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 September 30, 2007March 31, 2008
or
o Transition Report Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934
For the transition period from to
Commission File Number 1-7234
GP STRATEGIES CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware |
| 13-1926739 |
(State of Incorporation) |
| (I.R.S. Employer Identification No.) |
|
|
|
6095 Marshalee Drive, Suite 300, Elkridge, MD |
| 21075 |
(Address of principal executive offices) |
| (Zip Code) |
(410) 379-3600
Registrant’s telephone number, including area code:
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 o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a non-accelerated filer.smaller reporting company. See definitionthe definitions of “large accelerated filer,” “accelerated filer,” and large accelerated filer”“smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o | Accelerated filer x | Non-accelerated filero | Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12(b)-2 of the Exchange Act). Yes o No x
Indicate theThe number of shares outstanding of each of issuer’s classes ofthe registrant’s common stock as of October 31, 2007:May 2, 2008 was as follows:
Class |
| Outstanding |
|
Common Stock, par value $.01 per share |
|
|
|
GP STRATEGIES CORPORATION AND SUBSIDIARIES
TABLE OF CONTENTS
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(In thousands, except per share amounts)
|
| September 30, |
| December 31, |
|
| March 31, |
| December 31, |
| ||||
|
| 2007 |
| 2006 |
|
| 2008 |
| 2007 |
| ||||
|
| (Unaudited) |
|
|
|
| (Unaudited) |
|
|
| ||||
Assets |
|
|
|
|
|
|
|
|
|
| ||||
Current assets: |
|
|
|
|
|
|
|
|
|
| ||||
Cash and cash equivalents |
| $ | 2,662 |
| $ | 8,660 |
|
| $ | 3,662 |
| $ | 3,868 |
|
Accounts and other receivables, less allowance for doubtful accounts of $790 in 2007 and $665 in 2006 |
| 36,502 |
| 26,628 |
| |||||||||
Accounts and other receivables, less allowance for doubtful accounts of $865 in 2008 and 2007 |
| 46,717 |
| 46,897 |
| |||||||||
Inventories, net |
| 737 |
| — |
|
| 654 |
| 577 |
| ||||
Costs and estimated earnings in excess of billings on uncompleted contracts |
| 17,683 |
| 11,257 |
|
| 14,483 |
| 13,995 |
| ||||
Prepaid expenses and other current assets |
| 6,853 |
| 6,411 |
|
| 8,080 |
| 8,208 |
| ||||
Total current assets |
| 64,437 |
| 52,956 |
|
| 73,596 |
| 73,545 |
| ||||
Property, plant and equipment |
| 8,373 |
| 6,985 |
|
| 9,248 |
| 8,758 |
| ||||
Accumulated depreciation |
| (5,568 | ) | (5,126 | ) |
| (6,375 | ) | (5,915 | ) | ||||
Property, plant and equipment, net |
| 2,805 |
| 1,859 |
|
| 2,873 |
| 2,843 |
| ||||
Goodwill |
| 59,918 |
| 56,815 |
|
| 63,634 |
| 61,748 |
| ||||
Intangible assets, net of accumulated amortization of $2,439 in 2007 and $916 in 2006 |
| 5,759 |
| 645 |
| |||||||||
Deferred tax assets |
| 2,235 |
| 7,420 |
| |||||||||
Intangible assets, net |
| 6,680 |
| 6,340 |
| |||||||||
Other assets |
| 2,878 |
| 1,705 |
|
| 3,025 |
| 2,969 |
| ||||
|
| $ | 138,032 |
| $ | 121,400 |
|
| $ | 149,808 |
| $ | 147,445 |
|
Liabilities and Stockholders’ Equity |
|
|
|
|
|
|
|
|
|
| ||||
Current liabilities: |
|
|
|
|
|
|
|
|
|
| ||||
Short-term borrowings |
| $ | 3,330 |
| $ | — |
|
| $ | 4,718 |
| $ | 2,953 |
|
Current maturities of long-term debt |
| 2,729 |
| 30 |
|
| 8,082 |
| 8,021 |
| ||||
Accounts payable and accrued expenses |
| 28,569 |
| 22,903 |
|
| 32,072 |
| 32,820 |
| ||||
Billings in excess of costs and estimated earnings on uncompleted contracts |
| 6,491 |
| 6,881 |
|
| 10,277 |
| 11,671 |
| ||||
Total current liabilities |
| 41,119 |
| 29,814 |
|
| 55,149 |
| 55,465 |
| ||||
Long-term debt less current maturities |
| 5,251 |
| 10,896 |
|
| 17 |
| 26 |
| ||||
Deferred tax liabilities |
| 490 |
| 491 |
| |||||||||
Other noncurrent liabilities |
| 1,040 |
| 959 |
|
| 1,564 |
| 1,081 |
| ||||
Total liabilities |
| 47,410 |
| 41,669 |
|
| 57,220 |
| 57,063 |
| ||||
|
|
|
|
|
| |||||||||
Stockholders’ equity: |
|
|
|
|
|
|
|
|
|
| ||||
Common stock, par value $0.01 per share |
| 178 |
| 178 |
|
| 178 |
| 178 |
| ||||
Additional paid-in capital |
| 157,436 |
| 159,042 |
|
| 156,598 |
| 156,422 |
| ||||
Accumulated deficit |
| (58,711 | ) | (65,558 | ) |
| (53,123 | ) | (55,972 | ) | ||||
Treasury stock at cost |
| (7,900 | ) | (13,167 | ) |
| (10,714 | ) | (9,785 | ) | ||||
Accumulated other comprehensive loss |
| (381 | ) | (640 | ) |
| (351 | ) | (461 | ) | ||||
Note receivable from stockholder |
| — |
| (124 | ) | |||||||||
Total stockholders’ equity |
| 90,622 |
| 79,731 |
|
| 92,588 |
| 90,382 |
| ||||
|
| $ | 138,032 |
| $ | 121,400 |
|
| $ | 149,808 |
| $ | 147,445 |
|
See accompanying notes to condensed consolidated financial statements.
1
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(Unaudited)
(In thousands, except per share data)
|
| Three months ended |
| Nine months ended |
|
| Three months ended |
| ||||||||||||
|
| September 30, |
| September 30, |
|
| March 31, |
| ||||||||||||
|
| 2007 |
| 2006 |
| 2007 |
| 2006 |
|
| 2008 |
| 2007 |
| ||||||
Revenue |
| $ | 60,837 |
| $ | 44,051 |
| $ | 178,038 |
| $ | 133,358 |
|
| $ | 66,919 |
| $ | 53,543 |
|
Cost of revenue |
| 51,790 |
| 37,141 |
| 151,645 |
| 113,729 |
|
| 57,162 |
| 45,501 |
| ||||||
Gross profit |
| 9,047 |
| 6,910 |
| 26,393 |
| 19,629 |
|
| 9,757 |
| 8,042 |
| ||||||
Selling, general and administrative expenses |
| 4,665 |
| 3,827 |
| 14,273 |
| 10,831 |
|
| 4,803 |
| 4,619 |
| ||||||
Operating income |
| 4,382 |
| 3,083 |
| 12,120 |
| 8,798 |
|
| 4,954 |
| 3,423 |
| ||||||
Interest expense |
| 296 |
| 376 |
| 955 |
| 1,233 |
|
| 237 |
| 272 |
| ||||||
Other income |
| 148 |
| 180 |
| 662 |
| 764 |
|
| 151 |
| 371 |
| ||||||
Income before income tax expense |
| 4,234 |
| 2,887 |
| 11,827 |
| 8,329 |
|
| 4,868 |
| 3,522 |
| ||||||
Income tax expense |
| 1,690 |
| 1,140 |
| 4,882 |
| 3,468 |
|
| 2,019 |
| 1,468 |
| ||||||
Net income |
| $ | 2,544 |
| $ | 1,747 |
| $ | 6,945 |
| $ | 4,861 |
|
| $ | 2,849 |
| $ | 2,054 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Basic weighted average shares outstanding |
| 16,850 |
| 15,657 |
| 16,581 |
| 16,535 |
|
| 16,722 |
| 16,308 |
| ||||||
Diluted weighted average shares outstanding |
| 17,330 |
| 16,555 |
| 17,157 |
| 17,438 |
|
| 16,920 |
| 16,962 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Per common share data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Basic earnings per share |
| $ | 0.15 |
| $ | 0.11 |
| $ | 0.42 |
| $ | 0.29 |
|
| $ | 0.17 |
| $ | 0.13 |
|
Diluted earnings per share |
| $ | 0.15 |
| $ | 0.11 |
| $ | 0.40 |
| $ | 0.28 |
|
| $ | 0.17 |
| $ | 0.12 |
|
See accompanying notes to condensed consolidated financial statements.
2
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
NineThree months ended September 30,March 31, 2008 and 2007 and 2006
(Unaudited, in thousands)
|
| 2007 |
| 2006 |
|
| 2008 |
| 2007 |
| ||||
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
| ||||
Net income |
| $ | 6,945 |
| $ | 4,861 |
|
| $ | 2,849 |
| $ | 2,054 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
|
| ||||
Depreciation and amortization |
| 3,000 |
| 1,685 |
|
| 954 |
| 974 |
| ||||
Deferred income taxes |
| 3,887 |
| 2,653 |
|
| 1,407 |
| 1,109 |
| ||||
Non-cash compensation expense |
| 1,478 |
| 1,232 |
|
| 638 |
| 318 |
| ||||
Changes in other operating items, net of effect of acquisitions: |
|
|
|
|
| |||||||||
Changes in other operating items: |
|
|
|
|
| |||||||||
Accounts and other receivables |
| (8,693 | ) | 3,317 |
|
| 577 |
| (504 | ) | ||||
Inventories |
| 46 |
| — |
|
| (77 | ) | 23 |
| ||||
Costs and estimated earnings in excess of billings on uncompleted contracts |
| (6,426 | ) | (1,199 | ) |
| (413 | ) | (10,585 | ) | ||||
Prepaid expenses and other current assets |
| 411 |
| 1,135 |
|
| (1,256 | ) | (565 | ) | ||||
Accounts payable and accrued expenses |
| 2,919 |
| (1,356 | ) |
| 1,168 |
| 239 |
| ||||
Billings in excess of costs and estimated earnings on uncompleted contracts |
| (1,856 | ) | (2,611 | ) |
| (1,663 | ) | 602 |
| ||||
Other |
| 117 |
| 45 |
|
| (20 | ) | (93 | ) | ||||
Net cash provided by operating activities |
| 1,828 |
| 9,762 |
| |||||||||
Net cash provided by (used in) operating activities |
| 4,164 |
| (6,428 | ) | |||||||||
|
|
|
|
|
|
|
|
|
|
| ||||
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
| ||||
Additions to property, plant and equipment |
| (1,449 | ) | (509 | ) |
| (447 | ) | (125 | ) | ||||
Acquisitions, net of cash acquired |
| (8,800 | ) | (619 | ) |
| (1,156 | ) | (5,317 | ) | ||||
Capitalized software development costs and other |
| (819 | ) | 1 |
| |||||||||
Payment of contingent consideration for Sandy acquisition |
| (2,500 | ) | — |
| |||||||||
Net cash used in investing activities |
| (11,068 | ) | (1,127 | ) |
| (4,103 | ) | (5,442 | ) | ||||
|
|
|
|
|
|
|
|
|
|
| ||||
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
| ||||
Net proceeds from short-term borrowings |
| 3,330 |
| — |
|
| 1,765 |
| 3,852 |
| ||||
Negative cash book balance |
| 875 |
| — |
| |||||||||
Capital stock restructuring |
| — |
| (20,860 | ) | |||||||||
Repayment of note receivable from shareholder |
| 124 |
| 495 |
| |||||||||
Repurchases of common stock in the open market |
| (2,525 | ) | (1,939 | ) |
| (1,413 | ) | (983 | ) | ||||
Change in negative cash book balances |
| (645 | ) | — |
| |||||||||
Proceeds from issuance of common stock |
| 1,520 |
| 826 |
|
| 23 |
| 610 |
| ||||
Payments on obligations under capital leases |
| (98 | ) | (76 | ) | |||||||||
Payments of obligations under capital leases |
| (9 | ) | (14 | ) | |||||||||
Net cash provided by (used in) financing activities |
| 3,226 |
| (21,554 | ) |
| (279 | ) | 3,465 |
| ||||
|
|
|
|
|
|
|
|
|
|
| ||||
Effect of exchange rate changes on cash and cash equivalents |
| 16 |
| 17 |
|
| 12 |
| (2 | ) | ||||
Net decrease in cash and cash equivalents |
| (5,998 | ) | (12,902 | ) |
| (206 | ) | (8,407 | ) | ||||
Cash and cash equivalents at beginning of period |
| 8,660 |
| 18,118 |
|
| 3,868 |
| 8,660 |
| ||||
Cash and cash equivalents at end of period |
| $ | 2,662 |
| $ | 5,216 |
|
| $ | 3,662 |
| $ | 253 |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Non-cash financing activity: |
|
|
|
|
| |||||||||
Non-cash financing activities: |
|
|
|
|
| |||||||||
Reduction in carrying value of Gabelli Notes upon exercise of warrants |
| $ | 3,225 |
| $ | 418 |
|
| $ | — |
| $ | 2,099 |
|
Capital lease obligation |
| 121 |
| — |
|
| — |
| 121 |
|
See accompanying notes to condensed consolidated financial statements.
3
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 2007
March 31, 2008
(Unaudited)
(1) Basis of Presentation
GP Strategies Corporation (the “Company”) was incorporated in Delaware in 1959. The Company’s business consists of its training, engineering, technical services and consulting business operated by its wholly owned subsidiary, General Physics Corporation (“General Physics” or “GP”). General Physics is a workforce development company that seeks to improve the effectiveness of organizations by providing training, management consulting, e-learninge-Learning solutions, engineering and engineeringtechnical services that are customized to meet the specific needs of clients.
On March 1, 2008, General Physics completed the acquisition of Performance Consulting Services, Inc. (“PCS”), a company specializing in performance engineering support, training, combustion optimization, the implementation of smart equipment condition monitoring systems and testing services for power plants. The results of PCS’ operations have been included in the consolidated financial statements for the period beginning March 1, 2008. See note 3 for further details.
On October 1, 2007, General Physics acquired Via Training, LLC (“Via”), a U.S. custom e-Learning sales training company. The results of Via’s operations have been included in the consolidated financial statements since October 1, 2007.
On June 1, 2007, General Physics, through its wholly owned subsidiary, General Physics (UK) Ltd. (“GPUK”), completed the acquisition of Smallpeice Enterprises Limited (“SEL”), a provider of business improvement and technical and management training services in the United Kingdom. The results of SEL’s operations have been included in the consolidated financial statements since June 1, 2007.
On January 23, 2007, General Physics completed the acquisition of certain operating assets and the business of Sandy Corporation (“Sandy”), a leader in custom product sales training and part of the ADP Dealer Services division of ADP, Inc. (“ADP”). Sandy, which is run as an unincorporated division of General Physics, offers custom sales training and print-based and electronic publications primarily to the U.S. automotive industry. See notes 3, 4 and 11 for further details.
On June 1, 2007, General Physics, through its wholly owned subsidiary, General Physics (UK) Ltd. (“GPUK”), completed the acquisition of Smallpeice Enterprises Ltd. (“SEL”), a provider of business improvement and technical and management training services in the United Kingdom. See note 3 for further details. The results of SEL’sSandy’s operations arehave been included in the condensed consolidated financial statements for the period beginning June 1,since January 23, 2007.
Effective October 1, 2007, General Physics acquired Via Training, LLC (Via), a custom e-learning sales training company, for a purchase price of $1,800,000 in cash paid at closing. See note 3 for further details.
The accompanying condensed consolidated balance sheet of the Company as of September 30, 2007,March 31, 2008 and the condensed consolidated statements of operations for the three and nine months ended September 30, 2007 and 2006, and the condensed consolidated statements of cash flows for the ninethree months ended September 30,March 31, 2008 and 2007 and 2006 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 Company’s audited consolidated financial statements for the year ended December 31, 2006,2007, as presented in our Annual Report on Form 10-K for the fiscal year ended December 31, 2006.2007. 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 20072008 interim period are not necessarily indicative of results to be expected for the entire year. Certain amounts in 2006 have been reclassified to conform with the presentation for 2007.
