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, 2005
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.)
6095 Marshalee Drive,
Suite 300, Elkridge, MD 21075
(Address of principal executive offices) (Zip Code)
(410) 379-3600
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 if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. Yes No X
--- ---
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or 15(d) of the Act. Yes No X
--- ---
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. X
---
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer Accelerated filer X Non-accelerated filer
--- --- ---
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12(b)-2 of the Exchange Act). Yes No X
--- ---
The aggregate market value of the outstanding shares of the Registrant's Common
Stock, par value $.01 per share and Class B Capital Stock, par value $.01 per
share held by non-affiliates as of June 30, 2005 was approximately $106,684,000.
The number of shares outstanding of each of the registrant's Common Stock and
Class B Capital Stock as of February 28, 2006:
Class Outstanding
----- -----------
Common Stock, par value $.01 per share 15,695,275 shares
Class B Capital Stock, par value $.01 per share --
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement for its 2006 Annual
Meeting of Stockholders are incorporated herein by reference into Part III
hereof.
TABLE OF CONTENTS
PAGE
----
PART I
Item 1. Business 3
Item 1A. Risk Factors 9
Item 1B. Unresolved Staff Comments 14
Item 2. Properties 14
Item 3. Legal Proceedings 14
Item 4. Submission of Matters to a Vote of Security Holders 14
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters 15
Item 6. Selected Consolidated Financial Data 17
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations 18
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 30
Item 8. Financial Statements and Supplementary Data 31
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure 72
Item 9A. Controls and Procedures 72
Item 9B. Other Information 73
PART III
Item 10. Directors and Executive Officers of the Registrant * 74
Item 11. Executive Compensation * 74
Item 12. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters* 74
Item 13. Certain Relationships and Related Transactions* 74
Item 14. Principal Accounting Fees and Services* 74
PART IV
Item 15. Exhibits and Financial Statement Schedules 75
SIGNATURES 76
EXHIBIT INDEX 77
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
* To be incorporated by reference from the definitive Proxy Statement for the
registrant's 2006 Annual Meeting of Shareholders.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. The Private Securities Litigation Reform Act
of 1995 provides a "safe harbor" for forward looking statements. Forward-looking
statements are not statements of historical facts, but rather reflect our
current expectations concerning future events and results. We use words such as
"expects", "intends", "believes", "may", "will" and "anticipates" to indicate
forward-looking statements. Because these forward-looking statements involve
risks and uncertainties, there are important factors that could cause actual
results to differ materially from those expressed or implied by these
forward-looking statements, including, but not limited to, those factors set
forth under Item 1A - Risk Factors and those other risks and uncertainties
detailed in the Company's periodic reports and registration statements filed
with the Securities and Exchange Commission. We caution that these risk factors
may not be exhaustive. We operate in a continually changing business
environment, and new risk factors emerge from time to time. We cannot predict
these new risk factors, nor can we assess the effect, if any, of the new risk
factors on our business or the extent to which any factor or combination of
factors may cause actual results to differ from those expressed or implied by
these forward-looking statements.
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, whether as a
result of new information, future events or otherwise. You are cautioned not to
unduly rely on such forward-looking statements when evaluating the information
presented in this report.
PART I
ITEM 1: BUSINESS
GENERAL DEVELOPMENT OF BUSINESS
GP Strategies Corporation (the "Company") was incorporated in Delaware in 1959.
The Company is a New York Stock Exchange listed company traded under the symbol
GPX. The Company's business consists of its training, engineering, and
consulting business operated by General Physics Corporation ("General Physics"
or "GP"). General Physics is a workforce development company that seeks to
improve 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. References in this report to "we" and "our"
are to the Company and its subsidiaries, collectively.
On January 19, 2006, the Company completed a restructuring of its capital stock,
which included the repurchase of 2,121,500 shares of its Common Stock at a price
of $6.80 per share, the repurchase of 600,000 shares of its Class B Capital
Stock ("Class B Stock") at a price of $8.30 per share, and the exchange of
600,000 shares of its Class B Stock into 600,000 shares of Common Stock for a
cash premium of $1.50 per exchanged share. The repurchase prices and exchange
premium were based on a fairness opinion rendered by an independent third party
valuation firm. The repurchase and exchange transactions were negotiated and
approved by a Special Committee of the Board of Directors and had the effect of
eliminating all outstanding shares of the Company's Class B Stock. See Note 13
to the accompanying Consolidated Financial Statements for further details
regarding the repurchase and exchange transaction.
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On September 30, 2005, the Company completed a taxable spin-off of its 57%
interest in GSE Systems, Inc. ("GSE") through a dividend to the Company's
stockholders. GSE is a stand alone public company which provides simulation
solutions and services to energy, process and manufacturing industries
worldwide. On September 30, 2005, stockholders received in the spin-off 0.283075
shares of GSE common stock for each share of the Company's Common Stock or Class
B Stock held on the record date of September 19, 2005. Following the spin-off,
the Company ceased to have any ownership interest in GSE and the operations of
GSE have been reclassified as discontinued in the Company's consolidated
statements of operations for all periods presented herein. The Company continues
to provide corporate support services to GSE pursuant to a management services
agreement which extends through December 31, 2006 (see Note 15 to the
accompanying Consolidated Financial Statements).
In 2005, the Company re-evaluated its reportable business segments under
Statement of Financial Accounting Standards (SFAS) No. 131, Disclosures about
Segments of an Enterprise and Related Information (SFAS No. 131), as a result of
a change in the Company's Chief Operating Decision Maker (CODM). Based on the
information which the CODM reviews in order to assess the performance of the
Company and make decisions regarding the allocation of resources, the Company
determined that General Physics consists of two reportable business segments: 1)
Process, Energy & Government; and 2) Manufacturing & Business Process
Outsourcing (BPO). GSE ceased to be a reportable business segment as a result of
the spin-off effective September 30, 2005. As a result of the change in the
Company's reportable business segments, all prior period segment information
presented herein has been restated to conform to the current year's
presentation.
The Process, Energy & Government segment provides engineering consulting, design
and evaluation services regarding facilities, the environment, processes and
systems, staff augmentation, curriculum design and development, and training and
technical services primarily to federal and state governmental agencies, large
government contractors, petroleum and chemical refining companies, and electric
power utilities.
The Manufacturing & BPO segment provides training, curriculum design and
development, staff augmentation, e-Learning services, system hosting,
integration and help desk support, business process and training outsourcing,
and consulting and technical services to large companies in the automotive,
steel, pharmaceutical, electronics, and other industries as well as to
governmental clients.
On November 24, 2004, the Company completed the tax-free spin-off of National
Patent Development Corporation ("NPDC"). Subsequent to the spin-off, the results
of operations of NPDC are presented as discontinued in the Company's
consolidated statements of operations for all prior periods presented herein.
The Company provides certain corporate support services to NPDC pursuant to a
management services agreement (see Note 15 to the accompanying Consolidated
Financial Statements).
The information herein is as the Company exists as of December 31, 2005 after
the spin-offs of NPDC and GSE.
COMPANY INFORMATION AVAILABLE ON THE INTERNET
The Company's internet address is www.gpstrategies.com. Additional information
about General Physics may be found at www.gpworldwide.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.
4
GENERAL PHYSICS CORPORATION
Organization and Operations
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. General Physics is a global leader in performance
improvement, with four 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, and the
full spectrum of e-Learning technologies. General Physics' e-Learning services
enable the Company to function as a single-source e-Learning solutions provider
through its integration services and hosting, the development and provisioning
of proprietary content and the aggregation and distribution of third party
content.
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.
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.
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 training business
operations, including the outsourcing of administrative processes, for several
of its customers. Training products include instructor and student training
manuals, and 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
5
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.
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, processes 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 that serve the power generation and petrochemical industries.
CONTRACTS
The Company currently performs under time-and-materials, fixed-price and
cost-reimbursable contracts. The Company's contracts with the U.S. Government
have predominantly been cost-reimbursable contracts and fixed-price contracts.
The Company is required to comply with Federal Acquisition Regulations and
Government Cost Accounting Standards with respect to services provided to the
U.S. Government and its agencies. These Regulations and Standards govern the
procurement of goods and services by the U.S. 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 the
Company's contracts through 2002 without any material disallowances.
The following table illustrates the Company's percentage of total revenue
attributable to each type of contract for the year ended December 31, 2005:
Fixed-price (including fixed-fee per transaction) 71%
Time and materials, including fixed rate 15
Cost-reimbursable 14
---
Total revenue 100%
===
Fixed-price contracts provide for payment to the Company of pre-determined
amounts as compensation for the delivery of specific products or services,
without regard to the actual costs incurred. The Company bears the risk that
increased or unexpected costs required to perform the specified services may
reduce the Company's profit or cause the Company to sustain a loss, but the
Company 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 the Company would typically, at a minimum, be paid a
proportionate amount of the fixed price.
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. The Company's time-and-materials contracts
include certain contracts under which the Company has agreed to provide
training, engineering and technical services at fixed hourly rates.
Time-and-materials contracts generally permit the client to control the amount,
type and timing of the
6
services to be performed by the Company and to terminate the contract on written
notice. If a contract is terminated, the Company is typically paid for the
services it has provided through the date of termination.
Cost-reimbursable contracts provide for the Company to be reimbursed for its
actual direct and indirect costs plus a fee. These contracts also are generally
subject to termination at the convenience of the client. If a contract is
terminated, the Company is typically reimbursed for its costs through the date
of termination, plus the cost of an orderly termination and paid a proportionate
amount of the fee.
No significant terminations of the Company's contracts have occurred over the
last five years.
INTERNATIONAL
The Company also conducts its business outside of the United States, in Canada,
and in other countries 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, the Company 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, the
Company is able to coordinate the delivery to multi-national clients of services
and products that achieve consistency on a global, enterprise-wide basis.
Revenue from operations outside the United States represented approximately 10%
of the Company's consolidated revenue for the year ended December 31, 2005 (see
Note 14 to the accompanying Consolidated Financial Statements).
CUSTOMERS
As of December 31, 2005, the Company provides services to over 400 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, Mid-American Energy Company, 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, and U.S. Social Security Administration; U.S. government prime
contractors, such as Bechtel National, Inc., Washington Group International, and
Unisys Corporation; and other large multinational companies, such as Texas
Instruments, Motorola, Cisco Systems, Inc., Eli Lilly & Co., IBM Corporation,
United Technologies Corporation, Siemens Dematic Corporation, Agilent
Technologies, Inc., the Boeing Company, and Gerdau Ameristeel Corporation.
Revenue from the U.S. Government accounted for approximately 40% of the
Company's revenue for the year ended December 31, 2005. Revenue was derived from
many separate contracts with a variety of government agencies that are regarded
by the Company as separate customers. In 2005, revenue from the Department of
the Army, which is included in U.S. Government revenue, accounted for
approximately 20% of the Company's revenue. No other customer accounted for more
than 10% of the Company's revenue in 2005.
EMPLOYEES
The Company's principal resource is its personnel. As of December 31, 2005, the
Company employed 1,380 persons and over 200 adjunct instructors and consultants.
The Company's 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.
The Company utilizes a variety of methods to attract and retain personnel. We
believe that the compensation and benefits offered to our employees are
competitive with the compensation and benefits available from other
organizations with which we compete for personnel. In addition, the Company
maintains the professional
7
development of its employees, both internally via GP University (its own
internal training resource) and through third parties, and also offers tuition
reimbursement for job-related educational costs. The Company believes its
relations with its employees are good.
COMPETITION
The Company faces 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 the Company 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 the Company. 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 the Company's competitors offer services and products that are similar to
those of the Company at lower prices, and some competitors have significantly
greater financial, managerial, technical, marketing and other resources than
those of the Company. There can be no assurance that the Company will be
successful against such competition.
MARKETING
The Company has approximately 40 employees dedicated primarily to marketing its
services and products. The Company uses attendance at trade shows, presentations
of technical papers at industry and trade association conferences, press
releases, public courses and workshops given by Company personnel to serve an
important marketing function. The Company 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, the Company sometimes obtains contract awards or extensions without
having to undergo competitive bidding. In other cases, clients request the
Company to bid competitively. In both cases, the Company 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 noncompetitive, short-term
contracts), to a year or more (generally for large, competitive multi-year
contracts).
BACKLOG
The Company's backlog for services under executed contracts and subcontracts was
approximately $78.9 million as of December 31, 2005 compared to $105.2 million
as of December 31, 2004. The decrease in backlog is due to several clients
shifting from annual to quarterly funding of contracts, an anticipated decline
of $10.0 million in government funding for the Domestic Preparedness Equipment
Technical Assistance Program, and a delay in the receipt of contract funding as
of December 31, 2005 compared to December 31, 2004. During January 2006, the
Company received approximately $12.6 million of additional backlog for contract
awards or renewals which were not included in backlog as of December 31, 2005
because the contract funding was not yet formally received. The Company
anticipates that most of its backlog as of December 31, 2005 will be recognized
as revenue during 2006. However, the rate at which services are performed under
certain contracts, and thus the rate at which backlog will be recognized, is at
the discretion of the client and most contracts are, as mentioned above, subject
to termination by the client upon written notice.
ENVIRONMENTAL STATUTES AND REGULATIONS
The Company 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), the Company's
opportunities to provide such services may increase.
8
The Company's activities in connection with providing environmental engineering
services may also subject the Company to such Federal, state and local
environmental laws and regulations. Although the Company subcontracts most
remediation construction activities and all removal and offsite disposal and
treatment of hazardous substances, the Company 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. The
Company believes, however, that it is in compliance in all material respects
with such environmental laws and regulations.
FINANCIAL INFORMATION
For financial information about the Company's segments and geographic operations
and revenue, see Note 14 to the accompanying Consolidated Financial Statements.
ITEM 1A: RISK FACTORS
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 made by the Company.
Our holding company structure could adversely affect our ability to pay our
expenses and long-term debt obligations.
Our principal operations are conducted through our General Physics subsidiary.
General Physics' Credit Agreement currently limits its ability to loan, dividend
or otherwise pay funds to us, which could adversely affect our ability to pay
our expenses and long-term debt obligations which mature in 2008 (see Note 8 to
the accompanying Consolidated Financial Statements).
We recently identified a material weakness in our internal control over
financial reporting 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 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. In the course of
our assessment of the effectiveness of our internal control over financial
reporting as of December 31, 2005, we identified a material weakness in our
internal control over financial reporting, arising from deficiencies with
respect to our accounting for income taxes. To remediate this material weakness,
we will continue to revise our processes and procedures over the accounting for
income taxes and have hired a tax director which we believe will provide the
Company with the necessary technical skills to perform, review and analyze
complex tax accounting activities. We believe these additional controls will
remediate the material weakness; however, such determination will not occur
until these additional controls have been in place for a period of time
sufficient to demonstrate that the controls are operating effectively. See Item
9A, Controls and Procedures.
We cannot assure you that deficiencies or weaknesses in our controls and
procedures will not be identified in the future. Any such 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
9
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.
Our revenue and financial condition could be adversely affected by the loss of
business from significant customers, including the U.S. Government.
For the years ended December 31, 2005, 2004 and 2003, revenue from the U.S.
Government represented approximately 40%, 38%, and 38% of our revenue,
respectively. However, the revenue was derived from a number of separate
contracts with a variety of government agencies we regard as separate customers.
Most of our contracts and subcontracts, including those with the U.S.
Government, are subject to termination on written notice, and therefore our
operations are dependent on our customers' 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.
Government contracts are also subject to various uncertainties, restrictions and
regulations, including oversight audits by government representatives and profit
and cost controls. If we fail to comply with all of the applicable regulations,
requirements or laws, our existing contracts with the government could be
terminated and our ability to seek future government contracts or subcontracts
could be adversely affected. In addition, the funding of government contracts is
subject to Congressional appropriations. Budget decisions made by the U.S.
Government are outside of our control and could result in a reduction or
elimination of contract funding. A shift in government spending to other
programs in which we are not involved or a reduction in general government
spending could have a negative impact on our financial condition. The government
is under no obligation to maintain or continue funding our contracts or
subcontracts.
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 U.S. Government. The U.S. 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, U.S. 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.
We enter into fixed price contracts which could result in reduced profits or
losses if we have cost overruns.
A majority of our revenue is attributable to contracts entered into on a
fixed-price basis. This allows us to benefit from cost savings, but we carry the
burden of cost overruns. If our initial estimates are incorrect, or if
unanticipated circumstances arise, we could experience cost overruns which would
result in reduced profits or
10
losses on these contracts. Our financial condition is dependent on our ability
to maximize our earnings from our contracts. Lower earnings caused by cost
overruns could have a negative impact on our financial results.
We maintain a workforce based upon anticipated staffing needs. If we do not
receive future contract awards or if these awards are delayed or reduced in
scope or funding, we may incur significant costs.
Our estimates of future staffing requirements depend in part on the timing of
new contract awards. We make our estimates in good faith, but our estimates
could be inaccurate or change based on new information. In the case of larger
projects, it is particularly difficult to predict whether we will receive a
contract award and when the award will be announced. In some cases the contracts
that are awarded require staffing levels that are different, sometimes lower,
than the levels anticipated when the work was proposed. The uncertainty of
contract award timing and changes in scope or funding can present difficulties
in matching our workforce size with our contract needs. If an expected contract
award is delayed or not received, or if a contract is awarded for a smaller
scope of work than proposed, we could incur significant costs resulting from
reductions in staff.
Failure to keep pace with technology and changing market needs could harm our
business.
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 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 advanced 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.
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 increase
or may reduce their expenditures on external training, and other products and
services supplied by us, 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. In addition, we provide domestic preparedness and emergency
management services, including hurricane and other disaster recovery services,
which can result in revenue volatility associated with the unpredictability of
certain events occurring and the need for these types of services. 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. Downward
fluctuations may result in a decline in the trading price of our Common Stock.
