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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of The Securities Exchange
Act of 1934
For the fiscal year ended December 31, 2004
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of The Securities
Exchange Act of 1934
For the transition period from ________________ to ________________
Commission File Number 1-7234
GP STRATEGIES CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware 13-1926739
(State of Incorporation) (I.R.S. Employer Identification No.)
777 Westchester Avenue, White Plains, NY 10604
(Address of principal executive offices) (Zip Code)
(914) 249-9700
Registrant's telephone number, including area code:
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of each exchange on which registered:
------------------- ------------------------------------------
Common Stock, $.01 par value New York Stock Exchange, Inc.
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
Indicate by check mark whether the registrant is an accelerated filer.
Yes X No
----- -----
The aggregate market value of the outstanding shares of the Registrant's Common
Stock, par value $.01 per share and Class B Capital Stock, par value $.01 per
share held by non-affiliates as of June 30, 2004 was approximately $83,228,000.
The number of shares outstanding of each of the Registrant's Common Stock and
Class B Stock as of March 10, 2005:
Class Outstanding
----- -----------
Common Stock, par value $.01 per share 16,736,262 shares
Class B Capital Stock, par value $.01 per share 1,200,000 shares
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive Proxy Statement for its 2005 Annual
Meeting of Stockholders are incorporated herein by reference into Part III
hereof.
PAGE
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PART I
Item 1. Business 3
Item 2. Properties 17
Item 3. Legal Proceedings 18
Item 4. Submission of Matters to a Vote of Security Holders 19
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters 20
Item 6. Selected Financial Data 22
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 23
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 37
Item 8. Financial Statements and Supplementary Data 38
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 91
Item 9A. Controls and Procedures
Item 9B. Other Information 91
PART III
Item 10. Directors and Executive Officers of the Registrant * 92
Item 11. Executive Compensation * 92
Item 12. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters* 92
Item 13. Certain Relationships and Related Transactions* 92
Item 14. Principal Accountant Fees and Services* 92
PART IV
Item 15. Exhibits and Financial Statement Schedules 92
SIGNATURES 94
REPORTS OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMS 95
EXHIBIT INDEX 96
* To be incorporated by reference from the proxy statement for the
Registrant's 2004 and 2005 Annual Meeting of Shareholders.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
The forward-looking statements contained herein reflect GP Strategies'
management's current views with respect to future events and financial
performance. We use words such as "expects", "intends" and "anticipates" to
indicate forward-looking statements. These forward-looking statements are
subject to certain risks and uncertainties that could cause actual results to
differ materially from those in the forward-looking statements, all of which are
difficult to predict and many of which are beyond the control of GP Strategies,
including, but not limited to, our inability to generate funds by selling any
assets that were included in the spin-off, our holding company structure,
failure to continue to attract and retain personnel, loss of business from
significant customers, failure to keep pace with technology, changing economic
conditions, competition, our ability to implement procedures that will reduce
the likelihood that material weaknesses in internal control over financial
reporting will not occur in the future, and those other risks and uncertainties
detailed in GP Strategies' periodic reports and registration statements filed
with the Securities and Exchange Commission.
If any one or more of these expectations and assumptions proves incorrect,
actual results will likely differ materially from those contemplated by the
forward-looking statements. Even if all of the foregoing assumptions and
expectations prove correct, actual results may still differ materially from
those expressed in the forward-looking statements as a result of factors we may
not anticipate or that may be beyond our control. While we cannot assess the
future impact that any of these differences could have on our business,
financial condition, results of operations and cash flows or the market price of
shares of our common stock, the differences could be significant. We do not
undertake to update any forward-looking statements made by us.
PART I
ITEM 1: BUSINESS
GENERAL DEVELOPMENT OF BUSINESS
GP Strategies Corporation ("the Company" or "we") was incorporated in Delaware
in 1959. The Company is a New York Stock Exchange listed company traded under
the symbol GPX.
Prior to November 24, 2004 the Company had five operating business segments:
Manufacturing & Process, Information Technology, Simulation, Optical Plastics
and Home Improvement Distribution. On November 24, 2004, we completed the
distribution, which we refer to as the "spin-off," of the common stock of
National Patent Development Corporation ("NPDC"), which comprised our Optical
Plastics and Home Improvement Distribution segments and certain other non-core
assets. In the spin-off, holders of record on November 18, 2004 of the Company's
common stock and Class B capital stock received one share of NPDC common stock
for each share of the Company's common stock or Class B capital stock owned.
Shares of NPDC common stock are quoted on the OTC Bulletin Board under the
symbol "NPDV.OB." Shares of the Company's common stock will continue to be
listed on The New York Stock Exchange under the symbol "GPX." The Company
obtained a tax ruling from the Internal Revenue Service to the effect that the
spin-off was tax-free for U.S. federal income tax purposes to the Company and
its stockholders under Sections 355 and 368(a) of the Internal Revenue Code. We
continue to own and operate our majority owned subsidiary, GSE Systems Inc.
("GSE"), formerly the Simulation segment; and our wholly owned subsidiary,
General Physics Corporation ("General Physics"), comprised of our former
Manufacturing & Process and Information Technology
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segments. We reorganized our Manufacturing & Process and Information Technology
segments into the new General Physics segment because we monitor and operate the
General Physics subsidiary as a single business and reporting unit.
Subsequent to the spin-off, we have reclassified the operations of NPDC as
discontinued in our consolidated financial statements for all periods presented.
The business description below of the Company is as it exists after the
spin-off.
General Physics is a workforce development company that improves the
effectiveness of organizations by providing training, management consulting,
e-Learning solutions and engineering services that are customized to meet the
specific needs of clients. Additional information about General Physics may be
found at www.gpworldwide.com.
GSE develops and delivers business and technology solutions by applying
simulation software, systems and services to the energy, process and
manufacturing industries worldwide. Additional information about GSE may be
found at www.gses.com
Company Information Available on the Internet
The Company's internet address is www.gpstrategies.com. The Company makes
available free of charge through its internet site, its annual reports on Form
10-K; quarterly reports on Form 10-Q; current reports on Form 8-K; and any
amendment to those reports filed or furnished pursuant to the Securities
Exchange Act of 1934, or the "Exchange Act," as soon as reasonably practicable
after such material is electronically filed with, or furnished to, the U.S.
Securities and Exchange Commission.
GENERAL PHYSICS CORPORATION
Organization and Operations
General Physics provides performance improvement services and products to
multinational companies in manufacturing and process industries, electric power
utilities and other commercial and governmental customers. General Physics is a
global leader in performance improvement, with over three decades of experience
in providing solutions to optimize workforce performance. Since its
incorporation in 1966, General Physics has provided clients with the products
and services they need to successfully integrate their people, processes and
technology. General Physics' instructional delivery capabilities include
traditional classroom, structured on-the-job training (OJT), just-in-time
methods, electronic performance support systems (EPSS) and the full spectrum of
e-learning technologies. For businesses, government agencies and other
organizations, General Physics offers services and products spanning the entire
lifecycle of production facilities. General Physics' products and services
include plant, equipment and process launch assistance; operations and
maintenance practice training and consulting services; curriculum development
and delivery; facility and enterprise change and configuration management; lean
enterprise consulting; plant and process engineering review and re-design;
business continuity planning and support services; alternative fuels engineering
consulting, facility design and construction services; business process
outsourcing; training outsourcing; e-learning hosting, consulting and systems
implementation; and development and delivery of information technology (IT)
training on an enterprise-wide scale. General Physics' personnel bring a wide
variety of professional, technical and military backgrounds together to create
cost-effective solutions for modern business and governmental challenges.
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General Physics provides services and sells products within a structure that is
integrated both vertically and horizontally. Vertically, General Physics is
organized into Strategic Business Units (SBUs), Business Units (BUs) and Groups
focused on providing a wide range of products and services to clients and
prospective clients predominantly within targeted markets. Horizontally, General
Physics is organized across SBUs, BUs and Groups to integrate similar service
lines, technology, information, work products, client management and other
resources. Communications and market research, accounting, finance, legal, human
resources, information systems and other administrative services are organized
at the corporate level. Business development and sales resources are aligned
with operating units to support existing customer accounts and new customer
development.
General Physics provides technology-based training, engineering, consulting and
technical services to leading companies in the automotive, steel, power, oil and
gas, chemical, energy, electronics and semiconductor, pharmaceutical and food
and beverage industries, as well as to the government sector, and focuses on
developing long-term relationships with Fortune 500 companies, their suppliers
and government agencies. Through this segment General Physics provides training,
Business Process Outsource (BPO), training outsourcing, IT applications training
and courseware development, engineering and technical support services to
clients, whether involving workforce development, product/process/ plant launch,
modification of existing facilities and systems or regulatory compliance.
General Physics frequently supports the introduction of new work practices
associated with lean manufacturing, self-directed work teams and engineering.
Adult learning delivery capabilities include traditional classroom, structured
on-the-job training (OJT), just in time methods, and the full spectrum of
e-Learning technologies. General Physics e-Learning services, which enable it to
function as a single-source e-learning solution provider through its integration
services and hosting, the development and provisioning of proprietary content
and the aggregation and distribution of third party content.
General Physics Products and Services
Training. General Physics' provides training services and products to support
existing, as well as the launch of new, plants, products, equipment,
technologies and processes. The range of services includes fundamental analysis
of a client's training needs, curriculum design, instructional material
development (in hard copy, electronic/software or other format), information
technology service support and delivery of training using an instructor-led,
on-the-job, computer-based, web-based, video-based or other technology-based
method. General Physics has available an existing curriculum of business and
technical courses and also is involved in the management of the training
business operations for several of its customers. Training products include
instructor and student training manuals, instructional materials on CD-ROM and
PC-based simulators.
Consulting. Consulting services include not only training-related consulting
services, but also more traditional business management, engineering and other
disciplines. General Physics is able to provide high-level lean enterprise
consulting services, as well as training in the concept, methods and application
of lean enterprise and other quality practices, organizational development and
change management. General Physics also provides engineering consulting services
to support regulatory and environmental compliance, modification of facilities
and processes, plant performance improvement, reliability-centered maintenance
practices and plant start-up activities. Consulting services also include
operations continuity assessment, planning, training and procedure development.
Consulting products include copyrighted training and reference materials.
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Technical Support and Engineering. General Physics is staffed and equipped to
provide engineering and technical support services and products to clients.
General Physics has civil, mechanical and electrical engineers who provide
consulting, design and evaluation services regarding facilities, process and
systems. General Physics believes that it is a leader in the design and
construction of alternative fuel stations, cryogenic systems and high pressure
systems. Technical support services include procedure writing and configuration
control for capital intensive facilities, plant start-up assistance, logistics
support (e.g., inventory management and control), implementation and engineering
assistance for facility or process modifications, facility management for high
technology training environments, staff augmentation and help-desk support for
standard and customized client desktop applications. Technical support products
include General Physics' proprietary EtaPRO(TM) and Virtual Plant software
applications.
Contracts
General Physics is currently performing under time-and-materials, fixed-price
and cost-reimbursable contracts. General Physics' contracts with the United
States Government have predominantly been cost-reimbursable contracts and
fixed-price contracts. General Physics is required to comply with Federal
Acquisition Regulations and 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
2001 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,
2004:
Fixed-price 70%
Time and materials, including fixed rate 18%
Cost-reimbursable 12%
---
Total revenue 100%
===
General Physics' fixed-price contracts provide for payment to General Physics of
pre-determined amounts as compensation for the delivery of specific products or
services, without regard to the actual cost incurred by General Physics. General
Physics bears the risk that increased or unexpected costs required to perform
the specified services may reduce General Physics' profit or cause General
Physics to sustain a loss, but General Physics has the opportunity to derive
increased profit if the costs required to perform the specified services are
less than expected. Fixed-price contracts generally permit the client to
terminate the contract on written notice; in the event of such termination,
General Physics would typically, at a minimum, be paid a proportionate amount of
the fixed price.
6
General Physics' time-and-materials contracts generally provide for billing of
services based upon the hourly billing rates of the employees performing the
services and the actual expenses incurred multiplied by a specified mark-up
factor up to a certain aggregate dollar amount. General Physics'
time-and-materials contracts include certain contracts under which General
Physics has agreed to provide training, engineering and technical services at
fixed hourly rates (subject to adjustment for labor costs). Time-and-materials
contracts generally permit the client to control the amount, type and timing of
the services to be performed by General Physics and to terminate the contract on
written notice. If a contract is terminated, General Physics typically is paid
for the services provided by it through the date of termination.
General Physics' cost-reimbursable contracts provide for General Physics to be
reimbursed for its actual direct and indirect costs plus a specified fee. These
contracts also are generally subject to termination at the convenience of the
client. If a contract is terminated, General Physics typically would be
reimbursed for its costs to the date of termination, plus the cost of an orderly
termination and paid a proportionate amount of the fee.
No significant terminations of General Physics' contracts have occurred over the
last five years.
International
General Physics conducts its business outside the United States and Canada
primarily through its wholly-owned subsidiaries General Physics (UK) Ltd.,
General Physics Corporation Mexico, S.A. de C.V., General Physics Asia, Pte.
Ltd. and General Physics (Malaysia) Sdn Bhd. Through these companies, General
Physics is capable of providing substantially the same services and products as
are available to clients in the United States, although modified as appropriate
to address the language, business practices and cultural factors unique to each
client and country. In combination with its subsidiaries, General Physics is
able to coordinate the delivery to multi-national clients of services and
products that achieve consistency on a global, enterprise-wide basis.
GSE
GSE is a world leader in real-time power plant simulation. GSE provides
simulation solutions and services to the nuclear and fossil electric utility
industry, as well as process industries such as the chemical and petrochemical
industries. In addition, GSE provides plant monitoring, security access and
control and signal analysis monitoring and optimization software primarily to
the power industry.
Prior to September 25, 2003, GSE also had a process automation and control
business. The automation products of this business unit optimized batch and
hybrid plant control for the specialty chemical, food and beverage and
pharmaceutical industries. On September 25, 2003, GSE completed the sale of
substantially all of the assets of this business to Novatech, LLC. GSE is
currently comprised of three divisions: Power Simulation, Process Simulation and
Emergency Management Simulation.
GSE is positioning itself to take advantage of emerging trends in the power
industry. The operating licenses for numerous nuclear power plants will expire
over the next several years. Fourteen plants have already received license
extensions and sixteen more have applications pending. Many plants are also
planning significant upgrades to the physical equipment and control room
technology in conjunction with the license extensions. Both will result in the
need to modify or replace the existing plant control
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room simulators. GSE, having the largest installed base of existing simulators,
is well positioned to capture the majority of this business.
To address the varying levels of technology that exists across GSE's installed
base, GSE has developed a Java-based graphical overlay technology called JADE
(Java Application Development Environment). JADE provides a common look and feel
to GSE's various simulation tools regardless of whether the underlying
technology is UNIX, LINUX or Microsoft Windows XP. JADE also works with all of
GSE's tools for building electrical, logic and control and flow system models
for plants.
GSE continues to focus on the fossil power segment of the power industry.
Several fossil plant simulator projects were awarded in 2004, expanding GSE's
presence in the market and establishing key strategic relationships with power
industry DCS providers. GSE expects continued growth in this market segment and
is focusing on second time simulation buyers that now demand the more
sophisticated and realistic simulation models offered by GSE. Sales and
marketing resources have been expanded for the fossil power industry.
While GSE simulators are primarily utilized for power plant operator training,
the uses are expanding to include engineering analysis, plant modification
studies and operation efficiency improvements for both nuclear and fossil
utilities. During plant construction, simulators are used to test control
strategies and ensure on-time start-up. After commissioning, the same tools can
be used to increase plant availability and optimize plant performance for the
life of the facility. In 2004, GSE demonstrated its ability to link its
simulation models to plant optimization tools of third parties to provide a
unique and broad based optimization solution. GSE and its partners will be
bringing these new products to market in 2005.
GSE has targeted the Process simulation business as an area with a significant
potential for growth. The process industries, particularly oil and gas and
chemical, are expanding worldwide and are faced with the challenges of
performance improvement at existing facilities and training of personnel to
staff new and upgraded facilities. GSE's SimSuite Pro product and experience in
the process industries provide GSE with excellent capabilities to service these
needs. Dedicated sales and marketing resources have been assigned to Process
simulation to facilitate this initiative.
In 2004, GSE continued to expand the sale of its plant optimization tools based
on advanced signal analysis technology. GSE's Pegasus Plant Surveillance and
Diagnosis System helps improve plant availability, safety and economy. Pegasus
is a software package for semi-automatic plant surveillance and diagnostics and
enables site engineers to perform detailed analysis for specified component
faults, allowing the identification of degraded performance and replacement of
components before they fail. SensBase provides comprehensive sensor test
services, thus ensuring that changes in transmitters and other instruments do
not jeopardize the function of the nuclear plant protection systems. BRUS, a
noise analysis program package, is a collection of signal analysis tools which
allow users to detect developing abnormalities in the plant. GSE's worldwide
reputation for boiling water reactor stability training lead to an increase in
sales of both stability training courses and GSE's SIMON Stability Monitoring
equipment. GSE has been very successful in selling this technology to European
and Asian customers and is investigating its viability in the US market.
The acquisition by the Company of controlling interest in GSE has led to further
cooperation between General Physics and GSE. In addition to cooperating in the
marketing of individual products, the companies have combined some of General
Physics' extensive training materials and programs with
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GSE's power plant simulation models to provide truly interactive and adaptive
total training solutions. Cooperative marketing activities between General
Physics and GSE are intended to enable GSE to extend simulation capabilities
into industries beyond Power and Process and to expand the range of products and
services offered to customers.
In 2003, GSE began to aggressively market its access control and intrusion
detection system to the nuclear and process industries, however, the market has
been slow to develop. The nuclear industry security focus has been on investing
in technology to detect the approach of intruders farther away from the plant
perimeter. As a result, much of the anticipated sales of GSE's GAARDS system
have failed to materialize. At the end of 2003, GSE made the decision to reduce
its investment in this market segment until the market rebounds.
In lieu of pursuing physical security system projects, GSE has turned its
attention to opportunities for simulation in disaster recovery and terrorist
threat response. In 2003, GSE modified its simulation technology to simulate the
operation of Emergency Operations Centers (EOC) run by municipal and state
governments. REMITS is a Real-time Emergency Management Interactive Training
System designed to simulate emergency situations and enable EOC staffs to train
without requiring human participation in the field. REMITS enables the EOC staff
to stay current with the technology and enables instructors to introduce new
problems and challenges during the exercise to test the EOC staff response to
changing situations. As the Federal Government spends billions in first
responder training, GSE believes its REMITS product will find a large market in
the developing field of training for disaster recovery and terrorist threat
response.
CUSTOMERS
General Physics currently provides services to approximately 500 customers.
Significant customers include multinational automotive manufacturers, such as
General Motors Corporation, Ford Motor Company, Mercedes-Benz and Daimler
Chrysler Corporation; commercial electric power utilities, such as Bruce Power,
L.P., First Energy, Consolidated Edison Company of New York, Public Service
Electric & Gas Company and Entergy Operations, Inc.; governmental agencies, such
as the U.S. Department of Defense, U.S. Department of Treasury, Office of
Personnel Management, the U.S. Department of Homeland Security, and U.S. Social
Security Administration; U.S. government prime contractors, such as
Northrop-Grumman, Washington Group International, and Lockheed Martin; and other
large multinational companies, such as Texas Instruments, Merck & Co., Eli Lilly
& Co, IBM Corporation, United Technologies Corporation, Anheuser-Busch Company,
Siemens Dematic Corporation, Agilent Technologies, Inc, and Gerdau Ameristeel
Corporation. Revenue from the United States Government accounted for
approximately 38% of General Physics' revenue for the year ended December 31,
2004. 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 2004, revenue from the Department of the Army,
which is included in United States Government revenue, accounted for
approximately 19% of General Physics' revenue. No other customer accounted for
more than 10% of General Physics' revenue in 2004.
GSE has provided approximately 200 simulation systems to an installed base of
over 75 customers worldwide. GSE's largest customer (Batelle's Pacific Northwest
National Laboratory, a purchasing agent for the U.S. Department of Energy and
the numerous projects GSE performs in Eastern and Central Europe) accounted for
approximately 24% and 29%, respectively, of its revenue in 2004 and
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2003. In 2004, approximately 65% of GSE revenue was generated from customers
outside the United States.
EMPLOYEES
At December 31, 2004, the Company and its subsidiaries employed 1,449 persons,
including 10 in the Company's headquarters, 1,295 at General Physics and 144 at
GSE.
General Physics' principal resource is its personnel. General Physics' future
success depends to a significant degree upon its ability to continue to attract,
retain and integrate into its operations instructors, engineers, technical
personnel and consultants who possess the skills and experience required to meet
the needs of its clients. As of December 31, 2004, General Physics employed
1,295 employees and over 100 adjunct instructors.
General Physics utilizes a variety of methods to attract and retain personnel.
General Physics believes that the compensation and benefits offered to its
employees are competitive with the compensation and benefits available from
other organizations with which it competes for personnel. In addition, General
Physics maintains the professional development of its employees, both internally
via General Physics University (its own internal training resource) and through
third parties, and also offers tuition reimbursement for job-related educational
costs. General Physics believes its relations with its employees are good.
GSE employs a highly educated and experienced multinational workforce of 144
employees, including approximately 80 engineers and scientists. Approximately
60% of these engineers and scientists have advanced science and technical
degrees in fields such as chemical, mechanical and electrical engineering,
applied mathematics and computer sciences. GSE believes its employees offer a
competitive advantage that enhances its position to compete in the Simulation
markets.
COMPETITION
General Physics' services and products face a highly competitive environment.
The principal competitive factors are the experience and capability of service
personnel, performance, quality and functionality of products, reputation and
price. Consulting services such as those provided by General Physics are
performed by many of the customers themselves, large architectural and
engineering firms that have expanded their range of services beyond design and
construction activities, large consulting firms, information technology
companies, major suppliers of equipment, degree-granting colleges and
universities, vocational and technical training schools, continuing education
programs, small privately held training providers and individuals and
independent service companies similar to General Physics. The training industry
is highly fragmented and competitive, with low barriers to entry and no single
competitor accounting for a significant market share. Some of General Physics'
competitors offer services and products that are similar to those of General
Physics at lower prices, and some competitors have significantly greater
financial, managerial, technical, marketing and other resources than does
General Physics. There can be no assurance that General Physics will be
successful against such competition.
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The Power Simulation business encounters intense competition. In the nuclear
simulation market, GSE competes directly with larger firms primarily from Canada
and Germany, such as Canadian Aerospace & Electronics (CAE) and STN Atlas. The
fossil simulation market is represented by smaller companies in the U.S. and
overseas. Several of GSE's competitors have greater capital and other resources
than it has, including, among other advantages, more personnel and greater
marketing, financial, technical and research and development capabilities.
Customer purchasing decisions are generally based upon price, the quality of the
technology, experience in related projects and the financial stability of the
supplier. GSE's competitors in Process Simulation include major corporations
offering a wide range of products and services that include operator training
simulators, companies focused on Process Technology and manufacturing
enhancement, companies with specific industry niches that enables them to
compete in operator training simulation and smaller training companies that
compete at the lower cost levels of Computer Based Training (CBT) or simple
simulations close to CBT. GSE's competition in Emergency Management Simulation
is unclear at this time.
MARKETING
General Physics has approximately 40 employees dedicated primarily to marketing
its services and products. General Physics uses attendance at trade shows,
presentations of technical papers at industry and trade association conferences,
press releases, public courses and workshops given by General Physics personnel
to serve an important marketing function. General Physics also does selective
advertising and sends a variety of sales literature to current and prospective
clients. By staying in contact with clients and looking for opportunities to
provide further services, General Physics sometimes obtains contract awards or
extensions without having to undergo competitive bidding. In other cases,
clients request General Physics to bid competitively. In both cases, General
Physics submits proposals to the client for evaluation. The period between
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).
GSE markets its Power Simulation products and services through a network of
direct sales staff, agents and representatives, systems integrators and
strategic alliance partners. A direct sales force is employed in the continental
United States. Market-oriented business and customer development teams define
and implement specific campaigns to pursue opportunities in the power
marketplace. GSE's ability to support its multi-facility, international and/or
multinational Power Simulation clients is facilitated by its network of offices
and strategic partners in the U.S. and overseas. Power Simulation offices are
maintained in Maryland and Georgia, and outside the U.S. in Sweden, China and
Japan. GSE markets its Process Simulation technologies through a combination of
techniques including its existing direct sales channel, sales agents and
strategic alliance partners. GSE markets its product in the U.S. Homeland
Security industry through the existing sales channels of General Physics and
foreign markets through existing power simulation partners and agents.
BACKLOG
General Physics' backlog for services under signed contracts and subcontracts as
of December 31, 2004 was approximately $105.2 million compared to $74.9 million
as of December 31, 2003. General Physics anticipates that most of its backlog as
of December 31, 2004 will be recognized as revenue during fiscal year 2005,
however, the rate at which services are performed under certain contracts, and
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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.
As of December 31, 2004, GSE's aggregate contract backlog totaled approximately
$19.4 million, down from a backlog of $30.4 million as of December 31, 2003.
Approximately $13.3 million or 69% of the backlog is expected to be converted to
revenue by December 31, 2005.
INSURANCE
By providing services to the commercial electric power industry, in the area of
alternative fuel construction management and to the United States Armed Forces,
the Company is engaged in industries in which there are substantial risks of
potential liability. The Company maintains a consolidated insurance program
(including general liability coverage) and claims made by any covered insured
will reduce the amount of available insurance for the other insureds. In
addition, certain liabilities associated with the Company's business are not
covered by these insurance policies. In addition, such liabilities may not be
covered by Federal legislation providing a liability protection system for
licensees of the Nuclear Regulatory Commission (typically utilities) for certain
damages caused by nuclear incidents, since the Company is not such a licensee.
