account, if applicable, the results of any additional review caused by Landlord) reveal that Tenant has overpaid obligations for a preceding period, the amount of such overpayment shall be credited against Tenant's subsequent installment(s) of Base Rent, Additional Rent or other payments next coming due to Landlord under the Lease. In the event that such results show that Tenant has underpaid its obligations for a preceding period, the amount of such underpayment shall be paid by Tenant to Landlord within twenty (20) Business Days after Tenant's receipt of Landlord's demand therefor. If the actual Operating Costs Allocable to the Premises for any given Year were improperly computed and if the actual Operating Costs Allocable to the Premises are overstated by more than 5%, Landlord shall reimburse Tenant for the cost of its audit. 3.4.5 End of Term. If this Lease shall terminate on a day other than the last day of a Year, (a) Landlord shall estimate the Operating Costs and Property Taxes Allocable to the Premises for such Year predicated on the most recent reliable information available to Landlord; (b) the amount determined under clause (a) of this sentence shall be prorated by multiplying such amount by a fraction, the numerator of which is the number of days within the Lease Term in such Year and the denominator of which is 365; (c) the Operating Costs Base Amount Allocable to the Premises shall be prorated in the manner described in clause (b); (d) the clause (c) amount (i.e., the prorated Base Amount Allocable to the Premises) shall be deducted from the clause (b) amount (i.e., the prorated Operating Costs Allocable to the Premises); (e) if the clause (d) amount exceeds the Estimated Operating Costs Allocable to the Premises paid by Tenant for the last Year in the Lease Term, then Tenant shall pay the excess to Landlord within twenty (20) Business Days after Landlord's delivery to Tenant of a statement for such excess; and (f) if the Estimated Operating Costs Allocable to the Premises paid by Tenant for the last Year in the Lease Term exceeds the clause (d) amount, then Landlord shall refund to Tenant the excess within the twenty (20) Business Day period described in clause (e) if an Event of Default has not occurred which has not been cured as of the termination date of this Lease. Landlord's and Tenant's obligations under this paragraph shall survive the expiration or other termination of this Lease. 3.4.6 Definitions. Each underlined term in this subparagraph shall have the meaning set forth next to that underlined term: Operating Costs Base Amount Allocable to the Premises: The Operating Costs Allocable to the Premises for the year beginning January 1, 2003 and ending December 31, 2003 (the "Base Year"). Estimated Operating Costs Allocable to the Premises: Landlord's written estimate of Operating Costs Allocable to the Premises for a Year to be given by Landlord to Tenant pursuant to subsection 3.4.1. Operating Costs (net of Property Taxes): All expenses paid by Landlord for maintaining, operating, and repairing any or all of the Project, Premises, related improvements, and the personal property used in conjunction with such Project, Premises and related improvements, except for Property Taxes. Included are all expenses paid or incurred by Landlord for: (a) utilities, including electricity, water, gas, sewers, fire sprinkler charges, refuse collection, Telecommunication Services (if provided by Landlord), cable television (if provided by Landlord), steam, heat, cooling or any other similar service and which are not payable directly by tenants in the Project; (b) supplies; (c) cleaning, painting and janitorial services (including window washing), landscaping and landscaping maintenance (including irrigating, trimming, mowing, fertilizing, seeding and replacing plants), snow removal and other services; (d) security services, if any; (e) insurance premiums and applicable insurance deductible payments by Landlord; (f) management fees; (g) compensation (including employment taxes and fringe benefits) of all persons and business organizations who perform duties in connection with any service, repair, maintenance, replacement or improvement or other work included in this subparagraph; (h) license, permit and inspection fees; (i) assessments and special assessments due to deed restrictions, declarations or owners associations or other means of allocating costs of a larger tract of which the Land is a part; (j) rental of any machinery or equipment; (k) audit fees and accounting services related to the Project, and charges for the computation of the rents and charges payable by tenants in the Project (but only to the extent the cost of such fees and services are in addition to the cost of the management fee); (l) the cost of repairs or replacements; (m) charges under maintenance and service contracts; (n) legal fees and related expenses; (o) maintenance and repair of the roof and roof membranes, (p) costs incurred by Landlord for compliance with any and all Governmental Requirements, including Access Laws, and to increase the efficiency of any electrical, mechanical or other system servicing the Project or the Land; (q) elevator service and repair, if any; (r) business taxes and license fees; (s) any other expense or charge that in accordance with generally accepted accounting and management principles would be considered an expense of maintaining, operating, or repairing the Project; and (t) the amortization of costs of capital improvements in accordance with the next sentence. Costs associated with capital improvements installed or constructed by Landlord other than in the initial construction of the Project, whether such were constructed or installed before or after the Commencement Date, shall be amortized with interest return at the Prime Rate plus two (2) percentage points over the estimated useful life of the capital improvement as reasonably determined by Landlord and the annual amortization of principal and interest attributable to the Lease Term shall be an Operating Cost. The capital improvements referred to in the previous sentence shall include: replacement of roof structure and roof membranes; exterior painting; parking area resurfacing, resealing and restriping parking areas and driveways and upgrading Project common systems and facilities (including HVAC systems, and if owned by Landlord, Telecommunication Facilities). Exclusions from Operating Costs: Operating Costs shall not include any of the following: ground rent; interest and amortization of funds borrowed by Landlord for items other than capital improvements; leasing commissions, legal fees and advertising and space planning expenses incurred in procuring tenants; salaries, wages, or other compensation paid to officers or executives of Landlord in their capacities as officers and executives; any amount in excess of Landlord's actual costs; costs reimbursed by insurance or third parties; management fees in excess of prevailing, customary management fees charged for managing comparable buildings in and around Columbia, Maryland; financing costs; costs incurred by Landlord on other than an arms-length basis, to the extent such costs exceed market rates for comparable items or services; costs incurred due to another tenant's negligence, to the extent Landlord receives reimbursement from such tenant or its insurer; costs relating to any capital improvements of any kind to the extent such costs exceed in any calendar year the amortized value of such improvements allocated to such calendar year when such improvements are amortized over their useful life as determined in accordance with generally accepted accounting principles; any cost incurred primarily for the benefit of a particular tenant, which cost shall be paid by such tenant; and utilities consumed by non-office use tenants to the extent the applicable utility consumption of such non-office use tenant exceeds normal utility consumption by office use tenants (e.g., water usage by a restaurant). Controllable Operating Costs: Operating Costs with respect to which Landlord can reasonably control increases without materially adversely affecting the maintenance or operation of the Project, Premises, related improvements or personal property used in conjunction with such Project, Premises and related improvements. Operating Costs that are not controllable by Landlord include, but are not limited to, utilities, insurance and snow removal costs. Gross-Up Provision: If less than one hundred percent (100%) of the net rentable area of the Project is occupied by tenants at all times during any Year, including the Base Year, then Operating Costs for such Year shall include all additional costs and expenses that Landlord reasonably determines would have been incurred had one hundred percent (100%) of the Project been occupied at all times during such Year by tenants. If less than ninety-five percent (95%) of the net rentable area of the Project is occupied by tenants during any Year and, as a result the Property Taxes are lower than they would be if at least ninety-five percent (95%) of the net rentable area of the Project had been occupied by tenants, then Property Taxes for such Year shall include the additional Property Taxes that Landlord reasonably determines would have been incurred had ninety-five percent (95%) of the Project been occupied during such Year by tenants. Operating Costs Allocable to the Premises: The product of Tenant's Pro Rata Share times Operating Costs (net of Property Taxes). Qualified Person: This means an accountant or other person experienced in accounting for income and expenses of office projects, who is engaged solely by Tenant on terms which do not entail more than twenty percent (20%) of such person's compensation based or measured upon any savings in Additional Rent or reduction in Operating Costs Allocable to the Premises achieved through the inspection process described in this subparagraph. Property Tax Base Amount: The Property Taxes payable for the tax year 2004 (beginning July 1, 2003 and ending June 30, 2004). If the Property Taxes for tax year 2004 are determined to be artificially low because the Project has been assessed on a basis of less than 95% occupancy, the Property Taxes for tax year 2004 will be grossed up to adjust for less than 95% occupancy. Property Taxes Allocable to the Premises: Tenant's Pro Rata Share of Property Taxes. 3.4.7 Property Tax Escalation. In addition to the payments required by the previous subparagraphs of this Section, commencing January 1, 2004, Tenant shall pay as Additional Rent to Landlord one-twelfth (1/12) of the amount, if any, by which (a) Landlord's estimate of the Property Taxes Allocable to the Premises for the current tax year exceeds the Property Tax Base Amount. This sum shall be paid in advance on or before the first day of each calendar month of the Lease Term thereafter. After the close of each tax year during the Lease Term, Landlord shall deliver to Tenant a written statement setting forth (1) the actual Property Taxes Allocable to the Premises for the Preceding Tax Year, (2) the difference between the amount referred to in clause (1) and the Property Tax Base Amount and (3) the differential between the amount referred to in clause (2) and the sum of the tentative monthly payments toward such amount made by Tenant. If the differential referred to in clause (3) of the previous sentence represents an underpayment by Tenant, such differential shall be paid to Landlord within twenty (20) Business Days after delivery of Landlord's written statement to Tenant; if such differential represents an overpayment by Tenant, Landlord shall, at its option, either credit such overpayment to the installment(s) of Base Rent and Additional Rent next coming due from Tenant or refund such overpayment to Tenant within twenty (20) Business Days after Tenant's concurrence in the amount due as a refund. If the Lease Term begins or ends on a day other than the beginning or end of a tax year, the amount due as described in clause (2) of this subparagraph shall be prorated on a per diem basis with reference to the tax year. The provisions of this subparagraph shall survive the expiration or other termination of this Lease. 3.4.8 Tenant's Costs. Tenant agrees to reimburse or pay Landlord within twenty (20) Business Days after invoice from Landlord for (a) any cleaning expenses incurred by Landlord, including carpet cleaning, garbage and trash removal expenses, over and above the normal cleaning provided by Landlord, in accordance with Exhibit G , (b) any expense incurred by Landlord for usage in the Premises of heating, ventilating and air conditioning services, elevator services, electricity, water, janitorial services, or any other services or utilities over and above the normal usage for tenants of the Project, (c) any expense incurred by Landlord relating to or arising out of the usage by Tenant or Tenant's Agents of the public or common areas of the Building or Land, or any of the equipment contained therein, which usage is over and above the normal usage for such public or common areas or equipment, and (d) any other direct expense incurred by Landlord on Tenant's behalf. The normal cleaning to be provided by Landlord to the Premises is described in Exhibit G. If Landlord reasonably suspects that Tenant's consumption of utilities is consistently over and above the normal usage of office tenants in the Project, Landlord reserves the right to activate separate sub-metering of electricity, water or other utilities to the Premises, and Tenant agrees to reimburse or pay Landlord within twenty (20) Business Days after invoice from Landlord for all costs of such separate sub-metering, amortized with interest at the Prime Rate plus two (2) percentage points over the remaining Lease Term if the cost of such separate sub-metering exceeds $5,000, in which case the Base Amount Allocable to the Premises and Operating Costs shall be adjusted accordingly; provided that no adjustment shall be made to the Base Amount Allocable to the Premises and Operating Costs with respect to the separate sub-metering of Tenant's data center and supplemental HVAC as provided in Section 3.5.4. 3.4.9 Payments Deemed Additional Rent. Any sums payable under this Lease pursuant to this paragraph or otherwise shall be Additional Rent and, in the event of nonpayment of such sums, Landlord shall have the same rights and remedies with respect to such nonpayment as it has with respect to nonpayment of the Base Rent due under this Lease. 3.5 Utilities. 3.5.1 Landlord shall have the right from time to time to select the company or companies providing electricity, gas, fuel, and other similar utility services to the Building; provided that any such company shall provide utility services to the Building (and its tenants) upon terms which reflect competitive arms-length market rates for comparable services. Tenant shall contract directly and pay for Telecommunication Services used on or from the Premises together with any taxes, penalties, surcharges or similar charges relating to such Telecommunications Services. If any such service is not separately metered to the Premises or is not otherwise separately accounted for and billed to Tenant, the cost therefor shall be an Operating Cost under this Lease. However, notwithstanding the foregoing, nothing in this Lease shall require Tenant to use any utility service provider selected by Landlord where such utility service can be provided to Tenant and/or the Premises independent of the delivery of such service to other tenants in the Building; provided that, with the exception of Telecommunication Services, if the effect of Tenant's obtaining such utility service independent of Landlord's delivery of such service to other tenants in the Building is to increase the per unit cost of such service to the Building, Tenant shall reimburse Landlord for such increase in cost, and the Operating Costs for the Base Year shall be reduced by the cost of such utility service provided to the Premises during the Base Year. If during any Year Landlord commences to provide Telecommunications Services or cable television services that were not included in Operating Costs during the Base Year, the Operating Costs for the Base Year will be increased to include Landlord's reasonable estimate of the cost of such services that would have been incurred during the Base Year had such service been provided. 3.5.2 Tenant acknowledges that space on the Building rooftop and in Building risers, equipment rooms and equipment closets is limited. If Tenant requires Telecommunication Services for the Premises other than from the provider or providers of Telecommunication Services selected by Landlord and whose Telecommunication Facilities are installed in or about the Building or on the rooftop of the Building, provision for alternate or supplemental Telecommunication Services or Telecommunication Facilities has been made in Exhibit H attached to and made part of this Lease. Unless otherwise required by law, neither Tenant, nor a provider of Telecommunication Services to Tenant, in the future shall be entitled to locate or install Telecommunication Facilities in, on or about the Building without (a) first obtaining Landlord's advance, written consent (which consent shall not unreasonably be withheld, conditioned or delayed) and (b) the advance execution by Landlord and Tenant of a satisfactory agreement granting a license to Tenant for such purposes and setting forth the scope, the additional rent, if any, and the other terms and conditions of that license, and (c) Tenant negotiating and obtaining the right, if any is required, to bring such Telecommunication Facilities across public or private property to an approved entry point to the Building. Any future application by Tenant for permission to locate or install Telecommunication Facilities shall (1) be in such form and shall be accompanied by such supporting information as the Landlord may reasonably require, (2) be subject to such procedures, regulations and controls as the Landlord may reasonably specify and (3) be accompanied by such payment as the Landlord may reasonably request to reimburse Landlord for its costs of evaluating and processing the application and in negotiating and preparing the agreement described earlier in this subparagraph. 3.5.3 Landlord shall in no case be liable or in any way be responsible for damages or loss to Tenant arising from the failure of, diminution of or interruption in electrical power, natural gas, fuel, Telecommunication Services, sewer, water, or garbage collection services, other utility service or building service of any kind to the Premises, unless such interruption in, deprivation of or reduction of any such service was caused by the gross negligence or willful misconduct of Landlord, its agents or contractors or by a failure in facilities, equipment or systems in the Landlord's ownership. To the extent that Landlord bears any responsibility for any such interruption, deprivation or reduction in utility or building services to the Premises and such failure of, diminution of, or interruption in services causes Tenant to be deprived of all reasonable use of the Premises for more than three (3) consecutive Business Days, Landlord's responsibility and Tenant's remedy shall be limited to an abatement in Base Rent for the period beginning with (a) the day of such interruption, deprivation or reduction and ending on (b) the date such interruption, deprivation or reduction that is Landlord's responsibility is not causing Tenant to be deprived of all reasonable use of the Premises. 