11
Competition could adversely affect our performance.
The training industry is highly fragmented and competitive, with low barriers to
entry and no single competitor accounting for a significant market share. Our
competitors include several large publicly traded and privately held companies,
vocational and technical training schools, degree-granting colleges and
universities, continuing education programs and thousands of small privately
held training providers and individuals. In addition, many of our clients
maintain internal training departments. Some of our competitors offer similar
services and products at lower prices, and some competitors have significantly
greater financial, managerial, technical, marketing and other resources.
Moreover, we expect to face additional competition from new entrants into the
training and performance improvement market due, in part, to the evolving nature
of the market and the relatively low barriers to entry. We cannot provide any
assurance that we will be able to compete successfully, and the failure to do so
could adversely affect our business and financial condition.
We are subject to potential liabilities which are not covered by our insurance.
We engage in activities in which there are substantial risks of potential
liability. We provide services involving electric power distribution and
generation, nuclear power, chemical weapons destruction, environmental
remediation, engineering design and construction management. We maintain a
consolidated insurance program (including general liability coverage) covering
companies we currently own, including General Physics, as well as certain risks
associated with companies we no longer own, including GSE and NPDC. Claims by or
against any covered insured could reduce the amount of available insurance
coverage for the other insureds and for other claims. In addition, certain
liabilities may not be covered at all, such as deductibles, self-insured
retentions, amounts in excess of applicable insurance limits and claims that
fall outside the coverage of our policies. Although we believe that we currently
have appropriate insurance coverage, we do not have coverage for all of the
risks to which we are subject and we may not be able to obtain appropriate
coverage on a cost-effective basis in the future.
Our policies exclude coverage for incidents involving nuclear liability and we
may not be covered by United States laws or industry programs providing
liability protection for licensees of the Nuclear Regulatory Commission
(typically utilities) for damages caused by nuclear incidents; we are not a
licensee and few of our contracts with clients have contained provisions waiving
or limiting their liability. Therefore, we could be adversely affected by a
nuclear incident.
Certain environmental risks, such as liability under the Comprehensive
Environmental Response, Compensation and Liability Act, as amended
("Superfund"), also may not be covered by our insurance. We provide
environmental engineering services, 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 or state laws,
including Superfund, to be an "operator" of sites to which we provide
environmental engineering and support services, we could be subject to
liability. Our insurance policies may not provide coverage for these risks.
Various mechanisms exist whereby the U. S. 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 by reducing profits or causing us to incur losses related to the cost
of resolving such liability.
Some of our policies, such as our professional liability insurance policy,
provide coverage on a "claims made" basis covering only claims actually made
during the policy period currently in effect. To the extent that a risk is not
insured within our then available coverage limits, insured under a
low-deductible policy, indemnified against
12
by a third party or limited by an enforceable waiver or limitation of liability,
claims could be material and adversely affect our financial condition.
Acquisitions are part of our growth strategy and may not be successful.
We expect to pursue selective acquisitions of businesses as part of our growth
strategy. Acquisitions may bring us into businesses we have not previously
conducted and expose us to risks that are different than those we have
traditionally experienced. We can provide no assurances that we will be able to
find suitable acquisitions or that we will be able to consummate them on terms
and conditions favorable to us, or that we will successfully integrate and
manage acquired businesses.
We are subject to potential liabilities related to operations we have
discontinued.
In November 2004, we completed the spin-off to our stockholders of the shares of
stock we owned in NPDC. Prior to the spin-off, we provided certain financial
guarantees and entered into transactions involving assets owned by NPDC or
subsequently contributed by us to NPDC. We continued to guarantee certain lease
obligations and indebtedness of NPDC subsequent to the spin-off. We also have
outstanding debt that is collateralized by certain real property which was
transferred to NPDC in connection with the spin-off. We no longer have the
assets of NPDC available to us to use to satisfy these obligations, and if NPDC
fails to satisfy obligations for which we continue to guarantee, we could be
responsible for satisfying those obligations which could adversely impact our
financial condition.
Our stockholder rights plan and authorized preferred stock could make a
third-party acquisition of us difficult.
We have a stockholder rights plan. Our stockholder rights plan would cause
substantial dilution to any person or group that attempts to acquire us on terms
not approved in advance by our Board of Directors. In addition, our certificate
of incorporation allows us to issue up to 5,000,000 shares of preferred stock,
the rights, preferences, qualifications, limitations and restrictions of which
may be fixed by the Board of Directors without any further vote or action by the
stockholders. The stockholder rights plan, the ability to issue preferred stock
and certain provisions in our by-laws may have the effect of delaying,
discouraging or preventing a change in control and might affect the market price
of our Common Stock.
Our certificate of incorporation may discourage foreign ownership of our Common
Stock.
The United States Departments of Energy and Defense have policies regarding
foreign ownership, control or influence over government contractors who have
access to classified information, and inquire as to whether any foreign interest
has beneficial ownership of 5% or more of a contractor's or subcontractor's
voting securities. If either Department determines that an undue risk to the
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.
13
ITEM 1B: UNRESOLVED STAFF COMMENTS
None.
ITEM 2: PROPERTIES
The following information describes the material physical properties owned or
leased by the Company and its subsidiaries.
The Company leases approximately 30,700 square feet in an office building in
Elkridge, Maryland for its corporate headquarters office and approximately
165,500 square feet of office, classroom and warehouse space at various other
locations throughout the United States, the United Kingdom, Canada, Mexico and
Malaysia. The Company also leases approximately 10,000 square feet of office
space in White Plains, New York. NPDC continues to occupy a majority of this
space and compensates the Company pursuant to a management services agreement
(see Note 15 to the accompanying Consolidated Financial Statements).
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
We discuss our legal proceedings in Note 17 to the accompanying Consolidated
Financial Statements.
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.
14
PART II
ITEM 5: MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock, $0.01 par value, is traded on the New York Stock
Exchange. The following table presents the Company's high and low market prices
for the last two fiscal years. During the periods presented below, the Company
has not paid any cash dividends.
2005
-------------
QUARTER HIGH LOW
------- ----- -----
First $8.60 $6.92
Second 8.39 7.00
Third 9.01 7.58
Fourth 9.06 6.90
2004
-------------
QUARTER HIGH LOW
------- ----- -----
First $7.93 $6.29
Second 7.60 6.27
Third 7.45 6.05
Fourth 8.95 6.64
The number of shareholders of record of the Common Stock as of February 28, 2006
was 1,277 and the closing price of the Common Stock on the New York Stock
Exchange on that date was $7.20.
The Company has not declared or paid any cash dividends on its Common Stock
during the two most recent fiscal years. The Company does not anticipate paying
cash dividends on its Common Stock in the foreseeable future and intends to
retain future earnings to finance the growth and development of its business, as
well as to fund the repurchase of up to $5 million of its Common Stock, as
authorized in connection with the share repurchase and exchange transaction on
January 19, 2006 (see Note 13 to the accompanying Consolidated Financial
Statements). 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,
with the exception of a waiver by the lender which permits General Physics to
provide cash to the Company to repurchase up to $5 million of additional shares
of its outstanding common stock.
15
EQUITY COMPENSATION PLAN INFORMATION AS OF DECEMBER 31, 2005
NON-QUALIFIED
STOCK OPTION 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) 1,411,345
(b) Weighted average exercise price of outstanding
options (1) $ 4.83
(c) Number of securities remaining available for future
issuance under equity compensation plans (excluding
securities reflected in row (a)) (2) 1,331,094
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 1,732,000
(1) Does not include warrants to purchase 300,000 shares of Common Stock with
an exercise price of $2.67 per share, as adjusted following the spin-offs
of NPDC and GSE, and warrants to purchase 984,116 shares issued and sold to
four Gabelli funds in conjunction with the 6% Conditional Subordinated
Notes due 2008 at an exercise price of $5.85 per share, as adjusted
following the spin-offs of NPDC and GSE.
(2) Does not include shares of Common Stock that may be issued to directors of
the Company as director fees.
For a description of the material terms of the Company's Non-Qualified Stock
Option Plan and Incentive Stock Plan, see Note 12 to the accompanying
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 and in some cases Special Committees which are formed to work on a
specific project. Employees of the Company or its subsidiaries do not receive
additional compensation for serving as directors.
16
ITEM 6: SELECTED CONSOLIDATED FINANCIAL DATA
The selected financial data presented below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" in Item 7 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, 2005, 2004, and 2003 and our
consolidated balance sheet data as of December 31, 2005 and 2004 have been
derived from our audited consolidated financial statements included elsewhere in
this report. Our consolidated statement of operations data for the years ended
December 31, 2002 and 2001 and our consolidated balance sheet data as of
December 31, 2003, 2002, and 2001 have been derived from unaudited consolidated
financial statements, which are not presented in this report.
On September 30, 2005, we completed the spin-off of our majority ownership
interest in GSE, and on November 24, 2004, we completed the spin-off of NPDC.
The results of operations of GSE and NPDC have been reclassified as discontinued
in the consolidated statements of operations for all periods presented.
YEARS ENDED DECEMBER 31,
----------------------------------------------------
2005 2004 2003 2002 2001
-------- -------- -------- -------- --------
(In thousands, except per share amounts)
Revenue $175,555 $164,458 $133,875 $142,237 $175,422
Gross profit 24,991 19,339 15,401 15,366 20,332
Interest expense 1,518 1,937 2,903 2,467 4,418
Gain on litigation settlement, net 5,552 -- -- -- --
Gain on arbitration award, net -- 13,660 -- -- --
Income (loss) from continuing operations before taxes 15,224 14,017 (6,691) (3,590) 3,854
Income (loss) from continuing operations (1) 8,457 22,266 (7,839) (3,766) 377
Income (loss) from discontinued operations, net of taxes (1,244) 254 (437) (1,462) (1,322)
Net income (loss) 7,213 22,520 (8,276) (5,228) (945)
Diluted income (loss) per share:
Income (loss) from continuing operations 0.45 1.22 (0.46) (0.24) 0.04
Income (loss) from discontinued operations (0.07) 0.01 (0.02) (0.10) (0.13)
Net income (loss) $ 0.38 $ 1.23 $ (0.48) $ (0.34) $ (0.09)
DECEMBER 31,
----------------------------------------------------
BALANCE SHEET DATA (2) 2005 2004 2003 2002 2001
---------------------- -------- -------- -------- -------- --------
(In thousands, except per share amounts)
Cash and cash equivalents (3) $ 18,118 $ 2,417 $ 4,416 $ 1,516 $ 1,705
Short-term borrowings -- 6,068 26,521 22,058 32,338
Working capital (deficit) 34,804 20,601 17,998 780 (2,750)
Total assets 134,641 156,035 188,323 144,905 160,824
Long-term debt 11,380 11,051 14,861 6,912 6,863
Stockholders' equity 94,342 91,620 92,812 92,982 95,943
(1) During 2004, based upon an assessment of the realizability of the Company's
deferred tax assets, management considered it more likely than not that its
deferred tax assets would be realized and reduced its deferred tax
valuation allowance by $12.2 million, resulting in a net income tax benefit
for the year ended December 31, 2004.
(2) On September 30, 2005, the Company distributed net assets of $6.8 million
in connection with the spin-off of its majority ownership interest in GSE.
On November 24, 2004, the Company distributed net assets of $26.0 million
to NPDC in connection with its spin-off.
(3) Cash and cash equivalents include one-time cash receipts associated with
the EDS arbitration award and litigation settlement in 2005.
17
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
General Overview
The Company's business consists of its core operating subsidiary, General
Physics, a global training, engineering, and consulting company that seeks to
improve the effectiveness of organizations by providing training, management
consulting, e-Learning solutions and engineering services and products that are
customized to meet the specific needs of clients. Clients include Fortune 500
companies and manufacturing, process and energy companies and other commercial
and governmental customers. General Physics is a global leader in performance
improvement, with four decades of experience in providing solutions to optimize
workforce performance.
General Physics operates through its two reportable business segments:
- Process, Energy & Government - this segment provides engineering
consulting, design and evaluation services regarding facilities, the
environment, processes and systems, staff augmentation, curriculum
design and development, and training and technical services primarily
to federal and state governmental agencies, large government
contractors, petroleum and chemical refining companies, and electric
power utilities.
- Manufacturing & BPO - this segment provides training, curriculum
design and development, staff augmentation, e-Learning services,
system hosting, integration and help desk support, business process
and training outsourcing, and consulting and technical services to
large companies in the automotive, steel, pharmaceutical, electronics,
and other industries as well as to governmental clients.
Strategy
The Company's strategic objectives include the growth of its core business,
General Physics, through international expansion, selective acquisitions, and
the development of relationships with new and existing customers. The Company
also plans to continue to focus on its key initiatives: Business Process and
Training Outsourcing; e-Learning; and Domestic Preparedness and Emergency
Management. The Company has experienced growth across each of these areas during
2005 and 2004, contributing to improved revenue and profit margins.
Significant Events
Restructuring of Capital Stock
On January 19, 2006, the Company completed a restructuring of its capital stock,
which included the repurchase of 2,121,500 shares of its Common Stock at a price
of $6.80 per share, the repurchase of 600,000 shares of its Class B Stock at a
price of $8.30 per share, and the exchange of 600,000 shares of its Class B
Stock into 600,000 shares of Common Stock for a cash premium of $1.50 per
exchanged share. The repurchase prices and exchange premium were based on a
fairness opinion rendered by an independent third party valuation firm. The
repurchase and exchange transactions were negotiated and approved by a Special
Committee of the Board of Directors and had the effect of eliminating all
outstanding shares of the Company's Class B Stock.
Prior to the restructuring, the 1,200,000 outstanding shares of Class B Stock
collectively represented approximately 41% of the aggregate voting power of the
Company since the Class B Stock had ten votes per share. The repurchase of a
total of 2,721,500 shares represents approximately 15% of the total outstanding
shares of capital stock of the Company. Approximately $20.3 million was required
for the repurchase and exchange and was financed with cash on hand.
18
See Note 13 to the accompanying Consolidated Financial Statements for further
details regarding the repurchase and exchange transaction.
Legal Settlement with EDS
On November 23, 2005, the Company settled its remaining claims against
Electronic Data Systems Corporation, a successor to the Systemhouse subsidiaries
of MCI Communications Corporation, arising out of the Company's 1998 acquisition
of Learning Technologies. Pursuant to the settlement, EDS made a cash payment of
$9,000,000 to the Company on December 14, 2005. The Company recognized a gain on
the litigation settlement, net of legal fees and expenses, of approximately
$5,552,000 for the year ended December 31, 2005.
In connection with the spin-off of NPDC on November 24, 2004, the Company agreed
to make an additional capital contribution 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 related litigation
claims. In accordance with this agreement, the Company made an additional
capital contribution of $5,000,000 in January 2005 from the arbitration proceeds
awarded the Company in December 2004. The Company had a payable to NPDC of
approximately $1,201,000 as of December 31, 2005 for the additional capital
contribution relating to the litigation proceeds received in December 2005.
Refer to Note 17 to the accompanying Consolidated Financial Statements for
further details regarding the litigation.
Spin-off of GSE
On September 30, 2005, the Company completed a taxable spin-off of its 57%
interest in GSE through a dividend to the Company's stockholders. On September
30, 2005, stockholders received in the spin-off 0.283075 shares of GSE common
stock for each share of the Company's Common Stock or Class B Stock held on the
record date of September 19, 2005. Following the spin-off, the Company ceased to
have any ownership interest in GSE and the operations of GSE have been
reclassified as discontinued in the Company's consolidated statements of
operations for all periods presented herein.
In accordance with SFAS No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets (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. The following table sets forth the
components of income (loss) from discontinued operations for the years ended
December 31, 2005, 2004, and 2003 (in thousands):
2005 2004 2003
------- -------- -------
Revenue $17,617 $133,581 $34,803
Operating income (loss) (2,479) 2,027 277
Interest expense 251 1,284 722
Income tax expense (benefit) 208 573 (262)
Income (loss) from discontinued
operations, net of income taxes (1,244) 254 (437)
Discontinued operations for the years ended December 31, 2005, 2004 and 2003
include the results of GSE, which was distributed in the spin-off effective
September 30, 2005 as discussed above. The results of the discontinued
operations for 2004 and 2003 also include the results of MXL Industries, Inc.
("MXL"), Five Star Products, Inc. ("Five Star"), and certain other non-core
assets, which were distributed to NPDC in connection with the spin-off effective
November 24, 2004.
19
Operating Highlights
YEAR ENDED DECEMBER 31, 2005 COMPARED TO THE YEAR ENDED DECEMBER 31, 2004
For the year ended December 31, 2005, the Company had income from continuing
operations before income taxes of $15,224,000 compared to $14,017,000 for the
year ended December 31, 2004. The improved results were primarily due to
increased operating income of $4,696,000 for General Physics' two business
segments, a decrease in general and administrative expenses of $4,379,000 at the
corporate level, and a decrease in interest expense of $419,000. Corporate
general and administrative expenses in 2004 included corporate overhead expenses
that were for the benefit of both continuing and discontinued operations, which
were not allocated to discontinued operations unless they were solely
attributable to NPDC. These increases were offset by a decrease of $8,108,000 in
income relating to the EDS litigation in 2005 compared to 2004. In 2005, the
Company recognized a gain on the litigation settlement, net of legal fees and
expenses, of approximately $5,552,000 compared to a gain on the arbitration
award, net of legal fees and expenses, of approximately $13,660,000 in 2004.
