UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[x] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended March 31,June 30, 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 or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
777 Westchester Avenue, White Plains, New York 10604
- ------------------------------------------------------------------------------------------------------------------------------ -----
(Address of principal executive offices) (Zip Code)
(914)-249-9700
- ------------------------------------------------------------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
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 whether the registrant is an accelerated filer (as
defined in Rule 12(b)-2 of the Exchange Act). Yes [X] No [ ]
Indicate the number of shares outstanding of each of issuer's classes of
common stock as of May 4,July 29, 2005:
Common Stock 16,850,61216,977,248 shares
Class B Capital 1,200,000 shares
GP STRATEGIES CORPORATION AND SUBSIDIARIES
TABLE OF CONTENTS
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets -
March 31,June 30, 2005 and December 31, 2004 1
Condensed Consolidated Statements of Operations-
Three Months and Six Months Ended March 31,June 30, 2005 and 2004 2
Condensed Consolidated Statements of Cash Flows -
ThreeSix Months Ended March 31,June 30, 2005 and 2004 3
Notes to Condensed Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 1617
Item 3. Quantitative and Qualitative Disclosure About Market Risk 2127
Item 4. Controls and Procedures 2127
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 23
Item 2. Changes in Securities and Use of Proceeds 23
Item 3. Defaults Upon Senior Securities 23
Item 4. Submission of Matters to a Vote of Security Holders 2329
Item 5. Other Information 2329
Item 6. Exhibits 2330
Signatures 2431
PART I: FINANCIAL INFORMATION
ITEM 1: CONSOLIDATED FINANCIAL STATEMENTS
GP STRATEGIES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)THOUSANDS)
MARCH 31,JUNE 30,
2005 DECEMBER 31,
(UNAUDITED) 2004
----------- ------------
ASSETS
Current assets:
Cash and cash equivalents $ 5,4896,901 $ 2,417
Cash held in escrow from arbitration settlement --- 13,798
Accounts and other receivables, less allowance for doubtful accounts
of $738$886 in 2005 and $917 in 2004 25,84629,412 31,114
Costs and estimated earnings in excess of billings on uncompleted contracts 19,02319,204 16,834
Prepaid expenses and other current assets 7,2767,098 5,828
----------- --------------------- ---------
Total current assets 57,63462,615 69,991
----------- --------------------- ---------
Property, plant and equipment 12,966 13,078
Accumulated depreciation (10,513) (10,405)
--------- ---------
Property, plant and equipment, net 2,7442,453 2,673
Intangible assets:
Goodwill 62,35162,295 62,380
Patents, licenses and contract rights 1,821 1,821
Accumulated amortization of patents, licenses and contract rights (947) (797)
--------- ---------
Intangible assets, net 935 1,024
----------- ------------
63,28663,169 63,404
Deferred tax assets 16,30415,565 16,651
Other assets 3,4542,699 3,316
----------- --------------------- ---------
Total assets $ 143,422146,501 $ 156,035
=========== ===================== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 9489 $ 100
Short-term borrowings 700675 6,068
Accounts payable and accrued expenses 26,17824,709 33,219
Billings in excess of costs and estimated earnings on uncompleted contracts 8,7549,807 10,003
----------- --------------------- ---------
Total current liabilities 35,72635,280 49,390
Long-term debt less current maturities 11,02911,784 10,951
Other non-current liabilities 1,7273,042 1,739
----------- --------------------- ---------
Total liabilities 48,48250,106 62,080
----------- --------------------- ---------
Minority interest 1,9581,715 2,335
Stockholders' equity:
Common stock, par value $0.01 per share 168170 167
Class B capital stock, par value $0.01 per share 12 12
Additional paid-in capital 172,481174,633 171,852
Accumulated deficit (78,456)(77,235) (78,923)
Unearned compensation (1,317) -
Accumulated other comprehensive loss (496)(856) (761)
Note receivable from stockholder (619) (619)
Treasury stock, at cost (108) (108)
----------- --------------------- ---------
Total stockholders' equity 92,98294,680 91,620
----------- --------------------- ---------
Total liabilities and stockholders' equity $ 143,422146,501 $ 156,035
=========== ===================== =========
See accompanying notes to the condensed consolidated financial statements.
1
GP STRATEGIES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED MARCH 31,
-----------------------SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------- ------------------------
2005 2004 2005 2004
--------- --------- --------- ---------
Revenue $ 49,85350,376 $ 42,72047,074 $ 100,229 $ 89,794
Cost of revenue 43,274 37,01942,388 40,774 85,662 77,792
--------- --------- --------- ---------
Gross profit 6,579 5,7027,988 6,300 14,567 12,002
Selling, general and administrative expenses (5,451) (4,891)(5,301) (5,116) (10,752) (10,007)
--------- --------- --------- ---------
Operating income 1,128 8112,687 1,184 3,815 1,995
Interest expense (380) (633)(433) (506) (813) (1,139)
Other income (including interest income of $46 in 2005
and $4 in 2004) 194 138(expense) (91) 95 103 233
--------- --------- --------- ---------
Income from continuing operations
before income tax expense
and minority interest 942 3162,163 773 3,105 1,089
Income tax expense (851) (273)(1,186) (376) (2,037) (649)
--------- --------- --------- ---------
Income from continuing operations
before minority interest 91 43977 397 1,068 440
Minority interest 377 (27)243 (116) 620 (143)
--------- --------- --------- ---------
Income from continuing operations 468 161,220 281 1,688 297
Income from discontinued operations,
net of income taxes -- 115- 113 - 228
--------- --------- --------- ---------
Net income $ 4681,220 $ 131394 $ 1,688 $ 525
========= ========= ========= =========
Per common share data:
Basic
Income from continuing operations $ 0.030.07 $ -0.02 $ 0.09 $ 0.02
Income from discontinued operations - - - 0.01
--------- --------- --------- ---------
Net income $ 0.07 $ 0.02 $ 0.09 $ 0.03
0.01========= ========= ========= =========
Diluted
Income from continuing operations $ 0.07 $ 0.02 $ -0.09 $ 0.02
Income from discontinued operations --- - - 0.01
--------- --------- --------- ---------
Net income $ 0.07 $ 0.02 0.01$ 0.09 $ 0.03
========= ========= ========= =========
See accompanying notes to the condensed consolidated financial statements.
2
GP STRATEGIES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREESIX MONTHS ENDED MARCH 31,JUNE 30, 2005 AND 2004
(UNAUDITED)
(DOLLARS IN THOUSANDS)
2005 2004
----------------- --------
Cash flows from operating activities:
Income from continuing operations $ 4681,688 $ 16297
Income from discontinued operations, net of income taxes -- 115
---------- 228
-------- --------
Net income 468 1311,688 525
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Depreciation and amortization 732 8751,499 1,872
Collection of deposit in escrow 13,798 -
Issuance of stock for retirement savings plan
and non-cash compensation expense (recovery) 60 (122)517 107
Gain on sales of marketable securities -- (301)- (381)
Changes in other operating items net of effect of
acquisitions and disposals: (6,969) (4,518)
---------(9,348) (6,205)
-------- --------
Net cash provided (used) by operations 8,089 (3,935)
---------8,154 (4,082)
-------- --------
Cash flows from investing activities:
Additions to property, plant and equipment (404) (374)(431) (930)
Proceeds from sales of marketable securities -- 872
---------- 1,012
Other investing activities 14 -
-------- --------
Net cash provided (used) by investing activities (404) 498
---------(417) 82
-------- --------
Cash flows from financing activities:
Proceeds from (repayment of) short-term borrowings, net (5,368) 3,374(5,393) 3,677
Issuance of subordinated convertible note, net of
$500 restricted cash placed in escrow account 1,500 -
Repayment of long-term debt - (564)
Proceeds from exercised stock options 391 218
Repayment931 325
Deferred financing costs (182) -
Payments of long-term debt -- (266)
Other financing activities 86 --
---------obligations under capital leases (47) (250)
-------- --------
Net cash provided (used) by financing activities (4,891) 3,326
---------(3,191) 3,188
-------- --------
Effect of exchange rate changes on cash and cash equivalents 278 3
---------(62) (7)
-------- --------
Net increase (decrease) in cash and cash equivalents 3,072 (108)4,484 (819)
Cash and cash equivalents at the beginning of the period 2,417 4,416
----------------- --------
Cash and cash equivalents at the end of the period $ 5,4896,901 $ 4,308
=========3,597
======== ========
See accompanying notes to the condensed consolidated financial statements.
3
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Three and six months ended March 31,June 30, 2005 and 2004
(Unaudited)
(1) BASIS OF PRESENTATION
GP Strategies Corporation ("the Company") was incorporated in Delaware in
1959. As ofThrough March 31, 2005, the Company'sCompany operated under two business
consistssegments which consisted of its training and workforce development
business operated by General Physics Corporation ("General Physics" or
"GP") and its simulation business operated by GSE Systems Inc. ("GSE").
General Physics is a workforce development company that improves the
effectiveness of organizations by providing training, management
consulting, e-Learning solutions and engineering services that are
customized to meet the specific needs of clients. GSE develops and
delivers business and technology solutions by applying simulation
software, systems and services to energy, process and manufacturing
industries worldwide.
On April 26, 2005, the Board of Directors elected Scott N. Greenberg, who
was then President and Chief Financial Officer of the Company, to the
additional position of Chief Executive Officer ("CEO") of the Company,
succeeding Jerome I. Feldman. As a result of Mr. Greenberg's appointment
as CEO, 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. Based on the
information which Mr. Greenberg reviews in order to assess the performance
of the Company and make decisions regarding the allocation of resources,
the Company determined that it has three reportable business segments
effective with Mr. Greenberg's appointment as CEO. General Physics now
consists of two reportable business segments: 1) Process, Energy &
Government; and 2) Manufacturing & Business Process Outsourcing. GSE
continues to be one reportable business segment. Information regarding
these business segments is discussed in more detail in Note 7, Business
Segments.