3.5.4 The Tenant Improvements shall include a supplemental HVAC system for Tenant's 300 to 500 square foot data center in the Premises, which shall be separately metered for electricity and billed directly to Tenant by the utility company. Such separate metering and billing shall not reduce Tenant's Pro Rata Share or the Operating Costs Allocable to the Premises. 3.6 Holdover. Tenant is not authorized to hold over beyond the expiration or earlier termination of the Lease Term. If Landlord consents to a holdover and no other agreement is reached between Tenant and Landlord concerning the duration and terms of the Holdover, Tenant's holdover shall be a month-to-month tenancy. During such tenancy, Tenant shall pay to Landlord monthly 150% of the rate of monthly Base Rent in effect on the expiration or termination of the Lease Term plus all Additional Rent and other sums payable under this Lease, and shall be bound by all of the other covenants and conditions specified in this Lease, so far as applicable. If the Landlord does not consent to the Tenant's remaining in possession, Landlord shall have all the rights and remedies provided for by law and this Lease, including the right to recover consequential damages suffered by Landlord in the event of Tenant's wrongful refusal to relinquish possession of the Premises. The Base Rent applicable for the period that Tenant wrongfully remains in possession shall in be increased to 150% of the rate of Base Rent in effect for a comparable period on the expiration or termination of the Lease Term. 3.7 Late Charge. If Tenant fails to make any payment of Base Rent, Additional Rent or other amount within five (5) days after the date when due under this Lease, a late charge is immediately due and payable by Tenant equal to five percent (5%) of the amount of any such payment. Landlord and Tenant agree that this charge compensates Landlord for the administrative costs caused by the delinquency. The parties agree that Landlord's damage would be difficult to compute and the amount stated in this paragraph represents a reasonable estimate of such damage. Assessment or payment of the late charge contemplated in this paragraph shall not excuse or cure any Event of Default or breach by Tenant under this Lease or impair any other right or remedy provided under this Lease or under law. 3.8 Default Rate. Any Base Rent, Additional Rent or other sum payable under this Lease which is not paid within five (5) days after the date when due (or within twenty (20) Business Days if otherwise due on demand) shall bear interest at a rate equal to the lesser of: (a) the published prime or reference rate of Riggs Bank N.A., or such other national banking institution designated by Landlord if such bank ceases to publish such rate (the "Prime Rate"), then in effect, plus two (2) percentage points, or (b) the maximum rate of interest per annum permitted by applicable law (the "Default Rate"), but the payment of such interest shall not excuse or cure any Event of Default or breach by Tenant under this Lease or impair any other right or remedy provided under this Lease or under law. SECTION 4: MANAGEMENT AND LEASING PROVISIONS 4.1 Maintenance and Repair by Landlord; Services. 4.1.1 Subject to the Sections captioned "Damage or Destruction" and "Condemnation", Landlord shall repair, replace and maintain the Building, including, without limitation, structural elements, the foundation, the roof and roof membrane, and all Building systems, including, without limitation, electrical, mechanical, plumbing, sewer, fire-life-safety and heating, air conditioning and ventilating systems, in reasonably good order and condition consistent with Government Requirements and with first-class buildings of the same or similar use as the Building located in the metropolitan area in which the Building is located and subject to reasonable wear and tear. Landlord shall make such repairs and replacements thereto as become necessary after obtaining actual knowledge of the need for such repairs. All repair costs shall be included in Operating Costs, except for damage occasioned by the act or omission of Tenant or Tenant's Agents which shall be paid for entirely by Tenant within twenty (20) Business Days after demand by Landlord and except for damage occasioned by the act or omission of other tenants (or third parties for whom they are responsible) which shall be paid for entirely by such tenants. In the event any or all of the Building becomes in need of maintenance or repair which Landlord is required to make under this Lease, Tenant shall immediately give written notice to Landlord, and Landlord shall not be obligated in any way to commence such maintenance or repairs until a reasonable time (determined in the context of the circumstances requiring attention) elapses after Landlord's receipt of such notice. 4.1.2 Landlord agrees to furnish Tenant the following services: (a) hot and cold water at those points of supply in the Premises and where provided for general use of other tenants in the Building; (b) central heat and air conditioning at such temperatures and in such amounts as are considered by Landlord to be standard or as required by governmental authority; (c) routine maintenance and electric lighting service for all Building standard light fixtures in the Premises , and in all common areas of the Building in the manner and to the extent deemed by Landlord to be standard (but at a minimum including light bulb replacement); (d) janitorial service as provided in Exhibit G; (e) facilities to provide electrical current to Tenant in its use and occupancy of the Premises; (f) telephone service to the Premises unless Tenant provides its own telephone service; (g) elevator service; and (h) access to and egress from the Building, the Premises, the common areas and the parking spaces provided by Landlord to Tenant, twenty four (24) hours per day, seven (7) days per week. Landlord shall only be obligated to provide heating and air-conditioning to the Premises during Normal Business Hours (hereinafter defined). As used herein, the term "Normal Business Hours" shall mean Monday through Friday 7:30 a.m. to 6:00 p.m., and Saturday 9:00 a.m. to 12:00 p.m., excluding Holidays. As used herein, the term "Holidays" shall mean New Year's Day, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day. At times other than Normal Business Hours and days aforesaid, central air conditioning and heating shall be provided to Tenant upon at least twenty-four (24) hours' prior notice from Tenant (except for weekend and Holiday HVAC service, which requires notice by 6:00 p.m. on the second (2nd) Business Day immediately preceding such weekend day or Holiday). Tenant shall pay Landlord within twenty (20) Business Days after demand for such service at the hourly charge established by Landlord for each hour (or a portion thereof) of after-hours usage. The current hourly charge for after hours HVAC service is $50.00, which is Landlord's "fully loaded" actual cost. Such hourly charge may be adjusted by Landlord from time to time to pass through to Tenant direct incremental increases in utility costs from the utility company providing the applicable utility service. 4.2 Maintenance and Repair by Tenant. Except as is expressly set forth as Landlord's responsibility pursuant to the paragraph captioned "Maintenance and Repair by Landlord," Tenant shall at Tenant's sole cost and expense keep, clean and maintain the Premises in good condition and repair, including interior painting, plumbing and utility fixtures and installations, carpets and floor coverings, all interior wall surfaces and coverings (including tile and paneling), window replacement (if replacement is necessary due to the action or inaction of Tenant or Tenant's Agents), exterior and interior doors, roof penetrations and membranes in connection with any Tenant installations on the roof, light bulb replacement (except light bulb replacement for building standard lighting fixtures, which is Landlord's responsibility) and interior preventative maintenance. If Tenant fails to maintain or repair the Premises in accordance with this paragraph, then Landlord may, but shall not be required to, enter the Premises upon two (2) Business Days prior written notice to Tenant (or immediately without any notice in the case of an emergency) to perform such maintenance or repair at Tenant's sole cost and expense. Tenant shall pay to Landlord the cost of such maintenance or repair plus a fifteen percent (15%) administration fee within twenty (20) Business Days of written demand from Landlord. 4.3 Common Areas/Security. 4.3.1 The common areas of the Building shall be subject to Landlord's sole management and control. Without limiting the generality of the immediately preceding sentence, Landlord reserves the exclusive right as it deems necessary or desirable to install, construct, remove, maintain and operate lighting systems, facilities, improvements, equipment, Telecommunication Facilities and signs on, in or to all parts of the common areas; change the number, size, height, layout, or locations of walks, driveways and truckways or parking areas now or later forming a part of the Land or Building; make alterations or additions to the Building or common area; close temporarily all or any portion of the common areas to make repairs, changes or to avoid public dedication; grant easements to which the Land will be subject; replat, subdivide, or make other changes to the Land; place or relocate or cause to be placed or located utility lines and Telecommunication Facilities through, over or under the Land and Building; and use or permit the use of all or any portion of the roof of the Building. Landlord reserves the right to relocate parking areas and driveways and to build additional improvements in the common areas so long as Tenant's Parking Ratio is maintained. Landlord will not exercise a right under this subsection 4.3.1 if such exercise would unreasonably interfere with Tenant's access to or use or enjoyment of the Premises and the Project in accordance with this Lease. 4.3.2 Landlord has no duty or obligation to provide any security services in, on or around the Premises, Land or Building, and Tenant recognizes that security services, if any, provided by Landlord will be for the sole benefit of Landlord and the protection of Landlord's property and under no circumstances shall Landlord be responsible for, and Tenant waives any rights with respect to, Landlord providing security or other protection for Tenant or Tenant's Agents or property in, on or about the Premises, Land or Building. Subject to Landlord's prior approval, which shall not unreasonably be withheld, conditioned or delayed, Tenant may, at its sole cost and expense, install, establish and maintain security services within the Premises; provided that, such security services (including any apparatus, facilities, equipment or people utilized in connection with the provision of such security services) comply with the Governmental Requirements and shall not cause the Building to be out of compliance with the Governmental Requirements. Notwithstanding the foregoing, any such security services installed, established or maintained by Tenant must not unreasonably affect or impact any portion of the Building or the Land other than the Premises and shall not in any way limit or interfere with Landlord's ability to exercise its rights as provided in the paragraph captioned "Access". Tenant's rights under this subparagraph are subject to all the obligations, limitations and requirements as set forth in the paragraphs captioned "Tenant Alterations" and "Tenant's Work Performance". 4.4 Tenant Alterations. Without Landlord's prior approval and subsequent to completion of the Tenant Improvements, Tenant may make improvements, additions, installations, decorations and changes to the Premises that do not affect Building systems (other than minor electrical work or minor plumbing work inside the Premises) or structural components, the cost of which shall not exceed $25,000.00 in any one instance or $50,000.00 in the aggregate in any twelve-month period ("Permitted Alterations"). If Permitted Alterations will involve any drywall installation, Tenant shall give Landlord at least five (5) days' advance notice of such work. Other than Permitted Alterations, Tenant shall not make any alterations, additions or improvements in or to the Premises, or make changes to locks on doors, or add, disturb or in any way change any floor covering, wall covering, fixtures, plumbing, or wiring (individually and collectively "Tenant Alterations"), without first obtaining the consent of Landlord, which shall not unreasonably be withheld, conditioned or delayed; provided that Landlord's consent may be withheld in Landlord's absolute discretion if Building systems (other than minor electrical work or minor plumbing work inside the Premises) or structural components of the Building are affected. Tenant shall deliver to Landlord full and complete plans and specifications for any proposed Tenant Alterations and, if consent by Landlord is given, all such work shall be performed at Tenant's expense by Landlord or by Tenant at Tenant's election. Tenant shall pay to Landlord all reasonable costs incurred by Landlord for any architecture, engineering, supervisory and/or legal services in connection with any Tenant Alterations, including, without limitation, Landlord's review of the Plans and Specifications. Without limiting the generality of the foregoing, Landlord may require Tenant, at Tenant's sole cost and expense, to obtain and provide Landlord with proof of insurance coverage and a payment and performance bond (or other evidence of fiscal responsibility reasonably acceptable to Landlord), in forms, amounts and by companies reasonably acceptable to Landlord. Should Tenant make any alterations without Landlord's prior written consent, or without satisfaction of any conditions established by Landlord, Landlord shall have the right, in addition to and without limitation of any right or remedy Landlord may have under this Lease, at law or in equity, to require Tenant to remove some or all of Tenant Alterations, or at Landlord's election, Landlord may remove such Tenant Alterations and restore the Premises at Tenant's expense. Nothing contained in this paragraph or the paragraph captioned "Tenant's Work Performance" shall be deemed a waiver of the provisions of the paragraph captioned "Mechanic's Liens". For all purposes of this Lease other than the obligation to obtain Landlord's prior consent, Permitted Alterations are Tenant Alterations. 4.5 Tenant's Work Performance. Unless Tenant elects to have Landlord perform the Tenant Alterations, Tenant Alterations to be performed under this paragraph shall be performed by contractors employed by Tenant under one or more construction contracts, in form and content approved in advance in writing by Landlord. With respect to Tenant Alterations that require Landlord's approval, approval shall be subject to Landlord's discretion as provided in the preceding subsection and shall include a requirement that the prime contractor and the respective subcontractors of any tier performing the Tenant Alterations: (a) be parties to, and bound by, a collective bargaining agreement with a labor organization affiliated with the Building and Construction Trades Council of the AFL-CIO applicable to the geographic area in which the Building is located and to the trade or trades in which the work under the contract is to be performed and (b) employ only members of such labor organizations to perform work within their respective jurisdictions. Tenant's contractors, workers and suppliers shall work in harmony with and not interfere with workers or contractors of Landlord or other tenants of Landlord. If Tenant's contractors, workers or suppliers do, in the reasonable opinion of Landlord, cause such disharmony or interference, Landlord's consent to the continuation of such work may be withdrawn upon written notice to Tenant, pending resolution of such disharmony or interference. All Tenant Alterations shall be (1) completed in accordance with the plans and specifications approved by Landlord; (2) completed in accordance with all Governmental Requirements; (3) carried out promptly in a good and workmanlike manner; (4) of all new materials; and (5) free of defect in materials and workmanship. Tenant shall pay for all damage to the Premises, Building and Land caused by Tenant or Tenant's Agents. Tenant shall indemnify, defend and hold harmless Landlord and Landlord's Agents from any Claims arising as a result of the Tenant Alterations or any defect in design, material or workmanship of any Tenant Alterations, unless due to the acts or omissions of Landlord or Landlords' Agents. 4.6 Surrender of Possession. Subject to the Sections captioned "Damage or Destruction" and "Condemnation" and to the last subparagraph of the Section captioned "Insurance", Tenant shall, at the expiration or earlier termination of this Lease, surrender and deliver the Premises to Landlord in as good condition as when received by Tenant from Landlord or as later improved, reasonable use and wear excepted, and free from all tenancies or occupancies by any person. 4.7 Removal of Property. Upon expiration or earlier termination of this Lease, Tenant may remove its personal property, office supplies and office furniture and equipment if (a) such items are readily moveable and are not fixtures attached to the Premises; (b) such removal is completed prior to the expiration or earlier termination of this Lease; (c) an Event of Default has not occurred and not been cured at the time of such removal; and (d) Tenant immediately repairs all damage caused by or resulting from such removal. All other property in the Premises and any Tenant Alterations (including, wall-to-wall carpeting, paneling, wall covering, lighting fixtures and apparatus or any other fixture affixed to the floor, walls, ceiling or any other part of the Premises or Building) shall become the property of Landlord and shall remain upon and be surrendered with the Premises; provided, however, at Landlord's sole election, Tenant shall be obligated, at its sole cost and expense, to remove all (or such portion as Landlord shall designate) of the Tenant Alterations (including Telecommunication Facilities), repair any damages resulting from such removal and return the Premises to the same condition as existed prior to such Tenant Alterations if Landlord so notified Tenant at the time it gave its consent to such Tenant Alterations. Tenant waives all rights to any payment or compensation for such Tenant Alterations (including Telecommunication Facilities). If Tenant shall fail to remove any of its property from the Premises, Building or Land at the expiration or earlier termination of this Lease or when Landlord has the right of re-entry, Landlord may, at its option, remove and store such property at Tenant's expense without liability for loss of or damage to such property, such storage to be for the account and at the expense of Tenant. Tenant shall pay all costs incurred by Landlord within ten (10) Business Days after demand for such payment. If Tenant fails to pay the cost of storing any such property, Landlord may, at its option, after it has been stored for a period of twenty (20) Business Days or more, sell or permit to be sold, any or all such property at public or private sale (and Landlord may become a purchaser at such sale), in such manner and at such times and places as Landlord in its sole discretion may deem proper, without notice to Tenant, and Landlord shall apply the proceeds of such sale: first, to the cost and expense of such sale, including reasonable attorney's fees actually incurred; second, to the payment of the costs or charges for storing any such property; third, to the payment of any other sums of money which may then be or later become due Landlord from Tenant under this Lease; and, fourth, the balance, if any, to Tenant. 