ITEM 1. BUSINESS
(a) General Development of Business
GP Strategies Corporation (formerly National Patent Development Corporation), incorporated in Delaware in 1959, is a New York Stock Exchange listed company with established operating businesses and investments in several publicly traded companies. The Company's operations consist of three operating business segments: Physical Science, Distribution and Optical Plastics.
The Company has taken significant steps in the past year to transform itself from a holding company into an operating company focusing on providing training, technical and educational services through its wholly owned operating subsidiary General Physics Corporation ("General Physics"). In addition to the Company's General Physics operating subsidiary, the Company's two other operating subsidiaries consist of Five Star Group, Inc., a wholesale distributor of home decorating, hardware and finishing products and MXL Industries, Inc., which manufactures and distributes coated and molded plastic products.
The Company's recent name change on March 5, 1998 is consistent with the Company's strategy of attempting to increase sales and profitability within the commercial training group of General Physics through internal growth and acquisitions.
(b) Financial Information About Industry Segments
Certain financial information about business segments (classes of similar products or services) is included in Note 16 of Notes to Consolidated Financial Statements.
(c) Narrative Description of Business
PHYSICAL SCIENCE GROUP
GENERAL PHYSICS CORPORATION
Organization and Operations
General Physics, with approximately 1500 employees in 40 offices primarily located in the United States, provides performance improvement services to Fortune 500 companies in the manufacturing and process industries, electric power utilities, and other commercial and governmental customers.
General Physics believes it is a global leader in performance improvement, with over three decades of experience in providing systematic training to optimize work force performance. Since 1966, General Physics has provided clients with the products and services they need to successfully integrate their people, processes and technology - the elements most critical to the successful realization of any organization's goal.
General Physics' services are very broad and include customized curriculum, instruction and development in operating new equipment and facilities efficiently and safely, properly maintaining existing equipment, and instruction in engineering, math, English, leadership training and team building. At manufacturing and process facilities, multinational corporations, power plants, military installations and government research centers in the U.S. and abroad, General Physics provides training, engineering, and technical services designed to assist work forces in meeting operational challenges, cost management objectives and performance goals.
General Physics has three operating business units that serve diverse customers. These units are Workforce Development and Training, Applied Technology, and Facility and Process Technology. These units provide in-depth industry knowledge with expertise in training and customized curriculum design and development as well as on-site and interactive employee instruction. The Workforce Development and Training Group focuses on training for Fortune 500 and other commercial customers in the industrial and manufacturing sectors. The Applied Technology Group focuses on the development of new technologies to meet the training, management and operational challenges to commercial and governmental clients. The Facility and Process Technology Group provides engineering and technical support services to industrial companies, power plant owners, including electric utilities, governmental clients as well as clients in the aerospace industry.
General Physics was incorporated in 1966 to provide technical consulting services in the field of nuclear science and engineering services to nuclear power companies and government agencies. General Physics expanded its operations in the late 1960's to provide, among other things, training and technical support services to the commercial nuclear power industry. General Physics expanded its markets even further in the late 1980's to provide training and technical support services to United States Government nuclear weapons production and waste processing facilities, and environmental services to governmental and commercial clients.
In 1994, General Physics further expanded it range of capabilities, as well as its governmental clients, by acquiring the design engineering, seismic engineering, systems engineering, materials management and safety analysis businesses of Cygna Energy Services, and by acquiring the management and technical training and engineering consulting businesses of GPS Technologies, Inc.
On January 23, 1997, stockholders of each of the Company and General Physics voted to approve the merger of a wholly-owned subsidiary of the Company with General Physics pursuant to which General Physics became a wholly-owned subsidiary of the Company (the "Merger"). The Merger was completed on January 24, 1997. Under the terms of the Merger Agreement, holders of General Physics Common Stock received .60 shares of the Company's Common Stock for each share of General Physics common stock. The Company issued an aggregate of 3,028,574 shares of its Common Stock valued at $25,228,000 in the transaction.
In March 1997, General Physics was awarded a contract by the U.S. Navy's Fleet and Industrial Supply Center Norfolk, Detachment Washington, to provide naval aviation training development and support services for Naval Air Systems Command. The anticipated revenues of the contract over its initial one-year term and four option years, if all option years are exercised, are estimated to be approximately $32,000,000.
In March 1997, General Physics was awarded a contract by Westinghouse Savannah River Company ("WSRC") to provide environmental restoration services at the DOE's Savannah River Site. The contract is one of three awarded to successful contractors who will competitively bid for work to be awarded in the future under separate delivery orders. General Physics assists WSRC in developing and implementing environmental studies, programs and projects that address the Resource Conservation and Recovery Act (RCRA) and Comprehensive Environmental Response, Compensation and Liability Act (CERCLA) needs at the Savannah River Site. The total value of all tasks to be awarded to the three contractors over the five-year term of the contract is approximately $60 million at the rate of approximately $12 million per year. However, the actual value of the contract to General Physics will depend upon the value of individual delivery orders awarded to General Physics. During 1997, General Physics was awarded delivery orders totaling approximately $600,000 under the contract.
In mid-1997, General Physics launched an "enterprise resource planning" initiative to provide change management, documentation, end-user training and maintenance engineering support related to Enterprise-Wide Software Applications, such as those sold by the Baan Company, SAP and Oracle Corp. General Physics is a Baan Education Alliance Program member.
In July 1997, General Physics entered into a multi-year training services agreement with a wholly-owned subsidiary of Fluor Daniel, Facility and Plant Services, Inc., under which General Physics will develop and implement the technical training component of comprehensive workforce preparation solutions designed by Facility and Plant Services. Under the Agreement, General Physics will be the exclusive provider of technical training solutions to Facility and Plant Services' customers. The value of tasks awarded to General Physics in 1997 under the Agreement was approximately $6 million.
During 1997, General Physics formed an alliance with Primedia (formerly Westcott Communications) to develop and deliver workplace training via satellite broadcasts to subscribers. The Primedia venture, called Workplace Training Network ("WTN"), began broadcasts in January 1998.
Effective January 1, 1998, General Physics acquired substantially all of the assets and operations of United Training Services, Inc. ("UTS"). UTS provides training and consulting services to the U.S. automotive industry and to other commercial customers, including Ford Motor Company, Chrysler Corporation, IBM Corporation and MBNA.
General Physics' performance is significantly affected by the timing of performance on contracts. Results of operations are not seasonal, since contracts are performed throughout the year.
While General Physics continues to provide services to the U.S. Government and the commercial nuclear power industry, it has focused its marketing resources on expanding management and technical training services to manufacturing and process industries, and specialized engineering services to federal agencies and process industries. Since 1995, General Physics has experienced growth in these areas and anticipates future growth to come from these areas.
Customers
General Physics currently provides services to more than 525 customers. Significant customers include major automotive manufacturers, commercial nuclear utilities, the Department of the Navy, the Department of the Air Force, the Department of the Army, major defense and DOE contractors, and other large, multinational companies. Revenue from the United States Government accounted for approximately 43% of General Physics' revenue for the year ended December 31, 1997. However, such 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 1997, except for General Motors Corporation, which accounted for approximately 14% of General Physics revenue, no other customer accounted for more than 10% of General Physics' revenue.
Workforce Development and Training Group
The Workforce Development and Training Group focuses on training and human performance improvement needs of Fortune 500 and other commercial companies. The Workforce Development and Training Group provides workforce training and other related services to customers in the industrial and manufacturing market sectors. This Group analyzes the human, organizational and technical issues confronting its customers and recommends programs to improve performance.
Fortune 500 and Other Commercial Customers
Fortune 500 and other commercial customers represent a wide range of industries with diverse technical and geographic needs. These industries include automotive, utility, forest products, steel, food and beverage, oil and gas, pharmaceutical and others.
General Physics anticipates that the need for its services with Fortune 500 and other commercial customers will continue to grow. However, there can be no assurance that such need will continue to grow or that such companies will select General Physics over its competitors to provide such services.
Automotive Services
General Physics is a full-service training provider for the automotive industry. Since 1987, General Physics has participated in a strategic business partnership with the General Motors ("GM") Corporate Organization and Employee Development Staff, which is now a part of General Motors University. Each year several thousand GM employees attend courses conducted by General Physics. Additionally, training and consulting services are provided on a project basis to many divisions of GM, including GM Overseas operations in China, Europe, Southeast Asia, South America and Central America. General Physics also provides training and consulting services to Chrysler Corporation and Ford Motor Company as well as many of the automotive supplier companies.
Industrial Training Services
General Physics develops and provides customized training programs to the metals, forest products, food and beverage, and petrochemical industries. These services focus on continuous improvement in the maintenance and operations aspects of plants and facilities. General Physics supports several customers by providing complete process line or facility start-up services. Customers include Georgia Pacific Corp., Anheuser-Busch, Inc., Mobil Oil Company, USX Corporation and Aramco Services Company.
Manufacturing Services
General Physics offers training and technical services to manufacturing concerns. General Physics frequently supports the introduction of new work practices associated with lean manufacturing, self-directed work teams and engineering. General Physics' combination of technical skills and work practices training helps meet the needs of a diverse customer base, including Ford Electronics, Inland Steel, USX Corporation and Bell and Howell - Postal Systems, Inc.
Energy Services
General Physics furnishes a wide variety of training, engineering, technical and management support services to the commercial nuclear power industry, specializing in services which improve plant operation and maintenance and ultimately increase plant availability. General Physics has provided services at one time or another to virtually all of the commercial nuclear power plants in the United States. Services provided include development of training programs and materials; conduct of training, development and upgrade of operations and maintenance procedures; development and implementation of preventative maintenance programs; plant configuration management; training simulator maintenance and modification; staff augmentation; and computer based training (CBT) development and implementation. Major customers include General Electric Company, Public Service Electric & Gas Company, Entergy Operations, Inc. and Commonwealth Edison Company.
General Physics also provides services designed to improve the operations of conventional utility power plants, gas turbine combined cycle and cogeneration plants, waste-to-energy plants, and industrial facilities. These services include plant operations and maintenance documentation, simulator training programs, computer based training (CBT) development and implementation, plant startup engineering, maintenance management systems, and plant operations and maintenance training. Major customers include Entergy Operations, Inc., Cogentrix and Metropolitan Washington Airport Authority.
International Operations
General Physics maintains international operations in Kuala Lumpur, Beijing, Mexico City and London offering substantially the same services as are offered in the United States. Customers include electric utilities, independent power producers, automobile manufacturers and parts suppliers, pulp and paper companies, steel manufacturers and major petroleum refiners.
Enterprise Solutions
General Physics' Enterprise Solutions team provides Enterprise Resource Planning in the form of change management, documentation, end-user training and maintenance engineering support related to Enterprise Wide Software Applications. The Enterprise Solutions team includes support for products developed by the Baan Company, Oracle Corp. and SAP. General Physics is a Baan Education Alliance Program member.
Facility and Process Technology Group
General Physics' Facility and Process Technology Group provides engineering and technical support services to clients to help them cost-effectively realize their goals, whether involving new designs, modification of existing facilities and systems, regulatory compliance, or improved operations and maintenance. The Facility and Process Technology Group brings experience, knowledge, skill and judgment to the U.S. Government, aerospace research and test facilities, numerous utilities, and the process industry.
The Facility and Process Technology Group's commercial customers include clients on the Fortune 500 directory of industrial companies; power plants owners, including electric utilities (nuclear and fossil fuel); and independent power producers. Governmental clients include NASA, DOE, Department of Transportation, Air Force, Army and Navy research, development, test and evaluation laboratories and centers.
Specializing in technologies, processes, and equipment which are critical to these markets, the Facility and Process Technology Group's services are designed to provide customers with improved performance as well as regulatory compliance by increasing efficiency, reliability, and availability of plants and facilities. Service offerings range from computer aided design to construction management to environmental engineering to an online monitoring system that continuously checks the efficiency of operations.
General Physics' Facility and Process Technology Group, with over 20 years of applied engineering and management experience in helping clients increase efficiency and reduce risk, is consistently recognized for exceptional performance. General Physics' clients call upon the Facility and Process Technology Group to address their global competitive challenge, especially when that challenge requires significant capital investment in plants and facilities, and presents a potential risk to the workforce and the environment.
Process Industry Services
General Physics has expanded its services to the process industry which includes pharmaceutical, chemical, and petrochemical clients. Contract work includes regulatory compliance, process equipment, and performance and maintenance engineering. This work complements technical training and other related services provided by General Physics. Many clients request confidentiality, however others include Lyondell-Citgo, PPG, BFGoodrich, Witco, Pharmacia-Upjohn, and Merck, Inc.
Energy Services
General Physics continues to support the electric power generation business with systems engineering, regulatory support, performance engineering, and plant technical services. Assistance to nuclear utilities with licensing and related support was expanded through General Physics' alliance with GE Power Systems Group. General Physics' performance engineering services have enabled electric power generation clients to reduce operational costs, important for the deregulation ongoing in this industry. A major client is Entergy Operations, Inc., where General Physics has provided software and engineering support for plant efficiency improvement.