Finally, few of the Company's contracts with clients contain a waiver or
limitation of liability. Thus, to the extent a risk is neither insured nor
indemnified against nor limited by an enforceable waiver or limitation of
liability, the Company could be materially adversely affected by a nuclear
incident. Certain other environmental risks, such as liability under the
Comprehensive Environmental Response, Compensation and Liability Act, as amended
(Superfund), also may not be covered by the Company's insurance.
ENVIRONMENTAL STATUTES AND REGULATIONS
General Physics provides environmental engineering services to its clients,
including the development and management of site environmental remediation
plans. Due to the increasingly strict requirements imposed by Federal, state and
local environmental laws and regulations (including, without limitation, the
Clean Water Act, the Clean Air Act, Superfund, the Resource Conservation and
Recovery Act and the Occupational Safety and Health Act), General Physics'
opportunities to provide such services may increase.
General Physics' activities in connection with providing environmental
engineering services may also subject General Physics itself to such Federal,
state and local environmental laws and regulations. Although General Physics
subcontracts most remediation construction activities and all removal and
offsite disposal and treatment of hazardous substances, General Physics could
still be held liable for clean-up or violations of such laws as an "operator" or
otherwise under such Federal, state and local environmental laws and regulations
with respect to a site where it has provided environmental engineering and
support services. General Physics believes, however, that it is in compliance in
all material respects with such environmental laws and regulations.
The nuclear power industry is associated with a number of hazards which could
create significant liabilities for GSE. GSE's business could expose it to third
party claims with respect to product, environmental and other similar
liabilities. Although GSE has sought to protect itself from these potential
liabilities through a variety of legal and contractual provisions as well as
through liability insurance, the effectiveness of such protections has not been
fully tested. The failure or malfunction of
12
one of GSE's systems or devices could create potential liability for substantial
monetary damages and environmental cleanup costs. Such damages or claims could
exceed the applicable coverage of their insurance. Although management has no
knowledge of material liability claims against GSE to date, such potential
future claims could have a material adverse effect on their business or
financial condition.
FACTORS AFFECTING OUR FUTURE PERFORMANCE
Set forth below and elsewhere in this report and in other documents the Company
files with the Securities and Exchange Commission are risks and uncertainties
that could cause the Company's actual results to differ materially from the
results contemplated by the forward-looking statements contained in this report
and other public statements the Company makes.
Our holding company structure could adversely affect our ability to pay our
expenses.
Our principal operations are conducted through our General Physics subsidiary.
General Physics' credit agreement currently limits its ability to dividend or
pay funds to us, which could adversely affect our ability to pay our expenses.
We recently identified material weaknesses in our internal controls over
financial reporting, and in our disclosure controls and procedures, and cannot
assure you that we will not find further such weaknesses.
Section 404 of the Sarbanes-Oxley Act of 2002 requires us to conduct an annual
review and evaluation of our internal control of financial reporting and to
include a report on, and an attestation by our independent registered public
accountants, KPMG LLP, of, the effectiveness of these controls, beginning in
this Annual Report on Form 10-K for the fiscal year ending December 31, 2004. On
November 30, 2004, the Securities and Exchange Commission issued an exemptive
order under which certain companies are permitted to delay, for up to 45 days
after the due date of their Annual Report on Form 10-K, the filing of the
internal control report and the related attestation of the independent
registered public accountants. We qualify under the provisions of this exemptive
order for such 45-day delay. In reliance on this exemptive order, this Annual
Report on Form 10-K does not include the internal control report or related
attestation, which we plan to file by amendment prior to the expiration of the
45-day extension.
We are currently performing our assessment of the effectiveness of our internal
control over financial reporting as of December 31, 2004, and have devoted
considerable resources to this effort. In the course of this assessment, we have
identified certain material weaknesses in our internal control over financial
reporting. These material weaknesses arose from deficiencies with respect to our
accounting for income taxes and with respect to the preparation and review of
certain consolidated financial statement footnote disclosures. See Item 9A,
Controls and Procedures.
We are in the process of remediating these deficiencies. In addition, we have
not yet completed this assessment, and cannot assure you that additional
deficiencies or weaknesses in our controls and procedures will not be
identified. The material weaknesses already identified, as well as any other
weaknesses or deficiencies, could harm our business and operating results,
result in adverse publicity and a loss in investor confidence in our financial
reports, which in turn could have an adverse effect on our stock price, and, if
they are not properly remediated, could adversely affect our ability to report
our financial results on a timely and accurate basis.
Failure to continue to attract and retain qualified personnel could harm our
business.
Our principal resource is our personnel. A significant portion of our revenue is
derived from services and products that are delivered by instructors, engineers,
technical personnel and consultants. Our success depends upon our ability to
continue to attract and retain instructors, engineers, technical personnel and
consultants who possess the skills and experience required to meet the needs of
our clients. In order to initiate and develop client relationships and execute
our growth strategy, we must maintain and continue to hire qualified
salespeople. We must also continue to attract and develop capable management
personnel to guide our business and supervise the use of our resources.
Competition for qualified personnel can be intense. We cannot assure you that
qualified personnel will continue to be available to us. Any failure to attract
or retain qualified instructors, engineers, technical personnel, consultants,
salespeople and managers in sufficient numbers could adversely affect our
business and financial condition.
The loss of our key personnel, including our executive management team, could
harm our business.
Our success is largely dependent upon the experience and continued services of
our executive management team and our other key personnel. The loss of one or
more of our key personnel and a failure to attract or promote suitable
replacements for them may adversely affect our business.
13
Our revenue and financial condition could be adversely affected by the loss of
business from significant customers.
For the years ended December 31, 2002, 2003 and the 2004, revenue from the
United States Government represented approximately 32%, 32% and 37% of our
revenue, respectively. However, the revenue was derived from a number of
separate contracts and subcontracts with a variety of government agencies and
contractors we regard as separate customers. Most of our contracts and
subcontracts are subject to termination on written notice, and therefore our
operations are dependent on our clients' continued satisfaction with our
services and their continued inability or unwillingness to perform those
services themselves or to engage other third parties to deliver such services.
Failure to keep pace with technology and changing market needs could harm our
business.
Traditionally, most of our training and performance improvement services and
products have been delivered through instructors, written materials or video.
Our future success will depend upon our ability to gain expertise in
technological advances rapidly and respond quickly to evolving industry trends
and client needs. We intend to deliver many of our training and development
services and products, including some services and products previously delivered
in "traditional" formats, via interactive multimedia software, such as CD-ROM,
and distance-based media, such as video conferencing, intranets and the
Internet. We cannot assure you that we will be successful in adapting to
advances in technology, addressing client needs on a timely basis, or marketing
our services and products in multimedia software and distance-based media
formats. In addition, services and products delivered in the newer formats may
not provide comparable training results. Furthermore, subsequent technological
advances may render moot any successful expansion of the methods of delivering
our services and products. If we are unable to develop new means of delivering
our services and products due to capital, personnel, technological or other
constraints, our business and financial condition could be adversely affected.
Our business and financial condition could be adversely affected by government
limitations on contractor profitability and the possibility of cost
disallowance.
A significant portion of our revenue and profit is derived from contracts and
subcontracts with the United States Government. The United States Government
places limitations on contractor profitability; therefore, government related
contracts may have lower profit margins than the contracts we enter into with
commercial customers. Furthermore, United States Government contracts and
subcontracts are subject to audit by a designated government agency. Although we
have not experienced any material cost disallowances as a result of these
audits, we may be subject to material disallowances in the future.
Changing economic conditions in the United States or the United Kingdom could
harm our business and financial condition.
Our revenues and profitability are related to general levels of economic
activity and employment in the United States and the United Kingdom. As a
result, any significant economic downturn or recession in one or both of those
countries could harm our business and financial condition. A significant portion
of our revenues is derived from Fortune 1000-level companies and their
international equivalents, which historically have adjusted expenditures for
external training during economic downturns. If the economies in which these
companies operate weaken in any future period, these companies may not
14
increase or may reduce their expenditures on external training, which could
adversely affect our business and financial condition.
Our financial results are subject to quarterly fluctuations.
We experience, and expect to continue to experience, fluctuations in quarterly
operating results. Consequently, you should not deem our results for any
particular quarter to be necessarily indicative of future results. These
fluctuations in our quarterly operating results may vary because of, among other
things, the overall level of performance improvement services and products sold,
the gain or loss of material clients, the timing, structure and magnitude of
acquisitions, the commencement or completion of client engagements or custom
services and products in a particular quarter, and the general level of economic
activity. To the extent they are unexpected, downward fluctuations may result in
a decline in the trading price of our Common Stock.
Competition could adversely affect our performance.
The training industry is highly fragmented and competitive, with low barriers to
entry and no single competitor accounting for a significant market share. Our
competitors include several large publicly traded and privately held companies,
vocational and technical training schools, degree-granting colleges and
universities, continuing education programs and thousands of small privately
held training providers and individuals. In addition, many of our clients
maintain internal training departments. Some of our competitors offer similar
services and products at lower prices, and some competitors have significantly
greater financial, managerial, technical, marketing and other resources.
Moreover, we expect to face additional competition from new entrants into the
training and performance improvement market due, in part, to the evolving nature
of the market and the relatively low barriers to entry.
Our history of net losses could cause us to need additional capital.
While we had income from continuing operations of $22.4 million for the year
ended December 31, 2004, for the years ended December 31, 2001, 2002 and 2003,
we experienced net looses of, $945,000, $5,228,000 and $8,276,000, respectively.
If such net losses recur, we will need additional capital to fund our
operations. If adequate funds are not available it may have a negative impact on
our ability to conduct our operations at optimal levels.
We are subject to potential environmental liabilities and liabilities associated
with nuclear incidents.
We provide services that could subject us to significant environmental, third
party and professional liability. If we were found to have been negligent or to
have breached our obligations to our clients, we could be exposed to significant
fines and penalties and third-party liabilities and our reputation could be
adversely affected. The Company maintains a consolidated insurance program
(including general liability coverage) and claims made by any covered insured
will reduce the amount of available insurance for the other insureds. Although
we believe that we currently have appropriate insurance coverage, we may not be
able to obtain appropriate coverage on a cost-effective basis in the future. In
addition, we do not presently have coverage for all of the risks to which we are
subject. For example, liabilities associated with nuclear incidents may not be
covered by our insurance policies, or by indemnification provisions contained in
agreements with clients. In addition, because we are not a licensee, these
liabilities may not be covered by federal legislation providing liability
protection for licensees of the Nuclear Regulatory Commission, typically
utilities, for some damages caused by
15
nuclear incidents. Finally, few of our contracts with clients contain a waiver
or limitation of liability. A nuclear incident could adversely affect our
business and financial condition.
We also provide environmental engineering services to our clients, including the
development and management of site environmental remediation plans. Although we
subcontract most remediation construction activities, and in all cases
subcontract the removal and off-site disposal and treatment of hazardous
substances, we could be subject to liability relating to the environmental
services we perform directly or through subcontracts. Specifically, if we were
deemed under federal and state legislation, including "Superfund" legislation,
to be an "operator" of sites to which we provide environmental engineering and
support services, we could be subject to liabilities. Our insurance policies may
not provide coverage for these risks. Various mechanisms exist whereby the
United States Government may limit liability for environmental claims and losses
or indemnify us for such claims or losses under governmental contracts.
Nonetheless, incurrence of any substantial "Superfund" or other environmental
liability could adversely affect our business and financial condition.
We do not anticipate paying cash dividends on our Common Stock.
We do not, in the foreseeable future, anticipate paying any cash dividends on
our Common Stock.
Our Chief Executive Officer and directors can exercise significant influence
over GP Strategies.
The holder of a share of our Common Stock is entitled to one vote per share and
the holder of a share of our Class B capital stock is entitled to ten votes per
share. As of March 10, 2005, Jerome I. Feldman, our Chairman and Chief Executive
Officer, beneficially owned shares of Common Stock and Class B capital stock
constituting approximately 20% of our voting stock; Harvey Eisen, one of our
directors, beneficially owned shares of Common Stock and Class B capital stock
constituting approximately 18% of our voting stock; and EGI-Fund (02-04)
Investors, L.L.C., which has designated Mathew Zell to be one of our directors,
beneficially owns shares of Common Stock and Class B capital stock constituting
15% of our voting stock. Messrs. Feldman and Eisen and EGI will be able to
influence our management and affairs and all matters requiring stockholder
approval, including the election of directors and approval of significant
corporate transactions. This concentration of ownership may have the effect of
delaying, discouraging or preventing a change in control and might affect the
market price of our Common Stock.
Our stockholder rights plan and authorized preferred stock could make a
third-party acquisition of us difficult.
We have a stockholder rights plan. Our stockholder rights plan would cause
substantial dilution to any person or group that attempts to acquire us on terms
not approved in advance by our Board of Directors. In addition, our certificate
of incorporation allows us to issue up to 5,000,000 shares of preferred stock,
the rights, preferences, qualifications, limitations and restrictions of which
may be fixed by the Board of Directors without any further vote or action by the
stockholders. The stockholder rights plan, the ability to issue preferred stock
and certain provisions in our by-laws may have the effect of delaying,
discouraging or preventing a change in control and might affect the market price
of our Common Stock.
Our certificate of incorporation may discourage foreign ownership of our Common
Stock.
16
The United States Departments of Energy and Defense have policies regarding
foreign ownership, control or influence over government contractors who have
access to classified information, and inquire as to whether any foreign interest
has beneficial ownership of 5% or more of a contractor's or subcontractor's
voting securities. If either Department determines that an undue risk to the
common defense and security of the United States exists, it may, among other
things, terminate the contractor's or subcontractor's existing contracts. Our
certificate of incorporation allows us to redeem or require the prompt
disposition of all or any portion of the shares of our Common Stock owned by a
foreign stockholder beneficially owning 5% or more of the outstanding shares of
our Common Stock if either Department threatens termination of any of our
contracts as a result of such an ownership interest. These provisions may have
the additional effect of delaying, discouraging or preventing a change in
control and might affect the market price of our Common Stock.
FINANCIAL INFORMATION
For financial information about segments and geographic operations and revenue,
see note 15 to notes to Consolidated Financial Statements. Foreign operations
and export sales represent less than 10% of the Company's revenue.
ITEM 2: PROPERTIES
The following information describes the material physical properties owned or
leased by the Company and its subsidiaries.
The Company leases approximately 10,000 square feet of space for its White
Plains, New York principal executive offices. General Physics leases
approximately 30,700 square feet in an office building in Elkridge, Maryland and
approximately 172,000 square feet of office, classroom and warehouse space at
various other locations throughout the United States, the United Kingdom,
Canada, Mexico and Malaysia.
GSE is headquartered in an approximately 53,000 square feet facility in
Columbia, Maryland which also houses their support functions. In addition, GSE
leases office space domestically in Georgia and internationally in China, Japan
and Sweden. GSE leases these facilities for terms ending between 2005 and 2008.
The facilities owned or leased by the Company are considered to be suitable and
adequate for their intended uses and are considered to be well maintained and in
good condition.
ITEM 3: LEGAL PROCEEDINGS
On January 3, 2001, the Company commenced an action alleging that MCI
Communications Corporation, ("MCI') MCI's Systemhouse subsidiaries
("Systemhouse"), and Electronic Data Systems Corporation, as successor to
Systemhouse, ("EDS") committed fraud in connection with the Company's 1998
acquisition of Learning Technologies from the defendants for $24.3 million. The
Company seeks actual damages in the amount of $117.9 million plus interest,
punitive damages in an amount to be determined at trial, and costs. Such damages
are subject to reduction by the amount recovered in the arbitration described
below.
The complaint, which is pending in the New York State Supreme Court, alleges
that the defendants fraudulently induced the Company to acquire Learning
Technologies by concealing the poor
17
performance of Learning Technologies' United Kingdom operation. The complaint
also alleges that the defendants represented that Learning Technologies would
continue to receive new business from Systemhouse even though the defendants
knew that the sale of Systemhouse to EDS was imminent and that such new business
would cease after such sale. In February 2001, the defendants filed answers
denying liability. No counterclaims against the plaintiffs have been asserted.
Although discovery had not yet been completed, defendants made a motion for
summary judgment, which was submitted in April 2002. The motion was denied by
the court due to the MCI bankruptcy described below, but with leave to the other
defendants to renew, as described below.
The defendants other than MCI then made an application to the court to stay the
fraud action until a later-commenced arbitration, alleging breach of the
acquisition agreement and of a separate agreement to refer business to General
Physics on a preferred provider basis and seeking actual damages in the amount
of $17.6 million plus interest, is concluded. In a decision dated May 9, 2003,
the court granted the motion and stayed the fraud action pending the outcome of
the arbitration.
The arbitration hearings began on May 17, 2004 and concluded on May 24, 2004
before JAMS, a private dispute resolution firm. On September 10, 2004, the
arbitrator issued an interim award in which she found that the sellers of
Learning Technologies breached certain representations and warranties contained
in the acquisition agreement. In a final award dated November 29, 2004, the
arbitrator awarded General Physics $12.3 million in damages and $6.0 million in
interest. EDS made a payment of $18.4 million, which includes an additional $0.1
million of accrued interest, to General Physics in December 2004 to satisfy its
obligation under the arbitration award. The Company recognized a gain on
arbitration settlement, net of legal fees and expenses, of $13.7 million in
2004. EDS subsequently agreed that the arbitration award is final and binding
and that it will take no steps of any kind to vacate or otherwise challenge the
award.
As a result of the conclusion of the arbitration, the state court has lifted the
stay of the fraud claim against EDS. The Company is now proceeding with the
fraud claim against EDS. On February 14, 2005, EDS filed a new motion for
summary judgment dismissing the Company's fraud claim. The Company must respond
to the motion by March 17, 2005. The motion is currently scheduled for argument
on April 4, 2005.
The fraud action against MCI had been stayed as a result of the bankruptcy of
MCI. In February 2004, the Bankruptcy Court lifted the stay so that the state
court could rule on the merits of MCI's summary judgment motion. MCI has stated
that it intends to ask the Bankruptcy Court to reinstate the stay.
In connection with the spin-off of NPDC by the Company, which occurred on
November 24, 2004, the Company agreed to make an additional capital contribution
to NPDC in an amount equal to the first $5 million of any proceeds (net of
litigation expenses and taxes incurred, if any), and 50% of any proceeds (net of
litigation expenses and taxes incurred, if any) in excess of $15 million,
received with respect to the foregoing arbitration and litigation claims.
Pursuant to such agreement, in January 2005, the Company has made a $5 million
additional capital contribution to NPDC from the proceeds of the arbitration
award. After payment of such additional capital contribution and legal fees, the
net proceeds retained by General Physics are $8.5 million. A portion of such net
proceeds was used in January 2005 to reduce to zero the outstanding balance of
General Physics' revolving credit facility.
18
The Company is not a party to any legal proceeding, the outcome of which is
believed by management to have a reasonable likelihood of having a material
adverse effect upon the financial condition and operating results of the
Company.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this report.
19
PART II
ITEM 5: MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock, $.01 par value, is traded on the New York Stock
Exchange. The following table presents its high and low market prices for the
last two fiscal years. During the periods presented below, the Company has not
paid any dividends.
2004
-------------
QUARTER HIGH LOW
- ---------- ----- -----
First $7.93 $6.29
Second 7.60 6.27
Third 7.45 6.05
Fourth (1) 8.95 6.64
2003
-------------
QUARTER HIGH LOW
- ---------- ----- -----
First $5.30 $4.72
Second 6.60 4.62
Third 7.44 5.90
Fourth 8.00 7.01
(1) On November 24, 2004, the Company distributed 100% of the common stock of
NPDC to the Company's shareholders on record date of November 18, 2004.
Holders of recorded received one share of NPDC common stock for each share
of GP Strategies common stock or Class B capital stock owned. The closing
price of the NPDC stock was $1.00 per share on November 24, 2004.
The number of shareholders of record of the Common Stock as of March 10, 2005
was 1,282 and the closing price of the Common Stock on the New York Stock
Exchange on that date was $8.02.
The Company has not declared or paid any cash dividends on its Common Stock
during the two most recent fiscal years. The Company currently intends to retain
future earnings to finance the growth and development of its business. In
addition, the General Physics Credit Agreement (see Item 7 below) contains
restrictive covenants, including a prohibition on the payment of dividends.
General Physics is currently restricted from paying dividends or management fees
to the Company in excess of $1.0 million in any fiscal year.
20
Equity Compensation Plan information as of December 31, 2004
GP STRATEGIES
NON-QUALIFIED CORPORATION'S
STOCK OPTION 2003 INCENTIVE
PLAN STOCK PLAN
------------- --------------
Plan category:
Equity compensation plans not approved by security holders:
(A) Number of securities to be issued upon exercise
of outstanding options (1) 1,821,829
(B) Weighted average exercise price of outstanding
options (1) $ 4.73
(C) Number of securities remaining available for future
issuance under equity compensation plans
(excluding securities reflected in row (a)) (2) 1,366,299
Equity compensation plans approved by security holders:
(A) Number of securities to be issued upon exercise
of outstanding options, warrants and rights --
(B) Weighted average exercise price of outstanding
options, warrants and rights $ --
(C) Number of securities remaining available for future
issuance under equity compensation plans 2,000,000
(1) Does not include warrants to purchase 300,000 shares of Common Stock issued
to a financial consulting firm at an exercise price of $3.21 per share and
warrants to purchase 937,500 shares issued and sold to four Gabelli funds
in conjunction with the 6% Conditional Subordinated Notes due 2008 at an
exercise price of $6.14 per share.
(2) Does not include shares of Common Stock that may be issued to directors of
the Company as director's fees.
For a description of the material terms of the Company's Non-Qualified Stock
Option Plan and the Company's 2003 Incentive Stock Plan, see note 14 to the
notes to the Consolidated Financial Statements.
Directors of the Company who are not employees of the Company or its
subsidiaries receive an annual fee of $10,000, payable quarterly. At the option
of each director up to one-half of the annual fee could be paid in Common Stock.
In addition, the directors receive $1,500 for each meeting of the Board of
Directors attended, and generally do not receive any additional compensation for
service on the committees of the Board of Directors other than the Audit
Committee. Employees of the Company or its subsidiaries do not receive
additional compensation for serving as directors.
21
ITEM 6: SELECTED CONSOLIDATED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
The selected financial data presented below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our consolidated financial statements and the notes thereto
included elsewhere in this report. Our consolidated statement of operations data
for the years ended December 31, 2004, 2003, and 2002 and our consolidated
balance sheet data as of December 31, 2004 and 2003 have been derived from our
audited consolidated financial statements included elsewhere in this report
which have been audited by KPMG LLP, whose report is included elsewhere in this
report. Our statement of operations data for the years ended December 31, 2001
and 2000 and our balance sheet data as of December 31, 2002, 2001, and 2000 have
been derived from unaudited consolidated financial statements, which are not
presented in this report.
On November 24, 2004, we completed the spin-off of NPDC. The results of
operations of NPDC have been reclassified as discontinued operations in the
consolidated statements of operations for all periods presented.
YEARS ENDED DECEMBER 31,
----------------------------------------------------
(in thousands, except per share amounts) 2004 2003 2002 2001 2000
-------- -------- -------- -------- --------
Revenue $193,973 $140,034 $142,237 $175,422 $186,452
Gross profit 25,963 17,095 15,366 20,332 17,633
Gain from arbitration settlement, net 13,660 -- -- -- --
Interest expense 2,113 3,123 2,467 4,418 5,559
Income (loss) from continuing operations before taxes
and minority interests 14,424 (7,186) (4,799) 3,937 (33,611)
Income (loss) from continuing operations 22,445 (8,111) (4,504) 428 (25,012)
Income (loss) from discontinued operations, net of taxes 75 (165) (724) (1,373) (380)
Net income (loss) 22,520 (8,276) (5,228) (945) (25,392)
Diluted income (loss) per share:
Income (loss) from continuing operations $ 1.23 $ (0.47) $ (0.29) $ 0.04 $ (2.01)
Income (loss) from discontinued operations -- (0.01) (0.05) (0.13) (0.03)
Net income (loss) 1.23 (0.48) (0.34) (0.09) (2.04)
DECEMBER 31,
----------------------------------------------------
BALANCE SHEET DATA (1) 2004 2003 2002 2001 2000
- ---------------------- -------- -------- -------- -------- --------
Cash and cash equivalents $ 2,417 $ 4,416 $ 1,516 $ 1,705 $ 11,317
Short-term borrowings 6,068 26,521 22,058 32,338 36,162
Working capital (deficit) 20,601 17,998 780 (2,750) 1,834
Total assets 156,035 188,323 144,905 160,824 212,578
Long-term debt 11,051 14,861 6,912 6,863 17,612
Stockholders' equity 91,620 92,812 92,982 95,943 112,518
(1) On November 24, 2004, the Company distributed net assets of $26.0 million
to NPDC in connection with its spin-off.
22
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS:
RESULTS OF OPERATIONS
General Overview
The Company's primary operating entity is General Physics, a global workforce
development company that improves the effectiveness of organizations by
providing training, management consulting, e-Learning solutions and engineering
services that are customized to meet the specific needs of clients. Clients
include Fortune 500 companies, manufacturing, process and energy companies and
other commercial and governmental customers.
The Company's other operating entity is its majority owned subsidiary, GSE
Systems Inc. ("GSE"), which was formerly called the Simulation segment. GSE is a
world leader in real-time high fidelity simulation technology and model
development and provides simulation solutions and services to the power
generation industry, the process industries, and the U.S. Government sector. In
addition, GSE provides plant monitoring and signal analysis monitoring and
optimization software primarily to the power industry, and develops specialized
software applications for emerging technologies.
