10-Q 1 gp10q.txt GPX 10Q - JUNE 30, 2003 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2003 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ------------------------------------------------ Commission File Number: 1-7234 ------------------------------------------------- GP STRATEGIES CORPORATION ------------------------------------------------------------------------- (Exact Name of Registrant as Specified in its Charter) Delaware 13-1926739 ------------------------------------ ------------------------ (State or other jurisdiction of (I.R.S. Employer incorporation or organization Identification No.) 777 Westchester Avenue, White Plains, NY 10604 ----------------------------------------------------------------------- (Address of principal executive offices) (Zip code) (914) 249-9700 ------------------------------------------------------------------------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange act of 1934 during the preceding 12 months (or for such shorter period) that the registrant was required to file such reports and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12(b)-2 of the Exchange Act). Yes No X Indicate the number of shares outstanding of each of issuer's classes of common stock as of August 11, 2003: Common Stock 16,161,902 shares Class B Capital 1,200,000 shares GP STRATEGIES CORPORATION AND SUBSIDIARIES TABLE OF CONTENTS Page No. Part I. Financial Information Item 1. Financial Statements (Unaudited) Consolidated Condensed Balance Sheets - June 30, 2003 and December 31, 2002 1 Consolidated Condensed Statements of Operations- Three Months and Six Months Ended June 30, 2003 and 2002 3 Consolidated Condensed Statements of Cash Flows - Six Months Ended June 30, 2003 and 2002 4 Notes to Consolidated Condensed Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 21 Item 3. Quantitative and Qualitative Disclosure About Market Risk 29 Item 4. Controls and Procedures 29 Part II. Other Information Item 6. Exhibits and Reports on Form 8-K 30 Signatures 32 PART I. FINANCIAL INFORMATION GP STRATEGIES CORPORATION AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEETS (in thousands)
June 30, December 31, 2003 2002 --------- ------------- ASSETS (unaudited) Current assets -------------- Cash and cash equivalents $ 827 $ 1,516 Accounts and other receivables 24,499 26,708 Inventories 1,425 1,380 Costs and estimated earnings in excess of billings on uncompleted contracts 13,451 14,177 Prepaid expenses and other current assets 4,472 4,079 ---------- ---------- Total current assets 44,674 47,860 ---------- --------- Investments, marketable securities and note receivable 11,552 14,130 Property, plant and equipment, net 7,552 8,299 Intangible assets Goodwill 57,542 57,491 Patents and licenses, net 708 755 ---------- ----------- 58,250 58,246 ---------- ---------- Deferred tax asset 11,439 10,846 Other assets 5,923 5,524 ---------- ----------- $139,390 $144,905 ======== ========
See accompanying notes to the consolidated condensed financial statements. GP STRATEGIES CORPORATION AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEETS (Continued) (in thousands)
June 30, December 31, 2003 2002 ---------- --------------- LIABILITIES AND STOCKHOLDERS' EQUITY (unaudited) Current liabilities: Current maturities of long-term debt $ 1,200 $ 3,610 Short-term borrowings 21,230 22,058 Accounts payable and accrued expenses 16,708 17,552 Billings in excess of costs and estimated earnings on uncompleted contracts 3,551 3,860 -------- ---------- Total current liabilities 42,689 47,080 ------- --------- Long-term debt less current maturities 2,513 3,302 Other non-current liabilities 1,131 1,541 Stockholders' equity Common stock 161 154 Class B capital stock 12 12 Additional paid in capital 194,572 189,988 Accumulated deficit (96,736) (93,167) Accumulated other comprehensive income (619) 460 Note receivable from stockholder (4,095) (4,095) Treasury stock, at cost (238) (370) --------- ------------ Total stockholders' equity 93,057 92,982 --------- ---------- $139,390 $144,905 ======== ========
See accompanying notes to the consolidated condensed financial statements. GP STRATEGIES CORPORATION AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (Unaudited) (in thousands, except per share data)
Three months Six months ended June 30, ended June 30, 2003 2002 2003 2002 Sales $36,038 $ 39,242 $72,125 $ 79,468 Cost of sales 31,725 34,337 63,984 69,115 ------ -------- ------ ------ Gross margin 4,313 4,905 8,141 10,353 ------- --------- ------- ------ Executive incentive compensation bonus (1,000) (1,000) Non-cash debt conversion expense, net (622) (622) Other selling, general & administrative expenses (4,741) (4,737) (9,164) (9,277) ------- ------- --------- ------- Total selling, general & administrative expenses (6,363) (4,737) (10,786) (9,277) ------- --------- ------- ------- Interest expense (592) (675) (1,188) (1,429) Investment and other income (loss), net 502 (303) 662 (738) Gain on marketable securities 138 846 212 1,286 Restructuring (charge) reversal (218) 140 (218) 354 --------- ------- ----------- -------- (Loss) income before income taxes (2,220) 176 (3,177) 549 Income tax expense (646) (113) (392) (281) --------- -------- ----------- --------- Net (loss) income $(2,866) $ 63 $(3,569) $ 268 ======== ======== ======= ========= Net (loss) income per share: Basic and diluted $ (.17) $ (.01) $ (.21) $ - ========= ========= ========== ============= Dividends per share none none none none ========== ========= =========== =========
See accompanying notes to the consolidated condensed financial statements. GP STRATEGIES CORPORATION AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Unaudited) (in thousands)
Six months ended June 30, 2003 2002 ------- ------- Cash flows from operations: Net (loss) income $(3,569) $ 268 Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities: Depreciation and amortization 1,758 1,320 Non-cash debt conversion expense, net 622 Issuance of stock for retirement savings plan 628 394 Non-cash (credit) charge to compensation and consultant fees (306) 240 (Income) loss on equity investments (307) 1,086 Restructuring charge (reversal) 218 (354) Gain on marketable securities (212) (1,286) Changes in other operating items 1,784 (2,142) -------- -------- Net cash provided by (used in) operating activities 616 (474) --------- --------- Cash flows from investing activities: Proceeds from sale of marketable securities 752 1,883 Proceeds from note receivable 500 Additions to property, plant and equipment (398) (344) Increase in investments and other assets, net (1,043) (880) ---------- ---------- Net cash (used in) provided by investing activities (189) 659- ----------- ---------- Cash flows from financing activities: Net proceeds from sale of Common Stock 7,950 Net proceeds from sale of Class B Stock 1,260 Proceeds for exercised stock options 377 Repayment of short-term borrowings (828) (8,213) Repayments of long-term debt (559) (349) ----- --------- Net cash (used in) provided by financing activities (1,010) 648 ---------- -------- Effect of exchange rate changes on cash and cash equivalents (106) (268) ----------- ---------