On November 24, 2004, the Company completed the spin-off of National
Patent Development Corporation ("NPDC"). Subsequent to the spin-off, the
results of operations of NPDC are presented as discontinued in our
condensed consolidated financial statements for the three and six months
ended June 30, 2004.
During the six months ended June 30, 2005, GSE incurred a significant
operating loss. GSE's revenue and profitability were primarily impacted by
a lower volume of orders logged in 2004 coupled with the delay of two
large international simulator orders which GSE now anticipates receiving
in the third quarter of 2005 (see Note 5).
On June 20, 2005, the Board of Directors approved the Company's plan to
spin-off its 57% interest in GSE through a special dividend to the
Company's stockholders. Stockholders will receive in the spin-off a
pro-rata share of GSE common stock based on the number of shares of the
Company's common stock or Class B stock held on the record date, which
will be determined on a future date. On July 8, 2005, GSE filed a
registration statement with the Securities and Exchange Commission
relating to the shares of GSE to be distributed in the spin-off. The
Company anticipates that the record date will be set and the spin-off will
occur shortly after such registration statement is declared effective.
The condensed consolidated financial statements include the operations of
the Company and its majority-owned subsidiaries. The minority interest
balance is comprised of the minority share in GSE of 43% as of June 30,
2005 and 42% as of December 31 2004, which the Company did not own. All
significant intercompany balances and transactions have been eliminated.
4
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Three and six months ended June 30, 2005 and 2004
(Unaudited)
The accompanying condensed consolidated balance sheet as of March 31,June 30, 2005,
and
the condensed consolidated statements of operations for the three and six
months ended June 30, 2005, and the condensed consolidated statement of
cash flows for the threesix months ended March 31,June 30, 2005 have not been audited,
but have been prepared in conformity with U.S. generally accepted
accounting principles for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. These
condensed consolidated financial statements should be read in conjunction
with the audited consolidated financial statements for the year ended
December 31, 2004 as presented in our Annual Report on Form 10-K/A dated
April 5,May 16, 2005. In the opinion of management, this interim information
includes all material adjustments, which are of a normal and recurring
nature, necessary for a fair presentation. The results for the 2005
interim periods are not necessarily indicative of results to be expected
for the entire year. Certain amounts infor 2004 have been reclassified to
conform with the presentation for 2005.
Prior to November 24, 2004, the Company had five operating business
segments: Manufacturing & Process, Information Technology, Simulation,
Optical Plastics and Home Improvement Distribution. On November 24, 2004,
the Company completed the distribution, which we refer to as the
"spin-off," of the common stock of National Patent Development Corporation
("NPDC"), which comprised our Optical Plastics and Home Improvement
Distribution segments and certain other non-core assets.
Subsequent to the spin-off, we have reclassified the operations of NPDC as
discontinued in our condensed consolidated financial statements for the
three months ended March 31, 2004.
General Physics is a workforce development company that improves the
effectiveness of organizations by providing training, management
consulting, e-Learning solutions and engineering services that are
customized to meet the specific needs of clients.
GSE develops and delivers business and technology solutions by applying
simulation software, systems and services to energy, process and
manufacturing industries worldwide. In the first quarter of 2005, GSE
incurred a significant operating loss. GSE's revenue and profitability
were primarily impacted by a lower volume of orders logged.
4
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Three months ended March 31, 2005 and 2004
(Unaudited)
The condensed consolidated financial statements include the operations of
the Company and its majority-owned subsidiaries. The minority interests
balance as of March 31, 2005 and December 31, 2004 is comprised of the 43%
minority share in GSE, which the Company did not own. All significant
intercompany balances and transactions have been eliminated.
(2) INCOME PER SHARE
Basic income 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 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 per share for the three and six months ended June 30, 2005 and 2004
is as follows (in thousands, except per share data):
5
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Three and six months ended March 31,June 30, 2005 and 2004
(Unaudited)
Income per share (EPS) for the three months ended March 31, 2005 and 2004
is as follows (in thousands, except per share data):
THREE MONTHS ENDED MARCH 31,
-------------------------SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- ----------------------
2005 2004 ----------2005 2004
------- ------- ------- ----------
INCOME USED IN COMPUTATION:
Income from continuing operations $ 4681,220 $ 16281 $ 1,688 $ 297
Income from discontinued operations - 115
----------113 - 228
------- ------- ------- ----------
Net income $ 4681,220 $ 131
==========394 $ 1,688 $ 525
======= ======= ======= ==========
SHARES USED IN COMPUTATION:
Basic weighted average shares
outstanding 17,917 17,57418,141 17,634 18,029 17,600
Dilutive impact of stock options, warrants
and warrants 1,081 593
----------non-vested restricted stock units 620 519 850 548
------- ------- ------- ----------
Diluted weighted average shares
outstanding 18,998 18,167
==========18,761 18,153 18,879 18,148
======= ======= ======= ==========
INCOME PER COMMON SHARE:
Basic
Income from continuing operations $ 0.030.07 $ -0.02 $ 0.09 $ 0.02
Income from discontinued operations - - - 0.01
----------------- ------- ------- ----------
Net income $ 0.07 $ 0.02 $ 0.09 $ 0.03
$ 0.01
================= ======= ======= ==========
Diluted
Income from continuing operations $ 0.07 $ 0.02 $ -0.09 $ 0.02
Income from discontinued operations - - - 0.01
----------------- ------- ------- ----------
Net income $ 0.07 $ 0.02 $ 0.01
==========0.09 $ 0.03
======= ======= ======= ==========
The Company issued 76,000 shares of restrictedfully vested stock inawards during the periodfirst
quarter of 2005 which are included in the basic weighted average shares
outstanding. For the three and six months ended March 31,June 30, 2005, the dilutive effect of stock options,
warrants, and convertible notes which totaledtotaling 574,000 areshares for both periods were
not included
since they are anti-dilutive.dilutive and were excluded from the computation of diluted income per share.
For the three and six months ended June 30, 2004, stock options, warrants, and
convertible notes totaling 2,063,000 for both periods 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 three and six months ended June 30, 2005 and 2004 represents
dilutive stock options and warrants, computed under the treasury stock method
using the average market price during the period. The difference between the
basic and diluted number of weighted average shares outstanding for the three
months ended March 31,June 30, 2005 and 2004
representsalso includes dilutive non-vested restricted stock
options and warrants to purchase sharesawards granted during the second quarter of common stock2005, computed under the treasury
stock method using the average market price during the period.price.
6
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Three and six months ended March 31,June 30, 2005 and 2004
(Unaudited)
(3) STOCK BASED COMPENSATION
The Company applies the intrinsic-value-based method of accounting
prescribed by Accounting Principles Board ("APB") Opinion No. 25,
Accounting for Stock IssuesIssued to Employees, and related interpretations
including Financial Accounting Standards Board ("FASB") Interpretation No.
44, Accounting for Certain Transactions Involving Stock Compensation, an
interpretation of APB Opinion No. 25, to account for its fixed-plan stock
options. Under this method, compensation expense is recorded on the date
of grant only if the current market price of the underlying stock exceeds
the exercise price of the options. SFAS No. 123, Accounting for
Stock-Based Compensation, as amended, established accounting and
disclosure requirements using a fair-value-based method of accounting for
stock-based employee compensation plans. As allowed by SFAS No. 123, the
Company has elected to continue to apply the intrinsic-value-based method
of accounting described above, and has adopted only the disclosure
requirements of SFAS No. 123.
The following table illustrates the effect on net income if the
fair-value-based method had been applied to all outstanding and unvested
awards for the three and six months ended March 31,June 30, 2005 and 2004 (Dollars in(in
thousands, except per share data):
THREE MONTHS ENDED MARCH 31,
--------------------SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------ ------------------------
2005 2004 -------- -------2005 2004
--------- --------- --------- ---------
Net income - as reported $ 4681,220 $ 131394 $ 1,688 $ 525
Compensation expense, net of tax:
Company stock options (74) (84)(61) (54) (135) (138)
GSE stock options - (9) (672) (9)
-------- -------(18)
--------- --------- --------- ---------
Pro forma net income (loss) $ (278)1,159 $ 38
======== =======331 $ 881 $ 369
========= ========= ========= =========
Net income (loss) per share:
Basic - as reported $ 0.030.07 $ 0.010.02 $ 0.09 $ 0.03
Basic - pro forma $ (0.02)0.06 $ --0.02 $ 0.05 $ 0.02
Diluted - as reported $ 0.07 $ 0.02 $ 0.010.09 $ 0.03
Diluted - pro forma $ (0.02)0.06 $ --0.02 $ 0.05 $ 0.02
7
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Three and six months ended March 31,June 30, 2005 and 2004
(Unaudited)
The Company granted 1,000 options during the three months ended March 31,first quarter of 2005 and no
options during the second quarter of 2005. The per share weighted-average
fair value of the Company's stock options granted during the threesix months
ended March 31,June 30, 2005 and 2004 were $3.35 and $1.46, respectively, on the
date of grant using the modified Black-Scholes option-pricing model with
the following weighted-average assumptions:
THREESIX MONTHS
ENDED MARCH 31,
-------------------------JUNE 30,
------------------------------
2005 2004
----- --------------- ----------
Expected dividend yield 0% 0%
Risk-free interest rate 3.56% 1.70%1.69%
Expected volatility 53.51% 34.08%
Expected life 4.0 years 2.0 years
GSE granted 600,000 stock options with an average exercise price of $1.85
during the three months ended March 31,first quarter of 2005, all of which immediately vested.
Outstanding GSE options relate to grants to employees and directors of
GSE. GSE did not grant any stock options during the company.second quarter of
2005.
In December 2004, the FASB issued SFAS No. 123R, Share-Based Payment,
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 Note
11, Accounting Standard Issued.