4.8 Access. Tenant shall permit Landlord and Landlord's Agents to enter into the Premises at any time on at least one (1) Business Day's notice (except in case of emergency in which case no notice shall be required), for the purpose of inspecting the same or for the purpose of repairing, altering or improving the Premises or the Building. Landlord, Landlord's Agents and any other person entering the Premises shall comply with Government Requirements for security, if any, applicable to the Premises by virtue of any government contract work being performed by Tenant or Tenant's Agents therein. Nothing contained in this paragraph shall be deemed to impose any obligation upon Landlord not expressly stated elsewhere in this Lease. When reasonably necessary, Landlord may temporarily close Building or Land entrances, Building doors or other facilities, without liability to Tenant by reason of such closure and without such action by Landlord being construed as an eviction of Tenant or as relieving Tenant from the duty of observing or performing any of the provisions of this Lease. Landlord shall have the right to enter the Premises at any time one at least one (1) Business Day's notice during the last six (6) month's of the Lease Term for the purpose of showing the Premises to prospective tenants and to erect on the Premises a suitable sign indicating the Premises are available. Tenant shall give written notice to Landlord at least ten (10) Business Days prior to vacating the Premises and shall arrange to meet with Landlord for a joint inspection of the Premises prior to vacating. Landlord shall not be liable for the consequences of refusing to admit by passkey to the Premises Tenant or any of Tenant's Agents, or any other persons claiming the right of admittance who does not have a key, access card, or other appropriate identification authorizing access to the Premises. 4.9 Damage or Destruction. 4.9.1 If the Premises are damaged by fire, earthquake or other casualty, Tenant shall give immediate written notice thereof to Landlord. Landlord shall notify Tenant within forty (40) Business Days after notice of such casualty of Landlord's decision regarding restoration of the Premises. If Landlord fails to so notify Tenant within such forty (40) Business Day period and such failure continues for twenty (20) Business Days after written notice from Tenant, Tenant shall then have the right to terminate this Lease by written notice to Landlord given at any time after expiration of the twenty (20) Business Day notice period and before receipt of Landlord's notice of Landlord's decision regarding restoration of the Premises. Such termination shall be effective twenty (20) Business Days after the date of Tenant's termination notice. If Landlord estimates that the damage can be repaired in accordance with the then-existing Governmental Requirements within one hundred-twenty (120) Business Days after Landlord is notified by Tenant of such damage and if there are sufficient insurance proceeds available to repair such damage, then Landlord shall proceed with reasonable diligence to restore the Premises to substantially the condition which existed prior to the damage and this Lease shall not terminate. If, in Landlord's estimation, the damage cannot be repaired within such 120 Business Day period or if there are insufficient insurance proceeds available to repair such damage, Landlord may elect in its absolute discretion to either: (a) terminate this Lease or (b) restore the Premises to substantially the condition which existed prior to the damage and this Lease will continue. If Landlord restores the Premises under this paragraph, then Landlord shall use commercially reasonable efforts to proceed toward completion of the restoration and (1) the Lease Term shall be extended for the time required to complete such restoration, and (2) Landlord shall not be required to repair or restore Additional Tenant Improvements in excess of the Tenant Improvement Allowance, Tenant Alterations (including Telecommunication Facilities), or any or all furniture, fixtures, equipment, inventory, improvements or other property which was in or about the Premises at the time of the damage and was not owned by Landlord. If Landlord notifies Tenant of Landlord's intent to repair or restore the Premises, but does not complete the repairs or restoration with one hundred twenty (120) Business Days after Landlord is notified by Tenant of such damage, which period may be extended due to force majeure delays as provided in Section 6.8, Tenant shall have the right to notify Landlord of Tenant's intent to terminate this Lease, which termination will be effective twenty (20) Business Days after the date of such notice if Landlord does not complete and deliver the restored Premises to Tenant during such twenty (20) Business Day period. Base Rent, Additional Rent and any other sum due under this Lease shall be abated during any reconstruction period on a pro rata basis in proportion to the rentable square footage of the Premises that Tenant is deprived of all reasonable use during such restoration. Tenant agrees to look to the provider of Tenant's insurance for coverage for the loss of Tenant's use of the Premises and any other related losses or damages incurred by Tenant during any reconstruction period. 4.9.2 If the Building is damaged by fire, earthquake or other casualty and more than fifty percent (50%) of the Building is rendered untenantable, without regard to whether the Premises are affected by such damage, Landlord may in its absolute discretion and without limiting any other options available to Landlord under this Lease or otherwise, elect to terminate this Lease by notice in writing to Tenant within forty (40) Business Days after the occurrence of such damage if Landlord is also terminating the leases of other tenants in the Building who are similarly situated to Tenant. Such notice shall be effective twenty (20) Business Days after receipt by Tenant unless a later date is set forth in Landlord's notice. If Landlord fails to give such notice to Tenant within forty (40) Business Days after the occurrence of such damage, then Landlord shall proceed with reasonable diligence to restore the Building to substantially the condition which existed prior to the damage. 4.9.3 Notwithstanding anything contained in this Lease to the contrary, if there is damage to the Premises or Building and the holder of any indebtedness secured by a mortgage or deed of trust covering any such property requires that the insurance proceeds be applied to such indebtedness or if the insurance proceeds are otherwise inadequate to complete the repair of the damages to the Premises, the Building or both, then Landlord shall have the right to terminate this Lease by delivering written notice of termination to Tenant within fifteen (15) Business Days after Landlord is notified of such requirement. 4.9.4 Notwithstanding the foregoing, if the Premises or the Building are wholly or partially damaged or destroyed within the final twelve (12) months of the Term, Landlord or Tenant may, at its option, elect to terminate this Lease upon written notice to the other within thirty (30) days following such damage or destruction. 4.10 Condemnation. If all of the Premises, or such portions of the Building as may be required for the Tenant's reasonable use of the Premises, are taken by eminent domain or by conveyance in lieu thereof, this Lease shall automatically terminate as of the date the physical taking occurs, and all Base Rent, Additional Rent and other sums payable under this Lease shall be paid to that date. In case of taking of a part of the Premises or a portion of the Building not required for the Tenant's reasonable use of the Premises, then this Lease shall continue in full force and effect and the Base Rent shall be equitably reduced based on the proportion by which the floor area of the Premises is reduced, such reduction in Base Rent to be effective as of the date the physical taking occurs. Additional Rent and all other sums payable under this Lease shall not be abated but Tenant's Pro Rata Share shall be redetermined as equitable under the circumstances. Landlord reserves all rights to damages or awards for any taking by eminent domain relating to the Premises, Building, Land and the unexpired term of this Lease. Tenant assigns to Landlord any right Tenant may have to such damages or award and Tenant shall make no claim against Landlord for damages for termination of its leasehold interest or interference with Tenant's business. Tenant shall have the right, however, to claim and recover from the condemning authority compensation for any loss to which Tenant may be entitled for Tenant's moving expenses or other relocation costs; provided that, such expenses or costs may be claimed only if they are awarded separately in the eminent domain proceedings and not as a part of the damages recoverable by Landlord. 4.11 Parking. Appurtenant to the lease of the Premises, Tenant shall have the nonexclusive privilege during the Lease Term to use up to five (5) parking spaces per 1,000 rentable square feet leased hereunder among the parking spaces on the Land in common with other tenants of Landlord, but only in areas reasonably designated by Landlord. Landlord shall designate two (2) parking spaces as reserved for Tenant in a location to be determined by Landlord in the location shown cross-hatched in red on Exhibit A-1. Tenant's parking privileges shall be subject to the rules and regulations relating to parking adopted by Landlord from time to time. Landlord shall have the right to grant designated, reserved parking stalls to other tenants in the Building. In no event shall the number of parking stalls used by Tenant and Tenant's Agents, including reserved spaces, exceed the number of stalls allocated to Tenant in the definition of the Parking Ratio. Similarly, in no event shall Landlord materially reduce the number of available parking spaces on the Land to the extent that the Parking Ratio cannot reasonably be achieved. Landlord shall have no obligation whatsoever to monitor, secure or police the use of the parking or other common areas, including the reserved spaces. 4.12 Indemnification. 4.12.1 Tenant shall indemnify, defend and hold harmless Landlord and Landlord's Agents from and against any and all Claims, arising in whole or in part out of (a) the Tenant's possession, use or occupancy of the Premises or the business conducted in the Premises, (b) any act, omission or negligence of Tenant or Tenant's Agents, or (c) any uncured Event of Default under this Lease by Tenant; however, Tenant shall have no obligation to indemnify, defend or hold harmless Landlord or Landlord's Agents from or against any Claims arising solely out of the negligence or willful misconduct of Landlord or Landlord's Agents. 4.12.2 Except as specified in this Section 4.12, neither Landlord nor Landlord's Agents shall, to the extent permitted by law, have any liability to Tenant, or to Tenant's Agents, for (1) any Claims arising out of any repair to any portion of the Premises; (2) interruption in or interference with the use of the Premises or any equipment therein; (3) any accident or damage resulting from any use or operation by Landlord, Tenant or any person or entity of heating, cooling, electrical, sewerage or plumbing equipment or apparatus or Telecommunication Facilities; (4) termination of this Lease by reason of damage to the Premises or Building; (5) fire, robbery, theft, vandalism, mysterious disappearance or a casualty of any kind or nature; (6) actions of any other tenant of the Building or of any other person or entity; (7) inability to furnish any service required of Landlord as specified in this Lease; or (8) leakage in any part of the Premises or the Building from rain, ice or snow, or from drains, pipes or plumbing fixtures in the Premises or the Building. Landlord shall be responsible only for Claims arising solely out of the negligence or willful misconduct of Landlord in failing to repair or maintain the Building as required by the paragraph captioned "Maintenance and Repair by Landlord"; but in no event shall Landlord's responsibility extend to any interruption to Tenant's business or any indirect or consequential losses suffered by Tenant or Tenant's Agents or extend beyond Landlord's responsibility as set forth in the subsection entitled "Utilities" when that subsection is applicable. 4.12.3 Landlord hereby agrees to indemnify and hold Tenant and Tenant's Agents harmless from and against Claim incurred by or claimed against Tenant or Tenant's Agents, directly or indirectly, as a result of or in any way arising from the negligence or willful misconduct of Landlord, its officers, directors, employees and agents. 4.12.4 The obligations of this Section 4.12 shall be subject to the paragraph captioned "Waiver of Subrogation". 4.13 Tenant Insurance. 4.13.1 Tenant shall, throughout the Lease Term, at its own expense, keep and maintain in full force and effect the following policies: (a) A policy of commercial general liability insurance, including a contractual liability endorsement covering Tenant's obligations under the paragraph captioned "Indemnification", insuring against claims of bodily injury and death or property damage or loss with a combined single limit at the Commencement Date of this Lease of not less than Five Million Dollars ($5,000,000.00), which limit shall be reasonably increased during the Lease Term at Landlord's request to reflect both increases in liability exposure arising from inflation as well as from changing use of the Premises or changing legal liability standards, which policy shall be payable on an "occurrence" rather than a "claims made" basis, and which policy names Landlord and Manager and, at Landlord's request Landlord's mortgage lender(s) or investment advisors, as additional insureds; (b) A policy of extended property insurance (which is commonly called "all risk") covering Tenant Alterations (including Telecommunication Facilities), and any and all furniture, fixtures, equipment, inventory, improvements and other property in or about the Premises which is owned or leased by Tenant, for one hundred percent (100%) of the then current replacement cost of such property; (c) Business interruption insurance in an amount sufficient to cover Tenant's costs, damages, lost income, and expenses should any or all of the Premises not be usable for a period of up to six (6) months; (d) A policy of worker's compensation insurance as required by applicable law and employer's liability insurance with limits of no less than One Million Dollars ($1,000,000.00); and (e) A policy of comprehensive automobile liability insurance, including loading and unloading, and covering owned, non-owned and hired vehicles, with limits of no less than One Million Dollars ($1,000,000.00) per occurrence. 4.13.2 All insurance policies required under this paragraph shall be with companies reasonably approved by Landlord and each policy shall provide that it is not subject to cancellation, lapse or reduction in coverage except after thirty (30) days' written notice to Landlord. Tenant shall deliver to Landlord and, at Landlord's request Landlord's mortgage lender(s), prior to the Commencement Date and from time to time thereafter, certificates evidencing the existence and amounts of all such policies. Tenant may provide the insurance coverage required in this Section 4.13 through "blanket" policies and with such deductibles and retentions as are reasonably acceptable to Landlord. If in the future due to a change in market conditions affecting office use tenants generally or tenants of buildings similarly situated to the Project, any of the types or amounts of insurance coverage required by this Section 4.13 are no longer commercially available at commercially reasonable rates, Tenant shall not be in default of this Lease for failure to obtain such unavailable insurance; provided that in such event, Tenant shall obtain such insurance as close to the required insurance coverage in type and amount as is commercially available at commercially reasonable rates and, upon request from Landlord, shall explain in writing to Landlord what steps Tenant is taking to mitigate the effect of the uninsured risks. 4.13.3 If Tenant fails, within ten (10) Business Days after receipt from Landlord of notice of such failure, to acquire or maintain any insurance or provide any certificate required by this paragraph, Landlord may, but shall not be required to, obtain such insurance or certificates and the reasonable costs associated with obtaining such insurance or certificates shall be payable by Tenant to Landlord within twenty (20) Business Days after demand. 4.14 Landlord's Insurance. Landlord shall, throughout the Lease Term, keep and maintain in full force and effect: 4.14.1 A policy of commercial general liability insurance, insuring against claims of bodily injury and death or property damage or loss with a combined single limit at the Commencement Date of not less than Five Million Dollars ($5,000,000.00), which policy shall be payable on an "occurrence" rather than a "claims made" basis; 4.14.2 A policy of extended property insurance (what is commonly called "all risk") covering the Building, Tenant Improvements and Landlord's personal property, if any, located on the Land in the amount of one hundred percent (100%) of the then current replacement value of such property; and 4.14.3 Landlord may, but shall not be required to, maintain other types of insurance as Landlord reasonably deems appropriate, including but not limited to, property insurance coverage for earthquakes and floods in such amounts as Landlord reasonably deems appropriate. Such policies may be "blanket" policies which cover other properties owned by Landlord. If in the future due to a change in market conditions affecting the availability of insurance coverage for buildings similarly situated to the Project or owners of such buildings, any of the types or amounts of insurance coverage required by this Section 4.14 are no longer commercially available at commercially reasonable rates, Landlord shall have no obligation hereunder for failure to obtain such unavailable insurance; provided that in such event, Landlord shall obtain such insurance as close to the required insurance coverage in type and amount as is commercially available at commercially reasonable rates. 4.15 Waiver of Subrogation. Notwithstanding anything in this Lease to the contrary, Landlord and Tenant hereby each waive and release the other from any and all Claims or any loss or damage that may occur to the Land, Building, Premises, or personal property located therein, by reason of fire or other casualty regardless of cause or origin, including the negligence or misconduct of Landlord, Tenant, Landlord's Agents or Tenant's Agents, but only to the extent of the insurance proceeds paid to such releasor under its policies of insurance or, if it fails to maintain the required policies, the insurance proceeds that would have been paid to such releasor if it had maintained such policies. Each party to this Lease shall promptly give to its insurance company written notice of the mutual waivers contained in this subparagraph, and shall cause its insurance policies to be properly endorsed, if necessary, to prevent the invalidation of any insurance coverages by reason of the mutual waivers contained in this subparagraph. 4.16 Assignment and Subletting by Tenant. 