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, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 1-7234
GP STRATEGIES CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware 13-1926739
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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
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 30, 2003 was approximately $68,737,653.
The number of shares outstanding of each of the Registrant's Common Stock and
Class B Stock as of March 15, 2004:
Class Outstanding
Common Stock, par value $.01 per share 16,391,006 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 2004 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 24
Item 3. Legal Proceedings 25
Item 4. Submission of Matters to a Vote of
Security Holders 27
PART II
Item 5. Market for the Registrant's Common
Equity and Related Stockholder Matters 28
Item 6. Selected Financial Data 30
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations 31
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 50
Item 8. Financial Statements and Supplementary Data 51
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 115
Item 9A. Controls and Procedures 115
PART III
Item 10. Directors and Executive Officers of the Registrant* 116
Item 11. Executive Compensation* 116
Item 12. Security Ownership of Certain
Beneficial Owners and Management* 116
Item 13. Certain Relationships and Related Transactions* 116
Item 14. Principal Accountant Fees and Services* 116
PART IV
Item 15. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K 117
*To be incorporated by reference from the proxy statement for the
Registrant's 2004 Annual Meeting of Shareholders.
Cautionary Statement Regarding Forward-Looking Statements
The forward-looking statements contained herein reflect GP Strategies'
management's current views with respect to future events and financial
performance. We use words such as "expects", "intends" and "anticipates" to
indicate forward-looking statements. These forward-looking statements are
subject to certain risks and uncertainties that could cause actual results to
differ materially from those in the forward-looking statements, all of which are
difficult to predict and many of which are beyond the control of GP Strategies,
including, but not limited to, our inability to generate funds by selling any
assets that are included in the proposed spin-off, our holding company
structure, failure to continue to attract and retain personnel, loss of business
from significant customers, failure to keep pace with technology, changing
economic conditions, competition, and those other risks and uncertainties
detailed in GP Strategies' periodic reports and registration statements filed
with the Securities and Exchange Commission.
If any one or more of these expectations and assumptions proves
incorrect, actual results will likely differ materially from those contemplated
by the forward-looking statements. Even if all of the foregoing assumptions and
expectations prove correct, actual results may still differ materially from
those expressed in the forward-looking statements as a result of factors we may
not anticipate or that may be beyond our control. While we cannot assess the
future impact that any of these differences could have on our business,
financial condition, results of operations and cash flows or the market price of
shares of our common stock, the differences could be significant. We do not
undertake to update any forward-looking statements made by us.
PART I
ITEM 1. BUSINESS
GENERAL DEVELOPMENT OF BUSINESS
GP Strategies Corporation (the "Company") was incorporated in Delaware
in 1959. The Company is a New York Stock Exchange listed company traded under
the symbol GPX. Effective October 23, 2003, the Company has five 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 Corporation ("General Physics").
The third segment is the Optical Plastics Segment, comprised of the Company's
subsidiary MXL Industries, Inc. ("MXL"). The fourth segment is the Simulation
segment, comprised of the Company's majority-owned subsidiary GSE Systems Inc.
("GSE"). The fifth segment is the Home Improvement Distribution Segment,
comprised of the Company's majority-owned subsidiary Five Star Products Inc.
("Five Star").
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. Additional information about General Physics may be
found at www.gpworldwide.com.
GSE develops and delivers business and technology solutions by applying
simulation software, systems and services to the energy, process and
manufacturing industries worldwide. GSE was previously an investment of the
Company accounted for under the equity method. During the fourth quarter of 2003
due to the Company's acquisition of additional shares of GSE, bringing its
ownership to 58%, GSE will be consolidated into the Company's financial
statements effective October 23, 2003. GSE is a part of the Company's new
Simulation Segment.
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.
Five Star is a leading regional distributor of paint sundry items,
interior and exterior stains, brushes, rollers, caulking compounds and hardware
products. Five Star was previously an investment of the Company accounted for
under the equity method. During the fourth quarter of 2003 due to the Company's
acquisition of additional shares of Five Star, bringing its ownership to 54%,
Five Star will be consolidated into the Company's financial statements effective
October 8, 2003. Five Star is a part of the Company's new Home Improvement
Distribution Segment.
In addition, the Company holds an investment in Millennium Cell Inc., a
publicly held company, and an investment in a private company, Valera
Pharmaceuticals (formerly Hydro Med Sciences ) ("Valera"), and also owns certain
real estate.
The Company is actively pursuing a spin-off of certain of its non-core
assets, including MXL, its ownership in Five Star, the investment in Millennium
Cell Inc., the investment in Valera and certain real estate, into a separate
corporation to be named National Patent Development Corporation (See Recent
Developments)
Company Information Available on the Internet
The Company's internet address is www.gpstrategies.com. The Company
makes available free of charge through its internet site, its annual reports on
Form 10-K; quarterly reports on Form 10-Q; current reports on Form 8-K; and any
amendment to those reports filed or furnished pursuant to the Securities
Exchange Act of 1934, or the "Exchange Act," as soon as reasonably practicable
after such material is electronically filed with, or furnished to, the U.S.
Securities and Exchange Commission.
RECENT DEVELOPMENTS
On October 23, 2003, the Company purchased from ManTech International
("ManTech") 3,426,699 shares of common stock of GSE and a GSE Subordinated Note
in the outstanding principal amount of $650,000, which the Company immediately
converted into 418,653 shares of common stock of GSE. This transaction (the "GSE
Acquisition") increased the Company's ownership of the common stock of GSE from
approximately 22% to approximately 58%, and as a result, commencing in the
fourth quarter of 2003, GSE will be consolidated into the Company's consolidated
financial statements. Simultaneously with the closing of the GSE Acquisition,
three directors nominated by the Company were added to the GSE board of
directors.
The consideration paid to ManTech by the Company consisted of a
five-year 5% note of $5,250,955 (the "ManTech Note") due in full in October
2008. Each year during the term of the ManTech Note, ManTech will have the
option to convert up to 20% of the original principal amount of the note into
common stock of the Company at the then market price of the Company's common
stock, but only in the event that the Company's common stock is trading at $10
per share or more. In the event that less than 20% of the principal amount of
the note is not converted in any year, such amount not converted will be
eligible for conversion in each subsequent year until converted or until the
note is repaid in cash.
As part of the GSE Acquisition, the Company and ManTech entered into a
five-year Teaming Agreement pursuant to which ManTech and the Company will work
together to give the Company the opportunity to provide training services to
ManTech's customers.
On October 8, 2003, the Company converted $500,000 principal amount of
the $3,500,000 Senior Unsecured 8% Note due June 30, 2005, as amended, (the
"Five Star Note") of Five Star into 2,000,000 shares of Five Star common stock
(the "Five Star Acquisition"). In consideration for the Company agreeing to
convert at a conversion price of $0.25 per share, Five Star agreed to terminate
the voting agreement between the Company and Five Star. The voting agreement,
which by its terms would in any event have terminated on June 30, 2004, provided
that the Company (i) would vote its Five Star common stock so that not more than
50% of the members of the Five Star board of directors would be officers or
directors of the Company and (ii) would vote on matters other than the election
of directors in the same proportion as the other Five Star stockholders.
The Five Star Acquisition, which was approved by a Special Committee of
the Five Star board of directors comprised of an independent non-management
director who is unaffiliated with the Company, increased the Company's ownership
in Five Star from approximately 48% to approximately 54% of the outstanding Five
Star common stock and as a result, commencing in the fourth quarter of 2003,
Five Star will be consolidated into the Company's consolidated financial
statements. In addition, the Company continues to own the remaining $2.8 million
principal amount of the Five Star Note, the balance of which decreased in 2003
due to repayments of $1,000,000 prior to the Five Star Acquisition, $500,000 due
to the conversion of principal to common stock in the Five Star Acquisition and
a $200,000 repayment subsequent to the Five Star Acquisition.
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 and Five Star. 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
certain SEC filings. On February 12, 2004 the Company filed documents with the
Securities and Exchange Commission relating to the proposed spin-off and the
Company anticipates that the spin-off will occur at the conclusion of the SEC
review process.
After the spin-off becomes effective, the Company's business would be
comprised of its training and workforce development business operated by General
Physics and the GSE simulation business. NPDC would be a stand- alone public
company owning all of the stock of MXL, the interest in Five Star and certain
other non-core assets.