(4) LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
MARCH 31,JUNE 30, DECEMBER 31,
2005 2004
----------------- ------------
6% conditional subordinated notes due 2008 (a) $ 7,500 $ 7,500
ManTech Note (b) 5,251 5,251
8% senior subordinated secured convertible note due 2009,
net of warrant and conversion option discount of $1,324 (c) 676 -
Other 160132 190
-------- ---------
12,911--------
13,559 12,941
Less warrant related discount, net of accretion (1,788)(1,686) (1,890)
-------- ---------
11,123--------
11,873 11,051
Less current maturities (94)(89) (100)
-------- -----------------
$ 11,02911,784 $ 10,951
========= ================= ========
(a) Pursuant to a Note and Warrant Purchase Agreement dated August 8,
2003, the Company issued and sold to four Gabelli Funds $7,500,000
aggregate principal amount of 6% Conditional Subordinated
8
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Three and six months ended June 30, 2005 and 2004
(Unaudited)
Notes due 2008 (the "Gabelli Notes") and 937,500 warrants ("GP
Warrants"), each entitling the holder thereof to purchase (subject
to adjustment) one share of the Company's common stock. The
aggregate purchase price for the Gabelli Notes and GP Warrants was
$7,500,000.
8
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Three months ended March 31, 2005 and 2004
(Unaudited)
The Gabelli Notes bear interest at 6% per annum payable
semi-annually commencing on December 31, 2003 and mature in August
2008. The Gabelli Notes are secured by a mortgage on the Company's
former property located in Pawling, New York which was distributed
to NPDC. In addition, at any time that less than $1,875,000 of the
principal amount of the Gabelli Notes are outstanding, the Company
may defease the obligations secured by the mortgage and obtain a
release of the mortgage by depositing with an agent for the
Noteholders, bonds or government securities with an investment grade
rating by a nationally recognized rating agency which, without
reinvestment, will provide cash on the maturity date of the Gabelli
Notes in an amount not less than the outstanding principal amount of
the Gabelli Notes.
The GP Warrants have an exercise price of $6.14 per share, as
amended following the spin-off of NPDC, and are exercisable at any
time until August 2008. The exercise price may be paid in cash, by
delivery of the Gabelli Notes, or a combination of the two. The GP
Warrants contain anti-dilution provisions for stock splits,
reorganizations, mergers and similar transactions. The fair value of
the GP Warrants at the date of issuance was $2,389,000, which
reduced long-term debt in the accompanying condensed consolidated
balance sheets. This amount is being accreted as additional interest
expense using the effective interest rate over the term of the
Gabelli Notes. The Gabelli Notes have a yield to maturity of 15.436%
based on the discounted value. Accretion charged as interest expense
was approximately $102,000$103,000 and $89,000 during for the three months ended
March 31,June 30, 2005, respectively, and approximately $205,000 and $177,000
for the six months ended June 30, 2005 and 2004, respectively.
In connection with the spin-off, the Company contributed the Pawling
property, subject to the mortgage, to MXL Industries, Inc. (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) The Company has a five-year 5% note due in full on October 21, 2008
in the principal amount of $5,250,955 to ManTech International.
Interest is payable quarterly. Each year during the term of the
note, the holder of the note has the option to convert up to 20% of
the original principal amount of the note into common stock of the
Company at the then market price of the Company's common stock, but
only in the event that the Company's common stock is trading at $10
per share or more. In the event that less than 20% of the principal
amount of the note is not converted in any year, such amount not
converted will be eligible for conversion in each subsequent year
until converted or until the note is repaid in cash.
(c) On May 26, 2005, GSE issued and sold to Dolphin Direct Equity
Partners, LP, a Senior Subordinated Secured Convertible Note in the
aggregate principal amount of $2,000,000, maturing March 31, 2009
(the "Dolphin Note"), and a seven-year warrant to purchase 380,952
shares of GSE
9
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Three and six months ended March 31,June 30, 2005 and 2004
(Unaudited)
common stock at an exercise price of $2.22 per share (the "GSE
Warrant"). The Dolphin Note is convertible into 1,038,961 shares of
GSE common stock at a conversion price of $1.925 per share and
accrues interest at 8% payable quarterly. Both the convertible note
and the warrant are subject to anti-dilution provisions for stock
splits, reorganizations, mergers and similar transactions. The
aggregate purchase price for the Dolphin Note and GSE Warrant was
$2,000,000. At the date of issuance, the fair value of the GSE
Warrant was $374,000 and the fair value of the conversion option of
the Dolphin Note was $959,000, which were recorded as other
noncurrent liabilities, with the offset recorded as an original
issue discount (OID). The OID is accreted over the term of the
Dolphin Note and charged to interest expense and the unamortized
balance reduces long-term debt in the accompanying condensed
consolidated balance sheets. The noncurrent liabilities related to
the GSE Warrant and the conversion option are marked to market
through earnings on a quarterly basis in accordance with Emerging
Issues Task Force (EITF) 00-19, Accounting for Derivative Financial
Instruments Indexed to, and Potentially Settled in a Company's Own
Stock.
(5) SHORT-TERM BORROWINGS
(a) GENERAL PHYSICS
General Physics and General Physics' subsidiary, SkillRight, Inc.,
have a two-yearthree-year $25 million Financing and Security Agreement (the
Credit Agreement)"Credit Agreement") with a bank that expires on August 13, 2006 with
annual renewal options. The "Credit Agreement"Credit Agreement is secured by certain
assets of General Physics and provides for an unsecured guaranty
from the Company.
The interest rate on the Credit Agreement is at the daily LIBOR
market index rate plus 3.00%, which as of March 31,June 30, 2005 was
approximately 5.85%6.32%. Based upon the financial performance of General
Physics, the interest rate can be reduced. The Credit Agreement
contains covenants with respect to General Physics' minimum tangible
net worth, leverage ratio, interest coverage ratio and its ability
to make capital expenditures. General Physics was in compliance with
all loan covenants under the Credit Agreement as of June 30, 2005.
The Credit Agreement also contains certain restrictive covenants
including a prohibition on future acquisitions, incurrence of debt
and the payment of dividends. General Physics is currently
restricted from paying dividends or management fees to the Company
in excess of $1,000,000 in any fiscal year. On March 9, 2005,
General Physics received a waiver to loan GSE a maximum of $1.0
million to satisfy any GSE short-term capital requirements (the "GSE Loan") as described below.requirements. In
connection with GSE's sale and issuance of the Dolphin Note and GSE
Warrant (see note 4), General PhysicsPhysics' commitment to loan GSE $1.0
million was in compliance with all loan covenants under the Credit Agreement
as of March 31, 2005.terminated.
The Company repaid in full the $6,068,000 outstanding under the
Credit Agreement as of December 31, 2004 in the first quarter of
2005, using the proceeds received from the arbitration settlement.settlement as
discussed in more detail in Note 8, Litigation. As of March 31,June 30, 2005,
there werethe Company had no borrowings outstanding under the Credit Agreement
and there was approximately $18,395,000$20,712,000 of available borrowings
based upon 80% of eligible accounts receivable and 80% of eligible
unbilled receivables.
10
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Three and six months ended June 30, 2005 and 2004
(Unaudited)
(b) GSE
On March 30, 2004, under the terms of the General Physics' Credit
Agreement, as amended, $1,500,000 of General Physics' Credit
Agreement was allocated for use by GSE. The Credit Agreement was
amended to provide for additional collateral consisting of
substantially all of GSE's assets, as well as certain covenants
specific to GSE. It provides for borrowings by GSE up to 80% of
eligible accounts receivable and 80% of eligible unbilled
receivables, up to a maximum of $1,500,000. The interest rate is
based upon the daily LIBOR market index rate plus 3%, with interest
only payments due monthly (5.85 %(6.32% as of March 31,June 30, 2005). The Company
agreed to guarantee GSE's borrowings under the Credit Agreement, as
amended, in consideration for a fee pursuant to the Management
Services Agreement.its management
services agreement with GSE. There were no borrowings outstanding at
December 31, 2004. As of March 31,June 30, 2005, the amount outstanding under the
Credit Agreement was $700,000GSE had borrowings of
$675,000 and a letter of credit for $50,000 and approximately
$800,000 was$775,000 available to be borrowed under the Credit Agreement. The
Company has classified the borrowings outstanding under the Credit
Agreement as a current obligation.
The Credit Agreement requires GSE to comply with certain financial
ratios. At both March 31, 2005 and June 30, 2005, GSE was not in
compliance with its debt service coverage ratio. The Company
obtained a letter dated May 9,August 4, 2005 in which the lender has
agreed to forebearforbear from exercising its rights under the credit agreementCredit
Agreement against the Borrowersborrowers with respect to this event of
default by GSE until the earlier to occur of (a)
delivery of the quarterlyannual financial statements for
the period ending
June 30, 2005 or (b) August 15,year ended December 31, 2005. The lender will charge GSE Loan, if made by General Physics, will be due and payable by
GSE no later than June 9, 2006 and will be on such other terms and
conditionsa fee
of approximately $2,500 as are agreed upon by General Physics and GSE. The GSE
Loan would be reduced by any amounts owed by GSE tocompensation for the Company or
General Physics, primarily in connection with the Management
Services Agreement, which aggregated approximately $570,000 as of
March 31, 2005. Therefore, the availability under the GSE Loan was
approximately
10
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Three months ended March 31, 2005 and 2004
(Unaudited)
$430,000 as of March 31, 2005. GSE is seeking additional debt and/or
equity financing, although there can be no assurance that such debt
or equity financing will be available. The Company is currently
evaluating various alternatives with respect to its investment in
GSE. The Company expects to support GSE with its short-term capital
requirements as disclosed. Additional financial support from the
Company would require Board of Director and bank approval.waiver.