GP STRATEGIES CORPORATION AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Continued) (Unaudited) (in thousands)
Six months ended June 30, 2003 2002 -------- --------- Net (decrease) increase in cash and cash equivalents $ (689) $ 565 Cash and cash equivalents at the beginning of the period 1,516 1,705 -------- -------- Cash and cash equivalents at the end of the period $ 827 $ 2,270 ======== ======== Cash paid during the periods for: Interest $ 699 $ 1,066 ======= ======== Income taxes $ 231 $ 228 ======= =========
See accompanying notes to the consolidated condensed financial statements. GP STRATEGIES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited) 1. Basis of Presentation GP Strategies Corporation (the "Company") currently has three operating business segments. Two of these segments, the Manufacturing & Process Segment and the IT Segment, are managed through the Company's principal operating subsidiary General Physics Corporation ("GP") and the third segment through its operating subsidiary MXL Industries ("MXL"). 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. The accompanying Consolidated Condensed Balance Sheet at June 30, 2003 and the Consolidated Condensed Statements of Operations and Cash Flows for the periods ended June 30, 2003 and 2002 have not been audited, but have been prepared in conformity with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. These Consolidated Condensed Financial Statements should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 2002 as presented in our Annual Report on Form 10-K. In the opinion of management, this interim information includes all material adjustments, which are of a normal and recurring nature, necessary for a fair presentation. The results for the 2003 interim periods are not necessarily indicative of results to be expected for the entire year. GP STRATEGIES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited) 2. Earnings per share Earnings (loss) per share (EPS) for the three and six month periods ended June 30, 2003 and 2002 are as follows (in thousands, except per share amounts):
Three months Six months ended June 30, ended June 30, -------------------------- --------------------------- 2003 2002 2003 2002 ---- ---- ---- ---- Basic and Diluted EPS Net (loss) income $(2,866) $ 63 $(3,569) $ 268 -------- --------- -------- -------- Weighted average shares outstanding basic 17,247 15,035 16,866 14,444 Weighted average shares outstanding diluted 17,724 15,189 17,343 14,599 ------ ------ ------ ------ Basic and diluted net (loss) income per share (a) (b) $ (.17) $ (.01) $ (.21) $ - --------- -------- -------- ---------
Basic earnings (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 stock holders. Diluted earnings (loss) per share is 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 three and six months ended June 30, 2003 presentation of the dilutive effect of stock options, warrants and convertible notes, which totaled 476,379 shares are not included since they are anti-dilutive. (b) At June 30, 2002, the Company had a put option obligation of $495,000. This amount has been recorded in additional paid in capital in the Consolidated Condensed Balance Sheets. The addition to the liability of $225,000 and $255,000 in the three and six months ended June 30, 2002, respectively, are deemed to be a dividend for purposes of the basic and diluted (loss) income per share calculation. GP STRATEGIES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued) (Unaudited) 3. Long-term debt Long-term debt consists of the following (in thousands): June 30, December 31,
2003 2002 --------- ---------- Mortgage on MXL Pennsylvania facility $ 1,455 $ 1,505 Mortgage on MXL Illinois facility 1,199 1,212 Senior subordinated debentures 404 558 6% convertible exchangeable notes (a) 2,640 Other 655 997 --------- --------- 3,713 6,912 Less current maturities (1,200) (3,610) -------- --------- $ 2,513 $ 3,302 ======== ========
(a) On April 23, 2003, the Company entered into an agreement (the "Exchange Agreement") with the Holders of the 6% Convertible Exchangeable Notes due June 30, 2003 (the "HMS Notes") to exchange the HMS Notes plus related accrued interest to date for 554,000 shares of the Company's Common Stock. The original agreement provided that the HMS Notes, at the option of the Holders, could be exchanged for 19.9% of the outstanding capital stock of HMS, or into shares of the Company's Common Stock at a conversion rate of $7.50 per share. As a result, in accordance with the provisions of SFAS Statement No. 84, Induced Conversions of Convertible Debt, the Company recorded debt conversion expense, net of approximately $622,000, which is included in selling, general and administrative expenses. GP STRATEGIES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued) (Unaudited) 4. Comprehensive (loss) income The following are the components of comprehensive (loss) income (in thousands):
Three months ended Six months ended June 30, June 30, ------------------------- ---------------------- 2003 2002 2003 2002 ---- ---- ---- ---- Net (loss) income $(2,866) $ 63 $(3,569) $ 268 -------- --------- -------- --------- Other comprehensive loss before tax: Net unrealized loss on available-for-sale-securities (135) (3,900) (1,599) (8,904) Foreign currency translation adjustment (45) (415) (106) (268) ----------- ---------- --------- ---------- Other comprehensive loss before tax (180) (4,315) (1,705) (9,172) Income tax benefit relating to items of other comprehensive income 54 1,524 626 3,459 ---------- --------- --------- --------- Comprehensive loss, net of tax $(2,992) $ (2,728) $(4,648) $ (5,445) ======== ======== ======== =========
The components of accumulated other comprehensive income (loss) are as follows: June 30, December 31,
2003 2002 ---- ---- Net unrealized gain on available-for-sale-securities $1,081 $2,680 Foreign currency translation adjustment (1,255) (1,149) ------- ------ Accumulated other comprehensive (loss) income before tax (174) 1,531 Accumulated income tax expense related to items of other comprehensive loss (445) (1,071) -------- ------ Accumulated other comprehensive (loss) income, net of tax $ (619) $ 460 ======== ======