The condensed consolidated financial statements include the operations of the Company and its subsidiaries. All significant intercompany balances and transactions have been eliminated.
4
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
March 31, 2008
(Unaudited)
(2) Earnings Per Share
Basic earnings per share (EPS) is computed by dividing net income by the weighted average number of common shares outstanding during the periods. Diluted EPS reflects the potential dilution of common stock equivalent shares that could occur if securities or other contracts to issue common stock were exercised or converted into common stock.
4
The Company’s dilutive common stock equivalent shares consist of stock options, restricted stock units, and warrants to purchase shares of common stock computed under the treasury stock method, using the average market price during the period. The following table presents instruments which were not dilutive and were excluded from the computation of diluted EPS in each period, as well as the dilutive common stock equivalent shares which were included in the computation of diluted EPS:
|
| Three months ended |
| Nine months ended |
|
| Three months ended |
| ||||||
|
| September 30, |
| September 30, |
|
| March 31, |
| ||||||
|
| 2007 |
| 2006 |
| 2007 |
| 2006 |
|
| 2008 |
| 2007 |
|
|
| (In thousands) |
|
| (In thousands) |
| ||||||||
Non-dilutive instruments |
| 1,382 |
| 577 |
| 853 |
| 578 |
|
| 1,436 |
| 579 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive common stock equivalents |
| 480 |
| 898 |
| 576 |
| 903 |
|
| 198 |
| 654 |
|
(3) Acquisition
Acquisitions
Sandy Corporation
On January 23, 2007,March 1, 2008, General Physics completed the acquisition of Sandy,PCS, a leadercompany specializing in custom product salesperformance engineering support, training, combustion optimization, the implementation of smart equipment condition monitoring systems and part of the ADP Dealer Services division of ADP. Sandy, which is run as an unincorporated division of General Physics, offers custom sales training and print-based and electronic publications primarily to the automotive industry. General Physics acquired certain assets and the business of Sandytesting services for apower plants. The purchase price consists of $4,393,000$1,000,000 in cash paid at closing and $1,000,000 of guaranteed future payments to ADP from cashbe paid in two equal installments on handJanuary 31, 2009 and the assumption of certain liabilities to complete contracts.January 31, 2010. In addition, General Physics may be required to make payments ofpay up to an additional $8,000,000,$2,255,000, contingent upon Sandy achievingthe achievement of certain revenue targets, as defined in the purchase agreement, during the two twelve-month periods following the completion of the acquisition. In connection with
PCS is included in the acquisition and in accordance with Statement of Financial Accounting Standards (SFAS) No. 141, Business Combinations, the Company recorded $679,000 of goodwill, representing the excess of the purchase price over the net tangible and intangible assets. Sandy is reported as a separate businessCompany’s Process, Energy & Government segment and the results of its operations have been included in the condensed consolidated financial statements since the date of acquisition.
The purchase price consisted of the following (in thousands):
Cash purchase price |
| $ | 4,393 |
|
Acquisition costs |
| 964 |
| |
Total purchase price |
| $ | 5,357 |
|
The Company’s preliminary purchase price allocation for the net assets acquired is as follows (in thousands):
5
Inventory |
| $ | 783 |
|
Prepaid expenses and other current assets |
| 67 |
| |
Property, plant and equipment |
| 134 |
| |
Amortizable intangible assets |
| 6,006 |
| |
Goodwill |
| 679 |
| |
Total assets |
| 7,669 |
| |
Accounts payable, accrued expenses and other liabilities |
| 1,004 |
| |
Billings in excess of costs and estimated earnings on uncompleted contracts |
| 1,308 |
| |
Total liabilities assumed |
| 2,312 |
| |
|
|
|
| |
Net assets acquired |
| $ | 5,357 |
|
The Company recorded customer-related intangible assets as a result of the acquisition, which included $4,701,000 relating to customer lists and relationships acquired with an estimated useful life of 12 years, and $1,305,000 relating to contract backlog for future services under firm contracts to be amortized over 14 months subsequent to the acquisition in proportion to the amount of related backlog to be recognized in revenue. During the three and nine months ended September 30, 2007, the Company recognized $375,000 and $1,301,000 of amortization expense for these intangible assets, respectively. The amortization related to the contract backlog intangible asset totaled $277,000 and $1,040,000 for the three and nine months ended September 30, 2007, respectively, and the amortization related to the customer lists and relationships intangible asset totaled $98,000 and $261,000 for the three and nine months ended September 30, 2007, respectively.
The following unaudited pro forma condensed consolidated results of operations assume that the acquisition of Sandy was completed as of Januaryperiod beginning March 1, for each of the interim periods shown below:
|
| Nine months ended |
| ||||
|
| September 30, |
| ||||
|
| 2007 |
| 2006 |
| ||
|
| (In thousands, except per share amounts) |
| ||||
Revenue |
| $ | 181,986 |
| $ | 184,956 |
|
Net income |
| 7,035 |
| 6,320 |
| ||
Basic earnings per share |
| 0.42 |
| 0.38 |
| ||
Diluted earnings per share |
| 0.41 |
| 0.36 |
| ||
The pro forma data above may not be indicative of the results that would have been obtained had the acquisition actually been completed at the beginning of the periods presented, nor is it intended to be a projection of future results.
6
Smallpeice Enterprises Ltd. (SEL)
On June 1, 2007, General Physics, through its wholly owned GPUK subsidiary, completed the acquisition of SEL, a provider of business improvement and technical and management training services in the United Kingdom. GPUK acquired 100% ownership of SEL for a purchase price of approximately $3.3 million in cash, after a post-closing adjustment based on actual net assets, and incurred approximately $0.2 million of acquisition costs. In addition, General Physics may be required to pay the seller up to an additional $1.8 million, contingent upon SEL achieving certain earnings targets, as defined in the purchase agreement, during the one-year period following completion of the acquisition. SEL is included in the Company’s Manufacturing & BPO segment and its results of operations are included in the condensed consolidated financial statements since the date of the acquisition.2008. The pro-forma impact of the SELPCS acquisition is not material to the Company’s results of operations for the three and nine months ended September 30, 2007.
March 31, 2008.The Company’spreliminary estimated purchase price for PCS was $2,100,000, which consisted of $1,000,000 in cash paid at closing, $1,000,000 of deferred payments and approximately $100,000 of acquisition costs. The preliminary purchase price allocation consists of approximately $200,000 of tangible net assets and $1,900,000 of goodwill and intangible assets. The Company is currently finalizing the purchase price allocation, including the valuation of intangible assets.
5
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
March 31, 2008
(Unaudited)
(4) Intangible Assets
Goodwill
Changes in the carrying amount of goodwill by reportable business segment for the net assets acquired isthree months ended March 31, 2008 were as follows (in thousands):
Cash |
| $ | 30 |
|
Accounts receivable and other current assets |
| 1,275 |
| |
Property, plant and equipment |
| 172 |
| |
Goodwill and intangible assets |
| 2,866 |
| |
Total assets |
| 4,343 |
| |
Accounts payable, accrued expenses and other liabilities |
| 712 |
| |
Billings in excess of costs and estimated earnings on uncompleted contracts |
| 158 |
| |
Total liabilities assumed |
| 870 |
| |
|
|
|
| |
Net assets acquired |
| $ | 3,473 |
|
|
| Manufacturing |
| Process, Energy |
| Sandy Training |
|
|
| ||||
|
| & BPO |
| & Government |
| & Marketing |
| Total |
| ||||
Balance at December 31, 2007 |
| $ | 38,231 |
| $ | 21,009 |
| $ | 2,508 |
| $ | 61,748 |
|
Acquisition (note 3) |
| — |
| 1,367 |
| — |
| 1,367 |
| ||||
Foreign currency fluctuations |
| 15 |
| — |
| — |
| 15 |
| ||||
Adjustments to purchase price allocations |
| 4 |
| — |
| 500 |
| 504 |
| ||||
Balance at March 31, 2008 |
| $ | 38,250 |
| $ | 22,376 |
| $ | 3,008 |
| $ | 63,634 |
|
Via Training, LLC
Effective October 1,As of December 31, 2007, General Physics acquired Via, a custom e-learning sales training company, for a purchase pricethe Company had accrued $2,000,000 of $1,800,000 in cash paid at closing. In addition, General Physics may be requiredcontingent consideration with respect to pay up to an additional $3,250,000, contingent upon Via achieving certain earnings targets during the twofirst twelve-month periodsperiod following the completion of the acquisition. Via will beSandy acquisition based on the revenue targets achieved for the eleven-month period ended December 31, 2007. The actual contingent consideration paid during the first quarter of 2008 with respect to the first full twelve-month period completed in 2008 was $2,500,000. The accrued contingent consideration of $2,000,000 was applied to goodwill during 2007 and the additional $500,000 of contingent consideration paid in excess of the accrual was applied to goodwill during the first quarter of 2008.
Intangible Assets Subject to Amortization
Intangible assets with finite lives are subject to amortization over their estimated useful lives. The primary assets included in the Company’s Manufacturing & BPO segmentthis category and its results of operations will be included in its consolidated financial statements effective October 1, 2007.their respective balances were as follows (in thousands):
|
| March 31, 2008 |
| December 31, 2007 |
| ||||||||
|
| Gross |
| Accumulated |
| Gross |
| Accumulated |
| ||||
|
| Amount |
| Amortization |
| Amount |
| Amortization |
| ||||
Customer relationships |
| $ | 6,755 |
| $ | (818 | ) | $ | 6,115 |
| $ | (600 | ) |
Contract backlog |
| 1,305 |
| (1,305 | ) | 1,305 |
| (1,257 | ) | ||||
Non-compete agreements |
| 1,340 |
| (994 | ) | 1,340 |
| (977 | ) | ||||
Software and other |
| 458 |
| (61 | ) | 458 |
| (44 | ) | ||||
|
| $ | 9,858 |
| $ | (3,178 | ) | $ | 9,218 |
| $ | (2,878 | ) |
7
6
(4)GP STRATEGIES CORPORATION AND SUBSIDIARIES Inventory
Notes to Condensed Consolidated Financial Statements
Sandy produces brand specific glovebox portfolios, brochures and accessory kits for its customers, which are installed in new cars and trucks at the time of vehicle assembly. Sandy designs these items and outsources their manufacture to suppliers that provide the raw materials, bind and/or sew the portfolio, assemble its contents, and ship the finished product to its customers’ assembly plants. Although the inventory is kept at third party suppliers, the Company has title to the inventory and bears the risk of loss. As of September 30, 2007, the Company had inventory of $737,000, which primarily consisted of raw materials for the glovebox portfolios, brochures and accessory kits.March 31, 2008
(Unaudited)
(5)Stock-Based Compensation
The Company accounts for its stock-based compensation awards under SFASStatement of Financial Accounting Standards No. 123R, Share-Based Payment (SFAS(“SFAS No. 123R)123R”) which requires companies to recognizethe recognition of compensation expense for all equity-based compensation awards issued to employees that are expected to vest. Compensation cost is based on the fair value of awards as of the grant date.
The following table summarizes the pre-tax stock-based compensation expense included in reported net income (in thousands):
|
| Three months ended September 30, |
| Nine months ended September 30, |
|
| Three months ended March 31, |
| ||||||||||||
|
| 2007 |
| 2006 |
| 2007 |
| 2006 |
|
| 2008 |
| 2007 |
| ||||||
Non-qualified stock options |
| $ | 119 |
| $ | 13 |
| $ | 147 |
| $ | 152 |
|
| $ | 118 |
| $ | 11 |
|
Restricted stock units |
| 99 |
| 66 |
| 273 |
| 225 |
|
| 66 |
| 75 |
| ||||||
Board of Director stock grants |
| 12 |
| 11 |
| 58 |
| 23 |
|
| 37 |
| 23 |
| ||||||
Total stock-based compensation expense (pre-tax) |
| $ | 230 |
| $ | 90 |
| $ | 478 |
| $ | 400 |
| |||||||
Total stock-based compensation expense |
| $ | 221 |
| $ | 109 |
|
Pursuant to the Company’s 1973 Non-Qualified Stock Option Plan, as amended, (the “Non-Qualified Plan”), and 2003 Incentive Stock Plan, (the “2003 Plan”), the Company may grant awards of non-qualified stock options, incentive stock options, restricted stock, stock units, performance shares, performance units and other incentives payable in cash and/or in shares of the Company’s common stock to officers, employees or members of the Board of Directors. As of September 30, 2007,March 31, 2008, the Company had non-qualified stock options restricted stock, and restricted stock units outstanding under these plans as discussed below.
8
Non-Qualified Stock Options
Summarized information for the Company’s non-qualified stock options is as follows:
|
|
|
|
|
| Weighted |
|
|
|
|
|
|
|
| Weighted |
|
|
| ||||
|
|
|
| Weighted |
| average |
| Aggregate |
|
|
|
| Weighted |
| average |
| Aggregate |
| ||||
|
| Number of |
| average |
| remaining |
| intrinsic |
|
| Number of |
| average |
| remaining |
| intrinsic |
| ||||
Stock Options |
| options |
| exercise price |
| years |
| value |
|
| options |
| exercise price |
| years |
| value |
| ||||
Outstanding at December 31, 2006 |
| 572,108 |
| $ | 5.48 |
|
|
|
|
| ||||||||||||
Outstanding at December 31, 2007 |
| 1,037,221 |
| $ | 10.22 |
|
|
|
|
| ||||||||||||
Granted |
| 880,000 |
| 11.08 |
|
|
|
|
|
| 12,600 |
| 9.66 |
|
|
|
|
| ||||
Exercised |
| (346,366 | ) | 5.53 |
|
|
|
|
|
| (5,605 | ) | 4.10 |
|
|
|
|
| ||||
Cancelled/expired |
| (27,551 | ) | 5.75 |
|
|
|
|
|
| (14,913 | ) | 8.44 |
|
|
|
|
| ||||
Outstanding at September 30, 2007 |
| 1,078,191 |
| 10.03 |
| 5.11 |
| $ | 1,121,000 |
| ||||||||||||
Exercisable at September 30, 2007 |
| 198,191 |
| 5.36 |
| 2.31 |
| $ | 1,121,000 |
| ||||||||||||
Outstanding at March 31, 2008 |
| 1,029,303 |
| $ | 10.27 |
| 4.87 |
| $ | 655,000 |
| |||||||||||
Exercisable at March 31, 2008 |
| 136,703 |
| $ | 5.12 |
| 2.52 |
| $ | 655,000 |
|
During the second quarter of 2007, the Company granted 880,000 non-qualified stock options to certain key management personnel. The options have an exercise price of $11.08, vest over five years on a graded vesting schedule, and have a contractual term of six years. The per share fair value of the Company’s stock options granted during the second quarter of 2007 was $3.14 on the date of grant using the Black-Scholes Merton option pricing model with the following assumptions:7
| |||
| |||
|
| ||
|
|
| |
|
|
| |
|
|
|
As of September 30, 2007, the Company had approximately $2,223,000 of unrecognized compensation cost relatedGP STRATEGIES CORPORATION AND SUBSIDIARIES
Notes to the unvested portion of outstanding stock options to be recognized on a straight-line basis over the remaining service period of approximately 4.7 years.Condensed Consolidated Financial Statements
During the second quarter of 2007, the Company’s President exercised 47,887 outstanding and exercisable stock options and paid the exercise price of the options by having the Company withhold shares of common stock (valued based upon the market value of the Company’s stock on the exercise date) that would otherwise be issued to him upon exercise of the stock options.March 31, 2008
(Unaudited)
Restricted Stock Units
In addition to stock options, the Company issues restricted stock units to key employees and members of the Board of Directors based on meeting certain service goals. The stock units vest to the recipients at various dates, up to five years, based on fulfilling service requirements. In accordance with SFAS No. 123R, the Company recognizes the value of the market price of the underlying stock on the date of grant to compensation expense over the requisite service period. Upon vesting, the stock units are settled in shares of the
9
Company’s common stock. Summarized share information for the Company’s restricted stock units is as follows:
|
|
|
| Weighted |
| |
|
| Nine months ended |
| average |
| |
|
| September 30, |
| grant date |
| |
|
| 2007 |
| fair value |
| |
|
| (In shares) |
| (In dollars) |
| |
Outstanding and unvested, December 31, 2006 |
| 181,000 |
| $ | 7.53 |
|
Granted |
| 74,000 |
| 8.96 |
| |
Vested |
| (75,400 | ) | 7.52 |
| |
Forfeited |
| (16,400 | ) | 7.97 |
| |
Outstanding and unvested, September 30, 2007 |
| 163,200 |
| $ | 8.14 |
|
During the first quarter of 2007, the Company granted 74,000 restricted stock units to key employees in connection with the acquisition of Sandy. The awards had a grant date fair value of $8.96, and vest over a weighted average period of 4.4 years from the date of grant.
|
|
|
| Weighted |
| |
|
|
|
| average |
| |
|
| Three months ended |
| grant date |
| |
|
| March 31, 2008 |
| fair value |
| |
|
| (In shares) |
| (In dollars) |
| |
Outstanding and unvested, December 31, 2007 |
| 163,320 |
| $ | 8.14 |
|
Granted |
| 23,700 |
| 9.80 |
| |
Vested |
| (16,201 | ) | 8.96 |
| |
Forfeited |
| — |
| — |
| |
Outstanding and unvested, March 31, 2008 |
| 170,819 |
| $ | 8.29 |
|
(6) Short-Term Borrowings
General Physics has a $25 million Financing and Security Agreement as amended on August 6, 2007 (the ”Credit“Credit Agreement”), with a bank that expires on August 31, 2009 with annual renewal options. The Credit Agreement is secured by certain assets of General Physics and provides for an unsecured guaranty from the Company.