(6) COMPREHENSIVE INCOME
The following are the components of comprehensive income (loss) (in
thousands):
THREE MONTHS ENDED MARCH 31,
----------------------SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- --------------------
2005 2004 ---------2005 2004
------- ------- -------- -------
Net income $ 4681,220 $ 131394 $ 1,688 $ 525
Other comprehensive income
before income tax expense:
Net unrealized gain (loss) on
available-for-sale securities 191 (914)(197) 88 (6) (826)
Net unrealized loss on interest
rate swap -- (303)- 352 - 49
Foreign currency translation
adjustment 149 (59)
---------(240) (53) (91) (112)
------- ------- -------- 808 (1,145)-------
783 781 1,591 (364)
Income tax benefit (expense) relating
to items of other comprehensive
income (loss) (75) 475
---------77 (172) 2 303
------- ------- -------- -------
Comprehensive income (loss),
net of tax $ 733860 $ (670)
=========609 $ 1,593 $ (61)
======= ======= ======== =======
11
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Three and six months ended March 31,June 30, 2005 and 2004
(Unaudited)
The components of accumulated other comprehensive loss are as follows (in
thousands):
MARCH 31,JUNE 30, DECEMBER 31,
2005 2004
-------- --------------------- -----------
Net unrealized gain on available-for-sale securities $ 21114 20
Net unrealized gain on interest rate swap -- --
Foreign currency translation adjustment (624)(864) (773)
-------- ------------- ------
Accumulated other comprehensive loss before tax (413)(850) (753)
Accumulated income tax expense related to unrealized gain
on available-for-sale securities (83)(6) (8)
-------- ------------- ------
Accumulated other comprehensive loss,
net of tax $ (496)(856) (761)
======== ============= ======
(7) BUSINESS SEGMENTS
The operationsAs discussed in Note 1, the Company re-evaluated its reportable business
segments during the second quarter of 2005 due to the appointment of Scott
N. Greenberg as CEO. Based on the information which Mr. Greenberg reviews
in order to assess the performance of the Company currently consistand make decisions
regarding the allocation of resources, the Company determined that it has
three reportable business segments effective with Mr. Greenberg's
appointment as CEO. General Physics now consists of two reportable
business segments: 1) Process, Energy & Government; and 2) Manufacturing &
Business Process Outsourcing (BPO). GSE continues to be one reportable
business segment. As a result of the following twochange in its reportable business
operating segments, General Physics and GSE, by which the Company is managed.
General Physicshas restated the segment information below for all
prior periods presented to conform to the current period's presentation.
The Process, Energy & Government segment provides performance improvementengineering consulting,
design and evaluation services regarding facilities, the environment,
processes and productssystems, staff augmentation, curriculum design and
development, and training and technical services primarily to multinationalfederal 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, system hosting, integration and help desk
support, business process outsourcing, and consulting and technical
services to large companies in manufacturing and process industries, electric
power utilitiesthe automotive, pharmaceutical,
electronics, and other commercial andindustries as well as to governmental customers.clients.
GSE provides simulation solutions and services to the nuclear and fossil
electric utility industry, as well as process industries such as the
chemical and petrochemical industries. In addition, GSE provides plant
monitoring, security access and control and signal analysis monitoring and
optimization software primarily to the power industry.
The Company does not allocate the following corporate items: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.
12
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Three and six months ended March 31,June 30, 2005 and 2004
(Unaudited)
The following tables set forth the revenue and operating income of each of
the Company's operating segments and includes a reconciliation of segment
revenue to consolidated revenue and operating income to consolidated
income from continuing operations before income taxes and minority
interest (in thousands):
THREE MONTHS ENDED MARCH 31,
---------------------SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------ ------------------------
2005 2004 -------- --------2005 2004
--------- --------- --------- ---------
REVENUE:
General PhysicsProcess, Energy & Government $ 43,72720,968 $ 35,30919,354 $ 43,101 $ 38,242
Manufacturing & BPO 22,853 20,279 44,447 36,700
GSE 6,126 7,411
-------- --------6,555 7,441 12,681 14,852
--------- --------- --------- ---------
$ 49,85350,376 $ 42,720
======== ==========47,074 $ 100,229 $ 89,794
========= ========= ========= =========
OPERATING INCOME:
General PhysicsProcess, Energy & Government $ 2,9762,680 $ 1,5072,431 $ 5,078 $ 4,073
Manufacturing & BPO 816 (246) 1,394 (381)
GSE (1,043) 172(394) 282 (1,437) 454
Corporate and other general and
administrative expenses (414) (1,035)(574) (1,241) (988) (2,276)
Litigation expense for EDS (200)(50) - (250) -
Deferred compensation plan (191) 167
-------- --------
1,128 811
-------- --------209 (42) 18 125
--------- --------- --------- ---------
2,687 1,184 3,815 1,995
--------- --------- --------- ---------
Interest expense (380) (633)(433) (506) (813) (1,139)
Other income 194 138
-------- --------(expense) (91) 95 103 233
--------- --------- --------- ---------
Income from continuing
operations before income
taxes and minority interest $ 9422,163 $ 316
======== ========773 $ 3,105 $ 1,089
========= ========= ========= =========
(8) LITIGATION
On January 3, 2001, the Company commenced an action alleging that MCI
Communications Corporation ("MCI"), MCI's Systemhouse subsidiaries
("Systemhouse"), and Electronic Data Systems Corporation, as successor to
Systemhouse ("EDS"), committed fraud in connection with the Company's 1998
acquisition of Learning Technologies from the defendants for $24,300,000.
The Company seeks actual damages in the amount of $117,900,000 plus
interest, punitive damages in an amount to be determined at trial, and
costs, subject to reduction as set forth below.
The complaint, which is pendingwas 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 have
been asserted. Although discovery had not yet been
13
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Three and six months ended March 31,June 30, 2005 and 2004
(Unaudited)
No counterclaims against the plaintiffs have been asserted. Although
discovery had not yet been
completed, defendants made a motion for summary judgment, which was
submitted in April 2002. The motion was denied by the court due to the MCI
bankruptcy, but with leave to the other defendants to renew.
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, allegingin 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, was concluded. In a decision
dated May 9, 2003, the court granted the motion and stayed the fraud
action pending the outcome of the arbitration.
The arbitration hearings began on May 17, 2004 and concluded on May 24,
2004 before JAMS, a private dispute resolution firm. On September 10,
2004, the arbitrator issued an interim award in which she found that the
sellers of Learning Technologies breached certain representations and
warranties contained in the acquisition agreement. In a final award dated
November 29, 2004, the arbitrator awarded General Physics $12,273,575 in
damages and $6,016,109 in pre-award interest. (The damages sought in the
litigation 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 the
CompanyGeneral
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.
As a result of the conclusion of the arbitration, the state court lifted
the stay of the fraud claim against the defendants other than MCI. On
February 14, 2005, such defendants filed a new motion for summary judgment
dismissing the Company's fraud claim against them. The Company opposed the
motion, which was argued on April 4, 2005. TheOn June 6, 2005, the court
has not yet ruledissued a decision on the motion but set afor summary judgment refusing to dismiss
the Company's claims against EDS and Systemhouse relating to false
representations concerning the financial condition of Learning
Technologies' United Kingdom operation and held that the Company had
presented evidence sufficient to raise triable issues of fact as to
whether defendants provided the Company with financial projections which
they knew to be false or unreasonable, and made representations or
omissions indicating that Learning Technologies' United Kingdom operation
was on track to achieve revenue targets which they knew it would be unable
to achieve. However, the court dismissed the Company's claim that it had
been fraudulently induced to acquire Learning Technologies based on false
representations that Systemhouse was not for sale. A trial date of
November 1, 2005 in the event the
summary judgment motion is denied.has been set. The Company has requested a jury trial.
The fraud action against MCI had been stayed as a result of the bankruptcy
of MCI. In February 2004, the Bankruptcy Court lifted the stay so that the
state court could rule on the merits of MCI's summary judgment motion. MCI
has asked the Bankruptcy Court to reinstate the stay and to rule on its
summary judgment motion. The Company has argued that it would be more
efficient if the state court ruled on both summary judgment motions. The
Bankruptcy Court has not yet decided whether it or the state court should
determine MCI's summary judgment motion.
14
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Three and six months ended June 30, 2005 and 2004
(Unaudited)
In connection with the spin-off of NPDC by the Company, the Company agreed
to make an additional capital contribution to NPDC in an amount equal to
the first $5,000,000 of any proceeds (net of litigation expenses and taxes
incurred, if any), and 50% of any proceeds (net of litigation expenses and
taxes incurred, if any) in excess of $15,000,000, received with respect to
the foregoing arbitration and litigation claims.
Pursuant to such agreement, in January 2005, the Company made a $5,000,000
distribution to NPDC out of the proceeds of the arbitration award. The net
cash proceeds to the Company were approximately $8,500,000 after legal
fees and the distribution to NPDC. A portion of such net proceeds was used
to 14
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Three months ended March 31, 2005 and 2004
(Unaudited)
reduce to zero the outstanding balance of General Physics' revolving
credit facility, which as of December 31, 2004 was $6.1 million.
The Company is not a party to any legal proceeding, the outcome of which
is believed by management to have a reasonable likelihood of having a
material adverse effect upon the financial condition and operating results
of the Company.
(9) NEWRELATED PARTY TRANSACTIONS
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 associates, including the Chief Executive Officer 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. For the three and six
months ended June 30, 2005, the Company charged NPDC $362,000 and
$656,000, respectively, for services under this management agreement,
based on an agreed upon allocation of actual costs incurred by the Company
on behalf of NPDC. Pursuant to an amendment to the management agreement
effective July 1, 2005, NPDC will pay the Company an annual fee of not
less than $970,000 as compensation for these services, payable in equal
monthly installments.
Corporate Office Lease
NPDC continues to occupy a portion of corporate office space leased by the
Company. NPDC compensates the Company approximately $205,000 annually for
use of this space. The Company's lease extends through December 31, 2006.
In connection with the spin-off of NPDC, the Company also entered into a
separate management agreement with NPDC pursuant to which it was
anticipated that the Company would receive certain general corporate
services from NPDC. No such services have been required or provided, so
the Company
15
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Three and six months ended June 30, 2005 and 2004
(Unaudited)
and NPDC entered into a termination agreement effective as of July 1, 2005
terminating the management agreement.