Prior to November 24, 2004 the Company had five operating business segments:
Manufacturing & Process, Information Technology, Simulation, Optical Plastics
and Home Improvement Distribution. On November 24, 2004, we completed the
distribution, which we refer to as the "spin-off," of the common stock of
National Patent Development Corporation ("NPDC"), which comprised our Optical
Plastics and Home Improvement Distribution segments and certain other non-core
assets. We reorganized the Manufacturing & Process and Information Technology
segments into the General Physics segment. Effective with the spin-off, the
operations of NPDC were reclassified as discontinued operations for all periods
presented.
General Physics Overview
General Physics provides performance improvement services and products to
multinational companies in manufacturing and process industries, electric power
utilities and other commercial and governmental customers. General Physics is a
global leader in performance improvement, with over three decades of experience
in providing solutions to optimize workforce performance.
In 2004 General Physics showed a significant increase in profit, and continued
to post improved revenue results. The improvement in performance is primarily
attributable to the company's key initiatives; business process outsourcing and
training, e-Learning; and Domestic Preparedness and Emergency Management. The
company experienced growth in the last two years across each of these areas
contributing to the improved revenue and profit margins. General Physics plans
to continue to focus on growth in these areas in 2005. General Physics also
experienced an improvement in the training market in 2004.
On December 30, 2004, EDS made a payment of $18.4 million, which included $0.1
million of accrued interest, to General Physics to satisfy its obligation under
the arbitration award regarding the Learning Technologies acquisition. General
Physics recognized a gain on arbitration settlement, net of legal fees and
expenses, of $13.7 million in 2004. The net cash proceeds to General Physics was
approximately
23
$8.5 million after legal fees and a $5.0 million distribution to NPDC. On
January 6, 2005, General Physics used a portion of the proceeds to fully pay off
its $6.1 million of short term borrowings outstanding under the Credit Agreement
as of December 31, 2004. General Physics has no plans for any significant
capital expenditures in 2005, and expects the amounts generated from cash and
operations and cash available for borrowing under its Credit Agreement of
approximately $20.0 million, to be sufficient to finance it's ongoing
operations.
GSE Overview
GSE is a world leader in real-time power plant simulation. GSE provides
simulation solutions and services to the nuclear and fossil electric utility
industry, as well as process industries such as the chemical and petrochemical
industries. In addition, GSE provides plant monitoring, security access and
control and signal analysis monitoring and optimization software primarily to
the power industry.
GSE enters 2005 with no bank debt and only $9,000 of other notes payable.
However, GSE's backlog has decreased 36% in 2004, and GSE is investing heavily
in business development activities to expand its simulation business into the
Homeland Security and US Military industries. GSE's business is substantially
dependent on sales to the nuclear power industry (85% of revenue in 2004).
Spending by companies in this targeted industry is subject to period-to-period
fluctuations as a consequence of industry cycles, economic conditions, political
and regulatory environments and other factors; GSE's efforts to expand its
simulation business into the Homeland Security and US Military industries may
not generate sufficient revenues and margins in 2005 to offset the increased
business development spending; GSE relies on one customer, Battelle's Pacific
Northwest National Laboratory (24% of revenue in 2004) for a substantial portion
of its revenues. The loss of this customer would have a material adverse effect
upon GSE's results. Sales of products and the provision of services to end users
outside the United States accounted for approximately 65% of GSE's revenue in
2004. Thus, GSE is subject to risks associated with the application and
imposition of protective legislation and regulations relating to import or
export or otherwise resulting from trade or foreign policy.
Spin-off of National Patent Development Corporation
In July 2002, the Company's Board of Directors approved a spin-off of certain of
its non-core assets into a separate corporation, NPDC, leaving the Company's
business comprised of its training and workforce development business operated
by General Physics and the GSE simulation business. The separation of these
businesses was accomplished through a pro-rata distribution (the Distribution)
of 100% of the outstanding common stock of NPDC to the Company's stockholders on
the record date of the Distribution. NPDC is a stand-alone public company owning
all of the stock of MXL, the interest in Five Star and certain other non-core
assets. Following the spin-off, the Company ceased to have any ownership
interest in NPDC.
On March 21, 2003, the Internal Revenue Service issued a favorable tax ruling,
which enabled the Distribution to be tax-free. In the spin-off, holders of
record on November 18, 2004 of GP Strategies common stock and Class B capital
stock on November 24, 2004 received one share of NPDC common stock for each
share of GP Strategies common stock or Class B capital stock owned.
The spin-off is expected to result in several benefits to the Company and its
shareholders. By engaging in the spin-off, the Company believes that it will
improve its access to capital and significantly improve
24
its borrowing capacity, thereby facilitating its ability to raise additional
funds as well as achieving other corporate benefits. Having two separate public
companies will enable financial markets to better evaluate each company more
effectively, thereby enhancing stockholder value over the long term and making
the stock more attractive as currency for future acquisitions.
In accordance with Statement of Financial Accounting Standards (SFAS) No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets" (SFAS 144),
discontinued businesses are removed from the results of continuing operations
and are classified as discontinued operations in the consolidated statements of
operations. The following table sets forth the components of income (loss) from
discontinued operations for the period from January 1, 2004 to November 24, 2004
and for the fiscal years ended December 31, 2003 and 2002 (in thousands):
2004 2003 2002
-------- ------- ------
Revenue $104,067 $28,644 $9,996
Operating income (loss) 1,594 (189) 286
Interest expense (1,108) (502) (303)
Income taxes (expense) benefit (333) 99 524
Income (loss) from discontinued operations, net
of income taxes 75 (165) (724)
The results of the discontinued operations for 2004 include the results of Five
Star, which were consolidated with the Company effective October 8, 2003, when
the Company increased its ownership interest to 54%. Previously the Company
accounted for its investment in Five Star under the equity method (see note 6 to
the consolidated financial statements). In accordance with SFAS No. 144, only
those overhead costs that are solely attributable to the discontinued business
segments have been allocated to discontinued operations. As a result, 2004, 2003
and 2002 include overhead expenses that were incurred for the benefit of both
our continuing and discontinued operations, which are included in continuing
operations. Consolidated interest expense in periods prior to the spin-off has
been allocated to discontinued operations using a basis of net assets of each of
the continuing and discontinued business segments as of November 24, 2004.
25
The assets and liabilities distributed to NPDC in connection with the spin-off
included those specific to MXL, Five Star and certain other non-core assets. The
following table summarizes the net assets and liabilities distributed to NPDC on
November 24, 2004 (in thousands):
Assets:
Cash and cash equivalents $ 2,453
Due from GP Strategies (arbitration award) 5,000
Accounts and other receivables 14,002
Inventories 25,691
Prepaid expenses and other current assets 391
Investments and marketable securities 1,593
Property, plant and equipment, net 5,553
Deferred tax assets, net 4,045
Goodwill and other assets 2,818
-------
Total assets 61,546
-------
Liabilities:
Accounts payable and accrued expenses 12,672
Short-term borrowings 18,330
Long-term debt 2,961
Minority interest and other liabilities 1,616
-------
Total liabilities 35,579
-------
Net assets distributed to NPDC $25,967
=======
Operating Highlights
YEAR ENDED DECEMBER 31, 2004 COMPARED TO THE YEAR ENDED DECEMBER 31, 2003
Revenue
YEARS ENDED DECEMBER 31,
------------------------
(Dollars in Thousands) 2004 2003
-------- --------
General Physics $165,066 $133,975
GSE 28,907 6,059
-------- --------
$193,973 $140,034
======== ========
26
Revenue of General Physics increased by $31.1 million from 2003 to 2004
primarily due to increases in revenue from the organization's government
training, business process outsource and e-Learning businesses. Contract awards
continued to increase in 2004 for government training and domestic preparedness
services. The business process outsource organization received new contracts
from both government and commercial clients at the end of 2003 and in 2004 to
provide outsourced training management services. The e-Learning organization was
awarded several new contracts in 2004 with the U.S. government to provide
hosting and learning management systems integration services. The segment also
experienced a revenue increase of approximately $5.4 million in 2004 related to
hurricane relief services provided in the State of Florida. The Company does not
anticipate that these services will be a continuing stream of revenue going
forward. The overall increase in revenue was offset by a continued decline in
training-related revenue with certain automotive clients.
Revenue of GSE increased by $22.8 million from 2003 to 2004 primarily
attributable to the consolidation of GSE. In the fourth quarter of 2003 the
Company acquired additional shares of GSE, bringing its ownership to 58% as of
October 23, 2003. As a result, revenue of GSE was only consolidated in the
Company's results in the fourth quarter of 2003, while 2004 includes a full year
of GSE revenue.
Gross Profit
YEARS ENDED DECEMBER 31,
-----------------------------------------
(Dollars in thousands) 2004 2003
------------------- -------------------
% Revenue % Revenue
--------- ---------
General Physics $19,947 12.1% $15,501 11.6%
GSE 6,016 20.8% 1,594 26.3%
------- ---- ------- ----
$25,963 13.4% $17,095 12.2%
======= ==== ======= ====
General Physics gross profit of $19.9 million or 12.1% of revenue, in 2004
increased by $4.4 million or 28.7%, when compared to gross profit of $15.5
million, or 11.6% of revenue, in 2003. This increase in gross profit was
primarily driven by increases in revenue from the government training, business
process outsource and e-Learning businesses. While overhead expenses remained
flat year over year, the incremental profit increase was offset slightly by
increases in employee benefits due to the growth of the business.
GSE gross profit of $6.0 million or 20.8% of revenue in 2004 increased by $4.4
million, when compared to gross profit of $1.6 million, or 26.3% of revenue, in
2003, was attributable to the consolidation of GSE. In the fourth quarter of
2003 the Company acquired a majority ownership in GSE and as a result, gross
profit of GSE was only consolidated in the Company's results in the fourth
quarter of 2003, while 2004 includes a full year of GSE gross profit. GSE's
revenue for full year 2003 was $25.0 million.
Selling, General and Administrative Expense
SG&A increased $0.8 million or 3.5% from 2003 to 2004. This increase relates to
the following off-setting variances: GSE consolidation for a full year in 2004,
increased SG&A by $5.0 million; Corporate SG&A decreased in 2004 approximately
$4.2 million primarily due to reduced executive
27
compensation and payroll costs of $1.5 million and reduced legal and other
professional fees of $2.5 million; SG&A included corporate overhead expenses
that were for the benefit of both continuing and discontinued operations. Only
those costs that were solely attributable to the discontinued business segments
have been allocated to discontinued operations.
Interest Expense
The decrease in interest expense of $1.0 million from 2003 to 2004 was primarily
attributable to the Company's write-off of deferred financing costs on its prior
credit agreement of $0.9 million, as well as lower General Physics interest
expense, due to lower average borrowing levels in 2004 as compared to 2003.
Other Income
Other income of $0.6 million for 2004 was primarily related to interest income
on loans receivable of $0.3 million and other income of $0.3 million.
The Company recognized a gain of $13.7 million from the arbitration award paid
by EDS in the fourth quarter of 2004 (see General Physics Overview - above).
2003 - See year ended December 31, 2003 compared to the year ended December 31,
2002.
Income Taxes
Income tax benefit was $8.0 million in 2004 as a result of the Company's
reduction in valuation allowance offset by current tax provision. Income tax
expense was $1.0 million in 2003. In 2004, the Company's taxable income before
utilization of net operating loss carry forwards was approximately $22.0
million. In assessing the realizability of it's deferred tax assets, management
considered it more likely than not that it's deferred tax assets would be
realized and reduced its deferred tax valuation allowance by $12.2 million. As
of December 31, 2004, the Company had federal net operating loss carry forwards
of $19.3 million, which expire during 2022 and 2023.
28
YEAR ENDED DECEMBER 31, 2003 COMPARED TO THE YEAR ENDED DECEMBER 31, 2002
Revenue
YEARS ENDED DECEMBER 31,
------------------------
(Dollars in thousands) 2003 2002
-------- --------
General Physics $133,975 $142,237
GSE 6,059 --
-------- --------
$140,034 $142,237
======== ========
Revenue of General Physics, decreased by $8.3 million from 2002 to 2003
primarily due to a decrease in engineering and related services in connection
with Liquefied Natural Gas projects, decreased services provided to nuclear
power utilities, a decline in attendance at General Physics open enrollment
courses primarily due to reduced spending on training within the automotive
industry, General Physics's decision to focus on higher margin projects and
discontinue certain work with lower margins, and a general decline in client
spending (and budgets for spending) on consulting, training services, and
technology due to overall economic conditions in 2003. The decline in revenue
was partially offset by an increase in revenue from the US Government for
domestic preparedness training services for the Department of Homeland Security.
GSE revenue increased by $6.1 million in 2003 attributable to the consolidation
of GSE. In the fourth quarter of 2003 the Company acquired additional shares of
GSE, bringing its ownership to 58% as of October 23, 2003. As a result, revenue
of GSE was consolidated in the Company's results for the fourth quarter of 2003,
while 2002 does not include GSE revenue.
Gross Profit
YEARS ENDED DECEMBER 31,
----------------------------------------
(Dollars in thousands) 2003 2002
------------------- ------------------
% Revenue %Revenue
--------- --------
General Physics $15,501 11.6% $15,366 10.8%
GSE 1,594 26.3% -- --
------- ---- ------- ----
$17,095 12.2% $15,366 10.8%
======= ==== ======= ====
General Physics gross profit of $15.5 million or 11.6% of revenue, in 2003
increased by $135,000 or 0.9% when compared to gross profit of $15.4 million or
10.8% of revenue, in 2002. During this time General Physics experienced a
revenue decline which resulted in a loss of margin. However, General Physcis
made a decision to focus on higher gross margin opportunities and undertook cost
savings initiatives to preserve margin. The results of these initiatives allowed
General Physics to slightly increase gross profit in both dollars and as a
percentage of revenue.
29
GSE gross profit increased by $1.6 million from 2002 to 2003 attributable to the
consolidation of GSE. In the fourth quarter of 2003 the gross profit of GSE was
consolidated in Company's fourth quarter of 2003, while 2002 does not include
GSE gross profit.
Selling, General and Administrative Expense
The increase in SG&A of $3.7 million in 2003 from 2002 was primarily
attributable the following factors: $1.2 million of SG&A for the consolidation
of GSE in the Company's financial statements subsequent to the GSE acquisition;
executive incentive bonuses of $3.0 million; a non-cash debt conversion expense
of $0.6 million; and a decrease in the non-cash credit to compensation expense
of $1.1 million, relating to certain stock options to purchase stock of an
affiliate accounted for using the fair value method. The increase was offset by
a decrease in severance and related expense of $2.1 million.
Interest Expense
The increase in interest expense in 2003 of $0.7 million is primarily due to the
write off of $0.9 million of deferred financing costs as a result of the early
termination of the Company's prior credit agreement. This expense is included in
interest expense for year ended December 31, 2003.
Other Income
2003
The investment and other loss of $0.2 million for 2003 was primarily related to
an equity loss of GSE of $0.7 million (before its consolidation), offset by
interest income on loans receivable of $0.4.
The gains on marketable securities of $0.6 million in 2003 were primarily due to
the Company's disposal of shares of Millennium. Gains on sale of shares of
Millennium prior to the transfer of 1,000,000 shares of Millennium to MXL in
repayment of certain intercompany debt on October 17, 2003, are recorded as part
of operating results from continuing operations. Gains on sale of Millennium by
MXL after October 17, 2003 are recorded as part of operating results from
discontinued operations.
Pursuant to a Note and Warrant Purchase Agreement dated August 8, 2003, the
Company issued and sold to four Gabelli Funds $7,500,000 aggregate principal
amount of 6% Conditional Subordinated Notes due 2008 (the "Gabelli Notes") and
937,500 warrants ("GP Warrants"), each entitling the holder thereof to purchase
(subject to adjustment) one share of the Company's common stock. The changes in
the fair market value of the GP Warrants were marked to market through December
8, 2003 with the adjustment shown as other income in the consolidated statement
of operations. The Company recognized a gain of $1.4 million in its December 8,
2003 valuation adjustment of the liability relating to the GP Warrants using the
Black-Scholes model.
2002
The investment and other loss of $0.7 million for 2003 was primarily related to
an equity loss of GSE of $1.2 million, offset by interest income on loans
receivable of $0.6 million.
The gains on marketable securities of $2.3 million in 2002 were primarily due to
the Company's disposal of shares of Millennium.
30
Income Taxes
The Company recognized income tax expense of $1.0 million in 2003 and an income
tax benefit of $0.3 million in 2002.
Income (Loss) on Discontinued Operations
The decreased loss from discontinued operation of $0.6 million in 2003 was
primarily due to 2002 equity in losses of Valera Pharmaceuticals.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2004, the Company had cash and cash equivalents totaling $2.4
million. In addition the Company had cash held in escrow of $13.8 million from
the EDS arbitration award, of which the Company received approximately $8.5
million in January 2005, net of the $5.0 million distribution to NPDC. The
Company believes that cash generated from operations and borrowings availability
under the Credit Agreement (described below), will be sufficient to fund the
working capital and other requirements of the Company for the foreseeable
future. The Company does not believe the spin-off of NPDC will significantly
impact the Company's liquidity.
For the year ended December 31, 2004, the Company's working capital increased by
$2.6 million from $18.0 million to $20.6 million. The Company has increased
working capital during the year ended December 31, 2004 mainly due to receiving
the proceeds of the arbitration award against EDS, as well as increases in
current assets such as accounts receivable and unbilled receivables, due to
increased revenues.
The decrease in cash and cash equivalents of $2.0 million for the year ended
December 31, 2004 resulted from cash used in investing activities of $1.4
million and cash used in financing activities of $4.9 million; offset by cash
provided by operations of $4.2 million and the effect of exchange rate changes
on cash of $0.1 million. Net cash used in investing activities of $1.4 million
includes $1.8 million of capital expenditures and $0.3 million in additions to
intangible assets; offset by proceeds from the sale of marketable securities of
$0.6 million. Net cash used in financing activities of $4.9 million consisted of
cash distributed in the spin-off of $2.5 million; repayments of short-term
borrowings of $2.1 million; and repayments of long-term debt of $1.1 million;
offset by net proceeds from exercises of stock options of $0.9 million.
On October 23, 2003, the Company purchased from ManTech International
("ManTech") additional shares of GSE common stock in exchange for a 5% note for
$5.3 million due in full in October 2008. Interest is payable quarterly. Each
year during the term of the note, ManTech has the option to convert up to 20% of
the original principal amount of the note into common stock of the Company at
the then market price of the Company's common stock, but only in the event that
the Company's common stock is trading at $10 per share or more. In the event
that less than 20% of the principal amount of the note is not converted in any
year, such amount not converted will be eligible for conversion in each
subsequent year until converted or until the note is repaid in cash.
On August 13, 2003, General Physics, General Physics' subsidiary SkillRight,
Inc. and MXL Industries Inc. ("MXL") entered into a two-year $25 million
Financing and Security Agreement (Credit Agreement) with a bank, the proceeds of
which were used to repay the Company's previous credit
31
facility. The interest rate on borrowings under the Credit Agreement is at Libor
Market Index Rate plus 3%. The Credit Agreement, as amended in March 2004 to
include GSE, is secured by certain assets of General Physics. The Credit
Agreement also provides for an unsecured guaranty from the Company. The Credit
Agreement also contains certain restrictive covenants including a prohibition on
future acquisitions, incurrence of debt and the payment of dividends. The
Company received a waiver under the Credit Agreement with respect to the GSE
Acquisition. General Physics is currently restricted from paying dividends and
management fees to the Company in excess of $1.0 million in any fiscal year. On
July 30, 2004, General Physics received a waiver and paid the Company an
additional $1.0 million. The Company repaid in full the $6.1 million outstanding
under the Credit Agreement as of December 31, 2004 in January of 2005, using the
proceeds received from the EDS arbitration award (see Item 3). On March 9, 2005,
General Physics received a waiver to loan GSE a maximum of $1.0 million to
satisfy any GSE short-term capital requirements over the next 15 months.
Pursuant to a Note and Warrant Purchase Agreement dated August 8, 2003, the
Company issued and sold to four Gabelli funds $7.5 million aggregate principal
amount of 6% Conditional Subordinated Notes due 2008 and 937,500 warrants, each
entitling the holder thereof to purchase (subject to adjustment) one share of
the Company's common stock. The aggregate purchase price for the Gabelli Notes
and GP Warrants was $7.5 million. The Gabelli Notes are secured by a mortgage on
the Company's former property located in Pawling, New York which was distributed
to NPDC. In addition, at any time that less than $1.0 million principal amount
of the Gabelli Notes are outstanding, the Company may defease the obligations
secured by the mortgage and obtain a release of the mortgage by depositing with
an agent for the Noteholders, bonds or government securities with an investment
grade rating by a nationally recognized rating agency which, without
reinvestment, will provide cash on the maturity date of the Gabelli Notes in an
amount not less than the outstanding principal amount of the Gabelli Notes. The
Company used $5.8 million of the proceeds to repay its previous credit facility.
The Company and NPDC agreed to allocate to NPDC $1.9 million of the $7.5 million
received for the Gabelli Notes and Warrants, which the Company transferred to
NPDC prior to the spin-off of NPDC.
On March 30, 2004, GSE was added as an additional borrower under the General
Physics Credit Agreement. Under the terms of the Credit Agreement, as amended,
$1.5 million of General Physics' Credit Agreement has been allocated for use by
GSE. The Credit Agreement was amended to provide for additional collateral
consisting of substantially all of the GSE's assets as well as certain covenants
specific to GSE. It provides for borrowings by GSE up to 80% of eligible
accounts receivable and 80% of eligible unbilled receivables, up to a maximum of
$1.5 million. The interest rate is based upon the LIBOR Market Index Rate plus
3%, with interest only payments due monthly. The Company agreed to guarantee
GSE's borrowings under the Credit Agreement, as amended, in consideration for a
fee pursuant to the Management Services Agreement.
Contractual Obligations and Commitments
The following table summarizes long-term debt, capital lease commitments,
operating lease commitments, purchase commitments and employment agreements as
of December 31, 2004 (in thousands):
32
PAYMENTS DUE IN
-----------------------------------------------
2006 - 2008 AFTER
2005 2007 2009 2009 TOTAL
------- ------- ------- ------- -------
Long-term debt $ 9 $ -- $12,751 $ -- $12,760
Capital lease commitments 91 90 -- -- 181
Operating lease commitments 4,964 6,621 2,669 5,313 19,567
Purchase commitments 28,496 2,678 29 31,203
Employment agreements 2,080 3,093 471 5,644
------- ------- ------- ------- -------
Total $35,640 $12,482 $15,920 $ 5,313 $69,355
======= ======= ======= ======= =======
Off-Balance Sheet Commitments
The Company has guaranteed the leases for Five Star New Jersey and Connecticut
warehouses, totaling $1.6 million per year through the first quarter of 2007.
The Company's guarantee of such leases was in effect when Five Star was
originally a wholly owned subsidiary of the Company prior to the sale by the
Company in 1998 of substantially all of the operating assets of Five Star Group
to the predecessor company of Five Star. As part of this transaction, the
landlords of the New Jersey and Connecticut facilities did not consent to the
release of the Company's guarantee. The Company's guarantee of Five Star's
leases was not affected by the spin-off of NPDC.
General Physics has two letters of credit outstanding, which as of December 31,
2004 amount to approximately $0.3 million and expire in 2005. In addition the
Company guarantees MXL loans totaling approximately $2.9 million as of December
31, 2004.
The Company does not have any off-balance sheet financing, other than operating
leases and letters of credit entered into in the normal course of business and
disclosed above. GSE utilizes various derivative financial instruments to manage
market risks associated with the fluctuations in foreign currency exchange
rates. It is GSE's policy to use derivative financial instruments to protect
against market risk arising in the normal course of business. The criteria GSE
uses for designating an instrument as a hedge includes the instrument's
effectiveness in risk reduction and one-to-one matching of derivative
instruments to underlying transactions. GSE monitors its foreign currency
exposures to maximize the overall effectiveness of its foreign currency hedge
positions. Principal currencies hedged include the Euro and the Japanese yen.
GSE's objectives for holding derivatives are to minimize the risks using the
most effective methods to reduce the impact of these exposures. GSE minimizes
credit exposure by limiting counterparties to nationally recognized financial
institutions. As of December 31, 2004, GSE had contracts for the sale of
approximately $4.6 million Japanese Yen at fixed rates. The contracts expire on
various dates through May, 2007. The contracts do not qualify for hedge
treatment under SFAS No. 133, as amended. Accordingly, GSE has recorded the
estimated fair value of the contracts of approximately $200,000 as of December
31, 2004 as other assets in the consolidated balance sheet and other income in
the consolidated statement of operations.
MANAGEMENT DISCUSSION OF CRITICAL ACCOUNTING POLICIES
The preparation of our consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
requires us to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities at
33
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Our estimates, judgments and assumptions
are continually evaluated based on available information and experience. Because
of the use of estimates inherent in the financial reporting process, actual
results could differ from those estimates.
Certain of our accounting policies require higher degrees of judgment than
others in their application. These include contract revenue and cost
recognition, valuation of accounts receivable, accounting for investments,
impairment of long-lived and intangible assets and income tax recognition of
deferred tax items which are summarized below. In addition, note 2 to the
Consolidated Financial Statements includes further discussion of our significant
accounting policies.
CONTRACT REVENUE AND COST RECOGNITION.
Revenue Recognition
General Physics contract revenue and cost recognition. General Physics provides
services under time-and-materials, cost-plus-fixed fee and fixed-price
contracts. Each contract has different terms based on the scope, deliverables
and complexity of the engagement, requiring General Physics to make judgments
and estimates about recognizing revenue. In general, revenue is recognized on
these arrangements as the services are performed. Under time-and-material
contracts, as well as certain cost-plus-fixed fee and certain fixed-price
contracts, the contractual billing schedules are based on the specified level of
resources General Physics is obligated to provide. As a result, on those
"level-of-effort" contracts, the contractual billing amount for a given period
acts as a measure of performance and, therefore, revenue is typically recognized
in that amount.