GP STRATEGIES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued) (Unaudited) 5. Short-term borrowings On August 14, 2003, GP and GP's subsidiary SkillRight, Inc. ("SkillRight") entered into a new two-year $25 million Revolving Credit Facility (the "Credit Agreement") with a new bank, the proceeds of which were used to repay the Company's existing credit facility. The Credit Agreement is secured by certain of the assets of GP, Skillright and MXL. The Credit Agreement also provides for an unsecured guaranty from the Company. The interest rate on the Credit Agreement is at the Eurodollar plus 3.00%, (which as of August 14, 2003 is approximately 4%). Based upon the financial performance of GP, the interest rate can be reduced. The Credit Agreement contains covenants with respect to GP's minimum tangible net worth, leverage ratio, interest coverage ratio and its ability to make capital expenditures. The Credit Agreement also contains certain restrictive covenants including, a prohibition on future acquisitions, incurrence of debt and the payment of dividends. The Company is also subject to certain restrictive covenants including, limitations on future acquisitions. There is currently approximately $15,000,000 outstanding under the facility and approximately $3,700,000 is available to be borrowed under the facility. As of June 30, 2003, the current amount outstanding under the then existing current facility is $21,230,000. 6. Business segments The operations of the Company currently consist of 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 and distributes coated and molded plastic products. GP STRATEGIES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued) (Unaudited) 6. Business segments (continued) The management of the Company does not allocate the following items by segment: Investment and other income, net, interest expense, selling, general and administrative expenses, depreciation and amortization expense, income tax expense, significant non-cash items and long-lived assets. There are deminimis inter-segment sales. The reconciliation of gross margin to net (loss) income is consistent with the presentation on the Consolidated Condensed Statements of Operations. The following tables set forth the sales and gross margin of each of the Company's operating segments (in thousands):
Three months ended Six months ended June 30, June 30, ------------------------- ---------------------- 2003 2002 2003 2002 ------- -------- ------- ------- Sales Manufacturing and Process $32,349 $34,401 $64,587 $69,566 Information Technology 1,637 2,127 3,270 4,432 Optical Plastics 2,052 2,714 4,268 5,470 --------- --------- --------- --------- $36,038 $39,242 $72,125 $79,468 ------- ------- ------- ------- Gross margin Manufacturing and Process $ 3,601 $4,259 $ 6,696 $8,849 Information Technology 305 (54) 675 258 Optical Plastics 407 700 770 1,246 --------- -------- -------- --------- $ 4,313 $4,905 $8,141 $10,353 ======= ====== ====== =======
GP STRATEGIES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued) (Unaudited) 6. Business segments (Continued) Information about the Company's sales in different geographic regions, which are attributed to countries based on location of customers, is as follows (in thousands): Three months ended Six months ended June 30, June 30, ------------------------ ------------------------ 2003 2002 2003 2002 ------- --------- -------- ------- United States $33,755 $36,367 $66,075 $73,946 Canada 66 432 618 731 United Kingdom 1,576 1,845 3,415 3,618 Latin America 641 598 2,017 1,173 ------- --------- -------- --------- $36,038 $39,242 $72,125 $79,468 ------- ------- ------- ------- Information about the Company's identifiable assets in different geographic regions, is as follows (in thousands): June 30, December 31, 2003 2002 ---- ---- United States $134,053 $137,303 Canada 521 3,076 United Kingdom 3,280 3,301 Latin America and other 1,536 1,225 ----------- ---------- $139,390 $144,905 -------- -------- 7. Restructuring charges During 1999 and 2000, the Company adopted restructuring plans, primarily related to its IT business segment. During the six month period ended June 30, 2003 the Company utilized $378,000 of the restructuring reserve and recorded $254,000 of other adjustments to the reserve. Of the remaining total restructuring reserve balance of $1,077,000 at June 30, 2003 and $1,141,000 at December 31, 2002, $145,000 and $221,000, respectively, were included in GP STRATEGIES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued) (Unaudited) 7. Restructuring charges (continued) accounts payable and accrued expenses and $932,000 and $920,000, respectively, were included in other non-current liabilities in the Consolidated Condensed Balance Sheet. The remaining components of the restructuring reserve at June 30, 2003 and December 31, 2002 consist solely of lease and related obligations. Lease obligations are presented at their fair value, net of assumed sublets. 8. Goodwill and intangible assets The components of goodwill and intangible assets as of June 30, 2003 and December 31, 2002 are as follows (in thousands): June 30, December 31, 2003 2002 --------- ------------ Unamortized intangible assets: Goodwill $57,542 $57,491 ======= ======= Amortized intangible assets: Patents and licenses $ 1,348 $ 1,348 Less: accumulated depreciation 640 593 --------- -------- Patents and licenses, net $ 708 $ 755 ========= ========= Goodwill increased as of June 30, 2003 due to additional contingent payments made for previous acquisitions as well as the impact of foreign currency fluctuations. GP STRATEGIES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued) (Unaudited) 9. Investments, marketable securities and note receivable In March 2003, the Company and Inteferon Sciences, Inc. ("ISI") entered into an agreement whereby 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 debt obligations (the "ISI Debt"). The Company retained all of its rights in the collateral under the ISI Debt until its receipt of the Guaranteed Shares. The Company received the shares in the second quarter of 2003. The agreement obligates HEB to register the Guaranteed Shares, sets limits on the amount of shares the Company may sell and requires HEB to pay the Company an amount equal to the number of Guaranteed Shares remaining unsold on September 11, 2005 multiplied by $1.59. The Company currently has an 8% senior unsecured note receivable from Five Star Products, Inc. ("FSP") due September 30, 2004 in the amount of $4,000,000 (the "Five Star Note"). On June 20, 2003, the Company entered into an Agreement of Subordination and Assignments (the "Subordination Agreement") with FSP that permits the annual repayment of principal on the Five Star Note. On June 27, 2003, the Company received a partial repayment from