Aerospace Facilities
An outgrowth of General Physics' services to NASA and the Air Force has been work in support of commercial aerospace vehicle development and test facilities. General Physics provides design, analysis, inspection and test services for systems and equipment used for rocket engine development and testing. Major customers include Rocketdyne, now a part of Boeing, and Aerojet Corporation. These and other companies are looking to capture an expected growth market for space launches.
U.S. Government Services
General Physics supports major government research, development, and test centers across the country with facility design and modification, engineering and inspection, environmental services, and systems engineering. Larger contracts include environmental services for U.S. Army, Aberdeen Proving Ground; technical support services, such as new rocket propulsion facility and system design, and program support for USAF, Research Laboratory; engineering and inspection of wind tunnels and pressure systems at USAF Arnold Engineering Development Center and NASA's Lewis Research Center; engineering design, technical documentation development, and environmental services for the DOE, Savannah River Site; and systems engineering and computer science for new combat systems for The Johns Hopkins University, Applied Physics Laboratory.
Applied Technology Group
The Applied Technology Group includes General Physics Federal Systems, Inc., a wholly-owned subsidiary of General Physics. The Applied Technology Group provides services in three defined market sectors: DOD, Other Government and Information Technology ("IT"). The DOD market sector represents nearly 80% of this Group's operating revenues, while the Other Government and IT sectors are approximately equally represented in the remaining 20% of operating revenues.
General Physics provides a wide range of services to its government clients. These services fall into four "core competencies": training material development and delivery using the Instructional System Development (ISD) model, configuration management and the full range of Integrated Logistics Support (ILS) disciplines, Information Technology services, and multimedia development. Within each of these four areas, the Group has met rigorous qualification and certification requirements mandated by government agencies.
Major Naval command customers include NAVSEA, Naval Undersea Warfare Center, and Naval Surface Warfare Center. Additionally, this Group provides services to other agencies of the Federal Government, including the Department of the Army, Department of Energy, Defense Finance Accounting Service ("DFAS"), Department of Treasury, and Department of Justice.
Applied Technology and Undersea Warfare
General Physics provides engineering services to United States Navy-related activities, particularly the Naval Undersea Warfare Center, which is headquartered in Newport, Rhode Island, with detachments throughout the United States. General Physics has considerable computerized Information Systems Management expertise and is noted for its Bar Coded Inventory Management, Local Area Network and Wide Area Network design and administration capabilities and the development of Electronic Interactive technical manuals.
Systems Command Services
General Physics specializes in providing program and financial management services for Department of Defense ("DOD") commands in support of major weapon systems acquisitions, including providing the United States Navy with training/trainer products and services, including Submarine Operational Readiness Assessment and Training. General Physics also maintains full-service broadcast quality video production and computer-generated animation facilities and has developed more than 500 instructional hours of computer-based training, linear videotape and interactive video disc/CDROM productions.
Government Services
General Physics provides financial, specialty software and office automation training through contracts with EDS. The training is customer tailored for specific end-users, including the Department of Defense-DFAS and the Department of Justice-Immigration and Naturalization Service. General Physics provides specialized anti-submarine warfare technical services and training, including development of computer-based training used at the Naval Aviation Warfare Operator Training School.
U.S. Army Services
General Physics operates the training center in Edgewood, Maryland supporting the United States Army's chemical weapons demilitarization program. General Physics provides training for personnel who will operate and maintain demilitarization plants at seven locations across the country. General Physics has trained chemical demilitarization specialists from Russia as part of an effort to introduce U.S. technology and approaches for Russian chemical munitions demilitarization programs. In addition, General Physics is a subcontractor to Westinghouse at the Anniston Army Depot, with responsibility for training and operations engineering in support of Westinghouse's contract to destroy chemical weapons.
DOE Services
At the DOE's Savannah River site, General Physics provides professional services in such areas as training program design, development and accreditation assistance, technical support and quality assurance and various other operations support services. General Physics also has technical services contracts at many of the DOE's research laboratories, including Princeton Plasma Physics Laboratory and Brookhaven National Laboratory.
Contracts
General Physics is currently performing under approximately 1020 contracts, providing charges on a time-and-materials, a fixed-price or a cost reimbursable basis. General Physics' subcontracts with the United States Government have predominantly been cost reimbursable contracts and fixed-price contracts. General Physics is required to comply with the Federal Acquisition Regulations and the Government Cost Accounting Standards with respect to services provided to the United States Government and agencies thereof. These Regulations and Standards govern the procurement of goods and services by the United States Government and the nature of costs that can be charged with respect to such goods and services. All such contracts are subject to audit by a designated government audit agency, which in most cases is the Defense Contract Audit Agency (the "DCAA"). The DCAA has audited General Physics' contracts through 1995 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, 1997:
Year ended December 31, 1997
Time and 37% Materials......................... Fixed-Price....................... Cost Reimbursable...................... 21
Total 100% ==== Revenue...........................
General Physics' time-and-materials contracts generally provide for billing of services based upon the hourly labor rates of the employees performing the services and the actual expenses incurred, each multiplied by a specified mark-up factor, up to a certain aggregate dollar amount. General Physics' time-and-materials contracts include certain contracts under which General Physics has agreed to provide training, engineering and technical services at fixed hourly rates (subject to adjustment for labor costs). Time-and-materials contracts generally permit the client to control the amount, type and timing of the services to be performed by General Physics and to terminate the contract on written notice. If a contract is terminated, General Physics typically is paid for the services provided by it through the date of termination. While General Physics' clients often modify the nature and timing of services to be performed, no significant terminations of General Physics' time-and-materials contracts have occurred.
General Physics' fixed-price contracts provide for General Physics to perform specified services for a fixed price. General Physics bears the risk that increased or unexpected costs required to perform the specified services may reduce General Physics' profit or cause General Physics to sustain a loss, but General Physics has the opportunity to derive increased profit if the costs required to perform the specified services are less than expected. Fixed-price contracts generally permit the client to terminate the contract on written notice; in the event of such termination, General Physics would typically, at a minimum, be paid a proportionate amount of the fixed price. No significant terminations of General Physics' fixed-price contracts have occurred over the last three years.
General Physics' cost reimbursable contracts provide for General Physics to be reimbursed for its actual costs plus a specified fee. These contracts also are generally subject to termination at the convenience of the client. If a contract is terminated, General Physics typically would be reimbursed for its costs to the date of termination, plus the cost of an orderly termination, and paid a proportionate amount of the fee. No significant terminations of General Physics' cost reimbursable contracts have occurred.
Competition
The principal competitive factors in General Physics' markets are the experience and capability of technical personnel, performance, reputation and price. Services such as those provided by General Physics' Workforce Development and Training Group and by its Facility and Process Technology Group are performed by many of the customers themselves, architectural and engineering firms that have expanded their range of services beyond design and construction activities, major suppliers of equipment and independent service companies such as General Physics. A significant factor determining the business available to General Physics and its competitors is the ability of customers to use their own personnel to perform services provided by General Physics and its competitors. Competition has increased as architectural and engineering firms have devoted additional efforts to these areas as their work in other areas has diminished. Another factor affecting the competitive environment is the existence of small, specialty companies located at or near particular customer facilities and dedicated solely to servicing the technical needs of those particular facilities.
Competition in the industries served by the Applied Technology Group is strong and comes from large defense contractors and other service corporations, many of which have significantly greater resources than General Physics, as well as from small and disadvantaged businesses, which receive certain preferential treatment in the awarding of government contracts.
Competition in the environmental services industry is intense and comes from large corporations, such as architect-engineering firms, that have expanded their businesses to include environmental services, specialized service firms that work exclusively in the environmental arena and professional service firms such as General Physics.
Personnel
General Physics' principal resource is its technical personnel. General Physics' future success will depend to a significant degree upon its continued ability to hire, train, integrate into its operations and retain professionals. General Physics competes for new professionals with clients, as well as with its other competitors. In the United States, competition for qualified personnel has intensified. As of March 1, 1998, General Physics employed approximately 1,500 persons. Many of General Physics' employees perform multiple functions depending upon changes in the mix of demand for the services provided by General Physics.
General Physics' personnel have backgrounds in mechanical, electrical, chemical, civil, nuclear and human factors engineering; in technical education and training; in power plant design, operation and maintenance; in United States Navy weapons systems design, operation and maintenance; in instructional technology and computer-based training; in enterprise-wide resource planning software training; and in toxicology, industrial hygiene, health physics, chemistry, microbiology, ecology and mathematical modeling.
The United States Navy, the United States Army, the DOE and various other United States Government agencies generally require that contractor employees have appropriate security clearances. Thus, recruiting and retaining employees having appropriate security clearance to work at government facilities is important to the continued growth of General Physics.
None of General Physics' employees is represented by a labor union. General Physics generally has not entered into employment agreements with its employees, but has entered into employment agreements with certain officers and other employees. General Physics believes its relations with its employees are good.
Marketing
General Physics has more than fifty employees dedicated solely to marketing efforts through Corporate Sales and Market Sector development programs. Corporate level marketing is directed at long-term strategic business development with specific customers and with international business. General Physics markets its services to existing customers primarily through its technical personnel, using senior management to aid in the planning of marketing strategies and evaluating current and long-term marketing opportunities and business directions. General Physics has 40 offices and 57 sites, located in 30 states and offices in Kuala Lumpur, Beijing, Mexico City and London, from which it markets its services. Courses and workshops given by General Physics personnel to the public from time to time serve an important marketing function. General Physics also sends a variety of sales literature to current and prospective clients whose names are maintained in a computerized database which is updated periodically.
The goal of General Physics' marketing process is to obtain awards of new contracts and expansion of existing contracts. By staying in contact with clients and looking for opportunities to provide further services, General Physics sometimes obtains contract awards or extensions without having to undergo competitive bidding. In other cases, clients request General Physics to bid competitively. In both cases, General Physics submits formal proposals to the client for evaluation. The period between submission of a proposal to final award can range from 30 days or less (generally for non-competitive, short-term contracts), to a year or more (generally for large, competitive multi-year contracts with governmental clients).
General Physics maintains a site on the World Wide Web located at http://www.genphysics.com/.
Backlog
The following table sets forth the appropriate amounts of General Physics' backlog for services under signed contracts and subcontracts as of December 31, 1997, with information for each of General Physics' three business groups:
Year ended December 31, 1997 (in thousands)
Workforce Development and Training Group......... $47,736 Facility and Process Technology Group............ 18,747 Applied Technology Group......................... 16,291 --------
Total $82,774 ======= Backlog..........................................
General Physics anticipates that most of its backlog as of December 31, 1997 will be recognized as revenue during fiscal year 1998; however, the rate at which services are performed under certain contracts, and thus the rate at which backlog will be recognized, is at the discretion of the client, and most contracts are, as mentioned above, subject to termination by the client upon written notice.
Insurance
By providing services to the commercial electric power industry and to the United States Armed Forces, General Physics is engaged in industries in which there are substantial risks of potential liability. As of January 1, 1996, General Physics' insurance was combined with GP Strategies Corporation's insurance in a consolidated insurance program (including general liability coverage). However, certain liabilities associated with General Physics' business are not covered by these insurance policies. In addition, such liabilities may not be covered by Federal legislation providing a liability protection system for licensees of the Nuclear Regulatory Commission (typically utilities) for certain damages caused by nuclear incidents, since General Physics is not such a licensee. Finally, few of General Physics' contracts with clients contain a waiver or limitation of liability. Thus, to the extent a risk is neither insured nor indemnified against nor limited by an enforceable waiver or limitation of liability, General Physics could be materially adversely affected by a nuclear incident. Certain other environmental risks, such as liability under the Comprehensive Environmental Response, Compensation and Liability Act, as amended (Superfund), also may not be covered by General Physics' insurance.
Environmental Statutes and Regulations
General Physics provides environmental engineering services to its clients, including the development and management of site environmental remediation plans. Due to the increasingly strict requirements imposed by Federal, state and local environmental laws and regulations (including, without limitation, the Clean Water Act, the Clean Air Act, Superfund, the Resource Conservation and Recovery Act and the Occupational Safety and Health Act), General Physics' opportunities to provide such services may increase.
General Physics' activities in connection with providing environmental engineering services may also subject General Physics itself to such Federal, state and local environmental laws and regulations. Although General Physics subcontracts most remediation construction activities and all removal and offsite disposal and treatment of hazardous substances, General Physics could still be held liable for clean-up or violations of such laws as an "operator" or otherwise under such Federal, state and local environmental laws and regulations with respect to a site where it has provided environmental engineering and support services. General Physics believes, however, that it is in compliance in all material respects with such environmental laws and regulations.