(10) COMMITMENTS
Effective April 11, 2005, General Physics entered into employment
agreements with certain of its officers, resulting in committed
compensation of approximately $2.0 million annually. These agreements
have employment terms expiring in 2007, provide for grants of restricted
stock units pursuant to the Company's 2003 Incentive Stock Plan, contain
non-compete covenants and change of control and termination provisions.
(11) ACCOUNTING STANDARDSSTANDARD ISSUED
In December 2004, the FASB issued SFAS No. 123 - Revised, Share-Based
Payment (SFAS No. 123R),
"Share-Based Payment", which revises SFAS No. 123, "AccountingAccounting for
Stock-Based Compensation",Compensation, and supersedes APB No. 25, "AccountingAccounting for Stock
Issued to Employees." 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 addition to paid in
capital. SFAS No. 123R was to be effective as of July 1, 2005. However,
based on April 14, 2005,Final Rule 74 issued by the Securities and Exchange Commission announced thatin
April 2005, which delayed the effective dateimplementation of SFAS No. 123R, the Company
plans to adopt SFAS No. 123R effective January 1, 2006. The Company
expects to adopt SFAS No. 123R using the Modified Prospective Application
method without restatement of prior periods. Under this method, the
Company will begin to amortize compensation cost for the remaining portion
of its outstanding awards on the adoption date for which the requisite
service has not yet been rendered. Compensation cost for these awards will
be postponed until January 1, 2006,based on the fair value of the awards as disclosed on a pro-forma basis
under SFAS 123 in Note 3, Stock Based Compensation. The Company will
account for calendar year companies.awards that are granted, modified, or settled after the
adoption date in accordance with SFAS No. 123R. The Company is currently
in the process of evaluating the impact of SFAS No. 123R on its
consolidated financial statements.
1516
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
General Overview
GP Strategies Corporation ("Through March 31, 2005, the Company") consistsCompany operated under two business segments
which consisted of its training and workforce development business
operated by General Physics Corporation ("General Physics" or "GP") and
its simulation business operated by GSE Systems Inc. ("GSE"). The Company's primary operating entity is General
Physics is a global workforce development company that improves the
effectiveness of organizations by providing training, management
consulting, e-Learning solutions and engineering services that are
customized to meet the specific needs of clients. Clients
include Fortune 500 companies, manufacturing, process and energy companies and
other commercial and governmental customers. GSE is a leader in
real-time high fidelity simulation technology and model development and
provides simulation solutions and services to the power generation
industry, the process industries, and the U.S. Government. In addition,
GSE provides plant monitoring and signal analysis monitoring and
optimization software primarily to the power industry, and develops
specialized software applications for emerging technologies.
PriorOn April 26, 2005, the Board of Directors elected Scott N. Greenberg, who
was then President and Chief Financial Officer of the Company, to the
additional position of Chief Executive Officer ("CEO") of the Company,
succeeding Jerome I. Feldman. As a result of Mr. Greenberg's appointment
as CEO, the Company re-evaluated its reportable business segments under
SFAS No. 131, Disclosures about Segments of an Enterprise and Related
Information. Based on the information which Mr. Greenberg reviews in order
to assess the performance of the Company and make decisions regarding the
allocation of resources, the Company determined that it has three
reportable business segments effective with Mr. Greenberg's appointment as
CEO. General Physics now consists of two reportable business segments: 1)
Process, Energy & Government; and 2) Manufacturing & Business Process
Outsourcing (BPO). GSE continues to be one reportable business segment. As
a result of the change in the Company's reportable business segments, all
prior period information presented herein has been restated to conform to
the current period'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, system hosting, integration and help desk
support, business process outsourcing, and consulting and technical
services to large companies in the automotive, pharmaceutical,
electronics, and other industries as well as to governmental clients.
On November 24, 2004, the Company had five operating business segments:
Manufacturing & Process, Information Technology, Simulation, Optical Plastics
and Home Improvement Distribution. On November 24, 2004, we completed the distribution, which we refer to as the "spin-off," of the common stockspin-off of National
Patent Development Corporation ("NPDC"), which comprised our Optical
Plastics and Home Improvement Distribution segments and certain other non-core
assets. We reorganized the Manufacturing & Process and Information Technology
segments into the General Physics segment. Effective with. Subsequent to the spin-off, the
results of operations of NPDC were reclassifiedare presented as discontinued operations for
the three and six months ended March 31,June 30, 2004.
InDuring the first quarter ofsix months ended June 30, 2005, GSE incurred a significant
operating losses.loss. GSE's profitability and revenue were primarily impacted by
a lower volume of orders logged. Accordingly,In addition, GSE has continued to spend
heavily on business development activities in order to expand its
simulation business into new sectors, such as the U.S. military and
homeland security markets. GSE's cash position weakened during the quarter,six
months ended June 30, 2005, with total cash decreasing from $848,000$868,000 as of
December 31, 2004 to $94,000$294,000 as of June 30, 2005. As a result, GSE issued
and sold to Dolphin Direct Equity Partners, LP, a Senior Subordinated
Secured
17
Convertible Note in the aggregate principal amount of $2,000,000, maturing
March 31, 2005.2009 (the "Dolphin Note"), and a seven-year warrant to purchase
380,952 shares of GSE common stock at an exercise price of $2.22 per share
(the "GSE Warrant"). The note is convertible into 1,038,961 shares of GSE
common stock at a conversion price of $1.925 per share and accrues
interest at 8% payable quarterly. The aggregate purchase price for the
Dolphin Note and GSE Warrant was $2,000,000. In connection with this
transaction, General Physics' commitment to loan GSE up to $1,000,000 has
been terminated.
Additionally, GSE has utilized $700,000$725,000 of its $1.5 million credit
facility as of March
31,June 30, 2005, and expects to increase the utilization in the second quarterincluding $50,000 for a letter of 2005.credit.
Approximately $800,000$775,000 was available to be borrowed under the Credit
Agreement as of March 31,June 30, 2005. The Company has classified the borrowings
outstanding under the Credit Agreement as a current obligation.
16On June 20, 2005, the Board of Directors approved the Company's plan to
spin-off its 57% interest in GSE through a special dividend to the
Company's stockholders. Stockholders will receive in the spin-off a
pro-rata share of GSE common stock based on the number of shares of the
Company's common stock or Class B stock held on the record date, which
will be determined on a future date. On July 8, 2005, GSE filed with the
Securities and Exchange Commission a registration statement relating to
the shares of GSE to be distributed in the spin-off. The Company
anticipates that the record date will be set and the spin-off will occur
shortly after such registration statement is declared effective.
General Physics' backlog for services under signed contracts and
subcontracts was approximately $96.9 million as of June 30, 2005. GSE's
backlog was approximately $14.7 million as of June 30, 2005.
18
Operating Highlights
THREE MONTHS ENDED MARCH 31,JUNE 30, 2005 COMPARED TO THE THREE MONTHS ENDED MARCH 31,JUNE
30, 2004
For the three months ended March 31,second quarter of 2005, the Company had income from continuing
operations before income tax expense and minority interest of $942,000$2,163,000
compared to $316,000$773,000 for the three months ended March 31,second quarter of 2004. The improved results
were primarily due to increased operating segment income of $1,469,000 principally by$1,311,000 for General
Physics,Physics' two business segments, as well as reduced corporate general and
administrative expenses at the corporate level of $421,000.level. These improvements were
offset by a reduction in the operating segment income from GSE of
$1,215,000.$676,000. Government revenue accounted for approximately 39% of General
Physics' revenue for the quarter ended June 30, 2005.
Revenue
(Dollars in Thousands) THREE MONTHS ENDED
MARCH 31,
--------------------------
(Dollars in Thousands)JUNE 30,
------------------
2005 2004
----------- ------------------ --------
General Physics $ 43,727 $ 35,309Process, Energy & Government $20,968 $19,354
Manufacturing & BPO 22,853 20,279
GSE 6,126 7,411
----------- -----------
$ 49,853 $ 42,720
=========== ===========6,555 7,441
------- -------
$50,376 $47,074
======= =======
RevenueProcess, Energy & Government segment revenue increased $1.6 million or
8.3% during the second quarter of General Physics increased by $8.4 million from2005 compared to the three months ended
March 31, 2004 to 2005.same period of
2004. The revenue increase is primarily due to an increase in government, homeland
security, and various other training services. New contract awards and
increased contract scopes to provide these services to existing customers
led to increased revenue during the organization's government training andsecond quarter of 2005.
Manufacturing & BPO segment revenue increased $2.6 million or 12.7% during
the second quarter of 2005 compared to the same period of 2004. The
increase is due to an increase in business process outsource businesses.
Contract awardsoutsourcing services
provided to customers primarily in the electronics industry, increased
system implementation and contract scopeshosting services primarily to the federal
government, and increases in other professional development and training
courses provided to customers in the manufacturing industry. We continue to increase in 2005 for government
training and domestic preparedness services. General Physics also continues
to expand the scope of services it providesprovided to many of its business process and training
outsource customers.
RevenueGSE's revenue decreased $886,000 or 11.9% during the second quarter of
GSE decreased by $1.3 million from2005 compared to the three months ended March 31,
2004 to 2005.same period of 2004. The decrease reflects thea lower
order volume logged in 2004.
Gross Profit
(Dollars in thousands) THREE MONTHS ENDED
MARCH 31,
----------------------------------------------JUNE 30,
-------------------------------------
2005 2004
--------------------- ----------------------
(Dollars in thousands)----------------- ------------------
% Revenue % Revenue
--------- ---------
General Physics $ 5,711 13.1% $ 4,127 11.7%Process, Energy & Government $4,058 19.4% $3,637 18.8%
Manufacturing & BPO 2,472 10.8% 1,244 6.1%
GSE 868 14.2% 1,575 21.3%
---------1,458 22.2% 1,419 19.1%
------ ---- ---------------- ----
$ 6,579 13.2% $ 5,702 13.3%
=========$7,988 15.9% $6,300 13.4%
====== ==== ================ ====
General Physics'19
Process, Energy & Government gross profit of $5.7$4.1 million or 13.1%19.4% of
revenue for the three
months ended March 31,second quarter of 2005 increased by $1.6 million$421,000 or 38.4%,11.6% when
compared to gross profit of approximately $4.1$3.6 million or 11.7%18.8% of revenue
for the same period of 2004. This increase in gross profit was primarily
driven by an increase in revenue for training services provided to our
government and energy customers. 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 contract revenue growth.
