UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
[X] Annual Report Pursuant to Section 13 or 15(d) of The Securities Exchange Act
of 1934
For the fiscal year ended December 31, 2004
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of The Securities Exchange
Act of 1934
For the transition period from ______________ to ________________
Commission File Number 1-7234
GP STRATEGIES CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware 13-1926739
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(State of Incorporation) (I.R.S. Employer Identification No.)
777 Westchester Avenue, White Plains, NY 10604
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(Address of principal executive offices) (Zip Code)
914-249-9700
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Registrant's telephone number, including area code:
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of each exchange on which registered:
------------------- ------------------------------------------
Common Stock, $.01 par value New York Stock Exchange, Inc.
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
Indicate by check mark whether the registrant is an accelerated filer.
Yes [X] No [ ]
The aggregate market value of the outstanding shares of the Registrant's Common
Stock, par value $.01 per share and Class B Capital Stock, par value $.01 per
share held by non-affiliates as of June 30, 2004 was approximately $83,228,000.
The number of shares outstanding of each of the Registrant's Common Stock and
Class B Stock as of March 10, 2005:
Class Outstanding
----------------------------------------------- -----------------
Common Stock, par value $.01 per share 16,736,262 shares
Class B Capital Stock, par value $.01 per share 1,200,000 shares
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive Proxy Statement for its 2005 Annual
Meeting of Stockholders are incorporated herein by reference into Part III
hereof.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
The forward-looking statements contained herein reflect GP Strategies'
management's current views with respect to future events and financial
performance. We use words such as "expects", "intends" and "anticipates" to
indicate forward-looking statements. These forward-looking statements are
subject to certain risks and uncertainties that could cause actual results to
differ materially from those in the forward-looking statements, all of which are
difficult to predict and many of which are beyond the control of GP Strategies,
including, but not limited to, our inability to generate funds by selling any
assets that were included in the spin-off, our holding company structure,
failure to continue to attract and retain personnel, loss of business from
significant customers, failure to keep pace with technology, changing economic
conditions, competition, our ability to implement procedures that will reduce
the likelihood that material weaknesses in internal control over financial
reporting will not occur in the future, and those other risks and uncertainties
detailed in GP Strategies' periodic reports and registration statements filed
with the Securities and Exchange Commission.
If any one or more of these expectations and assumptions proves incorrect,
actual results will likely differ materially from those contemplated by the
forward-looking statements. Even if all of the foregoing assumptions and
expectations prove correct, actual results may still differ materially from
those expressed in the forward-looking statements as a result of factors we may
not anticipate or that may be beyond our control. While we cannot assess the
future impact that any of these differences could have on our business,
financial condition, results of operations and cash flows or the market price of
shares of our common stock, the differences could be significant. We do not
undertake to update any forward-looking statements made by us.
PART I
ITEM 7 IS HEREBY AMENDED AS INDICATED
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS:
RESULTS OF OPERATIONS
General Overview
The Company's primary operating entity is General Physics, a global workforce
development company that improves the effectiveness of organizations by
providing training, management consulting, e-Learning solutions and engineering
services that are customized to meet the specific needs of clients. Clients
include Fortune 500 companies, manufacturing, process and energy companies and
other commercial and governmental customers.
The Company's other operating entity is its majority owned subsidiary, GSE
Systems Inc. ("GSE"), which was formerly called the Simulation segment. GSE is a
world leader in real-time high fidelity simulation technology and model
development and provides simulation solutions and services to the power
generation industry, the process industries, and the U.S. Government sector. In
addition, GSE provides plant monitoring and signal analysis monitoring and
optimization software primarily to the power industry, and develops specialized
software applications for emerging technologies.
Prior to November 24, 2004 the Company had five operating business segments:
Manufacturing & Process, Information Technology, Simulation, Optical Plastics
and Home Improvement Distribution. On November 24, 2004, we completed the
distribution, which we refer to as the "spin-off," of the common stock of
National Patent Development Corporation ("NPDC"), which comprised our Optical
Plastics and Home Improvement Distribution segments and certain other non-core
assets. We reorganized the Manufacturing & Process and Information Technology
segments into the General Physics segment. Effective with the spin-off, the
operations of NPDC were reclassified as discontinued operations for all periods
presented.
General Physics Overview
General Physics provides performance improvement services and products to
multinational companies in manufacturing and process industries, electric power
utilities and other commercial and governmental customers. General Physics is a
global leader in performance improvement, with over three decades of experience
in providing solutions to optimize workforce performance.
In 2004 General Physics showed a significant increase in profit, and continued
to post improved revenue results. The improvement in performance is primarily
attributable to the company's key initiatives; business process outsourcing and
training, e-Learning; and Domestic Preparedness and Emergency Management. The
company experienced growth in the last two years across each of these areas
contributing to the improved revenue and profit margins. General Physics plans
to continue to focus on growth in these areas in 2005. General Physics also
experienced an improvement in the training market in 2004.
22
On December 30, 2004, EDS made a payment of $18.4 million, which included $0.1
million of accrued interest, to General Physics to satisfy its obligation under
the arbitration award regarding the Learning Technologies acquisition. General
Physics recognized a gain on arbitration settlement, net of legal fees and
expenses, of $13.7 million in 2004. The net cash proceeds to General Physics was
approximately $8.5 million after legal fees and a $5.0 million distribution to
NPDC. On January 6, 2005, General Physics used a portion of the proceeds to
fully pay off its $6.1 million of short term borrowings outstanding under the
Credit Agreement as of December 31, 2004. General Physics has no plans for any
significant capital expenditures in 2005, and expects the amounts generated from
cash and operations and cash available for borrowing under its Credit Agreement
of approximately $20.0 million, to be sufficient to finance its ongoing
operations.
GSE Overview
GSE is a world leader in real-time power plant simulation. GSE provides
simulation solutions and services to the nuclear and fossil electric utility
industry, as well as process industries such as the chemical and petrochemical
industries. In addition, GSE provides plant monitoring, security access and
control and signal analysis monitoring and optimization software primarily to
the power industry. GSE enters 2005 with no bank debt and only $9,000 of other
notes payable. However, GSE's backlog has decreased 36% in 2004, and GSE is
investing heavily in business development activities to expand its simulation
business into the Homeland Security and US Military industries. GSE's business
is substantially dependent on sales to the nuclear power industry (85% of
revenue in 2004). Spending by companies in this targeted industry is subject to
period-to-period fluctuations as a consequence of industry cycles, economic
conditions, political and regulatory environments and other factors; GSE's
efforts to expand its simulation business into the Homeland Security and US
Military industries may not generate sufficient revenues and margins in 2005 to
offset the increased business development spending; GSE relies on one customer,
Battelle's Pacific Northwest National Laboratory (24% of revenue in 2004) for a
substantial portion of its revenues. The loss of this customer would have a
material adverse effect upon GSE's results. Sales of products and the provision
of services to end users outside the United States accounted for approximately
65% of GSE's revenue in 2004. Thus, GSE is subject to risks associated with the
application and imposition of protective legislation and regulations relating to
import or export or otherwise resulting from trade or foreign policy.
Spin-off of National Patent Development Corporation
In July 2002, the Company's Board of Directors approved a spin-off of certain of
its non-core assets into a separate corporation, NPDC, leaving the Company's
business comprised of its training and workforce development business operated
by General Physics and the GSE simulation business. The separation of these
businesses was accomplished through a pro-rata distribution (the Distribution)
of 100% of the outstanding common stock of NPDC to the Company's stockholders on
the record date of the Distribution. NPDC is a stand-alone public company owning
all of the stock of MXL, the interest in Five Star and certain other non-core
assets. Following the spin-off, the Company ceased to have any ownership
interest in NPDC.
On March 21, 2003, the Internal Revenue Service issued a favorable tax ruling,
which enabled the Distribution to be tax-free. In the spin-off, holders of
record on November 18, 2004 of GP Strategies common stock and Class B capital
stock on November 24, 2004 received one share of NPDC common stock for each
share of GP Strategies common stock or Class B capital stock owned.
23
The spin-off is expected to result in several benefits to the Company and its
shareholders. By engaging in the spin-off, the Company believes that it will
improve its access to capital and significantly improve its borrowing capacity,
thereby facilitating its ability to raise additional funds as well as achieving
other corporate benefits. Having two separate public companies will enable
financial markets to better evaluate each company more effectively, thereby
enhancing stockholder value over the long term and making the stock more
attractive as currency for future acquisitions.
In accordance with Statement of Financial Accounting Standards (SFAS) No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets" (SFAS 144),
discontinued businesses are removed from the results of continuing operations
and are classified as discontinued operations in the consolidated statements of
operations. The following table sets forth the components of income (loss) from
discontinued operations for the period from January 1, 2004 to November 24, 2004
and for the fiscal years ended December 31, 2003 and 2002 (in thousands):
2004 2003 2002
---------- ---------- ----------
Revenue $ 104,067 $ 28,644 $ 9,996
Operating income (loss) 1,594 (189) 286
Interest expense (1,108) (502) (303)
Income taxes (expense) benefit (333) 99 524
Income (loss) from discontinued operations, net
of income taxes 75 (165) (724)
The results of the discontinued operations for 2004 include the results of Five
Star, which were consolidated with the Company effective October 8, 2003, when
the Company increased its ownership interest to 54%. Previously the Company
accounted for its investment in Five Star under the equity method (see note 6 to
the consolidated financial statements). In accordance with SFAS No. 144, only
those overhead costs that are solely attributable to the discontinued business
segments have been allocated to discontinued operations. As a result, 2004, 2003
and 2002 include overhead expenses that were incurred for the benefit of both
our continuing and discontinued operations, which are included in continuing
operations. Consolidated interest expense in periods prior to the spin-off has
been allocated to discontinued operations using a basis of net assets of each of
the continuing and discontinued business segments as of November 24, 2004.
24
The assets and liabilities distributed to NPDC in connection with the spin-off
included those specific to MXL, Five Star and certain other non-core assets. The
following table summarizes the net assets and liabilities distributed to NPDC on
November 24, 2004 (in thousands):
Assets:
Cash and cash equivalents $ 2,453
Due from GP Strategies (arbitration award) 5,000
Accounts and other receivables 14,002
Inventories 25,691
Prepaid expenses and other current assets 391
Investments and marketable securities 1,593
Property, plant and equipment, net 5,553
Deferred tax assets, net 4,045
Goodwill and other assets 2,818
---------
Total assets 61,546
---------
Liabilities:
Accounts payable and accrued expenses 12,672
Short-term borrowings 18,330
Long-term debt 2,961
Minority interest and other liabilities 1,616
---------
Total liabilities 35,579
---------
---------
Net assets distributed to NPDC $ 25,967
=========
Operating Highlights
YEAR ENDED DECEMBER 31, 2004 COMPARED TO THE YEAR ENDED DECEMBER 31, 2003
Revenue
25
YEARS ENDED DECEMBER 31,
------------------------
(Dollars in Thousands) 2004 2003
---------- -----------
General Physics $ 165,066 $ 133,975
GSE 28,907 6,059
---------- ----------
$ 193,973 $ 140,034
========== ==========
Revenue of General Physics increased by $31.1 million from 2003 to 2004
primarily due to increases in revenue from the organization's government
training, business process outsource and e-Learning businesses. Contract awards
continued to increase in 2004 for government training and domestic preparedness
services. The business process outsource organization received new contracts
from both government and commercial clients at the end of 2003 and in 2004 to
provide outsourced training management services. The e-Learning organization was
awarded several new contracts in 2004 with the U.S. government to provide
hosting and learning management systems integration services. The segment also
experienced a revenue increase of approximately $5.4 million in 2004 related to
hurricane relief services provided in the State of Florida. The Company does not
anticipate that these services will be a continuing stream of revenue going
forward. The overall increase in revenue was offset by a continued decline in
training-related revenue with certain automotive clients.
Revenue of GSE increased by $22.8 million from 2003 to 2004 primarily
attributable to the consolidation of GSE. In the fourth quarter of 2003 the
Company acquired additional shares of GSE, bringing its ownership to 58% as of
October 23, 2003. As a result, revenue of GSE was only consolidated in the
Company's results in the fourth quarter of 2003, while 2004 includes a full year
of GSE revenue.
Gross Profit
YEARS ENDED DECEMBER 31,
--------------------------------------
2004 2003
------------------ ------------------
(Dollars in thousands) % Revenue % Revenue
--------- ---------
General Physics $19,947 12.1% $15,501 11.6%
GSE 6,016 20.8% 1,594 26.3%
------- ---- ------- ----
$25,963 13.4% $17,095 12.2%
======= ==== ======= ====
General Physics gross profit of $19.9 million or 12.1% of revenue, in 2004
increased by $4.4 million or 28.7%, when compared to gross profit of $15.5
million, or 11.6% of revenue, in 2003. This increase in gross profit was
primarily driven by increases in revenue from the government training, business
process outsource and e-Learning businesses. While overhead expenses remained
flat year over year, the incremental profit increase was offset slightly by
increases in employee benefits due to the growth of the business.
GSE gross profit of $6.0 million or 20.8% of revenue in 2004 increased by $4.4
million, when compared to gross profit of $1.6 million, or 26.3% of revenue, in
2003, was attributable to the
26
consolidation of GSE. In the fourth quarter of 2003 the Company acquired a
majority ownership in GSE and as a result, gross profit of GSE was only
consolidated in the Company's results in the fourth quarter of 2003, while 2004
includes a full year of GSE gross profit. GSE's revenue for full year 2003 was
$25.0 million.