For other fixed price contracts, the contractual billing schedules are not based
on the specified level of resources General Physics is obligated to provide.
These arrangements typically do not have milestones or other reliable measures
of performance. As a result, revenue on these arrangements is recognized using
the percentage-of-completion method based on the relationship of costs incurred
to total estimated costs expected to be incurred over the term of the contract.
General Physics believes this methodology provides a reasonable measure of
performance on these arrangements since performance primarily involves personnel
costs and the customer typically is required to pay General Physics for the
proportionate amount of work and cost incurred in the event of contract
termination. Revenue for unpriced change orders is not recognized until the
customer agrees with the changes. Costs and estimated earnings in excess of
billings on uncompleted contracts are recorded as a current asset. Billings in
excess of costs and estimated earnings on uncompleted contracts are recorded as
a current liability. Generally contracts provide for the billing of costs
incurred and estimated earnings on a monthly basis.
Risks relating to service delivery, usage, productivity and other factors are
considered when making estimates of total contract cost, contract profitability
and progress towards completion. If sufficient risk exists, a reduced-profit
methodology is applied to a specific client contract's percentage-of-completion
model whereby the amount of revenue recognized is limited to the amount of costs
incurred until such time as the risks have been partially or wholly mitigated
through performance. General Physics' estimates of total contract cost and
contract profitability change periodically in the normal course of business,
occasionally due to modifications of contractual arrangements. In addition, the
implementation of cost saving initiatives and achievement of productivity gains
generally results in a
34
reduction of estimated total contract expenses on affected client contracts.
Such changes in estimate are recognized in the period the changes are
determined. For all client contracts, provisions for estimated losses on
individual contracts are made in the period in which the loss first becomes
apparent.
As part of General Physics' on-going operations to provide services to its
customers, incidental expenses, which are commonly referred to as
"out-of-pocket" expenses, are billed to customers, either directly as a
pass-through cost or indirectly as a cost estimated in proposing on fixed-price
contracts. Out-of-pocket expenses include expenses such as airfare, mileage,
hotel stays, out-of-town meals and telecommunication charges. General Physics'
policy provides for these expenses to be recorded as both revenue and direct
cost of services in accordance with the provisions of EITF 01-14, Income
Statement Characterization of Reimbursements Received for "Out-of-Pocket"
Expenses Incurred.
GSE revenue recognition. The majority of GSE's revenue is derived through the
sale of uniquely designed systems containing hardware, software and other
materials under fixed-price contracts. In accordance with Statement of Position
81-1, Accounting for Performance of Construction-Type and Certain
Production-Type Contracts, the revenue under these fixed-price contracts is
accounted for on the percentage-of-completion method, based on contract costs
incurred to date and estimated costs to complete. Estimated contract earnings
are reviewed and revised periodically as the work progresses and the cumulative
effect of any change is recognized in the period in which the change is
identified. Estimated losses are charged against earnings in the period such
losses are identified.
As GSE recognizes revenue under the percentage-of-completion method, it provides
an accrual for estimated future warranty costs based on historical and projected
claims experience. GSE's longer-term contracts generally provide for a one-year
warranty on parts, labor and any bug fixes as it relates to software embedded in
the systems.
GSE's system design contracts do not provide for "post customer support service"
(PCS) in terms of software upgrades, software enhancements or telephone support.
In order to obtain PCS, the customers must purchase a separate contract at the
date of system installation. Such PCS arrangements are generally for a one-year
period renewable annually and include customer support, unspecified software
upgrades, maintenance releases. GSE recognizes revenue from these contracts
ratably over the life of the agreements in accordance with Statement of Position
97-2, Software Revenue Recognition.
Revenue from the sale of software licenses for the Company's modeling tools,
which do not require significant modification or customization, are recognized
when the license agreement is signed, the license fee is fixed and determinable,
delivery has occurred, and collection is considered probable.
Revenues from certain consulting or training contracts are recognized on a
time-and-material basis. For time-and-material type contracts, revenue is
recognized based on hours incurred at a contracted labor rate plus expenses.
VALUATION OF ACCOUNTS RECEIVABLES
Provisions for allowance for doubtful accounts are made based on specific credit
risks identified by the Company. Measurement of such losses requires
consideration of the historical loss experience of the Company and its
subsidiaries, judgments about customer credit risk and the need to adjust for
current economic conditions. The allowance for doubtful accounts was $0.8
million at December 31, 2004.
35
IMPAIRMENT OF LONG-LIVED TANGIBLE AND INTANGIBLE ASSETS
Impairment of long-lived tangible and intangible assets with finite lives result
in a charge to operations whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. Recoverability of
long-lived tangible assets to be held and used is measured by a comparison of
the carrying amount of the asset to future undiscounted net cash flows expected
to be generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by determining the amount by which the
carrying amount of the assets exceeds the fair value of the asset.
The measurement of the future net cash flows to be generated is subject to
management's reasonable expectations with respect to the Company's future
operations and future economic conditions which may affect those cash flows.
In accordance with SFAS No. 142, goodwill is no longer amortized, but instead
tested for impairment at least annually. The goodwill impairment test requires
the Company to identify its reporting units and obtain estimates of the fair
values of those units as of the testing date. The Company estimates the fair
values of its reporting units using discounted cash flow valuation models. The
Company estimates these amounts by evaluating historical trends, current
budgets, operating plans and industry data. The estimated fair value of each
reporting unit exceeded its respective carrying value in both tests conducted in
2004 and 2003 indicating the underlying goodwill of each unit was not impaired
at the respective testing dates. The timing and frequency of our goodwill
impairment tests are based on an ongoing assessment of events and circumstances
that would more than likely reduce the estimated fair value of a reporting unit
below its carrying value. The Company will continue to monitor its goodwill for
impairment and conduct formal tests when impairment indicators are present. A
decline in the fair value of any reporting unit below its carrying value is an
indicator that the underlying goodwill of the unit is potentially impaired. This
would require a comparison of the implied fair value of a reporting unit's
goodwill to its carrying value. An impairment loss is required for the amount
which the carrying value of a reporting unit's goodwill exceeds its implied fair
value. The implied fair value of the reporting unit's goodwill would become the
new cost basis of the unit's goodwill.
The following table presents goodwill balances at December 31, 2004 and
operating income for the years ended December 31, 2004, 2003 and 2002 for each
of the Company's reportable segments (in thousands):
OPERATING INCOME FOR THE
GOODWILL AT YEARS ENDED DECEMBER 31,
DECEMBER 31, ------------------------
2004 2004 2003 2002
------------ ------ ------ ------
General Physics $57,624 $8,881 $4,233 $1,599
GSE 4,756 (174) 366 --
------- ------ ------ ------
$62,380 $8,707 $4,599 $1,599
======= ====== ====== ======
36
INCOME TAXES
The Company accounts for income taxes using the asset and liability method.
Deferred tax assets and liabilities are recognized for future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and for operating
loss and tax credit carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered. In
assessing the realizability of the deferred tax assets, the Company considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of the deferred tax assets
is dependent upon the generation of future taxable income during the periods in
which temporary differences are deductible. Management considers the scheduled
reversal of deferred tax liabilities, projected future taxable income and tax
planning strategies in making this assessment. Based upon these factors,
management believes it is more likely than not that the Company will realize the
benefits of deferred tax assets, net of the valuation allowance. The valuation
allowance relates to both foreign and domestic net operating loss carryforwards
for which the Company does not believe the benefits will be realized.
In 2004, the Company's taxable income before utilization of net operating loss
carry forwards was approximately $22.0 million. In assessing the realizability
of it's deferred tax assets, management considered it more likely than not that
it's deferred tax assets would be realized and reduced it's valuation allowance
by $12.2 million. As of December 31, 2004, the Company had federal net operating
loss carry forwards of $19.3 million, which expire during 2022 and 2023.
RECENT ACCOUNTING PRONOUNCEMENTS
During December 2004, the Financial Accounting Standards Board ("FASB") issued a
new standard entitled Statement of Financial Accounting Standards ("SFAS") 123R,
Share-Based Payment, which revises SFAS No. 123, Accounting for Stock-Based
Compensation, and amends SFAS No. 95, Statement of Cash Flows. Among other
items, the new standard would require the expensing, in the financial
statements, of stock options issued by the Company. The new standard will be
effective July 1, 2005, for calendar year companies. GP Strategies is currently
evaluating the adoption of SFAS No. 123R, including the valuation methods and
assumptions that underlie the valuation of the awards. The Company expects that
the adoption of SFAS No. 123R will have an adverse effect on the Company's
consolidated financial statements.
ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to the impact of interest rate, market risks and currency
fluctuations. In the normal course of business, the Company employs internal
processes to manage its exposure to interest rate, market risks and currency
fluctuations. The Company's objective in managing its interest rate risk is to
limit the impact of interest rate changes on earnings and cash flows and to
lower its overall borrowing costs. The Company is exposed to the impact of
currency fluctuations because of its international operations.
As of December 31, 2004, the Company had approximately $6.1 million of variable
rate borrowings. The Company estimates that for every 1% fluctuation in general
interest rates, assuming debt levels at December 31, 2004, interest expense
would vary by $60,000. As of December 31, 2004, GSE had contracts for the sale
of
37
approximately $4.6 million Japanese Yen at fixed rates. The contracts expire on
various dates through May, 2007. The contracts do not qualify for hedge
treatment under SFAS No. 133, as amended. Accordingly, GSE has recorded the
estimated fair value of the contracts of approximately $200,000 as of December
31, 2004 as other assets in the consolidated balance sheet and other income in
the consolidated statement of operations.
The Company's net investment in its foreign subsidiaries, including intercompany
balances, at December 31, 2004 was immaterial, and accordingly, fluctuations in
foreign currency do not have a material impact on the Company's financial
position.
The Company's revenues and profitability are related to general levels of
economic activity and employment in the United States and the United Kingdom. As
a result, any significant economic downturn or recession in one or both of those
countries could harm our business and financial condition. A significant portion
of the Company's revenues is derived from Fortune 500 level companies and their
international equivalents, which historically have adjusted expenditures for
external training during economic downturns. If the economies in which these
companies operate weaken in any future period, these companies may not increase
or may reduce their expenditures on external training, which could adversely
affect the Company's business and financial condition.
38
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
PAGE
----
FINANCIAL STATEMENTS OF GP STRATEGIES CORPORATION AND SUBSIDIARIES:
Report of Independent Registered Public Accounting Firm - KPMG LLP 40
Report of Independent Registered Public Accounting Firm - Eisner LLP 41
Consolidated Balance Sheets - December 31, 2004 and 2003 42
Consolidated Statements of Operations - Years ended December 31,
2004, 2003 and 2002 44
Consolidated Statements of Stockholders' Equity and Comprehensive
Income (Loss) - Years ended December 31, 2004, 2003 and 2002 45
Consolidated Statements of Cash Flows - Years ended December 31,
2004, 2003 and 2002 46
Notes to Consolidated Financial Statements 48
39
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
GP Strategies Corporation:
We have audited the accompanying consolidated balance sheets of GP Strategies
Corporation and subsidiaries as of December 31, 2004 and 2003, and the related
consolidated statements of operations, stockholders' equity and comprehensive
income (loss), and cash flows for each of the years in the three-year period
ended December 31, 2004. In connection with our audits of the consolidated
financial statements, we also have audited the financial statement schedule
listed under item 15a(2). These consolidated financial statements and financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements and financial statement schedule based on our audits. We did not
audit the 2003 financial statements of Five Star Products, Inc., a formerly 54%
owned subsidiary, which statements reflect total assets constituting 20% of the
related 2003 consolidated total assets. Those financial statements were audited
by other auditors whose report has been furnished to us, and our opinion,
insofar as it relates to the amounts included for Five Star Products, Inc., is
based solely on the report of other auditors.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits and the report of
the other auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of GP Strategies Corporation and
subsidiaries as of December 31, 2004 and 2003, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 2004, in conformity with U.S. generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly, in all material respects, the information set forth
therein.
/s/ KPMG LLP
Baltimore, Maryland
March 16, 2005
40
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Five Star Products, Inc.
We have audited the consolidated balance sheet of Five Star Products, Inc. and
subsidiaries (the "Company") as of December 31, 2003, and the related
consolidated statements of operations and comprehensive income, changes in
stockholders' equity and cash flows for each of the years in the two-year period
ended December 31, 2003 (not shown separately herein). These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Five Star
Products, Inc. and subsidiaries as of December 31, 2003 and the consolidated
results of their operations and their cash flows for each of the years in the
two-year period ended December 31, 2003, in conformity with accounting
principles generally accepted in the United States of America.
/s/ Eisner LLP
New York, New York
March 17, 2004, except for the first paragraph of Note 7,
as to which the date is March 31, 2004
41
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 2004 and 2003
(In thousands, except shares and par value per share)
2004 2003
-------- --------
ASSETS
Current assets:
Cash and cash equivalents $ 2,417 $ 4,416
Cash held in escrow from arbitration settlement 13,798 --
Accounts and other receivables, less allowance for doubtful
accounts of $917 in 2004 and $1,739 in 2003 31,114 39,737
Inventories -- 28,300
Costs and estimated earnings in excess of billings on
uncompleted contracts 16,834 14,502
Deferred tax assets 1,478 --
Prepaid expenses and other current assets 4,350 6,705
-------- --------
Total current assets 69,991 93,660
-------- --------
Investments and marketable securities -- 3,931
Property, plant and equipment, net 2,673 8,994
Intangible assets:
Goodwill 62,380 62,395
Patents, licenses and contract rights, net 1,024 1,031
-------- --------
63,404 63,426
-------- --------
Deferred tax assets 16,651 11,688
Other assets 3,316 6,624
-------- --------
$156,035 $188,323
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 100 $ 1,112
Short-term borrowings 6,068 26,521
Accounts payable and accrued expenses 33,219 38,107
Billings in excess of costs and estimated earnings on
uncompleted contracts 10,003 9,922
-------- --------
Total current liabilities 49,390 75,662
-------- --------
Long-term debt less current maturities 10,951 13,749
Other noncurrent liabilities 1,739 1,728
-------- --------
Total liabilities 62,080 91,139
-------- --------
Minority interests 2,335 4,372
-------- --------
(continued)
42
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 2004 and 2003
(In thousands, except shares and par value per share)
2004 2003
-------- --------
Stockholders' equity:
Preferred stock, par value $0.01 per share
Authorized 10,000,000 shares; issued none -- --
Common stock, par value $0.01 per share
Authorized 25,000,000 shares; issued 16,669,757 in 2004 and
16,348,777 shares in 2003 (of which 8,994 in 2004 and 14,722
shares in 2003 are held in treasury) 167 163
Class B common stock, par value $0.01 per share
Authorized 2,800,000 shares; issued and outstanding
1,200,000 shares 12 12
Additional paid-in capital 171,852 196,541
Accumulated deficit (78,923) (101,443)
Accumulated other comprehensive income (loss) (761) 24
Notes receivable from stockholder (619) (2,322)
Treasury stock at cost (108) (163)
-------- --------
Total stockholders' equity 91,620 92,812
-------- --------
$156,035 $188,323
======== ========
See accompanying notes to consolidated financial statements.
43
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
Years ended December 31, 2004, 2003 and 2002
(In thousands, except per share data)
2004 2003 2002
-------- -------- --------
Revenue $193,973 $140,034 $142,237
Cost of revenue 168,010 122,939 126,871
-------- -------- --------
Gross profit 25,963 17,095 15,366
Selling, general and administrative expenses (23,735) (22,935) (19,229)
-------- -------- --------
Operating income (loss) 2,228 (5,840) (3,863)
Interest expense (2,113) (3,123) (2,467)
Other income (expense) (including interest income of
$317 in 2004, $424 in 2003 and $584 in 2002) 649 (218) (736)
Gain on arbitration award, net of legal fees and expenses 13,660 -- --
Gains on sales of marketable securities, net -- 559 2,267
Valuation adjustment of liability for warrants -- 1,436 --
-------- -------- --------
Income (loss) from continuing operations before income
tax (expense) benefit and minority interests 14,424 (7,186) (4,799)
Income tax (expense) benefit 8,009 (985) 295
-------- -------- --------
Income (loss) from continuing operations before minority
interests 22,433 (8,171) (4,504)
Minority interests 12 60 --
-------- -------- --------
Income (loss) from continuing operations 22,445 (8,111) (4,504)
Income (loss) from discontinued operations, net of income taxes 75 (165) (724)
-------- -------- --------
Net income (loss) $ 22,520 $ (8,276) $ (5,228)
======== ======== ========
Per common share data:
Basic
Income (loss) from continuing operations $ 1.27 $ (0.47) $ (0.29)
Income (loss) from discontinued operations -- (0.01) (0.05)
Net income (loss) $ 1.27 $ (0.48) $ (0.34)
Diluted
Income (loss) from continuing operations $ 1.23 $ (0.47) $ (0.29)
Income (loss) from discontinued operations -- (0.01) (0.05)
Net income (loss) $ 1.23 $ (0.48) $ (0.34)
See accompanying notes to consolidated financial statements.
44
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity and Comprehensive Income (Loss)
Years ended December 31, 2004, 2003, and 2002
(In thousands, except for par value per share)
CLASS B ACCUMULATED
COMMON COMMON OTHER
STOCK STOCK ADDITIONAL ACCUMULATED COMPREHENSIVE
($0.01 PAR) ($0.01 PAR) PAID-IN CAPITAL DEFICIT INCOME (LOSS)
----------- ----------- --------------- ----------- --------------
Balance at December 31, 2001 $128 $ 9 $180,078 $ (87,939) $ 8,364
---- --- -------- --------- -------
Net loss -- -- -- (5,228) --
Other comprehensive loss -- -- -- -- (7,904)
Total comprehensive loss
Proceeds from issuance of common stock 26 3 9,910 -- --
---- --- -------- --------- -------
Balance at December 31, 2002 154 12 189,988 (93,167) 460
---- --- -------- --------- -------
Net loss -- -- -- (8,276) --
Other comprehensive loss -- -- -- -- (436)
Total comprehensive loss
Repayment of notes receivable from stockholder -- -- -- -- --
Issuance and sale of common stock and warrants 9 -- 6,553 -- --
---- --- -------- --------- -------
Balance at December 31, 2003 163 12 196,541 (101,443) 24
---- --- -------- --------- -------
Net income -- -- -- 22,520 --
Other comprehensive loss -- -- -- -- (861)
Total comprehensive income
Repayment of notes receivable from stockholder -- -- -- -- --
Distribution of net assets to NPDC -- -- (26,043) -- 76
Proceeds from issuance of common stock 4 -- 1,354 -- --
---- --- -------- --------- -------
Balance at December 31, 2004 $167 $12 $171,852 $ (78,923) $ (761)
==== === ======== ========= =======
NOTES
RECEIVABLE TOTAL
FROM TREASURY STOCKHOLDERS' COMPREHENSIVE
STOCKHOLDER STOCK AT COST EQUITY INCOME (LOSS)
----------- ------------- ------------- --------------
Balance at December 31, 2001 $(4,095) $(602) $95,943
------- ----- -------
Net loss -- -- (5,228) $ (5,228)
Other comprehensive loss -- -- (7,904) (7,904)
--------
Total comprehensive loss $(13,132)
========
Proceeds from issuance of common stock -- 232 10,171
------- ----- -------
Balance at December 31, 2002 (4,095) (370) 92,982
------- ----- -------
Net loss (8,276) $ (8,276)
Other comprehensive loss -- -- (436) (436)
--------
Total comprehensive loss $ (8,712)
========
Repayment of notes receivable from stockholder 1,773 -- 1,773
Issuance and sale of common stock and warrants -- 207 6,769
------- ----- -------
Balance at December 31, 2003 (2,322) (163) 92,812
------- ----- -------
Net income -- 22,520 $ 22,520
Other comprehensive loss -- -- (861) (861)
--------
Total comprehensive income $ 21,659
========
Repayment of notes receivable from stockholder 1,703 -- 1,703
Distribution of net assets to NPDC -- -- (25,967)
Proceeds from issuance of common stock -- 55 1,413
------- ----- -------
Balance at December 31, 2004 $ (619) $(108) $91,620
======= ===== =======
See accompanying notes to consolidated financial statements.
45
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 2004, 2003, and 2002
(In thousands)
2004 2003 2002
-------- ------- -------
Cash flows from operations:
Income (loss) from continuing operations $ 22,445 $(8,111) $(4,504)
Income (loss) from discontinued operations, net of income taxes 75 (165) (724)
-------- ------- -------
Net income (loss) 22,520 (8,276) (5,228)
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
Depreciation and amortization 4,084 2,928 3,304
Gain on arbitration award, net (13,660) -- --
Deferred income taxes (9,783) (623) (1,839)
Minority interests (407) (30) --
Issuance of stock for retirement savings plan and non-cash
compensation expense 2,348 3,903 (146)
Gains on sales of marketable securities (381) (846) (2,267)
Write-off of deferred financing costs -- 860 --
Noncash debt conversion expense -- 622 --
Valuation adjustment of liability for warrants -- (1,436) --
Loss on equity investments and other, net -- 559 2,603
Proceeds from sales of trading securities 404 249 --
Changes in other operating items, net of effect
of acquisitions and disposals:
Accounts and other receivables (5,379) 2,713 3,195
Inventories 2,609 (6,698) 354
Costs and estimated earnings in excess of billings on
uncompleted contracts (2,332) 3,788 2,584
Accounts payable and accrued expenses 2,707 4,656 1,901
Billings in excess of costs and estimated earnings on
uncompleted contracts 81 2,534 (3,174)
Prepaid and other current assets 1,442 194 (330)
Changes in other operating items (69) 253 (128)
-------- ------- -------
Net cash provided by operations 4,184 5,350 829
-------- ------- -------
Cash flows from investing activities:
Additions to property, plant and equipment (1,784) (2,123) (1,916)
Additions to intangible assets (250) (422) (1,503)
Proceeds from sales of marketable securities 609 2,124 3,833
Cash acquired in acquisitions -- 2,853 --
Decrease (increase) to investments and other -- (4,050) 489
-------- ------- -------
Net cash provided by (used in) investing activities (1,425) (1,618) 903
-------- ------- -------
(continued)
46
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 2004, 2003, and 2002
(In thousands)
2004 2003 2002
------- -------- --------
Cash flows from financing activities:
Proceeds from issuance of common stock 860 955 7,850
Proceeds from issuance of Class B common stock -- -- 1,260
Repayment of short-term borrowings (2,123) (13,461) (10,280)
Deferred financing costs -- (1,619) (728)
Proceeds from issuance of long-term debt -- 14,674 890
Repayment of long-term debt (1,135) (1,451) (841)
Distribution of cash to NPDC (2,453) -- --
------- -------- --------
Net cash used in financing activities (4,851) (902) (1,849)
------- -------- --------
Effect of exchange rate changes on cash and cash equivalents 93 70 (72)
------- -------- --------
Net increase (decrease) in cash and cash equivalents (1,999) 2,900 (189)
Cash and cash equivalents at beginning of year 4,416 1,516 1,705
------- -------- --------
Cash and cash equivalents at end of year $ 2,417 $ 4,416 $ 1,516
======= ======== ========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 2,383 $ 1,379 $ 1,942
Income taxes $ 639 $ 734 $ 434
Non-cash investing and financing activities:
Distribution of non-cash net assets to NPDC (see note 3) $23,514 $ -- $ --
Additions to property financed with capital leases $ 111 $ 163 $ 889
See accompanying notes to consolidated financial statements.
47
(1) DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
GP Strategies Corporation ("the Company") was incorporated in Delaware
in 1959. As of December 31, 2004, the Company's business consists of
its training and workforce development business operated by General
Physics Corporation ("General Physics" or "GP") and its simulation
business operated by GSE Systems Inc. ("GSE").
In July 2002, the Company's Board of Directors approved a spin-off of
certain of its non-core assets into a separate corporation, National
Patent Development Corporation ("NPDC"). NPDC is a stand-alone public
company owning all of the stock of MXL Industries, Inc. ("MXL"), the
interest in Five Star Products, Inc. ("Five Star") and certain other
non-core assets. The separation of these businesses was accomplished
through a pro-rata distribution of 100% of the outstanding common
stock of NPDC to the Company's stockholders on the record date of
November 18, 2004 of the distribution. On November 24, 2004, (the
"Distribution" or "spin-off") holders of record received one share of
NPDC common stock for each share of GP Strategies common stock or
Class B capital stock owned. The Company received a favorable tax
ruling on March 21, 2003 from the Internal Revenue Service which
enabled the Distribution to be tax-free.
Following the spin-off, the Company ceased to have any ownership
interest in NPDC, and the operations of NPDC have been reclassified as
discontinued in the Company's consolidated financial statements for
all periods presented (see note 3).
In connection with the spin-off, several of the Company's directors
and officers are also directors and officers of NPDC. The Company
entered into agreements with NPDC to allocate responsibility for
liabilities (including tax and other contingent liabilities associated
with their respective businesses or otherwise to be assumed by NPDC or
the Company), to separate their businesses, and for the Company and
NPDC to provide management services to each other. The Company and
NPDC will also provide certain guarantees of each others' financial
obligations.
On October 17, 2003, the Company transferred 100% of the outstanding
common stock in Valera Pharmaceuticals (formerly Hydro Med Sciences,
Inc.) valued at $6.5 million (based on an independent valuation) and
1,000,000 shares of common stock of Millennium Cell Inc.
("Millennium") with a quoted market price of $3.50 per share to MXL in
repayment of $10 million of a payable due to MXL from the Company. MXL
was a wholly owned subsidiary of the Company until the distribution.