Manufacturing & BPO gross profit of $2.5 million or 10.8% of revenue for
the second quarter of 2005 increased by $1.2 million or 98.7% when
compared to gross profit of approximately $1.2 million or 6.1% of revenue
for the same period of 2004. This increase in gross profit was primarily
driven by an increase in revenue from the
17
governmentbusiness process outsourcing and
training business, anoutsourcing services. The increase in gross profit as a
percentage of revenue from the business process
outsource and training outsource business, andis primarily due to a decrease in overhead expenses
as a percentage of revenue.revenue as our infrastructure costs have not increased
at the same rate as our contract revenue growth.
GSE gross profit of $0.9was $1.5 million or 14.2%22.2% of revenue for the three months
ended March 31,June 30, 2005 decreased by $0.7 million, when compared to gross profit of $1.6$1.4 million or 21.3%19.1% of
revenue in 2004.the same period of 2004, which is relatively flat for these
comparative periods.
Selling, General and Administrative Expense
SG&A expenses increased $0.2 million from $5.1 million for the second
quarter of 2004 to $5.3 million for the second quarter of 2005. This net
increase is primarily related to higher legal and accounting fees and
certain facility costs at GSE. These increases were partially offset by a
decrease in corporate SG&A expenses primarily due to the spin off of NPDC
in November 2004, which were not allocable to discontinued operations.
Interest Expense
Interest expense decreased $0.1 million from $0.5 million for the second
quarter of 2004 to $0.4 million for the second quarter of 2005. The
decrease was primarily attributable to a decline in revenue for the three months ended March 31, 2005.
Selling, General and Administrative Expense
SG&A increased $0.6 million or 11.4% from $4.9 million in the three months ended
March 31, 2004 to $5.5 million in 2005. This increase for the three months ended
March 31, 2005 primarily relates to an increase in business development and
other SG&A cost of $0.5 million at GSE and an increase in SG&A at General
Physics of $0.1 million. Corporate SG&A expenses were reduced for the three
months ended March 31, 2005 by approximately $0.6 million due to the spin off of
NPDC. The corporate reduction was offset by a $0.4 increase in the compensation
expense relating to certain stock options to purchase stock of prior affiliates
accounted for using the fair value method and $0.2 million of legal expenses
related to the EDS litigation that were incurred this period.
Interest Expense
The decrease in interest expense of $0.2 million from $0.6 million for the three
months ended March 31, 2004 to $0.4 million in 2005 was primarily attributable
to lower General Physics interest expense, due to thePhysics' payoff of its
short term borrowings in January of 2005.
Other Income (Expense)
Other incomeexpense was $0.2$0.1 million for the three months ended March 31, 2004 andsecond quarter of 2005 compared to
other income of $0.1 million for the same period of 2004. The increase in
2005.expense is primarily due to the reduction in estimated fair value of GSE
foreign currency contracts for the sale of Japanese Yen at fixed rates
which is recorded in other expense.
20
Income Taxes
Income tax expense increased by approximately $0.6$0.8 million from $0.4
million for the three months
ended March 31,second quarter of 2004 to $1.2 million for the second
quarter of 2005. This increase is due to increased income for the
three months ended March 31, 2005 of the consolidated tax operations.operations for the second quarter of 2005. The Company
derived no tax benefit from the $0.9$0.4 million loss from GSE operations for
the three months ended June 30, 2005, as GSE is not consolidated into the
Company's results for federal income tax purposes.
SIX MONTHS ENDED JUNE 30, 2005 COMPARED TO THE SIX MONTHS ENDED JUNE 30,
2004
For the six months ended June 30, 2005, the Company had income from
continuing operations before income tax expense and minority interest of
$3,105,000 compared to $1,089,000 for the same period in 2004. The
improved results were primarily due to increased operating income of
$2,780,000 for General Physics' two business segments, as well as reduced
general and administrative expenses at the corporate level. These
improvements were offset by a reduction in the operating segment income
from GSE of $1,891,000. Government revenue accounted for approximately
39% of General Physics' revenue for the six months ended June 30, 2005.
Revenue
(Dollars in Thousands) SIX MONTHS ENDED
JUNE 30,
-------------------
2005 2004
-------- --------
Process, Energy & Government $ 43,101 $ 38,242
Manufacturing & BPO 44,447 36,700
GSE 12,681 14,852
-------- --------
$100,229 $ 89,794
======== ========
Process, Energy & Government segment revenue increased $4.9 million or
12.7% during the six months ended June 30, 2005 compared to the same
period of 2004. The increase is primarily due to an increase in
government, homeland security, and various other training services. New
contract awards and increased contract scopes to provide these services to
existing customers led to increased revenue during the first six months of
2005.
Manufacturing & BPO segment revenue increased $7.7 million or 21.1% during
the six months ended June 30, 2005 compared to the same period of 2004.
The increase is due to an increase in business process outsourcing
services provided to customers primarily in the electronics industry,
increased system implementation and hosting services primarily to the
federal government, and increases in other professional development and
training courses provided to customers in the manufacturing industry. We
continue to expand the scope of services provided to business process and
training outsource customers.
GSE revenue decreased $2.2 million or 14.6% during the six months ended
June 30, 2005 compared to the same period of 2004. The decrease reflects a
lower order volume logged in 2004.
21
Gross Profit
(Dollars in thousands) SIX MONTHS ENDED
JUNE 30,
------------------------------------------
2005 2004
-------------------- --------------------
% Revenue % Revenue
---------- ---------
Process, Energy & Government $ 7,771 18.0% $ 6,587 17.2%
Manufacturing & BPO 4,470 10.1% 2,421 6.6%
GSE 2,326 18.3% 2,994 20.2%
-------- ---- --------- ----
$ 14,567 14.5% $ 12,002 13.4%
======== ==== ========= ====
Process, Energy & Government gross profit of $7.8 million or 18.0% of
revenue for the six months ended June 30, 2005 increased by $1.2 million
or 18.0% when compared to gross profit of approximately $6.6 million or
17.2% of revenue for the same period of 2004. This increase in gross
profit was primarily driven by an increase in revenue for training
services provided to our government and energy customers. 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 contract revenue growth.
Manufacturing & BPO gross profit of $4.5 million or 10.1% of revenue for
the six months ended June 30, 2005 increased by $2.0 million or 84.6% when
compared to gross profit of approximately $2.4 million or 6.6% of revenue
for the same period of 2004. This increase in gross profit was primarily
driven by an increase in revenue from business process outsourcing and
training outsourcing services. 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 contract revenue growth.
GSE gross profit of $2.3 million or 18.3% of revenue for the six months
ended June 30, 2005 decreased by $0.7 million or 22.3% when compared to
gross profit of $3.0 million or 20.2% of revenue for the same period of
2004. The decrease in gross profit is primarily attributable to the lower
revenue base to cover GSE's relatively fixed overhead costs.
Selling, General and Administrative Expense
SG&A increased $0.8 million or 7.4% from $10.0 million for the six months
ended June 30, 2004 to $10.8 million for the same period of 2005. This net
increase is primarily related to higher legal and accounting fees and
certain facility costs at GSE. These increases were partially offset by a
decrease in corporate SG&A expenses primarily due to the spin off of NPDC
in November 2004, which were not allocable to discontinued operations.
Interest Expense
Interest expense decreased $0.3 million from $1.1 million for the six
months ended June 30, 2004 to $0.8 million for the same period of 2005.
The decrease was primarily attributable to General Physics' payoff of its
short term borrowings in January of 2005.
Other Income (Expense)
Other income was $0.1 million for the six months ended June 30, 2005
compared to $0.2 million for the same period of 2004. The decrease
compared to the prior period is primarily due to a decrease in interest
income on
22
loans receivable. Additionally, GSE recorded a reduction in the estimated
fair value of foreign currency contracts for the sale of Japanese Yen at
fixed rates which is included in other expense.
Income Taxes
Income tax expense increased by approximately $1.4 million from $0.6
million for the six months ended June 30, 2004 to $2.0 million for the
same period of 2005. This increase is due to increased income of the
consolidated tax operations for the six months ended June 30, 2005. The
Company derived no tax benefit from the $1.4 million loss from GSE
operations for the six months ended June 30, 2005, as GSE is not
consolidated into the Company's results for federal income tax purposes.
LIQUIDITY AND CAPITAL RESOURCES
WORKING CAPITAL AND CASH FLOWS
As of March 31,June 30, 2005, the Company had cash and cash equivalents totaling
$5.4$6.9 million. The Company believes that cash generated from operations and
borrowing availability under theits Credit Agreement (described below), will
be sufficient to fund the working capital and other requirements of the
Company for the foreseeable future. ForDuring the quartersix months ended March 31,June 30,
2005, the Company's working capital increased by $1.3$6.7 million from $20.6
million at December 31, 2004 to $21.9 million.$27.3 million at June 30, 2005.
The Company's cash balance increased $4.5 million from $2.4 million at
December 31, 2004 to $6.9 million at June 30, 2005. The increase in cash
and cash equivalents of $3.1 million forduring the threesix months ended March 31,June 30, 2005 resulted
from cash provided by operating activities of $8.2 million, offset by cash
used by investing activities of $0.4 million, and cash used by financing
activities of $4.9 million; offset by cash
provided by operations of $8.0$3.2 million, and thea negative effect of exchange rate changes
on cash of $0.3approximately $0.1 million.