GENERAL PHYSICS CORPORATION
Organization and Operations
General Physics 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 is a global leader in performance improvement, with over three decades
of experience in providing solutions to optimize work force performance. Since
its incorporation in 1966, General Physics has provided clients with the
products and services they need to successfully integrate their people,
processes and technology. 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. General Physics products and
services include plant equipment and process launch assistance; 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' 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. 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 operates 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. 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. 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. Also included in this segment 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.
Information Technology
The Information Technology Segment provides information technology (IT)
training programs and solutions, including Enterprise Solution training.
Specific services include software applications training, change management, and
courseware development. This segment has operations in the United States and
Canada.
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 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.
Consulting. Consulting services 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.
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) General Physics software applications.
Contracts
General Physics is currently performing under time-and-materials,
fixed-price and cost-reimbursable contracts. General Physics' contracts 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 2000 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, 2003:
Fixed-Price...............................69%
Time and Materials........................17
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.
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.
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' contracts have occurred
over the last five years.
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 Physic Asia,
Ptd. Ltd. and General Physics (Malaysia) Sdn Bhd. 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.
SIMULATION SEGMENT
GSE
GSE is a world leader in real-time power plant simulation. GSE 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. In addition, GSE provides plant monitoring, security access and
control, and signal analysis monitoring and optimization software primarily to
the power industry.
Prior to September 25, 2003, GSE also had a process automation and
control business. The automation products of this business unit optimized batch
and hybrid plant control for the specialty chemical, food and beverage, and
pharmaceutical industries. On September 25, 2003, GSE completed the sale of
substantially all of the assets of this business to Novatech, LLC. GSE is
currently comprised of three divisions: Power Simulation, Process Simulation and
Emergency Management Simulation.
GSE is positioning itself to take advantage of emerging trends in the
power industry. The operating licenses for numerous nuclear power plants will
expire over the next several years. Fourteen plants have already received
license extensions, and sixteen more have applications pending. Many plants are
also planning significant upgrades to the physical equipment and control room
technology in conjunction with the license extensions. Both will result in the
need to modify or replace the existing plant control room simulators. GSE,
having the largest installed base of existing simulators, is well positioned to
capture the majority of this business.
To address the varying levels of technology that exists across GSE's
installed base, GSE has developed a Java-based graphical overlay technology
called JADE (Java Application Development Environment). JADE provides a common
look and feel to GSE's various simulation tools regardless of whether the
underlying technology is UNIX, LINUX or Microsoft Windows XP. JADE also works
with all of GSE's tools for building electrical, logic and control, and flow
system models for plants.
GSE continues to focus on the fossil power segment of the power
industry. Several fossil plant simulator projects were awarded in 2003,
expanding GSE's presence in the market and establishing key strategic
relationships with power industry DCS providers. GSE expects continued growth in
this market segment and is focusing on second time simulation buyers that now
demand the more sophisticated and realistic simulation models offered by GSE.
Sales and marketing resources have been expanded for the fossil power industry.
While GSE simulators are primarily utilized for power plant operator
training, the uses are expanding to include engineering analysis, plant
modification studies, and operation efficiency improvements for both nuclear and
fossil utilities. During plant construction, simulators are used to test control
strategies and ensure on-time start-up. After commissioning, the same tools can
be used to increase plant availability and optimize plant performance for the
life of the facility. In 2003, GSE demonstrated its ability to link its
simulation models to plant optimization tools of third parties to provide a
unique and broad based optimization solution. GSE and its partners will be
bringing these new products to market in 2004.
GSE has targeted the Process simulation business as an area with a
significant potential for growth. The process industries, particularly oil and
gas and chemical, are expanding worldwide and are faced with the challenges of
performance improvement at existing facilities and training of personnel to
staff new and upgraded facilities. GSE's SimSuite Pro product and experience in
the process industries provide GSE with excellent capabilities to service these
needs. Dedicated sales and marketing resources have been assigned to Process
simulation to facilitate this initiative.
In 2003, GSE continued to expand the sale of its plant optimization
tools based on advanced signal analysis technology. GSE's Pegasus Plant
Surveillance and Diagnosis System helps improve plant availability, safety and
economy. Pegasus is a software package for semi-automatic plant surveillance and
diagnostics and enables site engineers to perform detailed analysis for
specified component faults, allowing the identification of degraded performance
and replacement of components before they fail. SensBase provides comprehensive
sensor test services, thus ensuring that changes in transmitters and other
instruments do not jeopardize the function of the nuclear plant protection
systems. BRUS, a noise analysis program package, is a collection of signal
analysis tools which allow users to detect developing abnormalities in the
plant. GSE's worldwide reputation for boiling water reactor stability training
lead to an increase in sales of both stability training courses and GSE's SIMON
Stability Monitoring equipment. GSE has been very successful in selling this
technology to European and Asian customers and is investigating its viability in
the US market.
The acquisition by the Company of controlling interest in GSE has led
to further cooperation between the companies. In addition to cooperating in the
marketing of individual products, the companies will combine some of General
Physics' extensive training materials and programs with GSE's power plant
simulation models to provide truly interactive and adaptive total training
solutions. Cooperative marketing activities between General Physics and GSE will
enable GSE to extend simulation capabilities into industries beyond Power and
Process and to expand the range of products and services offered to customers.
In 2003, GSE began to aggressively market its access control and
intrusion detection system to the nuclear and process industries, however, the
market has been slow to develop. The nuclear industry security focus has been on
investing in technology to detect the approach of intruders farther away from
the plant perimeter. As a result, much of the anticipated sales of GSE's GAARDS
system have failed to materialize. At the end of 2003, GSE made the decision to
reduce its investment in this market segment until the market rebounds.
In lieu of pursuing physical security system projects, GSE has turned
its attention to opportunities for simulation in disaster recovery and terrorist
threat response. In 2003, GSE modified its simulation technology to simulate the
operation of Emergency Operations Centers (EOC) run by municipal and state
governments. REMITS is a Real-time Emergency Management Interactive Training
System designed to simulate emergency situations and enable EOC staffs to train
without requiring human participation in the field. REMITS enables the EOC staff
to stay current with the technology and enables instructors to introduce new
problems and challenges during the exercise to test the EOC staff response to
changing situations. As the Federal Government spends billions in first
responder training, GSE believes its REMITS product will find a large market in
the developing field of training for disaster recovery and terrorist threat
response.
Additional information about GSE may be found at www.gses.com
OPTICAL PLASTICS SEGMENT
MXL
MXL is a specialist in the manufacture of polycarbonate parts requiring
strict adherence to optical quality specifications, and in the application of
abrasion and fog resistant coatings to 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 Illinois facility, MXL has the capability
to design and construct injection molds for a variety of applications (optical
and non-optical).
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 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. In September
2003, MXL acquired certain of the precision custom optical assemblies inventory,
machinery and equipment of AOtec for $1.1 million in cash and notes, subject to
adjustment. MXL leased space in Massachusetts for the newly purchased equipment.
MXL's contracts in the military and commercial area often require
either vacuum deposited beam-splitter coatings, vacuum deposited anti-reflective
coatings, laser eye protection, or a combination of these technologies in
addition to MXL's capabilities of providing difficult and optically correct
molded and coated components. The laser eye protection manufacturing equipment
purchased from AOtec will enable MXL to better service purchase orders for
precision pilot visors for next generation military fighter and attack aircraft,
which require beam-splitter and anti-reflective coatings and will shortly
require laser eye protection.
Additional information about MXL may be found at www.mxl-industries.com
HOME IMPROVEMENT DISTRIBUTION SEGMENT
Five Star
Five Star is engaged in the wholesale distribution of home decorating,
hardware and finishing products. It serves over 3,500 independent retail dealers
in twelve states, making Five Star one of the largest distributors of its kind
in the Northeast. Five Star operates two state -of -the -art warehouse
facilities, located in Newington, CT and East Hanover, NJ with approximately
347,000 square feet of space between them. All operations are coordinated by
senior management from offices in New Jersey. Five Star's sales force consists
almost entirely of employees.
Five Star is a leading distributor of paint sundry items, interior and
exterior stains, brushes, rollers, caulking compounds and hardware products.