Revenue
YEARS ENDED DECEMBER 31,
------------------------
2005 2004
-------- --------
(Dollars in thousands)
Process, Energy & Government $ 85,953 $ 84,193
Manufacturing & BPO 90,127 80,873
Elimination of intercompany revenue with GSE (525) (608)
-------- --------
$175,555 $164,458
======== ========
Process, Energy & Government revenue increased $1.8 million or 2.1% during the
year ended December 31, 2005 compared to 2004. The increase in revenue is
primarily due to increased contract scopes with several of our existing
government and energy customers to provide various training, engineering, and
domestic preparedness services. These increases were offset by decreases in
revenue due to the completion of various non-recurring contracts during 2005, a
$0.3 million write-off related to a management consulting and emergency
management services contract, and a decrease in revenue related to hurricane
recovery services performed in 2005 compared to 2004. Revenue from hurricane
recovery services, primarily in the State of Louisiana, totaled approximately
$2.3 million in 2005 compared to similar services provided in the State of
Florida totaling approximately $5.4 million in 2004. The Company cannot
anticipate that these services will be a continuing stream of revenue going
forward.
Manufacturing & BPO revenue increased $9.3 million or 11.4% during the year
ended December 31, 2005 compared to 2004. The increase in revenue is due to net
increases of approximately $7.3 million of revenue from training and business
process outsourcing services provided to customers primarily in the electronics
industry, net increases of approximately $2.6 million of revenue from increased
system implementation and hosting services primarily to the federal government,
and net increases of approximately $2.0 million of revenue from other
professional development and training courses provided primarily to customers in
the steel and manufacturing industries. The Company continues to expand the
scope of services provided to new and existing business process and training
outsource customers. These increases in revenue were slightly offset by other
decreases in revenue, primarily due to the change in contract scopes with a
business process outsourcing customer during 2005 which resulted in a decrease
in revenue of $5.4 million.
20
Gross profit
YEARS ENDED DECEMBER 31,
-----------------------------------------
2005 2004
------------------- -------------------
% REVENUE % REVENUE
--------- ---------
(Dollars in thousands)
Process, Energy & Government $16,212 18.9% $14,727 17.5%
Manufacturing & BPO 9,304 10.3% 5,220 6.5%
Elimination of intercompany revenue with GSE (525) -- (608) --
------- ---- ------- ----
$24,991 14.2% $19,339 11.8%
======= ==== ======= ====
Process, Energy & Government gross profit of $16.2 million or 18.9% of revenue
for the year ended December 31, 2005 increased by $1.5 million or 10.1% when
compared to gross profit of approximately $14.7 million or 17.5% of revenue for
the year ended December 31, 2004. This increase in gross profit was primarily
driven by an increase in revenue from training services provided to our
government and energy customers, excluding the decreases in revenue discussed
above. The increase in gross profit as a percentage of revenue is primarily due
to a decrease in overhead expenses as a percentage of revenue as our
infrastructure costs have not increased at the same rate as our revenue growth.
Manufacturing & BPO gross profit of $9.3 million or 10.3% of revenue for the
year ended December 31, 2005 increased by $4.1 million or 78.2% when compared to
gross profit of approximately $5.2 million or 6.5% of revenue for the year ended
December 31, 2004. This increase in gross profit was primarily driven by an
increase in revenue from business process outsourcing and training outsourcing
services. The Company experienced increased gross profit as a percentage of
revenue during 2005 as it continued to expand services provided to new and
existing customers. Additionally, infrastructure costs have not increased at the
same rate as our revenue growth, resulting in increased profitability.
Selling, general and administrative expenses
SG&A expenses decreased $3.5 million or 20.0% from $17.5 million for the year
ended December 31, 2004 to $14.0 million for the year ended December 31, 2005.
This decrease is primarily related to a decrease in corporate SG&A expenses
primarily due to the spin-off of NPDC in November 2004, which resulted in lower
overhead costs in 2005 compared to 2004. SG&A expense in 2004 included corporate
overhead expenses that were for the benefit of both continuing and discontinued
operations. Only those costs that were solely attributable to NPDC were
allocated to discontinued operations in 2004. NPDC pays the Company a fee
pursuant to the management services agreement, which is reflected as a reduction
of SG&A expense in the accompanying consolidated statement of operations (see
Note 15 to the accompanying Consolidated Financial Statements for further
details). The decrease in corporate SG&A also includes a decrease in executive
compensation in 2005 compared to 2004. In 2004, SG&A expense included an
incentive payment of $2.0 million to the Company's former Chief Executive
Officer, which did not recur in 2005 (see Note 15 to the accompanying
Consolidated Financial Statements for further details). These decreases in
corporate SG&A were offset by an increase in SG&A at General Physics primarily
due to an increase in staff and an increase in the provision for uncollectible
accounts receivable.
Interest expense
Interest expense decreased $0.4 million or 21.6% from $1.9 million for the year
ended December 31, 2004 to $1.5 million for the year ended December 31, 2005.
The decrease was primarily attributable to General Physics' repayment of its
short-term borrowings in January 2005 with the proceeds received from the
arbitration award.
21
Other Income
Other income decreased $0.3 million or 52.4% from $0.5 million for the year
ended December 31, 2004 to $0.2 million for the year ended December 31, 2005.
The decrease was primarily due to a decrease in interest income primarily from
the arbitration award in 2004 which did not recur in 2005.
Gain from litigation settlement and arbitration award
The Company recognized a gain of $5.6 million from the litigation settlement
proceeds paid by EDS in the fourth quarter of 2005, net of legal fees and
expenses, compared to a gain of $13.7 million from the arbitration award in
2004, net of legal fees and expenses (see Note 17 to the accompanying
Consolidated Financial Statements).
Income taxes
Income tax expense was $6.8 million for the year ended December 31, 2005
compared to an income tax benefit of $8.2 million for the year ended December
31, 2004. In assessing the realizability of its deferred tax assets, management
considered it more likely than not that its deferred tax assets would be
realized and reduced its deferred tax valuation allowance by $12.2 million in
2004. This was offset by the current tax provision of $4.0 million, resulting in
a net income tax benefit of $8.2 million in 2004. As of December 31, 2005, the
Company had federal net operating loss carryforwards of $31.1 million, which
expire during 2022 and 2023.
YEAR ENDED DECEMBER 31, 2004 COMPARED TO THE YEAR ENDED DECEMBER 31, 2003
For the year ended December 31, 2004, the Company had income from continuing
operations before income taxes of $14,017,000 compared to a loss from continuing
operations before income taxes of $6,691,000 for the year ended December 31,
2003. The improved results were primarily due to the gain from the arbitration
award of $13,660,000 in 2004, increased operating income of $4,648,000 for
General Physics' two business segments, a decrease in general and administrative
expenses of $3,960,000 at the corporate level, and a decrease in interest
expense of $966,000. Corporate general and administrative expenses in 2004
included corporate overhead expenses that were for the benefit of both
continuing and discontinued operations, which were not allocated to discontinued
operations unless they were solely attributable to NPDC. In 2004, General
Physics showed increases in profit and revenue. The improvement in performance
was primarily attributable to the Company's key initiatives: Business Process
and Training Outsourcing; e-Learning; and Domestic Preparedness and Emergency
Management. The Company experienced growth across each of these areas,
contributing to the improved revenue and profit margins.
Revenue
YEARS ENDED DECEMBER 31,
------------------------
2004 2003
-------- --------
(Dollars in thousands)
Process, Energy & Government $ 84,193 $ 76,932
Manufacturing & BPO 80,873 57,043
Elimination of intercompany revenue with GSE (608) (100)
-------- --------
$164,458 $133,875
======== ========
Process, Energy & Government revenue increased $7.3 million or 9.4% during the
year ended December 31, 2004 compared to 2003. The increase in revenue is
primarily due to an increase of approximately $5.4 million during 2004 related
to hurricane relief services provided in the State of Florida. The net increase
in revenue is also due to increased contract awards for government training and
domestic preparedness services, offset by decreases in revenue due to the normal
completion of non-recurring projects during 2004.
22
Manufacturing & BPO revenue increased $23.8 million or 41.8% during the year
ended December 31, 2004 compared to 2003. The increase is primarily due to
increases in revenue from the organization's business process outsource and
e-Learning businesses. The business process outsourcing 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
overall increase in revenue was offset by a continued decline in
training-related revenue with certain automotive clients.
Gross profit
YEARS ENDED DECEMBER 31,
-----------------------------------------
2004 2003
------------------- -------------------
% REVENUE % REVENUE
--------- ---------
(Dollars in thousands)
Process, Energy & Government $14,727 17.5% $13,211 17.2%
Manufacturing & BPO 5,220 6.5% 2,290 4.0%
Elimination of intercompany revenue with GSE (608) -- (100) --
------- ---- ------- ----
$19,339 11.8% $15,401 11.5%
======= ==== ======= ====
Process, Energy & Government gross profit of $14.7 million or 17.5% of revenue
for the year ended December 31, 2004 increased by $1.5 million or 11.5% when
compared to gross profit of approximately $13.2 million or 17.2% of revenue for
the year ended December 31, 2003. This increase in gross profit was primarily
driven by an increase in revenue for training services provided to our
government and energy customers. While overhead expenses remained relatively
flat year over year, the incremental profit increase was offset slightly by
increases in employee benefits due to the growth of the business.
Manufacturing & BPO gross profit of $5.2 million or 6.5% of revenue for the year
ended December 31, 2004 increased by $2.9 million or 127.9% when compared to
gross profit of approximately $2.3 million or 4.0% of revenue for the year ended
December 31, 2003. This increase in gross profit was primarily driven by an
increase in revenue from business process outsourcing and training outsourcing
services as well as a decrease in lower margin subcontractor utilization and an
increase in higher margin internal labor utilization on several business process
outsourcing contracts. While overhead expenses remained relatively flat year
over year, the incremental profit increase was offset slightly by increases in
employee benefits due to the growth of the business.
Selling, general and administrative expenses
SG&A expenses decreased $4.2 million or 19.2% during the year ended December 31,
2004 from $21.7 million in 2003 to $17.5 million in 2004. This decrease is
primarily due to reduced executive compensation and payroll costs of $1.5
million as well as reduced legal and other professional fees of $2.5 million;
SG&A in 2004 and 2003 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
Interest expense decreased $1.0 million during the year ended December 31, 2004
from $2.9 million in 2003 to $1.9 million in 2004. The decrease was primarily
attributable to lower General Physics interest expense, due to lower average
borrowing levels in 2004 as compared to 2003, offset by the Company's write-off
of deferred financing costs on its prior credit agreement of $0.9 million.
23
Other Income
Other income was $0.5 million for both the years ended December 31, 2004 and
2003 and was primarily related to interest income on loans receivable and other
income.
Gain from arbitration settlement
The Company recognized a gain of $13.7 million from the arbitration award
related to the EDS litigation in the fourth quarter of 2004, net of legal fees
and expenses (see Note 17 to the accompanying Consolidated Financial
Statements).
Income taxes
Income tax benefit was $8.2 million for the year ended December 31, 2004 as a
result of the Company's reduction in valuation allowance, offset by the current
tax provision, compared to income tax expense of $1.1 million for the year ended
December 31, 2003. In assessing the realizability of its deferred tax assets,
management considered it more likely than not that its deferred tax assets would
be realized and reduced its deferred tax valuation allowance by $12.2 million in
2004.
LIQUIDITY AND CAPITAL RESOURCES
WORKING CAPITAL
As of December 31, 2005, the Company had cash and cash equivalents totaling
$18.1 million. On January 19, 2006, the Company completed a restructuring of its
capital stock in which it used approximately $20.3 million of cash on hand to
repurchase 2,121,500 shares of its Common Stock and 600,000 shares of its Class
B Stock, and to exchange 600,000 shares of its Class B Stock into 600,000 shares
of Common Stock. In connection with the capital stock restructuring, the Company
authorized the repurchase of up to $5 million of additional common shares from
time to time in the open market, subject to prevailing business and market
conditions and other factors. See Note 13 to the accompanying Consolidated
Financial Statements for further details regarding the repurchase and exchange
transaction.
On February 14, 2006, the Company completed the acquisition of Peters Management
Consultancy Ltd. (PMC), a performance improvement and training company in the
United Kingdom. The purchase price was $1.3 million in cash, subject to a
post-closing adjustment based on actual net equity, plus contingent payments of
up to $0.9 million based upon the achievement of certain performance targets
during the first year following completion of the acquisition.
The Company believes that cash generated from operations and borrowings
available under the General Physics Credit Agreement ($19.2 million of available
borrowings as of January 31, 2006) will be sufficient to fund the working
capital and other requirements of the Company for the foreseeable future.
The Company's working capital increased $14.2 million during 2005 from $20.6
million at December 31, 2004 to $34.8 million at December 31, 2005. The
Company's working capital increased during 2005 primarily due to an increase in
cash from operations as well as the receipt of proceeds from the EDS arbitration
award of $13,660,000 in January 2005 and the litigation settlement of
approximately $5,552,000, net of legal fees and expenses, in December 2005 (see
Note 17 to the accompanying Consolidated Financial Statements).
CASH FLOWS
YEAR ENDED DECEMBER 31, 2005 COMPARED TO THE YEAR ENDED DECEMBER 31, 2004
The Company's cash balance increased $15.7 million from $2.4 million as of
December 31, 2004 to $18.1 million at December 31, 2005. The increase in cash
and cash equivalents during the year ended December 31, 2005 resulted from cash
provided by operating activities of $19.3 million, offset by cash used in
investing activities of $1.0 million, and cash used in financing activities of
$2.6 million. Cash flows from discontinued operations are combined with cash
flows from continuing operations within the operating, investing, and financing
activities categories in the accompanying consolidated statements of cash flows
through the effective dates of the spin-offs of GSE and NPDC.
24
Cash provided by operating activities was $19.3 million for the year ended
December 31, 2005 compared to $4.2 million in 2004. The increase in cash
compared to the prior period is primarily due to receipt of proceeds from the
EDS arbitration award of $13.8 million in January 2005 (including post-award
interest) and the receipt of proceeds from the litigation settlement of $5.6
million in December 2005. This increase in cash flows from operating activities
was offset by a decrease in net income of approximately $15.3 million.
Additionally, there was a decrease in other operating items in 2005 compared to
2004 primarily due to a decrease in accrued expenses related to the payout of $5
million of the EDS arbitration proceeds to NPDC in 2005 which was accrued for as
of December 31, 2004 (see Note 17 to the accompanying Consolidated Financial
Statements).
Cash used in investing activities was $1.0 million for the year ended December
31, 2005 compared to $1.4 million in 2004. The decrease in cash used in
investing activities is primarily due to a decrease in cash proceeds from the
sale of marketable securities by NPDC of approximately $0.6 million in 2004 that
did not recur in 2005, offset by a decrease in capital expenditures for
property, plant and equipment of approximately $0.8 million during 2005 compared
to 2004. In 2004, cash used for capital expenditures included $0.7 million
related to the discontinued operations of GSE and NPDC.
Cash used in financing activities was $2.6 million for the year ended December
31, 2005 compared to $4.9 million for the same period of 2004. The decrease in
cash used in financing activities is primarily due to net cash proceeds of $2.0
million in 2005 from GSE's issuance of subordinated debt, as well as additional
borrowings by GSE of approximately $1.2 million under General Physics' Credit
Agreement during 2005, prior to the spin-off. Additionally, the Company
contributed $0.8 million of cash to GSE in 2005 and $2.5 million of cash to NPDC
in 2004 in connection with the spin-offs. Cash used in financing activities also
decreased as a result of an increase of $0.5 million of cash proceeds from the
issuance of Common Stock, primarily for the exercise of employee stock options,
in 2005 compared to 2004. These increases in cash were offset by a decrease in
cash due to the repayment by General Physics of its short-term borrowings of
$6.1 million in 2005 compared to repayments of short-term borrowings and
long-term debt of approximately $3.0 million in 2004.
YEAR ENDED DECEMBER 31, 2004 COMPARED TO THE YEAR ENDED DECEMBER 31, 2003
The Company's cash balance decreased $2.0 million from $4.4 million as of
December 31, 2003 to $2.4 million at December 31, 2004. The decrease in cash and
cash equivalents during the year ended December 31, 2004 resulted from cash
provided by operating activities of $4.2 million, offset by cash used in
investing activities of $1.4 million and cash used in financing activities of
$4.9 million, and a positive effect of exchange rate changes on cash of $0.1
million. Cash flows from discontinued operations are combined with cash flows
from continuing operations within the operating, investing, and financing
activities categories in the accompanying consolidated statements of cash flows
through the effective date of the spin-off of NPDC.
Cash used in investing activities was $1.4 million for the year ended December
31, 2004 compared to $1.6 million in 2003. The decrease in cash used was
primarily due to a decrease in expenditures for property, plant and equipment
and a decrease in cash used for other investing activities, offset by a decrease
in cash proceeds from the sale of marketable securities in 2004 compared to
2003. Cash proceeds from investing activities included $0.6 million and $2.1
million from the sale of marketable securities in 2004 and 2003, respectively,
which were related to the discontinued operations of NPDC.
Cash used in financing activities was $4.9 million for the year ended December
31, 2004 compared to $0.9 million in 2003. The increase in cash used was
primarily due to the repayment of short-term borrowings and long-term debt
totaling $3.0 million in 2004, compared to net proceeds of long-term debt of
$13.7 million offset by the repayment of short-term borrowings of $13.5 million.
Additionally, the Company contributed $2.5 million
25
of cash to NPDC in 2004 in connection with its spin-off on November 24, 2004.
The increase in cash used in financing activities was offset by a decrease due
to the use of cash in 2003 for deferred financing costs of $1.6 million which
did not recur in 2004.
LONG-TERM DEBT AND SHORT-TERM BORROWINGS
In August 2003, the Company issued and sold to four Gabelli funds $7.5 million
aggregate principal amount of 6% Conditional Subordinated Notes due 2008
(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 at an exercise price of $8.00. 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.
Subsequent to the spin-offs of NPDC and GSE and in accordance with the
anti-dilution provisions of the warrant agreement, the number of GP Warrants was
adjusted to 984,116 and the exercise price was adjusted to $5.85 per share.