48
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2004 and 2003
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) PRINCIPLES OF CONSOLIDATION AND INVESTMENTS
The consolidated financial statements include the operations of the
Company and its majority-owned subsidiaries. The minority interests
balance as of December 31, 2004 is comprised of the 42% minority share
in GSE, which the Company did not own. The minority interests balance
as of December 31, 2003 is comprised of the 42% minority share in GSE
and a 46% minority share of Five Star, which the Company did not own.
All significant intercompany balances and transactions have been
eliminated.
(B) CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of short-term highly liquid
investments with original maturities of three months or less.
(C) MARKETABLE SECURITIES
Marketable securities consist of U.S. corporate equity securities. The
Company classifies its marketable securities as trading or
available-for-sale investments, which are recorded at fair value.
Trading securities are those securities which are generally expected
to be sold within one year and were held principally for the purpose
of selling them in the near term.
Unrealized holding gains and losses on trading securities are included
in earnings. Unrealized holding gains and losses on available-for-sale
securities are excluded from earnings and are reported as a separate
component of stockholders' equity in accumulated other comprehensive
income (loss), net of income taxes, until realized. A decline in the
market value of any available-for-sale security below cost that is
deemed to be other-than-temporary results in a reduction in carrying
amount to fair value. The impairment is charged to earnings, and a new
cost basis is established. Gains and losses are derived using the
average cost method for determining the cost of securities sold.
Marketable securities were included in the net assets distributed to
NPDC (see note 3).
(D) INVENTORIES
Inventories are valued at the lower of cost or market, using the
first-in, first-out (FIFO) method. Inventories were included in the
net assets distributed to NPDC (see note 3).
(E) ALLOWANCE FOR DOUBTFUL ACCOUNTS RECEIVABLE
Trade accounts receivable are recorded at invoiced amounts. The
allowance for doubtful accounts is estimated based on historical
trends of past due accounts, write-offs and specific review of past
due accounts.
49
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2004 and 2003
(F) FOREIGN CURRENCY TRANSLATION
The functional currency of the Company's international operations is
the applicable local currency. The translation of the applicable
foreign currency into U.S. dollars is performed for balance sheet
accounts using current exchange rates in effect at the balance sheet
date and for revenue and expense accounts using the weighted average
rates of exchange prevailing during the year. The unrealized gains and
losses resulting from such translation are included as a separate
component of stockholders' equity in accumulated other comprehensive
income (loss).
(G) REVENUE RECOGNITION
GENERAL PHYSICS
GP provides services under time-and-materials, cost-plus-fixed fee and
fixed-price contracts. Each contract has different terms based on the
scope, deliverables and complexity of the engagement, requiring GP to
make judgments and estimates about recognizing revenue. In general,
revenue is recognized on these arrangements as the services are
performed. Under time-and-material contracts, as well as certain
cost-plus-fixed fee and certain fixed-price contracts, the contractual
billing schedules are based on the specified level of resources GP is
obligated to provide. As a result, on those "level-of-effort"
contracts, the contractual billing amount for a given period acts as a
measure of performance and, therefore, revenue is typically recognized
in that amount.
For other fixed price contracts, the contractual billing schedules are
not based on the specified level of resources GP is obligated to
provide. These arrangements typically do not have milestones or other
reliable measures of performance. As a result, revenue on these
arrangements is recognized using the percentage-of-completion method
based on the relationship of costs incurred to total estimated costs
expected to be incurred over the term of the contract. GP believes
this methodology provides a reasonable measure of performance on these
arrangements since performance primarily involves personnel costs and
the customer typically is required to pay GP for the proportionate
amount of work and cost incurred in the event of contract termination.
Revenue for unpriced change orders is not recognized until the
customer agrees with the changes. Costs and estimated earnings in
excess of billings on uncompleted contracts are recorded as a current
asset. Billings in excess of costs and estimated earnings on
uncompleted contracts are recorded as a current liability. Generally,
contracts provide for the billing of costs incurred and estimated
earnings on a monthly basis.
Risks relating to service delivery, usage, productivity and other
factors are considered when making estimates of total contract cost,
contract profitability and progress towards completion. If sufficient
risk exists, a reduced-profit methodology is applied to a specific
client contract's percentage-of-completion model whereby the amount of
revenue
50
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2004 and 2003
recognized is limited to the amount of costs incurred until such time
as the risks have been partially or wholly mitigated through
performance. GP's estimates of total contract cost and contract
profitability change periodically in the normal course of business,
occasionally due to modifications of contractual arrangements. In
addition, the implementation of cost saving initiatives and
achievement of productivity gains generally result in a reduction of
estimated total contract expenses on affected client contracts. Such
changes in estimate are recognized in the period the changes are
determined. For all client contracts, provisions for estimated losses
on individual contracts are made in the period in which the loss first
becomes apparent.
As part of GP's on-going operations to provide services to its
customers, incidental expenses, which are commonly referred to as
"out-of-pocket" expenses, are billed to customers, either directly as
a pass-through cost or indirectly as a cost estimated on fixed-price
contracts. Out-of-pocket expenses include expenses such as airfare,
mileage, hotel stays, out-of-town meals and telecommunication charges.
GP's policy provides for these expenses to be recorded as both revenue
and direct cost of services in accordance with the provisions of
Emerging Issues Task Force (EITF) 01-14, Income Statement
Characterization of Reimbursements Received for 'Out-of-Pocket'
Expenses Incurred.
GSE
The majority of GSE's revenue is derived through the sale of uniquely
designed systems containing hardware, software and other materials
under fixed-price contracts. In accordance with Statement of Position
("SOP") No. 81-1, Accounting for Performance of Construction-Type and
Certain Production-Type Contracts, the revenue under these fixed-price
contracts is accounted for on the percentage-of-completion method.
This methodology recognizes income as work progresses on the contract
and is based on an estimate of the income earned to date, less income
recognized in earlier periods. GSE bases its estimate of the degree of
completion of the contract by reviewing the relationship of costs
incurred to date to the expected total costs that will be incurred on
the project. Estimated contract earnings are reviewed and revised
periodically as the work progresses and the cumulative effect of any
change is recognized in the period in which the change is identified.
Estimated losses are charged against earnings in the period such
losses are identified.
As GSE recognizes revenue under the percentage-of-completion method,
it provides an accrual for estimated future warranty costs based on
historical and projected claims experience. GSE's longer-term
contracts generally provide for a one-year warranty on parts, labor
and any bug fixes as it relates to software embedded in the systems.
GSE's system design contracts do not provide for "post customer
support service" (PCS) in terms of software upgrades, software
enhancements or telephone support. In order to obtain PCS, the
customers must purchase a separate contract at the date of system
installation. Such
51
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2004 and 2003
PCS arrangements are generally for a one-year period, renewable
annually, and include customer support, unspecified software upgrades,
and maintenance releases. GSE recognizes revenue from these contracts
ratably over the life of the agreements in accordance with SOP
No.97-2, Software Revenue Recognition.
Revenue from the sale of software licenses for the Company's modeling
tools, which do not require significant modification or customization,
are recognized when the license agreement is signed, the license fee
is fixed and determinable, delivery has occurred, and collection is
considered probable.
Revenues from certain consulting or training contracts are recognized
on a time-and-material basis. For time-and-material type contracts,
revenue is recognized based on hours incurred at a contracted labor
rate plus expenses.
DISCONTINUED OPERATIONS
Revenue of discontinued operations, related primarily to Five Star,
were recognized as sales were made and title transferred to the
customers.
(H) COMPREHENSIVE INCOME
Comprehensive income consists of net income (loss), net unrealized
gains (losses) on available-for-sale securities and foreign currency
translation adjustments.
(I) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are carried at cost. Major additions and
improvements are capitalized while maintenance and repairs, which do
not extend the lives of the assets are expensed as incurred. Gain or
loss on the disposition of property, plant and equipment is recognized
in operations when realized.
Depreciation of property, plant and equipment is recognized 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
(J) IMPAIRMENT OF LONG-LIVED ASSETS
Long-lived assets, such as property, plant, and equipment, and
intangibles subject to amortization, are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. Recoverability of
52
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2004 and 2003
assets to be held and used is measured by a comparison of the carrying
amount of an asset to estimated undiscounted future cash flows expected to
be generated by the asset. If the carrying amount of an asset exceeds its
estimated future cash flows, an impairment charge is recognized at the
amount by which the carrying amount of the asset exceeds the fair value of
the asset. Assets to be disposed of would be separately presented in the
balance sheet and reported at the lower of the carrying amount or fair
value less costs to sell, and are no longer depreciated.
(K) GOODWILL AND INTANGIBLE ASSETS
The Company capitalizes costs incurred to obtain and maintain patents and
licenses, as well as contract rights acquired. 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. Contract rights are amortized
over the lives of the contracts acquired, ranging up to two years.
Goodwill represents the excess of costs over fair value of assets of
businesses acquired. Goodwill and intangible assets acquired in a purchase
business combination and determined to have an indefinite useful life are
not amortized, but instead tested for impairment at least annually or more
frequently if events and circumstances indicate that the asset might be
impaired in accordance with the provisions of Statement of Financial
Accounting Standards ("SFAS") No. 142, Goodwill and Other Intangible
Assets. The goodwill impairment test requires the Company to identify its
reporting units and obtain estimates of the fair values of those units as
of the testing date. The Company estimates the fair values of its reporting
units using discounted cash flow valuation models. An impairment loss is
recognized to the extent that the carrying amount exceeds the asset's fair
value. SFAS No. 142 also requires that intangible assets with estimable
useful lives be amortized over their respective estimated useful lives to
their estimated residual values, and reviewed for impairment in accordance
with SFAS No. 144, Accounting for Impairment or Disposal of Long-Lived
Assets. During 2004, 2003 and 2002, the Company tested its goodwill in
accordance with SFAS No. 142 and concluded no impairment charge was
required.
(L) OTHER ASSETS
Other assets include deferred financing costs and certain software
development costs. Deferred financing costs are amortized on a straight
line basis over the terms of the related debt and such amortization is
classified as interest expense in the consolidated statements of
operations.
53
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2004 and 2003
In accordance with SFAS No. 86, accounting for the costs of computer
software to be sold, leased, or otherwise marketed, certain computer
software development costs of GSE are capitalized in the Company's
Consolidated Balance Sheet. Capitalization of computer software begins upon
the establishment of technological feasibility. capitalization ceases and
amortization of capitalized cost begins when the software product is
commercially available for general release to customers. Amortization of
capitalized computer software development costs is included in cost of
revenue and is provided using the straight-line method over the remaining
estimated economic life of the product, which normally ranges from three to
five years. On an annual basis, the Company assesses the recovery of the
unamortized software computer costs by estimating the net undiscounted cash
flows expected to be generated by the sale of the product. If the
undiscounted cash flows are not sufficient to recover the unamortized
software costs, the Company will write-down the investment to its estimated
fair value based on future discounted cash flows. The excess of any
unamortized computer software costs over the related net realizable value
is written down and charged to income. Significant changes in the sales
projections could result in impairment with respect to the capitalized
software.
(M) INCOME TAXES
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases and for operating loss and tax credit carryforwards. Deferred tax
assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences
are expected to be recovered or settled. The effect on deferred tax assets
and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
GSE files separate federal, state and foreign tax returns from the Company,
as that entity is not consolidated with the Company for tax purposes.
(N) INCOME (LOSS) PER SHARE
Basic income (loss) per share is based upon the weighted average number of
common shares outstanding, including Class B common stock, during the
periods. Class B common stockholders have the same rights to share in
profits and losses and liquidation values as common stockholders.
Diluted income (loss) per share is based upon the weighted average number
of common shares outstanding during the period assuming the issuance of
common stock for all potential dilutive common stock equivalents
outstanding.
54
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2004 and 2003
Income (loss) per share (EPS) for the years ended December 31, 2004,
2003 and 2002 are as follows (in thousands, except per share amounts):
2004 2003 2002
------- ------- -------
INCOME (LOSS) USED IN COMPUTATION:
Income (loss) from continuing operations $22,445 $(8,111) $(4,504)
Income (loss) from discontinued operations 75 (165) (724)
------- ------- -------
Net income (loss) $22,520 $(8,276) $(5,228)
======= ======= =======
SHARES USED IN COMPUTATION:
Weighted average shares
outstanding, basic 17,678 17,139 15,370
Dilutive effect of outstanding
stock options and warrants 629 -- --
------- ------- -------
Weighted average shares
outstanding, diluted 18,307 17,139 15,370
======= ======= =======
INCOME (LOSS) PER COMMON SHARE:
Basic
Income (loss) from continuing operations $ 1.27 $ (0.47) $ (0.29)
Income (loss) from discontinued operations -- (0.01) (0.05)
------- ------- -------
Net income (loss) $ 1.27 $ (0.48) $ (0.34)
======= ======= =======
Diluted
Income (loss) from continuing operations $ 1.23 $ (0.47) $ (0.29)
Income (loss) from discontinued operations -- (0.01) (0.05)
------- ------- -------
Net income (loss) $ 1.23 $ (0.48) $ (0.34)
======= ======= =======
For the years ended December 31, 2003 and 2002, presentation of the
dilutive effect of stock options, warrants and convertible notes, which
totaled 1,249,000 and 612,000, respectively, are not included since they
are anti-dilutive.
(O) STOCK-BASED COMPENSATION
Options are granted to purchase Company, GSE and Five Star, prior to its
spin-off, common shares under stock-based incentive plans, which are
described more fully in note 14.
The Company applies the intrinsic-value-based method of accounting
prescribed by Accounting Principles Board ("APB") Opinion No. 25,
Accounting for Stock Issues to Employees, and related interpretations
including Financial Accounting Standards Board ("FASB") Interpretation No.
44, Accounting for Certain Transactions Involving Stock Compensation, an
interpretation of APB Opinion No. 25, to account for its fixed-plan stock
55
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2004 and 2003
options. Under this method, compensation expense is recorded on the date of
grant only if the current market price of the underlying stock exceeds the
exercise price of the options. SFAS No. 123, Accounting for Stock-Based
Compensation, as amended, established accounting and disclosure
requirements using a fair-value-based method of accounting for stock-based
employee compensation plans. As allowed by SFAS No. 123, the Company has
elected to continue to apply the intrinsic-value-based method of accounting
described above, and has adopted only the disclosure requirements of SFAS
No. 123. The following table illustrates the effect on net income (loss) if
the fair-value-based method had been applied to all outstanding and
unvested awards in each year (dollars in thousands, except per share date):
2004 2003 2002
------- ------- -------
Net income (loss) - as reported $22,520 $(8,276) $(5,228)
Compensation expense, net of tax:
Company stock options (608) (1,251) (1,495)
GSE stock options (30) (181) --
------- ------- -------
Pro forma net income (loss) $21,882 $(9,708) $(6,723)
======= ======= =======
Net income (loss) per share
Basic - as reported $ 1.27 $ (0.48) $ (0.34)
Basic - pro forma $ 1.24 $ (0.57) $ (0.44)
Diluted - as reported $ 1.23 $ (0.48) $ (0.34)
Diluted - pro forma $ 1.21 $ (0.57) $ (0.44)
At December 31, 2004, 2003 and 2002, the per share weighted average fair
value of the Company's stock options granted was $1.47, $2.95 and $2.78,
respectively, on the date of grant using the modified Black-Scholes
option-pricing model with the following weighted average assumptions:
2004 2003 2002
---------- ---------- ----------
Expected dividend yield 0% 0% 0%
Risk-free interest rate 1.70% 2.00% 4.30%
Expected volatility 32.24% 78.33% 72.84%
Expected life 2.03 years 4.00 years 6.16 years
Options were granted by GSE and Five Star during 2004 and 2003, subsequent
to their consolidation.
56
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2004 and 2003
(P) 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.
(Q) FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of financial instruments including cash and cash
equivalents, marketable securities, accounts receivable, accounts payable
and short-term borrowings approximate estimated market values because of
short-maturities and interest rates that approximate current rates. The
carrying values of investments 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 debt is
equal to the carrying amount. 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.
(R) RECLASSIFICATIONS
Certain amounts in 2003 and 2002 have been reclassified to conform to the
presentation in 2004.
(S) OFF BALANCE SHEET RISK AND FOREIGN EXCHANGE CONTRACTS
GSE utilizes various derivative financial instruments to manage market
risks associated with the fluctuations in foreign currency exchange rates.
It is GSE's policy to use derivative financial instruments to protect
against market risk arising in the normal course of business. The criteria
GSE uses for designating an instrument as a hedge includes the instrument's
effectiveness in risk reduction and one-to-one matching of derivative
instruments to underlying transactions. GSE monitors its foreign currency
exposures to maximize the overall effectiveness of its foreign currency
hedge positions. Principal currencies hedged include the Euro and the
Japanese Yen. GSE's objectives for holding derivatives are to minimize the
risks using the most effective methods to reduce the impact of these
exposures. GSE minimizes credit exposure by limiting counterparties to
nationally recognized financial institutions.
All derivatives, whether designated as hedging relationships or not, are
required to be recorded on the balance sheet at fair value. If the
derivative is designated as a fair value hedge, the changes in the fair
value of the derivative and of the hedged item attributable to the hedged
risk are recognized in operations. If the derivative is designated as a
cash flow
57
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2004 and 2003
hedge, the change in the fair value of the derivative and of the hedged
item are recognized as an element of other comprehensive income.
As of December 31, 2004, GSE had contracts for the sale of approximately
$4.6 million Japanese Yen at fixed rates. The contracts expire on various
dates through May, 2007. The contracts do not qualify for hedge treatment
under SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities, as amended. Accordingly, GSE has recorded the estimated fair
value of the contracts of approximately $200,000 as of December 31, 2004 as
other assets in the consolidated balance sheet and other income in the
consolidated statement of operations.
(T) RECENT ACCOUNTING PRONOUNCEMENTS
During December 2004, the FASB issued SFAS No.123R, Share-Based Payments.
Among other items, the standard will require the expensing, in the
financial statements, of stock options issued by the Company. The new
standard will be effective July 1, 2005, for calendar year-end companies.
GP Strategies is currently evaluating the adoption of SFAS No. 123R,
including the valuation methods and assumptions that underlie the valuation
of the awards. The Company expects that the adoption of SFAS No. 123R will
have an negative impact on the Company's consolidated financial statements.
(3) DISCONTINUED OPERATIONS AND SPIN-OFF OF NPDC
Under SFAS No. 144, discontinued businesses are removed from the results of
continuing operations and are classified as discontinued operations in the
consolidated statements of operations until the effective date of the
spin-off. The following table sets forth the components of income (loss)
from discontinued operations for the eleven months ended November 24, 2004
and the years ended December 31, 2004, 2003, and 2002 (in thousands):
2004 2003 2002
-------- ------- ------
Revenue $104,067 $28,644 $9,996
Operating income (loss) 1,594 (189) 286
Interest expense (1,108) (502) (303)
Income tax (expense) benefit (333) 99 524
Income (loss) from discontinued operations, net
of income taxes 75 (165) (724)
The results of the discontinued operations for 2004 include the results of
Five Star, which were consolidated with the Company effective October 8,
2003, when the Company increased its ownership interest to 54%. Previously,
the Company accounted for its investment in Five Star under the equity
method (see note 6).
58
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2004 and 2003
In accordance with SFAS No. 144, only those overhead costs that are solely
attributable to the discontinued business segments have been allocated to
discontinued operations. As a result, 2004, 2003 and 2002 include overhead
expenses that were incurred for the benefit of the Company's continuing and
discontinued operations, which are included in continuing operations.
Consolidated interest expense in periods prior to the spin-off has been
allocated to discontinued operations using a basis of net assets of each of
the continuing and discontinued business segments as of November 24, 2004.
The assets and liabilities distributed to NPDC in connection with the
spin-off included those specific to MXL, Five Star and certain other
non-core assets. The following table summarizes the net assets and
liabilities distributed to NPDC on November 24, 2004 (in thousands):
Assets:
Cash and cash equivalents $ 2,453
Due from GP Strategies (arbitration award) 5,000
Accounts and other receivables 14,002
Inventories 25,691
Prepaid expenses and other current assets 391
Investments and marketable securities 1,593
Property, plant and equipment, net 5,553
Deferred tax assets, net 4,045
Goodwill and other assets 2,818
-------
Total assets 61,546
-------
Liabilities:
Accounts payable and accrued expenses 12,672
Short-term borrowings 18,330
Long-term debt 2,961
Minority interest and other liabilities 1,616
-------
Total liabilities 35,579
-------
Net assets distributed to NPDC $25,967
=======
59
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2004 and 2003
(4) GOODWILL AND INTANGIBLE ASSETS
Changes in goodwill for the years ended December 31, 2004 and 2003 were as
follows (in thousands):
2004 2003
------- -------
Beginning of year balance $62,395 $57,491
GSE acquisition -- 4,755
Foreign currency translation 187 149
Distribution of goodwill to NPDC (202) --
------- -------
End of year balance $62,380 $62,395
======= =======
Intangible assets, which consist primarily of patents, licenses and
contract rights, with finite lives are being amortized to expense over
their estimated useful lives. As of December 31, 2004, the Company's
intangible assets with finite lives had a weighted average useful life of
six years. As of December 31, 2004, the Company had no intangible assets
with indefinite useful lives. Amortization expense for intangible assets
for 2004, 2003 and 2002 was $257,000, $147,000 and $103,000, respectively.
Amortization expense for intangible assets is estimated to be $376,000 in
2005, $156,000 in 2006, $128,000 in 2007 and $75,000 in 2008 and 2009.
(5) MARKETABLE SECURITIES
At December 31, 2003, the fair value of marketable securities were
comprised of the following (in thousands):
2003
------
Millennium Cell Inc. $3,570
Hemispherx Biopharma, Inc. 361
------
$3,931
======
Marketable securities were included in the net assets distributed to NPDC
(see note 3).
MILLENNIUM CELL INC.
Millennium is a publicly traded emerging technology company engaged in the
business of developing innovative fuel systems for the safe storage,
transportation and generation of hydrogen for use as an energy source. As
of December 31, 2003, the Company owned 1,532,000 shares of Millennium.
60
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2004 and 2003
In 2003 and 2002, the Company sold approximately 678,000 shares and
1,286,000 shares for $1,376,000 and $3,833,000, respectively, and
recognized net gains of $559,000 and $2,267,000, respectively.
On February 11, 2000, the Company granted options to certain of its
employees pursuant to the GP Strategies Millennium Option Plan to
purchase an aggregate of approximately 547,000 of its shares of
Millennium common stock, of which there are currently approximately
337,000 options outstanding. These options vested over either a
one-year or two-year period and expire on June 30, 2005, as amended.
The options in the Millennium Option Plan were fully vested as of
December 31, 2002. The Company may receive approximately $500,000 (of
which approximately $191,000 was received to date) upon exercise of
all options pursuant to the Millennium Option Plan. The Company's
liabilities to employees of $431,000 and $650,000 at December 31, 2004
and 2003 are included in accounts payable and accrued expenses in the
accompanying consolidated balance sheets. As of December 31, 2004 and
2003, the Company held approximately 337,000 shares of Millennium with
a fair value of $431,000 and $650,000, respectively, in the GP
Strategies Millennium Option Plan, classified as other assets on the
consolidated balance sheets.
The Company recorded a non-cash compensation credit of $219,000,
$150,000 and $1,211,000 for the years ended December 31, 2004, 2003
and 2002, respectively, which is included in selling, general and
administrative expenses in the accompanying consolidated statement of
operations.
As of December 31, 2003, the gross unrealized holding gains of
$1,613,000 (net of income tax expense of $984,000) for
available-for-sale securities was included as in accumulated other
comprehensive income (loss).
HEMISPHERX BIOPHARMA INC.
In March 2003, the Company and ISI entered into an agreement whereby
the Company agreed to receive shares of common stock of Hemispherx
Biopharma Inc. (HEB) with a market value of $425,000 (the Guaranteed
Shares) in full settlement of all of ISI's debt obligations. The
Company received 268,000 shares of HEB from ISI and subsequently made
a capital contribution of the shares to MXL. MXL sold 108,000 of the
shares in 2003 for $249,000, and recognized a net gain of $142,000 on
the sale of these shares, which is included in income (loss) from
discontinued operations, net of income taxes. As of December 31, 2003
the Company held 160,000 shares of HEB, which were classified as
trading securities, had a fair value of approximately $361,000 and
were sold in the first quarter of 2004. The Company recognized a net
gain of $44,000 on the sale of these shares, which is included in
discontinued operations.
61
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2004 and 2003
(6) ACQUISITIONS
(A) GSE SYSTEMS INC.
On October 23 2003, the Company purchased from ManTech International
(ManTech) 3,426,699 shares of common stock of GSE and a GSE
subordinated note in the outstanding principal amount of $650,000,
which the Company immediately converted into 418,653 shares of common
stock of GSE. This transaction (the GSE Acquisition) increased the
Company's ownership of the common stock of GSE from approximately 22%
to approximately 58%. Simultaneously with the closing of the GSE
Acquisition, three directors nominated by the Company were added to
the GSE Board of Directors. GSE was previously an investment of the
Company accounted for under the equity method. Subsequent to the GSE
Acquisition, GSE is consolidated into the Company's consolidated
financial statements. The GSE Acquisition was carried out in order to
allow the Company to work together with GSE to expand GSE's simulation
technology to the power, military and homeland defense markets that
are currently served by General Physics.
The consideration paid to ManTech by the Company consisted of a
five-year 5% note for $5,250,955 (the ManTech Note) due in full in
October 2008. Each year during the term of the ManTech Note, ManTech
has the option to convert up to 20% of the original principal amount
of the note into common stock of the Company at the then market price
of Company's common stock, but only in the event that Company's common
stock is trading at $10 per share or more. In the event that less than
20% of the principal amount of the note is not converted in any year,
such amount not converted will be eligible for conversion in each
subsequent year until converted or until the note is repaid in cash.
As part of the GSE Acquisition, the Company and ManTech entered into a
five-year Teaming Agreement pursuant to which ManTech and the Company
will work together to give the Company the opportunity to provide
training services to ManTech's customers.