FSP in the amount of $500,000, reducing the outstanding principal amount of the note from $4,500,000 to $4,000,000, the balance currently outstanding as of June 30, 2003. In July 2003, the Company received an additional repayment of $500,000, further reducing the outstanding principal from $4,000,000 to $3,500,000. Under the Subordination Agreement, FSP is permitted to make a further repayment in the amount of $200,000 during the remainder of 2003. In the second quarter of 2003, HMS completed a private placement offering pursuant to which HMS raised approximately $12 million in gross proceeds from the sale of Series B preferred stock. As part of such transaction, the Company was granted an option (the "HMS Option") until June 30, 2004 to purchase up to $5 million of Series B preferred stock at the offering price of $.72 per share. For the HMS Option, the Company valued the option using the Black-Scholes model and recorded approximately $500,000 of income which is included in Investments and other income (loss), net for the quarter and six months ended June 30, 2003. GP STRATEGIES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued) (Unaudited) 10. Litigation On January 3, 2001, the Company commenced an action alleging that MCI Communications Corporation ("MCI"), MCI's Systemhouse subsidiaries ("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 (the "State 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 new business from Systemhouse even though the defendants knew that the sale of Systemhouse to EDS was imminent and that such new 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 State 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. On or around April 22, 2003, MCI served objections to the Proofs of Claim filed by the Company and General Physics. On May 15, 2003 the Company and General Physics submitted their opposition to the objections. The Company and General Physics subsequently made a motion in Bankruptcy Court to lift the automatic stay to permit the litigation to proceed against MCI in State Court. MCI opposed the motion, which is scheduled to be heard by the Bankruptcy Court on September 23, 2003. The defendants other than MCI made an application to the State Court to stay the action until a later-commenced arbitration, alleging breach of the acquisition agreement and related agreements, is concluded. In a decision dated May 9, 2003, the State Court granted the motion and stayed the fraud action pending the outcome of the arbitration of the claim based on breach of the acquisition agreement. GP STRATEGIES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued) (Unaudited) 10. Litigation (continued) The Company has filed an appeal from the order staying the action. In the meantime, the arbitration is proceeding. Before the action was stayed, the parties engaged in non-binding mediation which did not result in a settlement. 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. 11. Financial guarantees On March 23, 2003, the Company extended its guarantee of up to $1,800,000 of GSES's debt pursuant to GSES's credit facility. GSES's credit facility was scheduled to expire on March 23, 2003, however, was extended until March 31, 2004. In consideration for the extension of the guarantee, the Company received 150,000 shares of GSES common stock with a value of $180,000. A deferred credit of $180,000 has been recorded for the receipt of these shares which will amortize to income over the term of the guarantee. During the second quarter of 2003, the Company recorded $45,000 of income. 12. Stock based compensation In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure - an amendment of SFAS No. 123" ("SFAS No. 148"), 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 of SFAS No. 148 for the 2003 fiscal year. GP STRATEGIES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued) (Unaudited) 12. Stock based compensation (continued) Proforma net income and earnings (loss) per share as if the Company recorded compensation expense based upon the fair value of stock-based awards have been presented in accordance with the provisions of SFAS No 123, for the three months and six months ended June 30, 2003 and 2002 are as follows (in thousands, except per share amounts):
Three months Six Months ended June 30, ended June 30, 2002 2003 2003 2002 ---- ---- ---- ---- Net (loss) income As reported $(2,866) $ 63 $(3,569) $ 268 Proforma $(3,161) $(318) $(3,965) $(487) Basic and Diluted earnings (loss) per share As reported $ (.17) $(.01) $(.21) $ - Proforma $ (.19) $(.02) $(.24) $ (.03)
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 June 30, 2003 and 2002, the per share weighted-average fair value of stock options granted was $2.89 and $2.68, respectively, on the date of grant using the modified Black-Scholes option-pricing model with the following weighted-average assumptions: 2003 expected dividend yield 0%, risk-free interest rate of 2.45%, expected volatility of 78.76% and an expected life of 4.0 years; 2002 expected dividend yield 0%, risk-free interest rate of 4.35%, expected volatility of 73.27% and an expected life of 5.71 years. GP STRATEGIES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued) (Unaudited) 13. Related party transactions Pursuant to the incentive compensation agreement entered into in 2002, Jerome I. 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. On each of June 11, 2003 and July 23, 2003, Mr. Feldman earned an incentive payment of $1 million each, which payments will be made in December 2003. 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 first against the outstanding accrued interest under such loans and next against any outstanding principal. The Company recorded compensation expense of $1 million in the second quarter ended June 30, 2003, which is included in selling, general and administrative expense. Although the set-off of the payment earned on June 11, 2003 and July 23, 2003 will take place in December 2003, for accounting purposes the set-offs will be deemed to have occurred on the dates earned. Therefore, as of June 30, 2003, $4,095,000 of Mr. Feldman's loan was outstanding and the Company applied the first $1million earned by Mr. Feldman against accrued interest. As of July 23, 2003, the Company applied the second $1million against the remaining $163,000 of accrued interest, which resulted in the outstanding balance of the loan being reduced by $837,000 from $4,095,000 at June 30th to $3,258,000 as of July 23, 2003. 