Selling, General and Administrative Expense
SG&A increased $0.8 million or 3.5% from 2003 to 2004. This increase relates to
the following off-setting variances: GSE consolidation for a full year in 2004,
increased SG&A by $5.0 million; Corporate SG&A decreased in 2004 approximately
$4.2 million primarily due to reduced executive compensation and payroll costs
of $1.5 million and reduced legal and other professional fees of $2.5 million;
SG&A included corporate overhead expenses that were for the benefit of both
continuing and discontinued operations. Only those costs that were solely
attributable to the discontinued business segments have been allocated to
discontinued operations.
Interest Expense
The decrease in interest expense of $1.0 million from 2003 to 2004 was primarily
attributable to the Company's write-off of deferred financing costs on its prior
credit agreement of $0.9 million, as well as lower General Physics interest
expense, due to lower average borrowing levels in 2004 as compared to 2003.
Other Income
Other income of $0.6 million for 2004 was primarily related to interest income
on loans receivable of $0.3 million and other income of $0.3 million.
The Company recognized a gain of $13.7 million from the arbitration award paid
by EDS in the fourth quarter of 2004 (see General Physics Overview - above).
2003 - See year ended December 31, 2003 compared to the year ended December 31,
2002.
Income Taxes
Income tax benefit was $8.0 million in 2004 as a result of the Company's
reduction in valuation allowance offset by current tax provision. Income tax
expense was $1.0 million in 2003. In 2004, the Company's taxable income before
utilization of net operating loss carry forwards was approximately $22.0
million. In assessing the realizability of it's deferred tax assets, management
considered it more likely than not that it's deferred tax assets would be
realized and reduced its deferred tax valuation allowance by $12.2 million. As
of December 31, 2004, the Company had federal net operating loss carry forwards
of approximately $41.6 million, which expire during 2022 and 2023.
27
YEAR ENDED DECEMBER 31, 2003 COMPARED TO THE YEAR ENDED DECEMBER 31, 2002
Revenue
YEARS ENDED DECEMBER 31,
------------------------
(Dollars in thousands) 2003 2002
--------- ----------
General Physics $ 133,975 $ 142,237
GSE 6,059 -
--------- ----------
$ 140,034 $ 142,237
========= ==========
Revenue of General Physics, decreased by $8.3 million from 2002 to 2003
primarily due to a decrease in engineering and related services in connection
with Liquefied Natural Gas projects, decreased services provided to nuclear
power utilities, a decline in attendance at General Physics open enrollment
courses primarily due to reduced spending on training within the automotive
industry, General Physic's decision to focus on higher margin projects and
discontinue certain work with lower margins, and a general decline in client
spending (and budgets for spending) on consulting, training services, and
technology due to overall economic conditions in 2003. The decline in revenue
was partially offset by an increase in revenue from the US Government for
domestic preparedness training services for the Department of Homeland Security.
GSE revenue increased by $6.1 million in 2003 attributable to the consolidation
of GSE. In the fourth quarter of 2003 the Company acquired additional shares of
GSE, bringing its ownership to 58% as of October 23, 2003. As a result, revenue
of GSE was consolidated in the Company's results for the fourth quarter of 2003,
while 2002 does not include GSE revenue.
Gross Profit
YEARS ENDED DECEMBER 31,
-----------------------------------------
2003 2002
------------------- --------------------
(Dollars in thousands) % Revenue % Revenue
--------- ---------
General Physics $ 15,501 11.6% $ 15,366 10.8%
GSE 1,594 26.3% - -
-------- ---- --------- ----
$ 17,095 12.2% $ 15,366 10.8%
======== ==== ========= ====
General Physics gross profit of $15.5 million or 11.6% of revenue, in 2003
increased by $135,000 or 0.9% when compared to gross profit of $15.4 million or
10.8% of revenue, in 2002. During this time General Physics experienced a
revenue decline which resulted in a loss of margin. However, General Physics
made a decision to focus on higher gross margin opportunities and undertook cost
savings initiatives to preserve margin. The results of these initiatives allowed
General Physics to slightly increase gross profit in both dollars and as a
percentage of revenue.
GSE gross profit increased by $1.6 million from 2002 to 2003 attributable to the
consolidation of GSE. In the fourth quarter of 2003 the gross profit of GSE was
consolidated in Company's fourth quarter of 2003, while 2002 does not include
GSE gross profit.
28
Selling, General and Administrative Expense
The increase in SG&A of $3.7 million in 2003 from 2002 was primarily
attributable the following factors: $1.2 million of SG&A for the consolidation
of GSE in the Company's financial statements subsequent to the GSE acquisition;
executive incentive bonuses of $3.0 million; a non-cash debt conversion expense
of $0.6 million; and a decrease in the non-cash credit to compensation expense
of $1.1 million, relating to certain stock options to purchase stock of an
affiliate accounted for using the fair value method. The increase was offset by
a decrease in severance and related expense of $2.1 million.
Interest Expense
The increase in interest expense in 2003 of $0.7 million is primarily due to the
write off of $0.9 million of deferred financing costs as a result of the early
termination of the Company's prior credit agreement. This expense is included in
interest expense for year ended December 31, 2003.
Other Income
2003
The investment and other loss of $0.2 million for 2003 was primarily related to
an equity loss of GSE of $0.7 million (before its consolidation), offset by
interest income on loans receivable of $0.4.
The gains on marketable securities of $0.6 million in 2003 were primarily due to
the Company's disposal of shares of Millennium. Gains on sale of shares of
Millennium prior to the transfer of 1,000,000 shares of Millennium to MXL in
repayment of certain intercompany debt on October 17, 2003, are recorded as part
of operating results from continuing operations. Gains on sale of Millennium by
MXL after October 17, 2003 are recorded as part of operating results from
discontinued operations.
Pursuant to a Note and Warrant Purchase Agreement dated August 8, 2003, the
Company issued and sold to four Gabelli Funds $7,500,000 aggregate principal
amount of 6% Conditional Subordinated Notes due 2008 (the "Gabelli Notes") and
937,500 warrants ("GP Warrants"), each entitling the holder thereof to purchase
(subject to adjustment) one share of the Company's common stock. The changes in
the fair market value of the GP Warrants were marked to market through December
8, 2003 with the adjustment shown as other income in the consolidated statement
of operations. The Company recognized a gain of $1.4 million in its December 8,
2003 valuation adjustment of the liability relating to the GP Warrants using the
Black-Scholes model.
2002
The investment and other loss of $0.7 million for 2003 was primarily related to
an equity loss of GSE of $1.2 million, offset by interest income on loans
receivable of $0.6 million. The gains on marketable securities of $2.3 million
in 2002 were primarily due to the Company's disposal of shares of Millennium.
Income Taxes
The Company recognized income tax expense of $1.0 million in 2003 and an income
tax benefit of $0.3 million in 2002.
29
Income (Loss) on Discontinued Operations
The decreased loss from discontinued operation of $0.6 million in 2003 was
primarily due to 2002 equity in losses of Valera Pharmaceuticals.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2004, the Company had cash and cash equivalents totaling $2.4
million. In addition the Company had cash held in escrow of $13.8 million from
the EDS arbitration award, of which the Company received approximately $8.5
million in January 2005, net of the $5.0 million distribution to NPDC. The
Company believes that cash generated from operations and borrowings availability
under the Credit Agreement (described below), will be sufficient to fund the
working capital and other requirements of the Company for the foreseeable
future. The Company does not believe the spin-off of NPDC will significantly
impact the Company's liquidity.
For the year ended December 31, 2004, the Company's working capital increased by
$2.6 million from $18.0 million to $20.6 million. The Company has increased
working capital during the year ended December 31, 2004 mainly due to receiving
the proceeds of the arbitration award against EDS, as well as increases in
current assets such as accounts receivable and unbilled receivables, due to
increased revenues.
The decrease in cash and cash equivalents of $2.0 million for the year ended
December 31, 2004 resulted from cash used in investing activities of $1.4
million and cash used in financing activities of $4.9 million; offset by cash
provided by operations of $4.2 million and the effect of exchange rate changes
on cash of $0.1 million. Net cash used in investing activities of $1.4 million
includes $1.8 million of capital expenditures and $0.3 million in additions to
intangible assets; offset by proceeds from the sale of marketable securities of
$0.6 million. Net cash used in financing activities of $4.9 million consisted of
cash distributed in the spin-off of $2.5 million; repayments of short-term
borrowings of $2.1 million; and repayments of long-term debt of $1.1 million;
offset by net proceeds from exercises of stock options of $0.9 million.
On October 23, 2003, the Company purchased from ManTech International
("ManTech") additional shares of GSE common stock in exchange for a 5% note for
$5.3 million due in full in October 2008. Interest is payable quarterly. Each
year during the term of the note, ManTech has the option to convert up to 20% of
the original principal amount of the note into common stock of the Company at
the then market price of the Company's common stock, but only in the event that
the Company's common stock is trading at $10 per share or more. In the event
that less than 20% of the principal amount of the note is not converted in any
year, such amount not converted will be eligible for conversion in each
subsequent year until converted or until the note is repaid in cash.
On August 13, 2003, General Physics, General Physics' subsidiary SkillRight,
Inc. and MXL Industries Inc. ("MXL") entered into a two-year $25 million
Financing and Security Agreement (Credit Agreement) with a bank, the proceeds of
which were used to repay the Company's previous credit facility. The interest
rate on borrowings under the Credit Agreement is at Libor Market Index Rate plus
3%. The Credit Agreement, as amended in March 2004 to include GSE, is secured by
certain assets of General Physics. The Credit Agreement also provides for an
unsecured guaranty from the Company. The Credit Agreement also contains certain
restrictive covenants including a prohibition on future
30
acquisitions, incurrence of debt and the payment of dividends. The Company
received a waiver under the Credit Agreement with respect to the GSE
Acquisition. General Physics is currently restricted from paying dividends and
management fees to the Company in excess of $1.0 million in any fiscal year. On
July 30, 2004, General Physics received a waiver and paid the Company an
additional $1.0 million. The Company repaid in full the $6.1 million outstanding
under the Credit Agreement as of December 31, 2004 in January of 2005, using the
proceeds received from the EDS arbitration award (see Item 3). On March 9, 2005,
General Physics received a waiver to loan GSE a maximum of $1.0 million to
satisfy any GSE short-term capital requirements over the next 15 months.
Pursuant to a Note and Warrant Purchase Agreement dated August 8, 2003, the
Company issued and sold to four Gabelli funds $7.5 million aggregate principal
amount of 6% Conditional Subordinated Notes due 2008 and 937,500 warrants, each
entitling the holder thereof to purchase (subject to adjustment) one share of
the Company's common stock. The aggregate purchase price for the Gabelli Notes
and GP Warrants was $7.5 million. The Gabelli Notes are secured by a mortgage on
the Company's former property located in Pawling, New York which was distributed
to NPDC. In addition, at any time that less than $1.0 million principal amount
of the Gabelli Notes are outstanding, the Company may defease the obligations
secured by the mortgage and obtain a release of the mortgage by depositing with
an agent for the Noteholders, bonds or government securities with an investment
grade rating by a nationally recognized rating agency which, without
reinvestment, will provide cash on the maturity date of the Gabelli Notes in an
amount not less than the outstanding principal amount of the Gabelli Notes. The
Company used $5.8 million of the proceeds to repay its previous credit facility.
The Company and NPDC agreed to allocate to NPDC $1.9 million of the $7.5 million
received for the Gabelli Notes and Warrants, which the Company transferred to
NPDC prior to the spin-off of NPDC.
On March 30, 2004, GSE was added as an additional borrower under the General
Physics Credit Agreement. Under the terms of the Credit Agreement, as amended,
$1.5 million of General Physics' Credit Agreement has been allocated for use by
GSE. The Credit Agreement was amended to provide for additional collateral
consisting of substantially all of the GSE's assets as well as certain covenants
specific to GSE. It provides for borrowings by GSE up to 80% of eligible
accounts receivable and 80% of eligible unbilled receivables, up to a maximum of
$1.5 million. The interest rate is based upon the LIBOR Market Index Rate plus
3%, with interest only payments due monthly. The Company agreed to guarantee
GSE's borrowings under the Credit Agreement, as amended, in consideration for a
fee pursuant to the Management Services Agreement.
Contractual Obligations and Commitments
The following table summarizes long-term debt, capital lease commitments,
operating lease commitments, purchase commitments and employment agreements as
of December 31, 2004 (in thousands):
31
PAYMENTS DUE IN
-----------------------------------------------------
2006 - 2008 AFTER
2005 2007 2009 2009 TOTAL
---------- --------- --------- -------- ---------
Long-term debt $ 9 $ - $ 12,751 $ - $ 12,760
Capital lease commitments 91 90 - - 181
Operating lease commitments 4,964 6,621 2,669 5,313 19,567
Purchase commitments 28,496 2,678 29 31,203
Employment agreements 2,080 3,093 471 5,644
---------- --------- --------- -------- ---------
Total $ 35,640 $ 12,482 $ 15,920 $ 5,313 $ 69,355
========== ========= ========= ======== =========
Off-Balance Sheet Commitments
The Company has guaranteed the leases for Five Star New Jersey and Connecticut
warehouses, totaling $1.6 million per year through the first quarter of 2007.