Five Star offers products from leading manufacturers such as Cabot Stain,
William Zinsser & Company, DAP, General Electric Corporation, American Tool,
USG, Stanley Tools, Minwax and 3M Company. Five Star distributes its products to
retail dealers, which include lumber yards, "do-it yourself" centers, hardware
stores and paint stores principally in the northeast region. It carries an
extensive inventory of the products it distributes and provides delivery,
generally within 24 to 72 hours. Five Star has grown to be one of the largest
independent distributors in the Northeast by providing a complete line of
competitively priced products, timely delivery and attractive pricing and
financing terms to its customers. Much of Five Star's success can be attributed
to a continued commitment to provide customers with the highest quality service
at reasonable prices.
As one of the largest distributors of paint sundry items in the
Northeast, Five Star enjoys cost advantages and favorable supply arrangements
over the smaller distributors in the industry. This enables Five Star to compete
as a "low cost" provider. Five Star uses a fully computerized warehouse system
to track all facets of its distribution operations. Five Star has enhanced the
sophistication of its warehouse and office facilities to take full advantage of
economies of scale, speed the flow of orders and to compete as a low cost
distributor. Nearly all phases of the selling process from inventory management
to receivable collection are automated and tracked; all operations are overseen
by senior management at the New Jersey facility. Five Star is able to capitalize
on manufacturer discounts by strategically timing purchases involving large
quantities.
Five Star has developed strong, long-term relationships with leading
suppliers since its predecessor company, J. Leven, was founded in 1912. As a
major distributor of paint sundry items, suppliers rely on Five Star to
introduce new products to market. Furthermore, suppliers have grown to trust
Five Star's ability to penetrate the market. As a result, Five Star is often
called on first by manufacturers to introduce new products into the marketplace.
For example, Minwax, Best Liebco and Cabot Stain have utilized Five Star to
introduce and distribute some of their new product innovations.
On February 6, 2004 Five Star announced that it will repurchase up to 5,000,000
shares, or approximately 30% of its common stock currently outstanding, through
a tender offer for the shares at $0.21 per share, originally set to expire on
March 16, 2004. On March 17, 2004 Five Star announced that it had increased the
price it was offering to pay for the shares in the tender offer to $0.25 per
share and extended the offer to March 31, 2004. Based on the final tabulation by
the depositary for the tender offer, approximately 2,648,000 shares of common
stock were tendered and acquired by Five Star. The effect of the tender offer
was to increase the Company's ownership in Five Star to approximately 64%.
If the Company increases its ownership to at least 80% of Five Star's
common stock, Five Star would become, for federal tax purposes, part of the
affiliated group of which the Company is the common parent. As a member of such
affiliated group, Five Star would be included in the Company's consolidated
federal income tax returns, Five Star's income or loss would be included as part
of the income or loss of the affiliated group and any of Five Star's income so
included might be offset by the consolidated net operating losses, if any, of
the affiliated group. As part of this agreement, Five Star has agreed to enter
into a tax sharing agreement with the Company pursuant to which Five Star will
make tax sharing payments to the Company once Five Star becomes a member of the
consolidated group equal to 80% of the amount of taxes Five Star would pay if
Five Star were to file separate consolidated tax returns but did not pay as a
result of being included in the Company affiliated group. If the Company
completes the spin-off of certain of its assets, including its interest in Five
Star into NPDC (See Recent Developments above), the foregoing agreement would be
assigned by the Company to NPDC.
Additional information about Five Star, may be found at
www.fivestargroup.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 Valera and Millennium Cell and also owns certain real estate.
Valera is a specialty pharmaceutical company focused on the acquisition,
development and commercialization of novel prescription pharmaceuticals,
particularly for the treatment of urological conditions and disorders. Valera
intends to develop new formulations using its hydron drug delivery technology,
which is a subcutaneous implant that controls the amount, timing and location of
the release of drug compounds into the body.
Valera's lead product is a twelve-month implant that delivers the luteinizing
hormone releasing hormone, or LHRH, histrelin for the palliative treatment of
metastatic prostate cancer. LHRH agonists are the premium standard of care in
the palliative treatment for metastatic breast cancer. This implant is currently
in open label Phase III clinical trials and is currently meeting its two primary
endpoints. On December 16, 2003, Valera submitted its New Drug Application (NDA)
for Vantas(TM), the name for Valera's long-acting LHRH implant for treating
prostate cancer.
Prior to June 2000, Valera 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 "Valera Notes"), Valera was incorporated as a
separate company and became a wholly-owned subsidiary of the Company. The Valera
Notes, at the option of the holders, could previously have been exchanged for
19.9% of the outstanding common stock of Valera on a fully diluted basis or into
shares of the Company's common stock. On April 23, 2003, the Company entered
into an agreement with the holders of the Valera Notes to exchange the Valera
Notes plus related accrued interest for 554,000 shares of the Company's Common
Stock at a conversion rate of $5.00 per share with a fair value of $2,770,000.
As a result, in accordance with the provisions of SFAS Statement No. 84, Induced
Conversions of Convertible Debt, the Company recorded debt conversion expense,
net of approximately $622,000, which is included in selling, general and
administrative expenses in 2003.
On December 27, 2001, Valera completed a $7 million private placement of Valera
Series A Convertible Preferred Stock (the "Preferred Stock") to certain
institutional investors. The Preferred Stock is convertible at any time at the
option of the holder and participates in dividends with Valera common stock on
an as converted basis.
The Company owns 100% of Valera's common stock but no longer has financial and
operating control of Valera. As a condition of the private placement, the
Company contractually gave up operating control over Valera through an Investors
Rights Agreement. Therefore, through December 27, 2001, the operating results of
Valera are consolidated within the Consolidated Statements of Operations.
However, subsequent to that date the Company accounts for its investment in
Valera under the equity method. Due to Valera's operating losses in 2002 the
Company's investment in Valera as of December 31, 2002 was written down to zero.
In the second quarter of 2003, Valera completed a $12 million private placement
offering of Series B Convertible Preferred Stock. As part of such transaction,
the Company was granted an option (the "Valera Option") until March 31, 2004
(which the Company did not exercise) to purchase up to $5 million of Series B
preferred stock at the offering price of $.72 per share. The Company valued the
Valera Option using the Black-Scholes model and recorded approximately $500,000
of income, which is included in Investments and other income (loss) net. The
Valera Option was written down to zero in the quarter ended September 30, 2003
due to the recognition of the Company's share of Valera's equity loss. Assuming
conversion of all of the outstanding shares of Series A and Series B convertible
preferred stock and exercise of options for the total number of Valera common
shares reserved for Valera's employee stock option plans, the Company would own
approximately 25% of Valera.
Millennium Cell Inc. ("Millennium") is a publicly traded emerging technology
company engaged in the business of developing innovative fuel systems for the
safe storage, transportation and generation of hydrogen for use as an energy
source. The Company owns approximately 4% of the outstanding common stock of
Millennium as of December 31, 2003, with a market value of $3,570,000.
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 and Daimler Chrysler Corporation;
commercial electric power utilities, such as Consolidated Edison Company of New
York, Public Service Electric & Gas Company and Entergy Operations, Inc.;
governmental agencies, such as the U.S. Departments of Defense, Energy and
Treasury, the U.S. Department of Homeland Security, U.S. Department of
Transportation and U.S. Social Security Administration; U.S. government prime
contractors, such as Northrop-Grumman and Lockheed Martin; and other large
multinational companies, such as Pfizer, Inc., Merck & Co., Eli Lily & Co, IBM
Corporation, United Technologies Corporation, Anheuser-Busch Company, The
Coca-Cola Company, ExxonMobil, USX Corporation, and General Electric Company.
Revenue from the United States Government accounted for approximately 38% of
General Physics' revenue for the year ended December 31, 2003. 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 2003, revenue from the Department of the Army, which is
included in United States Government revenue accounted for approximately 22% of
General Physics' revenue.
As the market for optical injection molded plastics is relatively
focused, MXL serves virtually all of the major users. The customer base of MXL
includes over 50 commercial customers in 27 states and Japan, the United
Kingdom, Europe, the Middle East, Mexico, Canada and Australia. These commercial
customers are primarily in the recreation, safety, and security industries.
MXL's largest two customers comprised approximately 25% and 12%, respectively,
of its total sales in 2003.
GSE has provided approximately 200 simulation systems to an installed
base of over 75 customers worldwide. GSE's largest two customers accounted for
approximately 28.7% and 11.0%, respectively, of its sales in 2003 and its 10
largest customers accounted for approximately 73.6% of such sales. In 2003,
approximately 15.2% of revenue was generated from end users outside the United
States.
Five Star's largest customer accounted for approximately 3.6% of its sales
in 2003 and its 10 largest customers accounted for approximately 12.4% of its
sales.