Properties
General Physics' principal executive offices are located at 6700 Alexander Bell Drive, Suite 400, Columbia, Maryland 21046, and its telephone number is (410) 290-2300. General Physics leases approximately 32,470 square feet of an office building at that address, and approximately 220,000 square feet of office space at various other locations throughout the United States, and in China, Great Britain, Mexico and Malaysia. General Physics believes that its facilities are adequate to carry on its business as currently conducted.
DISTRIBUTION GROUP
FIVE STAR GROUP, INC.
The Distribution Group, incorporated under the name Five Star Group, Inc. ("Five Star"), is engaged in the wholesale distribution of home decorating, hardware and finishing products. Five Star has two strategically located warehouses and office locations, with approximately 360,000 square feet of space in New Jersey and Connecticut, which enables Five Star to service the market from Maine to Virginia.
Five Star believes it is a leading distributor in the U.S. of paint sundry items, interior and exterior stains, brushes, rollers, caulking compounds and hardware products and offers products from leading manufacturers such as Cabot, Dap, 3-M, Stanley, Kwikset, Minwax and Rustoleum. Five Star distributes its products to retail dealers which include lumber yards, "do-it-yourself" centers, hardware stores and paint suppliers principally in the northeast region. It carries an extensive inventory of the products it distributes and provides delivery, generally, within 24 to 72 hours from the placement of an order.
The primary working capital investment for Five Star is inventory. Inventory levels will vary throughout the year reflecting the seasonal nature of the business. Five Star's strongest sales are typically in March through October because of strong seasonal consumer demand for its products. As a result, inventory levels tend to peak in the spring and reach their lowest levels in late fall.
The largest customer accounted for approximately 9% of Five Star's sales in 1997 and its 10 largest customers accounted for approximately 17% of such sales. No other customer accounted for in excess of 10% of Five Star's sales in 1997. All such customers are unaffiliated companies and neither Five Star nor the Company has a long-term contractual relationship with any of them.
Competition within the industry is intense. There are much larger national companies commonly associated with national franchises such as Ace and True Serv as well as smaller regional distributors, all of whom offer similar products and services. Additionally, 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, and consistent basis. In the future, Five Star will attempt to acquire complementary distributors and to expand the distribution of its line of private-label products sold under the "Five Star" name.
OPTICAL PLASTICS GROUP
MXL INDUSTRIES, INC.
The Optical Plastics Group consisting of MXL Industries, Inc. ("MXL") is engaged in the manufacture of molded and coated optical products, such as shields and face masks and non-optical plastic products. MXL is a state-of-the-art injection molder and precision coater of large optical products such as shields and face masks and non-optical plastics. 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. Through its Woodland Mold and Tool Division, MXL also designs and engineers state-of-the-art injection molding tools as well as providing a commodity custom molding shop.
As the market for optical injection molding, tooling and coating is focused, 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 enable it to increase its sales in the future and to expand into related products.
MXL uses only polycarbonate resin to manufacture shields, face masks and lenses for over 55 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.
MXL is dependent upon one client which accounts for approximately 35% of MXL's total sales and MXL's 10 largest customers accounted for approximately 72% of its total sales.
MXL's sales and marketing effort concentrates on industry trade shows. In addition, the Company employs one marketing and sales executive and one sales engineer. In the future, MXL will attempt to acquire complementary businesses.
HYDRO MED SCIENCES
Hydro Med Sciences ("HMS"), a division of the Company, is a drug delivery company focused on the development of proprietary, implantable, controlled release drug delivery products based upon its unique group of Hydron polymer biomaterials. HMS's lead product in development is a patented, subcutaneous retrievable hydrogel reservoir drug delivery device (the "Hydrogel Implant") designed to allow reliable, sustained release of a broad spectrum of therapeutic compounds continuously, at a constant, predetermined rate over at least a 12-month period. HMS is presently compiling data from clinical studies for this drug delivery system for the treatment of prostate cancer. The lead application of the Hydrogel Implant delivers the luteinizing hormone releasing hormone analog, histrelin, for the treatment of prostate cancer for a 12-month period. HMS's sales currently comprise less than 1% of the Company's revenues.
THE COMPANY'S INVESTMENTS
The Company has investments in the stock of certain publicly traded companies described below.
GTS Duratek, Inc.
GTS Duratek, Inc. ("Duratek") is an environmental technology and services firm that uses its proprietary vitrification processes to convert radioactive and hazardous waste into glass for long-term storage and disposal. As of December 31, 1997, the Company owned approximately 12% of the outstanding shares of Common Stock of Duratek.
Interferon Sciences, Inc.
Interferon Sciences, Inc. ("ISI") is a biopharmaceutical company engaged in the manufacture and sale of pharmaceutical products based on its highly purified, natural source multispecies alpha interferon. ISI's ALFERON(R) N Injection (Interferon Alfa-n3) product has been approved by the United States Food and Drug Administration for the treatment of certain types of genital warts and is being studied for potential use in the treatment of HIV and hepatitis C. As of December 31, 1997, the Company owned approximately 12% of the outstanding shares of common stock of ISI.
GSE Systems, Inc.
GSE Systems, Inc. ("GSE") is a global provider of integrated enterprise software and information solutions to the energy, process and manufacturing industries. As of December 31, 1997, the Company controlled approximately 22% of the outstanding shares of common stock of GSE.
American Drug Company
American Drug Company ("ADC") was organized in 1993 to initiate marketing activities for American generic pharmaceutical and medical products in Russia and the Commonwealth of Independent States ("CIS"). In 1997, ADC made the decision to concentrate on the sale of medical equipment and consulting services to Western companies doing business in Russia and Eastern Europe from offices in Prague and Moscow. As of December 31, 1997 the Company owned 54% of the outstanding shares of ADC.
Employees
At December 31, 1997, the Company and its subsidiaries employed 1,863 persons, including 19 in the Company's headquarters, 1,468 in the Physical Science Group, 273 in the Distribution Group, (116 of which are union employees) and 76 in the Optical Plastics Group. Of these, 5 persons were engaged in research and development. The Company considers its employee relations to be satisfactory.
Patents and Licenses
The operating businesses of the Company are not materially dependent upon patents, or patent and know-how licenses. The know-how and expertise gained with respect to the manufacture and sale of its products, acquired as a result of its license and ownership of patents, are of greater importance to its future ability to manufacture and sell such products than are the patents themselves.
(d) Financial Information about the Foreign and Domestic operations and Export Sales.
The Company has no material Foreign Operations or Export Sales.
ITEM 2.
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 New York City principal executive offices. The Company's Physical Sciences Group leases approximately 32,470 square feet of an office building in Columbia, Maryland and approximately 226,900 square feet of office space at various other locations throughout the United States and China, Great Britain, Mexico and Malaysia.
The Distribution Group leases 250,000 square feet in New Jersey and 110,000 square feet in Connecticut.
The Optical Plastics Group owns 33,000 square feet of office space in Lancaster, PA and 12,594 square feet of office space in Westmont, IL.
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.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any legal proceedings the outcome of which are believed by management to have a reasonable likelihood of having any material adverse effect upon the financial condition of the Company.
ITEM 4.
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.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock, $.01 par value, was traded on the American Stock Exchange, Inc. ("AMEX") and the Pacific Stock Exchange, Inc. ("Pacific") until March 27, 1998. On March 27, 1998 the Company's Common Stock commenced trading on the New York Stock Exchange. The following tables present 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
1997 First 9.00 6.00 Second 8.44 5.50 Third 13.00 7.75 Fourth 15.50 11.75
1996 First 9.875 8.125 Second 11.625 8.375 Third 10.125 8.125 Fourth 9.125 7.063
The number of shareholders of record of the Common Stock as of March 2, 1998 was 3,354. On March 2, 1998, the closing price of the Common Stock on the American Stock Exchange was $12.875.
GP STRATEGIES CORPORATION AND SUBSIDIARIES
GP STRATEGIES CORPORATION AND SUBSIDIARIES
GP STRATEGIES CORPORATION AND SUBSIDIARIES
GP STRATEGIES CORPORATION AND SUBSIDIARIES
GP STRATEGIES CORPORATION AND SUBSIDIARIES
GP STRATEGIES CORPORATION AND SUBSIDIARIES
GP STRATEGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Description of business and summary of significant accounting policies
Description of business. GP Strategies Corporation, formerly National Patent Development Corporation (the "Company") has three operating business segments: Physical Science, Distribution and Optical Plastics. In addition, the Company owns approximately 54% of the outstanding shares of common stock of the American Drug Company (ADC) (See Note 5). The Company also has an approximately 12% investment in Interferon Sciences, Inc. (ISI) (See Note 4), a 12.3% investment in GTS Duratek, Inc. (Duratek) (See Note 3) and controls approximately 22% of GSE Systems, Inc. (GSES) (See Note 6). The Company's Physical Science Group, through its wholly-owned subsidiary, General Physics Corporation (General Physics), (See Note 2) provides performance improvement services to Fortune 500 companies, manufacturing and process industries, electric power utilities and other commercial and governmental customers. The Company's Distribution Group, through its wholly-owned subsidiary, the Five Star Group, Inc. (Five Star), is engaged in the wholesale distribution of home decorating, hardware and finishing products. The Company's Optical Plastics Group, through its wholly owned subsidiary MXL Industries, Inc. (MXL), manufactures molded and coated optical products, such as shields and face masks and non-optical plastic products.
Principles of consolidation and investments. The consolidated financial statements include the operations of GP Strategies Corporation and its majority-owned subsidiaries. Investments in 20% - 50% owned companies are accounted for on the equity basis. All significant intercompany balances and transactions have been eliminated in consolidation.
Statements of cash flows. For purposes of the statements of cash flows, the Company considers all highly liquid instruments with original maturities of three months or less from purchase date to be cash equivalents.
Marketable securities. Marketable securities at December 31, 1997 and 1996 consist of U.S. corporate equity securities. The Company classifies its marketable equity securities as trading, available-for-sale and long-term. Long-term investments, in which the Company has less than a 20% interest, have not been reclassed to available-for-sale securities due to restrictions on the amount the Company is able to sell within a one year period. These long-term investments are carried at cost.
GP STRATEGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. Description of business and summary of significant accounting policies (Continued)
The Company's trading securities, which are included in Marketable securities on the consolidated balance sheet, are expected to be sold within one year. Available-for-sale securities and long-term investments are included in Investments and advances on the consolidated balance sheet. The Company records trading and available-for-sale securities at their fair value. Trading securities are held principally for the purpose of selling them in the near term. Unrealized holding gains and losses on trading securities are included in earnings. Unrealized holding gains and losses on available-for-sale securities are excluded from earnings and are reported as a separate component of stockholders' equity, net of tax, until realized.
Inventories. Inventories are valued at the lower of cost or market, principally using the first-in, first-out (FIFO) method.
Foreign currency transactions. The Company's Swiss Bonds (see Note 11) are subject to currency fluctuations and the Company has hedged portions of such debt from time to time, but not within the three year period ended December 31, 1997. During the years ended December 31, 1997, 1996 and 1995, the Company realized foreign currency transaction gains (losses) of $131,000, $340,000 and $(1,066,000), respectively. These amounts are included in Investment and other income, net. The Company's 54% owned subsidiary, the American Drug Company (See Note 5) conducts its business primarily in U.S. dollars.
Contract revenue and cost recognition. The Company provides services under time-and-materials, cost-plus-fixed-fee and fixed-price contracts. Revenue is recognized as costs are incurred and includes estimated fees at predetermined rates. Differences between recorded costs and estimated earnings and final billings are recognized in the period in which they become determinable. Costs and estimated earnings in excess of billings on uncompleted contracts are recorded as a current asset. Billings in excess of costs and estimated earnings on uncompleted contracts are recorded as a current liability. Generally, contracts provide for the billing of costs incurred and estimated earnings on a monthly basis. Retainages, amounts subject to future negotiation and amounts which are expected to be collected after one year are not material for any period.
Property, plant and equipment. Property, plant and equipment are carried at cost. Major additions and improvements are capitalized while maintenance and repairs which do not extend the lives of the assets are expensed currently. Gain or loss on the disposition of property, plant and equipment is recognized in operations when realized.
1. Description of business and summary of significant accounting policies (Continued)
Depreciation. The Company provides for depreciation of property, plant and equipment primarily on a straight-line basis over the following estimated useful lives:
CLASS OF ASSETS USEFUL LIFE
Buildings and improvements 5 to 40 years Machinery, equipment and furniture and fixtures 3 to 7 years Leasehold improvements Shorter of asset life or term of lease
Intangible assets. The excess of cost over the fair value of net assets of businesses acquired is recorded as goodwill and is amortized on a straight-line basis generally over periods ranging from 5 to 40 years. The Company capitalizes costs incurred to obtain and maintain patents and licenses. Patent costs are amortized over the lesser of 17 years or the remaining lives of the patents, and license costs over the lives of the licenses. The Company also capitalizes costs incurred to obtain long-term debt financing. Such costs are amortized on an effective yield basis over the terms of the related debt and such amortization is classified as interest expense in the Consolidated Statements of Operations.