NetCash Flows from Operating Activities
Cash provided by operating activities was $8.2 million for the six months
ended June 30, 2005 compared to cash used in operating activities of $4.1
million for the same period of 2004. The increase in cash compared to the
prior period is primarily due to $1.2 million higher net income in 2005
compared to 2004, proceeds from the EDS lawsuit arbitration of $13.8
million in 2005, and increased non-cash compensation expense in 2005
compared to 2004. These increases in cash flows from operating activities
were offset by a decrease in changes in other operating items by
approximately $3.1 million, 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 were accrued for in 2004. The remainder of
the change in other operating items is due to favorable changes in working
capital.
Cash Flows from Investing Activities
Cash used by investing activities was $0.4 million for the six months
ended June 30, 2005 compared to cash provided by investing activities of
$0.1 million for the same period of 2004. The decrease in cash is
primarily due to proceeds from the sale of marketable securities of
approximately $1.0 million in 2004 that did not recur in 2005. This
increase in cash used by investing activities was offset by a decrease in
capital expenditures for property, plant and equipment of $0.4approximately
$0.5 million relatesduring the six months ended June 30, 2005 compared to capital expenditures. Net cashthe
same period of 2004.
23
Cash Flows from Financing Activities
Cash used by financing activities was $3.2 million for the six months
ended June 30, 2005 compared to cash provided by financing activities of
$4.9$3.2 million for the same period of 2004. The decrease in cash is
primarily consisteddue to the repayment by General Physics of cash repayments ofits short-term
borrowings of $5.4
million.
18
Cash provided by operations consists$6.1 million during the six months ended June 30, 2005. This
use of $13.8 million of arbitration proceeds,
$0.7 million depreciation and amortization, $0.1 million non-cash compensation,cash was offset by a $6.7net cash proceeds of $1.5 million increase in other operating items.connection
with GSE's issuance of the Dolphin Note in 2005 compared to repayments of
long-term debt by General Physics of $0.6 million in 2004. Additionally,
cash proceeds from the exercise of employee stock options increased by
$0.6 million during the six months ended June 30, 2005 compared to the
same period of 2004.
LONG-TERM DEBT AND SHORT-TERM BORROWINGS
On October 23, 2003, the Company purchased from ManTech International
("ManTech") additional shares of GSE common stock in exchange for a 5%
note for $5.3 million due in full in October 2008. Interest is payable
quarterly. Each year during the term of the note, ManTech has the option
to convert up to 20% of the original principal amount of the note into
common stock of the Company at the then market price of the Company's
common stock, but only in the event that the Company's common stock is
trading at $10 per share or more.
General Physics and General Physics' subsidiary SkillRight, Inc. have a two-year
$25 million Credit Agreement with a bank that expires on August 13, 2006 with
annual renewal options. The interest rate on borrowings under the Credit
Agreement is at Libor Market Index Rate plus 3%. The Credit Agreement, as
amended in March 2004 to include GSE, is secured by certain assets of General
Physics. The Credit Agreement also 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. On July 30,
2004, General Physics received a waiver and paid the Company an additional $1.0
million. The Company repaid in full the $6.1 million outstanding under the
Credit Agreement as of December 31, 2004 in January of 2005, using the proceeds
received from the EDS arbitration award (see Item 4). On March 9, 2005, General
Physics received a waiver to loan GSE a maximum of $1.0 million to satisfy any
GSE short-term capital requirements over the next 15 months.
Pursuant to a Note and Warrant Purchase Agreement dated August 8, 2003,
the Company issued and sold to four Gabelli funds $7.5 million aggregate
principal amount of 6% Conditional Subordinated Notes due 2008 and 937,500
warrants, each entitling the holder thereof to purchase (subject to
adjustment) one share of the Company's common stock. The aggregate
purchase price for the Gabelli Notes and GP Warrants was $7.5 million. The
Gabelli Notes are secured by a mortgage on the Company's former property
located in Pawling, New York which was distributed to NPDC in the
spin-off. In addition, at any time that less than $1.9 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.
General Physics and General Physics' subsidiary, SkillRight, Inc., have a
three-year $25 million Credit Agreement with a bank that expires on August
13, 2006 with annual renewal options. The interest rate on borrowings
under the Credit Agreement is at the daily LIBOR Market Index Rate plus
3%. The Credit Agreement, as amended in March 2004 to include GSE, is
secured by certain assets of General Physics. The Credit Agreement also
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. 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 8 to the condensed consolidated financial
statements). On March 9, 2005, General Physics received a waiver to loan
GSE a maximum of $1.0 million to satisfy any GSE short-term capital
requirements over the next 15 months. In connection with GSE's issuance
and sale of the Dolphin Note (discussed below), General Physics'
commitment to loan GSE a maximum of $1.0 million was terminated.
On March 30, 2004, GSE was added as an additional borrower under the
General Physics Credit Agreement. Under the terms of the Credit Agreement,
as amended, $1.5 million of General Physics' Credit Agreement has beenwas
allocated for use by GSE. The Credit Agreement was amended to provide for
additional collateral consisting of substantially all of the GSE's assets as
well as certain covenants specific to GSE. The interest rate is based upon
the daily LIBOR Market Index Rate plus 3%, with interest only payments due
monthly. The Company agreed to guarantee GSE's borrowings under the Credit
Agreement, as amended, in consideration for a fee pursuant to the
Management Services Agreement.
The Credit Agreement requires GSE to comply with certain financial ratios.
At both March 31, 2005 and June 30, 2005, GSE was not in compliance with
its debt service coverage ratio. The Company obtained a letter dated
May 9,August 4, 2005 in which the lender has agreed to forebearforbear from exercising
its rights under the credit agreementCredit Agreement against the Borrowersborrowers with respect
to this event of default by GSE until the earlier to
occur of (a) delivery of the quarterlyannual financial
24
statements for the period
ending June 30, 2005 or (b) August 15,year ended December 31, 2005. The lender will charge
GSE Loan, if made by General Physics, will be duea fee of approximately $2,500 as compensation for the waiver. The
Company has classified the borrowings outstanding under the Credit
Agreement as a current obligation.
On May 26, 2005, GSE issued and sold to Dolphin Direct Equity Partners,
LP, a Senior Subordinated Secured Convertible Note in the aggregate
principal amount of $2,000,000, maturing March 31, 2009, and a seven-year
warrant to purchase 380,952 shares of GSE common stock at an exercise
price of $2.22 per share. The note is convertible into 1,038,961 shares of
GSE common stock at a conversion price of $1.925 per share and accrues
interest at 8% payable byquarterly. The aggregate purchase price for the
Dolphin Note and GSE no
later than June 9, 2006 and will be on such other terms and conditions as are
agreed upon by General Physics and GSE. The GSE Loan would be reduced by any
amounts owed by GSE to the Company or General Physics, primarily inWarrant was $2,000,000. In connection with this
transaction, General Physics' commitment to loan GSE up to $1,000,000 was
terminated. Under the Management Services Agreement, whichterms of the note, the number of shares of GSE
common stock actually issued on conversion of the Dolphin Note, when
aggregated approximately $570,000
aswith the number of March 31, 2005. Therefore, the availability undershares of GSE common stock actually issued
upon exercise of the GSE Loan was
approximately $430,000 asWarrant, could not exceed 19.99% of March 31, 2005.the
outstanding shares of GSE is seeking additional debt
and/or equity financing, although there can be no assurance that such debt or
equity financing will be available. The Company is currently evaluating various
alternatives with respect to its investment in GSE. The Company expects to
support GSE with its short-term capital requirements as disclosed. Additional
financial supportcommon stock on May 26, 2005 (the "Conversion
Share Limit"). Of the $2 million proceeds from the Company would require Boardsale of Director and bank
approval.
19
the Dolphin
Note, $500,000 was placed in escrow until the termination of the
Conversion Share Limit which expired on June 29, 2005. The $500,000 of
cash in escrow was released to GSE on July 7, 2005.
NEW ACCOUNTING STANDARDSSTANDARD
In December 2004, the FASB issued SFAS No. 123 - Revised (SFAS No. 123R),
"Share-Based Payment",Share-Based Payment, which revises SFAS No. 123, "AccountingAccounting for
Stock-Based Compensation",Compensation, and supersedes APB No. 25, "AccountingAccounting for Stock
Issued to Employees." 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 addition to paid in
capital. SFAS No. 123R was to be effective as of July 1, 2005. However,
based on April 14, 2005,Final Rule 74 issued by the Securities and Exchange Commission announced thatin
April 2005, which delayed the effective dateimplementation of SFAS No. 123R, the Company
plans to adopt SFAS No. 123R effective January 1, 2006. The Company
expects to adopt SFAS No. 123R using the Modified Prospective Application
method without restatement of prior periods. Under this method, the
Company will begin to amortize compensation cost for the remaining portion
of its outstanding awards on the adoption date for which the requisite
service has not yet been rendered. Compensation cost for these awards will
be postponed until January
1, 2006,based on the fair value of those awards as disclosed on a pro-forma
basis under SFAS 123 in Note 3, Stock-Based Compensation. The Company will
account for calendar year companies.awards that are granted, modified, or settled after the
adoption date in accordance with SFAS No. 123R. The Company is currently
in the process of evaluating the impact of SFAS No. 123R on its
consolidated financial statements.
FORWARD-LOOKING STATEMENTS
The forward-looking statements contained herein reflect GP Strategies'
management's current views with respect to future events and financial
performance. We use words such as "expects", "intends" and "anticipates"
to indicate forward-looking statements. These forward-looking statements
are subject to certain risks and uncertainties that could cause actual
results to differ materially from those in the forward-looking statements,
all of which are difficult to predict and many of which are beyond the
control of GP Strategies, including, but not limited to, our inability to generate funds by selling any
assets that were included in the spin-off, the ability of
GSE to secure additional financing, our holding company structure, failure
to continue to attract and retain personnel, loss of business from
significant customers, failure to keep pace with technology, changing
economic conditions, competition, our ability to implement procedures that
will reduce the likelihood that material
25
weaknesses in internal control over financial reporting will not occur in
the future, and those other risks and uncertainties detailed in GP
Strategies' periodic reports and registration statements filed with the
Securities and Exchange Commission.