14. Subsequent events Pursuant to a Note and Warrant Purchase Agreement dated August 8, 2003, the Company issued and sold to four Gabelli funds $7,500,000 aggregate principal amount of 6% Conditional Subordinated Notes due 2008 (the "Notes") and 937,500 warrants ("GP Warrants"), each entitling the holder thereof to purchase (subject to adjustment) one share of the Company's common stock. The aggregate purchase price for the Notes and GP Warrants was $7,500,000. The Notes mature August 2008 with interest at the rate of 6% per annum payable semi-annually commencing on December 31, 2003. The Notes are secured by a mortgage on the Company's property located in Pawling, New York. At any time that less than $1,875,000 principal amount of Notes are outstanding, the Company may defease the obligations secured by the mortgage and obtain a release of the lien of the mortgage by depositing with an agent for the Noteholders bonds or government securities with an investment grade rating by a nationally recognized rating agency which, without reinvestment, will provide cash on the maturity date of the Notes in an amount not less than the outstanding principal amount of the Notes. GP STRATEGIES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued) (Unaudited) 14. Subsequent events (continued) The GP Warrants have an exercise price of $8.00 per share and are exercisable at any time until August 2008. The exercise price may be paid in cash, by delivery of Notes, or a combination of the two. The GP Warrants contain anti-dilution provisions for stock splits, reorganizations, mergers, and similar transactions. The Company has agreed to file a registration statement to register the resale of the shares of its common stock issuable on exercise of the GP Warrants, and to certain other registration rights in favor of the holders of the GP Warrants. In July 2002, the Company announced that it was actively considering a spin-off of certain of its non-core assets, including MXL, into a separate corporation named National Patent Development Corporation ("NPDC"). In the spin-off, it is contemplated that each holder of the Company's common stock will receive one share of NPDC common stock for each share of the Company's common stock or Class B capital stock held. The Note and Warrant Purchase Agreement provides that, on completion of the spin-off, NPDC will issue warrants ("NPDC Warrants") to the holders of the GP Warrants. The NPDC Warrants will entitle the holders to purchase, in the aggregate, a number of shares of NPDC common stock equal to 8% of the number of shares outstanding at completion of the spin-off, subject to reduction for any GP Warrants exercised prior to the spin-off. The NPDC Warrants will be issued to the holders of the GP Warrants on the record date for the spin-off, and allocated among them pro-rata based on the respective number of GP Warrants held by them on such date. The exercise price of the GP Warrants will be adjusted to take into account the spin-off and issuance of the NPDC Warrants by multiplying the exercise price of the GP Warrants in effect immediately prior to the spin-off by a fraction, the numerator of which is the average closing price of GP common stock over the 20 consecutive trading days commencing on the record date of the spin-off, and the denominator is the sum of the average closing prices of GP common stock and NPDC common stock over the same period (assuming the issuance in the spin-off of one share of NPDC common stock for each share of the Company's common stock or Class B capital stock held). The exercise price of the NPDC Warrants will be 160% of the average closing price of the NPDC common stock over the 20 consecutive trading days commencing on the record date of the spin-off. The NPDC Warrants will be exercisable at any time after their exercise price is calculated through August 2008. The NPDC Warrants will have similar anti-dilution provisions. NPDC has agreed to provide the holders of the NPDC Warrants with registration rights similar to those provided by the Company to the holders of the GP Warrants. GP STRATEGIES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued) (Unaudited) 14. Subsequent events (continued) In connection with the spin-off, the Company intends to contribute the Pawling property, subject to the mortgage, to MXL. MXL will assume the mortgage, but without liability for repayment of the Notes or any other obligations of the Company under the Note and Warrant Purchase Agreement (other than foreclosure on such property). If there is a foreclosure on the mortgage for payment of the Notes, the Company has agreed to indemnify MXL for loss of the value of the property. The spin-off is still subject to certain conditions, including certain SEC filings. If the spin-off does not occur by January 2005, the Noteholders will have the right to require the Company to redeem the Notes. There can be no assurance that the spin-off will be consummated. GP STRATEGIES CORPORATION AND SUBSIDIARIES Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Overview The Company has three operating business segments. Two of these segments, the Manufacturing & Process Segment and the IT Segment, are managed through the Company's principal operating subsidiary General Physics Corporation and the third segment through its operating subsidiary MXL Industries. In addition, the Company holds a number of investments in publicly held companies, including Millennium Cell Inc., GSE Systems and Five Star Products, an investment in a private company Hydro Med Sciences and also owns certain real estate. General Physics 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 specific needs of clients. Clients include Fortune 500 companies, manufacturing, process and energy companies, and other commercial and governmental customers. For the quarter ended June 30, 2003, the Company had a net loss before income taxes of $2,220,000 compared to net income before income taxes of $176,000 for the quarter ended June 30, 2002. The loss in the second quarter of 2003 was primarily a result of an executive incentive compensation bonus of $1,000,000, a debt conversion expense, net, of approximately $622,000 related to the conversion of the Company's Convertible Exchangeable Notes, and a restructuring charge of $218,000. The income for the second quarter of 2002 was primarily attributable to a $846,000 gain from the sale of securities of Millennium Cell, Inc., and a non-cash credit of $311,000 relating to the Company's Millennium Cell Deferred Compensation Plan, offset by a non-cash equity loss of $596,000 on HMS. The Company's three operating business segments had decreased operating margins in the quarter ended June 30, 2003, compared to the quarter ended June 30, 2002 due to the reduction in sales. For the six months ended June 30, 2003, the Company had a loss before income taxes of $3,177,000 compared to income before income taxes of $549,000 for the six months ended