In October 2003, the Company issued a five-year 5% note due in full in October
2008 in the principal amount of $5,250,955 to ManTech International (ManTech).
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.
General Physics has a $25 million Credit Agreement with a bank that expires on
August 13, 2007, as amended, with annual renewal options, and is secured by
certain assets of General Physics. The interest rate on borrowings under the
Credit Agreement is at the daily LIBOR Market Index Rate plus 3.00%. Based upon
the financial performance of General Physics, the interest rate can be reduced
(as of December 31, 2005, the rate was reduced to LIBOR plus 2.50% for General
Physics). The Credit Agreement also contains certain restrictive covenants.
General Physics is currently restricted from paying dividends and management
fees to the Company in excess of $1.0 million in any fiscal year, with the
exception of a waiver by the lender which permits General Physics to provide
cash to the Company to repurchase up to $5 million of additional shares of its
outstanding Common Stock (see Note 13 to the accompanying Consolidated Financial
Statements). 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 Note 17 to the accompanying
Consolidated Financial Statements). As of December 31, 2005, the Company had no
borrowings outstanding under the Credit Agreement and there was approximately
$20,558,000 of available borrowings based upon 80% of eligible accounts
receivable and 80% of eligible unbilled receivables.
26
CONTRACTUAL PAYMENT OBLIGATIONS
The Company enters into various agreements that result in contractual
obligations in connection with its business activities. These obligations
primarily relate to our financing arrangements (such as long-term debt and
capital and operating leases), purchase commitments under non-cancelable
contracts for certain products and services, and contractual obligations to
certain of the Company's officers under employment contracts. The following
table summarizes the Company's total contractual payment obligations as of
December 31, 2005 (in thousands):
PAYMENTS DUE IN
--------------------------------------------
2007 - 2009 - AFTER
2006 2008 2010 2010 TOTAL
------ ------- ------ ------ -------
Long-term debt:
Principal $ -- $12,751 $ -- $ -- $12,751
Interest 713 1,204 -- -- 1,917
------ ------- ------ ------ -------
Total 713 13,955 -- -- 14,668
Capital lease commitments 94 21 -- -- 115
Operating lease commitments 3,604 4,172 2,575 4,843 15,194
Purchase commitments * 1,027 775 -- -- 1,802
Employment agreements 3,713 1,964 -- -- 5,677
------ ------- ------ ------ -------
Total $9,151 $20,887 $2,575 $4,843 $37,456
====== ======= ====== ====== =======
* Excludes purchase orders for goods and services entered into by the Company
in the ordinary course of business, which are non-binding and subject to
amendment or termination within a reasonable notification period.
OFF-BALANCE SHEET COMMITMENTS
Subsequent to the spin-off of NPDC, the Company continues to guarantee certain
operating leases for Five Star's New Jersey and Connecticut warehouses,
aggregating $1.6 million annually through the first quarter of 2007.
Subsequent to the spin-off of NPDC, the Company continues to guarantee the
repayment of two debt obligations of MXL, which are secured by property and
certain equipment of MXL. The aggregate outstanding balance as of December 31,
2005 was $1.4 million. The Company's guarantees expire upon the maturity of the
debt obligations which are October 1, 2006 and March 31, 2011.
The Company continued to guarantee GSE's borrowings under General Physics'
Credit Agreement (under which $1.5 million was allocated for use by GSE)
subsequent to the spin-off on September 30, 2005. As of December 31, 2005, GSE
had borrowings of $1,182,000 under the Credit Agreement. In March 2006, GSE
repaid its borrowings in full and ceased to be a Borrower under the Credit
Agreement.
As of December 31, 2005, the Company had one outstanding letter of credit for
$290,000 which expires in 2006, and had one outstanding performance bond for
$908,000 which expires in 2006.
The Company does not have any off-balance sheet financing except for operating
leases and letters of credit entered into in the normal course of business and
the items disclosed above.
27
MANAGEMENT DISCUSSION OF CRITICAL ACCOUNTING POLICIES
The preparation of our consolidated financial statements in conformity with U.S.
generally accepted accounting principles requires us to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Our estimates, judgments and assumptions are continually
evaluated based on available information and experience. Because of the use of
estimates inherent in the financial reporting process, actual results could
differ from those estimates.
Certain of our accounting policies require higher degrees of judgment than
others in their application. These include revenue recognition, valuation of
accounts receivable, impairment of intangible assets, including goodwill, and
valuation of deferred tax assets, which are summarized below. In addition, Note
2 to the accompanying Consolidated Financial Statements includes further
discussion of our significant accounting policies.
Revenue Recognition
The Company provides services under time-and-materials, cost-reimbursable, and
fixed-price (including fixed-fee per transaction) contracts to both government
and commercial customers. Each contract has different terms based on the scope,
deliverables and complexity of the engagement, requiring the Company to make
judgments and estimates about recognizing revenue. Revenue is recognized as
services are performed.
Under time-and-materials contracts, as well as certain government
cost-reimbursable and certain fixed-price contracts, the contractual billing
schedules are based on the specified level of resources the Company is obligated
to provide. As a result, for these "level-of-effort" contracts, the contractual
billing amount for the period is a measure of performance and, therefore,
revenue is recognized in that amount.
Revenue under government fixed price and certain commercial contracts is
recognized using the percentage of completion method in accordance with the
American Institute of Certified Public Accountants Statement of Position 81-1,
Accounting for Performance of Construction-Type and Certain Production-Type
Contracts. Under the percentage-of-completion method, management estimates the
percentage-of-completion based upon costs incurred as a percentage of the total
estimated costs. When total cost estimates exceed revenues, the estimated losses
are recognized immediately. The use of the percentage-of-completion method
requires significant judgment relative to estimating total contract revenues and
costs, including assumptions relative to the length of time to complete the
project, the nature and complexity of the work to be performed, and anticipated
changes in estimated salaries and other costs. Estimates of total contract
revenues and costs are continuously monitored during the term of the contract,
and recorded revenues and costs are subject to revision as the contract
progresses. When revisions in estimated contract revenues and costs are
determined, such adjustments are recorded in the period in which they are first
identified.
For commercial fixed-fee per transaction contracts, revenue is recognized during
the period in which services are delivered in accordance with the pricing
outlined in the contracts. For other commercial fixed price contracts which
typically involve a discrete project, such as development of training content
and materials, design of training processes, software implementation, or
engineering projects, the contractual billing schedules are not based on the
specified level of resources the Company is obligated to provide. These discrete
projects generally do not contain milestones or other reliable measures of
performance. As a result, revenue on these arrangements is recognized using the
percentage-of-completion method based on the relationship of costs incurred to
total estimated costs expected to be incurred over the term of the contract. The
Company believes this methodology is a reasonable measure of proportional
performance since performance primarily involves personnel costs and services
are provided to the customer throughout the course of the projects through
regular communications of progress toward completion and other project
deliverables. In addition, the customer typically is required to pay the Company
for the proportionate amount of work and cost incurred in the event of contract
termination.
28
Certain of the Company's fixed price commercial contracts contain revenue
arrangements with multiple deliverables. The Company applies the separation
guidance in Emerging Issues Task Force (EITF) 00-21, Revenue Arrangements with
Multiple Deliverables (EITF 00-21), for these types of contracts. Revenue
arrangements with multiple deliverables are evaluated to determine if the
deliverables can be divided into more than one unit of accounting. For contracts
determined to have more than one unit of accounting, the Company recognizes
revenue for each deliverable based on the revenue recognition policies discussed
above; that is, the Company recognizes revenue in accordance with work performed
and costs incurred, with fee being allocated proportionately over the service
period. Within each multiple deliverable project, there is objective and
reliable fair value across all units of the arrangement, as discounts are not
offered or applied to one deliverable versus another, and the rates bid across
all deliverables are consistent.
As part of the Company's on-going operations to provide services to its
customers, incidental expenses, which are commonly referred to as
"out-of-pocket" expenses, are billed to customers, 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. The Company's
policy provides for these expenses to be recorded as both revenue and direct
cost of services in accordance with the provisions of EITF 01-14, Income
Statement Characterization of Reimbursements Received for "Out-of-Pocket"
Expenses Incurred.
Valuation of Accounts Receivable
Provisions for allowance for doubtful accounts are made based on specific
collection 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 $1.2
million at December 31, 2005.
Impairment of Intangible Assets, Including Goodwill
In accordance with SFAS No. 142, Goodwill and Other Intangible Assets, 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
(as defined in SFAS No. 131) and obtain estimates of the fair values of those
units as of the testing date. The Company uses a third party valuation firm to
estimate the fair values of its reporting units using discounted cash flow
valuation models. These estimates are formed by evaluating historical trends,
current budgets, operating plans and industry data. For the years ended December
31, 2005, 2004, and 2003, the estimated fair values of each reporting unit
exceeded their respective carrying values, indicating the underlying
29
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
reporting unit's goodwill.
Valuation of Deferred Tax Assets
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 basis 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. As of
December 31, 2005, the Company had federal net operating loss carryforwards of
$31.1 million, which expire during 2022 and 2023.
ACCOUNTING STANDARDS ISSUED
We discuss recently issued accounting standards in Note 2 to the accompanying
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 estimates that the fair value of
its long-term debt approximates its carrying amount as the stated interest rates
approximate prevailing market rates.
The Company is exposed to the impact of currency fluctuations because of its
international operations. The Company's net investment in its foreign
subsidiaries, including intercompany balances, at December 31, 2005 was not
significant, 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.
30
PAGE
----
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
FINANCIAL STATEMENTS OF GP STRATEGIES CORPORATION AND SUBSIDIARIES:
Reports of Independent Registered Public Accounting Firm 32
Consolidated Balance Sheets - December 31, 2005 and 2004 35
Consolidated Statements of Operations - Years ended December 31, 2005,
2004 and 2003 36
Consolidated Statements of Stockholders' Equity and Comprehensive
Income (Loss) - Years ended December 31, 2005, 2004 and 2003 37
Consolidated Statements of Cash Flows - Years ended December 31, 2005,
2004 and 2003 38
Notes to Consolidated Financial Statements 40
31
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, 2005 and 2004, 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, 2005. 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 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 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, 2005 and 2004, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 2005, 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.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of GP Strategies
Corporation and subsidiaries internal control over financial reporting as of
December 31, 2005, based on criteria established in Internal Control--Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO), and our report dated March 15, 2006 expressed an unqualified
opinion on management's assessment of, and an adverse opinion on the effective
operation of, internal control over financial reporting.
/s/ KPMG LLP
Baltimore, Maryland
March 15, 2006
32
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
GP Strategies Corporation:
We have audited management's assessment, included in the accompanying
Management's Annual Report on Internal Control over Financial Reporting (Item
9A(b)), that GP Strategies Corporation did not maintain effective internal
control over financial reporting as of December 31, 2005, because of the effect
of the material weakness identified in management's assessment, based on
criteria established in Internal Control--Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO). GP
Strategies Corporation's management is responsible for maintaining effective
internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting. Our responsibility
is to express an opinion on management's assessment and an opinion on the
effectiveness of the Company's internal control over financial reporting based
on our audit.
We conducted our audit 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 effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, evaluating management's assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
A material weakness is a control deficiency, or combination of control
deficiencies, that results in more than a remote likelihood that a material
misstatement of the annual or interim financial statements will not be prevented
or detected. The following material weakness has been identified and included in
management's assessment as of December 31, 2005:
The Company's account reconciliation and management review controls over
the accounting for income taxes were not operating effectively because of
the lack of adequate tax accounting expertise as of December 31, 2005. As a
result, there was a material misstatement in the Company's income tax
provision.
(Continued)
33
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheets of
GP Strategies Corporation and subsidiaries as of December 31, 2005 and 2004, 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, 2005. The aforementioned material weakness
was considered in determining the nature, timing, and extent of audit tests
applied in our audit of the 2005 consolidated financial statements, and this
report does not affect our report dated March 15, 2006, which expressed an
unqualified opinion on those consolidated financial statements.
In our opinion, management's assessment that GP Strategies Corporation did not
maintain effective internal control over financial reporting as of December 31,
2005, is fairly stated, in all material respects, based on the criteria
established in Internal Control--Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO). Also, in our
opinion, because of the effect of the material weakness described above on the
achievement of the objectives of the control criteria, GP Strategies Corporation
has not maintained effective internal control over financial reporting as of
December 31, 2005, based on the criteria established in Internal
Control--Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO).
/s/ KPMG LLP
Baltimore, Maryland
March 15, 2006
34
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 2005 and 2004
(In thousands, except shares and par value per share)
2005 2004
-------- --------
ASSETS
Current assets:
Cash and cash equivalents $ 18,118 $ 2,417
Cash held in escrow from arbitration settlement -- 13,798
Accounts and other receivables, less allowance for
doubtful accounts of $1,166 in 2005 and $917 in 2004 26,390 31,114
Costs and estimated earnings in excess of billings on
uncompleted contracts 11,487 16,834
Deferred tax assets 1,174 1,478
Prepaid expenses and other current assets 5,451 4,350
-------- --------
Total current assets 62,620 69,991
-------- --------
Property, plant and equipment, net 1,857 2,673
Goodwill 57,483 63,867
Other intangible assets, net 647 1,024
Deferred tax assets 10,391 15,164
Other assets 1,643 3,316
-------- --------
$134,641 $156,035
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 71 $ 100
Short-term borrowings -- 6,068
Accounts payable and accrued expenses 20,315 33,219
Billings in excess of costs and estimated earnings on
uncompleted contracts 7,430 10,003
-------- --------
Total current liabilities 27,816 49,390
-------- --------
Long-term debt less current maturities 11,309 10,951
Other noncurrent liabilities 1,174 1,739
-------- --------
Total liabilities 40,299 62,080
-------- --------
Minority interest -- 2,335
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 17,116,575 shares in 2005 and
16,669,757 shares in 2004 (of which 2,379 shares in 2005 and
8,994 shares in 2004 are held in treasury) 171 167
Class B capital stock, par value $0.01 per share
Authorized 2,800,000 shares; 1,200,000 shares issued and outstanding 12 12
Additional paid-in capital 168,737 171,852
Accumulated deficit (71,710) (78,923)
Unearned compensation (1,133) --
Accumulated other comprehensive loss (1,087) (761)
Note receivable from stockholder (619) (619)
Treasury stock at cost (29) (108)
-------- --------
Total stockholders' equity 94,342 91,620
-------- --------
$134,641 $156,035
======== ========
See accompanying notes to consolidated financial statements.
35
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
Years ended December 31, 2005, 2004 and 2003
(In thousands, except per share data)
2005 2004 2003
-------- -------- --------
Revenue $175,555 $164,458 $133,875
Cost of revenue 150,564 145,119 118,474
-------- -------- --------
Gross profit 24,991 19,339 15,401
Selling, general and administrative expenses 14,039 17,545 21,707
-------- -------- --------
Operating income (loss) 10,952 1,794 (6,306)
Interest expense 1,518 1,937 2,903
Other income (including interest income of
$296 in 2005, $317 in 2004 and $424 in 2003) 238 500 523
Gain on litigation settlement, net of legal fees and expenses 5,552 -- --
Gain on arbitration award, net of legal fees and expenses -- 13,660 --
Gains on sales of marketable securities -- -- 559
Valuation adjustment of liability for warrants -- -- 1,436
-------- -------- --------
Income (loss) from continuing operations
before income taxes 15,224 14,017 (6,691)
Income tax expense (benefit) 6,767 (8,249) 1,148
-------- -------- --------
Income (loss) from continuing operations 8,457 22,266 (7,839)
Income (loss) from discontinued operations, net of income taxes (1,244) 254 (437)
-------- -------- --------
Net income (loss) $ 7,213 $ 22,520 $ (8,276)
======== ======== ========
Per common share data:
Basic
Income (loss) from continuing operations $ 0.47 $ 1.26 $ (0.46)
Income (loss) from discontinued operations (0.07) 0.01 (0.02)
-------- -------- --------
Net income (loss) $ 0.40 $ 1.27 $ (0.48)
======== ======== ========
Diluted
Income (loss) from continuing operations $ 0.45 $ 1.22 $ (0.46)
Income (loss) from discontinued operations (0.07) 0.01 (0.02)
-------- -------- --------
Net income (loss) $ 0.38 $ 1.23 $ (0.48)
======== ======== ========
See accompanying notes to consolidated financial statements.