The periods of amortization of goodwill are evaluated at least annually to determine whether events and circumstances warrant revised estimates of useful lives. This evaluation considers, among other factors, expected cash flows and profits of the businesses to which the goodwill relates. Based upon the periodic analysis, goodwill is written down or written off if it appears that future profits or cash flows will be insufficient to recover such goodwill.
Treasury stock. Treasury stock is recorded at cost. Reissuances of treasury stock are valued at market value at the date of reissuance. The cost of the treasury stock is relieved from the treasury stock account and the difference between the cost and market value is recorded within the equity accounts, as appropriate.
1. Description of business and summary of significant accounting policies (Continued)
Stock option plan. Prior to January 1, 1996, the Company accounted for its stock option plan in accordance with the provisions of Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. As such, compensation expense would be recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. On January 1, 1996, the Company adopted SFAS No. 123, Accounting for Stock-Based Compensation, which permits entities to recognize as expense over the vesting period the fair value of all stock-based awards on the date of grant. Alternatively, SFAS No. 123 also allows entities to continue to apply the provisions of APB Opinion No. 25 and provide pro forma net income and pro forma earnings per share disclosures for employee stock option grants made in 1995 and future years as if the fair-value-based method defined in SFAS No. 123 had been applied. The Company has elected to continue to apply the provisions of APB Opinion No. 25 and provide the pro forma disclosure provisions of SFAS No. 123.
Sales of stock by a subsidiary. The Company records in the Consolidated Statements of Operations gain or loss realized when a subsidiary sells its shares at an offering price which differs from the Company's carrying amount per share of such subsidiary's stock.
Income taxes. Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
Income (loss) per share. Basic earnings per share is based upon the weighted average number of common shares outstanding, including Class B common stock during the period. Diluted earnings per share is based upon the weighted average number of common shares outstanding during the period assuming the issuance of common stock for all dilutive potential common shares outstanding.
Use of estimates. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.
1. Description of business and summary of significant accounting policies (Continued)
Concentrations of credit risk. Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash investments and accounts receivable. The Company places its cash investments with high quality financial institutions and limits the amount of credit exposure to any one institution. With respect to accounts receivable, approximately 24% are related to United States government contracts, and the remainder are dispersed among various industries, customers and geographic regions. In addition, the Company has investments in various equity securities, including GTS Duratek, Inc., Interferon Sciences, Inc. and GSE Systems, Inc. (See Notes 3, 4 and 6).
The Company adopted the provisions of SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, on January 1, 1996. This Statement requires that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the assets. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceed the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. Adoption of this Statement did not have a material impact on the Company's financial position, results of operations, or liquidity.
2. General Physics Corporation
On January 24, 1997, the Company acquired the remaining 5,047,623 shares (48% of the outstanding shares) of General Physics that it did not already own, in exchange for .60 shares of GP Strategies common stock for each share of General Physics. The transaction has been accounted for as a purchase of a minority interest. The Company issued an aggregate of 3,028,574 shares of its common stock, valued at $25,228,000 in the transaction. In addition, the Company paid $4,533,000 in cash and had accrued $1,515,000 additional liabilities in relation to the purchase. As a result of this transaction, the Company purchased for a total of $31,143,000 the remaining 48% of the outstanding shares of General Physics and recorded $21,069,000 of goodwill, which is being amortized over approximately 30 years.
2. General Physics Corporation (Continued)
The following information shows on a pro-forma basis, the results of operations for the Company for the year ended December 31, 1996, as if the above transaction had occurred as of January 1, 1996 (in thousands): (unaudited) Sales $203,800 Income before discontinued operation and extraordinary item 13,751 Net income 13,751 Basic earnings per share 1.33 Diluted earnings per share 1.32
The following selected balance sheet information shows on a pro-forma basis, the financial position of the Company as if the above transaction had occurred on December 31, 1996 (in thousands): (unaudited) Cash, cash equivalents and marketable securities $ 24,334 Working capital 36,836 Intangible assets, net 54,200 Total assets 194,158 Stockholders' equity 118,972
The above pro-forma information is not necessarily indicative of the actual financial position or results of operations that would have been achieved if the transaction had occurred as of or for the period indicated, or of future results that may be achieved.
General Physics provides performance improvement services to Fortune 500 companies, manufacturing and process industries, electric power utilities and other commercial and governmental customers.
3. GTS Duratek, Inc.
On January 24, 1995, the Company sold 1,666,667 shares of common stock of GTS Duratek, Inc. (Duratek) at a price of $3.00 per share to The Carlyle Group (Carlyle) in connection with a $16 million financing by Duratek with Carlyle, a Washington, D.C. based private merchant bank. In addition, the Company granted Carlyle an option, which was exercised in December 1995, to purchase up to an additional 500,000 shares of the Company's Duratek common stock over the next year at $3.75 per share. The Company realized a gain of $3,768,000 during 1995 on sales of Duratek common stock, primarily in these two transactions.
3. GTS Duratek, Inc. (Continued)
In April 1996, the Company sold 1,000,000 shares of its Duratek common stock, received proceeds of $17,700,000 and recognized a gain of $12,200,000.
As a result of the above transactions, the Company accounted for its investment in Duratek on the equity basis from January 24, 1995 through the first quarter of 1996. The Company's share of Duratek's income included in Investment and other income, net is $31,000 in 1995. Commencing in April 1996, the Company accounts for its investment in Duratek as a combination of marketable securities, available-for-sale securities and securities held for long-term investment.
Duratek is an integrated environmental services and technology firm with proprietary waste processing systems applicable to radioactive, hazardous, mixed and other wastes.
At December 31, 1997, the Company owned 1,514,250 shares of Duratek, or 12.3% of the outstanding shares of common stock.
Information relating to the Company's investment in Duratek is as follows (in thousands):
1997 1996 - ------------------------------------------------------------------------------- Included in Marketable securities: Number of shares 100 250 Value $ 1,350 $ 3,250 Included in Investments and advances: Number of shares 500 225 Available-for-sale equity securities, at market $ 6,750 $ 2,925 Number of shares 914 1,345 Securities held for long-term investment, at cost $ 1,487 $ 2,188 Total number of shares owned 1,514 1,820 Market value of shares $20,442 $23,660 - -------------------------------------------------------------------------------
4. Interferon Sciences, Inc.
Interferon Sciences, Inc. (ISI) is approximately 12% owned by the Company. It is engaged in the manufacture and sale of ALFERON N Injection, ISI's first product commercially approved by the FDA for the treatment of recurring and refractory external genital warts, and the research and development of other alpha interferon based products for the treatment of viral diseases, cancers and diseases of the immune system.
In May 1996, the Company realized a $1,938,000 gain on issuance of stock by this affiliate as a result of the issuance of 2,000,000 shares of common stock by ISI at $8.00 per share. Effective in the third quarter of 1996, the Company accounted for its investment in ISI as a combination of long-term investments carried at cost and as long-term available-for-sale equity securities carried at market value. In 1996, the share of ISI's loss included in Investment and other income, net was $1,464,000.
In 1995, the Company realized a $2,775,000 gain on issuance of stock by this affiliate, primarily as the result of the issuance of 3,000,000 shares of Common Stock by ISI at $4.80 per share in August and September 1995.
All shares and per share information of ISI have been restated to reflect the one for four reverse stock split of ISI effective on March 21, 1997.
Information relating to the Company's investment in ISI is as follows (in thousands):
1997 1996 - ------------------------------------------------------------------------------- Included in Investments and advances: Number of shares 608 490 Available-for-sale equity securities, at market $ 5,284 $ 3,251 Number of shares 1,246 1,364 Securities held for long-term investment, at cost $ 2,841 $ 3,109 Total carrying amount $ 8,125 $ 6,360 Total number of shares owned 1,854 1,854 Market value of shares $16,107 $ 12,285 - -------------------------------------------------------------------------------
5. American Drug Company
The Company owns approximately 54% of the outstanding common stock of American Drug Company (ADC), which was organized in 1993 as a wholly-owned subsidiary of the Company to initiate marketing activities for American generic pharmaceutical and medical pharmaceuticals in Russia and the Commonwealth of Independent States (the "CIS"). ADC's subsidiary, NPD Trading (USA), Inc. provides consulting services to Western businesses in Russia and Eastern Europe. ADC sells American-made generic pharmaceutical and health care products under its own label in Russia and the CIS.
At the end of 1997, the Company made the decision to concentrate on the marketing and sales of medical equipment and related products, such as hospital furniture and laboratory supplies and to withdraw from the generic pharmaceutical and over-the-counter (OTC) healthcare product business because of significantly declining sales of generic products. Sales activity with respect to generic drugs will be undertaken solely through a Russian company.
In August 1994, pursuant to a Transfer and Distribution Agreement, the Company distributed 46% of its interest in ADC to the Company's shareholders. In addition, ADC issued warrants to the Company's shareholders to purchase its stock for a period of two years, which were extended for an additional two years, subject to cancellation under certain circumstances.
In July 1996, ADC issued convertible notes in the principal amount of $1,000,000 in a private offering. In connection with these notes, the Company issued warrants to purchase 82,306 shares of its common stock provided that the warrants may only be exercised utilizing the Notes (See Note 11(g)).
6. GSE Systems, Inc.
In March 1994, General Physics and a subsidiary of the Company contributed assets to a newly formed, multi party joint venture, GSE Systems, Inc. (GSES). GSES designs, develops and delivers business and technology solutions by applying process control, data acquisition, simulation, and business software, systems and services to the energy, process and manufacturing industries worldwide. On August 1, 1995, GSES completed an initial public offering of 1,725,000 shares (including an over-allotment option) of its common stock at $14 per share. As a result of the offering, the Company recognized a gain on issuance of stock by an affiliate of approximately $3,137,000 and at December 31, 1997, controls approximately 22% of GSES. The Company accounts for its investment in GSES on the equity basis.
Information relating to the Company's investment in GSES is as follows (in thousands):
1997 1996 - ---------------------------------------------------------------------------- Included in Investments and advances: Underlying assets $ 3,750 $ 5,484 Goodwill 4,238 4,384 Total carrying amount 7,988 9,868 Number of shares controlled 1,125 1,125 Market value of shares $ 5,906 $10,406 Equity in income (loss) included in Investment and other income (expenses), net (1,880) 924 - ----------------------------------------------------------------------------
Condensed financial information for GSES is as follows as of December 31, 1997 and 1996 and for the years then ended (in thousands):
1997 1996 - ---------------------------------------------------------------------------- Current assets $31,714 $37,876 Non current assets 16,610 13,130 Current liabilities 30,031 23,733 Non current liabilities 2,369 2,580 Stockholders' equity 15,924 24,693 Revenue 79,711 96,033 Gross profit 21,385 32,354 Net income (loss) (8,703) 4,143 - ----------------------------------------------------------------------------
7. Inventories
Inventories, consisting of material, labor and overhead, are classified as follows (in thousands):
December 31, 1997 1996 - ---------------------------------------------------------------------------- Raw materials $ 619 $ 793 Work in process 252 210 Finished goods 23,971 22,190 - ---------------------------------------------------------------------------- $ 24,842 $ 23,193 - ----------------------------------------------------------------------------
8. Property, plant and equipment
Property, plant and equipment consists of the following (in thousands):
December 31, 1997 1996 - ---------------------------------------------------------------------------- Land $ 173 $ 173 Buildings and improvements 1,374 1,374 Machinery and equipment 12,824 11,656 Furniture and fixtures 18,120 15,745 Leasehold improvements 7,268 7,097 - ---------------------------------------------------------------------------- 39,759 36,045 Accumulated depreciation and amortization (30,027) (26,767) - ---------------------------------------------------------------------------- $ 9,732 $ 9,278 - ----------------------------------------------------------------------------
9. Short-term borrowings
Short-term borrowings are as follows (in thousands):
December 31, 1997 1996 - --------------------------------------------------------------------------- Line of Credit Agreement (a) $ 16,894 $15,581 Revolving Credit Agreement (b) 7,051 4,700 - --------------------------------------------------------------------------- $ 23,945 $ 20,281 - ---------------------------------------------------------------------------
9. Short-term borrowings (Continued)
(a) In April 1993, Five Star Group, Inc. (Five Star) and MXL Industries, Inc. (MXL) each entered into a revolving credit and term loan agreement (the "Five Star Loan Agreement" and "MXL Loan Agreement"), which was amended on October 23, 1995 and September 30, 1996. The September 30, 1996 amendment extended the Agreements to September 30, 1997. The Five Star Loan Agreement provided for a $20,000,000 revolving credit facility (the "Five Star Revolving Credit Facility"). The Five Star Revolving Credit Facility was a committed facility which allowed Five Star to borrow amounts up to 50% of Eligible Inventory (as defined) and 80% of Eligible Receivables (as defined) at an interest rate of 1% in excess of the prime rate.