4.16.1 Except as expressly permitted by this Section 4.16, Tenant shall not have the right to assign, transfer, mortgage or encumber this Lease in whole or in part, nor sublet the whole or any part of the Premises, nor allow the occupancy of all or any part of the Premises by another, without first obtaining Landlord's consent, which consent may be granted or denied in accordance with this paragraph. Notwithstanding any permitted assignment or subletting, Tenant shall at all times remain directly, primarily and fully responsible and liable for the payment of all sums payable under this Lease and for compliance with all of its other obligations as tenant under this Lease. Landlord's acceptance of Base Rent, Additional Rent or any other sum from any assignee, sublessee, transferee, mortgagee or encumbrance holder shall not be deemed to be Landlord's approval of any such conveyance. Upon the occurrence and during the continuance of an uncured Event of Default, if the Premises or any part of the Premises is then subject to an assignment or subletting, Landlord may, at its option, collect directly from such assignee or subtenant all rents becoming due to Tenant under such assignment or sublease and apply such rents against any sums due to Landlord from Tenant under this Lease. No such collection shall be construed to constitute a novation or release of Tenant from the further performance of Tenant's obligations under this Lease. Landlord's right of direct collection shall be in addition to and not in limitation of any other rights and remedies provided for in this Lease or at law. 4.16.2 Except as expressly permitted in subsection 4.16.8, in the event Tenant desires to assign this Lease or to sublet all or any portion of the Premises, Tenant shall give written notice of such desire to Landlord setting forth the name of the proposed subtenant or assignee, the proposed term, the nature of the proposed subtenant's or assignee's business to be conducted on the Premises, the rental rate, and any other particulars of the proposed subletting or assignment that Landlord may reasonably request. Without limiting the preceding sentence, Tenant shall also provide Landlord with: (a) such financial information as Landlord may reasonably request concerning the proposed subtenant or assignee, including recent financial statements of the proposed subtenant or assignee; (b) proof satisfactory to Landlord that the proposed subtenant or assignee will occupy and thereafter use the entire Premises (or any sublet portion of the Premises) for the remainder of the Lease Term (or for the entire term of the sublease, if shorter) in compliance with the terms of this Lease; and (c) a copy of the proposed sublease or assignment or letter of intent. Tenant shall pay to Landlord, within twenty (20) Business Days after receipt of Landlord's written demand therefor, Landlord's reasonable out-of-pocket attorneys' fees incurred in the review of such documentation and in documenting Landlord's consent if Landlord engages outside counsel. Receipt of such fee shall not obligate Landlord to approve the proposed assignment or sublease. 4.16.3 In determining whether to grant or withhold consent to a proposed assignment or sublease, Landlord may consider, and weigh, any factor it deems relevant, in its reasonable discretion and shall not unreasonably withhold its consent. Without limiting what may be construed as a factor considered by Landlord, Tenant agrees that any one or more of the following will be proper grounds for Landlord's disapproval of a proposed assignment or sublease: (a) Landlord believes that the proposed assignment or sublease may constitute or may cause this Lease to be a prohibited transaction under or otherwise violate ERISA; (b) Landlord has had prior negative leasing experience with the proposed assignee or subtenant or an affiliate; as used in this clause, "negative leasing experience" means chronic late payment of rent, chronic complaints from other tenants regarding disruptive behavior, or similar events that would cause a reasonable landlord not to accept the proposed assignee or subtenant as a tenant; (c) The use of the Premises by the proposed assignee or subtenant will not be permitted under the Permitted Uses; (d) In Landlord's reasonable judgment, the proposed assignee or subtenant is engaged in a business that is materially different from Tenant's business and that will violate any negative covenant as to use contained in any other lease of space in the Building; (e) The use of the Premises by the proposed assignee or subtenant will violate any Governmental Requirement or create a violation of Access Laws; or (f) Landlord has had written negotiations with the proposed assignee or subtenant in the six (6) months preceding Tenant's request regarding the leasing of space by such proposed assignee or subtenant in the Project and space comparable in size to the Premises, or the proposed space to be sublet if less than the entire Premises, is available for the same term and on the same delivery date in the Project or, if the proposed assignee or subtenant is already a tenant of the Building, space comparable in size to the Premises, or the proposed space to be sublet if less than the entire Premises, is available for the same term and on the same delivery date in the Building; provided that after Landlord's initial lease up of the Building, the foregoing "non-compete" provision shall not apply to a sublet of the second floor area initially included in the Premises on the date of this Lease. 4.16.4 Within ten (10) Business Days after Landlord's receipt of all required information to be supplied by Tenant pursuant to this paragraph, Landlord shall notify Tenant of Landlord's approval, disapproval or conditional approval of any proposed assignment or subletting or of Landlord's election to recapture as described below. Landlord shall have no obligation to notify Tenant of its approval or disapproval unless and until all required information has been submitted. In the event Landlord approves of any proposed assignment or subletting, Tenant and the proposed assignee or sublessee shall execute and deliver to Landlord an assignment (or subletting) and assumption agreement in form and content reasonably satisfactory to Landlord. 4.16.5 If Landlord consents to any assignment or sublease and Tenant receives rent or any other consideration, either initially or over the term of the assignment or sublease, in excess of the Base Rent and Additional Rent (or, in the case of a sublease of a portion of the Premises, in excess of the Base Rent paid by Tenant on a square footage basis under this Lease), then after deducting Tenant's assignment and/or subleasing transaction costs (including but not limited to leasing commissions and cost of improvements) Tenant shall pay to Landlord fifty percent (50%) of such excess. 4.16.6 Landlord shall have the right to recapture the Premises or the applicable portion thereof (a "Recapture") by giving written notice of such Recapture to Tenant within ten (10) Business Days after receipt of Tenant's written request for Landlord's consent to such proposed assignment or subletting. Tenant shall have no right to retract its request for Landlord's consent to assign or sublease once such request has been made. Such Recapture shall terminate this Lease as to the applicable space effective on the prospective effective date of assignment or subletting, which shall be the last day of a calendar month and shall not be earlier than fifteen (15) Business Days after receipt of Tenant's request hereunder. If less than the entire Premises are recaptured, this Lease shall remain in full force and effect with respect to that remaining area not recaptured by Landlord. Tenant shall surrender that portion of the Premises recaptured by Landlord in accordance with the terms and conditions of this Lease, Base Rent shall be reduced in the same proportion as the reduction in size of the Premises, Tenant's Pro Rata Share shall be adjusted to subtract the portion attributable to the recaptured space, and Tenant shall thereafter have no liability with respect to the recaptured space. Notwithstanding the first sentence of this subparagraph, Landlord shall have no right to Recapture the Premises or applicable portion thereof if: (a) Tenant's proposed assignment or sublet is to an affiliate or wholly-owned subsidiary or is to a reorganized entity under which no change in ownership has occurred, or (b) Tenant's proposed assignment or sublet together with any previous assignments and sublets encompass, in the aggregate, net rentable area equal to or less than twenty percent (20%) of the total net rentable area of Premises. 4.16.7 Notwithstanding any contrary provision in the previous subparagraphs of this Section, Landlord's consent shall not be required for a proposed assignment or subletting of the Premises where (a) the assignment or subletting is to an affiliate or wholly-owned subsidiary of the Tenant or a reorganized entity under which no change of ownership has occurred or to the acquirer of all of the outstanding stock or substantially all the assets of Tenant (collectively, a "Related Entity"), (b) in the case of an assignment, the proposed assignee and any proposed guarantor has delivered to Landlord satisfactory evidence of financial worth (less goodwill) equal to or greater than that of Tenant and the guarantor of this Lease as of the effective date of the assignment or sublet under this Lease, and (c) the use of the Premises by the assignee or subtenant is permitted under the Permitted Uses. Landlord right of Recapture shall not apply to the assignments and subletting permitted by this subparagraph 4.16.7. 4.17 Assignment by Landlord. Landlord shall have the right to transfer and assign, in whole or in part, its rights and obligations under this Lease and in any and all of the Land or Building. If Landlord sells or transfers any or all of the Building, including the Premises, Landlord and Landlord's Agents shall, upon consummation of such sale or transfer, be released automatically from any liability relating to obligations or covenants under this Lease to be performed or observed after the date of such transfer, and in such event, Tenant agrees to look solely to Landlord's successor-in-interest with respect to such liability; provided that, as to the Lease Security Deposit and Prepaid Rent, Landlord shall not be released from liability therefor unless Landlord has delivered (by direct transfer or credit against the purchase price) the Lease Security Deposit or Prepaid Rent to its successor-in-interest. 4.18 Estoppel Certificates and Financial Statements. Tenant shall, from time to time, upon the written request of Landlord, execute, acknowledge and deliver to Landlord or its designee a written statement stating: (a) the date this Lease was executed and the date it expires; (b) the date Tenant entered into occupancy of the Premises; (c) the amount of monthly Base Rent and Additional Rent and the date to which such Base Rent and Additional Rent have been paid; and (d) certifying that (1) this Lease is in full force and effect and has not been assigned, modified, supplemented or amended in any way (or specifying the date of the agreement so affecting this Lease); (2) Landlord is not in breach of this Lease (or, if so, a description of each such breach) and that no event, omission or condition has occurred which would result, with the giving of notice or the passage of time, in a breach of this Lease by Landlord (or, if so, providing a description); (3) this Lease represents the entire agreement between the parties with respect to the Premises; (4) all required contributions by Landlord to Tenant on account of Tenant Improvements have been received (or describing any that have not been received); (5) on the date of execution, there exist no defenses or offsets which the Tenant has against the enforcement of this Lease by the Landlord (or describing any such defenses or offsets); (6) no Base Rent, Additional Rent or other sums payable under this Lease have been paid in advance except for Base Rent and Additional Rent for the then current (or next succeeding) month; (7) no security has been deposited with Landlord (or, if so, the amount of such security); (8) it is intended that any Tenant's statement may be relied upon by a prospective purchaser or mortgagee of Landlord's interest or an assignee of any such mortgagee; and (9) such other information as may be reasonably requested by Landlord. If Tenant fails to respond within ten (10) Business Days of its receipt of a written request by Landlord as provided in this paragraph, such shall be a breach of this Lease. In addition, Tenant shall, from time to time, upon the written request of Landlord, deliver to or cause to be delivered to Landlord or its designee unaudited financial statements (including a statement of operations and balance sheet and statement of cash flows) for the fiscal period most recently completed for which such statements are available (but in no event more than two quarters in arrears) and prepared in conformance with generally accepted accounting principles for (i) Tenant, (ii) any successor entity to Tenant by merger or operation of law, and (iii) any guarantor of this Lease. 4.19 Modification for Lender. If, in connection with obtaining construction, interim or permanent financing for the Building or Land, Landlord's lender, if any, shall request reasonable modifications to this Lease as a condition to such financing, Tenant will not unreasonably withhold or delay its consent to such modifications; provided that, such modifications do not increase the obligations of Tenant under this Lease or materially adversely affect Tenant's rights under this Lease. 4.20 Hazardous Substances. 4.20.1 Neither Tenant nor any of Tenant's Agents shall store, place, generate, manufacture, refine, handle, or locate on, in, under or around the Land or Building any Hazardous Substance, except for storage, handling and use of reasonable quantities and types of cleaning fluids and office supplies in the Premises in the ordinary course and the prudent conduct of Tenant's business in the Premises. Tenant agrees that (a) the storage, handling and use of such permitted Hazardous Substances must at all times conform to all Governmental Requirements and to applicable fire, safety and insurance requirements; (b) the types and quantities of permitted Hazardous Substances which are stored in the Premises must be reasonable and appropriate to the nature and size of Tenant's operation in the Premises and reasonable and appropriate for a first-class building of the same or similar use and in the same market area as the Building; and (c) no Hazardous Substance shall be spilled or disposed of on, in, under or around the Land or Building or otherwise discharged from the Premises or any area adjacent to the Land or Building. In no event will Tenant be permitted to store, handle or use on, in, under or around the Premises any Hazardous Substance which will increase the rate of fire or extended coverage insurance on the Land or Building, unless: (1) such Hazardous Substance and the expected rate increase have been specifically disclosed in writing to Landlord; (2) Tenant has agreed in writing to pay any rate increase related to each such Hazardous Substance; and (3) Landlord has approved in writing each such Hazardous Substance, which approval shall be subject to Landlord's discretion. 4.20.2 Tenant shall indemnify, defend and hold harmless Landlord and Landlord's Agents from and against any and all Claims arising out of any breach by Tenant of any provision of this Section 4.20, which expenses shall also include laboratory testing fees, personal injury claims, clean-up costs and environmental consultants' fees. Tenant agrees that Landlord may be irreparably harmed by Tenant's breach of this paragraph and that a specific performance action may appropriately be brought by Landlord; provided that, Landlord's election to bring or not bring any such specific performance action shall in no way limit, waive, impair or hinder Landlord's other remedies against Tenant. 4.20.3 As of the execution date of this Lease, Tenant represents and warrants to Landlord that, except as otherwise disclosed by Tenant to Landlord, Tenant has no intent to bring any Hazardous Substances on, in or under the Premises except for the type and quantities authorized in the first paragraph of the paragraph captioned "Hazardous Substances." 4.20.4 As of the execution date of this Lease, Landlord represents and warrants, to the best of Landlord's knowledge, which is limited to the Phase 1 Environmental Site Assessment dated March 23, 2000 and prepared by ECS Ltd., which was previously disclosed to Tenant, that no Hazardous Substances are currently present on, in, under, or affecting the Land. Landlord further represents and warrants to Tenant that, as of the execution date of this Lease, Landlord has no actual knowledge that, as a result of Landlord's construction of the base building or other action under Landlord's control, Hazardous Substances exist in the Building except for naturally occurring amounts or as permitted by Government Requirements in construction materials contained in the Building. 4.21 Access Laws. 4.21.1 Tenant agrees to notify Landlord promptly if Tenant receives written notification or otherwise acquires actual knowledge of: (a) any condition or situation on, in, under or around the Land or Building which constitutes a violation of any Access Laws or (b) any threatened or actual lien, action or notice that the Land or Building is not in compliance with any Access Laws. If Tenant is responsible for such condition, situation, lien, action or notice under this paragraph, Tenant's notice to Landlord shall include a statement as to the actions Tenant proposes to take in response to such condition, situation, lien, action or notice. 4.21.2 Tenant shall not alter or permit any assignee or subtenant or any other person to alter the Premises in any manner which would violate any Access Laws or increase Landlord's responsibilities for compliance with Access Laws, without the prior approval of the Landlord. In connection with any such approval, Landlord may require a certificate of compliance with Access Laws from an architect, engineer or other person acceptable to Landlord. Tenant agrees to pay the reasonable fees incurred by such architect, engineer or other third party in connection with the issuance of such certificate of compliance. Landlord's consent to any proposed Tenant Alteration shall (a) not relieve Tenant of its obligations or indemnities contained in this paragraph or this Lease or (b) be construed as a warranty that such proposed alteration complies with any Access Law. 4.21.3 Tenant shall be solely responsible for all costs and expenses relating to or incurred in connection with: (a) failure of the Premises to comply with the Access Laws, and (b) bringing the Building and the common areas of the Building into compliance with Access Laws, if and to the extent such failure or noncompliance arises out of or relates to: (1) Tenant's use of the Premises for other than Permitted Uses, (2) any Tenant Alterations to the Premises; or (3) any Tenant Improvements constructed in the Premises at the request of Tenant after the Commencement Date. 4.21.4 Landlord shall be responsible for all costs and expenses relating to or incurred in connection with (a) failure of the Premises, Building or Land to comply with Access Laws and other Governmental Requirements in effect as of the Commencement Date, and (b) bringing the common areas of the Building into compliance with Access Laws, unless such costs and expenses are Tenant's responsibility as provided in the preceding subparagraph. Any cost or expense paid or incurred by Landlord to bring the Building and the Land into compliance with Access Laws which is Landlord's responsibility under this paragraph shall be amortized over the useful economic life of the improvements with interest at the Prime Rate plus two (2) percentage points, and shall be an Operating Cost for purposes of this Lease; provided that Landlord shall only pass through as an Operating Cost those costs incurred to bring the Building and the Land into compliance with provisions of Access Laws that become effective after the Commencement Date. 4.21.5 The provisions of this paragraph shall supersede any other provisions in this Lease regarding Access Laws, to the extent inconsistent with the provisions of any other paragraphs. 