EMPLOYEES
At December 31, 2003, the Company and its subsidiaries employed 1,692
persons, including 10 in the Company's headquarters, 1,189 at General Physics,
146 at GSE, 93 at MXL and 254 at Five Star.
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. As of December 31, 2003, General Physics employed
1,189 employees and over 100 adjunct instructors.
During 2003, General Physics transferred certain contracts and
employees to SkillRight, Inc., a wholly-owned subsidiary of General Physics.
Substantially all of the non-management employees of SkillRight, Inc. are
members of the United Auto Workers union and covered by the terms of a
collective bargaining agreement entered into between SkillRight, Inc. and the
UAW.
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
believes its relations with its employees are good.
GSE employs a highly educated and experienced multinational workforce
of 146 employees, including approximately 84 engineers and scientists.
Approximately 60% of these engineers and scientists have advanced science and
technical degrees in fields such as chemical, mechanical and electrical
engineering, applied mathematics and computer sciences. GSE believes its
employees offer a competitive advantage that enhances its position to compete in
the Simulation markets.
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, information technology
companies, major suppliers of equipment, degree-granting colleges and
universities, vocational and technical training schools, continuing education
programs, small privately held training providers and individuals and
independent service companies similar to General Physics. The training industry
is highly fragmented and competitive, with low barriers to entry and no single
competitor accounting for a significant market share. 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. There can be no assurance that General Physics will be
successful against such competition.
The Power Simulation business encounters intense competition. In the
nuclear simulation market, GSE competes directly with larger firms primarily
from Canada and Germany, such as Canadian Aerospace & Electronics (CAE) and STN
Atlas. The fossil simulation market is represented by smaller companies in the
U.S. and overseas. Several of GSE's competitors have greater capital and other
resources than it has, including, among other advantages, more personnel and
greater marketing, financial, technical and research and development
capabilities. Customer purchasing decisions are generally based upon price, the
quality of the technology, experience in related projects, and the financial
stability of the supplier. GSE's competitors in Process Simulation include major
corporations offering a wide range of products and services that include
operator training simulators, companies focused on Process Technology and
manufacturing enhancement, companies with specific industry niches that enables
them to compete in operator training simulation and smaller training companies
that compete at the lower cost levels of Computer Based Training (CBT) or simple
simulations close to CBT. GSE's competition in Emergency Management Simulation
is unclear at this time.
The markets for the products currently manufactured and sold by MXL are
characterized by extensive competition. The principal competitive factors of MXL
are its reputation for quality, service and integrity. MXL is able to provide
its customers with a breadth of experience, from mold design through mold
construction, to injection molding, coating, laser eye protection and/or high
technology optical coating. MXL is able to accomplish the most complex projects
for its customers. In addition, MXL's engineering, performance, availability and
reliability are important competitive factors. Many existing and potential
competitors have greater financial, marketing and research resources than MXL.
Competition within the home improvement distribution industry is
intense. Among Five Star's competitors are much larger national companies
commonly associated with national franchises such as Ace and TruServ, smaller
regional distributors, Lowe's and Home Depot, which purchase directly from
manufacturers and dealer-owned distributors. Moreover, in some instances
manufacturers will bypass the distributor and choose to sell and ship their
products directly to the retail outlet. The principal means of competition for
Five Star are its strategically placed distribution centers and its extensive
inventory of quality, name-brand products. Five Star will continue to focus its
efforts on supplying its products to its customers at a competitive price and on
a timely, consistent basis.
MARKETING
General Physics has approximately 39 employees dedicated primarily to
marketing its services and products through Business Development initiatives at
both the Group and Business Unit levels. 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. 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).
GSE markets its Power Simulation products and services through a
network of direct sales staff, agents and representatives, systems integrators
and strategic alliance partners. A direct sales force is employed in the
continental United States. Market-oriented business and customer development
teams define and implement specific campaigns to pursue opportunities in the
power marketplace. GSE's ability to support its multi-facility, international
and/or multinational Power Simulation clients is facilitated by its network of
offices and strategic partners in the U.S. and overseas. Power Simulation
offices are maintained in Maryland and Georgia, and outside the U.S., in Sweden,
China and Japan. GSE will market its Process Simulation technologies through a
combination of techniques including its existing direct sales channel, sales
agents, and strategic alliance partners. GSE will market its product in the U.S.
Homeland Security industry through the existing sales channels of General
Physics and foreign markets through existing power simulation partners and
agents
Because of the narrow niche MXL serves, its sales and marketing effort
concentrates on industry trade shows, such as the Society of Plastics Engineers,
and advertising in industry journals. Its senior management team, as well as
four marketing and sales executives, is responsible for the sales and marketing
effort. It also utilizes one sales representative to market its products.
Five Star distributes and markets products from hundreds of manufacturers
to all of the various types of retailers from regional paint stores, to lumber
yards, to independent paint and hardware stores. The marketing efforts are
directed by regional sales managers who are responsible for designing,
implementing and coordinating marketing policies. The sales managers coordinate
company-wide marketing plans together with senior management, service Five
Star's major multi-state customers and oversee the efforts of sales
representatives.
The sales representatives each cover an assigned geographic area and are
responsible for generating revenue, ensuring customer satisfaction and expanding
the customer base. The representatives are compensated based solely on
commission. In addition, the representatives' efforts are strengthened by
company-sponsored marketing events. Each year in the first quarter, Five Star
invites all of its customers to special trade shows for Five Star's major
suppliers, so that suppliers may display their products and innovations. Five
Star also participates in advertising circular programs in the spring and the
fall which contain discount specials and information concerning new product
innovations.
BACKLOG
General Physics' backlog for services under signed contracts and
subcontracts as of December 31, 2003 was approximately $74,918,000 compared to
$72,500,000 as of December 31, 2002. General Physics anticipates that most of
its backlog as of December 31, 2003 will be recognized as revenue during fiscal
year 2004, 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.
GSE does not reflect an order in backlog until it has received a
contract that specifies the terms and milestone delivery dates. As of December
31, 2003, GSE's aggregate contract backlog totaled approximately $30,400,000.
Approximately $19,500,000 or 64% of the backlog is expected to be converted to
revenue by December 31, 2004.
MXL's sales order backlog as of December 31, 2003 was approximately
$1,703,000 and most of the orders were expected to be completed during fiscal
2004.
Five Star does not have any significant backlog.
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, the Company is engaged in industries in which there are substantial
risks of potential liability. The Company maintains a consolidated insurance
program (including general liability coverage) and claims made by any covered
insured will reduce the amount of available insurance for the other insureds. In
addition, certain liabilities associated with the Company's 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 the Company is not such a licensee.
Finally, few of the Company's 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, the Company 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 the Company's 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.
The nuclear power industry is associated with a number of hazards which
could create significant liabilities for GSE. GSE's business could expose it to
third party claims with respect to product, environmental and other similar
liabilities. Although GSE has sought to protect itself from these potential
liabilities through a variety of legal and contractual provisions as well as
through liability insurance, the effectiveness of such protections has not been
fully tested. The failure or malfunction of one of GSE's systems or devices
could create potential liability for substantial monetary damages and
environmental cleanup costs. Such damages or claims could exceed the applicable
coverage of their insurance. Although management has no knowledge of material
liability claims against GSE to date, such potential future claims could have a
material adverse effect on their business or financial condition.
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. In addition, MXL's activities may subject it to federal, state and
local environmental laws and regulations. MXL believes that it is in compliance
in all material respects with such government regulations and environmental
laws.
Factors Affecting Our Future Performance
Set forth below and elsewhere in this report and in other documents the Company
files with the Securities and Exchange Commission are risks and uncertainties
that could cause the Company's actual results to differ materially from the
results contemplated by the forward-looking statements contained in this report
and other public statements the Company makes.
Our history of net losses could cause us to need additional capital.
For the years ended December 31, 1999, 2000, 2001, 2002 and 2003, we have
experienced net losses of $22,205,000, $25,392,000, $945,000, $5,228,000, and
$8,276,000, respectively. If such net losses continue, we will need additional
capital to fund our operations. If adequate funds are not available, we may be
required to curtail our operations.
A spin-off of non-core assets could hamper our ability to generate funds by
selling such assets.
We are actively considering transferring certain of our non-core assets
into a separate corporation and spinning off that corporation to our
stockholders. We would lose our ability to raise funds by selling any assets
that are included in any spin-off.