On August 18, 1997, the Company's wholly-owned subsidiary, Five Star entered into a three year Loan Agreement with a syndicate of three banks. The Loan Agreement replaces the previous Five Star Loan Agreement. The Loan Agreement provides for a $22,000,000 revolving credit facility, which allows Five Star to borrow based upon a formula of up to 50% of eligible inventory and 80% of eligible accounts receivables, as defined. The Loan Agreement bears interest at 2.25% over LIBOR for up to $11,000,000 of the loan (at the Company's option) and the prime rate of interest plus .625% for the remaining balance. At December 31, 1997, there was $16,894,000 outstanding under the Loan Agreement, and an additional $818,000 was available to be borrowed.
The Five Star Loan Agreement is secured by all of the assets of Five Star and 339,844 shares of common stock of ISI, which was contributed to Five Star in connection with the forgoing transactions.
The amended MXL Loan Agreement provided for a $4,500,000 term loan, which was adjusted to a balance of $3,960,000 at November 1, 1995 (the "MXL Term Loan"). The MXL Revolving Credit Facility was terminated by the September 30, 1996 amendment. As of December 31, 1996, the balance of the MXL Term Loan was $2,722,000 (see Note 11).
9. Short-term borrowings (Continued)
(b) On April 7, 1995, the Company and General Physics entered into a three year $20,000,000 secured revolving credit agreement with a commercial bank, terminating a previous credit agreement. Borrowings under the credit agreement bare interest at the prime rate or 1.75% over LIBOR whichever rate was elected by General Physics. At December 31, 1996, $4,700,000 was borrowed under the credit agreement.
On March 26, 1997, the Company and its wholly-owned subsidiaries, General Physics and MXL Industries, Inc. (MXL), entered into a three year secured $25,000,000 Revolving Credit Agreement, with a syndicate of three banks. The Agreement replaces the MXL Loan Agreement, the General Physics Revolving Credit Agreement and the Company's Term Loan Agreement. The Agreement bears interest at the prime rate or 1.75% over LIBOR. The borrowing formula is based upon eligible accounts receivable of General Physics and MXL, as well as various corporate assets. The Agreement contains certain covenants which, among other things, limit the amount and nature of certain expenditures by General Physics and MXL, and require the maintenance of certain financial ratios. At December 31, 1997, the Company is in violation of its fixed asset additions covenant. The Company has received a waiver for this violation. Under the Agreement, the full $25,000,000 of the Revolving Credit Agreement would be available to the Company and/or General Physics and/or MXL. At December 31,1997, the amount outstanding was approximately $7,051,000 and an additional $17,949,000 was available to be borrowed.
10. Accounts payable and accrued expenses
Accounts payable and accrued expenses are comprised of the following (in thousands):
December 31, 1997 1996 - -------------------------------------------------------------------------- Accounts payable $ 15,133 $ 12,893 Payroll and related costs 5,063 5,012 Interest 309 211 Other 5,010 4,763 - -------------------------------------------------------------------------- $ 25,515 $ 22,879 - --------------------------------------------------------------------------
11. Long-term debt
Long-term debt is comprised of the following (in thousands):
December 31, 1997 1996 - ------------------------------------------------------------------------------ 8% Swiss Bonds, due 2000 (a) $ 2,158 $ 2,189 5% Convertible Bonds due 1999 (b) 1,786 1,755 12% Subordinated Debentures due 1997 (c) 6,732 Term loan with banks (Note 9(a)) 2,722 Senior Subordinated Debentures (d) 842 811 Notes payable in connection with settlement of litigation (e) 273 Term loan with bank (f) 4,000 7% Convertible Notes (g) 1,000 1,000 Equipment lease obligations (*) 802 634 - ------------------------------------------------------------------------------ 6,588 20,116 Less current maturities 342 9,309 - ------------------------------------------------------------------------------ $ 6,246 $ 10,807 - ------------------------------------------------------------------------------
(*) Secured by assets held under capital lease obligations.
(a) In June 1995, the Company exchanged for various Swiss debt obligations an aggregate of SFr. 3,604,000 of 8% Swiss Bonds, due June 28, 2000 (the "8% Bonds"). The 8% Bonds were valued at $2,340,000, at the then exchange rate (after an original issue discount of 25%). The principal and interest on the 8% Bonds are payable either in cash or in shares of common stock of the Company, at the option of the Company.
(b) As a result of an exchange offer on July 12, 1993, the Company issued $3,340,080 principal amount of 5% Bonds which are convertible into shares of the Company's Common Stock. The Company recorded an original issue discount on the 5% Bonds of 10%. At December 31, 1997, $1,879,000 of the 5% Bonds were outstanding and convertible into 107,989 of the Company's Common Stock.
11. Long-term debt (Continued)
(c) During the third quarter of 1987, the Company issued $12,500,000 of Subordinated Debentures (Debentures) which matured in 1997. On September 30, 1997, the Company repaid in full the remaining outstanding Debentures.
(d) In August 1994, General Physics, as a result of the acquisition of substantially all the assets of SGLG issued $15 million of 6% Senior Subordinated Debentures, which have a carrying value of $12,032,000, net of a debt discount of $2,968,000. The debentures are unsecured and require payments of interest only on a quarterly basis through June 30, 1999, quarterly principal installments of $525,000 plus interest through June 30, 2004 and the balance of $4.5 million on June 30, 2004. The debentures are subordinated to borrowings under the line of credit agreement. At December 31, 1997, the carrying value of the debentures held by the Company was $11,190,000, which was eliminated in consolidation, and the remaining $842,000 of debentures were held by the public.
(e) Under the terms of an 1987 settlement agreement, the Company agreed to a series of payments in either cash or Common Stock of the Company. The final payment was made in January 1997.
(f) On March 26, 1997, the Company entered into a new Revolving Credit Agreement, replacing the Term Loan Agreement (see Note 9(b)).
(g) In July 1996, ADC issued convertible notes (the "Notes") in the principal amount of $1,000,000 in a private offering (the "Offering"). ADC received net proceeds of $950,000 from the Offering. The Notes mature on June 30, 2001, bear interest at the rate of 7% per annum, and are convertible into shares of common stock of ADC at a conversion price of $.25 per share. In connection with the Offering, the Company issued warrants to purchase an aggregate of 82,306 shares of the Company's common stock, exercisable at a price of $12.15 per share, provided that the warrants may only be exercised utilizing the Notes. In the event that the closing price of the common stock of ADC is at least $1.00 per share for at least 20 consecutive trading days, the Notes shall be subject to redemption at the election of ADC, at a redemption price of 100% of the principal amount called for redemption, together with accrued interest.
The Company and ADC have agreed that (i) if the Notes are used to exercise the warrants prior to a default on the Notes, the Company will receive from ADC, in exchange for the Notes shares of ADC's common stock at a price equal to 60% of its then current market value, and (ii) if the Notes are used to exercise the warrants after a default on the Notes, the Company will receive from ADC, in exchange for the Notes shares of ADC's common stock at a price equal to 25% of its then current market value.
11. Long-term debt (Continued)
Aggregate annual maturities of long-term debt outstanding at December 31, 1997 for each of the next five years are as follows (in thousands):
1998 $ 342 1999 2,086 2000 2,426 2001 1,261 2002 263
12. Employee benefit plans
(a) Effective December 31, 1991, the Plan participants would no longer accrue benefits under its Defined Benefit Pension Plan, but became eligible to participate in the Company's Savings Plan. During 1997, the Company announced its intention to terminate the Defined Benefit Pension Plan (the Plan). The Plan was terminated effective October 31, 1996, and settled in 1997. The termination was a "standard termination" as defined by the Pension Benefit Guaranty Corporation (the "PBGC"). In order to terminate the Plan in a standard termination, Plan assets must be sufficient to provide all benefit obligations under the Plan.
The Company provided additional funding to the Plan such that Plan assets were sufficient to satisfy all benefit liabilities under the Plan, with respect to each participant and each beneficiary of a deceased participant. This was accomplished by the purchase of irrevocable annuity contracts from an insurer, or by an alternative form of distribution provided for under the Plan.
The Company paid $1,500,000 to the Plan Sponsor in July 1997 to fully fund the Plan to satisfy its benefit obligations.
The pension expense amounted to $278,000, $400,000 and $26,000 for 1997, 1996, 1995, respectively.
12. Employee benefit plans (Continued)
The following table sets forth the funded status of the plan and the amount recognized in the Company's Consolidated Financial Statements (in thousands):
December 31, 1996 1995 - ------------------------------------------------------------------------------ Actuarial present value of benefit plan obligations: Accumulated benefit obligation (including vested benefits of $5,549 and $5,365) $ (5,549) $(5,890) - ------------------------------------------------------------------------------ Projected benefit obligation for service rendered to date $ (5,549) $(5,890) Plan assets at fair value 4,482 4,353 - ------------------------------------------------------------------------------ Projected benefit obligation in excess of plan assets (1,067) (1,537) Unrecognized net loss from past experience different from that assumed 911 Minimum pension liability (911) Accrued pension cost included in accounts payable and accrued expenses in the consolidated balance sheets $ (1,067) $(1,537) - ------------------------------------------------------------------------------ The net periodic pension expense is as follows: Service cost-benefits earned $ $ Interest cost on projected benefit obligations 376 420 Actual return on plan assets (320) (424) Net amortization and deferral and other 344 30 - ------------------------------------------------------------------------------ Net periodic pension expense $ 400 $ 26 - ------------------------------------------------------------------------------
The Company's assumptions used as of December 31, 1996 and 1995 in determining the pension cost and pension cost liability shown above were as follows:
1996 1995 ----------------------- Percent
Discount rate 7.25 7.25 Long-term rate of return on assets 10.00 10.00
(b) Effective March 1, 1992, the Company adopted the 1992 401(k) Savings Plan (the Savings Plan).
12. Employee benefit plans (Continued)
The Company's Savings Plan is available to employees who have completed one year of service.
The Savings Plan permits pre-tax contributions to the Savings Plan by participants pursuant to Section 401(k) of the Internal Revenue Code of 2% to 6% of base compensation. The Company matches 40% of the participants' eligible contributions based on a formula set forth in the Savings Plan. Participants are fully vested in their contributions and may withdraw such contributions at time of employment termination, or at age 59 1/2 or earlier in the event of financial hardship. Amounts otherwise are paid at retirement or in the event of death or disability. Employer contributions vest at a rate of 20% per year.
The Savings Plan is administered by a trustee appointed by the Board of Directors of the Company and all contributions are held by the trustee and invested at the participants' direction in various mutual funds. The Company's expense associated with the Savings Plan was $201,000, $246,000 and $223,000 in 1997, 1996 and 1995, respectively.
(c) General Physics maintains a Profit Investment Plan (the Plan) for employees who have completed ninety days of service with General Physics. The Plan permits pre-tax contributions to the Plan by participants pursuant to Section 401(k) of the Internal Revenue Code of 1% to 14% of base compensation. General Physics matches participants' contributions up to a specific percentage of the first 7% of base compensation contributed for employees who have completed one year of service with General Physics and may make additional matching contributions. On April 20, 1995, the Company and General Physics agreed to exchange shares of General Physics' common stock or other consideration, for shares of the common stock of the Company upon terms which would permit General Physics to match participants' contributions in shares of the Company's common stock up to 57% of monthly employee salary deferral contributions. Previously, General Physics had made contributions of its own common stock to the Plan equal to approximately 50% of monthly employee salary deferral contributions. During 1996 and 1995, the exchange included 245,126 and 176,171 shares, respectively, of General Physics' common stock and 116,591 and 98,251 shares, respectively of the common stock of the Company. On January 24, 1997, the Company acquired the remaining 48% of General Physics, and contributed 122,290 shares of the Company's common stock directly to the Plan during 1997. All contributions are held by a trustee and invested at the participant's direction in various mutual funds. Participants are fully vested in their own contributions and may withdraw such contributions at age 59 1/2 or earlier in the event of financial hardship. Amounts will otherwise be paid at retirement or in the event of death or disability. Employer contributions vest at a rate of 20% per year. The Company made matching contributions to the Plan for employees of the Company of approximately $1,121,000, $1,065,000 and $1,097,000 for the years ended December 31, 1997, 1996 and 1995, respectively.
13. Income taxes
For U.S. Federal income tax purposes, a parent corporation with an 80% or greater equity interest in its subsidiary may file a consolidated tax return. Accordingly, the Company and its greater than 80% owned subsidiaries will file a consolidated Federal income tax return for the year ended December 31, 1997. The subsidiaries in which the Company has an equity ownership between 50% and 80%, are consolidated for financial reporting purposes, but file separate U.S. Federal income tax returns for the year ended December 31, 1997.