36
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity and Comprehensive Income (Loss)
Years ended December 31, 2005, 2004, and 2003
(In thousands, except for par value per share)
CLASS B
COMMON CAPITAL ADDITIONAL
STOCK STOCK PAID-IN ACCUMULATED UNEARNED
($0.01 PAR) ($0.01 PAR) CAPITAL DEFICIT COMPENSATION
----------- ----------- ---------- ----------- ------------
Balance at December 31, 2002 $154 $12 $189,988 $ (93,167) $ --
---- --- -------- --------- -------
Net loss -- -- -- (8,276) --
Other comprehensive loss -- -- -- -- --
Total comprehensive loss
Repayment of note receivable from stockholder -- -- -- -- --
Proceeds from issuance of common stock 9 -- 6,553 -- --
---- --- -------- --------- -------
Balance at December 31, 2003 163 12 196,541 (101,443) --
---- --- -------- --------- -------
Net loss -- -- -- 22,520 --
Other comprehensive loss -- -- -- -- --
Total comprehensive income
Repayment of note receivable from stockholder -- -- -- -- --
Distribution of net assets to NPDC -- -- (26,043) -- --
Issuance and sale of common stock and warrants 4 -- 1,354 -- --
---- --- -------- --------- -------
Balance at December 31, 2004 167 12 171,852 (78,923) --
---- --- -------- --------- -------
Net income -- -- -- 7,213 --
Other comprehensive loss -- -- -- -- --
Total comprehensive income
Distribution of net assets of GSE in spin-off -- -- (6,874) -- --
Distribution of net assets to NPDC -- -- (1,201) -- --
Restricted stock and stock unit awards -- -- 1,918 -- (1,133)
Excess tax benefits of stock options exercised -- -- 720 -- --
Proceeds from issuance of common stock 4 -- 2,322 -- --
---- --- -------- --------- -------
Balance at December 31, 2005 $171 $12 $168,737 $ (71,710) $(1,133)
==== === ======== ========= =======
ACCUMULATED NOTE
OTHER RECEIVABLE TREASURY TOTAL COMPREHENSIVE
COMPREHENSIVE FROM STOCK AT STOCKHOLDERS' INCOME
INCOME (LOSS) STOCKHOLDER COST EQUITY (LOSS)
------------- ----------- -------- ------------- -------------
Balance at December 31, 2002 460 $(4,095) $ (370) $ 92,982
------ ------- ------ --------
Net loss -- -- -- (8,276) $(8,276)
Other comprehensive loss (436) -- -- (436) (436)
-------
Total comprehensive loss $(8,712)
=======
Repayment of note receivable from stockholder -- 1,773 -- 1,773
Proceeds from issuance of common stock -- -- 207 6,769
------ ------- ------ --------
Balance at December 31, 2003 24 (2,322) (163) 92,812
------ ------- ------ --------
Net loss -- -- -- 22,520 $22,520
Other comprehensive loss (861) -- -- (861) (861)
-------
Total comprehensive income $21,659
=======
Repayment of note receivable from stockholder -- 1,703 -- 1,703
Distribution of net assets to NPDC 76 -- -- (25,967)
Issuance and sale of common stock and warrants -- -- 55 1,413
------ ------- ------ --------
Balance at December 31, 2004 (761) (619) (108) 91,620
------ ------- ------ --------
Net income -- -- -- 7,213 $ 7,213
Other comprehensive loss (418) -- -- (418) (418)
-------
Total comprehensive income $ 6,795
=======
Distribution of net assets of GSE in spin-off 92 -- -- (6,782)
Distribution of net assets to NPDC -- -- -- (1,201)
Restricted stock and stock unit awards -- -- -- 785
Excess tax benefits of stock options exercised -- -- -- 720
Proceeds from issuance of common stock -- -- 79 2,405
------ ------- ------ --------
Balance at December 31, 2005 (1,087) $ (619) $ (29) $ 94,342
====== ======= ====== ========
See accompanying notes to consolidated financial statements.
37
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 2005, 2004, and 2003
(In thousands)
2005 2004 2003
------- -------- --------
Cash flows from operations:
Income (loss) from continuing operations $ 8,457 $ 22,266 $ (7,839)
Income (loss) from discontinued operations, net of income taxes (1,244) 254 (437)
------- -------- --------
Net income (loss) 7,213 22,520 (8,276)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 3,090 4,084 2,928
Collection of deposit in escrow, including interest 13,798 -- --
Gain on arbitration award, net -- (13,660) --
Deferred income taxes 5,789 (9,783) (623)
Issuance of stock for retirement savings plan
and non-cash compensation expense 1,233 2,348 3,903
Minority interests (953) (407) (30)
Changes in other operating items, net of effect
of acquisitions and disposals:
Accounts and other receivables 2,237 (5,379) 2,713
Inventories -- 2,609 (6,698)
Costs and estimated earnings in excess of
billings on uncompleted contracts (81) (2,332) 3,788
Accounts payable and accrued expenses (8,257) 2,707 4,656
Billings in excess of costs and estimated
earnings on uncompleted contracts (1,725) 81 2,534
Prepaid and other current assets (2,561) 1,442 194
Other (435) (46) 261
------- -------- --------
Net cash provided by operations 19,348 4,184 5,350
------- -------- --------
Cash flows from investing activities:
Additions to property, plant and equipment (1,028) (1,784) (2,123)
Additions to intangible assets -- (250) (422)
Proceeds from sales of marketable securities -- 609 2,124
Cash acquired in acquisitions -- -- 2,853
Other investing activities 21 -- (4,050)
------- -------- --------
Net cash used in investing activities (1,007) (1,425) (1,618)
------- -------- --------
Cash flows from financing activities:
Repayment of short-term borrowings (6,068) (2,123) (13,461)
Short-term borrowings by GSE 1,182 -- --
Proceeds from issuance of subordinated convertible note by GSE 2,000 -- --
Proceeds from issuance of common stock 1,400 860 955
Distribution of cash of GSE and NPDC in spin-offs (804) (2,453) --
Deferred financing costs (by GSE in 2005) (212) -- (1,619)
Payments on obligations under capital leases (94) (298) (447)
Repayment of long-term debt -- (837) (1,004)
Proceeds from issuance of long-term debt -- -- 14,674
------- -------- --------
Net cash used in financing activities (2,596) (4,851) (902)
------- -------- --------
(continued)
38
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 2005, 2004, and 2003
(In thousands)
2005 2004 2003
------- -------- --------
Effect of exchange rate changes on cash and cash equivalents (44) 93 70
------- -------- --------
Net increase (decrease) in cash and cash equivalents 15,701 (1,999) 2,900
Cash and cash equivalents at beginning of year 2,417 4,416 1,516
------- -------- --------
Cash and cash equivalents at end of year $18,118 $ 2,417 $ 4,416
======= ======== ========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 784 $ 2,383 $ 1,379
Income taxes $ 1,160 $ 639 $ 734
Non-cash investing activities:
Distribution of non-cash net assets of GSE and NPDC in
connection with spin-offs (see Note 3) $ 5,978 $ 23,514 $ --
See accompanying notes to consolidated financial statements.
39
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2005 and 2004
(1) DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
GP Strategies Corporation (the "Company") was incorporated in Delaware in
1959. As of December 31, 2005, the Company's business consists of its
training, engineering, and consulting business operated by General Physics
Corporation ("General Physics" or "GP"). General Physics is a workforce
development company that seeks to improve 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.
On September 30, 2005, the Company completed a taxable spin-off of its 57%
interest in GSE Systems, Inc. ("GSE") through a dividend to the Company's
stockholders. GSE is a stand alone public company which provides simulation
solutions and services to energy, process and manufacturing industries
worldwide. On September 30, 2005, stockholders received in the spin-off
0.283075 shares of GSE common stock for each share of the Company's Common
Stock or Class B Capital Stock ("Class B Stock") held on the record date of
September 19, 2005. Following the spin-off, the Company ceased to have any
ownership interest in GSE and the operations of GSE have been reclassified
as discontinued in the Company's consolidated statements of operations for
all periods presented (see Note 3). The Company continues to provide
corporate support services to GSE pursuant to a management services
agreement which extends through December 31, 2006 (see Note 15).
In conjunction with the spin-off of GSE, the Company identified an amount
in its deferred tax assets that related to the excess tax basis over book
basis of its investment in GSE. This deferred tax asset should have been
eliminated in purchase accounting when the Company increased its ownership
interest in GSE to 57% in October 2003. The Company has reclassified
approximately $1.5 million from non-current deferred tax assets to goodwill
in the accompanying consolidated balance sheet as of December 31, 2004. The
Company determined the reclassification had de minimis impact on the
results of the Company's operations for all periods presented and was not
material quantitatively or qualitatively to the consolidated financial
statements taken as a whole.
On November 24, 2004, the Company completed the tax-free spin-off of
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. Subsequent to the spin-off of NPDC, the results of
operations of NPDC are presented as discontinued for all prior years
presented (see Note 3).
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the operations of the
Company and its majority-owned subsidiaries. The minority interest
balance as of December 31, 2004 is comprised of the 42% minority share
in GSE, which the Company did not own. All significant intercompany
balances and transactions have been eliminated.
(Continued)
40
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2005 and 2004
(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) 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 identification
and review of past due accounts.
(D) FOREIGN CURRENCY TRANSLATION
The functional currency of the Company's international operations is
the respective local currency. The translation of the 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 exchange rates
prevailing during the year. The unrealized gains and losses resulting
from such translation are included as a component of other
comprehensive income (loss).
(E) REVENUE RECOGNITION
The Company provides services under time-and-materials,
cost-reimbursable, and fixed-price (including fixed-fee per
transaction) contracts to both government and commercial customers.
Each contract has different terms based on the scope, deliverables and
complexity of the engagement, requiring the Company to make judgments
and estimates about recognizing revenue. Revenue is recognized as
services are performed.
Under time-and-materials contracts, as well as certain government
cost-reimbursable and certain fixed-price contracts, the contractual
billing schedules are based on the specified level of resources the
Company is obligated to provide. As a result, for these
"level-of-effort" contracts, the contractual billing amount for the
period is a measure of performance and, therefore, revenue is
recognized in that amount.
Revenue under government fixed price and certain commercial contracts
is recognized using the percentage of completion method in accordance
with the American Institute of Certified Public Accountants Statement
of Position 81-1, Accounting for Performance of Construction-Type and
Certain Production-Type Contracts. Under the percentage-of-completion
method, management estimates the percentage-of-completion based upon
costs incurred as a percentage of the total estimated costs. When
total cost estimates exceed revenues, the estimated losses are
recognized immediately. The use of the percentage-of-completion method
requires significant judgment relative to estimating total contract
revenues and costs, including assumptions relative to the length of
time to complete the project, the nature and complexity of the work to
be performed, and anticipated changes in estimated salaries and other
costs. Estimates of total contract revenues and costs are continuously
monitored during the term of the contract, and recorded revenues and
costs are subject to revision as the contract progresses. When
revisions in estimated contract revenues and costs are determined,
such adjustments are recorded in the period in which they are first
identified.
For commercial fixed-fee per transaction contracts, revenue is
recognized during the period in which services are delivered in
accordance with the pricing outlined in the contracts. For other
commercial fixed price contracts which typically involve a
discrete project, such as development of training content and
materials, design of training processes, software implementation, or
engineering projects, the contractual billing schedules are not based
on the specified level of resources the Company is obligated to
provide. These discrete projects generally
41
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2005 and 2004
do not contain milestones or other reliable measures of performance.
As a result, revenue on these arrangements is recognized using the
percentage-of-completion method based on the relationship of costs
incurred to total estimated costs expected to be incurred over the
term of the contract. The Company believes this methodology is a
reasonable measure of proportional performance since performance
primarily involves personnel costs and services are provided to the
customer throughout the course of the projects through regular
communications of progress toward completion and other project
deliverables. In addition, the customer typically is required to pay
the Company for the proportionate amount of work and cost incurred in
the event of contract termination.
Certain of the Company's fixed price commercial contracts contain
revenue arrangements with multiple deliverables. The Company applies
the separation guidance in Emerging Issues Task Force (EITF) 00-21,
Revenue Arrangements with Multiple Deliverables (EITF 00-21), for
these types of contracts. Revenue arrangements with multiple
deliverables are evaluated to determine if the deliverables can be
divided into more than one unit of accounting. For contracts
determined to have more than one unit of accounting, the Company
recognizes revenue for each deliverable based on the revenue
recognition policies discussed above; that is, the Company recognizes
revenue in accordance with work performed and costs incurred, with fee
being allocated proportionately over the service period. Within each
multiple deliverable project, there is objective and reliable fair
value across all units of the arrangement, as discounts are not
offered or applied to one deliverable versus another, and the rates
bid across all deliverables are consistent.
As part of the Company's on-going operations to provide services to
its customers, incidental expenses, which are commonly referred to as
"out-of-pocket" expenses, are billed to customers, 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. The Company's policy provides for these expenses to be
recorded as both revenue and direct cost of services in accordance
with the provisions of EITF 01-14, Income Statement Characterization
of Reimbursements Received for "Out-of-Pocket" Expenses Incurred.
(Continued)
42
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2005 and 2004
(F) COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) consists of net income (loss), net
unrealized gains (losses) on available-for-sale securities, and
foreign currency translation adjustments.
(G) 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 10 years
Leasehold improvements Shorter of asset life or term of lease
(H) 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 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.
(I) GOODWILL AND INTANGIBLE ASSETS
The Company's intangible assets include costs incurred to obtain
licenses and acquire contract rights and are amortized over their
estimated useful lives.
(Continued)
43
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2005 and 2004
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 (SFAS No. 142). 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. A
reporting unit is an operating segment as defined in SFAS No. 131,
Disclosures about Segments of an Enterprise and Related Information
(SFAS No. 131). The Company uses a third party valuation firm to
estimate 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 reporting unit'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 (SFAS No. 144). For the years ended December 31,
2005, 2004, and 2003, the Company tested its goodwill, as of December
31, at the reporting unit level in accordance with SFAS No. 142 and
concluded no impairment charge was required. The Company does not have
any intangible assets with indefinite useful lives.
(J) 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. The Company capitalizes the cost of
internal-use software in accordance with Statement of Position No.
98-1, Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use. These costs consist of payments made to
third parties and the salaries of employees working on such software
development and are amortized using the straight-line method over
their estimated useful lives, typically three to five years. The
Company distributed $1,102,000 of other assets of GSE in connection
with the spin-off on September 30, 2005, which primarily included
computer software development costs accounted for in accordance with
SFAS No. 86, Accounting for the Costs of Computer Software to Be Sold,
Leased, or Otherwise Marketed.
(K) 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 basis 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.
(Continued)
44
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2005 and 2004
(L) INCOME (LOSS) PER SHARE
Basic income (loss) per share is based upon the weighted average
number of common shares outstanding, including Class B Stock, during
the periods. Class B 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.
Income (loss) per share for the years ended December 31, 2005, 2004
and 2003 is as follows (in thousands, except per share amounts):
2005 2004 2003
------- ------- -------
Income (loss) used in computation:
Income (loss) from continuing
operations $ 8,457 $22,266 $(7,839)
Income (loss) from discontinued
operations (1,244) 254 (437)
------- ------- -------
Net income (loss) $ 7,213 $22,520 $(8,276)
======= ======= =======
Shares used in computation:
Weighted average shares
outstanding, basic 18,169 17,678 17,139
Dilutive effect of outstanding
stock options, warrants, and
non-vested stock units 777 629 --
------- ------- -------
Weighted average shares
outstanding, diluted 18,946 18,307 17,139
======= ======= =======
Income (loss) per common share:
Basic:
Income (loss) from continuing
operations $ 0.47 $ 1.26 $ (0.46)
Income (loss) from discontinued
operations (0.07) 0.01 (0.02)
------- ------- -------
Net income (loss) $ 0.40 $ 1.27 $ (0.48)
======= ======= =======
Diluted:
Income (loss) from continuing
operations $ 0.45 $ 1.22 $ (0.46)
Income (loss) from discontinued
operations (0.07) 0.01 (0.02)
------- ------- -------
Net income (loss) $ 0.38 $ 1.23 $ (0.48)
======= ======= =======
(Continued)
45
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2005 and 2004
For the years ended December 31, 2005, 2004, and 2003, stock options,
warrants, and convertible notes totaling 574,000, 1,954,000, and
1,249,000 shares, respectively, were not dilutive and were excluded
from the computation of diluted income per share.
The difference between the basic and diluted number of weighted
average shares outstanding for the years ended December 31, 2005, 2004
and 2003 represents dilutive non-vested stock units (2005 only), stock
options and warrants, computed under the treasury stock method using
the average market price during the period.
On January 19, 2006, the Company repurchased a total of 2,721,500
shares of Common Stock and Class B Stock, representing approximately
15% of the total outstanding shares of capital stock of the Company
(see Note 13).
(M) STOCK-BASED COMPENSATION
Pursuant to the stock-based incentive plans which are described more
fully in Note 12, the Company grants stock options, restricted stock,
stock units, and equity to officers, employees, and members of the
Board of Directors.
The Company applies the intrinsic-value-based method of accounting
prescribed by Accounting Principles Board (APB) Opinion No. 25,
Accounting for Stock Issued to Employees (APB No. 25), 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 stock-based compensation awards. Under this method,
compensation expense for stock options 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 (SFAS No. 123), 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. For other
fixed awards such as restricted stock and stock units, the Company
recognizes compensation expense over the vesting period based on the
market price of the underlying stock on the date of grant. The Company
applies the straight-line methodology for computing compensation
expense for fixed awards with pro-rata vesting.
(Continued)
46
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2005 and 2004
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
data):
2005 2004 2003
------ ------- -------
Net income (loss) - as reported $7,213 $22,520 $(8,276)
Add: stock-based compensation expense
determined under intrinsic value method and
included in reported net income, net of tax 183 25 9
Deduct: stock-based compensation expense
determined under the fair-value-based
method for all awards, net of tax (433) (633) (1,260)
------ ------- -------
Pro forma net income (loss) $6,963 $21,912 $(9,527)
Net income (loss) per share:
Basic - as reported $ 0.40 $ 1.27 $ (0.48)
Basic - pro forma $ 0.38 $ 1.24 $ (0.56)
Diluted - as reported $ 0.38 $ 1.23 $ (0.48)
Diluted - pro forma $ 0.37 $ 1.20 $ (0.56)
Disclosure of pro-forma information regarding net income and earnings
per share is required under SFAS No. 123, which uses the fair value
method. The per share weighted average fair value of the Company's
stock options granted during 2005, 2004, and 2003 was $3.35, $1.47,
and $2.95, respectively, on the date of grant using the Black-Scholes
option-pricing model with the following weighted average assumptions:
2005 2004 2003
--------- --------- ---------
Expected dividend yield --% --% --%
Risk-free interest rate 3.56% 1.70% 2.00%
Expected volatility 53.51% 32.24% 78.33%
Expected life 4.0 years 2.0 years 4.0 years
In December 2004, the FASB issued SFAS No. 123R, Share-Based Payment
(SFAS No. 123R), which changed the accounting for stock-based
compensation to require companies to expense stock options and other
equity awards based on their grant-date fair values. SFAS No. 123R is
discussed in more detail in the Accounting Standard Issued section
later in this Note.