The maximum interest rate on the Credit Agreement is at the daily LIBOR market index rate plus 2.75%. Based upon the financial performance of General Physics, the interest rate can be reduced. As of September 30, 2007,March 31, 2008, the rate was daily LIBOR plus 2.50%,1.25% which resulted in a rate of approximately 7.9%3.95%. The Credit Agreement contains covenants with respect to General Physics’ minimum tangible net worth, total liabilities ratio, 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 March 31, 2008. The Credit Agreement also contains certain restrictive covenants regarding future acquisitions, incurrence of debt and the payment of dividends. The Credit Agreement permits General Physics wasto provide the Company up to $10,000,000 of cash to repurchase shares of its outstanding common stock in compliance with all loan covenants under the amended Credit Agreement as of September 30, 2007. In addition, General Physicsopen market. The Company is otherwise currently restricted from paying dividends or management fees to the Company in excess of $1,000,000 in any year, with the exception that the amended Credit Agreementof a waiver which permits General Physics to provide up to $10 million of$8,100,000 in cash to repay debt obligations which mature in 2008 in the event the Company to repurchase shares of its outstanding common stock in the open market.does not have available cash (see Note 7).
As of September 30, 2007, General Physics had $3,330,000March 31, 2008, there were $4,718,000 of borrowings outstanding and $20,112,000 of available borrowings under the Credit Agreement and there was approximately $21,500,000 of additional borrowings available based upon 80% of eligible accounts receivable and 80% of eligible unbilled receivables.Agreement. As of December 31, 2006, General Physics had no2007, there were $2,953,000 of borrowings outstanding under the Credit Agreement.
108
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
March 31, 2008
(Unaudited)
(7) Long-Term Debt
Long-term debt consistsconsisted of the following (in thousands):
|
| September 30, |
| December 31, |
|
| March 31, |
| December 31, |
| ||||
|
| 2007 |
| 2006 |
|
| 2008 |
| 2007 |
| ||||
6% conditional subordinated notes due 2008 (a) |
| $ | 2,885 |
| $ | 6,483 |
|
| $ | 2,885 |
| $ | 2,885 |
|
ManTech Note (b) |
| 5,251 |
| 5,251 |
|
| 5,251 |
| 5,251 |
| ||||
Capital lease obligations |
| 51 |
| 30 |
|
| 52 |
| 61 |
| ||||
|
| 8,187 |
| 11,764 |
|
| 8,188 |
| 8,197 |
| ||||
Less warrant related discount, net of accretion |
| (207 | ) | (838 | ) |
| (89 | ) | (150 | ) | ||||
|
| 7,980 |
| 10,926 |
|
| 8,099 |
| 8,047 |
| ||||
Less current maturities |
| (2,729 | ) | (30 | ) |
| (8,082 | ) | (8,021 | ) | ||||
|
| $ | 5,251 |
| $ | 10,896 |
|
| $ | 17 |
| $ | 26 |
|
(a) In August 2003, the Company issued and sold to four Gabelli Funds $7,500,000 in aggregate principal amount of 6% Conditional Subordinated Notes due 2008 (the Gabelli Notes)“Gabelli Notes”) and 937,500 warrants (GP Warrants)(“GP Warrants”), each entitling the holder thereof to purchase (subject to adjustment) one share of the Company’s Common Stockcommon stock at an exercise price of $8.00. The aggregate purchase price for the Gabelli Notes and GP Warrants was $7,500,000.
The Gabelli Notes bear interest at 6% per annum payable semi-annually commencing on December 31, 2003 and mature in August 2008. The Gabelli Notes are secured by a mortgage on the Company’s former property located in Pawling, New York which was distributed to National Patent Development Corporation (NPDC)(“NPDC”) in connection with its spin-off by the Company on November 24, 2004. In addition, at any time that less than $1,875,000 of the principal amount of the Gabelli Notes is outstanding, the Company may defease the obligations secured by the mortgage and obtain a release of the mortgage by depositing with an agent for the Noteholders bonds or government securities with an investment grade rating by a nationally recognized rating agency which, without reinvestment, will provide cash on the maturity date of the Gabelli Notes in an amount not less than the outstanding principal amount of the Gabelli Notes.
Subsequent to the spin-off of NPDC in 2004 and GSE Systems, Inc. (GSE)(“GSE”) in 2005, and in accordance with the anti-dilution provisions of the warrant agreement for stock splits, reorganizations, mergers and similar transactions, the number of GP Warrants was adjusted to 984,116 and the exercise price was adjusted to $5.85 per share. The GP warrants are exercisable at any time until August 2008. The exercise price may be paid in cash, by delivery of the Gabelli Notes, or a combination of the two. During the yearyears ended December 31, 2007 and 2006, Gabelli exercised 624,862 and 197,823 GP Warrants, for a total exercise price of $1,157,000respectively, which was paid inreduced the form of $140,000 cash and delivery of $1,017,000principal balance of the Gabelli Notes and accrued interest thereon. Duringby an aggregate of $4,615,000. Gabelli did not exercise any warrants during the nine months ended September 30, 2007, Gabelli exercised 624,862 GP Warrants for a total exercise price of $3,655,000, which was paid in the form of delivery of the Gabelli Notes and
119
accrued interest thereon.GP STRATEGIES CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
March 31, 2008
(Unaudited)
three months ended March 31, 2008. As of September 30, 2007,March 31, 2008, there were 161,431 GP Warrants outstanding and exercisable with an exercise price of $5.85 per share outstanding and exercisable.$5.85.
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 and is being accreted as additional interest expense using the effective interest rate over the term of the Gabelli Notes. The Gabelli Notes have a yield to maturity of 15.436% based on the discounted value. Accretion charged as interest expense was approximately $57,000$61,000 and $119,000$75,000 for the three months ended September 30,March 31, 2008 and 2007, and 2006, respectively, and approximately $200,000 and $357,000 for the nine months ended September 30, 2007 and 2006, respectively. The exercises of the GP Warrants during the nine months ended September 30, 2007 resulted in a decrease of $3,225,000 in the carrying value of the Gabelli Notes, which was reclassified to equity to reflect the issuance of shares of common stock upon exercise.
(b) In October 2003, the Company issued a five-year 5% note due in full in October 2008 in the principal amount of $5,250,955$5,251,000 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. ManTech has not converted any portion of the note into common stock and the principal balance of such note was $5,251,000 as of March 31, 2008.
12
(8) Stockholders’ Equity
Changes in stockholders’ equity during the nine months ended September 30, 2007 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
| Accumulated |
| Note |
|
|
| |||||||
|
| Common |
| Additional |
|
|
| Treasury |
| other |
| receivable |
| Total |
| |||||||
|
| stock |
| paid-in |
| Accumulated |
| stock |
| comprehensive |
| from |
| stockholders’ |
| |||||||
|
| ($ 0.01 par) |
| capital |
| deficit |
| at cost |
| loss |
| stockholder |
| equity |
| |||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Balance at December 31, 2006 |
| $ | 178 |
| $ | 159,042 |
| $ | (65,558 | ) | $ | (13,167 | ) | $ | (640 | ) | $ | (124 | ) | $ | 79,731 |
|
Net income |
| — |
| — |
| 6,945 |
| — |
| — |
| — |
| 6,945 |
| |||||||
Other comprehensive income |
| — |
| — |
| — |
| — |
| 259 |
| — |
| 259 |
| |||||||
Repayment of note receivable from stock holder |
| — |
| — |
| — |
| — |
| — |
| 124 |
| 124 |
| |||||||
Repurchases of common stock |
| — |
| — |
| — |
| (2,525 | ) | — |
| — |
| (2,525 | ) | |||||||
Stock-based compensation expense |
| — |
| 465 |
| — |
| 13 |
| — |
| — |
| 478 |
| |||||||
Exercise of warrants by Gabelli |
| — |
| (1,124 | ) | — |
| 4,349 |
| — |
| — |
| 3,225 |
| |||||||
Cumulative effect adjustment upon adoption of FIN No. 48 |
| — |
| — |
| (98 | ) | — |
| — |
| — |
| (98 | ) | |||||||
Net issuances of treasury stock / other |
| — |
| (947 | ) | — |
| 3,430 |
| — |
| — |
| 2,483 |
| |||||||
Balance at September 30, 2007 |
| $ | 178 |
| $ | 157,436 |
| $ | (58,711 | ) | $ | (7,900 | ) | $ | (381 | ) | $ | — |
| $ | 90,622 |
|
13
(9) Comprehensive Income
The following are the components of comprehensive income (in thousands):
|
| Three months ended |
| Nine months ended |
| ||||||||
|
| September 30, |
| September 30, |
| ||||||||
|
| 2007 |
| 2006 |
| 2007 |
| 2006 |
| ||||
Net income |
| $ | 2,544 |
| $ | 1,747 |
| $ | 6,945 |
| $ | 4,861 |
|
Other comprehensive income |
| 155 |
| 123 |
| 259 |
| 256 |
| ||||
Comprehensive income |
| $ | 2,699 |
| $ | 1,870 |
| $ | 7,204 |
| $ | 5,117 |
|
As of September 30, 2007 and December 31, 2006, accumulated other comprehensive loss was $381,000 and $640,000, respectively, which consisted of foreign currency translation adjustments.
(10) Income Taxes
In July 2006, theUncertain tax positions are accounted for under Financial Accounting Standards Board (FASB) issued FASB(“FASB”) Interpretation No. 48, Accounting for Uncertainty in Income Taxes –— an Interpretation of FASB Statement No. 109 (FIN(“FIN No. 48)48”). FIN No. 48 prescribesrequires that a recognition threshold and measurement attribute for the financial statement recognition of a tax position taken or expected to be taken onin a tax return. Under FIN No. 48, a tax benefit from an uncertain tax position mayreturn be recognized only ifin the financial statements when it is “moremore likely than not”not (i.e., a likelihood of more than fifty percent) that the position is sustainablewould be sustained upon examination based on its technical merits. Theby tax benefitauthorities that have full knowledge of a qualifyingall relevant information. A recognized tax position under FIN No. 48 would equalis then measured at the largest amount of tax benefit that is greater than 50fifty percent likely of being realized upon ultimate settlement with a taxing authority having full knowledge of all relevant information. FIN No. 48 was effectivesettlement. Interest and penalties related to income taxes are accounted for as of January 1, 2007 for calendar-year companies. In applying the new accounting model prescribed by FIN No. 48, the Company was required to determine and assess all material positions existing as of the adoption date, including all significant uncertain positions, in allincome tax years, that were still subject to assessment or challenge under relevant tax statutes.expense.
Upon adoption on January 1, 2007, the Company recorded a net decrease of $98,000 to accumulated deficit to reflect the cumulative effect adjustment for FIN No. 48. As of January 1, 2007,March 31, 2008, the Company had $2,218,000 of unrecognized tax benefits, all of which would impact the effective tax rate if recognized. The Company recognizes interest and penalties related toThese unrecognized tax benefits are presented as a componentreduction of incomethe deferred tax expense. Asasset balance in the condensed consolidated balance sheet as of March 31, 2008 since they relate to tax positions taken in years which resulted in net operating loss carryforwards. The Company has not increased or decreased the amount of unrecognized tax benefits reflected in its condensed consolidated balance sheet since the adoption of FIN No. 48 on January 1, 2007, and does not expect any material changes to its uncertain tax positions in the next twelve months. As of March 31, 2008, the Company had no accrued interest or penalties.penalties due to the existence of net operating loss carryforwards in the years in which the related tax positions were taken. The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction, and various state and foreign jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal, state and local, or non-U.S. income tax examination by tax authorities for years prior to 2002.
10
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
March 31, 2008
(Unaudited)
(9) Stockholders’ Equity
Changes in stockholders’ equity during the three months ended March 31, 2008 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
| Accumulated |
|
|
| ||||||
|
|
|
| Additional |
|
|
| Treasury |
| other |
| Total |
| ||||||
|
| Common |
| paid-in |
| Accumulated |
| stock |
| comprehensive |
| stockholders’ |
| ||||||
|
| stock |
| capital |
| deficit |
| at cost |
| loss |
| equity |
| ||||||
Balance at December 31, 2007 |
| $ | 178 |
| $ | 156,422 |
| $ | (55,972 | ) | $ | (9,785 | ) | $ | (461 | ) | $ | 90,382 |
|
Net income |
| — |
| — |
| 2,849 |
| — |
| — |
| 2,849 |
| ||||||
Other comprehensive income |
| — |
| — |
| — |
| — |
| 110 |
| 110 |
| ||||||
Repurchases of common stock |
| — |
| — |
| — |
| (1,413 | ) | — |
| (1,413 | ) | ||||||
Stock-based compensation |
| — |
| 194 |
| — |
| 27 |
| — |
| 221 |
| ||||||
Issuances of treasury stock |
| — |
| (18 | ) | — |
| 457 |
| — |
| 439 |
| ||||||
Balance at March 31, 2008 |
| $ | 178 |
| $ | 156,598 |
| $ | (53,123 | ) | $ | (10,714 | ) | $ | (351 | ) | $ | 92,588 |
|
(10) Comprehensive Income
The following are the components of comprehensive income (in thousands):
|
| Three months ended |
| ||||
|
| March 31, |
| ||||
|
| 2008 |
| 2007 |
| ||
Net income |
| $ | 2,849 |
| $ | 2,054 |
|
Other comprehensive income - foreign currency translation |
| 110 |
| 33 |
| ||
Comprehensive income |
| $ | 2,959 |
| $ | 2,087 |
|
As of March 31, 2008 and December 31, 2007, accumulated other comprehensive loss was $351,000 and $461,000, respectively, and consisted of foreign currency translation adjustments.