The components of pretax income (loss) are as follows (in thousands):
Years ended December 31, 1997 1996 1995 - ------------------------------------------------------------------------------- Continuing operations $ 2,730 $ 11,244 $ 5,819 Discontinued operation (2,941)
The Company does not have any material foreign operations.
The components of income tax expense (benefit) from continuing operations are as follows (in thousands):
Years ended December 31, 1997 1996 1995 - ------------------------------------------------------------------------------- Current State and local $ 1,200 $ 315 $ 221 Federal tax expense 135 1,409 37 - ------------------------------------------------------------------------------- 1,335 1,724 258 - ------------------------------------------------------------------------------- Deferred State and local 11 39 206 Federal tax expense (benefit) (2,039) (1,899) 1,323 - ------------------------------------------------------------------------------- (2,028) (1,860) 1,529 - ------------------------------------------------------------------------------- $ (693) $(136) $ 1,787 - -------------------------------------------------------------------------------
The deferred provision excludes activity in the net deferred tax assets relating to tax on appreciation in securities available-for-sale, which is recorded to stockholders' equity in the approximate amounts of $1,400,000 and $1,300,000 for the years ended December 31, 1997 and 1996, respectively.
13. Income taxes (Continued)
The difference between the provision for income taxes computed at the statutory rate and the reported amount of tax expense attributable to consolidated earnings from continuing operations is as follows:
December 31, 1997 1996 1995 - ------------------------------------------------------------------------------ Federal income tax rate 35.0% 35.0% 35.0% State and local taxes net of Federal benefit 28.8 2.0 4.8 Items not deductible - primarily amortization of goodwill 25.4 4.8 14.0 Net operating loss utilization (82.6) (25.0) Valuation allowance adjustment (32.9) (19.0) (22.6) General Physics acquisition of SGLG 33.0 Other .9 1.0 (.5) - ------------------------------------------------------------------------------ Effective tax rate (25.4)% (1.2%) 30.7% - ------------------------------------------------------------------------------
In 1995, the Company recorded an income tax expense of $1,787,000. The current income tax provision of $258,000 reflected above, represents the estimated taxes payable by the Company for the year ended December 31, 1995. The deferred income tax provision of $1,529,000 represents the deferred taxes of General Physics, the Company's then 51% owned subsidiary.
In 1996, the Company recorded an income tax benefit of $136,000. The current income tax provision of $1,724,000 reflected above, represents the estimated taxes payable by General Physics, the Company's then 52% owned subsidiary. The deferred income tax benefit of $1,860,000 results from utilization of net operating loss carryovers and a reduction in the valuation allowance, among other factors. The decrease of $2,673,000 in the valuation allowance in 1996 was attributable in part to the utilization of the Company's net operating loss carryforwards, and to the Company's expectation of generating sufficient taxable income that will allow for the realization of a portion of its deferred tax assets.
In 1997, the Company recorded an income tax benefit of $693,000. The current income tax provision of $1,335,000 reflected above, represents the estimated taxes payable by the Company for the year ended December 31, 1997. The deferred income tax benefit of $2,028,000 results primarily from the utilization of net operating loss carryovers and a reduction in the valuation allowance. The decrease of $3,153,000 in the valuation allowance in 1997 was attributable in part to the utilization of the Company's net operating loss carryforwards, and to the Company's expectation of generating sufficient taxable income that will allow for the realization of a portion of its deferred tax assets.
13. Income taxes (Continued)
As of December 31, 1997, the Company has approximately $13,657,000 of net operating loss carryovers consisting of $9,644,000 with respect to net operating losses generated from the Company's consolidated tax return and $4,013,000 generated by ADC as a separate tax filer for Federal income tax return purposes. These carryovers expire in the years 2005 through 2012. In addition, the Company has approximately $3,800,000 of available credit carryovers of which approximately $2,800,000 expire in the years 1998 through 2003, and approximately $1,100,000 of which may be carried over indefinitely. The tax effects of temporary differences between the financial reporting and tax bases of assets and liabilities that are included in the net deferred tax assets are summarized as follows:
December 31, 1997 1996 - ----------------------------------------------------------------------------- Deferred tax assets: Accounts receivable, principally due to allowance for doubtful accounts $ 827 $ 663 Inventory 127 165 Lawsuit settlements 117 Accrued expenses 505 495 Net operating loss carryforwards 5,259 7,037 Tax credit carryforwards 3,808 3,627 - ----------------------------------------------------------------------------- Deferred tax assets 10,526 12,104 - ----------------------------------------------------------------------------- Deferred tax liabilities: Property and equipment, principally due to differences in depreciation 1,361 1,088 Unrealized exchange gain 1,323 1,272 Prepaid expenses 22 157 Unrealized marketable security gain 484 2,404 Investment in partially owned companies 3,813 1,109 - ----------------------------------------------------------------------------- Deferred tax liabilities 7,003 6,030 - ----------------------------------------------------------------------------- Net deferred tax assets 3,523 6,074 - ----------------------------------------------------------------------------- Less valuation allowance (2,422) (5,575) - ----------------------------------------------------------------------------- Net deferred tax asset $ 1,101 $ 499 - ----------------------------------------------------------------------------- Included in the balance sheets as: Current liabilities * $ $ (344) Deferred tax asset 1,101 843 - ----------------------------------------------------------------------------- $ 1,101 $ 499 - -----------------------------------------------------------------------------
* Relates to General Physics, a 52% owned subsidiary at December 31, 1996, not included in the Company's consolidated Federal income tax return in 1996.
13. Income taxes (Continued)
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of the deferred tax assets is dependent upon the generation of future taxable income during the periods in which temporary differences are deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based upon the Company's projection of future taxable income, attributable in part to the merger with General Physics (see Note 2) which will allow General Physics to be included in the consolidated tax return of the Company, and to unrealized gains on the Company's investments expected to be realized in the future, management believes it is more likely than not that the Company will realize the benefits of deferred tax assets of $1,101,000, and has recorded this amount as an asset as of December 31, 1997.
14. Discontinued operation
In December 1994, the Company decided to sell its Eastern Electronics Manufacturing Corporation (Eastern) subsidiary, which was the only company in the Electronics segment. As a result of the decision to sell Eastern, the Company reflected Eastern as a discontinued operation. The total loss for discontinued operation recognized in 1994 was $2,574,000, of which $1,789,000, which included an $800,000 write-down of inventories, was from operations and $785,000 was a loss on disposal, which was comprised of: (a) a $200,000 write-down of property and equipment; (b) a $485,000 write-off of goodwill relating to Eastern; (c) $100,000 for expected losses through the date of disposal. In 1995, the Company recognized a loss from discontinued operation of $2,941,000, of which a total of $2,610,000 was a loss on disposal incurred on the sale of inventory ($1,550,000), write-offs of accounts receivable ($360,000) and sales of fixed assets ($700,000). At the time the Company adopted a plan of disposal in December 1994, the Company was in negotiations to sell a substantial portion of its specific use inventory. These negotiations subsequently broke off and the Company therefore fully reserved this inventory in 1995.
The December 31, 1994 estimated net realizable value of Eastern's fixed assets was based upon a prior appraisal, but the actual sale in 1995 resulted in less proceeds than prior estimates. Receivable write-offs in 1995 were caused when the Company liquidated its assets rather than selling its inventory as part of a continuing business, therefore making it more difficult to collect the outstanding receivables. In addition, $331,000 in operating expenses were incurred during 1995. The Company sold or otherwise liquidated substantially all of Eastern's assets during 1995 and 1996.
15. Common Stock, stock options, warrants and other shares reserved
(a) Under the Company's non-qualified stock option plan, employees and certain other parties may be granted options to purchase shares of common stock. The options may be granted at a price not less than 85% of the fair market value of the common stock on the date of grant and are exercisable over periods not exceeding ten years from the date of grant. Shares of common stock are also reserved for issuance pursuant to other agreements, as described below. Changes in options and warrants outstanding during 1995, 1996, and 1997, options and warrants exercisable and shares reserved for issuance at December 31, 1995, 1996, and 1997 are as follows:
Common Stock Options and warrants Price Range Number Weighted-Average outstanding per share of share Exercise Price - -------------------------------------------------------------------------------- December 31, 1994 $9.00 - 24.00 1,077,055 - -------------------------------------------------------------------------------- Granted 8.375- 8.50 451,239 $ 8.41 Exercised Terminated 9.00 - 20.50 (651,182) 12.16 - -------------------------------------------------------------------------------- December 31, 1995 8.375- 24.00 877,072 9.03 - -------------------------------------------------------------------------------- Granted 7.69 - 10.00 551,657 9.31 Exercised 8.375- 9.00 (800) 8.51 Terminated 8.375- 22.50 (232,536) 9.55 - -------------------------------------------------------------------------------- December 31, 1996 7.69 - 24.00 1,195,393 9.05 - -------------------------------------------------------------------------------- Granted 4.68 - 11.15 1,578,715 7.85 Exercised 4.68 - 9.00 (21,573) 8.17 Terminated 7.75 - 12.00 (144,026) 8.87 - ------------------------------------------------------------------------------- December 31, 1997 4.68 - 24.00 2,608,509 8.35 - ------------------------------------------------------------------------------- Options and warrants exercisable December 31, 1995 8.37 - 24.00 770,685 9.07 - ------------------------------------------------------------------------------- December 31, 1996 8.375- 24.00 1,023,158 8.85 - ------------------------------------------------------------------------------- December 31, 1997 4.68 - 24.00 1,234,984 8.72 - ------------------------------------------------------------------------------- Shares reserved for issuance December 31, 1995 2,106,665 - ------------------------------------------------------------------------------- December 31, 1996 3,523,960 - ------------------------------------------------------------------------------- December 31, 1997 2,756,853 - -------------------------------------------------------------------------------
15. Common Stock, stock options, warrants and other shares reserved (Continued)
Class B Common Stock Options and warrants Price Range Number Weighted-Average outstanding per share of shares Exercise Price - ------------------------------------------------------------------------------- December 31, 1994 $9.00 387,500 - ------------------------------------------------------------------------------- Granted 8.50 125,000 $8.50 Exercised Terminated - ---------- December 31, 1995 8.50 -9.00 512,500 8.88 - ------------------------------------------------------------------------------- Granted 8.69 375,000 8.69 Exercised Terminated - ---------- December 31, 1996 8.50 -9.00 887,500 8.80 - ------------------------------------------------------------------------------- Granted Exercised Terminated - ---------- December 31, 1997 8.50 -9.00 887,500 8.80 - ------------------------------------------------------------------------------- Options and warrants exercisable December 31, 1995 8.50 -9.00 512,500 8.91 - ------------------------------------------------------------------------------- December 31, 1996 8.50 -9.00 595,625 8.87 - ------------------------------------------------------------------------------- December 31, 1997 8.50 -9.00 762,250 8.82 - ------------------------------------------------------------------------------- Shares reserved for issuance December 31, 1995 512,500 - ------------------------------------------------------------------------------- December 31, 1996 950,000 - ------------------------------------------------------------------------------- December 31, 1997 950,000 - -------------------------------------------------------------------------------
At December 31, 1997, the weighted average remaining contractual life of all outstanding options was 6 years.
15. Common Stock, stock options, warrants and other shares reserved (Continued)
At December 31, 1997, 1996, and 1995, options outstanding included 829,334, 629,334 and 629,334 shares for two officers who are principal shareholders of the Company.
Class B Common stock aggregating 887,500, 887,500 and 512,500 shares at December 31, 1997, 1996 and 1995, respectively, were reserved for issuance to these same two officers in 1995 and for three officers of the Company, two of whom are principal shareholders of the Company, at December 31, 1997 and 1996.
The holders of common stock are entitled to one vote per share and the holders of Class B Common stock are entitled to ten votes per share on all matters without distinction between classes, except when approval of a majority of each class is required by statute. The Class B Common stock is convertible at any time, at the option of the holders of such stock, into shares of common stock on a share-for-share basis. Common shares reserved for issuance at December 31, 1997, 1996, and 1995 include 950,000, 950,000 and 512,500 shares, respectively in connection with Class B shares. At December 31, 1997, 1996, and 1995, shares reserved for issuance were primarily related to shares reserved for options, warrants and the conversion of long-term debt.
(b) Prior to January 1, 1996, the Company accounted for its stock option plan in accordance with the provisions of Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. As such, compensation expense would be recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. On January 1, 1996, the Company adopted SFAS No. 123, Accounting for Stock-Based Compensation, which permits entities to recognize as expense over the vesting period the fair value of all stock-based awards on the date of grant. Alternatively, SFAS No. 123 also allows entities to continue to apply the provisions of APB Opinion No. 25 and provide pro forma net income and pro forma earnings per share disclosures for employee stock option grants made in 1995 and future years as if the fair-value-based method defined in SFAS No. 123 had been applied. The Company has elected to continue to apply the provisions of APB Opinion No. 25 in accounting for its Plan and, accordingly, no compensation cost has been recognized for its stock options in the financial statements.