Our holding company structure could adversely affect our ability to pay our
expenses.
Our principal operations are conducted through our General Physics
subsidiary. General Physics' credit agreement currently limits its ability to
dividend or pay funds to us, which could adversely affect our ability to pay our
expenses.
Failure to continue to attract and retain qualified personnel could harm our
business.
Our principal resource is our personnel. A significant portion of our
revenue is derived from services and products that are delivered by instructors,
engineers, technical personnel and consultants. Our success depends upon our
ability to continue to attract and retain instructors, engineers, technical
personnel and consultants who possess the skills and experience required to meet
the needs of our clients. In order to initiate and develop client relationships
and execute our growth strategy, we must maintain and continue to hire qualified
salespeople. We must also continue to attract and develop capable management
personnel to guide our business and supervise the use of our resources.
Competition for qualified personnel can be intense. We cannot assure you that
qualified personnel will continue to be available to us. Any failure to attract
or retain qualified instructors, engineers, technical personnel, consultants,
salespeople and managers in sufficient numbers could adversely affect our
business and financial condition.
The loss of our key personnel, including Jerome I. Feldman and Scott N.
Greenberg, could harm our business.
Our success is largely dependent upon the experience and continued services
of Jerome I. Feldman, our Chairman and Chief Executive Officer, Scott N.
Greenberg, our President and Chief Financial Officer, and our other key
personnel. The loss of one or more of our key personnel and a failure to attract
suitable replacements for them may adversely affect our business.
Our revenue and financial condition could be adversely affected by the loss of
business from significant customers.
For the years ended December 31, 2001, 2002 and the 2003, revenue from the
United States Government represented approximately 29%, 32%, and 32% of our
revenue, respectively. However, the revenue was derived from a number of
separate contracts and subcontracts with a variety of government agencies and
contractors we regard as separate customers. Most of our contracts and
subcontracts are subject to termination on written notice, and therefore our
operations are dependent on our clients' continued satisfaction with our
services and their continued inability or unwillingness to perform those
services themselves or to engage other third parties to deliver such services.
Failure to keep pace with technology and changing market needs could harm our
business.
Traditionally, most of our training and performance improvement services
and products have been delivered through instructors, written materials or
video. Our future success will depend upon our ability to gain expertise in
technological advances rapidly and respond quickly to evolving industry trends
and client needs. We intend to deliver many of our training and development
services and products, including some services and products previously delivered
in "traditional" formats, via interactive multimedia software, such as CD-ROM,
and distance-based media, such as video conferencing, intranets and the
Internet. We cannot assure you that we will be successful in adapting to
advances in technology, addressing client needs on a timely basis, or marketing
our services and products in multimedia software and distance-based media
formats. In addition, services and products delivered in the newer formats may
not provide comparable training results. Furthermore, subsequent technological
advances may render moot any successful expansion of the methods of delivering
our services and products. If we are unable to develop new means of delivering
our services and products due to capital, personnel, technological or other
constraints, our business and financial condition could be adversely affected.
Our business and financial condition could be adversely affected by government
limitations on contractor profitability and the possibility of cost
disallowance.
A significant portion of our revenue and profit is derived from contracts
and subcontracts with the United States Government. The United States Government
places limitations on contractor profitability; therefore, government related
contracts may have lower profit margins than the contracts we enter into with
commercial customers. Furthermore, United States Government contracts and
subcontracts are subject to audit by a designated government agency. Although we
have not experienced any material cost disallowances as a result of these
audits, we may be subject to material disallowances in the future.
Changing economic conditions in the United States or the United Kingdom could
harm our business and financial condition.
Our 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 our revenues are derived from Fortune 1000-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 our business and financial condition.
Our financial results are subject to quarterly fluctuations.
We experience, and expect to continue to experience, fluctuations in
quarterly operating results. Consequently, you should not deem our results for
any particular quarter to be necessarily indicative of future results. These
fluctuations in our quarterly operating results may vary because of, among other
things, the overall level of performance improvement services and products sold,
the gain or loss of material clients, the timing, structure and magnitude of
acquisitions, the commencement or completion of client engagements or custom
services and products in a particular quarter, and the general level of economic
activity. To the extent they are unexpected, downward fluctuations may result in
a decline in the trading price of our Common Stock.
Competition could adversely affect our performance.
The training industry is highly fragmented and competitive, with low
barriers to entry and no single competitor accounting for a significant market
share. Our competitors include several large publicly traded and privately held
companies, vocational and technical training schools, degree-granting colleges
and universities, continuing education programs and thousands of small privately
held training providers and individuals. In addition, many of our clients
maintain internal training departments. Some of our competitors offer similar
services and products at lower prices, and some competitors have significantly
greater financial, managerial, technical, marketing and other resources.
Moreover, we expect to face additional competition from new entrants into the
training and performance improvement market due, in part, to the evolving nature
of the market and the relatively low barriers to entry.
We are subject to potential environmental liabilities and liabilities associated
with nuclear incidents.
We provide services that could subject us to significant environmental,
third party and professional liability. If we were found to have been negligent
or to have breached our obligations to our clients, we could be exposed to
significant fines and penalties and third-party liabilities and our reputation
could be adversely affected. The Company maintains a consolidated insurance
program (including general liability coverage) and claims made by any covered
insured will reduce the amount of available insurance for the other insureds.
Although we believe that we currently have appropriate insurance coverage, since
2000 we have experienced increasing premiums and decreasing quality of available
insurance coverage, and we may not be able to obtain appropriate coverage on a
cost-effective basis in the future. In addition, we do not presently have
coverage for all of the risks to which we are subject. For example, liabilities
associated with nuclear incidents may not be covered by our insurance policies,
or by indemnification provisions contained in agreements with clients. In
addition, these liabilities may not be covered by federal legislation providing
liability protection for licensees of the Nuclear Regulatory Commission,
typically utilities, for some damages caused by nuclear incidents because we are
not a licensee. Finally, few of our contracts with clients contain a waiver or
limitation of liability. A nuclear incident could adversely affect our business
and financial condition.
We also provide environmental engineering services to our clients,
including the development and management of site environmental remediation
plans. Although we subcontract most remediation construction activities, and in
all cases subcontract the removal and off-site disposal and treatment of
hazardous substances, we could be subject to liability relating to the
environmental services we perform directly or through subcontracts.
Specifically, if we were deemed under federal and state legislation, including
"Superfund" legislation, to be an "operator" of sites to which we provide
environmental engineering and support services, we could be subject to
liabilities. Our insurance policies may not provide coverage for these risks.
Various mechanisms exist whereby the United States Government may limit
liability for environmental claims and losses or indemnify us for such claims or
losses under governmental contracts. Nonetheless, incurrence of any substantial
"Superfund" or other environmental liability could adversely affect our business
and financial condition.
We do not anticipate paying cash dividends on our Common Stock.
We do not, in the foreseeable future, anticipate paying any cash dividends
on our Common Stock.
Our Chief Executive Officer and directors can exercise significant influence
over GP Strategies.
The holder of a share of our Common Stock is entitled to one vote per share
and the holder of a share of our Class B capital stock is entitled to ten votes
per share. As of March 15, 2004, Jerome I. Feldman, our Chairman and Chief
Executive Officer, beneficially owned shares of Common Stock and Class B capital
stock constituting 20% of our voting stock; Harvey Eisen, one of our directors,
beneficially owned shares of Common Stock and Class B capital stock constituting
18% of our voting stock; and EGI-Fund (02-04) Investors, L.L.C., which has
designated Mark Radzik to be one of our directors, beneficially owns shares of
Common Stock and Class B capital stock constituting 14% of our voting stock.
Messrs. Feldman and Eisen and EGI will be able to influence our management and
affairs and all matters requiring stockholder approval, including the election
of directors and approval of significant corporate transactions. This
concentration of ownership may have the effect of delaying, discouraging or
preventing a change in control and might affect the market price of our Common
Stock.
Our stockholder rights plan and authorized preferred stock could make a
third-party acquisition of us difficult.
We have a stockholder rights plan. Our stockholder rights plan would cause
substantial dilution to any person or group that attempts to acquire us on terms
not approved in advance by our Board of Directors. In addition, our certificate
of incorporation allows us to issue up to 5,000,000 shares of preferred stock,
the rights, preferences, qualifications, limitations, and restrictions of which
may be fixed by the Board of Directors without any further vote or action by the
stockholders. The stockholder rights plan, the ability to issue preferred stock,
and certain provisions in our by-laws may have the effect of delaying,
discouraging or preventing a change in control and might affect the market price
of our Common Stock.