(11) Business Segments
Prior to the acquisition of Sandy on January 23, 2007, the Company had two reportable business segments. Subsequent to the acquisition, Sandy is being run as an unincorporated operating group of General Physics. The Company determined that the operations of Sandy constitute a separate reportable business segment and its results of operations are included in the Sandy Sales Training & Marketing segment since
14
the effective date of the acquisition. As of September 30, 2007,March 31, 2008, the Company’sCompany operated through three reportable business segments are: 1) Process, Energy & Government; 2)segments: (i) Manufacturing & Business Process Outsourcing (BPO);(“BPO”), (ii) Process, Energy & Government, and 3)(iii) Sandy Sales Training & Marketing. The Company is organized by operating group primarily based upon the markets served by each group and the services performed. The Manufacturing & BPO and Process, Energy & Government and Manufacturing & BPO segments represent an aggregation of the Company’s operating segments in accordance with the aggregation criteria in SFAS No. 131,Disclosures about Segments of an Enterprise and Related Information( (“SFAS No. 131)131”), and the Sandy Sales Training & Marketing segment represents one operating segment as defined in SFAS No. 131. Below is a descriptionDuring the first quarter of each of2008, the Company’s reportableCompany transferred the management responsibility for its automotive technical training business segments.unit from the Manufacturing &
11
•GP STRATEGIES CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
March 31, 2008
(Unaudited)
BPO segment to the Sandy Training & Marketing segment. The Company has reclassified the segment information below for the prior year interim period to reflect this change and conform to the current period’s presentation.
Further information regarding our business segments is discussed below.
Manufacturing & BPO. The Manufacturing & BPO segment delivers training, curriculum design and development, staff augmentation, e-Learning services, system hosting, integration and help desk support, training business process outsourcing, and consulting and technical services primarily to large companies in the steel, pharmaceutical, electronics and semiconductors, automotive, financial and other industries as well as to government agencies. The October 2007 acquisition of Via has expanded this segment’s delivery capabilities and diversified its core client base in the software, electronics and semiconductors and retail markets. This segment’s ability to deliver a wide range of training services allows the Company to take over the entire learning function for the client, including their training personnel.
Process, Energy & Government. The Process, Energy & Government — this segment has over four decades of experience providing consulting, engineering, technical and training services, including emergency preparedness, safety and regulatory compliance, chemical demilitarization and environmental services primarily servesto federal and state governmentalgovernment agencies, large government contractors, petroleum and chemical refining companies and electric power utilities and provides engineering consulting, design and evaluation services regarding facilities, the environment, processes and systems, and staff augmentation, curriculum design and development, and training and technical services.utilities.
•Sandy Training and Marketing. Manufacturing & BPO – this segment primarily serves large companiesAcquired in the automotive, steel, pharmaceutical, electronics, and other industries as well as certain governmental clients and provides training, curriculum design and development, staff augmentation, e-learning services, system hosting, integration and help desk support, business process and training outsourcing, and consulting and technical services.
•January 2007, Sandy Sales Training & Marketing – this segment providesis a provider of custom product sales training and print-basedhas been a leader in serving manufacturing customers in the U.S. automotive industry for over thirty years. Sandy provides custom product sales training designed to better educate customer sales forces with respect to new product features and electronic publications primarilydesigns, in effect rapidly increasing the sales force knowledge base and enabling them to theaddress detailed customer queries. Furthermore, Sandy helps its clients assess their customer relationship management strategy, measure performance against competitors and connect with customers on a one-to-one basis. As mentioned above, this segment also provides technical training services to automotive industry.customers.
For the nine months ended September 30, 2007 and 2006, sales to the United States government and its agencies represented approximately 18% and 30%, respectively,Significant Customers & Concentration of the Company’s revenue. Revenue from the Department of the Army, which is included in the Process, Energy & Government segment, accounted for approximately 9% and 13% of the Company’s revenue for the nine months ended September 30, 2007 and 2006, respectively.Credit Risk
As a result of the acquisition of Sandy, theThe Company has a concentration of revenue from General Motors Corporation and its affiliates (“General Motors”) as well as a market concentration in the automotive sector. RevenueFor the three months ended March 31, 2008 and 2007, revenue from General Motors accounted for approximately 21%22% and 20%, respectively, of the Company’s consolidated revenue, for the nine months ended September 30, 2007, and revenue from the automotive industry accounted for approximately 30%29% and 25%, respectively, of the Company’s consolidated revenue. Accounts receivable from General Motors totaled $11,731,000 as of March 31, 2008 which is reflected in the condensed consolidated balance sheet. No other customer accounted for more than 10% of the Company’s revenue in the first quarter of 2008 or accounts receivable as of March 31, 2008.
The Company also has a concentration of revenue from the United States government. For the three months ended March 31, 2008 and 2007, sales to the United States government and its agencies represented approximately 18% and 20%, respectively, of the Company’s consolidated revenue. Revenue was derived from many separate contracts with a variety of government agencies that are regarded by the Company as separate customers. Revenue from the Department of the Army, which is included in the
12
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
March 31, 2008
(Unaudited)
Process, Energy & Government segment, accounted for approximately 6% and 10% of the Company’s consolidated revenue for the ninethree months ended September 30, 2007.March 31, 2008 and 2007, respectively.
The Company does not allocate the following corporate items to the segments: other income and interest expense; selling, general and administrative expense; and income tax expense. Inter-segment revenue is eliminated in consolidation and is not significant.
15
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 before income tax expense (in thousands):
|
| Three months ended |
| Nine months ended |
| ||||||||
|
| September 30, |
| September 30, |
| ||||||||
|
| 2007 |
| 2006 |
| 2007 |
| 2006 |
| ||||
Revenue: |
|
|
|
|
|
|
|
|
| ||||
Process, Energy & Government |
| $ | 18,882 |
| $ | 18,910 |
| $ | 52,400 |
| $ | 57,821 |
|
Manufacturing & BPO |
| 27,055 |
| 25,141 |
| 80,181 |
| 75,537 |
| ||||
Sandy Sales Training & Marketing |
| 14,900 |
| — |
| 45,457 |
| — |
| ||||
|
| $ | 60,837 |
| $ | 44,051 |
| $ | 178,038 |
| $ | 133,358 |
|
Operating income: |
|
|
|
|
|
|
|
|
| ||||
Process, Energy & Government |
| $ | 3,132 |
| $ | 2,055 |
| $ | 7,884 |
| $ | 5,450 |
|
Manufacturing & BPO |
| 1,795 |
| 1,572 |
| 5,548 |
| 5,062 |
| ||||
Sandy Sales Training & Marketing* |
| (68 | ) | — |
| 221 |
| — |
| ||||
Corporate and other general and administrative expenses |
| (477 | ) | (544 | ) | (1,533 | ) | (1,714 | ) | ||||
|
| 4,382 |
| 3,083 |
| 12,120 |
| 8,798 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Interest expense |
| (296 | ) | (376 | ) | (955 | ) | (1,233 | ) | ||||
Other income |
| 148 |
| 180 |
| 662 |
| 764 |
| ||||
Income before income tax expense |
| $ | 4,234 |
| $ | 2,887 |
| $ | 11,827 |
| $ | 8,329 |
|
* Operating income for the Sandy Sales Training & Marketing segment includes expense for the amortization of intangible assets totaling $375,000 and $1,301,000 for the three and nine months ended September 30, 2007, respectively.
|
| Three months ended |
| ||||
|
| March 31, |
| ||||
|
| 2008 |
| 2007 |
| ||
Revenue: |
|
|
|
|
| ||
Manufacturing & BPO |
| $ | 29,121 |
| $ | 23,500 |
|
Process, Energy & Government |
| 19,430 |
| 16,778 |
| ||
Sandy Training & Marketing |
| 18,368 |
| 13,265 |
| ||
|
|
|
|
|
| ||
|
| $ | 66,919 |
| $ | 53,543 |
|
Operating income: |
|
|
|
|
| ||
Manufacturing & BPO |
| $ | 1,919 |
| $ | 1,530 |
|
Process, Energy & Government |
| 2,791 |
| 1,931 |
| ||
Sandy Training & Marketing |
| 783 |
| 470 |
| ||
Corporate and other |
| (539 | ) | (508 | ) | ||
|
|
|
|
|
| ||
|
| 4,954 |
| 3,423 |
| ||
|
|
|
|
|
| ||
Interest expense |
| (237 | ) | (272 | ) | ||
Other income |
| 151 |
| 371 |
| ||
|
|
|
|
|
| ||
Income before income tax expense |
| $ | 4,868 |
| $ | 3,522 |
|
(12) Related Party Transactions
Loans
On April 1, 2002, Jerome I. Feldman, the Company’s then Chief Executive Officer (CEO), entered into an incentive compensation agreement with the Company pursuant to which he was eligible to receive from the Company up to five payments of $1,000,000 each, based on the closing price of the Company’s Common Stock sustaining or averaging increasing specified levels over periods of at least 10 consecutive trading days. On June 11, 2003, July 23, 2003, December 22, 2003, November 3, 2004 and December 10, 2004, he earned an incentive payment of $1,000,000 each. The Company recorded compensation expense of $2,000,000 and $3,000,000 for the years ended December 31, 2004 and 2003, respectively, for this incentive compensation. Under the terms of the incentive compensation agreement, Mr. Feldman deferred payment of the incentive payments until May 31, 2007.
16
To the extent there were any outstanding loans from the Company to the CEO at the time an incentive payment was payable, the Company had the right to off-set the payment of such incentive payment first against the outstanding accrued interest under such loans and next against any outstanding principal. On May 31, 2007, the Company applied the entire deferred incentive compensation earned by the CEO during 2004 and 2003 against the unpaid accrued interest and principal on his outstanding loans which had been issued to him previously to exercise stock options to purchase Class B Common Stock of the Company.
The notes bore interest at the prime rate and were secured by certain assets owned by him. All unpaid principal and accrued interest on the loans were due on May 31, 2007. As of May 31, 2007, the Company had notes receivable and accrued interest from Mr. Feldman of approximately $207,000 after offsetting the $5 million deferred incentive compensation earned in 2004 and 2003, as discussed above. Mr. Feldman repaid the outstanding note receivable balance and accrued interest owed by him to the Company in cash during the second quarter of 2007.
Management Services Agreement Between NPDC and the Company
Prior to the spin-off of NPDC in 2004, 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 has provided certain general corporate services to NPDC and has been reimbursed for such services. 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. The Company charged NPDC approximately $0 and $234,000 for the three months ended September 30, 2007 and 2006, respectively, and $352,000 and $692,000 for the nine months ended September 30, 2007 and 2006, respectively, for services under the management agreement, which are reflected as reductions of selling, general and administrative expense in the accompanying condensed consolidated statements of operations.
(13) Commitments & Guarantees
Commitments
During 2007, General Physics entered into new and/or amendments to employment agreements with certain of its senior and executive officers. The agreements have initial employment terms which extend through at least February 2009 (with certain extension clauses), and contain non-compete covenants and change of control and termination provisions.
Guarantees
Subsequent to the spin-off of NPDC, the Company continued to guarantee certain obligations of NPDC’s subsidiaries, Five Star Products, Inc. (“Five Star”) and MXL Industries, Inc. (“MXL”). The Company guaranteed certain operating leases for Five Star’s New Jersey and Connecticut warehouses, totalingwhich totaled approximately $1,589,000 per year through March 31, 2007. The leases have been extended and now expire in the first quarter of 2009. The annual rent obligations are currently approximately $1,600,000. In connection with the spin-off of NPDC by the Company, NPDC agreed to assume the Company’s obligation under such guarantees, to use commercially reasonable efforts to cause the Company to be
17
released from each such guaranty, and to hold the Company harmless from all claims, expenses and liabilities connected with the leases or NPDC’s breach of any agreements effecting the spin-off. The Company has not received confirmation that it has been released from these guarantees. The Company
13
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
March 31, 2008
(Unaudited)
does not expect to incur any material payments associated with these guarantees, and as such, no liability is reflected in the condensed consolidated balance sheet.sheets.
The Company also guarantees the repayment of a debt obligation of MXL, which is secured by property and certain equipment of MXL. The aggregate outstanding balance of MXL’s debt obligation as of September 30, 2007March 31, 2008 was $1,030,000.$980,000. The Company’s guarantee expires upon the maturity of the debt obligation in March 2011. The Company does not expect to incur any material payments associated with this guarantee, and as such, no liability is reflected in the condensed consolidated balance sheet.sheets.
(14)(13) Litigation
In November 2004, an arbitrator awarded2001 the Company $12,274,000 in damages and $6,016,000 in interestinitiated legal proceedings in connection with the Company’sits 1998 acquisition of Learning Technologies from various subsidiaries (“Systemhouse”) of MCI Communications Corporation (“MCI”) which were subsequently acquired by Electronic Data Systems Corporation (“EDS”). EDS made a payment of $18,428,000 which included post-award interest of $139,000 to satisfy its obligation under the arbitration award. The Company recognized a gain on arbitration settlement, net of legal fees and expenses of $13,660,000 in 2004. In accordance with a spin-off agreement with NPDC, the Company made an additional capital contribution to NPDC of approximately $5,000,000 of the settlement proceeds.
In November 2005, the Companyhas settled its remaining fraud claims against EDS and Systemhouse, in connection with the acquisition of Learning Technologies. Pursuantbut continues to the settlement, EDS madehave a cash payment to the Company in the amount of $9,000,000 in December 2005. The Company recognized a gain on the litigation settlement, net of legal fees and expenses, of approximately $5,552,000 in the fourth quarter of 2005. In accordance with a spin-off agreement with NPDC, the Company madeclaim against MCI as an additional capital contribution to NPDC of approximately $1,201,000 of the settlement proceeds.unsecured creditor.
The Company’s original fraud action included MCI as a defendant. The fraud action against MCI had been stayed as a result of MCI’s bankruptcy filing in 2002, and the Company’s claims against MCI were not tried or settled with the claims against EDS and Systemhouse. On December 13, 2005, the Bankruptcy Court heard arguments on a summary judgment motion that MCI had made before filing for bankruptcy. On September 12, 2006, the Bankruptcy Court asked the parties to submit further briefs concerning whether the summary judgment motion should be decided based on the standard applicable to such motions under state or federal law. On August 21, 2007, the Court granted the motion in part and denied the motion in part, letting the action proceed with respect to the Company’s allegation that MCI, through its employees acting on its behalf, made a false oral representation relating to the sale of Systemhouse to EDS. Pursuant to the spin-off agreement with NPDC, the Company will contribute to NPDC 50% of any proceeds received in the future, net of legal fees and taxes, with respect to the litigation claims.
The Company is not a party to any legal proceeding, the outcome of which is believed by management to have a reasonable likelihood of having a material adverse effect upon the financial condition and operating results of the Company.
1814
(15) Subsequent Event
Effective October 1, 2007, General Physics acquired Via, a custom e-learning sales training company, for a purchase price of $1,800,000 in cash paid at closing. In addition, General Physics may be required to pay up to an additional $3,250,000, contingent upon Via achieving certain earnings targets during the two twelve-month periods following the completion of the acquisition (see note 3).
19
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Results of Operations
The Company’sOur business consists of itsour principal operating subsidiary, General Physics, a global training, engineering, technical services and consulting company that seeks to improve the effectiveness of organizations by providing training, management consulting, e-learninge-Learning solutions, engineering and engineeringtechnical services and products that are customized to meet the specific needs of clients. Clients include Fortune 500 companies and manufacturing, process and energy companies and other commercial and governmental customers. General Physics isWe believe we are a global leader in performance improvement, with over four decades of experience in providing solutions to optimize workforce performance.
Prior to the acquisition of Sandy Corporation (“Sandy”) on January 23, 2007, the Company had two reportable business segments. Subsequent to the acquisition, Sandy is run as an unincorporated operating group of General Physics. The Company determined that the operations of Sandy constitute a separate reportable business segment and its results of operations are included in the Sandy Sales Training & Marketing segment since the effective date of the acquisition. As of September 30, 2007, the Company’sWe operate through three reportable business segments are: 1) Process, Energy & Government; 2)segments: (i) Manufacturing & Business Process Outsourcing (BPO);(“BPO”), (ii) Process, Energy & Government, and 3)(iii) Sandy Sales Training & Marketing. The Company is We are organized by operating group primarily based upon the markets served by each group and the services performed. The Manufacturing & BPO and Process, Energy & Government and Manufacturing & BPO segments represent an aggregation of the Company’sour operating segments in accordance with the aggregation criteria in Statement of Financial Accounting Standards (SFAS)SFAS No. 131,Disclosures about Segments of an Enterprise and Related Information (SFAS(“SFAS No. 131)131”), and the Sandy Sales Training & Marketing segment represents one operating segment as defined in SFAS No. 131. During the first quarter of 2008, we transferred the management responsibility for our automotive technical training business unit from the Manufacturing & BPO segment to the Sandy Training & Marketing segment. The Company has reclassified the segment information for the prior year interim period to reflect this change and conform to the current period’s presentation.