The Company's guarantee of such leases was in effect when Five Star was
originally a wholly owned subsidiary of the Company prior to the sale by the
Company in 1998 of substantially all of the operating assets of Five Star Group
to the predecessor company of Five Star. As part of this transaction, the
landlords of the New Jersey and Connecticut facilities did not consent to the
release of the Company's guarantee. The Company's guarantee of Five Star's
leases was not affected by the spin-off of NPDC.
General Physics has two letters of credit outstanding, which as of December 31,
2004 amount to approximately $0.3 million and expire in 2005. In addition the
Company guarantees MXL loans totaling approximately $2.9 million as of December
31, 2004.
The Company does not have any off-balance sheet financing, other than operating
leases and letters of credit entered into in the normal course of business and
disclosed above. GSE utilizes various derivative financial instruments to manage
market risks associated with the fluctuations in foreign currency exchange
rates. It is GSE's policy to use derivative financial instruments to protect
against market risk arising in the normal course of business. The criteria GSE
uses for designating an instrument as a hedge includes the instrument's
effectiveness in risk reduction and one-to-one matching of derivative
instruments to underlying transactions. GSE monitors its foreign currency
exposures to maximize the overall effectiveness of its foreign currency hedge
positions. Principal currencies hedged include the Euro and the Japanese yen.
GSE's objectives for holding derivatives are to minimize the risks using the
most effective methods to reduce the impact of these exposures. GSE minimizes
credit exposure by limiting counterparties to nationally recognized financial
institutions. As of December 31, 2004, GSE had contracts for the sale of
approximately $4.6 million Japanese Yen at fixed rates. The contracts expire on
various dates through May, 2007. The contracts do not qualify for hedge
treatment under SFAS No. 133, as amended. Accordingly, GSE has recorded the
estimated fair value of the contracts of approximately $200,000 as of December
31, 2004 as other assets in the consolidated balance sheet and other income in
the consolidated statement of operations.
MANAGEMENT DISCUSSION OF CRITICAL ACCOUNTING POLICIES
The preparation of our consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
requires us to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Our estimates, judgments and assumptions
are continually evaluated based on
32
available information and experience. Because of the use of estimates inherent
in the financial reporting process, actual results could differ from those
estimates.
Certain of our accounting policies require higher degrees of judgment than
others in their application. These include contract revenue and cost
recognition, valuation of accounts receivable, accounting for investments,
impairment of long-lived and intangible assets and income tax recognition of
deferred tax items which are summarized below. In addition, note 2 to the
Consolidated Financial Statements includes further discussion of our significant
accounting policies.
CONTRACT REVENUE AND COST RECOGNITION.
Revenue Recognition
General Physics contract revenue and cost recognition. General Physics provides
services under time-and-materials, cost-plus-fixed fee and fixed-price
contracts. Each contract has different terms based on the scope, deliverables
and complexity of the engagement, requiring General Physics to make judgments
and estimates about recognizing revenue. In general, revenue is recognized on
these arrangements as the services are performed. Under time-and-material
contracts, as well as certain cost-plus-fixed fee and certain fixed-price
contracts, the contractual billing schedules are based on the specified level of
resources General Physics is obligated to provide. As a result, on those
"level-of-effort" contracts, the contractual billing amount for a given period
acts as a measure of performance and, therefore, revenue is typically recognized
in that amount.
For other fixed price contracts, the contractual billing schedules are not based
on the specified level of resources General Physics is obligated to provide.
These arrangements typically do not have milestones or other reliable measures
of performance. As a result, revenue on these arrangements is recognized using
the percentage-of-completion method based on the relationship of costs incurred
to total estimated costs expected to be incurred over the term of the contract.
General Physics believes this methodology provides a reasonable measure of
performance on these arrangements since performance primarily involves personnel
costs and the customer typically is required to pay General Physics for the
proportionate amount of work and cost incurred in the event of contract
termination. Revenue for unpriced change orders is not recognized until the
customer agrees with the changes. Costs and estimated earnings in excess of
billings on uncompleted contracts are recorded as a current asset. Billings in
excess of costs and estimated earnings on uncompleted contracts are recorded as
a current liability. Generally contracts provide for the billing of costs
incurred and estimated earnings on a monthly basis.
Risks relating to service delivery, usage, productivity and other factors are
considered when making estimates of total contract cost, contract profitability
and progress towards completion. If sufficient risk exists, a reduced-profit
methodology is applied to a specific client contract's percentage-of-completion
model whereby the amount of revenue recognized is limited to the amount of costs
incurred until such time as the risks have been partially or wholly mitigated
through performance. General Physics' estimates of total contract cost and
contract profitability change periodically in the normal course of business,
occasionally due to modifications of contractual arrangements. In addition, the
implementation of cost saving initiatives and achievement of productivity gains
generally results in a reduction of estimated total contract expenses on
affected client contracts. Such changes in estimate are recognized in the period
the changes are determined. For all client contracts, provisions for estimated
losses on individual contracts are made in the period in which the loss first
becomes apparent.
33
As part of General Physics' on-going operations to provide services to its
customers, incidental expenses, which are commonly referred to as
"out-of-pocket" expenses, are billed to customers, either directly as a
pass-through cost or indirectly as a cost estimated in proposing on fixed-price
contracts. Out-of-pocket expenses include expenses such as airfare, mileage,
hotel stays, out-of-town meals and telecommunication charges. General Physics'
policy provides for these expenses to be recorded as both revenue and direct
cost of services in accordance with the provisions of EITF 01-14, Income
Statement Characterization of Reimbursements Received for "Out-of-Pocket"
Expenses Incurred.
GSE revenue recognition. The majority of GSE's revenue is derived through the
sale of uniquely designed systems containing hardware, software and other
materials under fixed-price contracts. In accordance with Statement of Position
81-1, Accounting for Performance of Construction-Type and Certain
Production-Type Contracts, the revenue under these fixed-price contracts is
accounted for on the percentage-of-completion method, based on contract costs
incurred to date and estimated costs to complete. Estimated contract earnings
are reviewed and revised periodically as the work progresses and the cumulative
effect of any change is recognized in the period in which the change is
identified. Estimated losses are charged against earnings in the period such
losses are identified.
As GSE recognizes revenue under the percentage-of-completion method, it provides
an accrual for estimated future warranty costs based on historical and projected
claims experience. GSE's longer-term contracts generally provide for a one-year
warranty on parts, labor and any bug fixes as it relates to software embedded in
the systems.
GSE's system design contracts do not provide for "post customer support service"
(PCS) in terms of software upgrades, software enhancements or telephone support.
In order to obtain PCS, the customers must purchase a separate contract at the
date of system installation. Such PCS arrangements are generally for a one-year
period renewable annually and include customer support, unspecified software
upgrades, maintenance releases. GSE recognizes revenue from these contracts
ratably over the life of the agreements in accordance with Statement of Position
97-2, Software Revenue Recognition.
Revenue from the sale of software licenses for the Company's modeling tools,
which do not require significant modification or customization, are recognized
when the license agreement is signed, the license fee is fixed and determinable,
delivery has occurred, and collection is considered probable. Revenues from
certain consulting or training contracts are recognized on a time-and-material
basis. For time-and-material type contracts, revenue is recognized based on
hours incurred at a contracted labor rate plus expenses.
VALUATION OF ACCOUNTS RECEIVABLES
Provisions for allowance for doubtful accounts are made based on specific credit
risks identified by the Company. Measurement of such losses requires
consideration of the historical loss experience of the Company and its
subsidiaries, judgments about customer credit risk and the need to adjust for
current economic conditions. The allowance for doubtful accounts was $0.8
million at December 31, 2004.
IMPAIRMENT OF LONG-LIVED TANGIBLE AND INTANGIBLE ASSETS
Impairment of long-lived tangible and intangible assets with finite lives result
in a charge to operations whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be
34
recoverable. Recoverability of long-lived tangible assets to be held and used is
measured by a comparison of the carrying amount of the asset to future
undiscounted net cash flows expected to be generated by the asset. If such
assets are considered to be impaired, the impairment to be recognized is
measured by determining the amount by which the carrying amount of the assets
exceeds the fair value of the asset.
The measurement of the future net cash flows to be generated is subject to
management's reasonable expectations with respect to the Company's future
operations and future economic conditions which may affect those cash flows.
In accordance with SFAS No. 142, goodwill is no longer amortized, but instead
tested for impairment at least annually. The goodwill impairment test requires
the Company to identify its reporting units and obtain estimates of the fair
values of those units as of the testing date. The Company estimates the fair
values of its reporting units using discounted cash flow valuation models. The
Company estimates these amounts by evaluating historical trends, current
budgets, operating plans and industry data. The estimated fair value of each
reporting unit exceeded its respective carrying value in both tests conducted in
2004 and 2003 indicating the underlying goodwill of each unit was not impaired
at the respective testing dates. The timing and frequency of our goodwill
impairment tests are based on an ongoing assessment of events and circumstances
that would more than likely reduce the estimated fair value of a reporting unit
below its carrying value. The Company will continue to monitor its goodwill for
impairment and conduct formal tests when impairment indicators are present. A
decline in the fair value of any reporting unit below its carrying value is an
indicator that the underlying goodwill of the unit is potentially impaired. This
would require a comparison of the implied fair value of a reporting unit's
goodwill to its carrying value. An impairment loss is required for the amount
which the carrying value of a reporting unit's goodwill exceeds its implied fair
value. The implied fair value of the reporting unit's goodwill would become the
new cost basis of the unit's goodwill.
The following table presents goodwill balances at December 31, 2004 and
operating income for the years ended December 31, 2004, 2003 and 2002 for each
of the Company's reportable segments (in thousands):
OPERATING INCOME FOR THE YEARS ENDED
GOODWILL AT DECEMBER 31,
DECEMBER 31, ------------------------------------
2004 2004 2003 2002
------------ ----------- -------- ---------
General Physics $ 57,624 $ 8,881 $ 4,233 $ 1,599
GSE 4,756 (174) 366 -
-------- ---------- -------- ---------
$ 62,380 $ 8,707 $ 4,599 $ 1,599
======== ========== ======== =========
35
INCOME TAXES
The Company accounts for income taxes using the asset and liability method.
Deferred tax assets and liabilities are recognized for future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and for operating
loss and tax credit carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered. In
assessing the realizability of the deferred tax assets, the Company considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of the deferred tax assets
is dependent upon the generation of future taxable income during the periods in
which temporary differences are deductible. Management considers the scheduled
reversal of deferred tax liabilities, projected future taxable income and tax
planning strategies in making this assessment. Based upon these factors,
management believes it is more likely than not that the Company will realize the
benefits of deferred tax assets, net of the valuation allowance. The valuation
allowance relates to both foreign and domestic net operating loss carryforwards
for which the Company does not believe the benefits will be realized.
In 2004, the Company's taxable income before utilization of net operating loss
carry forwards was approximately $22.0 million. In assessing the realizability
of it's deferred tax assets, management considered it more likely than not that
it's deferred tax assets would be realized and reduced it's valuation allowance
by $12.2 million. As of December 31, 2004, the Company had federal net operating
loss carry forwards of approximately $41.6 million, which expire during 2022 and
2023.
RECENT ACCOUNTING PRONOUNCEMENTS
During December 2004, the Financial Accounting Standards Board ("FASB") issued a
new standard entitled Statement of Financial Accounting Standards ("SFAS") 123R,
Share-Based Payment, which revises SFAS No. 123, Accounting for Stock-Based
Compensation, and amends SFAS No. 95, Statement of Cash Flows. Among other
items, the new standard would require the expensing, in the financial
statements, of stock options issued by the Company. The new standard will be
effective July 1, 2005, for calendar year companies. GP Strategies is currently
evaluating the adoption of SFAS No. 123R, including the valuation methods and
assumptions that underlie the valuation of the awards. The Company expects that
the adoption of SFAS No. 123R will have an adverse effect on the Company's
consolidated financial statements.
36
ITEM 8 IS HEREBY AMENDED AS INDICATED
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
PAGE
FINANCIAL STATEMENTS OF GP STRATEGIES CORPORATION AND SUBSIDIARIES:
Report of Independent Registered Public Accounting Firm - KPMG LLP 39
Report of Independent Registered Public Accounting Firm - Eisner LLP 40
Consolidated Balance Sheets - December 31, 2004 and 2003 41
Consolidated Statements of Operations - Years ended December 31,
2004, 2003 and 2002 43
Consolidated Statements of Stockholders' Equity and Comprehensive Income (Loss)
- Years ended December 31, 2004, 2003 and 2002 44
Consolidated Statements of Cash Flows - Years ended December 31,
2004, 2003 and 2002 45
Notes to Consolidated Financial Statements 47
38
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
GP Strategies Corporation:
We have audited the accompanying consolidated balance sheet of GP Strategies
Corporation and subsidiaries as of December 31, 2004 and 2003, and the related
consolidated statements of operations, stockholders' equity and comprehensive
income (loss), and cash flows for each of the years in the three-year period
ended December 31, 2004. In connection with our audits of the consolidated
financial statements, we also have audited the financial statement schedule
listed under item 15a(2). These consolidated financial statements and financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements and financial statement schedule based on our audits. We did not
audit the 2003 financial statements of Five Star Products, Inc., a formerly 54%
owned subsidiary, which statements reflect total assets constituting 20% of the
related 2003 consolidated total assets. Those financial statements were audited
by other auditors whose report has been furnished to us, and our opinion,
insofar as it relates to the amounts included for Five Star Products, Inc., is
based solely on the report of other auditors.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits and the report of
the other auditors provide a reasonable basis for our opinion. In our opinion,
based on our audits and the report of other auditors, the consolidated financial
statements referred to above present fairly, in all material respects, the
financial position of GP Strategies Corporation and subsidiaries as of December
31, 2004 and 2003, and the results of their operations and their cash flows for
each of the years in the three-year period ended December 31, 2004, in
conformity with U.S. generally accepted accounting principles. Also, in our
opinion, the related financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein.