Our certificate of incorporation may discourage foreign ownership of our Common
Stock.
The United States Departments of Energy and Defense have policies regarding
foreign ownership, control or influence over government contractors who have
access to classified information, and inquire as to whether any foreign interest
has beneficial ownership of 5% or more of a contractor's or subcontractor's
voting securities. If either Department determines that an undue risk to the
common defense and security of the United States exists, it may, among other
things, terminate the contractor's or subcontractor's existing contracts. Our
certificate of incorporation allows us to redeem or require the prompt
disposition of all or any portion of the shares of our Common Stock owned by a
foreign stockholder beneficially owning 5% or more of the outstanding shares of
our Common Stock if either Department threatens termination of any of our
contracts as a result of such an ownership interest. These provisions may have
the additional effect of delaying, discouraging or preventing a change in
control and might affect the market price of our Common Stock.
FINANCIAL INFORMATION
For financial information about segments and geographic operations and
sales, see Note 13 to Notes to Consolidated Financial Statements. Foreign
operations and export sales represent less than 10% of the Company's 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 30,700 square feet in an office building in Elkridge, Maryland and
approximately 215,000 square feet of office, classroom and warehouse space at
various other locations throughout the United States, the United Kingdom,
Canada, Mexico, and Malaysia.
GSE is headquartered in an approximately 53,000 square feet facility in
Columbia, Maryland which also houses their support functions. In addition, GSE
leases office space domestically in Georgia and internationally in China, Japan,
and Sweden. GSE leases these facilities for terms ending between 2004 and 2008.
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 Downer's Grove, IL,
both of which are subject to mortgages. In September 2003, MXL entered into a
three-year lease for a 55,000 square foot storage and manufacturing facility in
Southbridge, Massachusetts for its newly purchased equipment from AOtec.
Five Star leases 236,000 square feet in New Jersey, 111,000 square feet
in Connecticut, 1,300 square feet of sales offices in New York and 800 square
feet in Maryland. Five Star's operating lease for the New Jersey facility
expires in March, 2007 and the operating lease for the Connecticut facility
expires in February, 2007.
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 ("MCI"), MCI's Systemhouse subsidiaries
("Systemhouse"), and Electronic Data Systems Corporation, as successor to
Systemhouse ("EDS"), 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 alleges that the defendants created a doctored budget to
conceal the poor performance of the United Kingdom operation of Learning
Technologies. The complaint also alleges that the defendants represented that
Learning Technologies would continue to receive new business from Systemhouse
even though the defendants knew that the sale of Systemhouse to EDS was imminent
and that such new business would cease after such sale. In February 2001, the
defendants filed answers denying liability. No counterclaims against the
plaintiffs have been asserted. Although discovery had not yet been completed,
defendants made a motion for summary judgment, which was submitted in April
2002. The motion was denied by the court due to the MCI bankruptcy described
below.
The defendants other than MCI then made an application to the court to
stay the fraud action until a later-commenced arbitration, alleging breach of
the acquisition agreement and of a separate agreement to refer business to
General Physics on a preferred provider basis, is concluded. In a decision dated
May 9, 2003, the court granted the motion and stayed the fraud action pending
the outcome of the arbitration. Limited discovery was conducted in connection
with the arbitration. The arbitration hearings are scheduled to begin on May 17,
2004 before JAMS, a private dispute resolution firm.
MCI filed for bankruptcy protection in July 2002. As a result, the
action was automatically stayed as to MCI. The Company and its subsidiary,
General Physics, both filed timely Proofs of Claim in the United States
Bankruptcy Court against MCI and WorldCom, Inc., among others. On or around
April 22, 2003, MCI served objections to these Proofs of Claim. On May 15, 2003,
the Company and General Physics submitted their opposition to the objections.
The Company and General Physics subsequently made a motion in Bankruptcy Court
to lift the automatic stay to permit the litigation to proceed against MCI. In
February 2004, the Bankruptcy Court granted the motion of the Company and
General Physics to the extent that they sought to have the stay lifted so that
the state court could rule on the merits of MCI's summary judgment motion. On
February 19, 2004, the Company and General Physics notified the state court of
the Bankruptcy Court's decision.
The Company will make a capital contribution to NPDC, which in turn
will transfer to MXL, the right to receive the first $5 million of any proceeds
(net of certain litigation expenses), and 50% of any proceeds (net of certain
litigation expenses) in excess of $15 million, received with respect to the
foregoing claims.
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 and operating results 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
2003 First $5.30 $4.72
Second 6.60 4.62
Third 7.44 5.90
Fourth 8.00 7.01
Quarter High Low
2002 First $4.00 $3.23
Second 5.75 3.50
Third 5.04 4.20
Fourth 5.10 3.60
The number of shareholders of record of the Common Stock as of March
15, 2004 was 1,370 and the closing price of the Common Stock on the New York
Stock Exchange on that date was $6.80.
The Company has not declared or paid any cash dividends on its Common
Stock during the two most recent fiscal years. The Company currently intends to
retain future earnings to finance the growth and development of its business. In
addition the Credit Agreement contains restrictive covenants, including a
prohibition on the payment of dividends. General Physics is currently restricted
from paying dividends or management fees to the Company in excess of $1,000,000
in any fiscal year.
Equity Compensation Plan Information as of December 31, 2003
(a) (b) (c)
- ------------------------------- ---------------------------- ---------------------------- --------------------------------------
- ------------------------------- ---------------------------- ---------------------------- --------------------------------------
Plan category Number of securities Weighted-average Number of securities remaining
to be issued upon exercise price of available for future issuance under
Equity compensation exercise of outstanding options, equity
plans not approved outstanding options, warrants and rights(i) compensation plans (excluding
by security holders warrants and rights (i) securities reflected in column(a))
(ii)
- ------------------------------- ---------------------------- ---------------------------- --------------------------------------
- ------------------------------- ---------------------------- ---------------------------- --------------------------------------
Non-Qualified
Stock Option Plan 2,552,397 $6.91 711,394
- ------------------------------- ---------------------------- ---------------------------- --------------------------------------
- ------------------------------- ---------------------------- ---------------------------- --------------------------------------
(a) (b) (c)
- ------------------------------- ---------------------------- ---------------------------- --------------------------------------
- ------------------------------- ---------------------------- ---------------------------- --------------------------------------
Plan category Number of securities Weighted-average Number of securities remaining
to be issued upon exercise price of available for future issuance under
Equity compensation exercise of outstanding outstanding options, equity
plans approved options, warrants and rights compensation plans
by security holders warrants and rights
- ------------------------------- ---------------------------- ---------------------------- --------------------------------------
- ------------------------------- ---------------------------- ---------------------------- --------------------------------------
GP Strategies Corporation's
2003 Incentive Stock Plan
0 2,000,000
- ------------------------------- ---------------------------- ---------------------------- --------------------------------------
(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 and
warrants to purchase 937,500 shares issued and sold to four Gabelli funds
in conjunction with the 6% Conditional Subordinated Notes due 2008.