June 30, 2002. The six months ended June 30, 2003 included an executive incentive compensation bonus of $1,000,000, a debt conversion expense, net of approximately $622,000 related to the conversion of the Convertible Exchangeable Notes, and a restructuring charge of $218,000 offset by a $212,000 gain from the sale of securities of Millennium Cell, Inc., and a non-cash credit of $321,000 relating to the Millennium Cell Deferred Compensation Plan. The income before income taxes for the six months ended June 30, 2002 included a $1,286,000 gain from the sale of shares of Millennium Cell, Inc. and a non-cash credit of $868,000 relating to the Millennium Cell Deferred Compensation Plan, offset by a non-cash equity loss of $1,331,000 on HMS. Three months ended Six months ended June 30, June 30, --------------------- --------------------- 2003 2002 2003 2002 ---- ---- ---- ---- Sales Manufacturing and Process $32,349 $34,401 $64,587 $69,566 Information Technology 1,637 2,127 3,270 4,432 Optical Plastics 2,052 2,714 4,268 5,470 ------- --------- --------- --------- $36,038 $39,242 $72,125 $79,468 ======= ======= ======= ======= For the quarter and six months ended June 30, 2003, sales decreased by $3,204,000 and $7,343,000 respectively, from the corresponding periods in 2002. The decrease in sales was primarily attributable to a continued reduction in sales from the automotive division of the Manufacturing and Process Segment, as well as decreased sales from certain high tech clients. The Information Technology and the Optical Plastic Segment's sales continue to decline primarily due to the overall continued downturn in the economy.
Three months ended Six months ended June 30, June 30, ------------------------------------- ---------------------------------- 2003 % 2002 % 2003 % 2002 % ---- - ---- - ---- - ---- - Gross margin Manufacturing and Process $3,601 11.1 $ 4,259 12.4 $6,696 10.4 $ 8,849 12.7 Information Technology 305 18.6 (54) 675 20.6 258 5.8 Optical Plastics 407 19.8 700 25.8 770 18.0 1,246 22.8 ------- ---- -------- ---- ------ ---- --------- ---- $4,313 12.0 $ 4,905 12.5 $8,141 11.3 $10,353 13.0 ====== ==== ======= ==== ====== ==== ======= ====
Consolidated gross margin of $4,313,000 or 12.0% of sales for the quarter ended June 30, 2003, decreased by $592,000, compared to the consolidated gross margin of $4,905,000, or 12.5% of sales for the quarter ended June 30, 2002. For the six months ended June 30, 2003, gross margin decreased by $2,212,000 from $10,353,000 to $8,141,000. The decreased gross margin in both the quarter and six months ended June 30, 2003 occurred within the Manufacturing and Process and Optical Plastics Segments, as a result of a reduction in sales for the periods. The increased gross margin in both the quarter and six months ended June 30, 2003 for the Information Technology Segment was a direct result of cost reduction initiatives within the segment and the Company's continued efforts to control costs on existing contracts. The overall gross margin percentage decreased slightly for the three months and six months ended June 30, 2003 due to reduced revenues without the ability to reduce certain fixed costs. Selling, general and administrative expenses For the quarter ended June 30, 2003, selling, general and administrative (SG&A) expenses were $6,363,000 compared to $4,737,000 in the second quarter of 2002. The increase in SG&A of $1,626,000 is primarily attributable to an executive incentive compensation bonus of $1,000,000, a debt conversion expense, net of approximately $622,000 related to the conversion of the Company's Convertible Exchangeable Notes, a reduction in the non-cash credit relating to the Deferred Compensation Plan of $295,000, offset by a reduction in SG&A expenses of approximately $290,000 due to the Company's continued efforts to reduce costs through reductions in personnel, office rental costs and other operating expenses. For the six months ended June 30, 2003, SG&A expenses increased by $1,509,000 from $9,277,000 to $10,786,000 primarily as a result of an executive incentive compensation bonus of $1,000,000, a debt conversion expense, net of approximately $622,000, a reduction in the non-cash credit relating to the Deferred Compensation Plan of $547,000, offset by a reduction in SG&A expenses of approximately $660,000 due to the Company's efforts to reduce operating expenses. Interest expense For the quarter ended June 30, 2003, interest expense decreased by $83,000 compared to the quarter ended June 30, 2002. For the six months ended June 30, 2002, there was a decrease in interest expense of $241,000 from $1,429,000 to $1,188,000. The decreased interest expense in 2003 was attributable to both a decrease in the Company's outstanding indebtedness and a reduction in interest rates offset by increased fees. Investment and other income (loss), net For the quarter and six months ended June 30, 2003, investment and other income (loss), net was $502,000 and $662,000 as compared to $(303,000) and $(738,000) for the quarter and six months ended June 30, 2002. The income in 2003 was primarily attributable to non-cash equity realized in connection with the HMS option as compared to equity losses recognized on HMS of $596,000 and $1,331,000 for comparable periods in 2002 and on interest income on loans receivable and other income of $104,000 and $355,000, respectively. Income taxes For the quarter and six months ended June 30, 2003, the Company recorded an income tax expense of $646,000 and $392,000, which represents the Company's applicable federal, state and local, and foreign tax expense for these periods. In the quarter and six months ended June 30, 2002, the Company recorded an income tax expense of $113,000 and $281,000, which represents the applicable federal, state and local, and foreign tax expense for these periods. Liquidity and capital resources On August 14, 2003,GP and GP's subsidiary SkillRight, Inc. ("SkillRight") entered into a new two-year $25 million Revolving Credit Facility (the "Credit Agreement") with a new bank, the proceeds of which were used to repay the Company's existing credit facility. The Credit Agreement is secured by certain of the assets of GP, Skillright and MXL. The Credit Agreement also provides for an unsecured guaranty from the Company. The interest rate on the Credit Agreement is at the Eurodollar plus 3.00%, (which as of August 14, 2003 is approximately 1%). Based upon the financial performance of GP, the interest rate can be reduced. The Credit Agreement contains covenants with respect to GP's minimum tangible net worth, leverage ratio, interest coverage ratio and its ability to make capital expenditures. The Credit Agreement also contains certain