/s/ KPMG LLP
Baltimore, Maryland
March 16, 2005
39
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Five Star Products, Inc.
We have audited the consolidated balance sheet of Five Star Products, Inc. and
subsidiaries (the "Company") as of December 31, 2003 and the related
consolidated statement of operations and comprehensive income, changes in
stockholders' equity and cash flows for the year then ended (not shown
separately herein). These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Five Star Products,
Inc. and subsidiaries as of December 31, 2003 and the consolidated results of
their operations and their cash flows for the year then ended , in conformity
with accounting principles generally accepted in the United States of America.
/s/ Eisner LLP
New York, New York
March 17, 2004, except for the first paragraph of Note 7,
as to which the date is March 31, 2004
40
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 2004 and 2003
(In thousands, except shares and par value per share)
2004 2003
-------- --------
ASSETS
Current assets:
Cash and cash equivalents $ 2,417 $ 4,416
Cash held in escrow from arbitration settlement 13,798 -
Accounts and other receivables, less allowance for doubtful accounts
of $917 in 2004 and $1,739 in 2003 31,114 39,737
Inventories - 28,300
Costs and estimated earnings in excess of billings on
uncompleted contracts 16,834 14,502
Deferred tax assets 1,478 -
Prepaid expenses and other current assets 4,350 6,705
-------- --------
Total current assets 69,991 93,660
-------- --------
Investments and marketable securities - 3,931
Property, plant and equipment, net 2,673 8,994
Intangible assets:
Goodwill 62,380 62,395
Patents, licenses and contract rights, net 1,024 1,031
-------- --------
63,404 63,426
-------- --------
Deferred tax assets 16,651 11,688
Other assets 3,316 6,624
-------- --------
$156,035 $188,323
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 100 $ 1,112
Short-term borrowings 6,068 26,521
Accounts payable and accrued expenses 33,219 38,107
Billings in excess of costs and estimated earnings on
uncompleted contracts 10,003 9,922
-------- --------
Total current liabilities 49,390 75,662
-------- --------
Long-term debt less current maturities 10,951 13,749
Other noncurrent liabilities 1,739 1,728
-------- --------
Total liabilities 62,080 91,139
-------- --------
Minority interests 2,335 4,372
-------- --------
(Continued)
41
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 2004 and 2003
(In thousands, except shares and par value per share)
2004 2003
---------- ----------
Stockholders' equity:
Preferred stock, par value $0.01 per share
Authorized 10,000,000 shares; issued none - -
Common stock, par value $0.01 per share
Authorized 25,000,000 shares; issued 16,669,757 in 2004 and 16,348,777
shares in 2003 (of which 8,994 in 2004 and 14,722
shares in 2003 are held in treasury) 167 163
Class B common stock, par value $0.01 per share
Authorized 2,800,000 shares; issued and outstanding
1,200,000 shares 12 12
Additional paid-in capital 171,852 196,541
Accumulated deficit (78,923) (101,443)
Accumulated other comprehensive income (loss) (761) 24
Notes receivable from stockholder (619) (2,322)
Treasury stock at cost (108) (163)
--------- ---------
Total stockholders' equity 91,620 92,812
--------- ---------
$ 156,035 $ 188,323
========= =========
See accompanying notes to consolidated financial statements.
42
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
Years ended December 31, 2004, 2003 and 2002
(In thousands, except per share data)
2004 2003 2002
---------- ---------- ----------
Revenue $ 193,973 $ 140,034 $ 142,237
Cost of revenue 168,010 122,939 126,871
--------- --------- ---------
Gross profit 25,963 17,095 15,366
Selling, general and administrative expenses (23,735) (22,935) (19,229)
--------- --------- ---------
Operating income (loss) 2,228 (5,840) (3,863)
Interest expense (2,113) (3,123) (2,467)
Other income (expense) (including interest income of
$317 in 2004, $424 in 2003 and $584 in 2002) 649 (218) (736)
Gain on arbitration award, net of legal fees and expenses 13,660 - -
Gains on sales of marketable securities, net - 559 2,267
Valuation adjustment of liability for warrants - 1,436 -
--------- --------- ---------
Income (loss) from continuing operations before income
tax (expense) benefit and minority interests 14,424 (7,186) (4,799)
Income tax (expense) benefit 8,009 (985) 295
--------- --------- ---------
Income (loss) from continuing operations before minority 22,433 (8,171) (4,504)
interests
Minority interests 12 60 -
--------- --------- ---------
Income (loss) from continuing operations 22,445 (8,111) (4,504)
Income (loss) from discontinued operations, net of income taxes 75 (165) (724)
--------- --------- ---------
Net income (loss) $ 22,520 $ (8,276) $ (5,228)
========= ========= =========
Per common share data:
Basic
Income (loss) from continuing operations $ 1.27 $ (0.47) $ (0.29)
Income (loss) from discontinued operations - (0.01) (0.05)
Net income (loss) $ 1.27 $ (0.48) $ (0.34)
Diluted
Income (loss) from continuing operations $ 1.23 $ (0.47) $ (0.29)
Income (loss) from discontinued operations - (0.01) (0.05)
Net income (loss) $ 1.23 $ (0.48) $ (0.34)
See accompanying notes to consolidated financial statements.
43
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity and Comprehensive Income (Loss)
Years ended December 31, 2004, 2003, and 2002
(In thousands, except for par value per share)
CLASS B ACCUMULATED NOTES
COMMON COMMON OTHER RECEIVABLE
STOCK STOCK ADDITIONAL ACCUMULATED COMPREHENSIVE FROM
($0.01 PAR) ($0.01 PAR) PAID-IN CAPITAL DEFICIT INCOME (LOSS) STOCKHOLDER
----------- ----------- --------------- ----------- ------------- -----------
Balance at December 31, 2001 $ 128 $ 9 $ 180,078 $ (87,939) $ 8,364 $ (4,095)
--------- --------- --------- ---------- ------------ ----------
Net loss - - - (5,228) - -
Other comprehensive loss - - - - (7,904) -
Total comprehensive loss
Proceeds from issuance of common stock 26 3 9,910 - - -
--------- --------- --------- ---------- ------------ ----------
Balance at December 31, 2002 154 12 189,988 (93,167) 460 (4,095)
--------- --------- --------- ---------- ------------ ----------
Net loss - - - (8,276) -
Other comprehensive loss - - - - (436) -
Total comprehensive loss
Repayment of notes receivable from stockholder - - - - - 1,773
Issuance and sale of common stock and warrants 9 - 6,553 - - -
--------- --------- --------- ---------- ------------ ----------
Balance at December 31, 2003 163 12 196,541 (101,443) 24 (2,322)
--------- --------- --------- ---------- ------------ ----------
Net income - - - 22,520 -
Other comprehensive loss - - - - (861) -
Total comprehensive income
Repayment of notes receivable from stockholder - - - - - 1,703
Distribution of net assets to NPDC - - (26,043) - 76 -
Proceeds from issuance of common stock 4 - 1,354 - - -
--------- --------- --------- --------- ----------- ----------
Balance at December 31, 2004 $ 167 $ 12 $ 171,852 $ (78,923) $ (761) $ (619)
========= ========= ========= ========= =========== ==========
TOTAL
TREASURY STOCKHOLDERS' COMPREHENSIVE
STOCK AT COST EQUITY INCOME (LOSS)
------------- ------------- -------------
Balance at December 31, 2001 $ (602) $ 95,943
------------ ---------
Net loss - (5,228) $ (5,228)
Other comprehensive loss - (7,904) (7,904)
---------
Total comprehensive loss $ (13,132)
=========
Proceeds from issuance of common stock 232 10,171
------------ ---------
Balance at December 31, 2002 (370) 92,982
------------ ---------
Net loss (8,276) $ (8,276)
Other comprehensive loss - (436) (436)
---------
Total comprehensive loss - $ (8,712)
=========
Repayment of notes receivable from stockholder - 1,773
Issuance and sale of common stock and warrants 207 6,769
------------ ---------
Balance at December 31, 2003 (163) 92,812
------------ ---------
Net income 22,520 $ 22,520
Other comprehensive loss - (861) (861)
---------
Total comprehensive income $ 21,659
=========
Repayment of notes receivable from stockholder - 1,703
Distribution of net assets to NPDC - (25,967)
Proceeds from issuance of common stock 55 1,413
------------ ---------
Balance at December 31, 2004 $ (108) $ 91,620
============ =========
See accompanying notes to consolidated financial statements.
44
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 2004, 2003, and 2002
(In thousands)
2004 2003 2002
--------- --------- ---------
Cash flows from operations:
Income (loss) from continuing operations $ 22,445 $ (8,111) $ (4,504)
Income (loss) from discontinued operations, net of income taxes 75 (165) (724)
-------- -------- --------
Net income (loss) 22,520 (8,276) (5,228)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 4,084 2,928 3,304
Gain on arbitration award, net (13,660) - -
Deferred income taxes (9,783) (623) (1,839)
Minority interests (407) (30) -
Issuance of stock for retirement savings plan
and non-cash compensation expense 2,348 3,903 (146)
Gains on sales of marketable securities (381) (846) (2,267)
Write-off of deferred financing costs - 860 -
Noncash debt conversion expense - 622 -
Valuation adjustment of liability for warrants - (1,436) -
Loss on equity investments and other, net - 559 2,603
Proceeds from sales of trading securities 404 249 -
Changes in other operating items, net of effect
of acquisitions and disposals:
Accounts and other receivables (5,379) 2,713 3,195
Inventories 2,609 (6,698) 354
Costs and estimated earnings in excess of
billings on uncompleted contracts (2,332) 3,788 2,584
Accounts payable and accrued expenses 2,707 4,656 1,901
Billings in excess of costs and estimated
earnings on uncompleted contracts 81 2,534 (3,174)
Prepaid and other current assets 1,442 194 (330)
Changes in other operating items (69) 253 (128)
-------- -------- --------
Net cash provided by operations 4,184 5,350 829
-------- -------- --------
Cash flows from investing activities:
Additions to property, plant and equipment (1,784) (2,123) (1,916)
Additions to intangible assets (250) (422) (1,503)
Proceeds from sales of marketable securities 609 2,124 3,833
Cash acquired in acquisitions - 2,853 -
Decrease (increase) to investments and other - (4,050) 489
-------- -------- --------
Net cash provided by (used in)
investing activities (1,425) (1,618) 903
-------- -------- --------
(continued)
45
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 2004, 2003, and 2002
(In thousands)
2004 2003 2002
--------- --------- ---------
Cash flows from financing activities:
Proceeds from issuance of common stock 860 955 7,850
Proceeds from issuance of Class B common stock - - 1,260
Repayment of short-term borrowings (2,123) (13,461) (10,280)
Deferred financing costs - (1,619) (728)
Proceeds from issuance of long-term debt - 14,674 890
Repayment of long-term debt (1,135) (1,451) (841)
Distribution of cash to NPDC (2,453) - -
-------- -------- --------
Net cash used in financing activities (4,851) (902) (1,849)
-------- -------- --------
Effect of exchange rate changes on cash and
cash equivalents 93 70 (72)
-------- -------- --------
Net increase (decrease) in cash and
cash equivalents (1,999) 2,900 (189)
Cash and cash equivalents at beginning of year 4,416 1,516 1,705
-------- -------- --------
Cash and cash equivalents at end of year $ 2,417 $ 4,416 $ 1,516
======== ======== ========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 2,383 $ 1,379 $ 1,942
Income taxes $ 639 $ 734 $ 434
Non-cash investing and financing activities:
Distribution of non-cash net assets to NPDC (see note 3) $ 23,514 $ - $ -
Additions to property financed with capital leases $ 111 $ 163 $ 889
See accompanying notes to consolidated financial statements.
46
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2004 and 2003
(1) DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
GP Strategies Corporation ("the Company") was incorporated in
Delaware in 1959. As of December 31, 2004, the Company's business
consists of its training and workforce development business operated
by General Physics Corporation ("General Physics" or "GP") and its
simulation business operated by GSE Systems Inc. ("GSE").
In July 2002, the Company's Board of Directors approved a spin-off
of certain of its non-core assets into a separate corporation,
National Patent Development Corporation ("NPDC"). NPDC is a
stand-alone public company owning all of the stock of MXL
Industries, Inc. ("MXL"), the interest in Five Star Products, Inc.
("Five Star") and certain other non-core assets. The separation of
these businesses was accomplished through a pro-rata distribution of
100% of the outstanding common stock of NPDC to the Company's
stockholders on the record date of November 18, 2004 of the
distribution. On November 24, 2004, (the "Distribution" or
"spin-off") holders of record received one share of NPDC common
stock for each share of GP Strategies common stock or Class B
capital stock owned. The Company received a favorable tax ruling on
March 21, 2003 from the Internal Revenue Service which enabled the
Distribution to be tax-free. Following the spin-off, the Company
ceased to have any ownership interest in NPDC, and the operations of
NPDC have been reclassified as discontinued in the Company's
consolidated financial statements for all periods presented (see
note 3). In connection with the spin-off, several of the Company's
directors and officers are also directors and officers of NPDC. The
Company entered into agreements with NPDC to allocate responsibility
for liabilities (including tax and other contingent liabilities
associated with their respective businesses or otherwise to be
assumed by NPDC or the Company), to separate their businesses, and
for the Company and NPDC to provide management services to each
other. The Company and NPDC will also provide certain guarantees of
each others' financial obligations.