(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 and the GP Strategies Corporation's 2003 Incentive Stock Plan,
see Note 12 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 $10,000, payable quarterly, in cash or
Common Stock of the Company, at their option. In addition, the directors receive
$1,500 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, 2003 2002 2001 2000 1999
- ------------------------------------------------------ ------------- -------------- ------------- ----------------- ---------------
- ------------------------------------------------------ ------------- -------------- ------------- ----------------- ---------------
Sales $168,678 $152,233 $186,611 $197,467 $224,810
Gross margin 23,442 17,465 22,577 19,789 26,379
Interest expense 3,625 2,770 4,733 5,616 4,922
(Loss) income before taxes and minority interests (7,420) (6,047) 1,570 (34,265) (21,293)
Net loss (8,276) (5,228) (945) (25,392) (22,205)
- ------------------------------------------------------ ------------- -------------- ------------- ----------------- ---------------
- ------------------------------------------------------ ------------- -------------- ------------- ----------------- ---------------
Loss per share:
Basic (.48) (.34) (.09) (2.04) (1.95)
Diluted (.48) (.34) (.09) (2.04) (1.95)
- ------------------------------------------------------ ------------- -------------- ------------- ----------------- ---------------
- ------------------------------------------------------ ------------- -------------- ------------- ----------------- ---------------
Balance Sheet Data
December 31, 2003 2002 2001 2000 1999
- ------------------------------------------------------ ------------- -------------- ------------- ----------------- ---------------
- ------------------------------------------------------ ------------- -------------- ------------- ----------------- ---------------
Cash and cash equivalents $ 4,416 $1,516 $ 1,705 $ 11,317 $4,068
Short-term borrowings 26,521 22,058 32,338 36,162 40,278
Working capital (deficit) 17,998 780 (2,750) 1,834 (146)
Total assets 188,323 144,905 160,824 212,578 197,118
Long-term debt 14,861 6,912 6,863 17,612 18,490
Stockholders' equity 92,812 92,982 95,943 112,518 99,982
- ------------------------------------------------------ ------------- -------------- ------------- ----------------- ---------------
- ------------------------------------------------------ ------------- -------------- ------------- ----------------- ---------------
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 operates in two segments: the Manufacturing & Process Segment
and the IT Segment. The Company has a third segment, Optical Plastics (MXL),
which manufactures molded and coated optical products. During the fourth quarter
of 2003 due to the Company's acquisition of additional shares of GSE, bringing
its ownership to 58%, GSE will be consolidated into the Company's consolidated
financial statements as the Company's new Simulation Segment effective October
23, 2003. Also during the fourth quarter of 2003 due to the Company's
acquisition of additional shares of Five Star, bringing its ownership to 54%,
Five Star will be consolidated into the Company's consolidated financial
statements as the Company's new Home Improvement Distribution Segment effective
October 8, 2003. The Company also holds investments in a publicly held company,
Millennium Cell, Inc. ("Millennium"), and in a private company, Valera
Pharmaceuticals (formerly Hydro Med Sciences) ("Valera"), and owns certain real
estate.
Spin-off of National Patent Development Corporation
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"). The spin-off, when effective,
will result in the Company being separated into two independent, publicly-held
companies. GP Strategies will own and operate the manufacturing & process
business and information technology business through its subsidiary, General
Physics Corporation, and retain the 58% interest in GSE. NPDC will own and
operate the optical plastics business through its subsidiary, MXL, and will own
the 54% interest in Five Star and certain other non-core assets.
On November 14, 2002, the Company filed a ruling request with the Internal
Revenue Service (the "IRS"), which enables the Company to do a tax-free spin-off
of certain non-core assets, including MXL and Five Star. 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 for the spin-off. On February 12, 2004 the Company filed documents with
the Securities and Exchange Commission relating to the proposed spin-off and the
Company anticipates that the spin-off will occur at the conclusion of the SEC
review process.
The spin-off is expected to result in several benefits to the Company and its
shareholders. By engaging in the spin-off, the Company would improve its access
to capital and significantly improve its borrowing capacity, thereby satisfying
its need to raise additional funds as well as achieving other corporate
benefits. Having two separate public companies will enable financial markets to
better evaluate each company more effectively, thereby enhancing stockholder
value over the long term for both companies and making the stock of each more
attractive as currency for future acquisitions. The spin-off will provide NPDC's
management with increased strategic flexibility and decision-making power to
realize significant growth opportunities. Having a separate management and
ownership structure for NPDC will provide equity based compensation that is more
closely related to the business in which its employees work.
Acquisitions
On October 23, 2003, the Company purchased from ManTech International
("ManTech") 3,426,699 shares of common stock of GSE and a GSE Subordinated Note
in the outstanding principal amount of $650,000, which the Company immediately
converted into 418,653 shares of common stock of GSE. This transaction (the "GSE
Acquisition") increased the Company's ownership of the common stock of GSE from
approximately 22% to approximately 58%, and as a result, effective October 23,
2003, GSE is consolidated in the Company's financial statements.
The consideration paid to ManTech by the Company consisted of a five-year 5%
note of $5,250,955 (the "ManTech Note") due in full in October 2008.
The GSE Acquisition was carried out in order to allow the Company to work
together with GSE to expand GSE's simulation technology to the power, military
and homeland defense markets that are currently served by General Physics. In
December 2003, John Moran, an executive of the Company with experience in both
the power industry and simulation technology, was elected Chief Executive
Officer of GSE by GSE's Board of Directors. In addition GSE restructured its
Power Simulation Business in order to reduce expenses and focus on business
development. Several operating personnel were terminated in the fourth quarter,
and GSE entered into a Management Services Agreement with the Company effective
January 1, 2004 pursuant to which GSE outsourced most of its corporate functions
to the Company and General Physics and terminated most of its corporate staff.
GSE recognized $256,000 of severance expense in connection with this
transaction. The Company agreed to provide corporate support services to GSE,
including accounting, finance, human resources, legal, network support and tax.
In addition, GSE will use General Physics' financial system. GSE will pay an
annual fee to General Physics of $685,000. The term of the agreement is one
year, subject to earlier termination only upon the mutual consent of the parties
to the agreement. The agreement can be renewed for successive one-year terms.
GSE reorganized, creating a dedicated worldwide business development
organization under the direction of one manager, and consolidating all of its
worldwide operations under another manager. To maintain its capability to
fulfill customer orders, GSE strengthened and expanded its relationships with
international partners to provide the necessary workforce augmentation.
On October 8, 2003, the Company converted $500,000 principal amount of the
$3,500,000 Senior Unsecured 8% Note due June 30, 2005, as amended, (the "Five
Star Note") of Five Star into 2,000,000 shares of Five Star common stock (the
"Five Star Acquisition"). The Five Star Acquisition increased the Company's
ownership in Five Star from approximately 48% to approximately 54% of the
outstanding Five Star common stock. As a result, effective October 8, 2003 Five
Star is consolidated in the Company's financial statements. In addition, the
Company continues to own the remaining $2.8 million principal amount of the Five
Star Note, the balance of which decreased in 2003 due to repayments of
$1,000,000 prior to the Five Star Acquisition, $500,000 due to the conversion of
principal to common stock in the Five Star Acquisition and a $200,000 repayment
subsequent to the Five Star Acquisition. The Five Star Acquisition occurred
because the Company believed that the common stock of Five Star represented an
attractive investment opportunity based on its valuation at that time.
Operating Highlights
In 2003, the Company had a loss before income taxes and minority interests of
$7,420,000 compared to a loss before income taxes of $6,047,000 in 2002. The
decrease in income before income taxes in 2003, as compared to 2002, was
primarily due to the following factors: (i) executive incentive bonuses of
$3,000,000, (ii) lower gains on sales of marketable securities by $1,421,000,
(iii) increased interest expense due to a write-off of deferred financing costs
of $860,000 and (iv) non-cash debt conversion expense of $622,000. These items
were partially offset by non-cash gain of $1,436,000 (due to a valuation
adjustment to the liability for the warrant to purchase Company Common Stock
issued in connection with the Gabelli Note and Warrant Purchase Agreement) (see
below), as well as increased operating profit from the consolidation of GSE and
Five Star, following the GSE and Five Star Acquisitions in the fourth quarter of
2003 of $358,000 and $333,000 respectively.
In 2003, the Company had a net gain of $846,000 on marketable securities,
primarily relating to the Company's sale of 783,000 shares of Millennium, which
were held as available-for-sale. The Company received gross proceeds of
$1,648,000 from these sales. In addition, the Company recorded a $150,000 credit
to compensation expense related to the GP Strategies Corporation Millennium
Cell, LLC Option Plan (the "Millennium Option Plan") offered to certain of its
employees, which is included as a credit to selling, general and administrative
expense, a $500,000 non-cash gain associated with an option to purchase Valera
Series B preferred stock and a non-cash gain of $1,436,000 due to a valuation
adjustment to the liability for the Gabelli warrant. These items were offset by
restructuring charges of $291,000, primarily attributable to adjustments to the
reserve for lease obligations, and $500,000 equity loss of Valera. The Company
incurred approximately $1,200,000 of legal fees relating to the Company's
ongoing litigation against MCI Communications, Systemhouse and Electronic Data
Systems Corporation, as successor to Systemhouse and incurred costs of
approximately $500,000 in connection with the proposed spin-off of NPDC.
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 Millennium Option Plan offered to
certain of its employees, which is included as a credit to selling, general and
administrative expense, 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 Valera and $1,210,000 to GSE. 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.
