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
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(State of Incorporation) (I.R.S. Employer Identification No.)
777 Westchester Avenue, White Plains, NY 10604
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(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
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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
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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
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