Further information regarding our business segments is discussed below.
Manufacturing & BPO.The following isManufacturing & BPO segment delivers training, curriculum design and development, staff augmentation, e-Learning services, system hosting, integration and help desk support, training business process outsourcing, and consulting and technical services primarily to large companies in the steel, pharmaceutical, electronics and semiconductors, automotive, financial and other industries as well as to government agencies. The October 2007 acquisition of Via Training, LLC (“Via”) has expanded this segment’s delivery capabilities and diversified its core client base in the software, electronics and semiconductors and retail markets. This segment’s ability to deliver a descriptionwide range of training services allows us to take over the Company’s three reportable business segments:entire learning function for the client, including their training personnel.
Process, Energy & Government.
• The Process, Energy & Government – this segment has over four decades of experience providing consulting, engineering, technical and training services, including emergency preparedness, safety and regulatory compliance, chemical demilitarization and environmental services primarily servesto federal and state governmentalgovernment agencies, large government contractors, petroleum and chemical refining companies and electric power utilities and provides engineering consulting, design and evaluation services regarding facilities, the environment, processes and systems, and staff augmentation, curriculum design and development, and training and technical services.utilities.
•Sandy Training and Marketing. Manufacturing & BPO - this segment primarily serves large companiesAcquired in the automotive, steel, pharmaceutical, electronics, and other industries as well as certain governmental clients and provides training, curriculum design and development, staff augmentation, e-learning services, system hosting, integration and help desk support, business process and training outsourcing, and consulting and technical services.
•January 2007, Sandy Sales Training & Marketing - - this segment providesis a provider of custom product sales training and print-basedhas been a leader in serving manufacturing customers in the U.S. automotive industry for over thirty years. Sandy provides custom product sales training designed to better educate customer sales forces with respect to new product features and electronic publications primarilydesigns, in effect rapidly increasing the sales force knowledge base and enabling them to theaddress detailed customer queries. Furthermore, Sandy helps its clients assess their customer relationship management strategy, measure performance against competitors and connect with customers on a one-to-one basis. As mentioned above, this segment also provides technical training services to automotive industry.customers.
15
Acquisitions
Sandy CorporationAcquisition
On January 23, 2007,March 1, 2008, General Physics completed the acquisition of certain operating assetsPerformance Consulting Services, Inc. (“PCS”), a company specializing in performance engineering support, training, combustion optimization, the implementation of smart equipment condition monitoring systems and the business of Sandy, a leader in custom product sales training and part of the ADP Dealer Services division of ADP. The Sandy business is run as an unincorporated division of General Physics. Sandy offers custom sales training and
20
print-based and electronic publications primarily to the automotive industry.testing services for power plants. The purchase price consistedconsists of approximately $4.4$1.0 million in cash paid at closing and $1.0 million of guaranteed future payments to ADP from cashbe paid in two equal installments on handJanuary 31, 2009 and the assumption by General Physics of certain liabilities to complete contracts.January 31, 2010. In addition, General Physics may be required to pay ADP up to an additional $8.0$2.3 million, contingent upon Sandy achievingthe achievement of certain revenue targets, as defined in the purchase agreement, during the two twelve-month periods following the completion of the acquisition.
The purchase price consisted of the following (in thousands):
Cash purchase price |
| $ | 4,393 |
|
Acquisition costs |
| 964 |
| |
Total purchase price |
| $ | 5,357 |
|
The Company’s preliminary purchase price allocation for the net assets acquired is as follows (in thousands):
Inventory |
| $ | 783 |
| |
Prepaid expenses and other current assets |
| 67 |
| ||
Property, plant and equipment |
| 134 |
| ||
Amortizable intangible assets |
| 6,006 |
| ||
Goodwill |
| 679 |
| ||
Total assets |
| 7,669 |
| ||
Accounts payable, accrued expenses and other liabilities |
| 1,004 |
| ||
Billings in excess of costs and estimated earnings on uncompleted contracts |
| 1,308 |
| ||
Total liabilities assumed |
| 2,312 |
| ||
|
|
|
| ||
| Net assets acquired |
| $ | 5,357 |
|
The Company recorded customer-related intangible assets as a result of the acquisition, which included $4,701,000 relating to customer lists and relationships acquired with an estimated useful life of 12 years, and $1,305,000 relating to contract backlog for future services under firm contracts to be amortized over 14 months subsequent to the acquisition in proportion to the amount of related backlog to be recognized in revenue. During the three and nine months ended September 30, 2007, the Company recognized $375,000 and $1,301,000 of amortization expense for these intangible assets, respectively. The amortization related to the contract backlog intangible asset totaled $277,000 and $1,040,000 for the three and nine months ended September 30, 2007, respectively, and the amortization related to the customer lists and relationships intangible asset totaled $98,000 and $261,000 for the three and nine months ended September 30, 2007, respectively.
The following unaudited pro forma condensed consolidated results of operations assume that the acquisition of Sandy was completed as of January 1 for each of the interim periods shown below:
21
|
| Nine months ended |
| ||||
|
| September 30, |
| ||||
|
| 2007 |
| 2006 |
| ||
|
| (In thousands, except per share amounts) |
| ||||
Revenue |
| $ | 181,986 |
| $ | 184,956 |
|
Net income |
| 7,035 |
| 6,320 |
| ||
Basic earnings per share |
| 0.42 |
| 0.38 |
| ||
Diluted earnings per share |
| 0.41 |
| 0.36 |
| ||
The pro forma data above may not be indicative of the results that would have been obtained had the acquisition actually been completed at the beginning of the periods presented, nor is it intended to be a projection of future results.
Smallpeice Enterprises Ltd. (SEL)
On June 1, 2007, General Physics, through its wholly owned GPUK subsidiary, completed the acquisition of Smallpeice Enterprises Ltd. (“SEL”), a provider of business improvement and technical and management training services in the United Kingdom. GPUK acquired 100% ownership of SEL for a purchase price of approximately $3.3 million in cash, subject to post-closing adjustment based on actual net assets, and incurred approximately $0.2 million of acquisition costs. In addition, General Physics may be required to pay the seller up to an additional $1.8 million, contingent upon SEL achieving certain earnings targets, as defined in the purchase agreement, during the one-year period following completion of the acquisition. SELPCS is included in the Company’s Manufacturingour Process, Energy & BPOGovernment segment and itsthe results of its operations arehave been included in the condensedour consolidated financial statements sincefor the date of the acquisition.period beginning March 1, 2008. The pro-forma impact of the SELPCS acquisition is not material to the Company’sour results of operations for the three and nine months ended September 30, 2007.
March 31, 2008.The Company’s preliminary estimated purchase price allocation for the net assets acquired is as follows (in thousands):
Cash |
| $ | 30 |
| |
Accounts receivable and other current assets |
| 1,275 |
| ||
Property, plant and equipment |
| 172 |
| ||
Goodwill and intangible assets |
| 2,866 |
| ||
Total assets |
| 4,343 |
| ||
Accounts payable, accrued expenses and other liabilities |
| 712 |
| ||
Billings in excess of costs and estimated earnings on uncompleted contracts |
| 158 |
| ||
Total liabilities assumed |
| 870 |
| ||
|
|
|
| ||
| Net assets acquired |
| $ | 3,473 |
|
Via Training
Effective October 1, 2007, General Physics acquired Via, a custom e-learning sales training company, for a purchase pricePCS was $2.1 million, which consisted of $1.8$1.0 million in cash paid at closing. closing, $1.0 million of deferred payments and approximately $0.1 million of acquisition costs. The preliminary purchase price allocation consists of approximately $0.2 million of tangible net assets and $1.9 million of goodwill and intangible assets. We are currently finalizing the purchase price allocation, including the valuation of intangible assets.In addition, General Physics may be required to pay up to
22
an additional $3.3 million, contingent upon Via achieving certain earnings targets during the two twelve-month periods following the completion of the acquisition. Via will be included in the Company’s Manufacturing & BPO segment and its results of operations will be included in its consolidated financial statements effective October 1, 2007.Share Repurchase Program
As previously disclosed, our Board of Directors authorized the repurchase of shares of our common stock from time to time in the open market, subject to prevailing business and market conditions and other factors. An aggregate of $13.0 million of share repurchases was authorized, which consisted of $5.0 million authorized in January 2006, an additional $5.0 million authorized in August 2007, and an additional $3.0 million authorized in March 2008. During the years ended December 31, 2007 and 2006, we repurchased approximately 678,500 and 420,000 shares, respectively, of our common stock in the open market for a total cost of approximately $6.5 million and $3.1 million, respectively. During the three months ended March 31, 2008, we repurchased approximately 152,000 shares of our common stock in the open market for a total cost of approximately $1.4 million. As of March 31, 200 8, there was approximately $2.0 million available for future share repurchases under the buyback program. There is no expiration date for the repurchase program.
Operating Highlights
Three Months ended September 30, 2007 ComparedMarch 31, 2008 compared to the Three Months ended September 30, 2006March 31, 2007
For the three months ended September 30, 2007, the CompanyMarch 31, 2008, we had income before income tax expense of $4.2$4.9 million compared to $2.9$3.5 million for the three months ended September 30, 2006.March 31, 2007. The improved results arewere primarily due to an increase in operating income of $1.3$1.5 million, the components of which are discussed below, and largely a result of increased margins in the Process, Energy & Government segment and the Sandy and SEL acquisitions which were accretive to earnings for the third quarter of 2007.below. Net income was $2.5$2.8 million, or $0.15$0.17 per diluted share, for the third quarter of 2007three months ended March 31, 2008, compared to net income of $1.7$2.1 million, or $0.11$0.12 per diluted share, for the third quarter of 2006.three months ended March 31, 2007.
Diluted weighted average shares outstanding were 17.3 million for the third quarter of 2007 compared to 16.6 million for the third quarter of 2006. The increase in shares outstanding is primarily due to the issuance of shares for warrant and stock option exercises, offset by shares repurchased in the open market in 2007. In connection with its share repurchase program, the Company repurchased 110,300 shares of common stock in the open market during the three months ended September 30, 2007 for approximately $1.2 million in cash. In August 2007, the Company’s Board of Directors authorized an additional $5 million of future share repurchases under the buyback program. As of September 30, 2007, there was approximately $4.4 million remaining to be used for repurchases under the additional $5 million buyback program authorized in August 2007.16
Revenue
|
| Three months ended |
| ||||
|
| September 30, |
| ||||
(Dollars in thousands) |
| 2007 |
| 2006 |
| ||
|
|
|
|
|
| ||
Process, Energy & Government |
| $ | 18,882 |
| $ | 18,910 |
|
Manufacturing & BPO |
| 27,055 |
| 25,141 |
| ||
Sandy Sales Training & Marketing |
| 14,900 |
| — |
| ||
|
| $ | 60,837 |
| $ | 44,051 |
|
Process, Energy & Government revenue was $18.9 million during both the third quarter of 2007 and the third quarter of 2006. Despite revenue being flat quarter over quarter, the following offsetting fluctuations were experienced by this segment during the third quarter of 2007 compared to the same period in 2006: net increases of $0.8 million in engineering and training services for petroleum and refining customers, net increases of $0.6 million for construction jobs primarily for liquefied natural gas (LNG) and hydrogen fueling station facilities, offset by a $1.2 million decrease in revenue from hurricane recovery services, and net decreases of $0.2 million primarily due to the completion of chemical demilitarization projects.
|
| Three months ended |
| ||||
|
| March 31, |
| ||||
(Dollars in thousands) |
| 2008 |
| 2007 |
| ||
|
|
|
|
|
| ||
Manufacturing & BPO |
| $ | 29,121 |
| $ | 23,500 |
|
Process, Energy & Government |
| 19,430 |
| 16,778 |
| ||
Sandy Training & Marketing |
| 18,368 |
| 13,265 |
| ||
|
| $ | 66,919 |
| $ | 53,543 |
|
Manufacturing & BPO revenue increased $1.9$5.6 million or 7.6%23.9% during the thirdfirst quarter of 20072008 compared to the thirdfirst quarter of 2006.2007. The increase in revenue is primarily due to the following: a $1.8$2.4 million increase in revenue from our operations in the United Kingdom, duewhich consists of a $1.4 million increase attributable to the acquisition of SEL which contributed $1.3Smallpeice Enterprises Limited (SEL) in June 2007 and a $1.0 million increase in revenue during the third
23
quarter of 2007, as well as the impact of foreign currency exchange fluctuationsprimarily due to increased training services with European BPO clients; a $1.5 million increase in the third quarter of 2007 comparedrevenue attributable to the third quarteracquisition of 2006. Other revenue increases during the third quarter of 2007 compared to the third quarter of 2006 included anVia in October 2007; a $2.3 million net increase in trainingBPO and consulting services with steel customers of $0.8 million and net increases of $0.2 million in the expansion of BPOe-Learning services with new and existing customers. The $0.2 million net increase in BPO services was comprised of $1.1 million of net increases with new and existing customers, offset by a decrease in revenue of $0.9 million from a BPO client in 2007 due to a reduction in scope. These net increases in revenue wereU.S. customers; offset by a $0.6 million decreasereduction in revenue due to reduced funding onservices for a lean manufacturing contract asconsulting client in the first quarter of 2008 compared to the thirdfirst quarter of 2006, and other net decreases2007.
Process, Energy & Government revenue increased $2.7 million or 15.8% during the first quarter of 2008 compared to the first quarter of 2007. The increase in revenue is due to the following: a $1.2 million net increase in training and related products and services primarily to energy customers; a $0.8 million net increase relating to construction projects for liquefied natural gas (LNG) and hydrogen fueling station facilities; and a $0.7 million net increase in engineering and technical services primarily for customers in the aerospace industry.
Sandy Training & Marketing revenue increased $5.1 million or 38.5% during the first quarter of $0.32008 compared to the first quarter of 2007. Of the net revenue increase, $3.9 million is due to Sandy’s results being included for a full quarter in 2008 compared to a partial quarter in 2007, as the acquisition of Sandy was completed on January 23, 2007. In addition, revenue increased $1.6 million during the first quarter of 2008 primarily due to fewer e-learning implementationsthe expansion of sales training programs with existing automotive customers and content development services taking placean increase in publications shipped during the thirdfirst quarter of 20072008 compared to the third quarter of 2006.
The acquisition of Sandy resulted in an increase in revenue of $14.9 million during the thirdfirst quarter of 2007. The resultsincreases in revenue in this segment were offset by a $0.4 million decrease in technical training services provided to automotive customers. As mentioned above, we transferred management responsibility for our automotive technical training business unit from the Manufacturing & BPO segment to the Sandy Training & Marketing segment during the first quarter of Sandy’s operations have been included in the Company’s consolidated statements of operations since the completion of the acquisition on January 23, 2007. The Company may2008.
We experience significant quarterly fluctuations in revenue and income related to Sandy’s publications business, since revenue and cost on publication contracts are recognized in the period in which the publications ship, based on the output method of performance. Shipments occur at various times throughout the year and the volume of publications shipped could fluctuate from quarter to quarter. Publications revenue in the Sandy Sales Training & Marketing segment totaled $1.4$4.0 million during the thirdfirst quarter of 2007,2008 compared to $4.1 million during the second quarter of 2007 and $2.6 million during the first quarter of 2007. Publications revenue increased $1.4 million during the first quarter of 2008 compared to the first quarter of 2007, with $1.1 million of the increase in publications revenue reflected in the $3.9 million net increase attributable to the timing of the Sandy acquisition noted above.