On October 17, 2003, the Company transferred 100% of the outstanding
common stock in Valera Pharmaceuticals (formerly Hydro Med Sciences,
Inc.) valued at $6.5 million (based on an independent valuation) and
1,000,000 shares of common stock of Millennium Cell Inc.
("Millennium") with a quoted market price of $3.50 per share to MXL
in repayment of $10 million of a payable due to MXL from the
Company. MXL was a wholly owned subsidiary of the Company until the
distribution.
47
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2004 and 2003
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) PRINCIPLES OF CONSOLIDATION AND INVESTMENTS
The consolidated financial statements include the operations of the
Company and its majority-owned subsidiaries. The minority interests
balance as of December 31, 2004 is comprised of the 42% minority
share in GSE, which the Company did not own. The minority interests
balance as of December 31, 2003 is comprised of the 42% minority
share in GSE and a 46% minority share of Five Star, which the
Company did not own. All significant intercompany balances and
transactions have been eliminated.
(b) CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of short-term highly liquid
investments with original maturities of three months or less.
(c) MARKETABLE SECURITIES
Marketable securities consist of U.S. corporate equity securities.
The Company classifies its marketable securities as trading or
available-for-sale investments, which are recorded at fair value.
Trading securities are those securities which are generally expected
to be sold within one year and were held principally for the purpose
of selling them in the near term.
Unrealized holding gains and losses on trading securities are
included in earnings. Unrealized holding gains and losses on
available-for-sale securities are excluded from earnings and are
reported as a separate component of stockholders' equity in
accumulated other comprehensive income (loss), net of income taxes,
until realized. A decline in the market value of any
available-for-sale security below cost that is deemed to be
other-than-temporary results in a reduction in carrying amount to
fair value. The impairment is charged to earnings, and a new cost
basis is established. Gains and losses are derived using the average
cost method for determining the cost of securities sold. Marketable
securities were included in the net assets distributed to NPDC (see
note 3).
(d) INVENTORIES
Inventories are valued at the lower of cost or market, using the
first-in, first-out (FIFO) method. Inventories were included in the
net assets distributed to NPDC (see note 3).
(e) ALLOWANCE FOR DOUBTFUL ACCOUNTS RECEIVABLE
Trade accounts receivable are recorded at invoiced amounts. The
allowance for doubtful accounts is estimated based on historical
trends of past due accounts, write-offs and specific review of past
due accounts.
(f) FOREIGN CURRENCY TRANSLATION
The functional currency of the Company's international operations is
the applicable local currency. The translation of the applicable
foreign currency into U.S. dollars is performed for balance sheet
accounts using current exchange rates in effect at the balance sheet
date and for revenue and expense accounts using the weighted average
rates of exchange
48
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2004 and 2003
prevailing during the year. The unrealized gains and losses
resulting from such translation are included as a separate component
of stockholders' equity in accumulated other comprehensive income
(loss).
(g) REVENUE RECOGNITION
GENERAL PHYSICS
GP provides services under time-and-materials, cost-plus-fixed fee
and fixed-price contracts. Each contract has different terms based
on the scope, deliverables and complexity of the engagement,
requiring GP to make judgments and estimates about recognizing
revenue. In general, revenue is recognized on these arrangements as
the services are performed. Under time-and-material contracts, as
well as certain cost-plus-fixed fee and certain fixed-price
contracts, the contractual billing schedules are based on the
specified level of resources GP is obligated to provide. As a
result, on those "level-of-effort" contracts, the contractual
billing amount for a given period acts as a measure of performance
and, therefore, revenue is typically recognized in that amount.
For other fixed price contracts, the contractual billing schedules
are not based on the specified level of resources GP is obligated to
provide. These arrangements typically do not have milestones or
other reliable measures of performance. As a result, revenue on
these arrangements is recognized using the percentage-of-completion
method based on the relationship of costs incurred to total
estimated costs expected to be incurred over the term of the
contract. GP believes this methodology provides a reasonable measure
of performance on these arrangements since performance primarily
involves personnel costs and the customer typically is required to
pay GP for the proportionate amount of work and cost incurred in the
event of contract termination. Revenue for unpriced change orders is
not recognized until the customer agrees with the changes. Costs and
estimated earnings in excess of billings on uncompleted contracts
are recorded as a current asset. Billings in excess of costs and
estimated earnings on uncompleted contracts are recorded as a
current liability. Generally, contracts provide for the billing of
costs incurred and estimated earnings on a monthly basis.
Risks relating to service delivery, usage, productivity and other
factors are considered when making estimates of total contract cost,
contract profitability and progress towards completion. If
sufficient risk exists, a reduced-profit methodology is applied to a
specific client contract's percentage-of-completion model whereby
the amount of revenue recognized is limited to the amount of costs
incurred until such time as the risks have been partially or wholly
mitigated through performance. GP's estimates of total contract cost
and contract profitability change periodically in the normal course
of business, occasionally due to modifications of contractual
arrangements. In addition, the implementation of cost saving
initiatives and achievement of productivity gains generally result
in a reduction of estimated total contract expenses on affected
client contracts. Such changes in estimate are recognized in the
period the changes are determined. For all client contracts,
provisions for estimated
49
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2004 and 2003
losses on individual contracts are made in the period in which the
loss first becomes apparent.
As part of GP's on-going operations to provide services to its
customers, incidental expenses, which are commonly referred to as
"out-of-pocket" expenses, are billed to customers, either directly
as a pass-through cost or indirectly as a cost estimated on
fixed-price contracts. Out-of-pocket expenses include expenses such
as airfare, mileage, hotel stays, out-of-town meals and
telecommunication charges. GP's policy provides for these expenses
to be recorded as both revenue and direct cost of services in
accordance with the provisions of Emerging Issues Task Force (EITF)
01-14, Income Statement Characterization of Reimbursements Received
for `Out-of-Pocket' Expenses Incurred.
GSE
The majority of GSE's revenue is derived through the sale of
uniquely designed systems containing hardware, software and other
materials under fixed-price contracts. In accordance with Statement
of Position ("SOP") No. 81-1, Accounting for Performance of
Construction-Type and Certain Production-Type Contracts, the revenue
under these fixed-price contracts is accounted for on the
percentage-of-completion method. This methodology recognizes income
as work progresses on the contract and is based on an estimate of
the income earned to date, less income recognized in earlier
periods. GSE bases its estimate of the degree of completion of the
contract by reviewing the relationship of costs incurred to date to
the expected total costs that will be incurred on the project.
Estimated contract earnings are reviewed and revised periodically as
the work progresses and the cumulative effect of any change is
recognized in the period in which the change is identified.
Estimated losses are charged against earnings in the period such
losses are identified.
As GSE recognizes revenue under the percentage-of-completion method,
it provides an accrual for estimated future warranty costs based on
historical and projected claims experience. GSE's longer-term
contracts generally provide for a one-year warranty on parts, labor
and any bug fixes as it relates to software embedded in the systems.
GSE's system design contracts do not provide for "post customer
support service" (PCS) in terms of software upgrades, software
enhancements or telephone support. In order to obtain PCS, the
customers must purchase a separate contract at the date of system
installation. Such PCS arrangements are generally for a one-year
period, renewable annually, and include customer support,
unspecified software upgrades, and maintenance releases. GSE
recognizes revenue from these contracts ratably over the life of the
agreements in accordance with SOP No.97-2, Software Revenue
Recognition.
Revenue from the sale of software licenses for the Company's
modeling tools, which do not require significant modification or
customization, are recognized when the license agreement is signed,
the license fee is fixed and determinable, delivery has occurred,
and collection is considered probable.
50
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2004 and 2003
Revenues from certain consulting or training contracts are
recognized on a time-and-material basis. For time-and-material type
contracts, revenue is recognized based on hours incurred at a contracted
labor rate plus expenses.
DISCONTINUED OPERATIONS
Revenue of discontinued operations, related primarily to Five Star, were
recognized as sales were made and title transferred to the customers.
(h) COMPREHENSIVE INCOME
Comprehensive income consists of net income (loss), net unrealized gains
(losses) on available-for-sale securities and foreign currency translation
adjustments.
(i) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are carried at cost. Major additions and
improvements are capitalized while maintenance and repairs, which do not
extend the lives of the assets are expensed as incurred. Gain or loss on
the disposition of property, plant and equipment is recognized in
operations when realized.
Depreciation of property, plant and equipment is recognized on a
straight-line basis over the following estimated useful lives:
CLASS OF ASSETS USEFUL LIFE
----------------------------------- --------------------------------------
Buildings and improvements 5 to 40 years
Machinery, equipment, and furniture
and fixtures 3 to 7 years
Leasehold improvements Shorter of asset life or term of lease
(j) IMPAIRMENT OF LONG-LIVED ASSETS
Long-lived assets, such as property, plant, and equipment, and intangibles
subject to amortization, are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may
not be recoverable. Recoverability of assets to be held and used is
measured by a comparison of the carrying amount of an asset to estimated
undiscounted future cash flows expected to be generated by the asset. If
the carrying amount of an asset exceeds its estimated future cash flows,
an impairment charge is recognized at the amount by which the carrying
amount of the asset exceeds the fair value of the asset. Assets to be
disposed of would be separately presented in the balance sheet and
reported at the lower of the carrying amount or fair value less costs to
sell, and are no longer depreciated.
(k) GOODWILL AND INTANGIBLE ASSETS
The Company capitalizes costs incurred to obtain and maintain patents and
licenses, as well as contract rights acquired. Patent costs are amortized
over the lesser of 17 years or the
51
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2004 and 2003
remaining lives of the patents and license costs over the lives of the
licenses. Contract rights are amortized over the lives of the contracts
acquired, ranging up to two years.
Goodwill represents the excess of costs over fair value of assets of
businesses acquired. Goodwill and intangible assets acquired in a purchase
business combination and determined to have an indefinite useful life are
not amortized, but instead tested for impairment at least annually or more
frequently if events and circumstances indicate that the asset might be
impaired in accordance with the provisions of Statement of Financial
Accounting Standards ("SFAS") No. 142, Goodwill and Other Intangible
Assets. The goodwill impairment test requires the Company to identify its
reporting units and obtain estimates of the fair values of those units as
of the testing date. The Company estimates the fair values of its
reporting units using discounted cash flow valuation models. An impairment
loss is recognized to the extent that the carrying amount exceeds the
asset's fair value. SFAS No. 142 also requires that intangible assets with
estimable useful lives be amortized over their respective estimated useful
lives to their estimated residual values, and reviewed for impairment in
accordance with SFAS No. 144, Accounting for Impairment or Disposal of
Long-Lived Assets. During 2004, 2003 and 2002, the Company tested its
goodwill in accordance with SFAS No. 142 and concluded no impairment
charge was required.
(l) OTHER ASSETS
Other assets include deferred financing costs and certain software
development costs. Deferred financing costs are amortized on a straight
line basis over the terms of the related debt and such amortization is
classified as interest expense in the consolidated statements of
operations.
In accordance with SFAS No. 86, Accounting for the Costs of Computer
Software to Be Sold, Leased, or Otherwise Marketed, certain computer
software development costs of GSE are capitalized in the Company's
consolidated balance sheet. Capitalization of computer software begins
upon the establishment of technological feasibility. Capitalization ceases
and amortization of capitalized cost begins when the software product is
commercially available for general release to customers. Amortization of
capitalized computer software development costs is included in cost of
revenue and is provided using the straight-line method over the remaining
estimated economic life of the product, which normally ranges from three
to five years. On an annual basis, the Company assesses the recovery of
the unamortized software computer costs by estimating the net undiscounted
cash flows expected to be generated by the sale of the product. If the
undiscounted cash flows are not sufficient to recover the unamortized
software costs, the Company will write-down the investment to its
estimated fair value based on future discounted cash flows. The excess of
any unamortized computer software costs over the related net realizable
value is written down and charged to income. Significant changes in the
sales projections could result in impairment with respect to the
capitalized software.
52
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2004 and 2003
(m) INCOME TAXES
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases and for operating loss and tax credit carryforwards. Deferred
tax assets and liabilities are measured using enacted tax rates expected
to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized
in income in the period that includes the enactment date.
GSE files separate federal, state and foreign tax returns from the
Company, as that entity is not consolidated with the Company for tax
purposes.
(n) INCOME (LOSS) PER SHARE
Basic income (loss) per share is based upon the weighted average number of
common shares outstanding, including Class B common stock, during the
periods. Class B common stockholders have the same rights to share in
profits and losses and liquidation values as common stockholders.
Diluted income (loss) per share is based upon the weighted average number
of common shares outstanding during the period assuming the issuance of
common stock for all potential dilutive common stock equivalents
outstanding.