4.22 Quiet Enjoyment. Landlord covenants that Tenant, upon paying Base Rent, Additional Rent and all other sums payable under this Lease and performing all covenants and conditions required of Tenant under this Lease shall and may peacefully have, hold and enjoy the Premises without hindrance, interference or molestation by Landlord, or anyone claiming by, from or through Landlord. 4.23 Signs. Subject to compliance with all Governmental Requirements and Restrictions and provided that Tenant or Related Entities occupy in the aggregate at least one full floor of the Building or otherwise leases more rentable square footage in the Building than any other single tenant of the Building, Tenant shall have the exclusive right to install a sign on the Building exterior. The exact size, appearance and location of such sign shall be subject to Landlord's prior written approval (which approval shall not unreasonably be withheld, conditioned or delayed). Tenant's approved exterior signage plans and specifications will be attached to this Lease as Exhibit F prior to installation of such signage. Any and all costs in connection with the permitting, fabrication, installation, maintenance and removal of Tenant's sign (including the cost of removal of the sign and repair to the Building caused by such removal) shall be borne by Tenant. Tenant agrees to maintain each such sign, awning, canopy, decoration, lettering, advertising matter or other thing as may be approved, in good condition at all times. Tenant shall not inscribe an inscription, or post, place, or in any manner display any sign, notice, picture, placard or poster, or any advertising matter whatsoever, anywhere in or about the Project at places visible (either directly or indirectly as an outline or shadow on a glass pane) from anywhere outside the Premises without first obtaining Landlord's consent, unless permitted in Exhibit F. Upon vacation of the Premises on the expiration or earlier termination of this Lease, Tenant shall be responsible, at it sole cost, for the removal of such sign and the repair, painting and/or replacement of the structure to which the sign is attached including discoloration caused by such installation or removal. If Tenant fails to perform such work, Landlord may cause the same to be performed, and the cost thereof shall be Additional Rent due and payable within twenty (20) Business Days after rendition of a bill therefor. At Landlord's cost and expense, Landlord shall install Building standard suite identification signage on the entry to the Premises and identification of Tenant on the Building directory. 4.24 Subordination. Tenant subordinates this Lease and all rights of Tenant under this Lease to any mortgage, deed of trust, ground lease or vendor's lien, or similar instrument which may from time to time be placed upon the Premises (and all renewals, modifications, replacements and extensions of such encumbrances), and each such mortgage, deed of trust, ground lease or lien or other instrument shall be superior to and prior to this Lease. Notwithstanding the foregoing, the holder or beneficiary of such mortgage, deed of trust, ground lease, vendor's lien or similar instrument shall have the right to subordinate or cause to be subordinated any such mortgage, deed of trust, ground lease, vendor's lien or similar instrument to this Lease or to execute a non-disturbance agreement in favor of Tenant on the standard form utilized by such lender or ground lessor. At the request of Landlord, the holder of such mortgage or deed of trust or any ground lessor, Tenant shall execute, acknowledge and deliver promptly in recordable form any instrument or subordination agreement that Landlord or such holder may reasonably request. Tenant further covenants and agrees that if the lender or ground lessor acquires the Premises as a purchaser at any foreclosure sale or otherwise, Tenant shall recognize and attorn to such party as landlord under this Lease, and shall make all payments required hereunder to such new landlord without deduction or set-off and, upon the request of such purchaser or other successor, execute, deliver and acknowledge documents confirming such attornment. Tenant waives the provisions of any law or regulation, now or hereafter in effect, which may give or purport to give Tenant any right to terminate or otherwise adversely affect this Lease or the obligations of Tenant hereunder in the event that any such foreclosure or termination or other proceeding is prosecuted or completed. Notwithstanding anything in this paragraph to the contrary, Landlord shall use reasonable efforts to obtain from any future mortgagee, trustee or lessor of the Land or Building a non-disturbance agreement in form reasonably acceptable to Tenant and such mortgagee, trustee or lessor. 4.25 Workers Compensation Immunity. [Intentionally Deleted.] 4.26 Brokers. Landlord agrees that it shall be solely responsible for any commission or finders fee owed to the Brokers in connection with this Lease. Each party to this Lease shall indemnify, defend and hold harmless the other party from and against any and all Claims asserted against such other party by any other real estate broker, finder or intermediary relating to any act of the indemnifying party in connection with this Lease. 4.27 Limitation on Recourse. Landlord has executed this Lease by its trustee signing solely in a representative capacity. Notwithstanding anything contained in this Lease to the contrary, Tenant confirms that the covenants of Landlord are made and intended, not as personal covenants of the trustee, or for the purpose of binding the trustee personally, but solely in the exercise of the representative powers conferred upon the trustee by its principal. Liability with respect to the entry and performance of this Lease by or on behalf of Landlord, however it may arise, shall be asserted and enforced only against Landlord's estate and equity interest in the Building. To the extent permitted by applicable law, neither Landlord nor any of Landlord's Agents shall have any personal liability in the event of any claim against Landlord arising out of or in connection with this Lease, the relationship of Landlord and Tenant or Tenant's use of the Premises. Further, in no event whatsoever shall any Landlord's Agent have any liability or responsibility whatsoever arising out of or in connection with this Lease, the relationship of Landlord and Tenant or Tenant's use of the Premises; provided that the foregoing limitation with respect to Landlord's Agents shall not release Manager from liability for the negligent or malfeasant acts or omissions of Manager, its agents or employees. Any and all personal liability, if any, beyond that which may be asserted under this paragraph, is expressly waived and released by Tenant and by all persons claiming by, through or under Tenant. 4.28 Mechanic's Liens and Tenant's Personal Property Taxes. 4.28.1 Tenant shall have no authority, express or implied, to create or place any lien or encumbrance of any kind or nature whatsoever upon, or in any manner to bind, the interest of Landlord or Tenant in the Premises or to charge the rentals payable under this Lease for any Claims in favor of any person dealing with Tenant, including those who may furnish materials or perform labor for any construction or repairs. Tenant shall pay or cause to be paid in a timely manner all sums legally due and payable by it on account of any labor performed or materials furnished in connection with any work performed on the Premises on which any lien is or can be validly and legally asserted against its leasehold interest in the Premises and Tenant shall indemnify, defend and hold harmless Landlord from any and all Claims arising out of any such asserted Claims. Tenant agrees to give Landlord immediate written notice of any such Claim. 4.28.2 Tenant shall be liable for all taxes levied or assessed against personal property, furniture or fixtures placed by Tenant in the Premises. If any such taxes for which Tenant is liable are levied or assessed against Landlord or Landlord's property and Landlord elects to pay them or if the assessed value of Landlord's property is increased by inclusion of such personal property, furniture or fixtures and Landlord elects to pay the taxes based on such increase, Tenant shall reimburse Landlord for the sums so paid by Landlord, within twenty (20) Business Days after written demand by Landlord. 4.29 Landlord's Security Interest. [Intentionally Deleted.] SECTION 5: DEFAULT AND REMEDIES 5.1 Events of Default. 5.1.1 The occurrence of any one or more of the following events shall constitute a material default and breach of this Lease by Tenant ("Event of Default"): (a) abandonment of all or any portion of the Premises; (b) failure by Tenant to make any payment of Base Rent, Additional Rent or any other sum payable by Tenant under this Lease, where such failure shall continue for a period of five (5) Business Days after receipt of written notice from Landlord; provided that Landlord shall not be obligated to provide notice more than twice in any twelve-month period before such payment failure becomes an Event of Default; (c) failure by Tenant to observe or perform any covenant or condition of this Lease, other than the making of payments, where such failure shall continue for a period of twenty (20) Business Days after written notice from Landlord; provided, however, that if such failure is of a nature that it cannot be cured within such twenty (20) day period, no Event of Default shall be deemed to have occurred if Tenant commences to cure such failure within such period and thereafter diligently prosecutes the same to completion; (d) the failure of Tenant to surrender possession of the Premises at the expiration or earlier termination of this Lease in the condition required by this Lease; (e) (1) the making by Tenant of any general assignment or general arrangement for the benefit of creditors; (2) the filing by or against Tenant of a petition in bankruptcy, including reorganization or arrangement, unless, in the case of a petition filed against Tenant, unless the same is dismissed within twenty (20) Business Days; (3) the appointment of a trustee or receiver to take possession of substantially all of Tenant's assets located in the Premises or of Tenant's interest in this Lease; (4) any execution, levy, attachment or other process of law against Tenant's interest in this Lease, unless the same is dismissed within twenty (20) Business Days; (5) adjudication that Tenant is bankrupt; (6) the making by Tenant of a transfer in fraud of creditors; or (7) the failure of Tenant to generally pay its debts as they become due; or (f) any information furnished by or on behalf of Tenant to Landlord in connection with the entry of this Lease is determined to have been materially false, misleading or incomplete when made. 5.1.2 If a petition in bankruptcy is filed by or against Tenant, and if this Lease is treated as an "unexpired lease" under applicable bankruptcy law in such proceeding, then Tenant agrees that Tenant shall not attempt nor cause any trustee to attempt to extend the applicable time period within which this Lease must be assumed or rejected. 5.2 Remedies. If any Event of Default occurs, Landlord may at any time after such occurrence, with or without notice or demand except as stated in this paragraph, and without limiting Landlord in the exercise of any right or remedy at law which Landlord may have by reason of such Event of Default, exercise the rights and remedies, either singularly or in combination, as are specified or described in the subparagraphs of this paragraph. 5.2.1 Landlord may terminate this Lease and all rights of Tenant under this Lease either immediately or at some later date by giving Tenant written notice that this Lease is terminated. If Landlord so terminates this Lease, then Landlord may recover from Tenant the sum of: (a) the unpaid Base Rent, Additional Rent and all other sums payable under this Lease which have been earned at the time of termination; (b) interest at the Default Rate on the unpaid Base Rent, Additional Rent and all other sums payable under this Lease which have been earned at the time of termination; plus (c) the amount by which the unpaid Base Rent, Additional Rent and all other sums payable under this Lease which would have been earned after termination until the time of award exceeds the amount of such rental loss, if any, as Tenant affirmatively proves could have been reasonably avoided and interest on such excess at the Default Rate; plus (d) the amount by which the aggregate of the unpaid Base Rent, Additional Rent and all other sums payable under this Lease for the balance of the Lease Term after the time of award exceeds the amount of such rental loss, if any, as Tenant affirmatively proves could be reasonably avoided, with such difference being discounted to present value at the Prime Rate at the time of award; plus (e) any other amount necessary to compensate Landlord for the detriment proximately caused by Tenant's failure to perform Tenant's obligations under this Lease or which, in the ordinary course of things, would be likely to result from such failure, including, leasing commissions, tenant improvement costs, renovation costs and advertising costs; plus (f) all such other amounts in addition to or in lieu of the foregoing as may be permitted from time to time by applicable law. 5.2.2 Landlord shall also have the right, with or without terminating this Lease, to re-enter the Premises and remove all persons and property from the Premises. Landlord may cause property so removed from the Premises to be stored in a public warehouse or elsewhere at the expense and for the account of Tenant. 5.2.3 Landlord shall also have the right, without terminating this Lease, to accelerate and recover from Tenant the sum of all unpaid Base Rent, Additional Rent and all other sums payable under the then remaining term of the Lease, discounting such amount to present value at the Prime Rate. 5.2.4 If Tenant abandons or surrenders the Premises without Landlord's consent, or if Landlord re-enters the Premises as provided in subparagraph 5.2.2 or takes possession of the Premises pursuant to legal proceedings or through any notice procedure provided by law, then, if Landlord does not elect to terminate this Lease, Landlord may, from time to time, without terminating this Lease, either (a) recover all Base Rent, Additional Rent and all other sums payable under this Lease as they become due or (b) relet the Premises or any part of the Premises on behalf of Tenant for such term or terms, at such rent or rents and pursuant to such other provisions as Landlord, in its sole discretion, may deem advisable, all with the right, at Tenant's cost, to make alterations and repairs to the Premises and recover any deficiency from Tenant as set forth in subparagraph 5.2.6. 5.2.5 None of the following remedial actions, singly or in combination, shall be construed as an election by Landlord to terminate this Lease unless Landlord has in fact given Tenant written notice that this Lease is terminated: (a) an act by Landlord to maintain or preserve the Premises; (b) any efforts by Landlord to relet the Premises; (c) any repairs or alterations made by Landlord to the Premises; (d) re-entry, repossession or reletting of the Premises by Landlord pursuant to this paragraph; or (e) the appointment of a receiver, upon the initiative of Landlord, to protect Landlord's interest under this Lease. If Landlord takes any of the foregoing remedial action without terminating this Lease, Landlord may nevertheless at any time after taking any such remedial action terminate this Lease by written notice to Tenant. 5.2.6 If Landlord relets the Premises, Landlord shall apply the revenue from such reletting as follows: first, to the payment of any indebtedness of Tenant to Landlord other than Base Rent, Additional Rent or any other sums payable by Tenant under this Lease; second, to the payment of any cost of reletting (including finders' fees and leasing commissions); third, to the payment of the cost of any alterations, improvements, maintenance and repairs to the Premises; and fourth, to the payment of Base Rent, Additional Rent and other sums due and payable and unpaid under this Lease. Landlord shall hold and apply the residue, if any, to payment of future Base Rent, Additional Rent and other sums payable under this Lease as the same become due, and shall deliver the eventual balance, if any, to Tenant. Should revenue from letting during any month, after application pursuant to the foregoing provisions, be less than the sum of the Base Rent, Additional Rent and other sums payable under this Lease and Landlord's expenditures for the Premises during such month, Tenant shall be obligated to pay such deficiency to Landlord as and when such deficiency arises. 5.2.7 Pursuit of any of the foregoing remedies shall not preclude pursuit of any of the other remedies provided in this Lease or by law (all such remedies being cumulative), nor shall pursuit of any remedy provided in this Lease constitute a forfeiture or waiver of any Base Rent, Additional Rent or other sum payable under this Lease or of any damages accruing to Landlord by reason of the violation of any of the covenants or conditions contained in this Lease. 5.2.8 If this Lease is terminated pursuant to this Section 5.2, Landlord shall use reasonable efforts to relet the Premises or any part thereof, alone or together with other premises, for such term or terms (which may be greater or less than the period which otherwise would have constituted the remainder of the Lease Term) and on such terms and conditions as Landlord may determine; provided however that Landlord shall not be obligated to relet or attempt to relet the Premises (or any portion thereof) before it has relet or attempted to relet all other space in the Project that is then available for lease; and in the event of reletting Landlord may relet the whole or any portion of the Premises for any period, to any tenant, and for any use and purpose on such terms and at such rentals as Landlord in its exclusive judgment may determine. 