(N) USE OF ESTIMATES
The preparation of financial statements in conformity with U.S.
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. On an
(Continued)
47
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2005 and 2004
ongoing basis, the Company evaluates the estimates used, including but
not limited to those related to revenue recognition, the allowance for
doubtful accounts receivable, impairments of goodwill and other
intangible assets, self-insurance liabilities, and income taxes.
Actual results could differ from these estimates.
(O) FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of financial instruments including cash and cash
equivalents, accounts receivable, accounts payable and short-term
borrowings approximate estimated market values because of
short-maturities and interest rates that approximate current rates.
The estimated fair value for the Company's long-term debt is equal to
the carrying amount as the stated interest rates approximate
prevailing market rates. 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.
(P) LEASES
The Company leases various office space, machinery and equipment under
noncancelable operating leases which have minimum lease obligations.
Several of the leases contain provisions for rent escalations based
primarily on increases in real estate taxes and operating costs
incurred by the lessor. Rent expense is charged to operations as
incurred except for escalating rents, which are charged to operations
on a straight-line basis over the terms of the leases.
(Q) LEGAL EXPENSES
The Company is involved, from time to time, in litigation and
proceedings arising out of the ordinary course of business. Legal
costs for services rendered in the course of these proceedings are
charged to expense as they are incurred.
(R) ACCOUNTING STANDARD ISSUED
In December 2004, the FASB issued SFAS No. 123R which revises SFAS No.
123 and supersedes APB No. 25. Currently, the Company does not record
compensation expense for certain stock-based compensation. Under SFAS
No. 123R, the Company will measure the cost of employee services
received in exchange for stock, based on the grant-date fair value
(with limited exceptions) of the stock award. Such cost will be
recognized over the period during which the employee is required to
provide service in exchange for the stock award (usually the vesting
period). The fair value of the stock award will be estimated using an
option-pricing model, with excess tax benefits, as defined in SFAS No.
123R, being recognized as an adjustment to additional paid-in capital.
The Company adopted SFAS No. 123R on January 1, 2006 using the
Modified Prospective Application method without restatement of prior
periods. Under this method, the Company recognizes compensation cost
for the unvested fair value of its outstanding awards as of January 1,
2006. Compensation cost for these awards will be based on the fair
value of the awards as disclosed on a pro forma basis under
(Continued)
48
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2005 and 2004
SFAS No. 123. The Company will account for awards that are granted,
modified, or settled after the adoption date in accordance with SFAS
No. 123R.
The Company estimates that it will recognize a total of approximately
$0.2 million of pre-tax compensation expense in 2006 and 2007 related
to the unvested portion of stock options outstanding as of December
31, 2005. In addition, the Company estimates that it will recognize
approximately $1.1 million of pre-tax compensation expense related to
the unvested portion of restricted stock awards outstanding as of
December 31, 2005, over a remaining vesting period of approximately
4.2 years. The Company has not yet developed an estimate of
compensation expense related to future grants of stock options or
other equity awards, which would result in additional expense under
SFAS No. 123R.
(3) DISCONTINUED OPERATIONS
Under SFAS No. 144, discontinued businesses are removed from the results of
continuing operations and are classified as discontinued in the
consolidated statements of operations through the effective date of
disposal. The following table sets forth the components of income (loss)
from discontinued operations for the years ended December 31, 2005, 2004,
and 2003 (in thousands):
2005 2004 2003
------- -------- -------
Revenue $17,617 $133,581 $34,803
Operating income (loss) (2,479) 2,027 277
Interest expense 251 1,284 722
Income tax expense (benefit) 208 573 (262)
Income (loss) from discontinued
operations, net of income taxes (1,244) 254 (437)
Discontinued operations for the years ended December 31, 2005, 2004 and
2003 include the results of GSE, which was distributed to the Company's
shareholders in connection with the spin-off effective September 30, 2005.
Discontinued operations for the years ended December 31, 2004 and 2003 also
include the results of MXL and Five Star, which were distributed to NPDC in
connection with the spin-off effective November 24, 2004.
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, 2005, 2004 and 2003 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 of NPDC has
been allocated to discontinued operations of NPDC using a basis of net
assets of each of the continuing and discontinued businesses as of November
24, 2004.
The Company provides corporate support services to GSE pursuant to a
management services agreement which extends through December 31, 2006 (see
Note 15). For the nine months ended September 30, 2005 and for the years
ended December 31, 2004 and 2003, the Company recorded revenues for
services provided to GSE of $525,000, $608,000, and $100,000, respectively.
The revenues and expenses related to these services, which were
intercompany transactions prior to the spin-off of GSE have been eliminated
in
(Continued)
49
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2005 and 2004
the accompanying consolidated statements of operations for the period from
January 1, 2005 through September 30, 2005 (the effective date of the
spin-off) and for the years ended December 31, 2004 and 2003.
The following table summarizes the carrying amount of the assets and
liabilities of GSE as of September 30, 2005, which are no longer
consolidated with the Company effective with the spin-off (in thousands):
Assets:
Cash and cash equivalents $ 804
Accounts and other receivables 2,487
Costs and estimated earnings in excess of billings
on uncompleted contracts 5,428
Prepaid expenses and other current assets 983
Property, plant and equipment, net 314
Goodwill and other assets 7,487
-------
Total assets 17,503
-------
Liabilities:
Accounts payable and accrued expenses 5,224
Short-term borrowings 1,182
Billings in excess of costs and estimated
earnings on uncompleted contracts 848
Long-term debt 782
Minority interest and other liabilities 2,685
-------
Total liabilities 10,721
-------
Net assets of GSE distributed in spin-off $ 6,782
=======
(Continued)
50
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2005 and 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
=======
(4) GOODWILL AND INTANGIBLE ASSETS
Changes in goodwill for the years ended December 31, 2005 and 2004 were as
follows (in thousands):
2005 2004
-------- -------
Beginning of year balance $ 63,867 $63,882
Foreign currency translation (141) 187
GSE goodwill balance distributed in spin-off (6,243) --
Distribution of goodwill to NPDC -- (202)
-------- -------
End of year balance $ 57,483 $63,867
======== =======
Intangible assets, which consist primarily of licenses and contract rights,
with finite lives are being amortized to expense over their estimated
useful lives. As of December 31, 2005, the Company's intangible assets with
finite lives had a weighted average useful life of six years. As of
December 31, 2005, the Company had no intangible assets with indefinite
useful lives. Amortization expense of intangible assets included in
continuing operations for 2005, 2004 and 2003 was $188,000, $82,000, and
$147,000, respectively. Amortization expense for intangible assets is
estimated to be $156,000 in 2006, $128,000 in 2007 and $73,000 in 2008,
2009 and 2010.
(Continued)
51
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2005 and 2004
(5) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following (in thousands):
DECEMBER 31,
------------------
2005 2004
------- --------
Machinery, equipment and vehicles 3,952 8,031
Furniture and fixtures 2,431 3,843
Leasehold improvements 236 1,204
------- --------
6,619 13,078
Accumulated depreciation and amortization (4,762) (10,405)
------- --------
$ 1,857 $ 2,673
======= ========
The Company distributed $314,000 and $5,553,000 in net property, plant and
equipment of GSE and NPDC, respectively, in connection with the spin-offs
on September 30, 2005 and November 24, 2004 (see Note 3). Depreciation
expense included in continuing operations in 2005, 2004, and 2003 was
$850,000, $1,143,000, and $1,548,000, respectively.
(6) SHORT-TERM BORROWINGS
General Physics has a $25 million Financing and Security Agreement (the
"Credit Agreement"), as amended, with a bank that expires on August 12,
2007 with annual renewal options. The Credit Agreement is secured by
certain assets of General Physics and provides for an unsecured guaranty
from the Company. The Company continued to guarantee GSE's borrowings under
the Credit Agreement (for which $1,500,000 is allocated for use by GSE)
subsequent to the spin-off on September 30, 2005. In March 2006, GSE repaid
its borrowings in full and ceased to be a Borrower under the Credit
Agreement.
The interest rate on the Credit Agreement is at the daily LIBOR market
index rate plus 3.00%. Based upon the financial performance of General
Physics, the interest rate can be reduced (as of December 31, 2005 the rate
was reduced to LIBOR plus 2.50% for General Physics). 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. General Physics was in compliance with all loan
covenants under the Credit Agreement as of December 31, 2005. The Credit
Agreement also contains certain restrictive covenants regarding 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 year, with the exception of a
waiver by the lender which permits General Physics to provide cash to the
Company to repurchase up to $5 million of additional shares of its
outstanding Common Stock (see Note 13).
As of December 31, 2005, the Company had no borrowings outstanding under
the Credit Agreement and there was approximately $20,558,000 of available
borrowings based upon 80% of eligible accounts receivable and 80% of
eligible unbilled receivables. As of December 31, 2004, the amount
outstanding under the Credit Agreement was approximately $6,068,000 with an
interest rate of approximately 5.4%.
(Continued)
52
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2005 and 2004
The Company repaid in full the $6,068,000 outstanding under the Credit
Agreement as of December 31, 2004 in January 2005, using the proceeds
received from the arbitration award (see Note 17).
(7) ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following (in
thousands):
DECEMBER 31,
-----------------
2005 2004
------- -------
Trade accounts payable $ 5,733 $ 8,936
Accrued salaries, vacation and benefits 7,852 8,677
Amount payable to NPDC 1,201 5,000
Other accrued expenses 5,529 10,606
------- -------
$20,315 $33,219
======= =======
The Company distributed $5,224,000 and $12,672,000 in accounts payable and
accrued expenses of GSE and NPDC, respectively, in connection with the
spin-offs on September 30, 2005 and November 24, 2004 (see Note 3).
(8) LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
DECEMBER 31,
-----------------
2005 2004
------- -------
6% conditional subordinated notes due 2008 (a) $ 7,500 $ 7,500
ManTech note (b) 5,251 5,251
Capital leases 93 190
------- -------
12,844 12,941
Less warrant related discount, net of accretion (1,464) (1,890)
------- -------
11,380 11,051
Less current maturities (71) (100)
------- -------
$11,309 $10,951
======= =======
(a) In August 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 at an exercise price of $8.00. The aggregate
purchase price for the Gabelli Notes and GP Warrants was $7,500,000.
(Continued)
53
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2005 and 2004
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 connection with the
spin-off on November 24, 2004. 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.
Subsequent to the spin-off of NPDC and GSE and in accordance with the
anti-dilution provisions of the warrant agreement for stock splits,
reorganizations, mergers and similar transactions, the number of GP
Warrants was adjusted to 984,116 and the exercise price was adjusted to
$5.85 per share. The GP warrants 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 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 and 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 $426,000, $372,000, and $127,000 for the years ended December
31, 2005, 2004, and 2003, respectively.
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 in 2003.
In connection with the spin-off of NPDC, 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) In October 2003, the Company issued a five-year 5% note due in full in
October 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.
(Continued)
54
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2005 and 2004
Aggregate annual maturities of long-term debt as of December 31, 2005 are
$71,000 in 2006, $22,000 in 2007, and $12,751,000 in 2008.
(9) EMPLOYEE BENEFIT PLAN
The Company offers a Retirement Savings Plan (the Plan) to its employees.
Eligible employees may elect to contribute at any time, and contributions
begin as soon as administratively feasible thereafter. The Plan permits
pre-tax contributions to the Plan by participants pursuant to Section
401(K) of the Internal Revenue Code (IRC). The Plan requires that the
Company match at least 25% of the participants' contributions, up to the
first 7% of base compensation for employees who have completed one year of
service. The Company may make additional matching contributions at its
discretion. In 2005, 2004, and 2003, the Company matched 50% of
participants' contributions in shares of its Common Stock, up to the first
7% of participants' base compensation. In 2005, 2004 and 2003, the Company
contributed 125,165, 135,921, and 188,317 shares of the Company's Common
Stock directly to the Plan with a value of approximately $986,000,
$971,000, and $1,053,000, respectively, which was recognized as expense in
the consolidated statements of operations.
(Continued)
55
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2005 and 2004
(10) INCOME TAXES
Income tax expense (benefit) for the years ended December 31, 2005, 2004
and 2003 is as follows (in thousands):
YEARS ENDED DECEMBER 31,
-------------------------
2005 2004 2003
------ ------- ------
Income tax expense (benefit) from
continuing operations $6,767 $(8,249) $1,148
Income tax expense (benefit) from
discontinued operations 208 573 (262)
------ ------- ------
$6,975 $(7,676) $ 886
====== ======= ======
The components of income tax expense (benefit) from continuing operations
are as follows (in thousands):
YEARS ENDED DECEMBER 31,
-------------------------
2005 2004 2003
------ ------- ------
Current:
Federal $ 136 $ 267 $ 185
State and local 642 298 513
Foreign 200 268 695
------ ------- ------
Total current 978 833 1,393
------ ------- ------
Deferred:
Federal 4,902 (7,768) --
State and local 1,100 (1,412) --
Foreign (213) 98 (245)
------ ------- ------
Total deferred 5,789 (9,082) (245)
------ ------- ------
Total income tax expense
(benefit) $6,767 $(8,249) $1,148
====== ======= ======
The deferred tax expense (benefit) excludes activity in the net deferred
tax assets relating to tax which is recorded directly to stockholders'
equity. Income (loss) before income tax expense (benefit) generated from
foreign entities was approximately $198,000, $404,000, and ($594,000),
respectively, in 2005, 2004 and 2003.
(Continued)
56
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2005 and 2004
The difference between the expense (benefit) for income taxes included in
income from continuing operations computed at the statutory rate and the
reported amount of tax expense (benefit) is as follows:
DECEMBER 31,
--------------------
2005 2004 2003
---- ----- -----
Federal income tax rate 35.0% 35.0% (35.0)%
Foreign, state and local taxes net of
Federal benefit 4.9 5.2 7.5
Permanent differences not deductible
for tax purposes 1.1 1.8 6.9
Valuation allowance adjustments 3.1 (87.0) 31.2
Change in effective rate, primarily net
operating loss carry forwards -- (17.0) --
Tax impact of foreign losses for which
no U.S. tax benefit has been provided (0.4) 0.6 1.5
Tax effect of permanent differences on
sales of securities -- -- 4.9
Other 0.7 2.5 0.2
---- ----- -----
Effective tax rate 44.4% (58.9)% 17.2%
==== ===== =====
As of December 31, 2005, the Company had $31,100,000 of Federal net
operating loss carryforwards, which expire during 2022 and 2023, and
$1,693,000 of available credit carryovers which may be carried over
indefinitely. The Company had $1,996,000 of foreign net operating loss
carryforwards for which a $783,000 valuation allowance has been provided.
(Continued)
57
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2005 and 2004
The tax effects of temporary differences between the financial reporting
and tax basis of assets and liabilities that are included in the net
deferred tax assets (liabilities) are summarized as follows (in thousands):
DECEMBER 31,
-----------------
2005 2004
------- -------
Deferred tax assets:
Allowance for doubtful accounts $ 453 $ 342
Accrued liabilities 500 1,739
Net Federal, State and Foreign operating loss carryforwards 12,790 16,383
Tax credit carryforwards 1,693 1,455
------- -------
Deferred tax assets 15,436 19,919
Deferred tax liabilities:
Property and equipment, principally due to
difference in depreciation and amortization 2,903 2,888
------- -------
Net deferred tax assets 12,533 17,031
Less valuation allowance (968) (389)
------- -------
Net deferred tax assets, net of valuation allowance 11,565 16,642
======= =======
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.
Management evaluates its projections of future taxable income each
reporting period and adjusts the valuation allowance as necessary. During
2005, the Company recorded an increase in its valuation allowance related
to foreign and state net operating losses by $579,000, based on historical
losses in the foreign jurisdictions and uncertainty regarding the
utilization of certain state net operating loss carryforwards. During 2004,
the spin-off of NPDC was completed, the arbitration gain 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 related to net operating losses by $12,197,000 due to
management's assessment of the Company's ability to realize its overall
deferred tax assets.
(Continued)
58
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2005 and 2004
(11) COMPREHENSIVE INCOME (LOSS)
The following are the components of comprehensive income (loss) (in
thousands):
YEARS ENDED DECEMBER 31,
--------------------------
2005 2004 2003
------ ------- -------
Net income (loss) $7,213 $22,520 $(8,276)
Other comprehensive (loss) income,
before income tax benefit:
Net unrealized loss on available-for-
sale securities (12) (1,703) (1,067)
Fair value change on interest rate
swap -- (82) 82
Foreign currency translation
adjustments (411) 237 139
------ ------- -------
6,790 20,972 (9,122)
Income tax benefit 5 687 410
------ ------- -------
Comprehensive income (loss) $6,795 $21,659 $(8,712)
====== ======= =======
As of December 31, 2005 and 2004, accumulated other comprehensive loss, net
of tax, was $1,087,000 and $761,000, respectively, and consisted of foreign
currency translation adjustments.
(12) STOCK-BASED COMPENSATION
Pursuant to the Company's Non-Qualified Stock Option Plan, as amended (the
"Non-Qualified Plan"), and 2003 Incentive Stock Plan (the "2003 Plan"), the
Company may grant awards of non-qualified stock options, incentive 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 Stock. The Company is authorized to grant an
aggregate of 4,237,515 shares under the Non-Qualified Plan and an aggregate
of 2,000,000 shares under the 2003 Plan. As of December 31, 2005, the
Company had non-qualified stock options, restricted stock, and non-vested
stock units outstanding under these plans as discussed below (see Note 2).
NON-QUALIFIED STOCK OPTIONS
Non-qualified stock options are granted with an exercise price not less
than the fair market value of the Common Stock at the date of grant, vest
over a period up to ten years, and expire at various terms up to ten years
from the date of grant. In accordance with APB No. 25, no compensation
expense is recognized for non-qualified stock options which are granted
with an exercise price equal to the fair market value of the Common Stock
at the date of grant (see Note 2).