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 Millennium Option Plan, which is included as a credit to selling,
general and administrative expense. 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 Valera of
approximately $3,400,000 and a $320,000 write-down on investments, of which
$200,000 related to Five Star. 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.
Sales
Years ended December 31, (in thousands) 2003 2002 2001
- ------------------------------------------------------------ ---------------- -----------------
- ------------------------------------------------------------ ---------------- -----------------
Manufacturing & Process $127,762 $134,255 $164,361
Information Technology 6,213 7,982 11,061
Simulation 6,059
Optical Plastics 8,613 9,996 11,184
Home Improvement Distribution 20,031
Valera 5
- ------------------------------------------------------------ ---------------- -----------------
- ------------------------------------------------------------ ---------------- -----------------
$168,678 $152,233 $186,611
- ------------------------------------------------------------ ---------------- -----------------
The decreased sales of $6,493,000 by the Manufacturing & Process Segment in 2003
were primarily due to the following: o A decrease in engineering and related
services in connection with Liquefied Natural Gas projects. o Decreased services
provided to nuclear power utilities.
o A decline in attendance at General Physics Training Institute (GPTI)
open enrollment courses primarily due to reduced spending on training
within the automotive industry.
o A general decline in client spending (and budgets for spending) on
consulting and training services due to overall economic conditions
during the past year.
The decline in revenue was partially offset by an increase in revenue from the
United States Army for Domestic Preparedness services for the Department of
Homeland Security.
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 decreased sales of $1,769,000 in the IT Segment in 2003 was primarily due to
the Company focusing on higher margin projects and declining certain work with
lower margins. The decrease in sales of $3,079,000 in the IT Segment in 2002 was
primarily due to the continued downturn in the economy, which caused a reduction
in overall technology spending, including training and consulting.
In 2003, the Optical Plastics Segment (MXL) sales decreased by $1,383,000 or 14%
primarily as a result of a decline in revenue from the discontinuance of a
product line. In 2002 MXL sales decreased by $1,188,000 or 11% primarily due to
the overall downturn in the economy, which caused a reduction in orders from
MXL's most significant customers.
In the fourth quarter of 2003 the Company acquired additional shares of GSE and
Five Star, bringing its ownership to 58% and 54% as of October 23, 2003 and
October 8, 2003 respectively. As a result, sales of GSE and Five Star of
$6,059,000 and $20,031,000, respectively, are included in the Company's
consolidated financial statements. GSE comprises the Company's new Simulation
Segment and Five Star comprises the Company's new Home Improvement Distribution
Segment.
Gross margin
- ------------------------------------------------------- ----------------------- ---------------------- ----------------------
Years ended December 31, (in thousands) 2003 2002 2001
- ------------------------------------------------------- ------------ ---------- ----------- ---------- ------------ ---------
% % %
Manufacturing & Process $14,240 11.1 $15,158 11.3 $18,551 11.3
Information Technology 1,261 20.3 208 2.6 1,781 16.1
Simulation 1,594 27.3
Optical Plastics 1,863 21.6 2,099 21.0 2,816 25.2
Home Improvement Distribution 4,484 22.4
Valera (571)
- ------------------------------------------------------- ------------ ---------- ----------- ---------- ------------ ---------
- ------------------------------------------------------- ------------ ---------- ----------- ---------- ------------ ---------
$23,442 13.8 $17,465 11.5 $22,577 12.1
- ------------------------------------------------------- ------------ ---------- ----------- ---------- ------------ ---------
The Manufacturing & Process Segment gross margin of $14,240,000 in 2003
decreased by $918,000 when compared to 2002. This decrease was primarily due to
reduced sales. In addition, the Company experienced a reduction in higher
value-added services primarily provided to customers in the automotive division,
that typically generate higher gross margins. However, the gross margin
percentage for the Manufacturing & Process Segment remained relatively
consistent as a result of the Company's efforts to monitor and control costs.
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. Nonetheless, 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 IT Segment gross margin of $1,261,000 in 2003 increased by $1,053,000 when
compared to 2002. This increase was due to the Company concentrating on higher
gross margin opportunities and cost cutting initiatives. The decrease of
$1,573,000 in the IT Segment gross margin in 2002 compared to 2001 was the
result of the continued downturn in the economy, and primarily due to the
inability to reduce certain overhead costs in proportion to the decline in
sales.
In the fourth quarter of 2003 the Company acquired additional shares of GSE and
Five Star, bringing its ownership to 58% and 54% as of October 23, 2003 and
October 8, 2003 respectively. As a result, gross margins of GSE and Five Star of
$1,594,000 and $4,484,000, respectively, are included in the Company's
consolidated financial statements as part of the new Simulation and Home
Improvement Distribution Segments, respectively.
Selling, general, and administrative expenses
The increase in SG&A of $8,428,000 in 2003 as compared to 2002 was primarily
attributable to the following factors: (i) $1,228,000 and $4,151,000 of SG&A for
GSE and Five Star, respectively, being consolidated in the Company's financial
statements subsequent to the GSE and Five Star Acquisitions, (ii) executive
incentive bonuses of $3,000,000, (iii) a non-cash debt conversion expense of
$622,000, (iv) restructuring charges of $291,000 (as compared to a reversal of
restructuring charges of $368,000 in 2002) and (v) a decrease in the non-cash
credit to compensation expense of $1,061,000, relating to the Millennium Option
Plan. The increase was offset by a decrease in severance and related expense of
$2,089,000 and decrease in rental expense of approximately $540,000 due to the
relocation of the Company's corporate office from New York City to White Plains,
New York.
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 Valera of $2,841,000 due to the
deconsolidation of Valera at December 27, 2001 and goodwill and other intangible
asset amortization expense of $1,410,000, which is not recorded in 2002 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
Millennium Option Plan, due to fluctuations in the share price of Millennium.
Interest expense
Interest expense was $3,625,000 in 2003, $2,770,000 in 2002, and $4,733,000 in
2001. The increase in interest expense in 2003 is primarily due to the write off
of $860,000 of deferred financing costs as a result of the early termination of
the Company's prior credit agreement. This expense is included in interest
expense for year ended December 31, 2003.
The reduction in interest expense in 2002 was attributable to both a decrease in
the Company's outstanding indebtedness and a reduction in variable interest
rates.
Investment and other income (loss) and gains on marketable securities, net,
Years ended December 31, (in thousands) 2003 2002 2001
Investment and other income, (loss) $ (49) $(1,967) $176
Gains on marketable securities, net 846 2,267 4,294
The investment and other income (loss) for 2003 was primarily related to
interest income on loans receivable of $424,000, equity income of Five Star of
$190,000 (before its consolidation) and other income of $70,000, offset by an
equity loss of GSE of $733,000 (before its consolidation).
The investment and other income (loss) for 2002 was related to equity losses on
GSE of $1,210,000 and Valera of $1,401,000, and a write-off of an investment of
$153,000 offset by equity income on Five Star 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 write downs of
$320,000 based upon the Company's impairment assessment in the carrying value of
the Company's equity investments, a loss of $205,000 from equity investments and
other miscellaneous losses.
The gains on marketable securities, net in 2003 were primarily due to the
Company's disposal of shares of Millennium and Hemispherx Biopharma, Inc. The
gains on marketable securities, net in 2002 and 2001 were primarily due to the
Company's disposal of shares of Millennium.
Valuation adjustment of liability for warrants
Pursuant to a Note and Warrant Purchase Agreement dated August 8, 2003, the
Company issued and sold to four Gabelli funds $7,500,000 aggregate principal
amount of 6% Conditional Subordinated Notes due 2008 (the "Gabelli Notes") and
937,500 warrants ("GP Warrants"), each entitling the holder thereof to purchase
(subject to adjustment) one share of the Company's common stock.
The GP Warrants were accounted for as a liability of the Company until the
shares of the Company's common stock issuable on exercise of the GP Warrants
were registered, which occurred on December 8, 2003, at which time the liability
was reclassified to additional paid in capital at its then fair market value of
$953,000. The changes in the fair market value of the GP Warrants were marked to
market through December 8, 2003 with the adjustment shown as other income in the
consolidated statement of operations. The Company recognized a gain of
$1,436,000 in its December 8, 2003 valuation adjustment of the liability
relating to the GP Warrants using the Black-Scholes model.
Income taxes
Income tax benefit (expense) for 2003, 2002 and 2001 was $(886,000), 819,000 and
$(2,515,000) respectively.
For the year ended December 31, 2003, the current income tax provision of
$1,131,000 repr