53
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2004 and 2003
Income (loss) per share (EPS) for the years ended December 31, 2004, 2003
and 2002 are as follows (in thousands, except per share amounts):
2004 2003 2002
----------- ----------- -----------
INCOME (LOSS) USED IN COMPUTATION:
Income (loss) from continuing operations $ 22,445 $ (8,111) $ (4,504)
Income (loss) from discontinued operations 75 (165) (724)
----------- ----------- -----------
Net income (loss) $ 22,520 $ (8,276) $ (5,228)
=========== =========== ===========
SHARES USED IN COMPUTATION:
Weighted average shares
outstanding, basic 17,678 17,139 15,370
Dilutive effect of outstanding
stock options and warrants 629 - -
----------- ----------- -----------
Weighted average shares
outstanding, diluted 18,307 17,139 15,370
=========== =========== ===========
INCOME (LOSS) PER COMMON SHARE:
Basic
Income (loss) from continuing operations $ 1.27 $ (0.47) $ (0.29)
Income (loss) from discontinued operations - (0.01) (0.05)
----------- ----------- -----------
Net income (loss) $ 1.27 $ (0.48) $ (0.34)
=========== =========== ===========
Diluted
Income (loss) from continuing operations $ 1.23 $ (0.47) $ (0.29)
Income (loss) from discontinued operations - (0.01) (0.05)
----------- ----------- -----------
Net income (loss) $ 1.23 $ (0.48) $ (0.34)
=========== =========== ===========
For the years ended December 31, 2003 and 2002, presentation of the
dilutive effect of stock options, warrants and convertible notes, which
totaled 1,249,000 and 612,000, respectively, are not included since they
are anti-dilutive.
(o) STOCK-BASED COMPENSATION
Options are granted to purchase Company, GSE and Five Star, prior to its
spin-off, common shares under stock-based incentive plans, which are
described more fully in note 14.
The Company applies the intrinsic-value-based method of accounting
prescribed by Accounting Principles Board ("APB") Opinion No. 25,
Accounting for Stock Issues to Employees, and related interpretations
including Financial Accounting Standards Board ("FASB") Interpretation No.
44, Accounting for Certain Transactions Involving Stock Compensation, an
interpretation of APB Opinion No. 25, to account for its fixed-plan stock
options. Under this method, compensation expense is recorded on the date
of grant only if the current market price of the underlying stock exceeds
the exercise price of the options.
54
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2004 and 2003
SFAS No. 123, Accounting for Stock-Based Compensation, as amended,
established accounting and disclosure requirements using a
fair-value-based method of accounting for stock-based employee
compensation plans. As allowed by SFAS No. 123, the Company has elected to
continue to apply the intrinsic-value-based method of accounting described
above, and has adopted only the disclosure requirements of SFAS No. 123.
The following table illustrates the effect on net income (loss) if the
fair-value-based method had been applied to all outstanding and unvested
awards in each year (dollars in thousands, except per share date):
2004 2003 2002
------------- ------------ ------------
Net income (loss) - as reported $ 22,520 $ (8,276) $ (5,228)
Compensation expense, net of tax:
Company stock options (608) (1,251) (1,495)
GSE stock options (30) (181) -
------------- ------------ ------------
Pro forma net income (loss) $ 21,882 $ (9,708) $ (6,723)
============= ============ ============
Net income (loss) per share
Basic - as reported $ 1.27 $ (0.48) $ (0.34)
Basic - pro forma $ 1.24 $ (0.57) $ (0.44)
Diluted - as reported $ 1.23 $ (0.48) $ (0.34)
Diluted - pro forma $ 1.21 $ (0.57) $ (0.44)
At December 31, 2004, 2003 and 2002, the per share weighted average fair
value of the Company's stock options granted was $1.47, $2.95 and $2.78,
respectively, on the date of grant using the modified Black-Scholes
option-pricing model with the following weighted average assumptions:
2004 2003 2002
---------- ---------- ----------
Expected dividend yield 0% 0% 0%
Risk-free interest rate 1.70% 2.00% 4.30%
Expected volatility 32.24% 78.33% 72.84%
Expected life 2.03 years 4.00 years 6.16 years
Options were granted by GSE and Five Star during 2004 and 2003, subsequent
to their consolidation.
(p) USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from these
estimates.
55
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2004 and 2003
(q) FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of financial instruments including cash and cash
equivalents, marketable securities, accounts receivable, accounts payable
and short-term borrowings approximate estimated market values because of
short-maturities and interest rates that approximate current rates. The
carrying values of investments approximate fair values based upon quoted
market prices. The investments for which there is no quoted market price
are not significant. The estimated fair value for the Company's debt is
equal to the carrying amount. Fair value estimates are made at a specific
point in time, based on relevant market information and information about
the financial instrument. These estimates are subjective in nature and
involve uncertainties and matters of significant judgment and therefore
cannot be determined with precision. Changes in assumptions could
significantly affect the estimates.
(r) RECLASSIFICATIONS
Certain amounts in 2003 and 2002 have been reclassified to conform to the
presentation in 2004.
(s) OFF BALANCE SHEET RISK AND FOREIGN EXCHANGE CONTRACTS
GSE utilizes various derivative financial instruments to manage market
risks associated with the fluctuations in foreign currency exchange rates.
It is GSE's policy to use derivative financial instruments to protect
against market risk arising in the normal course of business. The criteria
GSE uses for designating an instrument as a hedge includes the
instrument's effectiveness in risk reduction and one-to-one matching of
derivative instruments to underlying transactions. GSE monitors its
foreign currency exposures to maximize the overall effectiveness of its
foreign currency hedge positions. Principal currencies hedged include the
Euro and the Japanese Yen. GSE's objectives for holding derivatives are to
minimize the risks using the most effective methods to reduce the impact
of these exposures. GSE minimizes credit exposure by limiting
counterparties to nationally recognized financial institutions.
All derivatives, whether designated as hedging relationships or not, are
required to be recorded on the balance sheet at fair value. If the
derivative is designated as a fair value hedge, the changes in the fair
value of the derivative and of the hedged item attributable to the hedged
risk are recognized in operations. If the derivative is designated as a
cash flow hedge, the change in the fair value of the derivative and of the
hedged item are recognized as an element of other comprehensive income.
As of December 31, 2004, GSE had contracts for the sale of approximately
$4.6 million Japanese Yen at fixed rates. The contracts expire on various
dates through May, 2007. The contracts do not qualify for hedge treatment
under SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities, as amended. Accordingly, GSE has recorded the estimated fair
value of the contracts of approximately $200,000 as of December 31, 2004
as other assets in the consolidated balance sheet and other income in the
consolidated statement of operations.
56
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2004 and 2003
(t) RECENT ACCOUNTING PRONOUNCEMENTS
During December 2004, the FASB issued SFAS No.123R, Share-Based
Payments. Among other items, the standard will require the
expensing, in the financial statements, of stock options issued by
the Company. The new standard will be effective July 1, 2005, for
calendar year-end companies. GP Strategies is currently evaluating
the adoption of SFAS No. 123R, including the valuation methods and
assumptions that underlie the valuation of the awards. The Company
expects that the adoption of SFAS No. 123R will have an negative
impact on the Company's consolidated financial statements.
(3) DISCONTINUED OPERATIONS AND SPIN-OFF OF NPDC
Under SFAS No. 144, discontinued businesses are removed from the
results of continuing operations and are classified as discontinued
operations in the consolidated statements of operations until the
effective date of the spin-off. The following table sets forth the
components of income (loss) from discontinued operations for the
eleven months ended November 24, 2004 and the years ended December
31, 2004, 2003, and 2002 (in thousands):
2004 2003 2002
---------- --------- --------
Revenue $ 104,067 $ 28,644 $ 9,996
Operating income (loss) 1,594 (189) 286
Interest expense (1,108) (502) (303)
Income tax (expense) benefit (333) 99 524
Income (loss) from discontinued operations, net
of income taxes 75 (165) (724)
The results of the discontinued operations for 2004 include the
results of Five Star, which were consolidated with the Company
effective October 8, 2003, when the Company increased its ownership
interest to 54%. Previously, the Company accounted for its
investment in Five Star under the equity method (see note 6).
In accordance with SFAS No. 144, only those overhead costs that are
solely attributable to the discontinued business segments have been
allocated to discontinued operations. As a result, 2004, 2003 and
2002 include overhead expenses that were incurred for the benefit of
the Company's continuing and discontinued operations, which are
included in continuing operations. Consolidated interest expense in
periods prior to the spin-off has been allocated to discontinued
operations using a basis of net assets of each of the continuing and
discontinued business segments as of November 24, 2004.
The assets and liabilities distributed to NPDC in connection with
the spin-off included those specific to MXL, Five Star and certain
other non-core assets. The following table summarizes the net assets
and liabilities distributed to NPDC on November 24, 2004 (in
thousands):
57
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2004 and 2003
Assets:
Cash and cash equivalents $ 2,453
Due from GP Strategies (arbitration award) 5,000
Accounts and other receivables 14,002
Inventories 25,691
Prepaid expenses and other current assets 391
Investments and marketable securities 1,593
Property, plant and equipment, net 5,553
Deferred tax assets, net 4,045
Goodwill and other assets 2,818
-----------
Total assets 61,546
-----------
Liabilities:
Accounts payable and accrued expenses 12,672
Short-term borrowings 18,330
Long-term debt 2,961
Minority interest and other liabilities 1,616
-----------
Total liabilities 35,579
-----------
-----------
Net assets distributed to NPDC $ 25,967
===========
58
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2004 and 2003
(4) GOODWILL AND INTANGIBLE ASSETS
Changes in goodwill for the years ended December 31, 2004 and 2003
were as follows (in thousands):
2004 2003
--------- ---------
Beginning of year balance $ 62,395 $ 57,491
GSE acquisition - 4,755
Foreign currency translation 187 149
Distribution of goodwill to NPDC (202) -
--------- ---------
End of year balance $ 62,380 $ 62,395
========= =========
Intangible assets, which consist primarily of patents, licenses and
contract rights, with finite lives are being amortized to expense
over their estimated useful lives. As of December 31, 2004, the
Company's intangible assets with finite lives had a weighted average
useful life of six years. As of December 31, 2004, the Company had
no intangible assets with indefinite useful lives. Amortization
expense for intangible assets for 2004, 2003 and 2002 was $257,000,
$147,000 and $103,000, respectively. Amortization expense for
intangible assets is estimated to be $376,000 in 2005, $156,000 in
2006, $128,000 in 2007 and $75,000 in 2008 and 2009.
(5) MARKETABLE SECURITIES
At December 31, 2003, the fair value of marketable securities were
comprised of the following (in thousands):
2003
---------
Millennium Cell Inc. $ 3,570
Hemispherx Biopharma, Inc. 361
---------
$ 3,931
=========
Marketable securities were included in the net assets distributed to
NPDC (see note 3).
MILLENNIUM CELL INC.
Millennium is a publicly traded emerging technology company engaged
in the business of developing innovative fuel systems for the safe
storage, transportation and generation of hydrogen for use as an
energy source. As of December 31, 2003, the Company owned 1,532,000
shares of Millennium.
In 2003 and 2002, the Company sold approximately 678,000 shares and
1,286,000 shares for $1,376,000 and $3,833,000, respectively, and
recognized net gains of $559,000 and $2,267,000, respectively.
59
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2004 and 2003
On February 11, 2000, the Company granted options to certain of its
employees pursuant to the GP Strategies Millennium Option Plan to
purchase an aggregate of approximately 547,000 of its shares of
Millennium common stock, of which there are currently approximately
337,000 options outstanding. These options vested over either a
one-year or two-year period and expire on June 30, 2005, as amended.
The options in the Millennium Option Plan were fully vested as of
December 31, 2002. The Company may receive approximately $500,000
(of which approximately $191,000 was received to date) upon exercise
of all options pursuant to the Millennium Option Plan. The Company's
liabilities to employees of $431,000 and $650,000 at December 31,
2004 and 2003 are included in accounts payable and accrued expenses
in the accompanying consolidated balance sheets. As of December 31,
2004 and 2003, the Company held approximately 337,000 shares of
Millennium with a fair value of $431,000 and $650,000, respectively,
in the GP Strategies Millennium Option Plan, classified as other
assets on the consolidated balance sheets.
The Company recorded a non-cash compensation credit of $219,000,
$150,000 and $1,211,000 for the years ended December 31, 2004, 2003
and 2002, respectively, which is included in selling, general and
administrative expenses in the accompanying consolidated statement
of operations.
As of December 31, 2003, the gross unrealized holding gains of
$1,613,000 (net of income tax expense of $984,000) for
available-for-sale securities was included as in accumulated other
comprehensive income (loss).
HEMISPHERX BIOPHARMA INC.
In March 2003, the Company and ISI entered into an agreement whereby
the Company agreed to receive shares of common stock of Hemispherx
Biopharma Inc. (HEB) with a market value of $425,000 (the Guaranteed
Shares) in full settlement of all of ISI's debt obligations. The
Company received 268,000 shares of HEB from ISI and subsequently
made a capital contribution of the shares to MXL. MXL sold 108,000
of the shares in 2003 for $249,000, and recognized a net gain of
$142,000 on the sale of these shares, which is included in income
(loss) from discontinued operations, net of income taxes. As of
December 31, 2003 the Company held 160,000 shares of HEB, which were
classified as trading securities, had a fair value of approximately
$361,000 and were sold in the first quarter of 2004. The Company
recognized a net gain of $44,000 on the sale of these shares, which
is included in discontinued operations.
(6) ACQUISITIONS
(a) GSE SYSTEMS INC.
On October 23 2003, the Company purchased from ManTech International
(ManTech) 3,426,699 shares of common stock of GSE and a GSE
subordinated note in the outstanding principal amount of $650,000,
which the Company immediately converted into 418,653 shares of
common stock of GSE. This transaction (the GSE Acquisition)
increased the Company's ownership of the common stock of GSE from
approximately 22% to approximately 58%. Simultaneously with the
closing of the GSE Acquisition, three directors
60
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2004 and 2003
nominated by the Company were added to the GSE Board of Directors.