5.2.9 Tenant hereby waives its right of redemption pursuant to Section 401(e) of the Real Property Article of the Annotated Code of Maryland, as amended from time to time. 5.3 Right to Perform. If Tenant shall fail to pay any sum of money, other than Base Rent or Additional Rent, required to be paid by it under this Lease or shall fail to perform any other act on its part to be performed under this Lease, and such failure shall continue for ten (10) Business Days after Tenant's receipt of notice of such failure by Landlord, or such shorter time if reasonable under the circumstances, Landlord may, but shall not be obligated to, and without waiving or releasing Tenant from any obligations of Tenant, make such payment or perform such other act on Tenant's part to be made or performed as provided in this Lease. However, if such failure is of a nature that it cannot be cured within such ten (10) Business Day (or shorter) period, Landlord shall refrain from taking any action if Tenant commences to cure such failure within such period and thereafter diligently prosecutes the same to completion. Landlord shall have (in addition to any other right or remedy of Landlord) the same rights and remedies in the event of the nonpayment of sums due under this paragraph as in the case of default by Tenant in the payment of Base Rent. 5.4 Landlord's Default. 5.4.1 Landlord shall not be in default under this Lease unless Landlord fails to perform obligations required of Landlord within twenty (20) Business Days after written notice is delivered by Tenant to Landlord and to the holder of any mortgages or deeds of trust (collectively, "Lender") covering the Premises whose name and address shall have theretofore been furnished to Tenant in writing, specifying the obligation which Landlord has failed to perform; provided, however, that if the nature of Landlord's obligation is such that more than twenty (20) Business Days are required for performance, then Landlord shall not be in default if Landlord or Lender commences performance within such twenty (20) Business Day period and thereafter diligently prosecutes the same to completion. All obligations of Landlord hereunder shall be construed as covenants, not conditions. Except as expressly permitted below, Tenant hereby waives the benefit of any laws granting it the right to perform Landlord's obligations, a lien upon the property of Landlord other than a judgment lien on the Project, and/or a lien upon Rent due Landlord, or the right to withhold Rent on account of any Landlord default. Tenant waives any right to seek consequential or punitive damages against Landlord. 5.4.2 If (i) Landlord fails to maintain and operate the Premises and common areas in accordance with its obligations under this Lease, (ii) such failure continues beyond the notice and cure period stated in subsection 5.4.1, and (iii) the failure of Landlord to perform such obligations materially and adversely affects access to the Premises, parking in the designated parking areas of the Project, or otherwise materially and adversely affects Tenant's ability to operate its business in accordance with this Lease, then, subject to subsection 5.4.3 below, Tenant shall have the right to perform such obligation on Landlord's behalf, as long as (a) Tenant gives Landlord five (5) Business Days' notice of Tenant's intent to perform such obligation on Landlord's behalf and Tenant identifies in such notice the licensed contractors that Tenant intends to engage to perform such work, (b) Tenant performs such obligations in a good a workmanlike manner in accordance with all Governmental Requirements, and (c) Tenant promptly pays the cost of such work so that no liens or impositions are filed against the Premises or the Project. Upon completion of such obligations by Tenant, Tenant may deliver an invoice for the actual, reasonable costs incurred by Tenant in performing such obligation, and Landlord will reimburse such actual and reasonable costs within twenty (20) Business Days after receipt of such invoice. If Landlord fails to make such reimbursement as provided herein, Tenant shall have the right to offset such actual and reasonable costs against the next installments of Base Rent falling due, subject, however, to the terms of this Section 5.4. 5.4.3 Notwithstanding anything to the contrary contained herein, or in any applicable Governmental Requirement or rule of procedure, if, prior to Tenant's commencement of its self-help right under the preceding subsection 5.4.2, Landlord disputes in good faith Tenant's claim of default by Landlord or Landlord reasonably objects to Tenant's choice of contractors, Tenant shall not engage in self-help nor in any event shall Tenant abate or reduce any payment of Base Rent, Additional Rent or other sum payable by Tenant under this Lease as permitted in subsection 5.4.2 unless and until either (as Tenant shall elect) (A) Tenant shall have obtained a final, unappealed and unappealable judgment establishing such violation and the damages arising therefrom, or (B) such alleged violation or violations of this Lease shall have been submitted to mandatory, binding arbitration by the parties as follows. 5.4.4 If Landlord and Tenant cannot reach agreement on (i) whether Landlord has defaulted in its maintenance and repair obligations and is not diligently proceeding to correct such default or (ii) on Tenant's selection on contractors, then either party may submit such dispute to binding arbitration as provided herein. The arbitration shall be conducted before a single, independent arbitrator chosen pursuant to the then prevailing rules of the American Arbitration Association (the "Arbitrator") who shall alone decide the matter and whose decision shall be binding on the parties, be final, and shall not be subject to appeal. The Arbitrator will have a minimum of ten (10) years' experience in a profession related to the subject matter of the dispute and in the locale where the Building is situated, and the then-prevailing Commercial Arbitration Rules of the American Arbitration Association shall govern the proceeding. The arbitration shall occur at the office of the American Arbitration Association closest to where the Building is located. Both parties shall continue performing their Lease obligations pending the determination of the arbitration proceeding, except as otherwise provided in this Lease. The Arbitrator shall have no power to change the Lease provisions and the Arbitrator shall base his/her decision on the provisions of this Lease and, as appropriate, shall apply the law stated in Section 6.5 of this Lease. The Arbitrator shall have no power to award punitive or exemplary damages. The Arbitrator shall submit his/her findings in writing within thirty (30) days of the Arbitrator's appointment. The Arbitrator shall assess the costs of the arbitration in the final award. The findings of the Arbitrator shall be binding on both Landlord and Tenant. SECTION 6: MISCELLANEOUS PROVISIONS 6.1 Notices. Any notice, request, approval, consent or written communication required or permitted to be delivered under this Lease shall be: (a) in writing; (b) transmitted by personal delivery, express or courier service, United States Postal Service in the manner described below, or electronic means of transmitting written material; and (c) deemed to be delivered on the date received or the date delivery is refused. Such writings shall be addressed to Landlord or Tenant, as the case may be, at the respective designated addresses set forth opposite their signatures, or at such other address(es) as they may, after the execution date of this Lease, specify by written notice delivered in accordance with this paragraph, with copies to the persons at the addresses, if any, designated opposite each party's signature. Those notices which contain a notice of breach or default or a demand for performance may be sent by any of the methods described in clause (b) above, but if transmitted by personal delivery or electronic means, shall also be sent concurrently by certified or registered mail, return receipt requested. 6.2 Attorney's Fees and Expenses. In the event either party requires the services of an attorney in connection with enforcing the terms of this Lease, or in the event suit is brought for the recovery of Base Rent, Additional Rent or any other sums payable under this Lease or for the breach of any covenant or condition of this Lease, or for the restitution of the Premises to Landlord or the eviction of Tenant during the Lease Term or after the expiration or earlier termination of this Lease, the non-breaching party shall be entitled to a reasonable sum for attorney's and paralegal's fees, expenses and court costs, including those relating to any appeal. 6.3 No Accord and Satisfaction. No payment by Tenant or receipt by Landlord of an amount less than the Base Rent or Additional Rent or any other sum due and payable under this Lease shall be deemed to be other than a payment on account of the Base Rent, Additional Rent or other such sum, nor shall any endorsement or statement on any check or any letter accompanying any check or payment be deemed an accord and satisfaction, nor preclude Landlord's right to recover the balance of any amount payable or Landlord's right to pursue any other remedy provided in this Lease or at law. 6.4 Successors; Joint and Several Liability. Except as provided in the paragraph captioned "Limitation on Recourse" and subject to the paragraph captioned "Assignment and Subletting by Landlord", all of the covenants and conditions contained in this Lease shall apply to and be binding upon Landlord and Tenant and their respective heirs, executors, administrators, successors and assigns. In the event that more than one person, partnership, company, corporation or other entity is included in the term "Tenant", then each such person, partnership, company, corporation or other entity shall be jointly and severally liable for all obligations of Tenant under this Lease. 6.5 Choice of Law. This Lease shall be construed and governed by the laws of the state in which the Land is located. Tenant and Landlord each consents to venue and jurisdiction in the State and Federal courts located in Maryland for any legal proceeding brought by Landlord or Tenant to enforce the terms of this Lease. 6.6 No Waiver of Remedies. The waiver by either party of any covenant or condition contained in this Lease shall not be deemed to be a waiver of any subsequent breach of such covenant or condition nor shall any custom or practice which may develop between the parties in the administration of this Lease be construed to waive or lessen the rights of either party to insist on the strict performance by the other party of all of the covenants and conditions of this Lease. No act or thing done by Landlord or Landlord's Agents during the Lease Term shall be deemed an acceptance or a surrender of the Premises, and no agreement to accept a surrender of the Premises shall be valid unless made in writing and signed by Landlord. The mention in this Lease of any particular remedy shall not preclude Landlord from any other remedy it might have, either under this Lease or at law, nor shall the waiver of or redress for any violation of any covenant or condition in this Lease or in any of the rules or regulations attached to this Lease or later adopted by Landlord, prevent a subsequent act, which would have originally constituted a violation, from having all the force and effect of an original violation. The receipt by Landlord of Base Rent, Additional Rent or any other sum payable under this Lease with knowledge of a breach of any covenant or condition in this Lease shall not be deemed a waiver of such breach. The failure of Landlord to enforce any of the rules and regulations attached to this Lease or later adopted, against Tenant or any other tenant in the Building, shall not be deemed a waiver. Any waiver by either party must be in writing and signed by such party to be effective. 6.7 Offer to Lease. The submission of this Lease in a draft form to Tenant or its broker or other agent does not constitute an offer to Tenant to lease the Premises. This Lease shall have no force or effect until: (a) it is executed and delivered by Tenant to Landlord; and (b) it is executed and delivered by Landlord to Tenant. 6.8 Force Majeure. In the event that Landlord or Tenant shall be delayed, hindered in or prevented from the performance of any act or obligation required under this Lease (other than Tenant's obligation to pay Base Rent and Additional Rent hereunder) by reason of acts of God, strikes, lockouts, labor troubles or disputes, inability to procure or shortage of materials or labor, failure of power or utilities, delay in transportation, fire, vandalism, accident, flood, severe weather, other casualty, Governmental Requirements (including mandated changes in the Plans and Specifications or the Tenant Improvements resulting from changes in pertinent Governmental Requirements or interpretations thereof), riot, insurrection, civil commotion, sabotage, explosion, war, natural or local emergency, acts or omissions of others,or other reasons of a similar or dissimilar nature not solely the fault of, or under the exclusive control of, the delayed party, then performance of such act or obligation shall be excused for the period of the delay and the period for the performance of any such act or obligation shall be extended for the period equivalent to the period of such delay. 6.9 Landlord's Consent. Unless otherwise provided in this Lease, whenever Landlord's consent, approval or other action is required under the terms of this Lease, such consent, approval or action shall be subject to Landlord's judgment or discretion exercised in good faith and shall be delivered in writing. 6.10 Severability; Captions. If any clause or provision of this Lease is determined to be illegal, invalid, or unenforceable under present or future laws, the remainder of this Lease shall not be affected by such determination, and in lieu of each clause or provision that is determined to be illegal, invalid or unenforceable, there be added as a part of this Lease a clause or provision as similar in terms to such illegal, invalid or unenforceable clause or provision as may be possible and be legal, valid and enforceable. Headings or captions in this Lease are added as a matter of convenience only and in no way define, limit or otherwise affect the construction or interpretation of this Lease. 6.11 Interpretation. Whenever a provision of this Lease uses the term (a) "include" or "including", that term shall not be limiting but shall be construed as illustrative, (b) "covenant", that term shall include any covenant, agreement, term or provision, (c) "at law", that term shall mean as specified in any applicable statute, ordinance or regulation having the force of law or as determined at law or in equity, or both, and (d) "day", that uncapitalized word shall mean a calendar day. This Lease shall be given a fair and reasonable interpretation of the words contained in it without any weight being given to whether a provision was drafted by one party or its counsel. 6.12 Incorporation of Prior Agreement; Amendments. This Lease contains all of the agreements of the parties to this Lease with respect to any matter covered or mentioned in this Lease, and no prior agreement or understanding pertaining to any such matter shall be effective for any purpose. No provision of this Lease may be amended or added to except by an agreement in writing signed by the parties to this Lease or their respective successors in interest. 6.13 Authority. If Tenant is a partnership, company, corporation or other entity, each individual executing this Lease on behalf of Tenant represents and warrants to Landlord that he or she is duly authorized to so execute and deliver this Lease and that all partnership, company, corporation or other entity actions and consents required for execution of this Lease have been given, granted or obtained. If Tenant is a partnership, company, corporation or other business organization, it shall, within ten (10) Business Days after demand by Landlord, deliver to Landlord satisfactory evidence of the due authorization of this Lease and the authority of the person executing this Lease on its behalf. 6.14 Time of Essence. Time is of the essence with respect to the performance of every covenant and condition of this Lease. 6.15 Survival of Obligations. Notwithstanding anything contained in this Lease to the contrary or the expiration or earlier termination of this Lease, any and all obligations of either party accruing prior to the expiration or termination of this Lease shall survive the expiration or earlier termination of this Lease, and either party shall promptly perform all such obligations whether or not this Lease has expired or terminated. Such obligations shall include any and all indemnity obligations set forth in this Lease. 6.16 Consent to Service. Tenant irrevocably consents to the service of process of any action or proceeding at the address of the Premises after the Commencement Date. Nothing in this paragraph shall affect the right to serve process in any other manner permitted by law. 6.17 Landlord's Authorized Agents. Notwithstanding anything contained in the Lease to the contrary, including without limitation, the definition of Landlord's Agents, only officers of Riggs Bank N.A., are authorized to amend, renew or terminate this Lease, or to compromise any of Landlord's claims under this Lease or to bind Landlord in any manner. Without limiting the effect of the previous sentence, no property manager or broker shall be considered an authorized agent of Landlord to amend, renew or terminate this Lease, to compromise any of Landlord's claims under this Lease or to bind Landlord in any manner. 6.18 Waiver of Jury Trial. Landlord and Tenant irrevocably waive the respective rights to trial by jury in any action, proceeding or counterclaim brought by either against the other (whether in contract or tort) on any matter arising out of or relating in any way to this Lease, the relationship of Landlord and Tenant or Tenant's use or occupancy of the Premises. Signatures on Next Page IN WITNESS WHEREOF, this Lease has been executed the day and year first above set forth. Designated Address for Landlord: LANDLORD: - ------------------------------- --------- c/o Riggs & Company/MEPT RIGGS & COMPANY, a division of Riggs Attn: Senior Asset Manager Bank, N.A., as Trustee of the Multi- 808 17th Street, N.W. Employer Property Trust, a trus organized Washington, DC 20006 under 12 C.F.R. Section 9.18 Facsimile: 202-835-6887 By: Name: Its: with a copy to Manager at: Trammell Crow Company 7 St. Paul Street Baltimore, Maryland 21202 Designated Address for Tenant: TENANT: - ----------------------------- ------ Prior to the Commencement Date: General Physics Corporation General Physics Corporation, Attn: K.L. Crawford, General Counsel A Delaware Corporation 6700 Alexander Bell Drive, Suite 400 Columbia, MD 21046 Facsimile: 410-290-2646 By: Name: After the Commencement Date: Its: General Physics Corporation Attn: K.L. Crawford, General Counsel 6095 Marshalee Drive, Suite 300 Elkridge, MD 21075 LANDLORD ACKNOWLEDGEMENT ) DISTRICT OF COLUMBIA ) ss. ) On this _____ day of _______________, 2002, before me personally appeared _________________________, to me known to be a _____________________ of Riggs & Company, a division of Riggs Bank N.A., the Trustee of the Multi-Employer Property Trust, the national banking association that executed the within and foregoing instrument, and acknowledged said instrument to be the free and voluntary act and deed of said national banking association as trustee, for the uses and purposes therein mentioned, and on oath stated that __________ was authorized to execute said instrument. IN WITNESS WHEREOF, I have hereunto set my hand and affixed my official seal the day and year first above written. Name: _________________________________________ NOTARY PUBLIC in and for the District of Columbia, residing at ____________________. My appointment expires: ______________________. TENANT ACKNOWLEDGEMENT (CORPORATION) - ----------------------------- ) ) ss. - ----------------------------- ) On this _______ day of _______________, 2002, before me, a Notary Public in and for the of ___________________________, personally appeared _______________________________, the ________________________ of General Physics Corporation, the corporation that executed the within and foregoing instrument, and acknowledged said instrument to be the free and voluntary act and deed of said corporation for the uses and purposes therein mentioned, and on oath stated that s/he/they was/were authorized to execute said instrument. WITNESS my hand and official seal hereto affixed the day and year first as above written. Name: _________________________________________ NOTARY PUBLIC in and for the State of , residing at ____________________. My appointment expires: ______________________. [NOTARIAL SEAL] - Guaranty - LEASE GUARANTY THIS GUARANTY is made as of _________________, 2002 by GP STRATEGIES CORPORATION, having an address at 9 West 57th Street, Suite 4170, New York, NY 10019 ("Guarantor") in favor of RIGGS & COMPANY, a division of Riggs Bank N.A., as Trustee of the Multi-Employer Property Trust, a trust organized under 12 C.F.R. Section 9.18 ("Landlord"). A. Landlord and General Physics Corporation ("Tenant") have entered into an Agreement of Lease of even date herewith (as hereafter amended from time to time, the "Lease"), pertaining to the lease of the premises consisting of 30,208 square feet of rentable area located on the second and third floors of 6095 Marshallee Drive, Elkridge, Maryland. B. Guarantor has a material business interest in Tenant, and it is a condition precedent to the Landlord's entering into the Lease that Guarantor guarantee the Lease. C. Capitalized terms not otherwise defined herein have the meanings given to them in the Lease. NOW, THEREFORE, WITNESSETH, in consideration of the agreement of Landlord to enter into the Lease with Tenant, Guarantor, jointly and severally if more than one, hereby covenants and agrees as follows: 1. Guaranty. Guarantor hereby unconditionally guarantees to Landlord the full, complete, and timely payment and performance by Tenant of all of the terms, covenants, and conditions of Tenant under or pursuant to the Lease, including without limitation, the payment of all Base Rent and Additional Rent and any other commitment to pay money whether or not designated in the Lease as rent (collectively, the "Rent") when due without deduction by reason of any set-off, defense, or counterclaim, irrespective of any invalidity therein or the unenforceability thereof. 