17
Gross Profit
|
| Three months ended |
|
| Three months ended |
| ||||||||||||||||
|
| September 30, |
|
| March 31, |
| ||||||||||||||||
|
| 2007 |
| 2006 |
|
| 2008 |
| 2007 |
| ||||||||||||
(Dollars in thousands) |
|
|
| % Revenue |
|
|
| % Revenue |
|
|
|
| % Revenue |
|
|
| % Revenue |
| ||||
Manufacturing & BPO |
| $ | 3,715 |
| 12.8 | % | $ | 3,146 |
| 13.4 | % | |||||||||||
Process, Energy & Government |
| 3,932 |
| 20.2 | % | 3,101 |
| 18.5 | % | |||||||||||||
Sandy Training & Marketing |
| 2,110 |
| 11.5 | % | 1,795 |
| 13.5 | % | |||||||||||||
|
|
|
|
|
|
|
|
|
|
| $ | 9,757 |
| 14.6 | % | $ | 8,042 |
| 15.0 | % | ||
Process, Energy & Government |
| $ | 4,221 |
| 22.4 | % | $ | 3,449 |
| 18.2 | % | |||||||||||
Manufacturing & BPO |
| 3,501 |
| 12.9 | % | 3,461 |
| 13.8 | % | |||||||||||||
Sandy Sales Training & Marketing |
| 1,325 |
| 8.9 | % | — |
| — |
| |||||||||||||
|
| $ | 9,047 |
| 14.9 | % | $ | 6,910 |
| 15.7 | % |
Manufacturing & BPO gross profit of $3.7 million or 12.8% of revenue for the first quarter of 2008 increased by $0.6 million or 18.1% when compared to gross profit of $3.1 million or 13.4% of revenue for the first quarter of 2007. The increase in gross profit dollars is primarily attributable to the increase in gross profit from our UK operations largely due to the acquisition of SEL in June 2007, and due to other revenue increases in this segment including an increase attributable to the acquisition of Via in October 2007. Gross profit as a percentage of revenue decreased slightly in this segment during the first quarter of 2008 compared to the first quarter of 2007, primarily due to some courses running below full capacity for certain of our BPO clients, as well as a decline in revenue and corresponding profit margin in lean consulting services during the first quarter of 2008 as mentioned above in the revenue section.
Process, Energy & Government gross profit of $4.2$3.9 million or 22.4%20.2% of revenue for the thirdfirst quarter of 20072008 increased by $0.8 million or 22.4%26.8% when compared to gross profit of $3.4$3.1 million or 18.2%18.5% of revenue for the thirdfirst quarter of 2006. This2007. The increase in gross profit dollars and margin is primarily attributable to revenue and margin increases on petroleum and refining projects due to both direct costs and indirect overhead costs increasing at a lower rate than the revenue growth on these projectsin this segment, including an increase in software product sales to energy clients during the thirdfirst quarter of 20072008, as well as costs not increasing as the same rate as the revenue growth for certain business units within this segment during the first quarter of 2008 compared to the thirdfirst quarter of 2006. In addition, there were increases in2007.
Sandy Training and Marketing gross profit due to revenue growth on construction jobs primarily for liquefied natural gas (LNG) and hydrogen fueling station facilities, as well as an increase in gross profit related to the sale of a software product to an energy customer that occurred during the third quarter of 2007. Costs were also reduced to re-align with the declining revenue streams experienced by the other areas within this segment as discussed above.
Manufacturing & BPO gross profit was $3.5$2.1 million or 12.9%11.5% of revenue for the thirdfirst quarter of 20072008 increased by $0.3 million or 17.5% when compared to gross profit of $3.5$1.8 million or 13.8%13.5% of revenue for the thirdfirst quarter of 2006. 2007. The increase in gross profit dollars is largely due to Sandy’s results being included for a full quarter in 2008 compared to a partial quarter in 2007, as the acquisition of Sandy was completed on January 23, 2007, as well as the other net increases in revenue discussed above. Gross profit was flat quarter over quarter, but decreased as a percentage of revenue fordecreased in this segment during the thirdfirst quarter of 2008 compared to the first quarter of 2007, compared to 2006. The decreased margins areprimarily due to the following: non-billable start-upan increase in business development costs incurred onrelated to our west coast operations in this segment, and a new major BPO contract during the third quarter of 2007, a lower volume of participant attendance per course fordecrease in revenue and margin in our automotive technical training provided to certain BPO customers during the third quarter of 2007 compared to the third quarter of 2006,
24
and investments in the expansion of international operations during the third quarter of 2007 compared to the third quarter of 2006.
Sandy Sales Training and Marketing gross profit was $1.3 million or 8.9% of revenue for the third quarter of 2007. The results of Sandy’s operations have been included in the Company’s consolidated statements of operations since the completion of the acquisition on January 23, 2007.business unit within this segment.
Selling, General and Administrative Expenses
SG&ASelling, general and administrative expenses increased $0.8$0.2 million or 21.9%4.0% from $3.8$4.6 million for the thirdfirst quarter of 20062007 to $4.7$4.8 million for the thirdfirst quarter of 2007.2008. The increase in SG&A expenses during the third quarter of 2007 compared to the third quarter of 2006 is primarily due to an increase in amortization expense of $0.4 million related to intangible assets recorded in connection with the acquisition of Sandy and an increase in labor, benefits and facilities expense of $0.4related to the acquisitions we completed during 2007, offset by a net $0.2 million decrease in amortization expense for intangible assets, primarily due to a decrease in amortization expense associated with the backlog we acquired in connection with the Sandy acquisition.acquisition which became fully amortized in the first quarter of 2008.
18
Interest Expense
Interest expense was $0.3 milliondecreased from $272,000 for the thirdfirst quarter of 2007 compared to $0.4 million$237,000 for the thirdfirst quarter of 2006.2008. The slight decrease of $80,000 is primarily due to a decrease in interest expense related to the Gabelli Notes as a result of warrant exercises by Gabelli Funds during 2007 and the second half of 2006 which resulted in a decrease in the principal balance of the debt (see Note 7 to the accompanying condensed consolidated financial statements), as well as a decrease in amortization of deferred financing costs during the third quarter of 2007 compared to the third quarter of 2006. The decrease in interest expense was slightly offset by an increase in interest expense due to an increase in short-term borrowings under the Credit Agreement during the third quarter of 2007 compared to the third quarter of 2006..
Other Income
Other income was $0.1 milliondecreased from $371,000 for the thirdfirst quarter of 2007 compared to $0.2 million$151,000 for the thirdfirst quarter of 2006.2008. The decrease of $32,000 is primarily due to a $125,000 gain on the sale of an investment in the first quarter of 2007 which did not recur in 2008 and a decrease in interest income.income, primarily due to lower cash balances during the first quarter of 2008 compared to the first quarter of 2007.
Income Tax Expense
Income tax expense was $1.7$2.0 million for the thirdfirst quarter of 20072008 compared to $1.1$1.5 million for the thirdfirst quarter of 2006.2007. The increase is due to increased income before income tax expense for the thirdfirst quarter of 20072008 compared to the thirdfirst quarter of 20062007. The effective income tax rate was 39.9%41.5% and 39.5%41.7% for the three months ended September 30,March 31, 2008 and 2007, and 2006, respectively. Income tax expense for the quarterly periods is based on an estimated annual effective tax rate which includes the federal and state statutory rates, permanent differences, and other items that may have an impact on income tax expense.
Nine Months ended September 30, 2007 Compared to the Nine Months ended September 30, 2006
For the nine months ended September 30, 2007, the Company had income before income tax expense of $11.8 million compared to $8.3 million for the nine months ended September 30, 2006. The improved results are primarily due to an increase in operating income of $3.3 million, the components of which are discussed below, and is attributable to increases in operating income across all of the Company’s business segments as well as the Sandy and SEL acquisitions which were accretive to earnings in 2007. Net income was $6.9 million, or $0.40 per diluted share for the nine months ended September 30, 2007 compared to net income of $4.9 million, or $0.28 per diluted share, for the same period in 2006.
25
Diluted weighted average shares outstanding were 17.2 million for the nine months ended September 30, 2007 compared to 17.4 million for the same period in 2006. In connection with its share repurchase program, the Company repurchased 255,300 shares of common stock in the open market during the nine months ended September 30, 2007 for approximately $2.5 million in cash. In August 2007, the Company’s Board of Directors authorized an additional $5 million of future share repurchases under the buyback program. As of September 30, 2007, there was approximately $4.4 million remaining to be used for repurchases under the additional $5 million buyback program authorized in August 2007.
Revenue
|
| Nine months ended |
| ||||
|
| September 30, |
| ||||
(Dollars in thousands) |
| 2007 |
| 2006 |
| ||
|
|
|
|
|
| ||
Process, Energy & Government |
| $ | 52,400 |
| $ | 57,821 |
|
Manufacturing & BPO |
| 80,181 |
| 75,537 |
| ||
Sandy Sales Training & Marketing |
| 45,457 |
| — |
| ||
|
| $ | 178,038 |
| $ | 133,358 |
|
Process, Energy & Government revenue decreased $5.4 million or 9.4% during the nine months ended September 30, 2007 compared to the same period in 2006. The decrease in revenue is primarily due to a decrease in revenue of $4.8 million due to the completion of chemical demilitarization projects during 2006 and a $3.9 million decrease in hurricane recovery services during the nine months ended September 30, 2007 compared to the same period in 2006. In addition, there was a $0.9 million decline in revenue funding for the Domestic Preparedness Equipment Technical Assistance Program (DPETAP), offset by an increase of $0.4 million of revenue for state emergency awareness training services. There were also net decreases of $1.0 million for services provided to energy and other customers primarily due to contracts concluding in late 2006 and early 2007. These decreases were offset by an increase of $3.3 million in engineering and training services for petroleum and refining customers and a net increase of $1.5 million for construction jobs primarily for liquefied natural gas (LNG) and hydrogen fueling station facilities.
Manufacturing & BPO revenue increased $4.6 million or 6.1% during the nine months ended September 30, 2007 compared to the same period in 2006. The increase in revenue is primarily due to a $3.1 million increase in revenue from our operations in the United Kingdom due to the acquisition of SEL which contributed $1.9 million in revenue during the nine months ended September 30, 2007, as well as the impact of foreign currency exchange fluctuations during the nine months ended September 30, 2007 compared to the same period in 2006. Other revenue increases during 2007 included an increase in training and consulting services with steel customers of $1.7 million and net increases of $1.4 million in the expansion of BPO services with new and existing customers. The $1.4 million net increase in BPO services is comprised of $5.2 million of net increases with new and existing customers, offset by a decrease in revenue of $3.8 million from a BPO client in 2007 due to a reduction in scope. These net increases in revenue were offset by a $1.2 million net revenue decrease primarily due to fewer e-learning implementations and content development services taking place during the nine months ended September 30, 2007 compared to the same period in 2006, as well as a net $0.4 million decrease in revenue on lean manufacturing contracts as compared to 2006.
The acquisition of Sandy resulted in an increase in revenue of $45.5 million during the nine months ended September 30, 2007. The results of Sandy’s operations have been included in the Company’s consolidated
26
statements of operations since the completion of the acquisition on January 23, 2007. The Company may experience significant quarterly fluctuations in revenue and income related to Sandy’s publications business, since revenue and cost on publication contracts are recognized in the period in which the publications ship, based on the output method of performance. Shipments occur at various times throughout the year and the volume of publications shipped could fluctuate from quarter to quarter. Publications revenue in the Sandy Sales Training & Marketing segment totaled $1.4 million during the third quarter of 2007, compared to $4.1 million during the second quarter of 2007 and $2.6 million during the first quarter of 2007.
In addition, as a result of the acquisition of Sandy, the Company has a concentration of revenue from General Motors Corporation and its affiliates (“General Motors”) as well as a market concentration in the automotive sector. Revenue from General Motors accounted for approximately 21% of the Company’s revenue for the nine months ended September 30, 2007, and revenue from the automotive industry accounted for approximately 30% of the Company’s revenue for the nine months ended September 30, 2007.
Gross Profit
|
| Nine months ended |
| ||||||||
|
| September 30, |
| ||||||||
|
| 2007 |
| 2006 |
| ||||||
(Dollars in thousands) |
|
|
| % Revenue |
|
|
| % Revenue |
| ||
Process, Energy & Government |
| $ | 11,014 |
| 21.0 | % | $ | 9,419 |
| 16.3 | % |
Manufacturing & BPO |
| 10,764 |
| 13.4 | % | 10,210 |
| 13.5 | % | ||
Sandy Sales Training & Marketing |
| 4,615 |
| 10.2 | % | — |
| — |
| ||
|
| $ | 26,393 |
| 14.8 | % | $ | 19,629 |
| 14.7 | % |
Process, Energy & Government gross profit of $11.0 million or 21.0% of revenue for the nine months ended September 30, 2007 increased by $1.6 million or 16.9% when compared to gross profit of $9.4 million or 16.3% of revenue for the same period in 2006. This increase in gross profit is primarily attributable to revenue and margin increases on petroleum and refining projects due to both direct costs and indirect overhead costs increasing at a lower rate than the revenue growth on these projects during the nine months ended September 30, 2007 compared to the same period in 2006. In addition, there were increases in gross profit due to revenue growth on construction jobs primarily for liquefied natural gas (LNG) and hydrogen fueling station facilities. Costs were also reduced to re-align with the declining revenue streams experienced by the other areas within this segment as discussed above. The gross profit increase on the petroleum and refining projects combined with these cost reductions more than offset the revenue decreases in this segment.
Manufacturing & BPO gross profit of $10.8 million or 13.4% of revenue for the nine months ended September 30, 2007 increased by $0.6 million or 5.4% when compared to gross profit of $10.2 million or 13.5% of revenue for the same period in 2006. This increase in gross profit is primarily due to revenue growth in this segment, partially offset by decreases in margin due to non-billable start-up costs incurred on a new major BPO contract, a lower volume of participant atttendance per course for training provided to certain BPO customers during the third quarter of 2007 compared to the third quarter of 2006, and investments in the expansion of international operations during the third quarter of 2007. In addition, there was a decrease in gross profit due to income from a management services agreement with GSE Systems in 2006 which ended on December 31, 2006 and did not generate income in 2007.
Sandy Sales Training and Marketing gross profit was $4.6 million or 10.2% of revenue for the nine months ended September 30, 2007. The results of Sandy’s operations have been included in the Company’s consolidated statements of operations since the completion of the acquisition on January 23, 2007.
27
Selling, General and Administrative Expenses
SG&A expenses increased $3.4 million or 31.8% from $10.8 million for the nine months ended September 30, 2006 to $14.3 million for the same period in 2007. The increase is primarily due to the following increases in SG&A expenses during the nine months ended September 30, 2007 compared to the same period in 2006: an increase in amortization expense of $1.3 million related to intangible assets recorded in connection with the acquisition of Sandy, an increase in labor, benefits and facilities expense of $1.1 million due to the Sandy acquisition, increases in accounting, legal and board of director fees totaling approximately $0.4 million, and the effect of a bad debt recovery of $0.4 million in the first quarter of 2006 which reduced SG&A expense in 2006 and did not recur in 2007.
Interest Expense
Interest expense decreased $0.3 million from $1.2 million for the nine months ended September 30, 2006 to $1.0 million for the same period in 2007. The decrease is primarily due to a $0.3 million decrease in interest expense related to the Gabelli Notes as a result of warrant exercises by Gabelli Funds during 2007 and the second half of 2006 which resulted in a decrease in the principal balance of the debt (see Note 7 to the accompanying condensed consolidated financial statements), as well as a decrease in amortization of deferred financing costs during the nine months ended September 30, 2007 compared to the same period in 2006. The decrease in interest expense was slightly offset by an increase in interest expense due to an increase in short-term borrowings under the Credit Agreement during the first half of 2007 compared to the same period in 2006.
Other Income
Other income was $0.7 million for the nine months ended September 30, 2007 compared to $0.8 million for the same period in 2006. The decrease of $0.1 million was primarily due to a decrease in interest income during the nine months ended September 30, 2007 compared to the same period in 2006.
Income Tax Expense
Income tax expense was $4.9 million for the nine months ended September 30, 2007 compared to $3.5 million for the same period in 2006. The increase is due to increased income before income tax expense for the nine months ended September 30, 2007 compared to the same period in 2006. The effective income tax rate was 41.3% and 41.6% for the nine months ended September 30, 2007 and 2006, respectively. Income tax expense for the quarterly periods is based on an estimated annual effective tax rate which includes the federal and state statutory rates, permanent differences, and other items that may have an impact on income tax expense.