On January 1, 2004, GSE entered into a Management Services Agreement
with the Company in which the Company agreed to provide corporate
support services to GSE, including accounting, finance, human
resources, legal, network support and tax. In addition, GSE will use
General Physics' financial system. GSE will pay an annual fee to
General Physics of $685,000. The term of the agreement is one year,
subject to earlier termination only upon the mutual consent of the
parties to the agreement. The Management Services Agreement, which can
be renewed for successive one-year terms, was renewed for fiscal 2005.
The acquisition was accounted for as a purchase transaction in
accordance with SFAS No. 141, Business Combinations, and accordingly,
the net assets acquired were recorded at their fair value at the date
of the acquisition. The excess of the purchase price over the
62
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2004 and 2003
estimated fair values of the net assets acquired was recorded as
goodwill. Goodwill associated with the GSE acquisition will be
deductible for tax purposes.
The components of the net assets acquired were as follows (in
thousands):
Cash $ 2,847
Accounts receivable and unbilled receivables 6,587
Intangible assets, including goodwill 2,684
Property, plant and equipment and
other assets 2,444
-------
Total assets 14,562
-------
Accounts payable, accrued expenses and
other liabilities 5,303
Billings in excess of revenue earned 3,528
-------
Total liabilities assumed 8,831
-------
GSE net assets as of
October 23, 2003 $ 5,731
=======
(B) FIVE STAR PRODUCTS, INC.
The net assets of Five Star were included in the net assets
distributed to NPDC (see note 3).
Prior to October 8, 2003, Five Star was a 47.3% investment of the
Company accounted for under the equity method and was indebted to the
Company for an unsecured 8% note (the Five Star Note) due June 30,
2005, as amended, which amounted to $4,500,000 as of December 31,
2002. On June 20, 2003, the Company entered into an Agreement of
Subordination and Assignments (the Subordination Agreement) with Five
Star that amended the amount of annual repayment of principal on the
Five Star Note. Pursuant to the provisions of the Subordination
Agreement, in 2003 the Company received partial repayments from Five
Star in the amount of $1,200,000. On October 8, 2003, the Company
converted an additional $500,000 of the principal amount of the Five
Star Note into 2,000,000 shares of Five Star common stock (the Five
Star Acquisition) increasing the Company's investment in Five Star to
54%.
The acquisition was accounted for as a purchase transaction in
accordance with SFAS No. 141, and accordingly, the net assets acquired
were recorded at their fair value at the date of the acquisition. The
excess of the net assets acquired over the purchase price was recorded
as a reduction to property, plant and equipment to reflect the
allocation of negative goodwill arising in purchase accounting.
63
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2004 and 2003
The components of the net assets acquired were as follows (in
thousands):
Accounts receivable $13,267
Inventories 20,222
Property, plant and equipment and
other assets 1,529
-------
Total assets 35,018
-------
Short-term borrowings 17,616
Accounts payable and accrued expenses 10,063
Debt to GP Strategies 3,000
-------
Total liabilities assumed 30,679
-------
Five Star net assets as of
October 8, 2003 $ 4,339
=======
On February 6, 2004, Five Star announced that it would repurchase up
to 5,000,000 shares, or approximately 30% of its common stock through
a tender offer. The tender offer increased the Company's ownership in
Five Star to approximately 64% as of November 24, 2004, prior to
distribution.
(7) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following (in thousands):
DECEMBER 31
------------------
2004 2003
-------- -------
Land $ -- 915
Buildings and improvements -- 3,561
Machinery and equipment 8,031 14,534
Furniture and fixtures 3,843 8,583
Leasehold improvements 1,204 2,072
-------- -------
13,078 29,665
Accumulated depreciation and amortization (10,405) (20,671)
-------- -------
$ 2,673 8,994
======== =======
The Company distributed $5,553,000 in net property, plant and
equipment to NPDC (see note 3). Depreciation expense included in
continuing operations in 2004, 2003, and 2002 was $1,659,000,
$1,625,000 and $1,631,000, respectively.
64
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2004 and 2003
(8) SHORT-TERM BORROWINGS
(A) GENERAL PHYSICS
On August 13, 2003, General Physics, General Physics' subsidiary,
SkillRight, Inc., and MXL entered into a two-year $25 million
Financing and Security Agreement (the Credit Agreement) with a new
bank, the proceeds of which were used to repay the Company's previous
credit facility. The Company wrote off $860,000 of deferred financing
costs due to the early termination of its previous credit facility.
This expense is included in interest expense for year ended December
31, 2003. The Credit Agreement is secured by certain assets of General
Physics and, until March 31, 2004, certain of the accounts receivable
of MXL. The Credit Agreement also provides for an unsecured guaranty
from the Company. On March 31, 2004, the Credit Agreement was also
amended to include GSE.
The interest rate on the Credit Agreement is at LIBOR market index
rate plus 3.00%, (which as of December 31, 2004 was approximately
5.4%). Based upon the financial performance of General Physics, the
interest rate can be reduced. The Credit Agreement contains covenants
with respect to General Physics' minimum tangible net worth, leverage
ratio, interest coverage ratio and its ability to make capital
expenditures. The Credit Agreement also contains certain restrictive
covenants including a prohibition on future acquisitions, incurrence
of debt and the payment of dividends. General Physics is currently
restricted from paying dividends or management fees to the Company in
excess of $1,000,000 in any fiscal year. On July 30, 2004, General
Physics received a waiver and paid the Company an additional
$1,000,000. General Physics was in compliance with all loan covenants
under the Credit Agreement as of December 31, 2004. On March 9, 2005,
General Physics received a waiver to loan GSE a maximum of $1.0
million to satisfy any GSE short-term capital requirements over the
next 15 months.
As of December 31, 2004, the amount outstanding under the Credit
Agreement was approximately $6,068,000 and approximately $14,087,000
was available to be borrowed under the Credit Agreement. The Company
repaid in full the $6,068,000 outstanding under the Credit Agreement
as of December 31, 2004 in the first quarter of 2005, using the
proceeds received from arbitration (see note 17). Borrowings
outstanding on December 31, 2003 were $9.5 million.
(B) GSE
On March 30, 2004, GSE was added as an additional borrower under the
General Physics Credit Agreement. Under the terms of the Credit
Agreement, as amended, $1,500,000 of General Physics' Credit Agreement
has been allocated for use by GSE, as well as certain covenants
specific to GSE. The Credit Agreement was amended to provide for
additional collateral consisting of substantially all of the GSE's
assets, as well as certain covenants specific to GSE. It provides for
borrowings by GSE up to 80% of eligible accounts receivable and 80% of
eligible unbilled receivables, up to a maximum of $1,500,000. The
65
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2004 and 2003
interest rate is based upon the LIBOR market index rate plus 3%, with
interest only payments due monthly (5.4 % as of December 31, 2004).
The Company agreed to guarantee GSE's borrowings under the Credit
Agreement, as amended, in consideration for a fee pursuant to the
Management Services Agreement. There were no borrowings outstanding at
December 31, 2004.
(C) FIVE STAR
On June 20, 2003, Five Star obtained a Loan and Security Agreement
(the Loan Agreement) with Fleet Capital Corporation. The Loan
Agreement has a five-year term, with a maturity date of June 30, 2008.
The Loan Agreement provides for a $25,000,000 revolving credit
facility, which allows Five Star to borrow based upon a formula of
eligible inventory and eligible accounts receivable, as defined
therein. The interest rates under the Loan Agreement are LIBOR plus a
credit spread for borrowings not to exceed $15,000,000 and the prime
rate plus a credit spread for borrowings in excess of the
above-mentioned LIBOR-based borrowings. The credit spreads can be
reduced in the event that Five Star achieves and maintains certain
performance benchmarks. At December 31, 2003, approximately
$16,685,000 was outstanding under the Loan Agreement. The Company
distributed $18,330,000 in Five Star short-term borrowings to NPDC on
November 24, 2004 (see note 3). The Company does not guarantee the
Five Star obligation.
(9) ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses are comprised of the following (in
thousands):
DECEMBER 31,
-----------------
2004 2003
------- -------
Accounts payable $ 8,936 $22,795
Payroll and related costs 6,629 6,324
Amount payable to NPDC 5,000 --
Other accrued expenses 12,654 8,988
------- -------
$33,219 $38,107
======= =======
The Company distributed $12,672,136 in accounts payable and accrued
expenses to NPDC (see note 3).
66
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2004 and 2003
(10) LONG - TERM DEBT
Long-term debt is comprised of the following (in thousands):
DECEMBER 31,
----------------
2004 2003
------- ------
6% conditional subordinated notes due 2008 (a) $ 7,500 7,500
ManTech Note (b) 5,251 5,251
Mortgage on MXL Pennsylvania facility (c) -- 1,405
Mortgage on MXL Illinois facility (d) -- 1,185
Other (e) 190 1,782
------- ------
12,941 17,123
Less warrant related discount, net of accretion (1,890) (2,262)
------- ------
11,051 14,861
Less current maturities (100) (1,112)
------- ------
$10,951 13,749
======= ======
(A) Pursuant to a Note and Warrant Purchase Agreement dated August 8,
2003, the Company issued and sold to four Gabelli Funds $7,500,000
aggregate principal amount of 6% Conditional Subordinated Notes due
2008 (the Gabelli Notes) and 937,500 warrants (GP Warrants), each
entitling the holder thereof to purchase (subject to adjustment) one
share of the Company's common stock. The aggregate purchase price for
the Gabelli Notes and GP Warrants was $7,500,000.
The Gabelli Notes bear interest at 6% per annum payable semi-annually
commencing on December 31, 2003 and mature in August 2008. The Gabelli
Notes are secured by a mortgage on the Company's former property
located in Pawling, New York which was distributed to NPDC. In
addition, at any time that less than $1,875,000 of the principal
amount of the Gabelli Notes are outstanding, the Company may defease
the obligations secured by the mortgage and obtain a release of the
mortgage by depositing with an agent for the noteholders, bonds or
government securities with an investment grade rating by a nationally
recognized rating agency which, without reinvestment, will provide
cash on the maturity date of the Gabelli Notes in an amount not less
than the outstanding principal amount of the Gabelli Notes.
The GP Warrants have an exercise price of $6.14 per share, as amended
following the spin-off of NPDC, and are exercisable at any time until
August 2008. The exercise price may be paid in cash, by delivery of
the Gabelli Notes, or a combination of the two. The GP Warrants
contain anti-dilution provisions for stock splits, reorganizations,
mergers and
67
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2004 and 2003
similar transactions. The fair value of the GP Warrants at the date of
issuance was $2,389,000, which reduced long-term debt in the
accompanying consolidated balance sheets.
This amount is being accreted as additional interest expense using the
effective interest rate over the term of the Gabelli Notes. The
Gabelli Notes have a yield to maturity of 15.436% based on the
discounted value. Accretion charged as interest expense was
approximately $372,000 in 2004 and $127,000 during 2003.
The GP Warrants were accounted for as a liability of the Company until
the shares of the Company's common stock issuable on exercise of the
GP Warrants were registered, which occurred on December 8, 2003, at
which time the liability was reclassified to additional
paid-in-capital at its then fair market value of $953,000. The changes
in the fair market value of the GP Warrants were marked-to-market
through December 8, 2003 with the adjustment shown as other income in
the consolidated statement of operations. The Company recognized a
gain in operations of $1,436,000 in valuation adjustment of the
liability relating to the GP Warrants using the Black-Scholes model.
In connection with the Distribution, the Company contributed the
Pawling property, subject to the mortgage, to MXL. MXL assumed the
mortgage, but without liability for repayment of the Gabelli Notes or
any other obligations of the Company under the Note and Warrant
Purchase Agreement (other than foreclosure on such property). If there
is a foreclosure on the mortgage for payment of the Gabelli Notes, the
Company has agreed to indemnify MXL for loss of the value of the
property.
(B) On October 23, 2003 in connection with the GSE Acquisition the
Company issued a five-year 5% note due in full on October 21, 2008 in
the principal amount of $5,250,955 to ManTech International. Interest
is payable quarterly. Each year during the term of the note, the
holder of the note has the option to convert up to 20% of the original
principal amount of the note into common stock of the Company at the
then market price of the Company's common stock, but only in the event
that the Company's common stock is trading at $10 per share or more.
In the event that less than 20% of the principal amount of the note is
not converted in any year, such amount not converted will be eligible
for conversion in each subsequent year until converted or until the
note is repaid in cash.
(C) MXL had a loan in the amount of $1,680,000, secured by a mortgage
covering the real estate and fixtures on its property in Pennsylvania.
The loan requires monthly repayments of $8,333 plus interest at 2.5%
above the one-month LIBOR rate and was to mature on March 8, 2011. The
amount outstanding on November 24, 2004 was included in the net assets
distributed to NPDC. The MXL loan is guaranteed by the Company.
(D) MXL had a loan in the amount of $1,250,000, secured by a mortgage
covering the real estate and fixtures on its property in Illinois. The
loan requires monthly payments of principal and interest in the amount
of $11,046 with interest at a fixed rate of 8.75% per
68
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2004 and 2003
annum and was to mature on June 26, 2006. The amount outstanding on
November 24, 2004 was included in the net assets distributed to NPDC.
The MXL loan is guaranteed by the Company.
(E) Other debt as of December 31, 2004, represents capital lease
obligations for equipment. Other debt outstanding as of November 24,
2004 was included in the net assets distributed to NPDC.
Aggregate annual maturities of long-term debt at December 31, 2004 are
as follows (in thousands):
2005 $ 100
2006 68
2007 22
2008 12,751
Thereafter --
=======
(11) EMPLOYEE BENEFIT PLANS
(A) GP STRATEGIES EMPLOYEE BENEFIT PLAN
The Company and its employees maintain a Retirement Savings Plan (the
Plan) for employees who have completed at least one month of service.
The Plan permits pre-tax contributions to the Plan by participants
pursuant to Section 401(K) of the Internal Revenue Code (IRC). The
Company 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 and may make
additional matching contributions at its discretion. In 2004, 2003 and
2002, the Company did not make any discretionary matching
contributions. The Company matches participants' contributions in
shares of its Common Stock up to 57% of monthly employee salary
deferral contributions. In 2004, 2003 and 2002, the Company
contributed 135,921, 188,317 and 270,000 shares of the Company's
common stock directly to the Plan with a value of approximately
$971,000, $1,053,000 and $1,058,000, respectively.
(B) GSE EMPLOYEE BENEFIT PLAN
GSE has a qualified defined contribution plan that covers
substantially all its U.S. employees under Section 401(K) of the IRC.
Under this plan, GSE stipulated basic contribution matches a portion
of the participants' contributions based upon a defined schedule.
GSE's contributions to the plan were approximately $110,000 in 2004
and $12,000 from October 23, 2003 to December 31, 2003.
69
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2004 and 2003
(12) INCOME TAXES
Income tax (expense) benefit for the years ended December 31, 2004,
2003 and 2002 is as follows (in thousands):
YEARS ENDED DECEMBER 31,
------------------------
2004 2003 2002
------ ----- ----
Income tax (expense) benefit from $8,009 $(985) $295
continuing operations
Income tax (expense) benefit from
discontinued operations $ 466 99 524
------ ----- ----
8,475 $(886) $819
====== ===== ====
The components of income tax (expense) benefit from continuing
operations are as follows (in thousands):
YEARS ENDED DECEMBER 31,
-------------------------
2004 2003 2002
------- ------- -----
Current:
Federal $ (482) $ (39) $ --
State and local (323) (498) (233)
Foreign (268) (693) (361)
------- ------- -----
Total current (1,073) (1,230) (594)
------- ------- -----
Deferred:
Federal 7,768 -- 805
State and local 1,412 -- 74
Foreign (98) 245 --
------- ------- -----
Total deferred 9,082 245 879
------- ------- -----
Total income tax (expense)
benefit $ 8,009 $ (985) $ 285
======= ======= =====
The deferred (expense) benefit excludes activity in the net deferred
tax assets relating to tax on appreciation (depreciation) in
available-for-sale securities, which is recorded directly to
stockholders' equity. Income (loss) before income tax (expense)
benefit generated from foreign entities was approximately $404,000,
($594,000), and $150,000 respectively, in 2004, 2003 and 2002.
70
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2004 and 2003
The difference between the (expense) benefit for income taxes computed
at the statutory rate and the reported amount of tax (expense) benefit
is as follows:
DECEMBER 31,
-----------------------
2004 2003 2002
----- ----- -----
Federal income tax rate (35.0)% 35.0% 35.0%
Foreign, state and local taxes net of
Federal benefit (5.2) (6.6) (7.8)
Taxes of subsidiaries that are not
consolidated for tax purposes -- (1.9) --
Items not deductible - primarily meals and
entertainment (1.7) (6.4) (3.7)
Valuation allowance adjustment 84.6 (29.0)
Change in effective rate, pirmarily net operating
loss carry forwards 16.5 -- --
Net losses from foreign operations for
which no tax benefit has been provided (0.6) (0.8) (2.1)
Tax effect recorded in stockholders' equity
for sale of available-for sale-securities (0.7) (4.5) (11.5)
Other (2.4) 0.5 (3.8)
----- ----- -----
Effective tax rate expense (benefit) 55.5% (13.7)% 6.1%
===== ===== =====
As of December 31, 2004, the Company has approximately $19,332,000 of
Federal net operating loss carryforwards. These carryforwards expire
during 2022 and 2023. The Company has approximately $1,455,000 of
available credit carryovers which may be carried over indefinitely. In
addition, GSE, which is not consolidated with the Company for tax
reporting, has approximately $16,119,000 of Federal net operating loss
carry forwards that expire from 2012 through 2023.
71
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2004 and 2003
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 (liabilities) are summarized as follows
(in thousands):
DECEMBER 31,
-----------------
2004 2003
------- -------
Deferred tax assets:
Allowance for doubtful accounts $ 342 405
Accrued liabilities 1,574 2,166
Net Federal, State and Foreign operating loss carryforwards 16,383 22,751
Tax credit carryforwards 1,455 972
Tax benefits of subsidiaries not consolidated for tax
purposes 50 227
Investment in partially owned companies 1,602 128
------- -------
Deferred tax assets 21,406 26,649
Deferred tax liabilities:
Property and equipment, principally due to
difference in depreciation and amortization 2,888 2,375
------- -------
Net deferred tax assets 18,518 24,274
Less valuation allowance (389) (12,586)
------- -------
Net deferred tax assets $18,129 11,688
======= =======
In the fourth quarter of 2004, the spin-off was completed, the
arbitration settlement was recognized and projected taxable income was
revised in light of the Company's structure subsequent to the
spin-off. Accordingly, the Company reduced its valuation allowance by
$12,197,000 attributable primarily to the ability to realize the
overall deferred tax assets, primarily net operating losses. In 2003,
the valuation allowance increased by $2,125,000 attributable primarily
to domestic net operating losses for the year ended December 31, 2003
for which no tax benefit was provided. Net deferred tax assets of
$3,589,000 were included in the net assets distributed to NPDC (see
note 5).
In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or all
of the deferred tax assets will not be realized. The ultimate
realization of the deferred tax assets is dependent upon the
generation of future taxable income during the periods in which
temporary differences are deductible. Management considers the
scheduled reversal of deferred tax liabilities, projected future
taxable income and tax planning strategies in making this assessment.
Based upon these factors, management believes it is more likely than
not that the Company will realize the benefits of deferred tax assets,
net of the valuation allowance.
72
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2004 and 2003
(13) COMPREHENSIVE INCOME (LOSS)
The following are the components of comprehensive income (loss) (in
thousands):
YEARS ENDED DECEMBER 31,
----------------------------
2004 2003 2002
------- ------- --------
Net income (loss) $22,520 $(8,276) $ (5,228)
Other comprehensive (loss) income,
before income tax benefit
Net unrealized loss on available-for-
sale securities (1,703) (1,067) (12,130)
Fair value change on interest rate
swap (82) 82 --
Foreign currency translation adjustments 237 139 (492)
------- ------- --------
Comprehensive loss before
income tax benefit (1,548) (846) (12,622)
Income tax benefit 687 410 4,718
------- ------- --------
Comprehensive income (loss) $21,659 $(8,712) $(13,132)
======= ======= ========
The components of accumulated other comprehensive income are as
follows (in thousands):
DECEMBER 31,
---------------
2004 2003
----- -------
Net unrealized gain on available-for-sale
securities $ 20 $ 1,613
Net unrealized gain on interest rate swap -- 82
Foreign currency translation adjustment (773) (1,010)
----- -------
Accumulated other
comprehensive income
before tax (753) 685
Accumulated income tax expense related
to items of other comprehensive loss (8) (661)
----- -------
Accumulated other
comprehensive income,
net of tax $(761) $ 24
===== =======
73
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2004 and 2003
(14) COMMON STOCK, STOCK OPTIONS AND WARRANTS
(A) On October 29, 2003 the Company's shareholders approved the GP
Strategies Corporation 2003 Incentive Stock Plan (the 2003 Plan). The
2003 Plan permits awards of incentive stock options, nonqualified
stock options, restricted stock, stock units, performance shares,
performance units and other incentives payable in cash or in shares of
the Company's Common Stock or Class B Common Stock. The aggregate
number of shares of Common Stock or Class B Common Stock available for
issuance under the 2003 Plan is 2,000,000, of which not more than
500,000 shares may be shares of Class B Common Stock. As of December
31, 2004 approximately 1,366,000 shares of the Company's Common Stock
were available for grant under the Plan and 2,000,000 shares of the
Company's Common Stock were available for grant under the 2003 Plan.
Under the Plan, employees and certain other parties may be granted
options to purchase shares of common stock. Although the Plan permits
options to be granted at a price not less than 85% of the fair market
value, the Plan options primarily are granted at the fair market value
of the common stock at the date of the grant and vest over periods
ranging from two to ten years from the date of grant. Shares of common
stock may also be reserved for issuance pursuant to other agreements.
74
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2004 and 2003
Changes in options and warrants outstanding during 2004, 2003 and
2002, and options and warrants exercisable and shares reserved for
issuance at December 31, 2004, 2003 and 2002 are as follows:
NUMBER OF WEIGHTED
PRICE RANGE OPTIONS AND AVERAGE
OPTIONS AND WARRANTS OUTSTANDING PER SHARE WARRANTS EXERCISE PRICE
- -------------------------------- --------------- ----------- --------------
December 31, 2001 $3.00 - $15.375 2,790,665 $7.37
Granted $3.60 - $4.75 845,800 4.13
Exercised $3.60 - $4.61 (1,233) 4.08
Terminated $3.60 - $14.625 (722,235) 7.87
---------
December 31, 2002 $3.00 - $15.375 2,912,997 6.57
Granted $4.90 - $8.00 1,222,250 7.32
Exercised $3.00 - $5.1875 (248,983) 3.94
Terminated $3.60 - $14.625 (96,367) 6.16
---------
December 31, 2003 $3.00 - $15.375 3,789,897 7.00
---------
Granted $6.86 - $7.66 126,000 7.13
Exercised $2.82 - $7.13 (199,959) 4.33
Terminated $3.01 - $15.375 (979,423) 8.98
Spin-off adjustment 322,814
---------
December 31, 2004 $2.81 - $12.85 3,059,329 5.01
=========
Shares reserved for issuance as of December 31, 2004 were 4,425,628.
In connection with the spin-off, options to purchase shares of Company
common stock were adjusted such that each option held the same ratio
of the exercise price per option to the market value per share, the
same aggregate difference between market value and exercise price, and
the same vesting provisions, option periods and other terms and
conditions applicable prior to the spin-off.
75
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2004 and 2003
Weighted average characteristics of outstanding and exercisable stock
options and warrants by exercise price range as of December 31, 2004
were as follows:
OUTSTANDING OPTIONS AND WARRANTS EXERCISABLE OPTIONS
---------------------------------- ----------------------
WEIGHTED WEIGHTED WEIGHTED
NUMBER OF AVERAGE AVERAGE NUMBER OF AVERAGE
RANGE OF OPTIONS AND YEARS EXERCISE OPTIONS AND EXERCISE
EXERCISE PRICES WARRANTS REMAINING PRICE WARRANTS PRICE
- --------------- ----------- --------- -------- ----------- --------
$2.82 - $3.97 1,160,176 3.90 $ 3.38 1,023,231 $ 3.35
$4.09 - $5.54 332,160 3.97 4.36 309,245 4.27
$5.96 - $6.48 1,517,993 3.16 6.22 1,376,920 6.22
$6.86 - $12.84 49,000 3.22 10.52 37,769 10.39
--------- ---- ------ --------- ------
3,059,329 3.53 $ 5.01 2,747,165 $ 4.99
========= ==== ====== ========= ======
The Company had no outstanding Class B Common Stock options during
fiscal years 2004, 2003 and 2002.
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. Shares
reserved for issuance of common stock were primarily related to
options, warrants and the conversion of long-term debt.
The Company reserved 950,000 shares of its Common Stock for issuance
upon conversion of Class B Common Stock at December 31, 2000. The
Company reserved an additional 300,000 shares for a private placement
transaction (see note 14(c)) bringing the total to 1,250,000 shares
reserved for issuance upon conversion of Class B Common Stock at
December 31, 2004, 2003 and 2002.
(B) Pursuant to an agreement dated as of October 19, 2001 (the Stock
Purchase Agreement), the Company sold to Bedford Oak Partners, LP (the
Bedford Oak) in a private placement transaction, 300,000 shares of
Class B Common Stock (the Bedford Class B Shares) for $900,000. Upon
the disposition of any of the Bedford Class B Shares (other than to an
affiliate of Bedford Oak who agrees to be bound by the provisions of
the Stock Purchase Agreement) or at the request of the Board of
Directors of the Company, Bedford Oak is required to exercise the
right to convert all of the Bedford Class B Shares then owned by
Bedford Oak into an equal number of shares of common stock of the
Company (the Bedford Underlying Shares). The Company was required to
file a registration statement to register
76
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2004 and 2003
the resale of the Bedford Underlying Shares by Bedford Oak, which
registration statement was declared effective as of August 13, 2002.