15. Common Stock, stock options, warrants and other shares reserved (Continued)
Had the Company determined compensation cost based on the fair value at the grant date for its stock options under SFAS No. 123, the Company's net income would have been reduced to the pro forma amounts indicated below (in thousands, except per share amount):
1997 1996 1995 ---- ---- ----
Net income As reported $ 3,423 $11,380 $1,012 Pro forma 1,344 9,927 (416)
Basic earnings (loss) per share As reported .33 1.55 .15 Pro forma .13 1.35 (.06)
Diluted earnings (loss) per share As reported .31 1.54 .15 Pro forma .12 1.34 (.06)
Pro forma net income reflects only options granted since 1995. Therefore, the full impact of calculating compensation cost for stock options under SFAS No. 123 is not reflected in the pro forma net income amounts presented above because compensation cost is reflected over the options' vesting period and compensation cost for options granted prior to January 1, 1995 is not considered.
At December 31, 1997, 1996 and 1995, the per share weighted-average fair value of stock options granted was $4.32, $3.64 and $3.94, respectively on the date of grant using the modified Black Scholes option-pricing model with the following weighted-average assumptions: 1997 - expected dividend yield 0%, risk-free interest rate of 6.37%, expected volatility of 43.1 % and an expected life of 7.7 years; 1996 - expected dividend yield 0%, risk-free interest rate of 6%, expected volatility of 39.1%, and an expected life of 4.5 years; 1995 - expected dividend yield 0%, risk-free interest rate of 5.9%, expected volatility of 44.9%, and an expected life of 4.5 years.
(c) In the fourth quarter of 1997, the Company adopted the provisions of Statement of Financial Accounting Standards No. 128, "Earning per Share". (SFAS 128), as required, and restated the previously reported earnings per share in conforming with SFAS 128. The new standard specifies the computation, presentation and disclosure requirements for earnings per share.
15. Common Stock, stock options, warrants and other shares reserved (Continued)
Earnings per share (EPS) for the years ended December 31, 1997, 1996 and 1995 are as follows (in thousands, except per share amounts):
1997 1996 1995 ---- ---- ---- Basic EPS Net income $ 3,423 $ 11,380 $ 1,012 Weighted average shares outstanding 10,457 7,339 6,638 Basic earnings per share $ .33 $ 1.55 $ .15
Diluted EPS Net income $ 3,423 $ 11,380 $ 1,012
Weighted average shares outstanding 10,457 7,339 6,638 Dilutive effect of stock options and warrants 430 69 ---------- --------- -------- Weighted average shares outstanding, diluted 10,887 7,408 6,638
Diluted earnings per share $ .31 $ 1.54 $ .15
Basic earnings per share are based upon the weighted average number of common shares outstanding, including Class B common shares, during the period. Class B common stockholders have the same rights to share in profits and losses and liquidation values as common stock holders. Diluted earnings per share are based upon the weighted average number of common shares outstanding during the period, assuming the issuance of common shares for all dilutive potential common shares outstanding.
For the year ended December 31, 1995, the Company had basic and diluted loss per share from discontinued operation of $(.44) and basic and diluted loss from extraordinary item of $(.01).
16. Business segments
The operations of the Company consist of the following business segments:
Physical Science Group - performance improvement services to Fortune 500 companies, manufacturing and process industries, electric power utilities and other commercial and governmental customers; Distribution Group - wholesale distribution of home decorating, hardware and finishing products; Optical Plastics Group - the manufacture and distribution of coated and molded plastic products.
The following tables set forth the sales and operating results attributable to each line of business and include a reconciliation of the groups' sales to consolidated sales and operating results to consolidated income from operations before income taxes, discontinued operation and extraordinary item for the periods presented (in thousands):
Years ended December 31, 1997 1996 1995 - ----------------------------------------------------------------------------- Sales Physical Science $140,620 $117,183 $107,549 Distribution 82,300 76,102 65,098 Optical Plastics 10,362 8,781 10,949 Other (principally ADC) 1,519 1,734 1,429 - ----------------------------------------------------------------------------- $234,801 $203,800 $185,025 - ----------------------------------------------------------------------------- Operating results Physical Science $ 9,603 $ 6,504 $ 4,854 Distribution 2,230 1,767 1,374 Optical Plastics 1,864 1,485 2,661 Other (principally ADC) (691) (1,287) (1,575) - ----------------------------------------------------------------------------- Total operating profit 13,006 8,469 7,314 Interest expense (4,075) (4,358) (5,019) Corporate general and administrative expenses and Investment and other income, net (6,201) 7,133 3,524 - ----------------------------------------------------------------------------- Income from operations before income taxes, discontinued operation and extraordinary item $ 2,730 $ 11,244 $ 5,819 - -----------------------------------------------------------------------------
16. Business segments (Continued)
Operating profits represent gross revenues less operating expenses. In computing operating profits, none of the following items have been added or deducted; general corporate expenses at the holding company level, foreign currency transaction gains and losses, investment income and interest expense. General corporate expenses at the holding company level, which are primarily salaries, occupancy costs, professional fees and costs associated with being a publicly traded company, totaled approximately $5,246,000, $6,170,000 and $6,173,000 for the years ended December 31, 1997, 1996 and 1995 respectively. For the years ended December 31, 1997, 1996 and 1995, sales to the United States government and its agencies represented approximately 26%, 27% and 31%, respectively, of sales.
Additional information relating to the Company's business segments is as follows (in thousands):
December 31, 1997 1996 1995 - ------------------------------------------------------------------------------ Identifiable assets Physical Science $100,548 $ 83,414 $ 82,022 Distribution 41,530 47,243 44,400 Optical Plastics 10,197 12,453 12,267 Corporate and other 38,337 32,917 12,681 Assets relating to discontinued operation 350 - ------------------------------------------------------------------------------ $190,612 $176,027 $151,720 - ------------------------------------------------------------------------------ Years ended December 31, 1997 1996 1995 - ------------------------------------------------------------------------------ Additions to property, plant, and equipment, net Physical Science $ 2,307 $ 1,976 $ 1,555 Distribution 275 522 352 Optical Plastics 939 201 Corporate and other 193 (21) 39 Discontinued operation, net (505) - ------------------------------------------------------------------------------ $ 3,714 $ 2,678 $ 2,006 - ------------------------------------------------------------------------------ Years ended December 31, 1997 1996 1995 - ------------------------------------------------------------------------------ Depreciation and amortization Physical Science $ 3,121 $ 2,404 $ 1,785 Distribution 1,195 1,125 1,069 Optical Plastics 488 66 788 Corporate and other 1,063 474 674 Discontinued operation - ------------------------------------------------------------------------------ $ 5,867 $ 4,069 $ 4,316 - ------------------------------------------------------------------------------
17. Fair value of financial instruments
Identifiable assets by industry segment are those assets that are used in the Company's operations in each segment. Corporate and other assets are principally cash and cash equivalents, marketable securities and unallocated intangibles.
The carrying value of financial instruments including cash, short-term investments, accounts receivable, accounts payable and short-term borrowings approximate estimated market values because of short maturities and interest rates that approximate current rates.
The carrying values of investments, other than those accounted for on the equity basis, approximate fair values based upon quoted market prices. The investments for which there is no quoted market price are not significant.
The estimated fair value for the Company's major long-term debt components are as follows (in thousands):
December 31, 1997 December 31, 1996 Carrying Estimated Carrying Estimated amount fair value amount fair value
8% Swiss Bonds due 2000 $ 2,158 $ 1,942 $ 2,189 $ 1,883 5% Convertible Bonds 1,786 1,661 1,755 1,632 12% Subordinated Debentures 6,732 5,386 7% Convertible Note 1,000 1,000 1,000 1,000 Other long-term debt 1,644 1,644 8,440 8,440
Limitations. Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.
18. Accounting for certain investments in debt and equity securities
A decline in the market value of any available-for-sale security below cost that is deemed other than temporary is charged to earnings resulting in the establishment of a new cost basis for the security. In 1995, the Company recognized a permanent impairment in one of its available-for-sale securities as a result of receipt of a tender offer at a price below the Company's carrying cost, and recorded a loss of $785,000 to adjust the carrying amount to the tender offer price, which loss is included in Investment and other income (expense), net. In July 1996, the Company recognized a $4,000,000 loss on the Company's investments in American White Cross, Inc. (AWC) due to AWC filing for protection under Chapter 11 of the United States Bankruptcy Code.
Realized gains and losses for securities classified as available-for-sale are included in earnings and are derived using the average cost method for determining the cost of securities sold.
In April 1996, the Company sold 1,000,000 shares of Duratek common stock, including 250,000 shares that were included in marketable securities at December 31, 1995. As a result, the Company received proceeds of $17,700,000 and recognized a gain of $12,200,000. In 1995, the Company recognized a $3,183,000 gain on the transfer of the 250,000 shares of Duratek common stock to marketable securities, representing the excess of the quoted market value of such shares on the date of transfer over the Company's cost. In the second half of 1996, the Company transferred an additional 250,000 shares from long-term investments available- for- sale, to trading securities, resulting in the recognition of a $3,314,000 gain, representing the net excess of the quoted market price of such shares at December 31, 1996, over the Company's cost at the time of transfer and subsequent changes in market value of these shares. At December 31, 1996, the Company was permitted to sell approximately 475,000 shares of Common Stock of Duratek pursuant to various agreements. At December 31, 1996, the Company had determined to sell promptly 250,000 shares of its Duratek Common Stock in 1997 pursuant to various agreements, and therefore, classified such securities in the trading category.
In 1997, the Company recognized a net $689,000 gain. The gain is the result of a $828,000 gain on the transfer from long-term investments to trading securities partially offset by a $139,000 realized loss on the sale of Duratek common stock. In 1997, the Company sold 305,750 shares of Duratek common stock, and received net proceeds of $2,756,000. At December 31, 1997, the Company had determined to sell promptly 100,000 shares of Duratek common stock in 1998, and therefore, classified such securities in the trading category. Under the Company's current bank agreement, it is permitted to sell 600,000 shares of Duratek common stock in 1998.
18. Accounting for certain investments in debt and equity securities (Continued)
The gross unrealized holding gains (losses) and fair value for available-for-sale securities were as follows (in thousands):
Gross unrealized holding Cost gains (losses) Fair Value Available-for-sale equity securities:
December 31, 1997 $2,200 $9,834 $ $12,034 - ------------------------------------------------------------------------------ December 31, 1996 $1,601 4,722 $ (91) $ 6,232 - ------------------------------------------------------------------------------ December 31, 1995 $2,210 $ (1,440) $ 770 - ------------------------------------------------------------------------------
Differences between cost and market of $6,630,000 and $3,324,000, net of taxes at December 31, 1997 and 1996, respectively, were credited to a separate component of shareholders' equity called Net unrealized gain on available-for-sale securities.
Gross realized (losses) gains included in income in 1997 and 1996 were $(139,000) and $9,150,000, respectively. In 1997 and 1996, the Company did not have gross realized gains and losses, respectively.
The Company did not realize any gains or losses on available-for-sale securities for the year ended December 31, 1995.
19. Commitments and contingencies
(a) The Company has several noncancellable leases which cover real property, machinery and equipment and certain manufacturing facilities. Such leases expire at various dates with, in some cases, options to extend their terms.
Minimum rentals under long-term operating leases are as follows(in thousands): Real Machinery & property equipment Total 1998 $ 4,661 $ 1,627 $ 6,288 1999 3,351 1,418 4,769 2000 3,144 895 4,039 2001 2,310 546 2,856 2002 2,232 408 2,640 After 2002 4,003 147 4,150 - ---------------------------------------------------------------------------- Total $19,701 $5,041 $24,742 - ----------------------------------------------------------------------------
19. Commitments and contingencies (Continued)
Several of the leases contain provisions for rent escalation based primarily on increases in real estate taxes and operating costs incurred by the lessor. Rent expense for real and personal property was approximately $7,603,000, $6,745,000 and $5,598,000 for 1997, 1996 and 1995, respectively.
(b) In February 1986, Duratek completed its initial public offering of common stock. In connection with Duratek's public offering, the Company issued to certain officers of Duratek and the Company 358,609 options for the purchase of Duratek common stock owned by the Company at a price equal to the greater of (a) $1.75 per share or (b) the net book value per share of Duratek's common stock as of the end of the most recently completed fiscal quarter which ends not less than 60 days before the date of exercise of such option. In 1991, an additional 270,000 options for the purchase of Duratek common stock owned by the Company at a price of $1.90 per share were issued to certain employees and officers of the Company. In 1994, an additional 20,000 options were granted at a price of $3.50 per share. Through December 31, 1997, 322,086 options under the plan were exercised, 43,723 were canceled, and at December 31, 1997, 278,800 options are currently exercisable and 282,800 options are currently outstanding. At December 31, 1997, the Company owned 12.3% of Duratek (See Note 3).