2. Consent To Lease. Guarantor hereby unconditionally consents to the terms, covenants, and conditions of the Lease. 3. Consent To Amendments And Extensions. Guarantor hereby consents, without notice to Guarantor, to any changes or alterations that may be made by mutual written agreement of Landlord and Tenant in any term, covenant, or condition of the Lease and to the extension (which term includes renewals and holding over) of the Lease, in whole or in part from time to time, whether or not for a term in excess of the original term and any extension terms. Guarantor agrees in case the dates of payment of Rent shall be changed in whole or in part, that all moneys due hereunder shall be paid when due according to such change or extension. Guarantor further consents to the waiving or amendment by Landlord of any term, covenant, or condition of the Lease or of any forbearance, indulgence, or release granted thereunder. 4. Consent To Assignment And Sublease. Guarantor further consents to any assignment or sublease of the Lease or any license, concession, franchise, or use agreement of the Premises. No such assignment, sublease, or agreement shall affect this Guaranty. 5. Obligations Of Guarantor. If Tenant shall fail to cure an Event of Default under the Lease, Guarantor hereby unconditionally guarantees to Landlord that Guarantor shall then (a) pay (without first requiring the Landlord to proceed against Tenant, any other person, or any other security) to the Landlord all sums due and owing under the Lease, including without limitation interest, premiums, and charges on past due obligations of Tenant, and (b) cure any Event of Default under the Lease. Guarantor further agrees to indemnify and hold harmless Landlord from any loss (including reasonable attorneys' fees) resulting from any Event of Default by Tenant under the Lease or any default by the Guarantor under the terms of this Guaranty. 6. Waivers By Guarantor. Guarantor hereby waives presentment, demand for payment, protest, notice of nonpayment, promptness, and diligence. Guarantor hereby waives notice of acceptance of this Guaranty by Landlord and any and all notices and demands of every kind and description which may be required to be given by any statute or rule of law and Guarantor agrees that the liability of Guarantor hereunder shall in no way be affected, diminished, or released by any forbearance or indulgence which may be granted to Tenant (or to any successor thereto or to any person or entity which shall have assumed the obligations thereof) or by any waiver of any term, covenant, or condition in the Lease by Landlord or by reason of any change or modification in the Lease, or by the acceptance of additional security or the release by Landlord of any security or of any person or entity primarily or secondarily liable, including Tenant and one or more of the undersigned; or by the failure of Landlord to protect, secure, preserve, or insure any security. 7. Enforcement By Landlord. Guarantor agrees that this Guaranty may be enforced by Landlord without enforcing any rights Landlord may have against any other person or entity or any collateral. Guarantor further agrees that nothing herein contained shall prevent Landlord from suing on the Lease or from exercising any other right available to it under the Lease or against any other person or entity, and the exercise of any of the aforementioned rights shall not constitute a legal or equitable discharge of Guarantor, it being the purpose and intent of Guarantor that its obligations under this Guaranty shall be absolute and unconditional until all terms, covenants, and conditions of the Lease have been completely fulfilled. 8. Effect Of Bankruptcy. This Guaranty shall remain in full force and effect notwithstanding the institution by or against Tenant of any insolvency, bankruptcy, or reorganization proceedings or the disaffirmance of the Lease in such proceedings or otherwise. This Guaranty shall continue to be effective or to be reinstated, as the case may be, if at any time any payment is rescinded or must otherwise be returned by Landlord upon the insolvency, bankruptcy, or reorganization of Tenant or otherwise, all as though such payment had not been made. 9. Claims By Guarantor Against Tenant. Nothing hereunder contained shall operate as a release or discharge, in whole or in part, of any claim of Guarantor against Tenant by subrogation or otherwise, by reason of any act done or any payment made by Guarantor pursuant to the provisions of this Guaranty; but all such claims shall be subordinate to the claims of Landlord. 10. Waiver Of Exemptions. All the laws exempting real or personal property from execution and inquisition and extension upon any levy on real or personal property are hereby waived and condemnation agreed to, and no benefit of exemption will be claimed under or by virtue of any exemption law now in force or which hereafter may be passed. 11. Notices. Any notice to Guarantor required or permitted by this Guaranty shall be sent to Guarantor at its address set forth above. 12. Applicable Law; Jurisdiction. Guarantor hereby acknowledges, consents, and agrees (i) that the provisions of this Guaranty and the rights of all parties mentioned herein shall be governed by the laws of the State of Maryland and interpreted and construed in accordance with such laws (excluding Maryland conflict of laws) and (ii) that the United States District Court of the District of Maryland and any court of competent jurisdiction in the State of Maryland shall have jurisdiction in any proceeding instituted to enforce this Guaranty, and any objections to venue are hereby waived. 13. Binding Effect. The rights, powers, privileges, and discretions (collectively, the "rights") to which Landlord may be entitled hereunder shall inure to the benefit of Landlord and Landlord's personal representatives, successors, and assigns. All the rights of Landlord are cumulative and not alternative and may be enforced successively or concurrently. Failure of Landlord to exercise any of its rights shall not be deemed a waiver thereof, and no waiver of any of its rights shall be deemed to apply to any other rights, nor shall it be effective unless in writing and signed by Landlord. The terms, covenants, and conditions of or imposed upon Guarantor herein shall be binding upon the personal representatives, successors, and assigns of each Guarantor. 14. Severability. If any provision (or any part of any provision) contained in this Guaranty shall for any reason be held to be invalid, illegal, or unenforceable in any respect, such invalidity, illegality, or unenforceability shall not affect any other provision (or remaining part of the affected provision) of this Guaranty, but this Guaranty shall be construed as if such invalid, illegal, or unenforceable provision (or part thereof) had never been contained herein but only to the extent it is invalid, illegal, or unenforceable. 15. Grammar. When used herein, the singular shall include the plural; the plural, the singular; and the use of any gender shall be applicable to all genders. 16. Time Of Essence. Time is of the essence. 17. Counterparts. This Guaranty may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed to be an original, and all of which taken together shall constitute but one and the same instrument. This Guaranty shall be fully effective against any Guarantor which signs below, even if one or more persons whose name or names appear below does not execute this Guaranty. 18. Captions. The captions appearing in this Guaranty are inserted only as a matter of convenience and do not define, limit, construe, or describe the scope or intent of the Sections of this Guaranty nor in any way affect this Guaranty. IN WITNESS WHEREOF, Guarantor has caused this instrument to be duly executed under seal and delivered as of the date first above written. WITNESS: GUARANTOR GP STRATEGIES CORPORATION ________________________ By:___________________________(SEAL) Name: Title: ACKNOWLEDGEMENT OF GUARANTOR - ----------------------------- ) ) ss. - ----------------------------- ) On this _______ day of _______________, 2002, before me, a Notary Public in and for the of ___________________________, personally appeared _______________________________, the ________________________ of GP Strategies Corporation, the corporation that executed the within and foregoing instrument, and acknowledged said instrument to be the free and voluntary act and deed of said corporation for the uses and purposes therein mentioned, and on oath stated that s/he/they was/were authorized to execute said instrument. WITNESS my hand and official seal hereto affixed the day and year first as above written. Name: _________________________________________ NOTARY PUBLIC in and for the State of , residing at ____________________. My appointment expires: ______________________. [NOTARIAL SEAL] EX-10 10 ex1037.txt FIRST AMENDMENT AND LIMITED WAIVER [EXECUTION COPY] Exhibit 10.37 FIRST AMENDMENT AND LIMITED WAIVER TO CREDIT AGREEMENT FIRST AMENDMENT AND LIMITED WAIVER TO CREDIT AGREEMENT, dated as of March 31, 2003 (this "First Amendment"), by and among GP STRATEGIES CORPORATION (the "Parent"), a Delaware corporation and GENERAL PHYSICS CORPORATION, a Delaware corporation ("Physics"; and together with the Parent, the "Borrowers"), the Lenders (as defined below) signatories hereto, and Fleet National Bank ("Fleet"), as agent for the Lenders (in such capacity, the "Agent"), as issuing bank (in such capacity, the "Issuing Bank") and as lead arranger (in such capacity, the "Lead Arranger"). W I T N E S S E T H: - - - - - - - - - - WHEREAS, the Borrowers, certain financial institutions parties thereto (collectively, the "Lenders"), and the Agent have entered into the Second Amended and Restated Credit Agreement, dated as of December 14, 2001 (as heretofore amended, supplemented or otherwise modified, the "Existing Credit Agreement"); WHEREAS, the Borrowers and the Lenders wish to, among other things (i) amend and provide a limited waiver of certain financial covenants contained in the Existing Credit Agreement, (ii) add a new financial covenant with respect to Minimum Consolidated EBITDA (defined below) and (iii) amend the definition of Revolving Loan Commitment Amount to (a) permanently reduce such amount to $30,000,000 and (b) limit the availability under the Revolving Loan Commitment Amount during the Test Periods (defined below); and WHEREAS, the Required Lenders have agreed, subject to the terms and conditions hereinafter set forth, to amend (and provide a limited waiver) such provisions of the Existing Credit Agreement in certain respects as provided below (the Existing Credit Agreement, as so amended by this First Amendment, being referred to as the "Credit Agreement"); NOW, THEREFORE, in consideration of the premises, covenants and agreements contained herein, and for other good and valuable consideration (the receipt and sufficiency of which are hereby acknowledged), the parties hereto, intending to be legally bound, hereby agree as follows: PART I DEFINITIONS SUBPART 1.1. Certain Definitions. Terms for which meanings are provided in the Existing Credit Agreement are, unless otherwise defined herein or the context otherwise requires, used in this First Amendment with such meanings. PART II AMENDMENTS AND LIMITED WAIVER TO EXISTING CREDIT AGREEMENT Effective on (and subject to the occurrence of) the First Amendment Effective Date (as defined below), the Existing Credit Agreement is hereby amended in accordance with the terms of this Part II as of the date; except as so amended, the Existing Credit Agreement shall continue in full force and effect in accordance with its terms. SUBPART 2.1. Section 1.1 of the Existing Credit Agreement is hereby amended by inserting the following definitions in their appropriate alphabetical sequence: "First Amendment" means the First Amendment and Limited Waiver to Credit Agreement, dated as of March 31, 2003, among the Borrowers, the Lenders parties thereto, and the Agent with respect to this Agreement. "First Test Period": is defined in the definition of Revolving Loan Commitment Amount. "First Amendment Effective Date" is defined in Subpart 3.1 of the First Amendment. "Minimum Consolidated EBITDA": for any period shall mean net income (or net loss) of the Parent and its Subsidiaries, determined on a consolidated basis in accordance with GAAP for such period plus (i) the sum of (in each case to the extent deducted in the calculation of net income), without duplication, (a) Consolidated Interest Expense for such period, (b) provision for income taxes of the Parent and its Subsidiaries for such period, (c) depreciation and amortization of the Parent and its Subsidiaries for such period, (d) any extraordinary losses (including, but not limited to, losses associated with sales of Property not in the ordinary course of business), to the extent utilized in determining such net income (or net loss) for such period and (e) any non-cash contributions made by the Parent and its Subsidiaries pursuant to their matching 401(k) or any similar retirement program minus (ii) with respect to the Parent and its Subsidiaries, to the extent utilized in determining such net income (or net loss), without duplication, the sum of (a) extraordinary gains (including, but not limited to, gains associated with sales of Property not in the ordinary course of business), (b) investment income and (c) interest income. Notwithstanding anything to the contrary contained in this definition, any extraordinary losses reported within operating income (including, but not limited to, severance, restructuring charges or related expenses), shall not be added back to the calculation of net income. "Second Test Period": is defined in the definition of Revolving Loan Commitment Amount. "Test Periods": is defined in the definition of Revolving Loan Commitment Amount. SUBPART 2.2. Section 1.1 of the Existing Credit Agreement is hereby amended by deleting the definition of "Subordinated Debt" in its entirety and replacing such definition with the following: "Subordinated Debt": the Hydro Med Subordinated Debt and all other Indebtedness of a Obligor which is subordinated to the Obligations on terms and conditions at least as favorable to the Lenders as are contained in the Subordination Agreement or on other terms and conditions acceptable to the Agent and the Required Lenders, provided that, notwithstanding the terms of the Subordination Agreement, in order for such Indebtedness (other than the Hydro Med Subordinated Debt) to be considered "Subordinated Debt", the principal amount of such Indebtedness shall not be payable until at least 180 days after the Revolving Loan Commitment Termination Date, and no principal of or interest on or other amounts in respect to such Indebtedness shall be payable at any time after the occurrence and during the continuance of any Default or Event of Default, provided further; that in no event shall any principal amount of the Hydro Med Subordinated Debt be paid until the date on which all the Obligations have been paid in cash in full and the Commitments hereunder have been permanently terminated. SUBPART 2.3. Section 1.1 of the Existing Credit Agreement is hereby amended by deleting the definition of "Accounts Receivable Borrowing Base" in its entirety and replaced with the following new definition: "Accounts Receivable Borrowing Base": 80% of Eligible Accounts from time to time outstanding or such lesser percentage as the Agent shall reasonably determine (including any determination based upon the results of any field or computer audits). SUBPART 2.4. Section 1.1 of the Existing Credit Agreement is hereby amended by deleting the definition of "Borrowing Base" in its entirety and replacing such definition with the following: "Borrowing Base": (i) Accounts Receivable Borrowing Base; plus (ii) the Marketable Securities Borrowing Base; plus (iii) the Real Estate Borrowing Base. The Agent shall have the right to review such computations and if, in its reasonable judgment, such computations have not been completed in accordance with the terms of this Agreement, the Agent shall have the right to correct such errors. Notwithstanding anything to the contrary contained herein, the Agent shall have the right to establish reserves in such amounts, and with respect to such matters, as the Agent in its reasonable discretion shall deem necessary or appropriate, against the Borrowing Base. SUBPART 2.5. Section 1.1 of the Existing Credit Agreement is hereby amended by deleting the definition of "Eligible Accounts" in its entirety and replacing such definition with the following: "Eligible Accounts": Borrowing Base Accounts payable to other than GP (UK) (i) which are General Eligible Accounts, (ii) which are owed by account debtors located within the United States of America and (iii) 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), in each case, net of any reserves reasonably required by the Agent from time to time in accordance with the Agent's customary practices. The Borrowers, by including an account in any computation of the Borrowing Base, shall be deemed to represent and warrant to the Agent and each Lender the accuracy and completeness of such statements above. SUBPART 2.6. Section 1.1 of the Existing Credit