(Continued)
59
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2005 and 2004
Summarized information for the Company's non-qualified stock options is as
follows:
WEIGHTED
NUMBER OF AVERAGE
OPTIONS OUTSTANDING OPTIONS EXERCISE PRICE
------------------- --------- --------------
December 31, 2002 2,612,997 $6.80
Granted 284,750 5.08
Exercised (248,983) 3.94
Cancelled/expired (96,367) 6.16
---------
December 31, 2003 2,552,397 6.91
Granted 126,000 7.13
Exercised (199,959) 4.33
Cancelled/expired (979,423) 8.98
Spin-off adjustment 322,814
---------
December 31, 2004 1,821,829 4.73
Granted 1,000 7.44
Exercised (321,393) 4.35
Cancelled/expired (90,091) 4.58
---------
December 31, 2005 1,411,345 $4.83
=========
In connection with the spin-off of NPDC on November 24, 2004, 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.
Weighted average characteristics of outstanding and exercisable stock
options by exercise price range as of December 31, 2005 were as follows:
OUTSTANDING OPTIONS EXERCISABLE OPTIONS
-------------------------------- --------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
RANGE OF NUMBER OF YEARS EXERCISE NUMBER OF EXERCISE
EXERCISE PRICES OPTIONS REMAINING PRICE OPTIONS PRICE
--------------- --------- --------- -------- --------- --------
$2.82 - $4.00 668,277 2.14 $3.48 606,060 $3.47
$4.01 - $5.50 192,043 3.09 4.23 190,127 4.22
$5.51 - $7.50 502,025 1.50 6.29 458,912 6.31
$7.51 - $12.84 49,000 2.22 10.53 34,000 9.51
--------- ---- ---------
1,411,345 2.05 $4.83 1,289,099 $4.75
========= =========
(Continued)
60
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2005 and 2004
RESTRICTED STOCK AND STOCK UNIT AWARDS
The Company granted 268,000 restricted stock and non-vested stock units to
certain Company officers and employees during 2005. These awards have a
weighted-average grant date fair value of $7.40 per share and vest to the
recipients at various dates, up to five years, based on fulfilling service
requirements. In accordance with APB No. 25, the Company recognizes
compensation expense for these awards by amortizing the value of the market
price of the underlying stock on the date of grant to compensation expense
over the vesting period. The Company recorded compensation expense related
to these awards of approximately $249,000 in 2005 and $536,000 in 2004.
Certain shares of restricted stock granted during 2005 were fully vested
upon grant because they were attributed to 2004 service, but have a sale
restriction until December 31, 2007.
(13) COMMON STOCK AND CLASS B STOCK
The holders of Common Stock are entitled to one vote per share and the
holders of Class B 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 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 are primarily related to stock-based compensation (see Note 12),
warrants (see below), and the conversion of long-term debt (see Note 8).
On January 19, 2006, the Company completed a restructuring of its capital
stock, which included the repurchase of 2,121,500 shares of its Common
Stock at a price of $6.80 per share, the repurchase of 600,000 shares of
its Class B Stock at a price of $8.30 per share, and the exchange of
600,000 shares of its Class B Stock into 600,000 shares of Common Stock for
a cash premium of $1.50 per exchanged share. The repurchase prices and
exchange premium were based on a fairness opinion rendered by an
independent third party valuation firm. The repurchase and exchange
transactions were negotiated and approved by a Special Committee of the
Board of Directors and had the effect of eliminating all outstanding shares
of the Company's Class B Stock. The repurchase and exchange was financed
with approximately $20.3 million of cash on hand.
Prior to the restructuring, the 1,200,000 outstanding shares of Class B
Stock collectively represented approximately 41% of the aggregate voting
power of the Company since the Class B Stock has ten votes per share. The
repurchase of a total of 2,721,500 shares represents approximately 15% of
the total outstanding shares of capital stock of the Company. Of the
600,000 Class B shares exchanged for common shares, 568,750 shares were
owned by the Chairman of the Executive Committee of the Company.
In connection with the repurchase and exchange transactions, the Company
has authorized the repurchase of up to $5 million of additional common
shares from time to time in the open market, subject to prevailing business
and market conditions and other factors. Pursuant to the General Physics'
Credit Agreement, as amended, the lender has permitted the borrowers under
the Credit Agreement to provide cash to the Company to repurchase up to $5
million of additional shares of the Company's outstanding Common Stock (see
Note 6).
(Continued)
61
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2005 and 2004
WARRANTS
As of December 31, 2005, there were outstanding warrants to purchase
300,000 and 984,116 shares of the Company's Common Stock at exercise prices
of $2.67 and $5.85 per share, respectively, as adjusted in accordance with
the anti-dilution provisions of the warrant agreements. These warrants are
exercisable at any time and expire in June 2011 and August 2008,
respectively.
(14) BUSINESS SEGMENTS
In 2005, the Company re-evaluated its reportable business segments under
SFAS No. 131, as a result of a change in the Chief Operating Decision Maker
(CODM) of the Company. Based on the information which the CODM reviews in
order to assess the performance of the Company and make decisions regarding
the allocation of resources, the Company determined that General Physics
consists of two reportable business segments: 1) Process, Energy &
Government; and 2) Manufacturing & Business Process Outsourcing (BPO). The
Company is organized by operating group primarily based upon the services
performed and markets served by each group. The reportable business
segments represent an aggregation of the Company's operating segments in
accordance with the aggregation criteria in SFAS No. 131. GSE ceased to be
a reportable business segment effective with the spin-off on September 30,
2005 and its results are reported in discontinued operations in the
consolidated statements of operations through the effective date of the
spin-off. As a result of the change in its reportable business segments,
all prior period segment information has been restated to conform to the
current year's presentation.
The Process, Energy & Government segment provides engineering consulting,
design and evaluation services regarding facilities, the environment,
processes and systems, staff augmentation, curriculum design and
development, and training and technical services primarily to federal and
state governmental agencies, large government contractors, petroleum and
chemical refining companies, and electric power utilities.
The Manufacturing & BPO segment provides training, curriculum design and
development, staff augmentation, e-Learning services, system hosting,
integration and help desk support, business process and training
outsourcing, and consulting and technical services to large companies in
the automotive, pharmaceutical, electronics, and other industries as well
as to governmental clients.
For the years ended December 31, 2005, 2004 and 2003, sales to the United
States government and its agencies represented approximately 40%, 38%, and
38%, respectively, of the Company's revenue. Revenue from the Department of
the Army, which is included in the Process, Energy & Government segment,
accounted for approximately 20%, 19%, and 22% of the Company's revenue for
the years ended December 31, 2005, 2004, and 2003, respectively. No other
customer accounted for more than 10% of the Company's revenue in 2005.
(Continued)
62
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2005 and 2004
The Company does not allocate the following corporate items to the
segments: other income and interest expense; selling, general and
administrative expense; and income tax expense. Inter-segment revenue is
eliminated in consolidation and is not significant.
The following table sets forth the revenue and operating results
attributable to each reportable segment 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,
------------------------------
2005 2004 2003
-------- -------- --------
Revenue:
Process, Energy & Government $ 85,953 $ 84,193 $ 76,932
Manufacturing & BPO 90,127 80,873 57,043
Elimination of intercompany revenue with GSE (525) (608) (100)
-------- -------- --------
$175,555 $164,458 $133,875
======== ======== ========
Operating income (loss):
Process, Energy & Government $ 10,419 $ 9,046 $ 7,575
Manufacturing & BPO 3,158 (165) (3,342)
Elimination of intercompany revenue with GSE (525) (608) (100)
Corporate and other (2,100) (6,479) (10,439)
-------- -------- --------
10,952 1,794 (6,306)
Interest expense (1,518) (1,937) (2,903)
Other income, gain on litigation settlement,
net, gain on arbitration award, net,
gains on sales of marketable securities,
net and valuation adjustment of liability
for warrants 5,790 14,160 2,518
-------- -------- --------
Income (loss) from continuing operations
before income taxes $ 15,224 $ 14,017 $ (6,691)
======== ======== ========
(Continued)
63
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2005 and 2004
Additional information relating to the Company's business segments is as
follows (in thousands):
DECEMBER 31,
-------------------
2005 2004
-------- --------
Identifiable assets:
Process, Energy & Government $ 59,428 $ 64,127
Manufacturing & BPO 67,918 62,621
GSE -- 17,208
Corporate and other 7,295 12,079
-------- --------
$134,641 $156,035
======== ========
DECEMBER 31,
-----------------
2005 2004
------- -------
Goodwill:
Process, Energy & Government $27,990 $27,990
Manufacturing & BPO 29,493 29,634
GSE -- 6,243
------- -------
$57,483 $63,867
======= =======
YEARS ENDED DECEMBER 31,
------------------------
2005 2004 2003
------ ------ ------
Additions to property, plant and equipment:
Process, Energy & Government $ 48 $ 71 $ 85
Manufacturing & BPO 596 786 498
GSE and NPDC 124 691 1,314
Corporate and other 260 236 226
------ ------ ------
$1,028 $1,784 $2,123
====== ====== ======
Depreciation and amortization:
Process, Energy & Government $ 126 $ 178 $ 263
Manufacturing & BPO 661 809 1,036
GSE and NPDC 844 1,582 804
Corporate and other 1,459 1,515 825
------ ------ ------
$3,090 $4,084 $2,928
====== ====== ======
Identifiable assets by business segment are those assets that are used in
the Company's operations in each segment. Corporate and other assets
consist primarily of cash and cash equivalents, other assets, and deferred
tax assets. Amounts reflected for GSE and NPDC are for periods prior to the
respective spin-off dates (see Note 3).
(Continued)
64
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2005 and 2004
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,
------------------------------
2005 2004 2003
-------- -------- --------
United States $157,343 $148,938 $124,195
United Kingdom 12,879 11,010 7,131
Other 5,333 4,510 2,549
-------- -------- --------
$175,555 $164,458 $133,875
======== ======== ========
Information about the Company's total assets in different geographic
regions is as follows (in thousands):
DECEMBER 31,
-------------------
2005 2004
-------- --------
United States $128,543 $146,986
United Kingdom 4,353 4,230
Other 1,745 4,819
-------- --------
$134,641 $156,035
======== ========
(15) RELATED PARTY TRANSACTIONS
Refer to Note 13 for a description of certain transactions pursuant to
which the Company repurchased or exchanged shares of its Common Stock and
Class B Stock held by certain related parties.
Related Party Transactions with Company Officers
On April 1, 2002, the Company's then Chief Executive Officer (CEO) entered
into an incentive compensation agreement with the Company pursuant to which
he was eligible to receive from the Company up to five payments 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, he earned an
incentive payment of $1,000,000 each. The Company recorded compensation
expense of $2,000,000 and $3,000,000 for the years ended December 31, 2004
and 2003, respectively, which is included in selling, general and
administrative expense.
To the extent there were any outstanding loans from the Company to the CEO
at the time an incentive payment was payable, the Company had 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 applied the entire incentive compensation earned by
the CEO during 2004 and 2003 against the accrued interest and principal
balances on his outstanding loans.
As of December 31, 2005, the Company had a note receivable from the
Company's Chairman of the Executive Committee and former CEO, of
approximately $619,000, after offsetting his incentive compensation earned
in 2004 and 2003, as discussed above. The note bears interest at the prime
rate and is
(Continued)
65
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2005 and 2004
secured by Class B Stock and certain other assets owned by him. All unpaid
principal on the loans and accrued interest are due on May 31, 2007. In
addition, as of December 31, 2005, the Company had other employee advances
and unsecured loans receivable from him, totaling approximately $221,000.
On January 19, 2006, he repaid approximately $853,000 of approximately
$972,000 of total indebtedness (including principal and interest) owed by
him to the Company, including the entire remaining balance of the note
receivable discussed above.
The Company had loans receivable from other Company officers of
approximately $18,000 and $65,000 as of December 31, 2005 and 2004,
respectively.
Management Services Agreements Between NPDC and the Company
Prior to the spin-off, NPDC was a wholly-owned subsidiary of the Company.
In connection with the spin-off, NPDC entered into a separate management
agreement with the Company pursuant to which the Company provides certain
general corporate services to NPDC.
Corporate Tax, Legal Support, and Executive Management Consulting Services
The Company has four employees, including the CEO and Chief Legal Officer,
who also provide services to NPDC under a management services agreement,
for which the Company is reimbursed for such services. Services under the
agreement relate to corporate federal and state income taxes, corporate
legal services, corporate secretarial administrative support, and executive
management consulting. The term of the agreement extends for three years
from the date of the spin-off, or through November 24, 2007, and may be
terminated by either NPDC or the Company on or after July 30, 2006 with 180
days prior written notice, with the exception of fees relating to
compensation for NPDC's CEO for which NPDC is liable through May 31, 2007
pursuant to his employment agreement. Pursuant to an amendment to the
management services agreement effective July 1, 2005, NPDC pays the Company
an annual fee of not less than $969,500 as compensation for these services,
payable in equal monthly installments. Prior to this amendment, the Company
charged NPDC a management fee based on an allocation of actual general and
administrative costs incurred by the Company on behalf of NPDC. For the
year ended December 31, 2005, NPDC reimbursed the Company approximately
$1,141,000 for services under the management agreement, which is included
as a reduction of selling, general and administrative expense.
Corporate Office Lease
NPDC continues to occupy a portion of corporate office space leased by the
Company. Pursuant to the management services agreement, a portion of the
management fee paid by NPDC to the Company represents compensation for use
of this space. The Company's lease extends through December 31, 2006.
Management Services Agreement Between GSE and the Company
Pursuant to a management services agreement, the Company provides corporate
support services to GSE. GSE pays the Company an annual fee of $685,000 for
these services and can terminate the agreement by providing sixty days
written notice. The management services agreement can be renewed by GSE for
successive one-year terms and was renewed through December 31, 2006.
Subsequent to the spin-off of
(Continued)
66
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2005 and 2004
GSE effective September 30, 2005, the Company continues to provide GSE with
corporate support services through December 31, 2006.
(16) COMMITMENTS, GUARANTEES, AND CONTINGENCIES
Commitments
OPERATING LEASES
The Company has various noncancelable leases for real property and
machinery and equipment. Such leases expire at various dates with, in some
cases, options to extend their terms.
Minimum rentals under long-term operating leases are as follows (in
thousands):
REAL MACHINERY AND
PROPERTY EQUIPMENT TOTAL
-------- ------------- -------
2006 $ 2,628 $ 976 $ 3,604
2007 1,969 546 2,515
2008 1,603 54 1,657
2009 1,327 2 1,329
2010 1,246 -- 1,246
Thereafter 4,843 -- 4,843
------- ------ -------
Total $13,616 $1,578 $15,194
======= ====== =======
Certain of the leases contain provisions for rent escalation based
primarily on increases in a specified Consumer Price Index, real estate
taxes and operating costs incurred by the lessor. Rent expense included in
continuing operations was approximately $3,541,000, $3,834,000, and
$4,200,000 for 2005, 2004 and 2003, respectively.
EMPLOYMENT AGREEMENTS
The Company has employment agreements with certain of its officers, which
provide for committed compensation of $3,713,000, $1,623,000, and $341,000
in 2006, 2007, and 2008, respectively. The Company's employment agreements
have various employment terms expiring through 2008, and contain
non-compete covenants and change of control and termination provisions.
INDEMNIFICATION AGREEMENTS
In December 2005, the Company entered into indemnification agreements with
the directors and certain executive officers of the Company. The
indemnification agreements provide that the Company will contractually
indemnify and advance expenses on behalf of such persons if he or she is
made or threatened to be made a party or a participant in a proceeding by
reason of the fact that he or she was a director and/or officer of the
Company, as applicable, subject to certain exceptions, to the fullest
extent permitted by applicable law.
Guarantees
The Company guarantees certain operating 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 Five Star's
leases remained in effect subsequent to the spin-off of NPDC.
Subsequent to the spin-off of NPDC, the Company continues to guarantee the
repayment of two debt obligations of MXL, which are secured by property and
certain equipment of MXL. The aggregate
(Continued)
67
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2005 and 2004
outstanding balance as of December 31, 2005 was $1.4 million. The Company's
guarantees expire upon the maturity of the debt obligations which are
October 1, 2006 and March 31, 2011.
The Company continued to guarantee GSE's borrowings under the Credit
Agreement (for which $1,500,000 is allocated for use by GSE) subsequent to
the spin-off on September 30, 2005. As of December 31, 2005, GSE had
borrowings of $1,182,000 under the Credit Agreement. In March 2006, GSE
repaid its borrowings in full and ceased to be a Borrower under the Credit
Agreement (see Note 6).
(17) 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 in
cash. The Company sought actual damages in the amount of $74,067,044 plus
interest, punitive damages in an amount to be determined at trial, and
costs, subject to reduction as set forth below.
The complaint, which was filed 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 were asserted. Although
discovery had not yet been completed, defendants made a motion for summary
judgment, which was submitted in April 2002. Before the motion was decided,
MCI filed for bankruptcy. As a result of MCI's bankruptcy filing, the state
court did not decide the motion.
The defendants other than MCI then made an application to the court to stay
the fraud action until the Company and EDS completed a later-commenced
arbitration, in which the Company alleged 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. In a decision dated May 9, 2003, the court
granted the motion and stayed the fraud action until the arbitration was
completed.
The arbitration hearings took place in May 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 $12,273,575 in damages and $6,016,109 in
pre-award interest. (The damages sought in the fraud action are subject to
reduction by the $12,273,575 in damages awarded in the arbitration.) On
December 30, 2004, EDS made a payment of $18,428,486, which included
$138,802 of post-award interest, to General Physics to satisfy its
obligation under the arbitration award, which cash was held in escrow as of
December 31, 2004. EDS subsequently agreed that the arbitration award was
final and binding and that it would take no steps of any kind to vacate or
otherwise challenge the award. As a result of the foregoing, the Company
recognized a gain on the arbitration award, net of legal fees and expenses,
of $13,660,000 in 2004.