restrictive covenants including a prohibition on future acquisitions, incurrence of debt and the payment of dividends. The Company is also subject to certain restrictive covenants including limitations on future acquisitions. There is currently approximately $15,000,000 outstanding under the facility and $3,700,000 is available to be borrowed under the facility. As of June 30, 2003, the current amount outstanding under the prior credit facility is $21,230,000. Due to the Company's subsidiaries entering into a new Credit Agreement on August 14, 2003, described above, the Company anticipates writing off approximately $800,000 of unamortized deferred financing costs in the third quarter of 2003 relating to the prior credit facility. Pursuant to a Note and Warrant Purchase Agreement dated August 8, 2003, the Company issued and sold to four Gabelli Funds, $7,500,000 aggregate principal amount of 6% Conditional Subordinated Notes due 2008 (the "Notes") and 937,500 warrants ("GP Warrants"), each entitling the holder thereof to purchase (subject to adjustment) one share of the Company's common stock. The aggregate purchase price for the Notes and GP Warrants was $7,500,000. The Notes mature August 2008 with interest payable semi-annually commencing on December 31, 2003. The Notes are secured by a mortgage on the Company's property located in Pawling, New York. At any time that less than $1,875,000 principal amount of Notes are outstanding, the Company may defease the obligations secured by the mortgage and obtain a release of the lien of the mortgage by depositing with an agent for the Noteholders bonds or government securities with an investment grade rating by a nationally recognized rating agency which, without reinvestment, will provide cash on the maturity date of the Notes in an amount not less than the outstanding principal amount of the Notes. The GP Warrants have an exercise price of $8.00 per share and are exercisable at any time until August 2008. The exercise price may be paid in cash, by delivery of Notes, or a combination of the two. The GP Warrants contain anti-dilution provisions for stock splits, reorganizations, mergers, and similar transactions. The Company has agreed to file a registration statement to register the resale of the shares of its common stock issuable on exercise of the GP Warrants, and to certain other registration rights in favor of the holders of the GP Warrants. In July 2002, the Company announced that it was actively considering a spin-off of certain of its non-core assets, including MXL, into a separate corporation named National Patent Development Corporation ("NPDC"). In the spin-off, it is contemplated that each holder of the Company's common stock will receive one share of NPDC common stock for each share of the Company's common stock or Class B capital stock held. The Note and Warrant Purchase Agreement provides that, on completion of the spin-off, NPDC will issue warrants ("NPDC Warrants") to the holders of the GP Warrants. The NPDC Warrants will entitle the holders to purchase, in the aggregate, a number of shares of NPDC common stock equal to 8% of the number of shares outstanding at completion of the spin-off, subject to reduction for any GP Warrants exercised prior to the spin-off. The NPDC Warrants will be issued to the holders of the GP Warrants on the record date for the spin-off, and allocated among them pro-rata based on the respective number of GP Warrants held by them on such date. The exercise price of the GP Warrants will be adjusted to take into account the spin-off and issuance of the NPDC Warrants, as specified in the Note and Warrant Purchase Agreement. The exercise price of the NPDC Warrants will be 160% of the average closing price of the NPDC common stock over the 20 consecutive trading days commencing on the record date of the spin-off. The NPDC Warrants will be exercisable at any time after their exercise price is calculated through August 2008. The NPDC Warrants will have anti-dilution provisions similar to the GP Warrants. NPDC has agreed to provide the holders of the NPDC Warrants with registration rights similar to those provided by the Company to the holders of the GP Warrants. The spin-off is still subject to certain conditions, including certain SEC filings. If the spin-off does not occur by January, 2005, the Noteholders will have the right to require the Company to redeem to the Notes. There can be no assurance that the spin-off will be consummated. The Company currently has an 8% senior unsecured note receivable from Five Star Products, Inc. ("FSP") due September 30, 2004 in the amount of $4,000,000 (the "Five Star Note"). On June 20, 2003, the Company entered into an Agreement of Subordination and Assignments (the "Subordination Agreement") with FSP that permits the annual repayment of principal on the Five Star Note. On June 27, 2003, the Company received a partial repayment from FSP in the amount of $500,000, reducing the outstanding principal amount of the note from $4,500,000 to $4,000,000, the balance currently outstanding as of June 30, 2003. In July 2003, the Company received an additional repayment of $500,000, further reducing the outstanding principal from $4,000,000 to $3,500,000. Under the Subordination Agreement, FSP is permitted to make a further repayment in the amount of $200,000 during the remainder of 2003. On March 23, 2000, the Company agreed to guarantee up to $1,800,000 of GSES's debt pursuant to GSES's credit facility. GSES's credit facility would have expired on March 23, 2003, however the facility was extended until March 31, 2004. In consideration for the extension of the guarantee, the Company received 150,000 shares of GSES common stock, with a value of $180,000. A deferred credit of $180,000 has been recorded for the receipt of these shares which will amortize to income over the term of the guarantee. During the second quarter of 2003, the Company recorded $45,000 of income. At June 30, 2003, the Company had cash and cash equivalents totaling $827,000. The Company believes that cash generated from operations, borrowing availability under the new 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. For the six months ended June 30, 2003, the Company's working capital increased by $1,205,000 to $1,985,000. The decrease in cash and cash equivalents of $689,000 for the six months ended June 30, 2003 resulted primarily from cash provided by operating activities of $616,000 offset by cash used in investing activities of $189,000 and financing activities of $1,010,000. 