GSE was previously an investment of the Company accounted for under
the equity method. Subsequent to the GSE Acquisition, GSE is
consolidated into the Company's consolidated financial statements.
The GSE Acquisition was carried out in order to allow the Company to
work together with GSE to expand GSE's simulation technology to the
power, military and homeland defense markets that are currently
served by General Physics.
The consideration paid to ManTech by the Company consisted of a
five-year 5% note for $5,250,955 (the ManTech Note) due in full in
October 2008. Each year during the term of the ManTech Note, ManTech
has the option to convert up to 20% of the original principal amount
of the note into common stock of the Company at the then market
price of Company's common stock, but only in the event that
Company's common stock is trading at $10 per share or more. In the
event that less than 20% of the principal amount of the note is not
converted in any year, such amount not converted will be eligible
for conversion in each subsequent year until converted or until the
note is repaid in cash.
As part of the GSE Acquisition, the Company and ManTech entered into
a five-year Teaming Agreement pursuant to which ManTech and the
Company will work together to give the Company the opportunity to
provide training services to ManTech's customers.
On January 1, 2004, GSE entered into a Management Services Agreement
with the Company in which the Company agreed to provide corporate
support services to GSE, including accounting, finance, human
resources, legal, network support and tax. In addition, GSE will use
General Physics' financial system. GSE will pay an annual fee to
General Physics of $685,000. The term of the agreement is one year,
subject to earlier termination only upon the mutual consent of the
parties to the agreement. The Management Services Agreement, which
can be renewed for successive one-year terms, was renewed for fiscal
2005.
The acquisition was accounted for as a purchase transaction in
accordance with SFAS No. 141, Business Combinations, and
accordingly, the net assets acquired were recorded at their fair
value at the date of the acquisition. The excess of the purchase
price over the estimated fair values of the net assets acquired was
recorded as goodwill. Goodwill associated with the GSE acquisition
will be deductible for tax purposes.
61
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2004 and 2003
The components of the net assets acquired were as follows (in thousands):
Cash $ 2,847
Accounts receivable and unbilled receivables 6,587
Intangible assets, including goodwill 2,684
Property, plant and equipment and
other assets 2,444
---------
Total assets 14,562
---------
Accounts payable, accrued expenses and
other liabilities 5,303
Billings in excess of revenue earned 3,528
---------
Total liabilities assumed 8,831
---------
GSE net assets as of
October 23, 2003 $ 5,731
=========
(b) FIVE STAR PRODUCTS, INC.
The net assets of Five Star were included in the net assets distributed to
NPDC (see note 3).
Prior to October 8, 2003, Five Star was a 47.3% investment of the Company
accounted for under the equity method and was indebted to the Company for
an unsecured 8% note (the Five Star Note) due June 30, 2005, as amended,
which amounted to $4,500,000 as of December 31, 2002. On June 20, 2003,
the Company entered into an Agreement of Subordination and Assignments
(the Subordination Agreement) with Five Star that amended the amount of
annual repayment of principal on the Five Star Note. Pursuant to the
provisions of the Subordination Agreement, in 2003 the Company received
partial repayments from Five Star in the amount of $1,200,000. On October
8, 2003, the Company converted an additional $500,000 of the principal
amount of the Five Star Note into 2,000,000 shares of Five Star common
stock (the Five Star Acquisition) increasing the Company's investment in
Five Star to 54%.
The acquisition was accounted for as a purchase transaction in accordance
with SFAS No. 141, and accordingly, the net assets acquired were recorded
at their fair value at the date of the acquisition. The excess of the net
assets acquired over the purchase price was recorded as a reduction to
property, plant and equipment to reflect the allocation of negative
goodwill arising in purchase accounting.
62
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2004 and 2003
The components of the net assets acquired were as follows (in
thousands):
Accounts receivable $ 13,267
Inventories 20,222
Property, plant and equipment and
other assets 1,529
----------
Total assets 35,018
----------
Short-term borrowings 17,616
Accounts payable and accrued expenses 10,063
Debt to GP Strategies 3,000
----------
Total liabilities assumed 30,679
----------
Five Star net assets as of
October 8, 2003 $ 4,339
==========
On February 6, 2004, Five Star announced that it would repurchase up
to 5,000,000 shares, or approximately 30% of its common stock
through a tender offer. The tender offer increased the Company's
ownership in Five Star to approximately 64% as of November 24, 2004,
prior to distribution.
(7) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following (in
thousands):
DECEMBER 31
--------------------
2004 2003
---------- -------
Land $ - 915
Buildings and improvements - 3,561
Machinery and equipment 8,031 14,534
Furniture and fixtures 3,843 8,583
Leasehold improvements 1,204 2,072
---------- -------
13,078 29,665
Accumulated depreciation and amortization (10,405) (20,671)
---------- -------
$ 2,673 8,994
========== =======
The Company distributed $5,553,000 in net property, plant and
equipment to NPDC (see note 3). Depreciation expense included in
continuing operations in 2004, 2003, and 2002 was $1,659,000,
$1,625,000 and $1,631,000, respectively.
(8) SHORT-TERM BORROWINGS
(a) GENERAL PHYSICS
On August 13, 2003, General Physics, General Physics' subsidiary,
SkillRight, Inc., and MXL entered into a two-year $25 million
Financing and Security Agreement (the Credit
63
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2004 and 2003
Agreement) with a new bank, the proceeds of which were used to repay
the Company's previous credit facility. The Company wrote off
$860,000 of deferred financing costs due to the early termination of
its previous credit facility. This expense is included in interest
expense for year ended December 31, 2003. The Credit Agreement is
secured by certain assets of General Physics and, until March 31,
2004, certain of the accounts receivable of MXL. The Credit
Agreement also provides for an unsecured guaranty from the Company.
On March 31, 2004, the Credit Agreement was also amended to include
GSE.
The interest rate on the Credit Agreement is at LIBOR market index
rate plus 3.00%, (which as of December 31, 2004 was approximately
5.4%). Based upon the financial performance of General Physics, the
interest rate can be reduced. The Credit Agreement contains
covenants with respect to General Physics' minimum tangible net
worth, leverage ratio, interest coverage ratio and its ability to
make capital expenditures. The Credit Agreement also contains
certain restrictive covenants including a prohibition on future
acquisitions, incurrence of debt and the payment of dividends.
General Physics is currently restricted from paying dividends or
management fees to the Company in excess of $1,000,000 in any fiscal
year. On July 30, 2004, General Physics received a waiver and paid
the Company an additional $1,000,000. General Physics was in
compliance with all loan covenants under the Credit Agreement as of
December 31, 2004. On March 9, 2005, General Physics received a
waiver to loan GSE a maximum of $1.0 million to satisfy any GSE
short-term capital requirements over the next 15 months.
As of December 31, 2004, the amount outstanding under the Credit
Agreement was approximately $6,068,000 and approximately $14,087,000
was available to be borrowed under the Credit Agreement. The Company
repaid in full the $6,068,000 outstanding under the Credit Agreement
as of December 31, 2004 in the first quarter of 2005, using the
proceeds received from arbitration (see note 17). Borrowings
outstanding on December 31, 2003 were $9.5 million.
(b) GSE
On March 30, 2004, GSE was added as an additional borrower under the
General Physics Credit Agreement. Under the terms of the Credit
Agreement, as amended, $1,500,000 of General Physics' Credit
Agreement has been allocated for use by GSE, as well as certain
covenants specific to GSE. The Credit Agreement was amended to
provide for additional collateral consisting of substantially all of
the GSE's assets, as well as certain covenants specific to GSE. It
provides for borrowings by GSE up to 80% of eligible accounts
receivable and 80% of eligible unbilled receivables, up to a maximum
of $1,500,000. The interest rate is based upon the LIBOR market
index rate plus 3%, with interest only payments due monthly (5.4 %
as of December 31, 2004). The Company agreed to guarantee GSE's
borrowings under the Credit Agreement, as amended, in consideration
for a fee pursuant to the Management Services Agreement. There were
no borrowings outstanding at December 31, 2004.
64
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2004 and 2003
(c) FIVE STAR
On June 20, 2003, Five Star obtained a Loan and Security Agreement
(the Loan Agreement) with Fleet Capital Corporation. The Loan
Agreement has a five-year term, with a maturity date of June 30,
2008. The Loan Agreement provides for a $25,000,000 revolving credit
facility, which allows Five Star to borrow based upon a formula of
eligible inventory and eligible accounts receivable, as defined
therein. The interest rates under the Loan Agreement are LIBOR plus
a credit spread for borrowings not to exceed $15,000,000 and the
prime rate plus a credit spread for borrowings in excess of the
above-mentioned LIBOR-based borrowings. The credit spreads can be
reduced in the event that Five Star achieves and maintains certain
performance benchmarks. At December 31, 2003, approximately
$16,685,000 was outstanding under the Loan Agreement. The Company
distributed $18,330,000 in Five Star short-term borrowings to NPDC
on November 24, 2004 (see note 3). The Company does not guarantee
the Five Star obligation.
(9) ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses are comprised of the following
(in thousands):
DECEMBER 31,
----------------------
2004 2003
---------- ---------
Accounts payable $ 8,936 $ 22,795
Payroll and related costs 6,629 6,324
Amount payable to NPDC 5,000 -
Other accrued expenses 12,654 8,988
---------- ---------
$ 33,219 $ 38,107
========== =========
The Company distributed $12,672,136 in accounts payable and accrued
expenses to NPDC (see note 3).
65
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2004 and 2003
(10) LONG -TERM DEBT
Long-term debt is comprised of the following (in thousands):
DECEMBER 31,
--------------------
2004 2003
-------- --------
6% conditional subordinated notes due 2008 (a) $ 7,500 7,500
ManTech Note (b) 5,251 5,251
Mortgage on MXL Pennsylvania facility (c) - 1,405
Mortgage on MXL Illinois facility (d) - 1,185
Other (e) 190 1,782
-------- --------
12,941 17,123
Less warrant related discount, net of accretion (1,890) (2,262)
-------- --------
11,051 14,861
Less current maturities (100) (1,112)
-------- --------
$ 10,951 13,749
======== ========
(a) Pursuant to a Note and Warrant Purchase Agreement dated August 8,
2003, the Company issued and sold to four Gabelli Funds $7,500,000
aggregate principal amount of 6% Conditional Subordinated Notes due 2008
(the Gabelli Notes) and 937,500 warrants (GP Warrants), each entitling the
holder thereof to purchase (subject to adjustment) one share of the
Company's common stock. The aggregate purchase price for the Gabelli Notes
and GP Warrants was $7,500,000.
The Gabelli Notes bear interest at 6% per annum payable semi-annually
commencing on December 31, 2003 and mature in August 2008. The Gabelli
Notes are secured by a mortgage on the Company's former property located
in Pawling, New York which was distributed to NPDC. In addition, at any
time that less than $1,875,000 of the principal amount of the Gabelli
Notes are outstanding, the Company may defease the obligations secured by
the mortgage and obtain a release of the mortgage by depositing with an
agent for the Noteholders, bonds or government securities with an
investment grade rating by a nationally recognized rating agency which,
without reinvestment, will provide cash on the maturity date of the
Gabelli Notes in an amount not less than the outstanding principal amount
of the Gabelli Notes.
The GP Warrants have an exercise price of $6.14 per share, as amended
following the spin-off of NPDC, and are exercisable at any time until
August 2008. The exercise price may be paid in cash, by delivery of the
Gabelli Notes, or a combination of the two. The GP Warrants contain
anti-dilution provisions for stock splits, reorganizations, mergers and
similar transactions. The fair value of the GP Warrants at the date of
issuance was $2,389,000, which reduced long-term debt in the accompanying
consolidated balance sheets.
66
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2004 and 2003
This amount is being accreted as additional interest expense using the
effective interest rate over the term of the Gabelli Notes. The Gabelli
Notes have a yield to maturity of 15.436% based on the discounted value.
Accretion charged as interest expense was approximately $372,000 in 2004
and $127,000 during 2003.
The GP Warrants were accounted for as a liability of the Company until the
shares of the Company's common stock issuable on exercise of the GP
Warrants were registered, which occurred on December 8, 2003, at which
time the liability was reclassified to additional paid-in-capital at its
then fair market value of $953,000. The changes in the fair market value
of the GP Warrants were marked-to-market through December 8, 2003 with the
adjustment shown as other income in the consolidated statement of
operations. The Company recognized a gain in operations of $1,436,000 in
valuation adjustment of the liability relating to the GP Warrants using
the Black-Scholes model.
In connection with the Distribution, the Company contributed the Pawling
property, subject to the mortgage, to MXL. MXL assumed the mortgage, but
without liability for repayment of the Gabelli Notes or any other
obligations of the Company under the Note and Warrant Purchase Agreement
(other than foreclosure on such property). If there is a foreclosure on
the mortgage for payment of the Gabelli Notes, the Company has agreed to
indemnify MXL for loss of the value of the property.
(b) On October 23, 2003 in connection with the GSE Acquisition the Company
issued a five-year 5% note due in full on October 21, 2008 in the
principal amount of $5,250,955 to ManTech International. Interest is
payable quarterly. Each year during the term of the note, the holder of
the note has the option to convert up to 20% of the original principal
amount of the note into common stock of the Company at the then market
price of the Company's common stock, but only in the event that the
Company's common stock is trading at $10 per share or more. In the event
that less than 20% of the principal amount of the note is not converted in
any year, such amount not converted will be eligible for conversion in
each subsequent year until converted or until the note is repaid in cash.