(Continued)
68
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2005 and 2004
Once the arbitration was concluded, the state court lifted the stay of the
fraud claim against the defendants other than MCI. In November 2005, trial
began on the Company's claims against EDS and Systemhouse relating to false
representations concerning the financial condition of Learning
Technologies' United Kingdom operation. On November 23, 2005, after more
than four days of trial, the Company agreed to settle its claims against
EDS and Systemhouse. Pursuant to the settlement, EDS made a cash payment to
the Company in the amount of $9,000,000 on December 14, 2005.
In connection with the spin-off of NPDC by the Company on November 24,
2004, 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 in
excess of $15,000,000 (net of litigation expenses and taxes incurred, if
any), received with respect to the foregoing arbitration and litigation
claims. After payment of legal fees associated with the litigation, the net
proceeds received by the Company for the settlement were approximately
$6,880,000. The Company had previously incurred approximately $1,328,000 of
expenses with respect to the litigation, so the Company recognized a gain
on the litigation settlement, net of legal fees and expenses, of
approximately $5,552,000 in 2005.
Pursuant to the agreement with NPDC, the Company made a $5,000,000
additional capital contribution to NPDC out of the proceeds of the
arbitration award in January 2005. The Company had a payable to NPDC of
approximately $1,201,000 as of December 31, 2005 for the additional capital
contribution relating to the litigation proceeds received in December 2005.
These additional capital contributions to NPDC were accounted for as
components of the net assets distributed to NPDC in connection with the
spin-off, through a reduction of additional paid-in capital.
The fraud action against MCI had been stayed as a result of the bankruptcy
of MCI and the Company's claims against MCI were not tried or settled with
the claims against EDS. On December 13, 2005, the Bankruptcy Court heard
argument on the summary judgment that MCI had made in state court in April
2002, before its bankruptcy filing. The motion has not yet been decided.
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.
(Continued)
69
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2005 and 2004
(18) 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,
2005 2005 2005 2005 2005
--------- -------- ------------- ------------ ------------
Revenue $43,560 $43,659 $44,059 $44,277 $175,555
Gross profit 5,544 6,368 6,688 6,391 24,991
Income from
continuing operations 842 1,441 1,459 4,715 8,457
Loss from discontinued
operations, net of income
taxes (374) (221) (417) (232) (1,244)
Net income 468 1,220 1,042 4,483 7,213
Per common share data
Basic:
Income from
continuing operations $ 0.05 $ 0.08 $ 0.08 $ 0.25 $ 0.47
Loss from discontinued
operations, net of
income taxes (0.02) (0.01) (0.02) (0.01) (0.07)
------- ------- ------- ------- --------
Net income $ 0.03 $ 0.07 $ 0.06 $ 0.24 $ 0.40
======= ======= ======= ======= ========
Diluted:
Income from
continuing operations $ 0.04 $ 0.08 $ 0.07 $ 0.25 $ 0.45
Loss from discontinued
operations, net
of income taxes (0.02) (0.01) (0.02) (0.01) (0.07)
------- ------- ------- ------- --------
Net income $ 0.02 $ 0.07 $ 0.05 $ 0.24 $ 0.38
======= ======= ======= ======= ========
The sum of the quarterly earnings per share amounts may not equal the total
for the year due to the effects of rounding and dilution as a result of
issuing common shares during the year.
(Continued)
70
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2005 and 2004
THREE MONTHS ENDED
--------------------------------------------------- YEAR ENDED
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, DECEMBER 31,
2004 2004 2004 2004 2004
--------- -------- ------------- ------------ ------------
Revenue $35,159 $39,477 $44,178 $45,644 $164,458
Gross profit 3,977 4,728 5,323 5,311 19,339
Income (loss) from
continuing operations (61) 77 600 21,650 22,266
Income (loss) from discontinued
operations, net of income
taxes 192 316 (171) (83) 254
Net income 131 393 429 21,567 22,520
Per common share data:
Basic:
Income from
continuing operations $ -- $ -- $ 0.03 $ 1.21 $ 1.26
Income (loss) from
discontinued
operations,
net of income taxes 0.01 0.02 (0.01) -- 0.01
------- ------- ------- ------- --------
Net income $ 0.01 $ 0.02 $ 0.02 $ 1.21 $ 1.27
======= ======= ======= ======= ========
Diluted:
Income from
continuing operations $ -- $ -- $ 0.03 $ 1.15 $ 1.22
Income (loss) from
discontinued
operations,
net of income taxes 0.01 0.02 (0.01) -- 0.01
------- ------- ------- ------- --------
Net income $ 0.01 $ 0.02 $ 0.02 $ 1.15 $ 1.23
======= ======= ======= ======= ========
The sum of the quarterly earnings per share amounts may not equal the total for
the year due to the effects of rounding and dilution as a result of issuing
common shares during the year.
(19) SUBSEQUENT EVENTS
On January 19, 2006, the Company repurchased a total of 2,721,500 shares of
Common Stock and Class B Stock representing approximately 15% of the total
outstanding shares of capital stock of the Company. See Note 13 for further
details regarding this transaction.
On February 14, 2006, the Company announced that it had completed the
acquisition of Peters Management Consultancy Ltd. (PMC), a performance
improvement and training company in the United Kingdom. The purchase price
was $1.3 million in cash, subject to a post-closing adjustment based on
actual net equity, plus contingent payments of up to $0.9 million based
upon the achievement of certain performance targets during the first year
following completion of the acquisition.
On March 8, 2006, GSE repaid its borrowings of $1,182,000 under General
Physics' Credit Agreement using proceeds received from a separate financing
transaction. In connection with this transaction, GSE ceased to be a
Borrower under General Physics' Credit Agreement (see Note 6).
71
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A: CONTROLS AND PROCEDURES
(a) 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, 2005. Based upon that evaluation, the Chief
Executive Officer and Chief Financial Officer concluded that the Company's
disclosure controls and procedures were not effective as of such date because of
the material weakness described in Management's Annual Report on Internal
Control over Financial Reporting (Item 9A(b)).
(b) Management's Annual Report on Internal Control over Financial Reporting
The Company's management is responsible for establishing and maintaining
adequate internal control over financial reporting as defined in Exchange Act
Rule 13a-15(f). Under the supervision and with the participation of our
management, the Company carried out an evaluation of the effectiveness of the
design and operation of the Company's internal control over financial reporting
as of December 31, 2005, based on the framework in "Internal Control -
Integrated Framework" issued by the Committee of Sponsoring Organizations of the
Treadway Commission ("COSO").
In conducting the aforementioned evaluation and assessment, management
identified the following material weakness in internal control over financial
reporting as of December 31, 2005:
The Company's account reconciliation and management review controls over
the accounting for income taxes were not operating effectively because of
the lack of adequate tax accounting expertise as of December 31, 2005. As a
result, there was a material misstatement in the Company's income tax
provision that was corrected prior to the issuance of the 2005 consolidated
financial statements.
Based on the material weakness described above, management concluded that the
Company's internal control over financial reporting was not effective as of
December 31, 2005. Management's assessment of the effectiveness of its internal
control over financial reporting as of December 31, 2005 has been audited by
KPMG LLP, an independent registered public accounting firm, whose report appears
in Item 8.
(c) Changes in Internal Control over Financial Reporting
No change in our internal control over financial reporting occurred during our
fourth fiscal quarter of 2005 that has materially affected, or is reasonably
likely to materially affect, our internal control over financial reporting.
Regarding the material weakness described in Management's Annual Report on
Internal Control over Financial Reporting above, the Company will continue to
revise its processes and procedures over the accounting for income taxes and
hired a tax director on December 31, 2005 which we believe will provide the
Company with the necessary technical skills to perform, review and analyze
complex tax accounting activities. We believe these
72
additional controls will remediate the material weakness; however, such
determination will not occur until these additional controls have been in place
for a period of time sufficient to demonstrate that the controls are operating
effectively.
(d) LIMITATIONS OF EFFECTIVENESS OF CONTROLS
Internal control over financial reporting cannot provide absolute assurance of
achieving financial reporting objectives because of its inherent limitations.
Internal control over financial reporting is a process that involves human
diligence and compliance and is subject to lapses in judgment and breakdowns
resulting from human failures. Internal control over financial reporting also
can be circumvented by collusion or improper management override. Because of
such limitations, there is a risk that material misstatements may not be
prevented or detected on a timely basis by internal control over financial
reporting. However, these inherent limitations are known features of the
financial reporting process. Therefore, it is possible to design into the
process safeguards to reduce, though not eliminate, this risk.
ITEM 9B: OTHER INFORMATION
None.
73
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 2006 Annual Meeting of Shareholders.
74
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
----
Reports of Independent Registered Public Accounting Firm 32
Consolidated Balance Sheets - December 31, 2005 and 2004 35
Consolidated Statements of Operations - Years ended December 31, 2005, 2004 and 2003 36
Consolidated Statements of Stockholders' Equity and Comprehensive Income (Loss)
- Years ended December 31, 2005, 2004 and 2003 37
Consolidated Statements of Cash Flows - Years ended December 31, 2005, 2004 and 2003 38
Notes to Consolidated Financial Statements 40
(a)(2) Financial Statement Schedule
Schedule II - Schedule of Valuation and Qualifying Accounts i
Schedules other than Schedule II are omitted as not applicable or required.
(a)(3) Exhibits
Consent of Independent Registered Public Accounting Firm *
* Filed herewith.
75
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, 2006
By /s/ Scott N. Greenberg
-------------------------------------
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
---------- -----
Principal executive officer and
director:
By /s/ Scott N. Greenberg Chief Executive Officer and Director
----------------------------------
Principal financial and accounting
officer:
By /s/ Sharon Esposito-Mayer Executive Vice President and Chief
---------------------------------- Financial Officer
Directors:
/s/ Harvey P. Eisen Chairman of the Board
-------------------------------------
/s/ Jerome I. Feldman Director
-------------------------------------
/s/ Marshall S. Geller Director
-------------------------------------
/s/ Richard Pfenniger Director
-------------------------------------
/s/ Ogden R. Reid Director
-------------------------------------
76
EXHIBIT NUMBER
--------------
3.1 Restated Certificate of Incorporation of the Registrant filed
on October 6, 1995. Incorporated herein by reference to Exhibit
3 of the Registrant's Form 10-Q for the 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. Incorporated herein by reference to Exhibit 3.3
of the Registrant's Form 10-K for the year ended December 31,
2004.
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,
2003.
10.3 General Physics Corporation 2004 Bonus Plan. Incorporated
herein by reference to Exhibit 10.3 of the Registrant's Form
10-K for the year ended December 31, 2004.
10.4 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
quarter ended June 30, 1999.
10.5 Amended and Restated Incentive Compensation Agreement dated as
of June 11, 2003 between the Registrant and Jerome I. Feldman.
Incorporated herein by reference to Exhibit 10 to the
Registrant's Form 10-Q for the quarter ended September 30,
2003.
10.6 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
Registrant's Form 10-Q for the quarter ended September 30,
2003.
10.7 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.
10.8 Stock Exchange Agreement dated January 19, 2006 by and between
the Registrant and Jerome I. Feldman. Incorporated herein by
reference to Exhibit 10.3 of the Registrant's Form 8-K dated
January 25, 2006.
77
EXHIBIT NUMBER
--------------
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
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 Lock-Up Agreement between the Registrant and Scott N. Greenberg
in connection with a stock grant authorized by the Compensation
Committee of the Board of Directors on March 23, 2005.
Incorporated herein by reference to Exhibit 10.3 of the
Registrant's Form 10-Q for the quarter ended June 30, 2005.
10.12 Separation Agreement, dated as of September 3, 2002, between
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.
10.13 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
quarter ended June 30, 2001.
10.14 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.
10.15 Stock Unit Agreement between the Registrant and Andrea D.
Kantor dated April 11, 2005. Incorporated herein by reference
to Exhibit 10.5 of the Registrant's Form 10-Q for the quarter
ended June 30, 2005.
10.16 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.
10.17 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.
10.18 Lock-Up Agreement between the Registrant and Douglas E. Sharp
in connection with a stock grant authorized by the Compensation
Committee of the Board of Directors on March 23, 2005.
Incorporated herein by reference to Exhibit 10.4 of the
Registrant's Form 10-Q for the quarter ended June 30, 2005.
10.19 Employment Agreement, dated August 16, 2005, between the
Registrant and Sharon Esposito-Mayer.*
10.20 Stock Unit Agreement, dated April 11, 2005, between the
Registrant and Sharon Esposito-Mayer.*
10.21 Form of Employment Agreement between the Registrant's
subsidiary, General Physics Corporation and certain officers.
Incorporated herein by reference to Exhibit 10.1 of the
Registrant's Form 10-Q for the quarter ended June 30, 2005.
78
EXHIBIT NUMBER
--------------
10.22 Form of Stock Unit Agreement between the Registrant's
subsidiary, General Physics Corporation and certain officers.
Incorporated herein by reference to Exhibit 10.2 of the
Registrant's Form 10-Q for the quarter ended June 30, 2005.
10.23 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.
10.24 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.
10.25 Financing 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.
10.26 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.
10.27 First Amendment dated March 30, 2004 to the Financing and
Security Agreement dated August 13, 2003. *
10.28 Second Amendment dated July 2, 2004 to the Financing and
Security Agreement dated August 13, 2003.*
10.29 Third Amendment dated July 30, 2004 to the Financing and
Security Agreement dated August 13, 2003.*
10.30 Fourth Amendment dated January 19, 2006 to the Financing and
Security Agreement dated August 13, 2003 by General Physics
Corporation, Skillright, Inc., GSE Systems, Inc., GSE Power
Systems, Inc., MSHI, Inc. and Wachovia Bank, National
Association. Incorporated herein by reference to the
Registrant's Form 8-K dated January 25, 2006.
10.31 Forbearance letter dated August 4, 2005. Incorporated herein by
reference to the Registrant's Form 10-Q for the quarter ended
June 30, 2005.
10.32 Waiver letter dated February 17, 2006.*
10.33 Rights Agreement, dated as of June 23, 1997, between the
Registrant 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.
79
EXHIBIT NUMBER
--------------
10.34 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.
10.35 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.
10.36 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 10-K for
the year ended December 31, 1998.
10.37 Stock Exchange Agreement dated January 19, 2006 by and between
the Registrant and Martin M. Pollak. Incorporated herein by
reference to Exhibit 10.4 of the Registrant's Form 8-K dated
January 25, 2006.
10.38 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.
10.39 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 quarter ended March 31, 2002.
10.40 Stock Repurchase Agreement dated January 19, 2006 by and
between the Registrant and Bedford Oak Partners, L.P.
Incorporated herein by reference to Exhibit 10.2 of the
Registrant's Form 8-K filed on January 25, 2006.
10.41 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 quarter ended March 31, 2002.
10.42 Stock Repurchase Agreement dated January 19, 2006 by and
between the Registrant and EGI-Fund (02-04) Investors, L.L.C.
Incorporated herein by reference to Exhibit 10.1 of the
Registrant's Form 8-K filed on January 25, 2006.
10.43 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
quarter ended March 31, 2002.
10.44 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.
10.45 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.
10.46 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.
80
EXHIBIT NUMBER
--------------
10.47 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.
10.48 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.
10.49 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.
10.50 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.
10.51 Mortgage Security Agreement and Assignment of Leases dated
August 14, 2003 between GP Strategies Corporation and Gabelli
Funds, LLC. Incorporated herein by reference to Exhibit 10.04
to the Registrant's Form 10-Q for the quarter ended June 30,
2003.
10.52 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.
10.53 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.
81
EXHIBIT NUMBER
--------------
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.
10.60 Amendment dated July 1, 2005, to the Management Agreement dated
July 30, 2004 between the Registrant and National Patent
Development Corporation. Incorporated herein by reference to
Exhibit 10.7 of the Registrant's Form 10-Q for the quarter
ended June 30, 2005.
10.61 Form of Management Agreement between National Patent
Development Corporation and the Registrant. Incorporated herein
by references to Exhibit 10.2 of National Patent Development
Corporation Form S-1, Registration No. 333-118568.
10.62 Termination Agreement dated June 30, 2005 of the Management
Agreement dated July 30, 2004, between National Patent
Development Corporation and the Registrant. Incorporated herein
by reference to Exhibit 10.8 of the Registrant's Form 10-Q for
the quarter ended June 30, 2005.
10.63 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.
10.64 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.
10.65 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.
10.66 Form of Indemnification Agreement. Incorporated herein by
reference to Exhibit 10.1 of the Registrant's Form 8-K dated
December 23, 2005.
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*
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*
82
EXHIBIT NUMBER
* Filed herewith.
83
GP STRATEGIES CORPORATION AND SUBSIDIARIES
SCHEDULE OF VALUATION AND QUALIFYING ACCOUNTS
SCHEDULE II
(In thousands)
BALANCE AT BALANCE AT
BEGINNING DEDUCTIONS END OF
ALLOWANCE FOR DOUBTFUL ACCOUNTS (A) OF YEAR ADDITIONS (B) YEAR
----------------------------------- ---------- --------- ---------- ----------
Year ended December 31, 2005: $ 917 535 (286) $1,166
Year ended December 31, 2004: $1,739 191 (1,013) $ 917
Year ended December 31, 2003: $ 854 1,130 (245) $1,739
(A) Deducted from accounts and other receivables on Consolidated Balance
Sheets.
(B) Write-off of uncollectible accounts, net of recoveries. For the years ended
December 31, 2005 and 2004, deductions include allowance distributed in the
spin-offs of GSE Systems, Inc. ($22) and National Patent Development
Corporation ($418).
i