On any date prior to October 19, 2003 during which Bedford Oak was not
able to resell the Bedford Underlying Shares pursuant to the
registration statement, Bedford Oak had the right to require the
Company to purchase all, but not less than all, of the Bedford Class B
Shares and the Bedford Underlying Shares then held by Bedford Oak for
a purchase price as specified in the Stock Purchase Agreement. The put
option obligation expired upon the effectiveness of the registration
statement on August 13, 2002 covering the Bedford Underlying Shares.
Pursuant to an agreement dated May 3, 2002, the Company agreed to sell
to Bedford Oak in a private placement transaction 1,200,000 shares of
Common Stock (the Bedford Common Shares) of the Company for an
aggregate purchase price of $4,200,000. Harvey Eisen, the managing
member of Bedford Oak Advisors, LLC, the investment manager of Bedford
Oak, was elected a director of the Company in July 2002.
Pursuant to an agreement dated May 3, 2002, the Company sold 100,000
shares of Common Stock for $350,000 to Marshall Geller (the Geller
Shares), a director of the Company, in a private placement
transaction.
Pursuant to an agreement dated May 3, 2002 (the EGI Agreement), the
Company sold to Equity Group Investments, L.L.C. (EGI) in a private
placement transaction 1,000,000 shares of Common Stock (the EGI Common
Shares) for $3,500,000 and 300,000 shares of Class B Common Stock (the
EGI Class B Shares) for $1,260,000. Mark Radzik, a designee of EGI,
was elected a director of the Company in July 2002. Mark Radzik was
replaced by Matthew Zell as the designee for EGI in February 2005.
Upon the disposition of any of the EGI Class B Shares (other than to
an affiliate of EGI or to a transferee approved by the Board who in
each case agrees to be bound by the provisions of the EGI Agreement),
EGI was required to convert all of the EGI Class B Shares into an
equal number of shares of Common Stock (the EGI Underlying Shares).
On August 13, 2002, a registration statement covering the resale of
the Bedford Underlying Shares, the Bedford Common Shares, the EGI
Common Shares, the EGI Underlying Shares and the Geller Shares was
declared effective by the SEC.
(C) In June 2001, the Company entered into an agreement with a financial
consulting firm to provide certain services for which the Company, in
addition to cash payments, agreed to issue warrants to purchase
300,000 shares of the Company's common stock at an exercise price of
$4.60 per share. Pursuant to the spin-off of NPDC the exercise price
of the warrants was adjusted to $3.21 per share. These warrants expire
in June 2011.
77
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2004 and 2003
(D) On August 8, 2003, the Company issued and sold to four Gabelli funds
937,500 GP Warrants, each entitling the holder thereof to purchase
(subject to adjustment) one share of the Company's common stock (see
note 10 (a)). The GP Warrants previously had an exercise price of
$8.00 per share and are exercisable at any time until August 2008.
Pursuant to the spin-off of NPDC the exercise price of the warrants
was adjusted to $6.14 per share.
(E) GSE LONG-TERM INCENTIVE PLAN
During 1995, GSE established the 1995 Long-Term Incentive Stock Option
Plan (the GSE Plan), which includes all officers, key employees and
non-employee members of GSE's Board of Directors. All options to
purchase shares of GSE's common stock under the GSE Plan expire seven
years from the date of grant and generally become exercisable in three
installments with 40% vesting on the first anniversary of the grant
date and 30% vesting on each of the second and third anniversaries of
the grant date, subject to acceleration under certain circumstances.
At December 31, 2004, GSE had 686,844 shares of common stock reserved
for future grants under the GSE Plan.
Stock option and warrant activity for GSE is as follows:
NUMBER OF WEIGHTED
OPTIONS AND WARRANTS PRICE RANGE OPTIONS AND AVERAGE
OUTSTANDING PER SHARE WARRANTS EXERCISE PRICE
-------------------- --------------- ----------- --------------
October 23, 2003 $1.00 - $14.750 1,931,376 $3.93
Terminated $2.00 - $2.800 (27,400) 2.31
December 31, 2003 $1.00 - $14.750 1,903,976 3.95
Terminated $1.48 - $2.950 (37,200) 3.79
---------
December 31, 2004 $1.00 - $14.750 1,866,776 3.96
=========
78
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2004 and 2003
The following table summarizes information relating to currently
outstanding and exercisable options and warrants at December 31, 2004:
WEIGHTED WEIGHTED
AVERAGE AVERAGE
RANGE OF NUMBER YEARS EXERCISE
EXERCISE PRICES OUTSTANDING REMAINING PRICE
- ---------------- ----------- --------- --------
$0.00 - $1.47 175,000 2.5 $ 1.19
$1.48 - $2.95 528,350 3.0 2.15
$2.96 - $4.43 789,485 1.6 3.67
$4.44 - $5.90 200,000 2.1 4.75
$5.91 - $7.38 10,000 2.3 6.38
$7.39 - $8.85 20,000 2.2 7.50
$8.86 - $11.80 17,700 1.6 11.25
$11.81 - $14.75 126,241 0.7 14.11
--------- --- ------
Total 1,866,776 2.1 $ 3.96
========= === ======
All options and warrants are currently exercisable.
(15) BUSINESS SEGMENTS
Prior to November 24, 2004 the Company had five operating business
segments: Manufacturing & Process, Information Technology, Simulation,
Optical Plastics and Home Improvement Distribution. On November 24,
2004, the Company completed the spin-off of NPDC, which comprised the
Optical Plastics (MXL) and Home Improvement Distribution (Five Star)
segments and certain other non-core assets. The Company continues to
own and operate its wholly owned subsidiary, General Physics,
comprised of its former Manufacturing & Process and Information
Technology segments and its majority-owned subsidiary, GSE, formerly
called the Simulation segment. The Company reorganized its
Manufacturing & Process and Information Technology segments into the
General Physics segment because it monitors and operates the General
Physics subsidiary as a single business.
General Physics, provides technology based training, engineering,
consulting and technical services to leading companies in the
automotive, steel, power, oil and gas, chemical, energy,
pharmaceutical and food and beverage industries and to the government
sector, as well as IT training programs and solutions, including
Enterprise Solutions and comprehensive career training and transition
programs.
GSE provides real-time simulation, homeland security and engineering
services for the energy, process and military industries.
79
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2004 and 2003
The management of the Company does not allocate the following items by
segment: investment and other income; interest expense; selling,
general and administrative expenses; depreciation and amortization
expense; income tax expense; significant non-cash items and long-lived
assets. Inter-segment sales are eliminated in consolidation and are
not significant.
The following table sets forth the revenue and operating results
attributable to each line of business and includes a reconciliation of
segment revenue to consolidated revenue and operating results to
consolidated income (loss) before income taxes (in thousands):
YEARS ENDED DECEMBER 31,
------------------------------
2004 2003 2002
-------- -------- --------
Revenue:
General Physics $165,066 $133,975 $142,237
GSE 28,907 6,059 --
-------- -------- --------
$193,973 $140,034 $142,237
======== ======== ========
Operating profit:
General Physics $ 8,881 $ 4,233 $ 1,599
GSE (174) 366 --
Corporate and other (6,479) (10,439) (5,462)
-------- -------- --------
2,228 (5,840) (3,863)
Interest expense (2,113) (3,123) (2,467)
Other income (expense), gain on
arbitration award, net, gains
on sales of marketable securities,
net and valuation adjustment of
liability for warrants 14,309 1,777 1,531
-------- -------- --------
Income (loss) from continuing
operations before income
taxes and minority
interests $ 14,424 $ (7,186) $ (4,799)
======== ======== ========
For the years ended December 31, 2004, 2003 and 2002, sales to the
United States government and its agencies represented approximately
37%, 32% and 32%, respectively, of the Company's revenue.
80
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2004 and 2003
Additional information relating to the Company's business segments is as
follows (in thousands):
DECEMBER 31,
------------------------------
2004 2003 2002
-------- -------- --------
Identifiable assets:
General Physics $130,529 $ 97,289 $102,171
GSE 17,208 19,817 --
MXL (1) -- 10,462 9,818
Five Star (1) -- 38,721 --
Corporate and other 8,298 22,034 32,916
-------- -------- --------
$156,035 $188,323 $144,905
======== ======== ========
YEARS ENDED DECEMBER 31,
------------------------
2004 2003 2002
------ ------ ------
Additions to property, plant and equipment:
General Physics $1,085 $ 707 $1,523
GSE 227 20 --
MXL (1) 238 1,135 368
Five Star (1) 226 159 --
Corporate and other 8 102 25
------ ------ ------
$1,784 $2,123 $1,916
====== ====== ======
Depreciation and amortization:
General Physics $1,645 $1,601 $1,854
GSE 853 192 --
MXL (1) 559 565 510
Five Star (1) 170 47 --
Corporate and other 857 523 940
------ ------ ------
$4,084 $2,928 $3,304
====== ====== ======
(1) On November 24, 2004, the Company completed the spin-off of MXL and Five
Star segments. The Company distributed $61,546,000 in total assets to NPDC
in the spin-off. The additions to property, plant and equipment and
depreciation and amortization shown in 2004 for MXL and Five Star segments
include the activity for the period from January 1, 2004 through November
24, 2004.
81
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2004 and 2003
Identifiable assets by industry segment are those assets that are used
in the Company's operations in each segment. Corporate and other
assets are principally cash and cash equivalents, marketable
securities and intangible assets, including goodwill.
Information about the Company's revenue in different geographic
regions, which are attributed to countries based on location of
customers, is as follows (in thousands):
YEARS ENDED DECEMBER 31,
------------------------------
2004 2003 2002
-------- -------- --------
United States $173,713 $129,433 $131,568
United Kingdom 11,010 7,131 7,258
Other 9,250 3,470 3,411
-------- -------- --------
$193,973 $140,034 $142,237
======== ======== ========
Information about the Company's total assets in different geographic
regions is as follows (in thousands):
DECEMBER 31,
------------------------------
2004 2003 2002
-------- -------- --------
United States $146,986 $180,026 $137,303
United Kingdom 4,230 3,820 3,301
Other 4,819 4,477 4,301
-------- -------- --------
$156,035 $188,323 $144,905
======== ======== ========
All corporate intangible assets of the Company, as well as other
corporate assets, are assumed to be in the United States.
(16) OTHER RELATED PARTY TRANSACTIONS
For a description of certain transactions pursuant to which the
Company received proceeds from the sale of Common Stock and Class B
Common Stock to certain related parties (see note 14).
As of December 31, 2004 and 2003, the Company had total loans
receivable from Mr. Feldman, the Company's Chief Executive Officer, of
approximately $619,000 and $2,323,000, respectively. Such loans bear
interest at the prime rate and are secured by the purchased Class B
Common Stock and certain other assets. All principal on the loans and
accrued interest are due on May 31, 2007.
82
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2004 and 2003
On April 1, 2002, Jerome I. Feldman and the Company entered into an
incentive compensation agreement pursuant to which Mr. Feldman is
eligible to receive from the Company up to five payments in an amount
of $1,000,000 each, based on the closing price of the Company's Common
Stock sustaining or averaging increasing specified levels over periods
of at least 10 consecutive trading days. On June 11, 2003, July 23,
2003, December 22, 2003, November 3, 2004 and December 10, 2004, Mr.
Feldman earned an incentive payment of $1,000,000 each, which amounts
are payable in January 2006, unless further deferred. To the extent
there are any outstanding loans from the Company to Mr. Feldman at the
time an incentive payment is payable, the Company has the right to
off-set the payment of such incentive payment first against the
outstanding accrued interest under such loans and next against any
outstanding principal.
The Company recorded compensation expense of $2,000,000 for the year
ended December 31, 2004 and $3,000,000 for the year ended December 31,
2003, which is included in selling, general and administrative
expense. Although the off-set of the payments earned will take place
in future periods, for accounting purposes, the off-set will be deemed
to have occurred on the dates earned since the Company possesses the
right of set-off under the Incentive Agreement. As a result, in 2003
and 2004 the Company applied incentive compensation earned against
interest receivable as well as the loan outstanding, which resulted in
the outstanding balance of the note receivable being reduced from
$4,095,000 at December 31, 2002 to $2,322,000 as of December 31, 2003
and to $619,000 as of December 31, 2004.
On July 1, 2002, the Company made a loan to Douglas Sharp, the
President of GP in the principal amount of $150,000 in connection with
Mr. Sharp's relocation. The loan bears interest at the prime rate of
Wachovia Bank. As of December 31, 2004, the aggregate amount of
indebtedness outstanding under the loan was approximately $65,000.
In December 2003, GSE's Board of Directors elected John Moran, an
executive of the Company with experience in the power industry and
simulation technology, as its Chief Executive Officer. In 2004, Mr.
Moran continued as an employee of the Company, however, Mr. Moran
devoted 100% of his time to the performance of his duties as CEO of
GSE. For 2003, GSE reimbursed the Company $35,000 for his compensation
and benefits and in 2004 GSE reimbursed the Company $300,000 for Mr.
Moran's compensation and benefits. Effective January 1, 2005, Mr.
Moran became an employee of GSE.
In 2004, Michael Feldman received a salary of $85,000 from GSE as
marketing manager and in 2003 received a salary of $16,000 from GSE.
Michael Feldman is the son of Jerome I. Feldman, the Company's
Chairman and Chief Executive Officer.
The Company has guaranteed the leases for Five Star's New Jersey and
Connecticut warehouses, totaling approximately $1,589,000 per year
through the first quarter of 2007. The Company's guarantee of such
leases was in effect when the Five Star business was in effect when
the Five Star business was conducted by a wholly-owned subsidiary of
the Company.
83
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2004 and 2003
In 1998, the Company sold substantially all of the operating assets of
the Five Star business to the predecessor corporation of Five Star. As
part of this transaction, the landlord of the New Jersey and
Connecticut facilities and the lessor of the equipment did not consent
to the release of the Company's guarantee. The Company has also
guaranteed the mortgages for MXL's Illinois and Pennsylvania
properties through June 2006 and March 2011, respectively, as well as
$700,000 in debt entered into by MXL on October 1, 2003 in connection
with the acquisition of certain assets from AOtec, LLC. The Company's
guarantees continued after the spin-off.
Prior to the spin-off, NPDC was a wholly-owned subsidiary of the
Company. The Company and NPDC have entered into contracts that will
govern certain relationships between them. The Company and NPDC
believe that these agreements are at fair market value and are on
terms comparable to those that would have been reached in arm's-length
negotiations had the parties been unaffiliated at the time of the
negotiations.
Certain of NPDC's executive officers are also executive officers of
the Company and will remain on the Company's payroll. The executive
officers will not receive any salary from NPDC; however, they will
provide NPDC with management services under a management agreement
between the Company and NPDC. The Company charges NPDC a management
fee to cover an allocable portion of the compensation of these
officers, based on the time they spend providing services to NPDC, in
addition to an allocable portion of certain other corporate expenses.
In connection with the spin-off, NPDC entered into a separate
management agreement with the Company pursuant to which NPDC will
provide certain general corporate services to the Company. Under this
management agreement, NPDC will charge the Company a management fee to
cover an allocable portion of the compensation of its employees, based
on the time they spend providing services to the Company, in addition
to an allocable portion of corporate overhead related to services
performed for the Company and its subsidiaries.
Both management fees will be paid quarterly. Any disagreements over
the amount of such fees will be subject to arbitration. Each of the
management agreements will each have an initial term of three years,
and after two years, will be terminable by both the Company and NPDC,
upon six months prior written notice.
NPDC was included in the Company's consolidated income tax group and
NPDC's tax liability was included in the consolidated federal income
tax liability of the Company until the time of the spin-off. The Tax
Sharing Agreement provides for tax sharing payments between the
Company and NPDC for periods prior to the spin-off, so that NPDC will
be generally responsible for the taxes attributable to its lines of
business and entities
84
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2004 and 2003
comprising it and the Company will be generally responsible for the
taxes attributable to its lines of business and the entities
comprising it.
The Company and NPDC agreed that taxes related to intercompany
transactions that are triggered by the NPDC spin-off will be generally
allocated to the Company. The Company and NPDC agreed that joint
non-income tax liabilities will generally be allocated between the
Company and NPDC based on the amount of such taxes attributable to
each group's line of business. If the line of business with respect to
which the liability is appropriately associated cannot be readily
determined, the tax liability will be allocated to the Company.
Under the distribution agreement that governed the spin-off of NPDC
from the Company, the Company and NPDC each agreed that neither would
take any action that might cause the spin-off of NPDC to not qualify
as a tax-free distribution under Section 355 of the Code. Should one
party take an action which causes the spin-off not to so qualify, then
that party would be liable to the other for any taxes incurred by the
other from the failure of the spin-off to qualify as a tax-free
distribution.
On March 23, 2003, the Company extended its guarantee of up to
$1,800,000 of GSE debt pursuant to GSE's previous credit facility
through March 31, 2004 (see note 8). In consideration for the
extension of the guarantee, the Company received 150,000 shares of GSE
common stock with a value of $180,000. A deferred credit of $180,000
was recorded for the receipt of these shares which is being amortized
to income over the term of the guarantee. During the year ended
December 31, 2003, the Company recorded $135,000 to other income in
the consolidated statement of operation. The guarantee was extended
through May 31, 2004. On March 30, 2004, GSE was added as a borrower
under the General Physics Credit Agreement (see note 8). The Company
agreed to guarantee GSE's allocated portion ($1,500,000) of the Credit
Agreement. General Physics received a waiver to loan GSE a maximum of
$1.0 million to satisfy any GSE short-term capital requirements over
the next 15 months.
(17) COMMITMENTS AND CONTINGENCIES
(A) The Company has various non-cancelable leases for real property and
machinery and equipment. Such leases expire at various dates with, in
some cases, options to extend their terms.
85
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2004 and 2003
Minimum rentals under long-term operating leases are as follows (in
thousands):
REAL MACHINERY AND
PROPERTY EQUIPMENT TOTAL
-------- ------------- -------
2005 $ 3,920 $1,044 $ 4,964
2006 3,261 415 3,676
2007 2,755 190 2,945
2008 1,746 31 1,777
2009 890 2 892
Thereafter 5,313 -- 5,313
------- ------ -------
Total $17,885 $1,682 $19,567
======= ====== =======
Several of the leases contain provisions for rent escalation based
primarily on increases in real estate taxes and operating costs
incurred by the lessor. Rent expense was approximately $5,125,000,
$4,200,000 and $3,961,000 for 2004, 2003 and 2002, respectively.
(B) The Company has guaranteed the leases for Five Star's New Jersey and
Connecticut warehouses, totaling approximately $1,589,000 per year
through the first quarter of 2007. The Company's guarantee of such
leases was in effect when Five Star was originally a wholly owned
subsidiary of the Company prior to the sale by the Company in 1998 of
substantially all of the operating assets of Five Star to the
predecessor company of Five Star. As part of this transaction, the
landlord of the New Jersey and Connecticut facilities did not consent
to the release of the Company's guarantee. The Company's guarantee of
Five Star's leases was not affected by the spin-off of NPDC.
(18) LITIGATION
On January 3, 2001, the Company commenced an action alleging that MCI
Communications Corporation, ("MCI") MCI's Systemhouse subsidiaries
("Systemhouse"), and Electronic Data Systems Corporation, as successor
to Systemhouse, ("EDS") committed fraud in connection with the
Company's 1998 acquisition of Learning Technologies from the
defendants for $24,300,000. The Company seeks actual damages in the
amount of $117,900,000 plus interest, punitive damages in an amount to
be determined at trial, and costs. Such damages are subject to
reduction by the amount recovered in the arbitration.
The complaint, which is pending in the New York State Supreme Court,
alleges that the defendants fraudulently induced the Company to
acquire Learning Technologies by concealing the poor performance of
Learning Technologies' United Kingdom operation. The complaint also
alleges that the defendants represented that Learning Technologies
would continue to receive new business from Systemhouse even though
the defendants knew that the sale of Systemhouse to EDS was imminent
and that such new business would cease after such sale. In February
2001, the defendants filed answers denying liability. No counterclaims
against the plaintiffs have been asserted. Although discovery had not
yet been completed, defendants made a motion for summary judgment,
which was submitted in
86
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2004 and 2003
April 2002. The motion was denied by the court due to the MCI
bankruptcy, but with leave to the other defendants to renew, as
described below.
The defendants other than MCI then made an application to the court to
stay the fraud action until a later-commenced arbitration, alleging
breach of the acquisition agreement and of a separate agreement to
refer business to General Physics on a preferred provider basis and
seeking actual damages in the amount of $17,600,000 plus interest, is
concluded. In a decision dated May 9, 2003, the court granted the
motion and stayed the fraud action pending the outcome of the
arbitration.
The arbitration hearings began on May 17, 2004 and concluded on May
24, 2004 before JAMS, a private dispute resolution firm. On September
10, 2004, the arbitrator issued an interim award in which she found
that the sellers of Learning Technologies breached certain
representations and warranties contained in the acquisition agreement.
In a final award dated November 29, 2004, the arbitrator awarded the
Company $12,273,575 in damages and $6,016,109 in interest. On December
30, 2004, EDS made a payment of $18,427,684, which included $138,000
of accrued interest, to the Company to satisfy its obligation under
the arbitration award. The Company recognized a gain on arbitration
settlement, net of legal fees and expenses of $13,660,000 in 2004, and
the cash was held in escrow as of December 31, 2004. EDS subsequently
agreed that the arbitration award is final and binding and that it
will take no steps of any kind to vacate or otherwise challenge the
award.
As a result of the conclusion of the arbitration, the state court has
lifted the stay of the fraud claim against EDS. The Company is now
proceeding with the fraud claim against EDS. On February 14, 2005, EDS
filed a new motion for summary judgment dismissing the Company's fraud
claim. The Company must respond to the motion by March 17, 2005. The
motion is currently scheduled for argument on April 4, 2005.
The fraud action against MCI had been stayed as a result of the
bankruptcy of MCI. In February 2004, the Bankruptcy Court lifted the
stay so that the state court could rule on the merits of MCI's summary
judgment motion. MCI has stated that it intends to ask the Bankruptcy
Court to reinstate the stay.
In connection with the spin-off of NPDC by the Company, the Company
agreed to make an additional capital contribution to NPDC in an amount
equal to the first $5,000,000 of any proceeds (net of litigation
expenses and taxes incurred, if any), and 50% of any proceeds (net of
litigation expenses and taxes incurred, if any) in excess of
$15,000,000, received with respect to the foregoing arbitration and
litigation claims.
Pursuant to such agreement, in January 2005, the Company has made a
$5,000,000 distribution to NPDC out of the proceeds of the arbitration
award. The net cash proceeds to the Company was approximately
$8,500,000 after legal fees and distribution to NPDC. A
87
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2004 and 2003
portion of such net proceeds was used to reduce to zero the
outstanding balance of General Physics' revolving credit facility,
which as of December 31, 2004 was $6.1 million.
The Company is not a party to any legal proceeding, the outcome of
which is believed by management to have a reasonable likelihood of
having a material adverse effect upon the financial condition and
operating results of the Company.
88
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2004 and 2003
(19) QUARTERLY INFORMATION (UNAUDITED)
The Company's quarterly financial information has not been audited but, in
management's opinion, includes all adjustments necessary for a fair
presentation.
THREE MONTHS ENDED
--------------------------------------------------- YEAR ENDED
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, DECEMBER 31,
2004 2004 2004 2004 2004
--------- -------- ------------- ------------ ------------
Revenue $42,720 $47,074 $51,518 $52,661 $193,973
Gross profit 5,702 6,300 6,989 6,972 25,963
Income from
continuing operations 16 280 559 21,590 22,445
Income from discontinued
operations, net of income taxes 115 113 (130) (23) 75
Net income 131 393 429 21,567 22,520
Per common share data
Basic:
Income from
continuing operations $ -- $ 0.02 $ 0.03 $ 1.21 $ 1.27
Income (loss) from discontinued
operations, net of income taxes 0.01 -- (0.01) -- --
Net income 0.01 0.02 0.02 1.21 1.27
Diluted:
Income from
continuing operations $ -- $ 0.02 $ 0.03 $ 1.15 $ 1.23
Income (loss) from discontinued
operations, net of income taxes 0.01 -- (0.01) -- --
Net income 0.01 0.02 0.02 1.15 1.23
(Continued)
89
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2004 and 2003
THREE MONTHS ENDED
--------------------------------------------------- YEAR ENDED
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, DECEMBER 31,
2003 2003 2003 2003 2003
--------- -------- ------------- ------------ ------------
Revenue $33,871 $33,986 $32,313 $39,864 $140,034
Gross profit 3,465 3,906 4,128 5,596 17,095
Loss from continuing operations (609) (3,025) (2,524) (1,953) (8,111)
Income (loss) from discontinued
operations, net of income taxes (94) 159 (323) 93 (165)
Net loss (703) (2,866) (2,847) (1,860) (8,276)
Per common share data
Basic:
Loss from continuing operations $ (0.04) $ (0.18) $ (0.14) $ (0.11) $ (0.47)
Income (loss) from discontinued
operations, net of income taxes (0.01) 0.01 (0.02) 0.01 (0.01)
Net loss (0.05) (0.17) (0.16) (0.10) (0.48)
Diluted:
Loss from continuing operations $ (0.04) $ (0.18) $ (0.14) $ (0.11) $ (0.47)
Income (loss) from discontinued
operations, net of income taxes (0.01) 0.01 (0.02) 0.01 (0.01)
Net loss (0.05) (0.17) (0.16) (0.10) (0.48)
90
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A: CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures.