Working Capital
The Company hadFor the quarter ended March 31, 2008, the Company’s working capital increased $0.3 million from $18.1 million at December 31, 2007 to $18.4 million at March 31, 2008. We believe that cash generated from operations and cash equivalents totaling $2.7borrowings available under the General Physics Credit Agreement ($20.1 million of available borrowings as of September 30, 2007 comparedMarch 31, 2008), will be sufficient to $8.7 million as of December 31, 2006. In addition,fund our working capital and other requirements for at least the Company had a negative cash book balance resulting from outstanding checks which had not cleared the bank as of September 30, 2007 totaling $0.9 million due to the timing of payments, which is included in accounts payable and accrued expenses on the accompanying condensed consolidated balance sheet as of September 30, 2007.next twelve months.
The decrease in cash from December 31, 2006 is primarily due toDuring the usefirst quarter of a total of $8.8 million of cash to complete the acquisitions of Sandy in January 2007 and SEL in the United Kingdom in June 2007. The
28
Company also2008, we used approximately $2.5$1.4 million of cash to repurchase 255,300approximately 152,000 shares of itsour common stock in the open market, and $1.2 million of cash, including transaction costs, to complete the acquisition of PCS. In addition, we paid ADP, Inc. (“ADP”) $2.5 million of contingent consideration during the nine months ended September 30, 2007.first quarter of 2008 based upon the revenue targets achieved during the first twelve-month period following the completion of the Sandy acquisition.
In connection with the acquisitionsPCS acquisition on March 1, 2008, a portion of Sandy, SELthe purchase price consists of $1.0 million of guaranteed future payments to be paid in two equal installments on January 31, 2009 and Via Training during 2007, the CompanyJanuary 31, 2010. In addition, we may be required to pay the following additional payments tocontingent consideration in connection with the sellers:acquisitions we completed during 2007 and 2008:
•· up to an additional $8.0$4.0 million to ADP, contingent upon Sandy achieving certain revenue targets, as defined in the purchase agreement, during the twosecond twelve-month periodsperiod following the completion of the acquisition (a maximumacquisition. As of $4.0December 31, 2007, we accrued $2.0 million each year subsequentof contingent consideration with respect to the January 23,first twelve-month period following the completion of the Sandy acquisition based on the revenue targets achieved for the eleven-month period ended December 31, 2007. As discussed above, the actual contingent consideration paid during the first quarter of 2008 with respect to the first full twelve-month period completed in 2008 was $2.5 million. The accrued contingent consideration of $2.0 million was
19
applied to goodwill during 2007 acquisition date);and the additional $0.5 million of contingent consideration paid in excess of the accrual was applied to goodwill during the first quarter of 2008;
•· up to an additional $1.8 million to the sellersseller of SEL, contingent upon SEL achieving certain earnings targets, as defined in the purchase agreement, during the one-year period following completion of the acquisition; andacquisition on June 1, 2007;
•· 160; up to an additional $3.3 million to the seller of Via, contingent upon Via achieving certain earnings targets during the two twelve-month periods following the completion of the acquisition.acquisition (a maximum of $1.625 million each year subsequent to the October 1, 2007 acquisition date); and
The Company believes that cash generated from operations and borrowing availability under·up to $2.3 million to the Credit Agreement (described below), will be sufficient to fundsellers of PCS, contingent upon the working capital and other requirementsachievement of certain revenue targets during the two twelve-month periods following the completion of the CompanyPCS acquisition (a maximum of $1.0 million and $1.3 million, respectively, for first and second twelve-month periods subsequent to the foreseeable future.
For the nine months ended September 30, 2007, the Company’s working capital increased $0.2 million from $23.1 million at December 31, 2006 to $23.3 million at September 30, 2007.March 1, 2008 acquisition date).
Cash Flows
NineThree months ended March 31, 2008 compared to the Three Months ended September 30,March 31, 2007 Compared to the Nine Months ended September 30, 2006
The Company’s cash balance decreased $0.2 million from $8.7$3.9 million as of December 31, 20062007 to $2.7$3.7 million at September 30, 2007.as of March 31, 2008. The decrease in cash and cash equivalents during the first quarter of 2008 resulted from cash provided by operating activities of $4.2 million, cash used in investing activities of $11.1 million, offset by cash provided by operating activities of $1.8$4.1 million, and cash provided byused in financing activities of $3.2 million during the nine months ended September 30, 2007.$0.3 million.
Cash provided by operating activities was $1.8$4.2 million for the nine months ended September 30, 2007first quarter of 2008 compared to $9.8cash used in operations of $6.4 million for the same period in 2006.first quarter of 2007. The decreaseincrease in cash provided by operating activities compared to the prior periodyear is primarily due to favorable changes in operating assets and liabilities during the first quarter of 2008 compared to the first quarter of 2007, primarily due to the initial working capital investment required in the first quarter of 2007 related to the Sandy acquisition which did not recur in 2008. The increase in cash provided by operating activities is also due in part to an increase in accounts receivableboth net income and costs and estimated earnings in excessnon-cash items added back to net income for the first quarter of billings on uncompleted contracts as a result2008 compared to the first quarter of the Sandy acquisition. The Company did not acquire Sandy’s accounts receivable and contract-related unbilled balances as of the acquisition date, which resulted in a short-term investment by the Company to complete contracts and a delay in the collection of billings.2007.
Cash used in investing activities was $11.1$4.1 million for the nine months ended September 30, 2007first quarter of 2008 compared to $1.1$5.4 million for the same period in 2006.first quarter of 2007. The increasedecrease in cash used in investing activities is primarily due to $5.4a decrease in cash used for acquisitions during the first quarter of 2008 compared to the first quarter of 2007. We used a total of $3.7 million of cash during the first quarter of 2008 for acquisitions ($1.2 million for the PCS acquisition and $2.5 million of contingent consideration paid for the Sandy acquisition), compared to $5.3 million of cash paid upon completion of the Sandy acquisition in the first quarter of 2007. The decrease in cash used in investing activities for acquisitions was slightly offset by an increase of $0.3 million of cash used for the acquisition of Sandy and $3.4 million of cash used for the acquisition of SEL in the United Kingdom (see Note 3 to the accompanying condensed consolidated financial statements for further details regarding these acquisitions), compared to $0.6 million of cash used in 2006 for the acquisition of Peters Management Consultancy Ltd. (PMC) in the United Kingdom. In addition, cash used for fixed asset additions increased $0.9 millioncapital expenditures during the nine months ended September 30, 2007first quarter of 2008 compared to the same period in 2006, and cash used for software development costs related to a new financial system implementation was $0.8 million during the nine months ended September 30,first quarter of 2007.
Cash used in financing activities was $0.3 million for the first quarter of 2008 compared to cash provided by financing activities was $3.2of $3.5 million for the nine months ended September 30, 2007 compared tofirst quarter of 2007. The decrease in cash used inprovided by financing activities of $21.6 million for the same period in 2006. The increase in cash provided
29
is primarily due to $20.9a $2.1 million decrease in proceeds from short-term borrowings and a $0.6 million decrease in cash received from the exercise of stock options during the first quarter of 2008 compared to the first quarter of 2007. In addition, there was a $0.4 million increase in cash used for repurchases of our common stock in connection with the capital stock restructuring in 2006 which did not recur in 2007, an increase in short-term borrowingsopen market during the nine months ended September 30, 2007first quarter of $3.3 million2008 compared to no borrowingsthe first quarter of 2007, and a $0.6 million decrease in 2006, and aour negative cash book balance totaling $0.9 million asduring the first quarter of September 30, 2007 resulting2008 (the negative cash book balance results from outstanding checks which had not cleared the bank asat the end of September 30, 2007 due to the timing of payments,period and are classified as accounts payable in the condensed consolidated balance sheet. In addition, there was an increasesheets and presented as a financing activity in the condensed consolidated statements of cash received from the exercise of stock options of $0.7 million during the nine months ended September 30, 2007 compared to the same period in 2006.flows).
20
Short-term Borrowings and Long-term Debt
General Physics has a $25 million Credit Agreement with a bank that expires on August 31, 2009, with annual renewal options, and is secured by certain assets of General Physics and provides for an unsecured guaranty from the Company.Physics. The maximum interest rate on borrowings under the Credit Agreement is at the daily LIBOR Market Index Rate plus 2.75%. Based upon the financial performance of General Physics, the interest rate can be reduced. As of September 30, 2007,March 31, 2008, the rate was daily LIBOR plus 2.50%,1.25% which resulted in a rate of approximately 7.9%3.95%. The Credit Agreement contains covenants with respect to General Physics’ minimum tangible net worth, total liabilities ratio, leverage ratio, interest coverage ratio and its ability to make capital expenditures. The Credit Agreement also contains certain restrictive covenants regarding future acquisitions, incurrence of debt and the payment of dividends. General Physics was in compliance with all loan covenants under theThe Credit Agreement as of September 30, 2007. General Physics is also currently restricted from paying dividends and management fees to the Company in excess of $1.0 million in any fiscal year, with the exception of a waiver by the lender which permits General Physics to provide GP Strategies up to $10 million of cash to the Company to repurchase shares of its outstanding common stock in the open market. The Company is otherwise currently restricted from paying dividends or management fees to GP Strategies in excess of $1 million in any year, with the exception of a waiver which permits General Physics to provide up to $8.1 million of cash to repay debt obligations which mature in 2008 in the event GP Strategies does not have available cash (see Note 7 to the Condensed Consolidated Financial Statements). As of September 30, 2007, the Company had $3,330,000March 31, 2008, there were $4.7 million of outstanding borrowings under the Credit Agreement and there was approximately $21,500,000 of additional borrowings available based upon 80% of eligible accounts receivable and 80% of eligible unbilled receivables. As of December 31, 2006, the Company had no borrowings outstanding and $20.1 million of available borrowings under the Credit Agreement.
Long-term Debt
In August 2003, the Companywe issued and sold to four Gabelli funds $7.5 million in aggregate principal amount of 6% Conditional Subordinated Notes due in August 2008 (Gabelli Notes)(“Gabelli Notes”) and 937,500 warrants (GP Warrants)(“GP Warrants”), each entitling the holder thereof to purchase (subject to adjustment) one share of the Company’sour common stock at an exercise price of $8.00. The aggregate purchase price for the Gabelli Notes and GP Warrants was $7.5 million. The Gabelli Notes are secured by a mortgage on the Company’sour former property located in Pawling, New York which was distributed to National Patent Development Corporation (NPDC)(“NPDC”) in connection with itsthe spin-off in November 2004. In addition, at any time that less than $1,875,000$1.9 million principal amount of the Gabelli Notes isare outstanding, the Companywe may defease the obligations secured by the mortgage and obtain a release of the mortgage. Subsequent to the spin-offs of NPDC and GSE Systems, Inc. and in accordance with the anti-dilution provisions of the warrant agreement, the number of GP Warrants was adjusted to 984,116 and the exercise price was adjusted to $5.85 per share. During the yearyears ended December 31, 2007 and 2006, Gabelli exercised 624,862 and 197,823 GP Warrants, for a total exercise price of $1,157,000,respectively, which was paid inreduced the form of $140,000 cash and delivery of $1,017,000principal balance of the Gabelli Notes and accrued interest thereon. Duringby an aggregate of $4,615,000. Gabelli did not exercise any warrants during the nine months ended September 30, 2007, Gabelli Funds exercised an additional 624,862 GP Warrants for a total exercise pricefirst quarter of $3,655,000 which was paid in2008. As of March 31, 2008, the form of deliveryprincipal balance of the Gabelli Notes was $2.9 million and accrued interest thereon. As of September 30, 2007, there were 161,431 GP Warrants outstanding and exercisable with an exercise price of $5.85 per share outstanding and exercisable.which expire in August 2008.
In October 2003, the Companywe issued a five-year 5% note due in full in October 2008 in the principal amount of $5,250,955$5.3 million to ManTech International (ManTech). Interest is payable quarterly. Each year during the term of the note, ManTech has the option to convert up to 20% of the original principal amount of the note into our common
30
stock of the Company at the then market price of the Company’sour common stock, but only in the event that the Company’sour 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. ManTech has not converted any portion of the note into common stock and the principal balance of such note was $5.3 million as of March 31, 2008.
Off-Balance Sheet Arrangements – GuaranteesCommitments
Subsequent to the spin-off of NPDC, the Companywe continued to guarantee certain obligations of NPDC’s subsidiaries, Five Star Products, Inc. (“Five Star”) and MXL Industries, Inc. (“MXL”). The CompanyWe guaranteed certain operating leases for Five Star’s New Jersey and Connecticut warehouses, totalingwhich totaled approximately $1,589,000$1.6 million per year through March 31, 2007. The leases have been extended and now expire in the first quarter of 2009. The annual rent obligations are currently approximately $1,600,000.$1.6 million. In connection with theour spin-off of NPDC, by the Company, NPDC agreed to assume the Company’sour obligation under such guarantees, to use commercially reasonable efforts to cause the Companyus to be released from each such guaranty, and to hold the Companyus harmless from all claims, expenses and liabilities connected with the
21
leases or NPDC’s breach of any agreements effecting the spin-off. The Company hasWe have not received confirmation that it haswe have been released from these guarantees. The Company doesWe do not expect to incur any material payments associated with these guarantees, and as such, no liability is reflected in the condensed consolidated balance sheet.sheets.
The CompanyWe also guaranteesguarantee the repayment of a debt obligation of MXL, which is secured by property and certain equipment of MXL. The aggregate outstanding balance of MXL’s debt obligation as of September 30, 2007March 31, 2008 was $1,030,000. The Company’s$1.0 million. Our guarantee expires upon the maturity of the debt obligation in March 2011. The Company doesWe do not expect to incur any material payments associated with this guarantee, and as such, no liability is reflected in the condensed consolidated balance sheet.sheets.
Management Discussion of Critical Accounting PoliciesStandards Issued
The preparationSFAS No. 141R
In December 2007, the Financial Accounting Standards Board (“FASB”) issued Statement of our consolidatedFinancial Accounting Standard (“SFAS”) No. 141 (revised 2007), Business Combinations (“SFAS No. 141R”). SFAS No. 141R establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any noncontrolling interest in conformity with U.S. generally accepted accounting principles requires usthe acquiree and the goodwill acquired. SFAS No. 141R also establishes disclosure requirements to make estimates and assumptions that affectenable the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dateevaluation of the nature and financial statementseffects of the business combination. SFAS No. 141R is effective for acquisitions in fiscal years beginning after December 15, 2008, and will be adopted by the Company on January 1, 2009.
SFAS No. 160
In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements—an amendment of Accounting Research Bulletin No. 51 (“SFAS No. 160”). SFAS No. 160 establishes accounting and reporting standards for ownership interests in subsidiaries held by parties other than the parent, the amount of consolidated net income attributable to the parent and to the noncontrolling interest, changes in a parent’s ownership interest, and the reported amountsvaluation of revenuesretained noncontrolling equity investments when a subsidiary is deconsolidated. SFAS No. 160 also establishes disclosure requirements that clearly identify and expenses duringdistinguish between the reporting period. Our estimates, judgmentsinterests of the parent and assumptions are continually evaluated basedthe interests of the noncontrolling owners. SFAS No. 160 is effective for fiscal years beginning after December 15, 2008, and will be adopted by the Company on available informationJanuary 1, 2009.
Accounting Standards Adopted
SAB No. 110
In December 2007, the Securities and experience. Because ofExchange Commission issued Staff Accounting Bulletin No. 110, Shared Based Payment (“SAB No. 110”). SAB No. 110 expresses the views, that under certain circumstances, the SEC staff will continue to accept the use of estimates inherenta “simplified method” in developing an estimate of the financial reporting process, actual results could differ fromexpected term of “plain vanilla” share options in accordance with SFAS No. 123R for stock option grants issued after December 31, 2007. Examples of such circumstances might include those estimates.in which a company does not have sufficient historical stock option exercise experience upon which to estimate an expected term, situations where historical exercise data may no longer provide a reasonable basis upon which to estimate an expected term, or situations where more relevant detailed information (employee exercise patterns by industry and/or other categories of companies) is not widely available. We currently use the simplified method to estimate the expected term for stock option grants due to inadequate historical experience to form a reasonable estimate. We will continue to use the simplified method until we have enough historical experience to provide a reasonable estimate of expected term in accordance with SAB No. 110. SAB No. 110 was effective January 1, 2008.