(c) The Company is party to several lawsuits and claims incidental to its business, including claims regarding environmental matters, one of which is in the early stages of investigation. It is not possible at the present time to estimate the ultimate legal and financial liability, if any, of the Company in respect to such litigation and claims; however, management believes that the ultimate liability, if any, will not have a material adverse effect on the Company's consolidated financial statements.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None. PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information with respect to the directors of the Company is incorporated herein by reference to the Company's definitive proxy statement pursuant to Regulation 14A, which proxy statement will be filed not later than 120 days after the end of the fiscal year covered by this Report.
ITEM 11. EXECUTIVE COMPENSATION
Information with respect Executive Compensation is incorporated herein by reference to the Company's definitive proxy statement pursuant to Regulation 14A, which proxy statement will be filed not later than 120 days after the end of the fiscal year covered by this Report.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information with respect to Security Ownership of Certain Beneficial Owners is incorporated herein by reference to the Company's definitive proxy statement pursuant to Regulation 14A, which proxy statement will be filed not later than 120 days after the end of the fiscal year covered by this Report.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information with respect to Certain Relationships and Related Transactions is incorporated herein by reference to the Company's definitive proxy statement pursuant to Regulation 14A, which proxy statement will be filed not later than 120 days after the end of the fiscal year covered by this Report.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K:
(a)(1)The following financial statements are included in Part II, Item 8. Financial Statements and Supplementary Data:
FINANCIAL STATEMENTS OF GP STRATEGIES CORPORATION AND SUBSIDIARIES: Page Independent Auditors' Report 31
Financial Statements:
Consolidated Balance Sheets - December 31, 1997 and 1996 32
Consolidated Statements of Operations - Years ended December 31, 1997, 1996 and 1995 34
Consolidated Statements of Changes in Stockholders' Equity - Years ended December 31, 1997, 1996 and 1995 35
Consolidated Statements of Cash Flows - Years ended December 31, 1997, 1996 and 1995 37
Notes to Consolidated Financial Statements 40
(a)(2) Financial Statement Schedules
Schedules have been omitted and if required will be filed in an amendment to the Form 10-K
(a)(3) Exhibits
Consent of KPMG Peat Marwick LLP, Independent Auditors
(b) There were no Reports on Form 8-K filed by the Registrant during the last quarter of the period covered by this report
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
GP STRATEGIES CORPORATION
Jerome I. Feldman President and Chief Executive Officer
Dated: March 31, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signatures Title
Jerome I. Feldman President, Chief Executive Officer and Director (Principal Executive Officer)
Martin M. Pollak Executive Vice President and Treasurer and Director
Scott N. Greenberg Vice President and Chief Financial Officer and Director
Ogden R. Reid Director
John C. McAuliffe Director
Herbert R. Silverman Director
INDEX TO EXHIBITS
The following is a list of all exhibits filed as part of this Report.
SEQUENTIAL EXHIBIT NO. DOCUMENT PAGE NO.
3.1 Amendment to the Registrant's Restated Certificate of Incorporation filed on March 5, 1998.*
3.2 Amended By-Laws of the Registrant. Incorporated by reference to Exhibit 3 of the Registrants Form 10-Q for the third quarter ended September 30, 1997.
10.1 1973 Non-Qualified Stock Option Plan of the Registrant, as amended on March 1, 1998.*
10.2 Registrant's 401(k) Savings Plan, dated January 29, 1992, effective March 1, 1992. Incorporated herein by reference to Exhibit 10.12 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1991.
10.3 Amended and Restated Loan Agreement dated August 18, 1997 by and among Five Star Group, Inc., Summit Bank, The Dime Savings Bank of New York and Fleet Bank, National Association as Administrative and Collateral Agent for such banks. Incorporated herein by reference to Exhibit 2 of the Registrant's Form 10-Q for the third quarter ended September 30, 1997.
10.4 $25,000,000 Credit Agreement dated March 26, 1997 by and among GP Strategies Corporation, General Physics Corporation, GP Environmental Services, Inc., General Physics Federal Systems, Inc. and MXL Industries, Inc. the banks signatory thereto and Fleet Bank, National Association as Administrative Agent and Collateral Agent for such banks. Incorporated herein by reference to Exhibit 10.13 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1996.
10.5 Stock Purchase Agreement dated as of January 24, 1995 among Carlyle Partners II, L.P., Carlyle International Partners III, L.P., C/S International Partners, Carlyle-GTSD Partners, L.P., Carlyle-GTSD Partners II, L.P. and GTS Duratek, Inc. and the Registrant. Incorporated herein by reference to Exhibit 4.1 to the Registrants Form 8-K dated January 24, 1995.
10.6 Stockholders Agreement dated as of January 24, 1995 by and among GTS Duratek, Inc., Carlyle Partners II, L.P., Carlyle International Partners III, L.P., C/S International Partners, Carlyle-GTS Partners, L.P., and the Registrant. Incorporated herein by reference to Exhibit 4.2 to the Registrants Form 8-K dated January 24, 1995.
10.7 Registration Rights Agreement dated as of January 24, 1995 by and among GTS Duratek, Inc., Carlyle Partners II, L.P., Carlyle International Partners III, L.P., C/S International Partners, Carlyle-GTS Partners, L.P., and the Registrant. Incorporated herein by reference to Exhibit 4.3 to the Registrants Form 8-K dated January 24, 1995.
10.8 Agreement and Plan of Merger, dated as of November 19, 1996, among the Registrant, General Physics Corporation ("GPC") and GPX Acquisition, Inc. ("GPX"). Incorporated herein by reference to Exhibit 99.1 to the Registrant's Form S-4 filed on November 26, 1996.
10.9 Amendment No. 1, dated as of December 18, 1996, to the Agreement and Plan of Merger dated November 19, 1996 among the Registrant, GPC and GPX. Incorporated herein by reference to Exhibit 2.2 to the Registrant's Form S-4 filed on December 19, 1996.
10.10 Rights Agreement, dated as of June 23, 1997, between National Patent Development Corporation and Harris Trust Company of New York, as Rights Agent, which includes, as Exhibit A thereto, the Resolution of the Board of Directors with respect to Series A Junior Participating Preferred Stock, as Exhibit B thereto, the form of Rights Certificate and as Exhibit C thereto the form of Summary of Rights. Incorporated herein by reference to Exhibit 4.1 of the Registrant's Form 8-K filed on July 17, 1997.
13 Not Applicable
18 Not Applicable
19 Not Applicable
21 Subsidiaries of the Registrant*
22 Not Applicable
23 Consent of KPMG Peat Marwick LLP, Independent Auditors*
27 Not Applicable
28 Not Applicable
* Filed herewith.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None. PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information with respect to the directors of the Company is incorporated herein by reference to the Company's definitive proxy statement pursuant to Regulation 14A, which proxy statement will be filed not later than 120 days after the end of the fiscal year covered by this Report.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
Information with respect Executive Compensation is incorporated herein by reference to the Company's definitive proxy statement pursuant to Regulation 14A, which proxy statement will be filed not later than 120 days after the end of the fiscal year covered by this Report.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information with respect to Security Ownership of Certain Beneficial Owners is incorporated herein by reference to the Company's definitive proxy statement pursuant to Regulation 14A, which proxy statement will be filed not later than 120 days after the end of the fiscal year covered by this Report.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information with respect to Certain Relationships and Related Transactions is incorporated herein by reference to the Company's definitive proxy statement pursuant to Regulation 14A, which proxy statement will be filed not later than 120 days after the end of the fiscal year covered by this Report.
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K:
(a)(1)The following financial statements are included in Part II, Item 8. Financial Statements and Supplementary Data:
FINANCIAL STATEMENTS OF GP STRATEGIES CORPORATION AND SUBSIDIARIES: Page Independent Auditors' Report 31
Financial Statements:
Consolidated Balance Sheets - December 31, 1997 and 1996 32
Consolidated Statements of Operations - Years ended December 31, 1997, 1996 and 1995 34
Consolidated Statements of Changes in Stockholders' Equity - Years ended December 31, 1997, 1996 and 1995 35
Consolidated Statements of Cash Flows - Years ended December 31, 1997, 1996 and 1995 37
Notes to Consolidated Financial Statements 40
(a)(2) Financial Statement Schedules
Schedules have been omitted and if required will be filed in an amendment to the Form 10-K
(a)(3) Exhibits
Consent of KPMG Peat Marwick LLP, Independent Auditors
(b) There were no Reports on Form 8-K filed by the Registrant during the last quarter of the period covered by this report
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
GP STRATEGIES CORPORATION
Jerome I. Feldman President and Chief Executive Officer
Dated: March 31, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signatures Title
Jerome I. Feldman President, Chief Executive Officer and Director (Principal Executive Officer)
Martin M. Pollak Executive Vice President and Treasurer and Director
Scott N. Greenberg Vice President and Chief Financial Officer and Director
Ogden R. Reid Director
John C. McAuliffe Director
Herbert R. Silverman Director
INDEX TO EXHIBITS
The following is a list of all exhibits filed as part of this Report.
SEQUENTIAL EXHIBIT NO. DOCUMENT PAGE NO.
3.1 Amendment to the Registrant's Restated Certificate of Incorporation filed on March 5, 1998.*
3.2 Amended By-Laws of the Registrant. Incorporated by reference to Exhibit 3 of the Registrants Form 10-Q for the third quarter ended September 30, 1997.
10.1 1973 Non-Qualified Stock Option Plan of the Registrant, as amended on March 1, 1998.*
10.2 Registrant's 401(k) Savings Plan, dated January 29, 1992, effective March 1, 1992. Incorporated herein by reference to Exhibit 10.12 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1991.
10.3 Amended and Restated Loan Agreement dated August 18, 1997 by and among Five Star Group, Inc., Summit Bank, The Dime Savings Bank of New York and Fleet Bank, National Association as Administrative and Collateral Agent for such banks. Incorporated herein by reference to Exhibit 2 of the Registrant's Form 10-Q for the third quarter ended September 30, 1997.
10.4 $25,000,000 Credit Agreement dated March 26, 1997 by and among GP Strategies Corporation, General Physics Corporation, GP Environmental Services, Inc., General Physics Federal Systems, Inc. and MXL Industries, Inc. the banks signatory thereto and Fleet Bank, National Association as Administrative Agent and Collateral Agent for such banks. Incorporated herein by reference to Exhibit 10.13 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1996.
10.5 Stock Purchase Agreement dated as of January 24, 1995 among Carlyle Partners II, L.P., Carlyle International Partners III, L.P., C/S International Partners, Carlyle-GTSD Partners, L.P., Carlyle-GTSD Partners II, L.P. and GTS Duratek, Inc. and the Registrant. Incorporated herein by reference to Exhibit 4.1 to the Registrants Form 8-K dated January 24, 1995.
10.6 Stockholders Agreement dated as of January 24, 1995 by and among GTS Duratek, Inc., Carlyle Partners II, L.P., Carlyle International Partners III, L.P., C/S International Partners, Carlyle-GTS Partners, L.P., and the Registrant. Incorporated herein by reference to Exhibit 4.2 to the Registrants Form 8-K dated January 24, 1995.
10.7 Registration Rights Agreement dated as of January 24, 1995 by and among GTS Duratek, Inc., Carlyle Partners II, L.P., Carlyle International Partners III, L.P., C/S International Partners, Carlyle-GTS Partners, L.P., and the Registrant. Incorporated herein by reference to Exhibit 4.3 to the Registrants Form 8-K dated January 24, 1995.
10.8 Agreement and Plan of Merger, dated as of November 19, 1996, among the Registrant, General Physics Corporation ("GPC") and GPX Acquisition, Inc. ("GPX"). Incorporated herein by reference to Exhibit 99.1 to the Registrant's Form S-4 filed on November 26, 1996.
10.9 Amendment No. 1, dated as of December 18, 1996, to the Agreement and Plan of Merger dated November 19, 1996 among the Registrant, GPC and GPX. Incorporated herein by reference to Exhibit 2.2 to the Registrant's Form S-4 filed on December 19, 1996.
10.10 Rights Agreement, dated as of June 23, 1997, between National Patent Development Corporation and Harris Trust Company of New York, as Rights Agent, which includes, as Exhibit A thereto, the Resolution of the Board of Directors with respect to Series A Junior Participating Preferred Stock, as Exhibit B thereto, the form of Rights Certificate and as Exhibit C thereto the form of Summary of Rights. Incorporated herein by reference to Exhibit 4.1 of the Registrant's Form 8-K filed on July 17, 1997.
13 Not Applicable
18 Not Applicable
19 Not Applicable
21 Subsidiaries of the Registrant*
22 Not Applicable
23 Consent of KPMG Peat Marwick LLP, Independent Auditors*
27 Not Applicable
28 Not Applicable
* Filed herewith.