The Company maintains disclosure controls and procedures that are designed to
ensure that information required to be disclosed by it in its reports filed or
submitted pursuant to the Securities Exchange Act of 1934, as amended (Exchange
Act), is recorded, processed, summarized and reported within the time periods
specified in the Securities and Exchange Commission's rules and forms and that
information required to be disclosed by the Company in its Exchange Act reports
is accumulated and communicated to management, including the Company's Chief
Executive Officer and Chief Financial Officer, to allow timely decisions
regarding required disclosure.
Under the supervision and with the participation of our management, including
the Company's Chief Executive Officer and Chief Financial Officer, the Company
carried out an evaluation of the effectiveness of the design and operation of
the Company's disclosure controls and procedures pursuant to Exchange Act Rule
13a-15(e) as of December 31, 2004. Based upon that evaluation and the material
weaknesses described below, the Chief Executive Officer and Chief Financial
Officer concluded that the Company's disclosure controls and procedures were not
effective as of such date.
SECTION 404 ASSESSMENT
Section 404 of the Sarbanes-Oxley Act of 2002 requires us to conduct an annual
assessment of our internal control over financial reporting and to include a
report on, and an attestation by our independent registered public accountants,
KPMG LLP, of, the effectiveness of these controls, beginning in this Annual
Report on Form 10-K for the fiscal year ended December 31, 2004.
On November 30, 2004, the Securities and Exchange Commission issued an exemptive
order under which certain companies are permitted to delay, for up to 45 days
after the due date of their Annual Report on Form 10-K, the filing of the
internal control report and the related attestation of the independent
registered public accountants. The Company qualifies under the provisions of
this exemptive order for such 45-day delay. In reliance on this exemptive order,
this Annual Report on Form 10-K does not include the internal control report or
related attestation, which the Company plans to file by amendment prior to the
expiration of the 45-day extension.
The Company is currently performing its assessment of the effectiveness of the
Company's internal control over financial reporting as of December 31, 2004,
using the control criteria framework of the Committee of Sponsoring
Organizations (COSO) of the Treadway Commission published in its report entitled
Internal Control-Integrated Framework. As of the date of this filing, the
Company and KPMG LLP have determined that certain material weaknesses exist in
the Company's internal control over financial
91
reporting. These material weaknesses arose from deficiencies in two areas: (1)
the accounting for income taxes and (2) the preparation and review of certain
consolidated financial statement footnote disclosures. In both cases, the
Company did not have adequate technical resources or sufficient management
review procedures.
The deficiencies were promptly brought to the attention of the Company's Audit
Committee and the Company has assigned a high priority to the improvement of the
internal control over financial reporting. The Company is developing a plan to
remediate the material weaknesses that is expected to include:
- Increasing the level of review in the preparation of the quarterly
and annual tax provision;
- Formalizing the processes, procedures and documentation standards
over the preparation of the quarterly and annual accounting for
income tax and the preparation of the consolidated financial
statement footnote disclosures; and
- Increasing resources for reporting to the Securities and Exchange
Commission pursuant to the Exchange Act.
The Company expects to begin implementing such remediation plan as soon as
possible.
Changes in Internal Control over Financial Reporting
No change in our internal control over financial reporting occurred during our
fourth fiscal quarter of 2004 that has materially affected, or is reasonably
likely to materially affect, our internal control over financial reporting.
LIMITATIONS OF EFFECTIVENESS OF CONTROLS
It should be noted that any system of controls, however well designed and
operated, can provide only reasonable, and not absolute, assurance that the
objectives of the system will be met. The design of any control system is based,
in part, upon the benefits of the control system relative to its costs. Because
of the inherent limitations in all control systems, no evaluation of controls
can provide absolute assurance that all control issues and instances of fraud,
if any, within the Company have been detected. These inherent limitations
include the realities that judgments in decision making can be faulty, and that
controls can be circumvented by the individual acts of some persons, by
collusion of two or more people or by management override of control. In
addition, over time, controls may become inadequate because of changes in
conditions, or the degree of compliance with the policies or procedures may
deteriorate. Also, the design of any control system is based in part upon
certain assumptions about the likelihood of future events. Because of inherent
limitation in a cost-effective control system, misstatements due to error or
fraud may occur and not be detected. The Company's controls and procedures are
designed to provide a reasonable level of assurance of achieving their
objectives.
92
PART III
The Company has adopted a Code of Business Conduct and Ethics for directors,
officers and employees of the Company and its subsidiaries, which was approved
by the Company's Audit Committee and Board of Directors. A copy of this Code of
Business Conduct and Ethics is incorporated herein by reference into this report
as Exhibit 14.1. If the Company makes any amendments to the Code of Business
Conduct and Ethics or grants any waiver from a provision of the Code of Business
Conduct and Ethics for its executive officers or directors, the Company will
within five (5) days disclose the nature of such amendment or waiver on its
website at www.gpstrategies.com or in a report on Form 8-K.
All other information required by Items 10, 11, 12, 13 and 14 of Part III of
this Annual Report on Form 10-K is incorporated herein by reference to the
information under the captions "Directors and Executive Officers of the
Registrant", "Executive Compensation", "Security Ownership of Certain Beneficial
Owners and Management and Related Stockholder Matters", "Certain Relationships
and Related Transactions" and "Principal Accountant Fees and Services" in the
Proxy Statement for the company's 2004 and 2005 Annual Meeting of Shareholders.
PART IV
ITEM 15: EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(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
----
Report of Independent Registered Public Accounting Firm - KPMG LLP 40
Report of Independent Registered Public Accounting Firm - Eisner LLP 41
Consolidated Balance Sheets - December 31, 2004 and 2003 42
Consolidated Statements of Operations - Years ended December 31,
2004, 2003 and 2002 44
Consolidated Statements of Stockholders' Equity and Comprehensive Income
(Loss)- Years ended December 31, 2004, 2003 and 2002 45
Consolidated Statements of Cash Flows - Years ended December 31,
2004, 2003 and 2002 46
Notes to Consolidated Financial Statements 48
(a)(2) Financial Statement Schedules
Schedule I - Schedule of Valuation and Qualifying Accounts i
94
(a)(3) Exhibits
Consent of Independent Registered Public Accounting Firm - KPMG LLP *
Consent of Independent Registered Public Accounting Firm - Eisner LLP *
* Filed herewith
95
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
Dated: March 16, 2005
/s/ Jerome I. Feldman
Chief Executive Officer
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
---------- -----
/s/ Jerome I. Feldman Principal Executive Officer
/s/ Scott N. Greenberg President and Chief Financial Officer and Director
/s/ Ogden R. Reid Director
/s/ Harvey P. Eisen Director
/s/ Marshall S. Geller Director
96
EXHIBIT INDEX
3.1 Amended Restated Certificate of Incorporation of the Registrant
filed on October 5, 1995. Incorporated herein by reference to
Exhibit 3 of the Registrant's Form 10-Q for the third quarter
ended September 30, 1995.
3.2 Amendment to the Registrant's Restated Certificate of
Incorporation filed on January 24, 1997. Incorporated herein by
reference to Exhibit 3.1 of the Registrant's Form 10-K for the
year ended December 31, 1996.
3.3 Certificate of Designations, Preferences and Rights of Series A
Junior Participating Preferred Stock of the Registrant dated
June 23, 1997.*
3.4 Amendment to the Registrant's Restated Certificate of
Incorporation filed on March 5, 1998. Incorporated herein by
reference to Exhibit 3.1 of the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1997.
3.5 Amended and Restated By-Laws of the Registrant. Incorporated
herein by reference to Exhibit 1 of the Registrant's Form 8-K
filed on September 1, 1999.
10.1 1973 Non-Qualified Stock Option Plan of the Registrant, as
amended on June 26, 2000. Incorporated herein by reference to
Exhibit 10.1 of the Registrant's Annual Report on Form 10-K for
the year ended December 31, 2000.
10.2 GP Strategies Corporation 2003 Incentive Stock Plan.
Incorporated herein by reference to Exhibit 4 of the
Registrant's Form 10-Q for the quarter ended September 30,
2004.
10.3 General Physics Corporation 2004 Bonus Plan.*
10.4 GP Strategies' Millennium Cell, LLC Option Plan. Incorporated
herein by reference to Exhibit 10.2 to the Registrant's Annual
Report on Form 10-K for the year ended December 31, 2001.
10.5 Employment Agreement, dated as of June 1, 1999, between the
Registrant and Jerome I. Feldman. Incorporated herein by
reference to Exhibit 10 of the Registrant's Form 10-Q for the
second quarter ended June 30, 1999.
97
EXHIBIT INDEX
EXHIBIT NUMBER
- --------------
10.6 Amended and Restated Incentive Compensation Agreement dated as
of June 11, 2003 between the Registrant and Jerome I. Feldman.
Incorporated here in by reference to Exhibit 10 to the
Registrant's Form 10-Q for the Quarter Ended September 30,
2003.
10.7 Amendment dated as of October 1, 2003 to the Amended and
Restated Incentive Compensation Agreement dated June 11, 2003
between GP Strategies Corporation and Jerome I. Feldman.
Incorporated herein by reference to Exhibit 10.1 to the
Registrants Form 10-Q for the Quarter Ended September 30, 2003.
10.8 Amended and Restated Incentive Compensation Agreement dated
November 17, 2003 between GP Strategies Corporation and Jerome
I. Feldman. Incorporated herein by reference to Exhibit 10.2 to
the Registrant's Form 10-Q for the Quarter Ended September 30,
2003.
10.9 Employment Agreement, dated as of July 1, 1999, between the
Registrant and Scott N. Greenberg. Incorporated herein by
reference to Exhibit 10.1 of the Registrant's Form 10-Q for the
third quarter ended September 30, 1999.
10.10 Amendment, dated January 21, 2005, to Employment Agreement
dated as of July 1, 1999 between the Company and Scott N.
Greenberg. Incorporated herein by reference to Exhibit 10.1 of
the Registrant's Form 8-K filed on January 25, 2005.
10.11 Separation Agreement, dated as of September 3, 2002, between
the General Physics Corporation and John C. McAuliffe.
Incorporated herein by reference to Exhibit 10 of the
Registrant's Form 8-K filed on September 4, 2002.
10.12 Employment Agreement dated as of May 1, 2001 between the
Registrant and Andrea D. Kantor. Incorporated herein by
reference to Exhibit 10 of the Registrant's Form 10-Q for the
second quarter ended June 30, 2001.
10.13 Amendment, dated January 21, 2005, to Employment Agreement
dated as of May 1, 2001 between the Company and Andrea D.
Kantor. Incorporated herein by reference to Exhibit 10.3 of the
Registrant's Form 8-K filed on January 25, 2005.
10.14 Employment Agreement, dated as of July 1, 1999, between the
Registrant and Douglas E. Sharp. Incorporated herein by
reference to Exhibit 10.11 of the Registrant's Form 10-K for
the year ended December 31, 2003.
98
EXHIBIT INDEX
EXHIBIT NUMBER
- --------------
10.15 Amendment, dated January 21, 2005, to Employment Agreement
dated as of July 1, 1999 between the Company and Douglas E.
Sharp. Incorporated herein by reference to Exhibit 10.2 of the
Registrant's Form 8-K filed on January 25, 2005.
10.16 Asset Purchase Agreement, dated as of June 3, 1998, by and
among SHL Systemhouse Co., MCI Systemhouse Corp., SHL Computer
Innovations Inc., SHL Technology Solutions Limited and General
Physics Corporation. Incorporated herein by reference to
Exhibit 10.1 of the Registrant's Form 8-K dated June 29, 1998.
10.17 Preferred Provider Agreement, dated as of June 3, 1998, by and
among SHL Systemhouse Co., MCI Systemhouse Corp., SHL Computer
Innovations Inc., SHL Technology Solutions Limited and General
Physics Corporation. Incorporated herein by reference to
Exhibit 10.2 of the Registrant's Form 8-K dated June 29, 1998.
10.18 Financial and Security Agreement dated August 13, 2003 by and
between General Physics Corporation, MXL Industries, Inc. and
Wachovia Bank National Association. Incorporated herein by
reference to Exhibit 10.10 to the Registrant's Form 10-Q for
the quarter ended June 30, 2003.
10.19 Guaranty of Payment Agreement dated August 13, 2003 by GP
Strategies Corporation for the benefit of Wachovia Bank,
National Association. Incorporated herein by reference to
Exhibit 10.11 to the Registrant's Form 10-Q for the quarter
ended June 30, 2003
10.20 Limited Guaranty of Payment Agreement dated August 13, 2003 by
MXL Industries, Inc. for the benefit of Wachovia Bank, National
Association. Incorporated herein by reference to Exhibit 10.12
to the Registrant's Form 10-Q for the quarter ended June 30,
2003
10.21 Rights Agreement, dated as of June 23, 1997, between National
Patent Development Corporation and Computershare Investor
Services LLC, as Rights Agent, which includes, as Exhibit A
thereto, the Resolution of the Board of Directors with respect
to Series A Junior Participating Preferred Stock, as Exhibit B
thereto, the form of Rights Certificate and as Exhibit C
thereto the form of Summary of Rights. Incorporated herein by
reference to Exhibit 4.1 of the Registrant's Form 8-K filed on
July 17, 1997.
10.22 Amendment, dated as of July 30, 1999, to the Rights Agreement
dated as of June 23, 1997, between the Computershare Investor
Services LLC, as Rights Agent. Incorporated herein by reference
to Exhibit 4.2 of the Registrant's report on Form 8-A12B/A
filed on August 2, 1999.
99
EXHIBIT INDEX
EXHIBIT NUMBER
- --------------
10.23 Amendment, dated as of December 16, 1999, to the Rights
Agreement dated as of June 23, 1997, between the Registrant and
Computershare Investor Services LLC, as Rights Agent.
Incorporated herein by reference to Exhibit 4.2 of the
Company's report on From 8-A12B/A filed on December 17, 1999.
10.24 Agreement dated, December 29, 1998, among the Registrant,
Jerome I. Feldman and Martin M. Pollak. . Incorporated herein
by reference to Exhibit 10.11 of the Registrant's Form 10K for
the year ended December 31, 1998.
10.25 Subscription Agreement dated as of October 19, 2001 between the
Registrant and Bedford Oak Partners, L.P. Incorporated herein
by reference to Exhibit 10.21 to the Registrant's Annual Report
on Form 10-K for the year ended December 31, 2001.
10.26 Subscription Agreement dated as of May 3, 2002 by and between
the Registrant and Bedford Oak Partners, L.P. Incorporated
herein by reference to Exhibit 10.3 to the Registrant's Form
10-Q for the second quarter ended March 31, 2002.
10.27 Investor Rights Agreement dated as of December 27, 2001 among
the Registrant, Hydro Med Sciences and certain Institutional
Investors. Incorporated herein by reference to Exhibit 10.23 to
the Registrants Annual Report on Form 10-K for the year ended
December 31, 2001.
10.28 Stock Purchase Agreement dated as of December 27, 2001 among
the Registrant, Hydro Med Sciences and certain Institutional
Investors. Incorporated herein by reference to Exhibit 10.24 to
the Registrant's Annual Report on Form 10-K for the year ended
December 31, 2001.
10.29 Right of First Refusal Co-Sale Agreement dated as of December
27, 2001 among the Registrant, Hydro Med Sciences and certain
Institutional Investors. Incorporated herein by reference to
Exhibit 10.25 to the Registrant's Annual Report on Form 10-K
for the year ended December 31, 2001.
10.30 Termination Agreement dated as of December 21, 2001 between
Hydro Med Sciences and Shire US Inc. Incorporated herein by
reference to Exhibit 10.26 to the Registrant's Annual Report on
Form 10-K for the year ended December 31, 2002.
10.31 Stock Purchase Agreement dated as of May 30, 2003, by and among
Hydro Med Sciences, Inc. and Investors. Incorporated herein by
reference to Exhibit 10.32 of the Registrant's Annual Report on
Form 10-K for the year ended December 31, 2003.
100
EXHIBIT INDEX
EXHIBIT NUMBER
- --------------
10.32 Amendment No. 1 to Stock Purchase Agreement dated November 18,
2003 by and among Valera Pharmaceutical, Inc. (f/k/a Hydro Med
Sciences, Inc.) and Investors. Incorporated herein by reference
to Exhibit 10.33 of the Registrant's Annual Report on Form 10-K
for the year ended December 31, 2003.
10.33 Amended and Restated Investor Rights Agreement dated May 30,
2003, by and among Hydro Med Sciences, Inc. and Investors.
Incorporated herein by reference to Exhibit 10.34 of the
Registrant's Annual Report on Form 10-K for the year ended
December 31, 2003.
10.34 Amended and Restated Investor Right of First Refusal and
Co-Sale Agreement dated as of May 30, 2003 by and among Hydro
Med Sciences, Inc. and Investors. Incorporated herein by
reference to Exhibit 10.35 of the Registrant's Annual Report on
Form 10-K for the year ended December 31, 2003.
10.35 Amended Note dated December 19, 2003 in the amount of
$2,800,000 payable by Five Star Products, Inc. to JL
Distributors, a wholly owned subsidiary of the Registrant.
Incorporated herein by reference to Exhibit 10.36 of the
Registrant's Annual Report on Form 10-K for the year ended
December 31, 2003.
10.36 Amended Note dated March 31, 2003 in the amount of $2,800,000
payable by Five Star Products, Inc. to JL Distributors, a
wholly owned subsidiary of the Registrant. Incorporated herein
by reference to Exhibit 10.37 of the Registrant's Annual Report
on Form 10-K for the year ended December 31, 2003.
10.37 Tax Sharing Agreement dated as of February 1, 2004 between
Registrant and Five Star Products. Incorporated herein by
reference to Exhibit 10.38 of the Registrant's Annual Report on
Form 10-K for the year ended December 31, 2003.
10.38 Conversion Letter dated January 22, 2004 between the Registrant
and Five Star Products. Incorporated herein by reference to
Exhibit 10.39 of the Registrant's Annual Report on Form 10-K
for the year ended December 31, 2003.
10.39 Agreement of Subordination & Assignment dated as of June 30,
2003 by JL Distributors in Favor of Fleet Capital Corporation.
Incorporated herein by reference to Exhibit 10.40 of the
Registrant's Annual Report on Form 10-K for the year ended
December 31, 2003.
101
EXHIBIT INDEX
EXHIBIT NUMBER
- --------------
10.40 Stock Purchase Agreement dated as of May 3, 2002 by and between
the Registrant and EGI-Fund(02)04 Investors, L.L.L.
Incorporated herein by reference to Exhibit 10.1 to the
Registrant's Form 10-Q for the second quarter ended March 31,
2002.
10.41 Subscription Agreement dated as of May 3, 2002 by and between
the Registrant and Marshall Geller. Incorporated herein by
reference to Exhibit 10.4 to the Registrant's Form 10-Q for the
second quarter ended March 31, 2002.
10.42 Form of Officer's Pledge Agreement. Incorporated herein by
reference to Exhibit 10.33 to the Registrant's Form 10-K for
the year ended December 31, 2002.
10.43 Form of Officer's Promissory Note. Incorporated herein by
reference to Exhibit 10.34 to the
Registrant's Form 10-K for the year ended December 31, 2002.
10.44 Sublease Agreement dated as of December 13, 2002 between the
Registrant and Austin Nichols & Company, Inc. Incorporated
herein by reference to Exhibit 10.35 to the Registrant's Form
10-K for the year ended December 31, 2002.
10.45 Lease Agreement dated as of July 5, 2002 between the
Registrant's wholly owned subsidiary, General Physics
Corporation and Riggs Company. Incorporated herein by reference
to Exhibit 10.36 to the Registrant's Form 10-K for the year
ended December 31, 2002.
10.46 Note and Warrant Purchase Agreement dated August 8, 2003 among
GP Strategies Corporation, National Patent Development
Corporation and Gabelli Funds, LLC. Incorporated herein by
reference to Exhibit 10.0 to the Registrant's Form 10-Q for the
quarter ended June 30, 2003.
10.47 Form of GP Strategies Corporation 6% Conditional Subordinated
Note due 2008 dated August 14, 2003. Incorporated herein by
reference to Exhibit 10.01 to the Registrant's Form 10-Q for
the quarter ended June 30, 2003.
10.48 Form of GP Strategies Corporation Warrant Certificate dated
August 14, 2003. Incorporated herein by reference to Exhibit
10.02 to the Registrant's Form 10-Q for the quarter ended June
30, 2003.
10.49 Form of National Patent Development Corporation Warrant
Certificate dated August 14, 2003. Incorporated herein by
reference to Exhibit 10.03 to the Registrant's Form 10-Q for
the quarter ended June 30, 2003.
10.50 Mortgage Security Agreement and Assignment of Leases dated
August 14, 2003 between GP Strategies Corporation and Gabelli
Funds, LLC.
102
EXHIBIT INDEX
EXHIBIT NUMBER
- --------------
Incorporated herein by reference to Exhibit 10.04 to the
Registrant's Form 10-Q for the quarter ended June 30, 2003.
10.51 Registration Rights Agreement dated August 14, 2003 between GP
Strategies and Gabelli Funds, LLC. Incorporated herein by
reference to Exhibit 10.05 to the Registrant's Form 10-Q for
the quarter ended June 30, 2003.
10.52 Registration Rights Agreement dated August 14, 2003 between
National Patent Development Corporation and Gabelli Funds, LLC.
Incorporated herein by reference to Exhibit 10.06 to the
Registrant's Form 10-Q for the quarter ended June 30, 2003.
10.53 Indemnity Agreement dated August 14, 2003 by GP Strategies
Corporation for the benefit of National Patent Development
Corporation and MXL Industries, Inc. Incorporated herein by
reference to Exhibit 10.07 to the Registrant's Form 10-Q for
the quarter ended June 30, 2003.
10.54 Subordination Agreement dated August 14, 2003 among GP
Strategies Corporation, Gabelli Funds, LLC, as Agent on behalf
of the holders of the Company's 6% Conditional Subordinated
Notes due 2008 and Wachovia Bank, National Association.
Incorporated herein by reference to Exhibit 10.08 to the
Registrant's Form 10-Q for the quarter ended June 30, 2003.
10.55 Purchase and Sale Agreement dated October 21, 2003 by and
between GP Strategies Corporation and ManTech International.
Incorporated herein by reference to Exhibit 10.1 to the
Registrant's Form 8-K dated October 23, 2003.
10.56 Teaming Agreement dated October 21, 2003 by and between GP
Strategies Corporation and ManTech International. Incorporated
herein by reference to Exhibit 10.2 to the Registrant's Form
8-K dated October 23, 2003.
10.57 $5,250,955 Promissory Note dated October 21, 2003 of GP
Strategies Corporation. Incorporated herein by reference to
Exhibit 10.3 of the Registrant's Form 8-K dated October 23,
2003.
10.58 Management Service Agreement dated January 1, 2004 between the
Registrant and GSE Systems, Inc. Incorporated herein by
reference to Exhibit 10.60 of the Registrant's Annual Report on
Form 10-K for the year ended December 31, 2003.
10.59 Form of Management Agreement between the Registrant and
National Patent Development Corporation. Incorporated herein by
reference to Exhibit 10.1 of National Patent Development
Corporation Form S-1, Registration No. 333-118568. 10.61 Form
of Management Agreement
103
EXHIBIT INDEX
EXHIBIT NUMBER
- --------------
between National Patent Development Corporation and the
Registrant. Incorporated herein by reference to Exhibit 10.2.
of National Patent Development Corporation Form S-1,
Registration No. 333-118568.
10.60 Form of Management Agreement between National Patent
Development Corporation and the Registrant. Incorporated herein
by reference to Exhibit 10.2 of National Patent Development
Corporation Form S-1, Registration No. 333-118568.
10.61 Form of Tax Sharing Agreement between the Registrant and
National Patent Development Corporation. Incorporated herein by
reference to Exhibit 10.4 of National Patent Development
Corporation Form S-1, Registration No. 333-118568.
10.62 Form of Distribution Agreement between the Registrant and
National Patent Development Corporation. Incorporated herein by
reference to Exhibit 2.1 of National Patent Development
Corporation Form S-1, Registration No. 333-118568.
14.1 Code of Ethics Policy. Incorporated herein by reference to
Exhibit 14.1 of the Registrant's Annual Report on Form 10-K for
the year ended December 31, 2003.
18 Not Applicable
19 Not Applicable
20 Not Applicable
21 Subsidiaries of the Registrant*
22 Not Applicable
23 Consent of KPMG LLP, Independent Registered Public Accounting
Firm*
23.1 Consent of Eisner LLP, Independent Registered Public
Accounting Firm*
28 Not Applicable
31.1 Certification of Chief Executive Officer
31.2 Certification of Chief Financial Officer
32.1 Certification Pursuant to Section 18 U.S.C. Section 1350 *
* Filed herewith.
104
GP STRATEGIES CORPORATION AND SUBSIDIARIES SCHEDULE I
Schedule of
Valuation and Qualifying Accounts
ADDITIONS
BALANCE AT ADDITIONAL CHARGED TO BALANCE AT
BEGINNING ALLOWANCE COSTS AND DEDUCTIONS END OF
OF YEAR ACQUIRED (A) EXPENSES (B) YEAR
---------- ------------ ---------- ---------- ----------
Year ended December 31, 2004:
Allowance for doubtful
accounts (C) $1,739 -- 191 (1,013) $ 917
Year ended December 31, 2003:
Allowance for doubtful
accounts (C) $ 854 707 423 (245) $1,739
Year ended December 31, 2002:
Allowance for doubtful
accounts (C) $ 529 823 (498) $ 854
(A) Represents the allowance for doubtful accounts acquired as part of the Five
Star and GSE Acquisitions of $700 and $7, respectively.
(B) Write-off of uncollectible accounts, net of recoveries. For year ended
December 31, 2004 also represents allowance of Five Star of $294 and MXL of
$124 distributed in the spin-off of NPDC.
(C) Deducted from related asset on Consolidated Balance Sheet.
i