Agreement is hereby amended by deleting the definition of "Revolving Loan Commitment Amount" in its entirety and replacing such definition with the following: "Revolving Loan Commitment Amount": means, on any date, $30,000,000, as such amount may be reduced from time to time; provided, however, that (i) for the period commencing on the First Amendment Effective Date through and including May 31, 2003 (the "First Test Period"), the availability under the Revolving Loan Commitment Amount shall be reduced to $27,000,000 and (ii) for the period commencing on June 1, 2003 through and including the date on which the Borrowers deliver their Compliance Certificate for the Fiscal Quarter ending September 30, 2003 (the "Second Test Period"; and together with the First Test Period, the "Test Periods"), the availability under the Revolving Loan Commitment Amount shall be reduced to $26,000,000; provided, further, that the availability under the Revolving Loan Commitment Amount shall only increase to $30,000,000 at the end of the Second Test Period in the event that the Borrowers are in full compliance with all matters listed in such Compliance Certificate and no Default or Event of Default has occurred and is continuing. SUBPART 2.7. Clause (d) of Section 2.4 of the Existing Credit Agreement is hereby deleted in its entirety and replaced with the following: (d) In General. (i) Each reduction of the Revolving Loan Commitment Amount, shall be made by reducing each Lender's applicable Revolving Loan Commitment Amount by an amount equal to such Lender's applicable Revolving Loan Commitment Percentage. Any optional or mandatory reduction of the Revolving Loan Commitment Amount pursuant to the terms of this Agreement which reduces the Revolving Loan Commitment Amount below the sum of the Letter of Credit Commitment Amount and the Swing Line Loan Commitment Amount shall result in an automatic and corresponding reduction of the Letter of Credit Commitment and the Swing Line Loan Commitment (as specified by the Borrowers if, after giving effect to such reduction in the Revolving Loan Commitment Amount, the Revolving Loan Commitment Amount exceeds the Swing Line Loan Commitment Amount) to an aggregate amount not in excess of the then current Revolving Loan Commitment Amount, as so reduced without any further action on the part of the Issuing Bank or the Swing Line Loan Lender. (ii) Simultaneously with each reduction of the Commitment Amount under this Section, the Borrowers shall pay the Revolving Loan Commitment Fee accrued on the amount by which the Revolving Loan Commitment Amount has been reduced. SUBPART 2.8. Section 6.2 of the Existing Credit Agreement is hereby deleted in its entirety and replaced with the following: 6.2 Borrowing Request; Letter of Credit Request; Compliance with Borrowing Base With respect to the Revolving Credit Loans and Swing Line Loans to be made, and the Letters of Credit to be issued, (i) on each Borrowing Date, the Agent shall have received, (a) in the case of Revolving Credit Loans and Swing Line Loans, a Borrowing Request, (b) in the case of Letters of Credit, a Letter of Credit Request and an application with respect to the Letter of Credit requested, (c) in the case of Swing Line Loans, telephonic notice (followed by a Borrowing Request) in accordance with Section 2.3(b) herein and (d) in each case, an Updated Borrowing Base Certificate, in each case duly executed by an Authorized Signatory of the Borrowers and (ii) after giving effect to the Revolving Credit Loan(s) and/or Swing Line Loans to be made and/or the Letter(s) of Credit to be issued, the Credit Exposure does not exceed the lesser of (i) the then existing Borrowing Base and (ii) the Revolving Loan Commitment Amount as reflected in the updated Borrowing Base Certificate. Notwithstanding anything to the contrary contained in this Agreement, after giving effect to the Revolving Credit Loan(s) and/or Swing Line Loans to be made and/or the Letter(s) of Credit to be issued, the Credit Exposure shall not exceed the lesser of (i) the then existing Borrowing Base, (ii) the Revolving Loan Commitment Amount and (iii) (a) for the First Test Period, $27,000,000 and (b) for the Second Test Period, $26,000,000, as reflected in the updated Borrowing Base Certificate. SUBPART 2.9. Section 7.9 of the Existing Credit Agreement is hereby deleted in its entirety and replaced with the following: 7.9 Inspection of Property; Books and Records; Discussions At all reasonable times, upon reasonable prior notice, at the Borrowers' expense, permit representatives of the Agent and each Lender to visit the offices of each Borrower, each other Obligor and each Foreign Subsidiary, to examine the books and records thereof and Accountants' reports relating thereto, and to make copies or extracts therefrom, to discuss the affairs of each Borrower, each other Obligor and each Foreign Subsidiary with the respective officers thereof, and to examine and inspect the Property of each Borrower, each other Obligor and each Foreign Subsidiary and to meet and discuss the affairs of each Borrower, each other Obligor and each Foreign Subsidiary with the Accountants. SUBPART 2.10. Section 7.11 of the Existing Credit Agreement is hereby deleted in its entirety and replaced with the following: 7.11 Financial Covenants. (a) Fixed Charge Coverage Ratio. Maintain as of the last day of each Reference Period set forth below a Fixed Charge Coverage Ratio in a proportion not less than that set forth below opposite each such Fiscal Quarter: Reference Period Ratio ---------------- ----- 1/01/03-6/29/03 1.35:1.00 6/30/03 - 9/29/03 1.00:1.00 9/30/03 and thereafter 1.50:1.00 (b) Leverage Ratio. Maintain as of the last day of each Reference Period set forth below, a Leverage Ratio in a proportion not greater than the ratios set forth below opposite each such Fiscal Quarter: Reference Period Ratio ---------------- ----- 1/01/03 - 6/29/03 4.30:1.00 6/30/03 -9/29/03 3.50:1.00 9/30/03 - 12/30/03 2.50:1.00 12/31/03 and thereafter 2.25:1.00 (c) Minimum Consolidated Net Worth. Maintain for the Fiscal Quarter ending 3/31/03, Consolidated Net Worth of not less than $89,000,000 and at all times thereafter, as of the last day of each Fiscal Quarter, Consolidated Net Worth in an amount not less than the Minimum Net Worth Amount for such Fiscal Quarter. (d) Interest Coverage Ratio. Maintain as of the last day of each Reference Period set forth below an Interest Coverage Ratio in a proportion not less than set forth opposite such Fiscal Quarter: Reference Period Ratio ---------------- ----- 1/01/03 - 9/29/03 2.75:1.00 9/30/03 - 12/30/03 3.50:1.00 12/31/03 and thereafter 3.75:1.00 (e) Minimum Consolidated EBITDA. Maintain as of the last day of each Fiscal Quarter set forth below, a Minimum Consolidated EBITDA in an amount not less than the Minimum Consolidated EBITDA set forth opposite such Fiscal Quarter: Reference Period Minimum Consolidated EBITDA ---------------- --------------------------- 1/01/03 - 3/31/03 $200,000 4/01/03 - 6/30/03 $1,875,000 7/01/03 -9/30/03 $2,900,000 0/01/03 - 12/31/03 $3,050,000 SUBPART 2.11. Exhibit A of the Existing Credit Agreement is hereby deleted in its entirety and replaced with Exhibit A attached to the First Amendment. SUBPART 2.12. Limited Waiver. The Required Lenders hereby waive the Borrowers' compliance with, and any Defaults under, (i) clause (b) of Section 7.11 of the Existing Credit Agreement restricting the Leverage Ratio to a maximum of 2.50:1.00 for (and only for) the Fiscal Quarter ending December 31, 2002; provided that the actual Leverage Ratio for such period ending December 31, 2002 shall not exceed 3.36:1.00 and (ii) clause (d) of Section 7.11 of the Existing Credit Agreement restricting the Interest Coverage Ratio to a minimum of 3.50:1.00 for (and only for) the Fiscal Quarter ending December 31, 2002; provided that the actual Interest Coverage Ratio for such period ending December 31, 2002 shall not be less than 3.11:1.00. PART III CONDITIONS TO EFFECTIVENESS SUBPART 3.1. First Amendment Effective Date. This First Amendment (and the amendments and limited waiver contained herein) shall become effective as of the date, and shall thereafter be referred to as the "First Amendment", on the date (the "First Amendment Effective Date") when all of the conditions set forth in this Subpart 3.1 have been satisfied. SUBPART 3.1.1. Execution of Counterparts. The Agent shall have received counterparts of this First Amendment, duly executed and delivered on behalf of the Borrowers, the Required Lenders and the Agent. SUBPART 3.1.2. Amendment Fee. In consideration of the Lenders' agreement to amend the Existing Credit Agreement pursuant to the terms of this First Amendment and the limited waiver contained herein, the Borrowers shall pay to the Agent, for the pro rata account of each Lender, a nonrefundable amendment fee in the amount of $112,500. SUBPART 3.1.3. Legal Details, etc. All documents executed or submitted pursuant hereto shall be satisfactory in form and substance to the Agent. The Agent shall have received all information and such counterpart originals or such certified or other copies or such materials, as the Agent may reasonably request on or prior to the date hereof, and all legal matters incident to the transactions contemplated by this First Amendment shall be satisfactory to the Agent. PART IV REPRESENTATIONS; WARRANTIES AND COVENANTS In order to induce the Lenders and the Agent to enter into this First Amendment, the Borrowers represents, warrants and covenants unto the Agent, each Issuing Bank and each Lender as set forth in this Part IV. SUBPART 4.1. Compliance With Representations Warranties. The representations and warranties set forth in Article IV of the Existing Credit Agreement and in each other Loan Document delivered in connection herewith or therewith are true and correct in all material respects with the same effect as if made on and as of the date hereof and on and as of the First Amendment Effective Date (unless stated to relate solely to an earlier date, in which case such representations and warranties shall have been true and correct in all material respects on and as of such earlier date), provided, that, for purposes of the foregoing restatement of representations and warranties, all references to the "Agreement" in all representations and warranties shall also mean the Existing Credit Agreement as amended by this First Amendment. SUBPART 4.2. Compliance With Existing Credit Agreement. As of the date hereof and as of the First Amendment Effective Date, no Default or Event of Default has occurred and is continuing. SUBPART 4.3. Covenant to Engage Field Auditor. The Borrowers hereby agree that the Agent, on behalf of the Lenders shall engage a field auditor (at the sole expense of the Borrowers) to deliver a detailed report and recommendations to the Agent and the Lenders within thirty days of the date hereof, such report and conclusions shall be satisfactory in form and substance in all respects to the Agent and the Lenders. To the extent that such report is not satisfactory to the Agent and the Lenders (or any reports, calculations or numbers used in any such calculations, previously delivered by the Borrowers to the Agent and the Lender are incorrect in any material respect (in the sole judgment of the Agent)), the Borrowers shall take all steps necessary to remedy the situation, the failure to remedy such situation within 15 days following a notice from the Agent, on behalf of the Lenders, shall result in an immediate Event of Default under the Credit Agreement. SUBPART 4.4. Hydro Med Subordinated Debt. The Borrowers covenant and agree that, pursuant to the terms of the Hydro Med Subordinated Debt, no principal amount of the Hydro Med Subordinated Debt shall be paid until the date on which all Obligations under the Credit Agreement have been paid in cash in full and the Commitments under the Credit Agreement have been permanently terminated. SUBPART 4.5. Further Assurances. The Borrowers agree to deliver to the Agent all documents and information, and such counterpart originals or such certified or other copies or such materials, as may be necessary to effectuate the purposes of or comply with the terms of this First Amendment, as the Agent may reasonably request. PART V MISCELLANEOUS SUBPART 5.1. Cross-References. References in this First Amendment to any Part or Subpart are, unless otherwise specified or otherwise required by the context, to such Part or Subpart of this First Amendment SUBPART 5.2. Ratification of Existing Credit Agreement. The Existing Credit Agreement, as expressly amended by the terms hereof, is hereby ratified, approved and confirmed in each and every respect. Except as specifically amended herein, the Existing Credit Agreement shall continue in full force and effect in accordance with the provisions thereof and except as expressly set forth herein the provisions hereof shall not operate as a waiver of any right, power or privilege of the Agent, the Lenders or any Issuing Bank, nor shall the entering into of this First Amendment preclude the Lenders from refusing to enter into any further or future amendments. This First Amendment is a Loan Document executed pursuant to the Existing Credit Agreement and shall be construed, administered and applied, except as specifically amended herein, in accordance with all of the terms and provisions of the Existing Credit Agreement, and without limiting the foregoing, the Borrowers expressly agree to pay all reasonable expenses, including reasonable legal fees and other charges of Paul, Hastings, Janofsky & Walker LLP in connection with the preparation, negotiation and delivery of this First Amendment. In addition, the Borrowers jointly and severally also agree, to reimburse the Agent on demand for all reasonable third party administration, audit and monitoring expenses incurred in connection with the Borrowing Base and determinations in respect thereof. SUBPART 5.3. Successors and Assigns. This First Amendment shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns. SUBPART 5.4. Counterparts. This First Amendment may be executed by the parties hereto in several counterparts, each of which when executed and delivered shall be deemed to be an original and all of which shall constitute together but one and the same agreement. SUBPART 5.5. Consent and Acknowledgment of Subsidiary Guarantors, etc. By their signatures below, the Subsidiary Guarantors, in their capacity as guarantors and pledgors of collateral under the Subsidiary Guaranty and Security Agreement, hereby each acknowledges, consents and agrees to this First Amendment and hereby ratifies and confirms each of their respective obligations under the Subsidiary Guaranty and Security Agreement executed and delivered by each of them in all respects. SUBPART 5.6. Governing Law. THIS FIRST AMENDMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF NEW YORK (INCLUDING FOR SUCH PURPOSE SECTIONS 5-1401 AND 5-1402 OF THE GENERAL OBLIGATIONS LAW OF THE STATE OF NEW YORK BUT EXCLUDING, TO THE MAXIMUM EXTENT PERMITTED BY LAW, ALL OTHER CHOICE OF LAW AND CONFLICTS OF LAW RULES). [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] IN WITNESS WHEREOF, the parties hereto have caused this First Amendment to be executed by their respective officers as of the day and year first above written. GP STRATEGIES CORPORATION By:_____________________________ Name: Title: GENERAL PHYSICS CORPORATION By:_____________________________ Name: Title: FLEET NATIONAL BANK, Individually, as Issuing Bank and as Agent By:_____________________________ Name: Title: WASHINGTON MUTUAL BANK, FA (the successor in interest to DIME SAVINGS BANK OF NEW YORK, FSB) By:_____________________________ Name: Title: LASALLE BUSINESS CREDIT INC. By:_____________________________ Name: Title: Acknowledged and Agreed: MXL INDUSTRIES, INC. By:____________________ GP e-LEARNING TECHNOLOGIES, INC. By:_____________________ THE CHESTNUT HILL RESERVOIR COMPANY By:______________________ EXHIBIT A LENDERS; REVOLVING LOAN COMMITMENT PERCENTAGES; ADDRESSES - ------------------------------------------------------------------------------ -------------------------
Revolving Loan LENDER Commitment Commitment Percentage - ------------------------------------------------------------------------------ ------------------------- - ------------------------------------------------------------------------------ ------------------------- FLEET NATIONAL BANK $15,000,000 50% 1185 Avenue of the Americas New York, NY 10036 Attention: Martha Novak Tel: (212) 819-5760 Fax: (212) 819-4120 - ------------------------------------------------------------------------------ ------------------------- - ------------------------------------------------------------------------------ ------------------------- LASALLE BUSINESS CREDIT INC. $7,500,000 25% 135 S. LaSalle Street Suite 145 Chicago, IL 60603 Attention: Tom Brennan Tel: (312) 904-6169 Fax: (312) 904-6450 - ------------------------------------------------------------------------------ ------------------------- - ------------------------------------------------------------------------------ ------------------------- WASHINGTON MUTUAL BANK, FA (the successor in interest to DIME SAVINGS BANK OF NEW YORK, FSB) $7,500,000 25% 1180 Avenue of the Americas New York, NY 10036 Attention: Patrick Grady Tel: (212) 382-8352 Fax: (212) 382-8349 - ------------------------------------------------------------------------------ ------------------------- - ------------------------------------------------------------------------------ ------------------------- TOTAL COMMITMENT $30,000,000 100% - ------------------------------------------------------------------------------ -------------------------
EX-21 11 ex21.txt SUBSIDIARIES Exhibit 21 SUBSIDIARIES OF THE REGISTRANT Jurisdiction Of Name Incorporation General Physics Corporation Delaware MXL Industries, Inc. Delaware J. L. Distributors, Inc. Delaware EX-23 12 ex23.txt KPMG CONSENT Exhibit 23 CONSENT OF INDEPENDENT AUDITORS The Board of Directors GP Strategies Corporation We consent to incorporation by reference in the Registration Statement No. 33-26261 on Form S-8 and Registration Statement No. 333-97531 on Form S-3 of GP Strategies Corporation and subsidiaries of our reports dated April 9, 2003 relating to the consolidated balance sheets of GP Strategies Corporation as of December 31, 2002 and 2001 and the related consolidated statements of operations, changes in stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 2002, and the related schedule, which reports appear in Form 10-K for the year ended December 31, 2002 of GP Strategies Corporation. Our report dated April 9, 2003 refers to the adoption of the provisions of Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets", effective January 1. 2002. [GRAPHIC OMITTED][GRAPHIC OMITTED] KPMG LLP New York, New York April 11, 2003 EX-99 13 ex991.txt CERTIFICATION OF CHIEF EXECUTIVE OFFICER Exhibit 99.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of GP Strategies Corporation (the "Company") on Form 10-K for the year ended December 31, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Jerome I. Feldman, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. Jerome I. Feldman Chief Executive Officer March 31, 2003 EX-99 14 ex992.txt CERTIFICATION OF CHIEF FINANCIAL OFFICER Exhibit 99.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of GP Strategies Corporation (the "Company") on Form 10-K for the year ended December 31, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Scott N. Greenberg, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. Scott N. Greenberg Chief Financial Officer March 31, 2003 -----END PRIVACY-ENHANCED MESSAGE-----