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 application of SFAS No. 143 did not have and is not expected to 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 on 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 December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure - an amendment of SFAS No. 123" ("SFAS No. 148"),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 of SFAS No. 148 for the 2003 fiscal year. In April 2003, the FASB issued SFAS No. 149, "Amendment of SFAS No. 133 on Derivative Instruments and Hedging Activities." SFAS No. 149 amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS No. 133. In particular, this Statement clarifies under what circumstances a contract with an initial net investment meets the characteristic of a derivative. It also clarifies when a derivative contains a financing component that warrants special reporting in the statement of cash flows. SFAS No. 149 is generally effective for contracts entered into or modified after June 30, 2003 and is not expected to have an impact on the Company's Consolidated Financial Statements. In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." SFAS No. 150 establishes standards for how a company classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify certain financial instruments as a liability (or as an asset in some circumstances). SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003.The adoption of SFAS No. 150 did not have an impact on 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 applied the provisions of FIN No. 45 for its financial guarantee entered into in the first quarter of 2003. 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 has evaluated its interests in certain entities to determine if any such entities will require consolidation under FIN No. 46, and has determined that, at this time, it is not necessary to consolidate any such entities. 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 adoption of Issue No. 00-21 did not have an impact on the Company's Consolidated Financial Statements. Forward-looking statements The forward-looking statements contained herein reflect managements' current expectations regarding future growth, results of operations, performance and business prospects and opportunities. Wherever possible, words such as "anticipate," "believe," "plan," "expect" and similar expressions have been used to identify these forward- looking statements. These statements reflect the Company's current beliefs and are based on information currently available to the Company. Except as otherwise required by federal securities law, the company is not obligated to update or revise these forward-looking statements to reflect new events or circumstances. Accordingly, these statements are subject to certain risks and uncertainties which could cause the Company's actual growth, results, performance and business prospects and opportunities to differ from those expressed in, or implied by these statements, 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. GP STRATEGIES CORPORATION AND SUBSIDIARIES QUALIFICATION RELATING TO FINANCIAL INFORMATION Item 3. Quantitative and Qualitative Disclosure About Market Risk We have no material changes to the disclosure on this matter made in our report on Form 10-K for the fiscal year ended December 31, 2002. Item 4. Controls and Procedures a. Evaluation of disclosure controls and procedures. The Company's Chief Executive Officer and Chief Financial Officer have reviewed and evaluated the effectiveness of the Company's disclosure controls and procedures (as defined in Exchange Act Rules 240.13a-14(c) and 15d-14(c)) as of a date within ninety days before the filing date of this quarterly report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that the Company's current disclosure controls and procedures are effective, providing them with material timely information relating to the Company required to be disclosed in the reports the Company files or submits under the Exchange Act. b. Changes in internal controls. There have not been any significant changes in the Company's internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation. There were no significant deficiencies or material weaknesses and therefore no corrective actions were taken. GP STRATEGIES CORPORATION AND SUBSIDIARIES PART II. OTHER INFORMATION Item 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 10.0 Note and Warrant Purchase Agreement dated August 8, 2003 among GP Strategies Corporation, National Patent Development Corporation and Gabelli Funds, LLC. 10.01 Form of GP Strategies Corporation 6% Conditional Subordinated Note due 2008 dated August 14, 2003. 10.02 Form of GP Strategies Corporation Warrant Certificate dated August 14, 2003. 10.03 Form of National Patent Development Corporation Warrant Certificate dated August 14, 2003. 10.04 Mortgage Security Agreement and Assignment of Leases dated August 14, 2003 between GP Strategies Corporation and Gabelli Funds, LLC. 10.05 Registration Rights Agreement dated August 14, 2003 between GP Strategies Corporation and Gabelli Funds, LLC. 10.06 Registration Rights Agreement dated August 14, 2003 between National Patent Development Corporation and Gabelli Funds, LLC. 10.07 Indemnity Agreement dated August 14, 2003 by GP Strategies Corporation for the benefit of National Patent Development Corporation and MXL Industries, Inc. 10.08 Subordination Agreement dated August 14, 2003 among GP Strategies Corporation, Gabelli Funds LLC, as Agent on behalf of the holders of the Company's 6% Conditional Subordinated Notes due 2008 and Wachovia Bank, National Association. 10.09 Amended and Restated Incentive Compensation Agreement dated June 11, 2003 between GP Strategies Corporation and Jerome I. Feldman. 10.10 Financial and Security Agreement dated August 13, 2003 by and between General Physics Corporation, MXL Industries, Inc. and Wachovia Bank, National Association. 10.11 Guaranty of Payment Agreement dated August 13, 2003 by GP Strategies Corporation for the benefit of Wachovia Bank, National Association. 10.12 Limited Guaranty of Payment Agreement dated August 13, 2003 by MXL Industries, Inc. for the benefit of Wachovia Bank, National Association. 31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14 of the Securities Act of 1934. 31.2 Certification of Chief Financial Officer pursuant to Rule 13a-14 of the Securities Act of 1934. 32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. b. Reports Form 8-K filed on May 15, 2003 reporting event under Item 12. GP STRATEGIES CORPORATION AND SUBSIDIARIES June 30, 2003 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed in its behalf by the undersigned thereunto duly authorized. GP STRATEGIES CORPORATION DATE: August 18, 2003 BY: Scott N. Greenberg President & Chief Financial Officer DATE: August 18, 2003 BY: Jerome I. Feldman Chief Executive Officer