If any one or more of these expectations and assumptions proves incorrect,
actual results will likely differ materially from those contemplated by
the forward-looking statements. Even if all of the foregoing assumptions
and expectations prove correct, actual results may still differ materially
from those expressed in the forward-looking statements as a result of
factors we may not anticipate or that may be beyond our control. While we
cannot assess the future impact that any of these differences could have
on our business, financial condition, results of operations and cash flows
or the market price of shares of our common stock, the differences could
be significant. We do not undertake to update any forward-looking
statements made by us.
2026
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company has no material changes to the disclosure on this matter made
in its report on Form 10-K/A for the fiscal year ended December 31, 2004.
GSE's most significant market risk is changes in foreign currency exchange
rates. GSE's exposure to foreign currency exchange rate fluctuations
arises in part from inter-company accounts in which costs incurred in one
entity are charged to other entities in different foreign jurisdictions.
GSE is also exposed to foreign currency exchange rate fluctuations as the
financial results of all foreign subsidiaries are translated into U.S.
dollars in consolidation. As exchange rates vary, those results when
translated may vary from expectations and adversely impact overall
expected profitability.
GSE utilizes various derivative financial instruments to manage market
risks associated with the fluctuations in foreign currency exchange rates.
It is GSE's policy to use derivative financial instruments to protect
against market risk arising in the normal course of business. GSE monitors
its foreign currency exposures to maximize the overall effectiveness of
its foreign currency positions. GSE's objectives forobjective in holding derivatives areis
to minimize the risks by using the most effective methods to reduce the impact of these
exposures. GSE minimizes credit exposure by limiting counterparties to
nationally recognized financial institutions. As of March 31,June 30, 2005, GSE had
foreign currency contracts for the sale of $3.6$2.8 million Japanese Yen at
fixed rates. The contracts expire at various dates through May 2007. The
Company has not designated the contracts as hedges and, accordingly, has
recorded the reduction in estimated fair value of approximately $0.2
millionthe contracts during the
quarter and six months ended June 30, 2005 of these contracts$102,000 and $157,000,
respectively, in the accompanying condensed consolidated balance sheet.financial
statements.
ITEM 4. CONTROLS AND PROCEDURES
We carried out an evaluation, under the supervision and with the
participation of our management including our Chief Executive Officer and
our Chief Financial Officer, of the effectiveness of the design and
operation of our disclosure controls and procedures pursuant to Rule
13-15(b) of the Securities Exchange Act of 1934, as amended. Based upon
that evaluation and the material weaknesses described below, the Chief
Executive Officer and Chief Financial Officer concluded that the Company's
disclosure controls and procedures were not effective as of the date
covered by this report.
As discussed more fully in Item 9A of our Annual Report on Form 10-K/A-2
dated April 29, 2005, for the year ended December 31, 2004, in connection
with our audit of our consolidated financial statements for the fiscal
year ended December 31, 2004, we determined that the Company's policies
and procedures did not provide for adequate management oversight and
review of the Company's income tax accounting. This lack of adequate
management oversight and review of the Company's income tax accounting
resulted in material errors in the Company's income tax provision, which
were identified and corrected prior to the issuance of the accompanying 2004 consolidated
financial statements.statements for the year ended December 31, 2004. This deficiency
represents more than a remote likelihood that a material misstatement of
the Company's annual or interim financial statements would not have been
prevented or detected.
The Company's policies and procedures did not provide for adequate
management oversight and review of the Company's consolidated financial
statements and footnote disclosures. In addition, the Company did not have
adequate technical resources to ensure the timely completion and review of
its consolidated financial statements and footnote disclosures. These
deficiencies resulted in material errors in the consolidated financial
statements, primarily the number of weighted average common shares
outstanding used in the earnings per share calculation, the presentation
of cash flows from operating and financing activities, and certain
financial statement footnote disclosures related to income taxes and
stock-based compensation, which were identified and corrected prior to
27
the issuance of the accompanying 2004 consolidated financial statements. These
deficiencies represent more
21
than a remote likelihood that a material
misstatement of the Company's annual or interim financial statements would
not have been prevented or detected.
Based on the material weaknesses described above, management concluded
that the Company's internal control over financial reporting was not
effective as of December 31, 2004. This assessment is based on
management's conclusion that as of December 31, 2004, there was more than
a remote likelihood that a material misstatement of the Company's annual
or interim financial statements would not be prevented or detected on a
timely basis by Company employees in the normal course of performing their
assigned functions.
As a result, we implemented changes in certain of our internal controls
over financial reporting during the fiscal quartersix months ended March 31,June 30, 2005, as
follows:
- The Company has, subsequent to December 31, 2004, revised its
processes and procedures to prepare the consolidated income
tax provision and the consolidated financial statements and
footnote disclosures, and implemented additional management
review controls over the related processes.
- The Company hired a Director of Financial Reporting who is
in the process of hiring an additional technical
resource to dedicatededicated to the Company's financial reporting requirements.
We will continue to evaluate the effectiveness of our disclosure controls
and procedures and our internal controls over financial reporting on an
ongoing basis, and will take further action as appropriate. However, there
can be no assurance that our controls and procedures will prevent or
detect material misstatement of the Company's annual or interim financial
statements.
2228
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.On April 24, 2005, the Company held its annual meeting of
shareholders. At that meeting, the following matters were
voted upon:
1. All of the Directors nominated by the Company were
elected as follows:
Common Shares Cast: Class B Shares Cast:
------------------- --------------------
For Withheld For Withheld
--- -------- --- --------
Harvey P. Eisen 14,466,822 85,527 12,000,000 0
Jerome I. Feldman 14,460,265 92,084 12,000,000 0
Marshall S. Geller 14,488,371 63,978 12,000,000 0
Scott N. Greenberg 14,465,639 86,710 12,000,000 0
Scott R. Peppet 14,491,033 61,316 12,000,000 0
Richard C. Pfenniger, Jr. 14,491,432 60,917 12,000,000 0
Ogden R. Reid 14,488,023 64,326 12,000,000 0
Matthew Zell 14,462,592 89,757 12,000,000 0
2. The ratification of KPMG LLP as independent auditors was
approved. With respect to holders of common stock, the
number of affirmative votes cast was 14,478,647 and the
number of votes cast against was 73,702. With respect to
holders of Class B common stock, the number of
affirmative votes cast was 12,000,000 and the number of
votes cast against was zero.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
10.1 Forbearance letter dated May 9, 2005.*
31.1 CertificationEffective April 11, 2005, General Physics entered into
employment agreements with certain of Chief Executive Officerits officers. These
agreements have employment terms expiring in 2007, provide for
grants of restricted stock units pursuant to the Company's
2003 Incentive Stock Plan (the "Plan"), contain non-compete
covenants and Chief Financial
Officerchange of control and termination provisions.
The form of the employment agreement is filed herewith as
Exhibit 10.1.
On April 11, 2005, the Company dated May 12, 2005granted 172,000 restricted
stock units to certain officers of General Physics pursuant to
Securitiesthe Plan. Each stock unit is equivalent to one share of
Company stock and Exchange Act Rule 13d-14(a)/15(d-14(a), as adopted pursuantvests to Section 302 and 404the officers of General Physics
over a five year service period. The form of the Sarbanes-Oxley Act of 2002.*
32.1 Certification of Chief Executive Officer and Chief Financial
Officer of the Company dated May 12,stock unit
agreement is filed herewith as Exhibit 10.2.
29
ITEM 6. EXHIBITS
- ------ --------
10.1 Form of Employment Agreement between General Physics Corporation and
certain officers.*
10.2 Form of Stock Unit Agreement between GP Strategies Corporation and
certain executive officers.*
10.3 Lock-Up Agreement between GP Strategies Corporation and Scott Greenberg
in connection with stock grant authorized by the Compensation Committee
of the Board of Directors on March 23, 2005.*
10.4 Lock-Up Agreement between GP Strategies Corporation and Doug Sharp in
connection with stock grant authorized by the Compensation Committee of
the Board of Directors on March 23, 2005.*
10.5 Stock Unit Agreement between GP Strategies Corporation and Andrea
Kantor.*
10.6 Forbearance letter dated August 4, 2005.*
10.7 Amendment, dated July 1, 2005, to the Management Agreement, dated July
30, 2004, between GP Strategies Corporation and National Patent
Development Corporation.*
10.8 Termination Agreement, dated June 30, 2005, of the Management Agreement,
dated July 30, 2004, between National Patent Development Corporation and
GP Strategies Corporation.*
10.9 Form of Management Agreement between GP Strategies Corporation and
National Patent Development Corporation. Incorporated herein by
reference to Exhibit 10.1 of National Patent Development Corporation
Form S-1, Registration No. 333-118568.10.61.
10.10 Form of Management Agreement between National Patent Development
Corporation and GP Strategies Corporation. Incorporated herein by
reference to Exhibit 10.2 of National Patent Development Corporation
Form S-1, Registration No. 333-118568.
31.1 Certification of Chief Executive Officer and Chief Financial Officer of
the Company dated August 9, 2005 pursuant to Securities and Exchange Act
Rule 13d-14(a)/15(d-14(a), as adopted pursuant to Section 302 and 404 of
the Sarbanes-Oxley Act of 2002.*
32.1 Certification of Chief Executive Officer and Chief Financial Officer of
the Company dated August 9, 2005 pursuant to 18 U.S.C. Section 1350 as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*
- -------------
*Filed herewith
2330
SIGNATURESSIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed in its behalf by the
undersigned thereunto duly authorized.
GP STRATEGIES CORPORATION
May 12,August 9, 2005 /s/ Scott N. Greenberg
--------------------------------------------------
Chief Executive Officer and Chief Financial Officer
2431