Certain of our accounting policies require higher degrees of judgment than others in their application. These include revenue recognition, impairment of intangible assets, including goodwill, and valuation of deferred tax assets. We discuss our accounting policies for impairment of intangible assets and valuation of deferred tax assets in Note 2 to our Annual Report on Form 10-K for the fiscal year ended December 31, 2006. As a result of the acquisition of Sandy during the first quarter of 2007, we have updated our accounting policy with respect to revenue recognition below.
Revenue Recognition
The Company provides services under time-and-materials, cost-reimbursable, fixed-price and fixed-fee per transaction contracts to both government and commercial customers. Each contract has different terms based on the scope, deliverables and complexity of the engagement, requiring the Company to make judgments and estimates about recognizing revenue. Revenue is recognized as services are performed.
3122
Under time-and-materials contracts, as well as certain government cost-reimbursable and certain fixed-price contracts, the contractual billing schedules are based on the specified level of resources the Company is obligated to provide. As a result, for these “level-of-effort” contracts, the contractual billing amount for the period is a measure of performance and, therefore, revenue is recognized in that amount.
Revenue under government fixed price and certain commercial contracts is recognized using the percentage of completion method SFAS No. 157in accordance with the American Institute of Certified Public Accountants Statement of Position 81-1, Accounting for Performance of Construction-Type and Certain Production-Type Contracts. Under the percentage-of-completion method, management estimates the percentage-of-completion based upon costs incurred as a percentage of the total estimated costs. When total cost estimates exceed revenues, the estimated losses are recognized immediately. The use of the percentage-of-completion method requires significant judgment relative to estimating total contract revenues and costs, including assumptions relative to the length of time to complete the project, the nature and complexity of the work to be performed, and anticipated changes in estimated salaries and other costs. Estimates of total contract revenues and costs are continuously monitored during the term of the contract, and recorded revenues and costs are subject to revision as the contract progresses. When revisions in estimated contract revenues and costs are determined, such adjustments are recorded in the period in which they are first identified.
For certain commercial fixed-fee per transaction contracts, revenue is recognized during the period in which services are delivered in accordance with the pricing outlined in the contracts. For other commercial fixed price contracts which typically involve a discrete project, such as development of training content and materials, design of training processes, software implementation, or engineering projects, the contractual billing schedules are not based on the specified level of resources the Company is obligated to provide. These discrete projects generally do not contain milestones or other reliable measures of performance. As a result, revenue on these arrangements is recognized using the percentage-of-completion method based on the relationship of costs incurred to total estimated costs expected to be incurred over the term of the contract. The Company believes this methodology is a reasonable measure of proportional performance since performance primarily involves personnel costs and services are provided to the customer throughout the course of the projects through regular communications of progress toward completion and other project deliverables. In addition, the customer typically is required to pay the Company for the proportionate amount of work and cost incurred in the event of contract termination.
For certain fixed-fee per transaction and fixed price contracts in which the output of the arrangement is measurable, such as for the shipping of publications and print materials, revenue is recognized when the deliverable is met and the product is delivered based on the output method of performance. The customer is required to pay for the cost incurred in the event of contract termination.
Certain of the Company’s fixed price commercial contracts contain revenue arrangements with multiple deliverables. The Company applies the separation guidance in Emerging Issues Task Force (EITF) 00-21, Revenue Arrangements with Multiple Deliverables (EITF 00-21), for these types of contracts. Revenue arrangements with multiple deliverables are evaluated to determine if the deliverables can be divided into more than one unit of accounting. For contracts determined to have more than one unit of accounting, the Company recognizes revenue for each deliverable based on the revenue recognition policies discussed above; that is, the Company recognizes revenue in accordance with work performed and costs incurred, with fee being allocated proportionately over the service period. Within each multiple deliverable project, there is objective and reliable fair value across all units of the arrangement, as discounts are not offered or applied to one deliverable versus another, and the rates bid across all deliverables are consistent.
32
As part of the Company’s on-going operations to provide services to its customers, incidental expenses, which are commonly referred to as “out-of-pocket” expenses, are billed to customers, either directly as a pass-through cost or indirectly as a cost estimated in proposing on fixed-price contracts. Out-of-pocket expenses include expenses such as airfare, mileage, hotel stays, out-of-town meals and telecommunication charges. The Company’s policy provides for these expenses to be recorded as both revenue and direct cost of services in accordance with the provisions of EITF 01-14, Income Statement Characterization of Reimbursements Received for “Out-of-Pocket” Expenses Incurred.
In connectionSeptember 2006, the FASB issued SFAS No. 157, Fair Value Measurements (SFAS No. 157), which defines fair value, establishes guidelines for measuring fair value and expands disclosures regarding fair value measurements. SFAS No. 157 does not require any new fair value measurements but rather eliminates inconsistencies in guidance found in various prior accounting pronouncements. SFAS No.157 was effective on January 1, 2008, except with its delivery of products, primarilyrespect to non-financial assets and liabilities for publications deliveredwhich the effective date was deferred by the Sandy Sales Training & Marketing segment,FASB for one year later than the Company incurs shipping and handling costs which are billed to customers directly as a pass-through cost.effective date set forth in SFAS No. 157. The Company’s policy provides for these expenses to be recorded as both revenue and direct cost of revenue in accordance with the provisions of EITF 00-10, Accounting for Shipping and Handling Fees and Costs.
Accounting Standard Adopted
In July 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes – an Interpretation of FASB Statement No. 109 (FIN No. 48). FIN No. 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition of a tax position taken or expected to be taken on a tax return. Under FIN No. 48, a tax benefit from an uncertain tax position may be recognized only if it is “more likely than not” that the position is sustainable upon examination, based on its technical merits. The tax benefit of a qualifying position under FIN No. 48 would equal the largest amount of tax benefit that is greater than 50 percent likely of being realized upon ultimate settlement with a taxing authority having full knowledge of all relevant information. FIN No. 48 was effective as of January 1, 2007 for calendar-year companies. In applying the new accounting model prescribed by FIN No. 48, the Company was required to determine and assess all material positions existing as of the adoption date, including all significant uncertain positions, in all tax years, that are still subject to assessment or challenge under relevant tax statutes. The Company adopted FIN No. 48 effective January 1, 2007. See Note 10 to the accompanying condensed consolidated financial statements for further details regarding the impact ofinitial adoption of FINSFAS No. 48157 did not have an impact on the Company’sour consolidated financial statements.
Forward-Looking Statements
This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for forward-lookingforward looking statements. Forward-lookingForward—looking statements are not statements of historical facts, but rather reflect our current expectations concerning future events and results. We use words such as “expects”, “intends”, “believes”, “may”,“expects,” “intends,” “believes,” “may,” “will,”“should, “should,” “could,” “anticipates”“anticipates,” “estimates,” “plans” and similar expressions to indicate forward-looking statements, but their absence does not mean a statement is not forward-looking. Because these forward-looking statements involveare based upon management’s expectations and assumptions and are subject to risks and uncertainties, there are important factors that could cause actual results to differ materially from those expressed or implied by these forward-looking statements, including, but not limited to, those factors set forth under Item 1A - Risk Factors of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 20062007 and those other risks and uncertainties detailed in the Company’sour periodic reports and registration statements filed with the Securities and Exchange Commission. We caution that these risk factors may not be exhaustive. We operate in a continually changing business environment, and new risk factors emerge from time to time. We cannot predict these new risk factors, nor can we assess the effect, if any, of the new risk factors on our business or the extent to which any factor or combination of factors may cause actual results to differ from those expressed or implied by these forward-looking statements.
33
If any one or more of these expectations and assumptions proves incorrect, actual results will likely differ materially from those contemplated by the forward-looking statements. Even if all of the foregoing assumptions and expectations prove correct, actual results may still differ materially from those expressed in the forward-looking statements as a result of factors we may not anticipate or that may be beyond our control. While we cannot assess the future impact that any of these differences could have on our business, financial condition, results of operations and cash flows or the market price of shares of our common stock, the differences could be significant. We do not undertake to update any forward-looking statements made by us, whether as a result of new information, future events or otherwise. You are cautioned not to unduly rely on such forward-looking statements when evaluating the information presented in this report.
23
Item 3. Quantitative and Qualitative Disclosure About Market Risk
The Company has no material changes to the disclosure on this matter made in its Annual Report on Form 10-K for the fiscal year ended December 31, 2006.2007.
Item 4. Controls and Procedures
Disclosure Controls and Procedures
We maintain a comprehensive set of disclosure controls and procedures (as defined in Rules 13a-15(e) and under the Securities Exchange Act of 1934 (“Exchange Act”)) designed to provide reasonable assurance that information required to be disclosed in our filings under the Exchange Act is recorded, processed, summarized and reported accurately and within the time periods specified in the SEC’s rules and forms. Under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, we have evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based upon this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the design and operation of these disclosure controls and procedures are effective in providing reasonable assurance of the achievement of the objectives described above.
Internal Control Over Financial Reporting
DuringExcept as discussed below, during the nine monthsquarter ended September 30, 2007,March 31, 2008, there washas been no change in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d—15(f) under the Exchange Act) that has materially affected, or is reasonably likely to materially affect our internal control over financial reporting.
34On January 1, 2008, we implemented a new financial system, which included a general ledger and various sub-ledgers. The implementation affected systems that include internal controls, and accordingly, the implementation has required certain revisions to our internal control over financial reporting. We reviewed the function and output of the system as it was implemented, as well as the controls affected by the implementation of the system, and made appropriate changes to affected internal controls. Because of inherent limitations, internal controls over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
24
None.
Item 1. | |
None. | |
Item 1A. | |
The Company has no material changes to the disclosure on this matter made in its Annual Report on Form 10-K for the fiscal year ended December 31, 2007. | |
Item 2. | |
The following table provides information about the Company’s share repurchase activity for the three months ended March 31, 2008: |
|
| Issuer Purchases of Equity Securities |
| ||||||||
|
|
|
|
|
| Total number |
| Approximate |
| ||
|
|
|
|
|
| of shares |
| dollar value of |
| ||
|
| Total number |
| Average |
| purchased as |
| shares that may yet |
| ||
|
| of shares |
| price paid |
| part of publicly |
| be purchased under |
| ||
Month |
| purchased |
| per share |
| announced program |
| the program |
| ||
January 1-31, 2008 |
| — |
| — |
| — |
| — |
| ||
February 1-29, 2008 |
| — |
| — |
| — |
| — |
| ||
March 1-31, 2008 |
| 151,797 | (1) | $ | 9.27 |
| 151,797 | (1) | $ | 1,996,000 |
|
(1) | Represents shares repurchased in the open market in connection with our share repurchase program under which we may repurchase up to an aggregate of $13 million of our common stock from time to time in the open market subject to prevailing business and market conditions and other factors. The original $5 million buyback program was authorized by our Board of Directors and was publicly announced in January 2006, an additional $5 million of repurchases was authorized and announced in August 2007, and an additional $3 million of repurchases was authorized and announced in March 2008. There is no expiration date for the repurchase program. |
Item 3. | |
None. | |
Item 4. | |
None. | |
Item 5. | |
None. |
The following are additions and changes to the risk factors set forth in our Annual Report on Form 10-K for the fiscal year ended December 31, 2006, and should be read in conjunction with such risk factors:
Acquisitions are part of our growth strategy and might not be successful.
We expect to continue to pursue selective acquisitions of businesses as part of our growth strategy. Acquisitions may bring us into businesses we have not previously conducted and expose us to risks that are different than those we have traditionally experienced. We can provide no assurances that we will be able to find suitable acquisitions or that we will be able to consummate them on terms and conditions favorable to us, or that we will successfully integrate and manage acquired businesses.
During 2007, we have completed the acquisitions of Via, Smallpeice and certain assets and the business of Sandy. While we believe that all of these acquisitions will be accretive to our earnings and we will be able to integrate their operations into our business successfully, we can provide no assurances that our expectations will prove to be accurate. Sandy’s business, in particular, is heavily oriented toward providing sales training to auto manufacturers in the U.S. domestic automotive industry. Developments in that industry, as well as certain unforeseen factors or other risks may cause our actual results to differ from our expectations.
Difficulties in integrating acquired businesses could result in reduced revenues and income.
We may not be able to integrate successfully any business we have acquired or could acquire in the future. The integration of the businesses will be complex and time consuming, will place a significant strain on management, administrative services personnel and our information systems, and this strain could disrupt our businesses. Furthermore, we could be adversely impacted by unknown liabilities of acquired businesses. We could encounter substantial difficulties, costs and delays involved in integrating common accounting, information and communication systems, operating procedures, internal controls and human resources practices, including incompatibility of business cultures and the loss of key employees and customers. These difficulties could reduce our ability to gain customers or retain existing customers, and could increase operating expenses, resulting in reduced revenues and income and a failure to realize the anticipated benefits of acquisitions.
We have made several acquisitions during the past two years. As a result of these transactions, our past performance is not indicative of future performance, and investors should not base their expectations as to our future performance on our historical results.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The following table provides information about the Company’s share repurchase activity for the three months ended September 30, 2007:
|
| Issuer Purchases of Equity Securities |
| ||||||
|
|
|
|
|
| Total number |
| Approximate |
|
|
|
|
|
|
| of shares |
| dollar value of |
|
|
| Total number |
| Average |
| purchased as |
| shares that may yet |
|
|
| of shares |
| price paid |
| part of publicly |
| be purchased under |
|
Month |
| purchased |
| per share |
| announced program (1) |
| the program |
|
July 1-31, 2007 |
| — |
| — |
| — |
| — |
|
August 1-31, 2007 |
| 63,600 |
| $10.04 |
| 63,600 |
| $4,882,000 |
|
September 1-30, 2007 |
| 46,700 |
| $11.01 |
| 46,700 |
| $4,368,000 |
|
(1)Represents shares repurchased in the open market in connection with the Company’s share repurchase program under which the Company may repurchase up to $10 million of its common stock from time to time in the open market subject to prevailing business and market conditions and other factors. The original $5 million buyback program was authorized by the Company’s Board of Directors and was publicly announced on January 19, 2006, and an additional $5 million of repurchases was authorized and announced in August 2007. There is no expiration date for the repurchase program.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
None.
3525
| |
31.1 | Certification of Chief Executive Officer of the Company dated May 8, 2008 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.* |
31.2 | Certification of Executive Vice President and Chief Financial Officer of the Company dated May 8, 2008 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 May 8, 2008 pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.* |
10.2 Amendment, dated June 20, 2007, to Employment Agreement dated as of July 1, 1999 between the Company and Douglas E. Sharp. Incorporated herein by reference to Exhibit 10.2 of the Registrant’s Form 8-K filed on June 26, 2007.
10.3 Form of Employment Agreement between the Company and certain of its executive vice presidents. Incorporated herein by reference to Exhibit 10.1 of the Registrant’s Form 8-K filed on October 4, 2007.
10.4 Form of Employment Agreement between General Physics Corporation and certain of its senior vice presidents.*
31.1 Certification of Chief Executive Officer of the Company dated November 8, 2007 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.*
31.2 Certification of Executive Vice President and Chief Financial Officer of the Company dated November 8, 2007 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 November 8, 2007 pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*
_____________
*Filed herewith
3626
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| GP STRATEGIES CORPORATION | |||
|
| |||
|
| |||
| 2008 | /s/ Scott N. Greenberg | ||
| Scott N. Greenberg | |||
| Chief Executive Officer | |||
|
| |||
|
| |||
| /s/ Sharon Esposito-Mayer | |||
| Sharon Esposito-Mayer | |||
| Executive Vice President and Chief Financial Officer | |||
3727