(c) MXL had a loan in the amount of $1,680,000, secured by a mortgage
covering the real estate and fixtures on its property in Pennsylvania. The
loan requires monthly repayments of $8,333 plus interest at 2.5% above the
one-month LIBOR rate and was to mature on March 8, 2011. The amount
outstanding on November 24, 2004 was included in the net assets
distributed to NPDC. The MXL loan is guaranteed by the Company.
(d) MXL had a loan in the amount of $1,250,000, secured by a mortgage
covering the real estate and fixtures on its property in Illinois. The
loan requires monthly payments of principal and interest in the amount of
$11,046 with interest at a fixed rate of 8.75% per annum and was to mature
on June 26, 2006. The amount outstanding on November 24, 2004 was included
in the net assets distributed to NPDC. The MXL loan is guaranteed by the
Company.
67
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2004 and 2003
(e) Other debt as of December 31, 2004, represents capital lease
obligations for equipment. Other debt outstanding as of November 24, 2004
was included in the net assets distributed to NPDC.
Aggregate annual maturities of long-term debt at December 31, 2004 are as
follows (in thousands):
2005 $ 100
2006 68
2007 22
2008 12,751
Thereafter -
=======
(11) EMPLOYEE BENEFIT PLANS
(a) GP STRATEGIES EMPLOYEE BENEFIT PLAN
The Company and its employees maintain a Retirement Savings Plan (the
Plan) for employees who have completed at least one month of service. The
Plan permits pre-tax contributions to the Plan by participants pursuant to
Section 401(K) of the Internal Revenue Code (IRC). The Company matches
participants' contributions up to a specific percentage of the first 7% of
base compensation contributed for employees who have completed one year of
service and may make additional matching contributions at its discretion.
In 2004, 2003 and 2002, the Company did not make any discretionary
matching contributions. The Company matches participants' contributions in
shares of its Common Stock up to 57% of monthly employee salary deferral
contributions. In 2004, 2003 and 2002, the Company contributed 135,921,
188,317 and 270,000 shares of the Company's common stock directly to the
Plan with a value of approximately $971,000, $1,053,000 and $1,058,000,
respectively.
(b) GSE EMPLOYEE BENEFIT PLAN
GSE has a qualified defined contribution plan that covers substantially
all its U.S. employees under Section 401(K) of the IRC. Under this plan,
GSE stipulated basic contribution matches a portion of the participants'
contributions based upon a defined schedule. GSE's contributions to the
plan were approximately $110,000 in 2004 and $12,000 from October 23, 2003
to December 31, 2003.
68
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2004 and 2003
(12) INCOME TAXES
Income tax (expense) benefit for the years ended December 31, 2004, 2003
and 2002 is as follows (in thousands):
YEARS ENDED DECEMBER 31,
---------------------------
2004 2003 2002
------- ------- -------
Income tax (expense) benefit from $ 8,009 $ (985) $ 295
continuing operations
Income tax (expense) benefit from
discontinued operations $ 466 99 524
------- ------- -------
8,475 $ (886) $ 819
======= ======= =======
The components of income tax (expense) benefit from continuing operations
are as follows (in thousands):
YEARS ENDED DECEMBER 31,
---------------------------
2004 2003 2002
------- ------- -------
Current:
Federal $ (482) $ (39) $ -
State and local (323) (498) (233)
Foreign (268) (693) (361)
------- ------- -------
Total current (1,073) (1,230) (594)
------- ------- -------
Deferred:
Federal 7,768 - 805
State and local 1,412 - 74
Foreign (98) 245 -
------- ------- -------
Total deferred 9,082 245 879
------- ------- -------
Total income tax (expense)
benefit $ 8,009 $ (985) $ 285
======= ======= =======
The deferred (expense) benefit excludes activity in the net deferred tax
assets relating to tax on appreciation (depreciation) in
available-for-sale securities, which is recorded directly to stockholders'
equity. Income (loss) before income tax (expense) benefit generated from
foreign entities was approximately $404,000, ($594,000), and $150,000
respectively, in 2004, 2003 and 2002.
69
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2004 and 2003
The difference between the (expense) benefit for income taxes computed at
the statutory rate and the reported amount of tax (expense) benefit is as
follows:
DECEMBER 31,
-----------------------
2004 2003 2002
----- ----- -----
Federal income tax rate (35.0)% 35.0% 35.0%
Foreign, state and local taxes net of
Federal benefit (5.2) (6.6) (7.8)
Taxes of subsidiaries that are not
consolidated for tax purposes - (1.9) -
Items not deductible - primarily meals and
entertainment (1.7) (6.4) (3.7)
Valuation allowance adjustment 84.6 (29.0)
Change in effective rate, primarily net operating
loss carry forwards 16.5 - -
Net losses from foreign operations for
which no tax benefit has been provided (0.6) (0.8) (2.1)
Tax effect recorded in stockholders' equity
for sale of available-for sale-securities (0.7) (4.5) (11.5)
Other (2.4) 0.5 (3.8)
----- ----- -----
Effective tax rate expense (benefit) 55.5% (13.7)% 6.1%
===== ===== =====
As of December 31, 2004, the Company has approximately $41,620,000 of
Federal net operating loss carryforwards. These carryforwards expire
during 2022 and 2023. The Company has approximately $1,455,000 of
available credit carryovers which may be carried over indefinitely. In
addition, GSE, which is not consolidated with the Company for tax
reporting, has approximately $16,119,000 of Federal net operating loss
carry forwards that expire from 2012 through 2023.
70
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2004 and 2003
The tax effects of temporary differences between the financial reporting
and tax bases of assets and liabilities that are included in the net
deferred tax assets (liabilities) are summarized as follows (in
thousands):
DECEMBER 31,
-------------------
2004 2003
-------- --------
Deferred tax assets:
Allowance for doubtful accounts $ 342 405
Accrued liabilities 1,574 2,166
Net Federal, State and Foreign operating loss carryforwards 16,383 22,751
Tax credit carryforwards 1,455 972
Tax benefits of subsidiaries not consolidated for tax
purposes 50 227
Investment in partially owned companies 1,602 128
-------- --------
Deferred tax assets 21,406 26,649
Deferred tax liabilities:
Property and equipment, principally due to
difference in depreciation and amortization 2,888 2,375
-------- --------
Net deferred tax assets 18,518 24,274
Less valuation allowance (389) (12,586)
-------- --------
Net deferred tax assets $ 18,129 11,688
======== ========
In the fourth quarter of 2004, the spin-off was completed, the arbitration
settlement was recognized and projected taxable income was revised in
light of the Company's structure subsequent to the spin-off. Accordingly,
the Company reduced its valuation allowance by $12,197,000 attributable
primarily to the ability to realize the overall deferred tax assets,
primarily net operating losses. In 2003, the valuation allowance increased
by $2,125,000 attributable primarily to domestic net operating losses for
the year ended December 31, 2003 for which no tax benefit was provided.
Net deferred tax assets of $3,589,000 were included in the net assets
distributed to NPDC (see note 5).
In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or all of
the deferred tax assets will not be realized. The ultimate realization of
the deferred tax assets is dependent upon the generation of future taxable
income during the periods in which temporary differences are deductible.
Management considers the scheduled reversal of deferred tax liabilities,
projected future taxable income and tax planning strategies in making this
assessment. Based upon these factors, management believes it is more
likely than not that the Company will realize the benefits of deferred tax
assets, net of the valuation allowance.
71
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2004 and 2003
(13) COMPREHENSIVE INCOME (LOSS)
The following are the components of comprehensive income (loss) (in
thousands):
YEARS ENDED DECEMBER 31,
------------------------------
2004 2003 2002
-------- -------- --------
Net income (loss) $ 22,520 $ (8,276) $ (5,228)
Other comprehensive (loss) income,
before income tax benefit
Net unrealized loss on available-for-
sale securities (1,703) (1,067) (12,130)
Fair value change on interest rate
swap (82) 82 -
Foreign currency translation adjustments 237 139 (492)
-------- -------- --------
Comprehensive loss before
income tax benefit (1,548) (846) (12,622)
Income tax benefit 687 410 4,718
-------- -------- --------
Comprehensive income (loss) $ 21,659 $ (8,712) $(13,132)
======== ======== ========
The components of accumulated other comprehensive income are as follows
(in thousands):
DECEMBER 31,
-----------------
2004 2003
------- -------
Net unrealized gain on available-for-sale
securities $ 20 $ 1,613
Net unrealized gain on interest rate swap - 82
Foreign currency translation adjustment (773) (1,010)
------- -------
Accumulated other
comprehensive income
before tax (753) 685
Accumulated income tax expense related
to items of other comprehensive loss (8) (661)
------- -------
Accumulated other
comprehensive income,
net of tax $ (761) $ 24
======= =======
(14) COMMON STOCK, STOCK OPTIONS AND WARRANTS
(a) On October 29, 2003 the Company's shareholders approved the GP
Strategies Corporation 2003 Incentive Stock Plan (the 2003 Plan). The 2003
Plan permits awards of
72
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2004 and 2003
incentive stock options, nonqualified stock options, restricted stock,
stock units, performance shares, performance units and other incentives
payable in cash or in shares of the Company's Common Stock or Class B
Common Stock. The aggregate number of shares of Common Stock or Class B
Common Stock available for issuance under the 2003 Plan is 2,000,000, of
which not more than 500,000 shares may be shares of Class B Common Stock.
As of December 31, 2004 approximately 1,366,000 shares of the Company's
Common Stock were available for grant under the Plan and 2,000,000 shares
of the Company's Common Stock were available for grant under the 2003
Plan.
Under the Plan, employees and certain other parties may be granted options
to purchase shares of common stock. Although the Plan permits options to
be granted at a price not less than 85% of the fair market value, the Plan
options primarily are granted at the fair market value of the common stock
at the date of the grant and vest over periods ranging from two to ten
years from the date of grant. Shares of common stock may also be reserved
for issuance pursuant to other agreements.
Changes in options and warrants outstanding during 2004, 2003 and 2002,
and options and warrants exercisable and shares reserved for issuance at
December 31, 2004, 2003 and 2002 are as follows:
NUMBER OF WEIGHTED
PRICE RANGE OPTIONS AND AVERAGE
OPTIONS AND WARRANTS OUTSTANDING PER SHARE WARRANTS EXERCISE PRICE
-------------------------------- --------------- ----------- --------------
December 31, 2001 $3.00 - $15.375 2,790,665 $ 7.37
Granted $3.60 - $4.75 845,800 4.13
Exercised $3.60 - $4.61 (1,233) 4.08
Terminated $3.60 - $14.625 (722,235) 7.87
----------
December 31, 2002 $3.00 - $15.375 2,912,997 6.57
Granted $4.90 - $8.00 1,222,250 7.32
Exercised $3.00 - $5.1875 (248,983 3.94
Terminated $3.60 - $14.625 (96,367 6.16
----------
December 31, 2003 $3.00 - $15.375 3,789,897 7.00
----------
Granted $6.86 - $7.66 126,000 7.13
Exercised $2.82 - $7.13 (199,959) 4.33
Terminated $3.01 - $15.375 (979,423) 8.98
Spin-off adjustment 322,814
----------
December 31, 2004 $2.81-$12.85 3,059,329 5.01
==========
Shares reserved for issuance as of December 31, 2004 were 4,425,628. In
connection with the spin-off, options to purchase shares of Company common
stock were adjusted such that each option held the same ratio of the
exercise price per option to the market value per share, the same
aggregate difference between market value and exercise price, and the same
73
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2004 and 2003
vesting provisions, option periods and other terms and conditions
applicable prior to the spin-off.
Weighted average characteristics of outstanding and exercisable stock
options and warrants by exercise price range as of December 31, 2004 were
as follows:
OUTSTANDING OPTIONS AND WARRANTS EXERCISABLE OPTIONS
-------------------------------- ---------------------
WEIGHTED WEIGHTED WEIGHTED
NUMBER OF AVERAGE AVERAGE NUMBER OF AVERAGE
RANGE OF OPTIONS AND YEARS EXERCISE OPTIONS AND EXERCISE
EXERCISE PRICES WARRANTS REMAINING PRICE WARRANTS PRICE
--------------- ----------- --------- -------- ----------- --------
$2.82 - $3.97 1,160,176 3.90 $ 3.38 1,023,231 $ 3.35
$4.09 - $5.54 332,160 3.97 4.36 309,245 4.27
$5.96 - $6.48 1,517,993 3.16 6.22 1,376,920 6.22
$6.86 - $12.84 49,000 3.22 10.52 37,769 10.39
--------- ---- -------- --------- --------
3,059,329 3.53 $ 5.01 2,747,165 $ 4.99
========= ==== ======== ========= ========
The Company had no outstanding Class B Common Stock options during fiscal
years 2004, 2003 and 2002.
The holders of Common Stock are entitled to one vote per share and the
holders of Class B Common Stock are entitled to ten votes per share on all
matters without distinction between classes, except when approval of a
majority of each class is required by statute. The Class B Common Stock is
convertible at any time, at the option of the holders of such stock, into
shares of common stock on a share-for-share basis. Shares reserved for
issuance of common stock were primarily related to options, warrants and
the conversion of long-term debt.
The Company reserved 950,000 shares of its Common Stock for issuance upon
conversion of Class B Common Stock at December 31, 2000. The Company
reserved an additional 300,000 shares for a private placement transaction
(see note 14(c)) bringing the total to 1,250,000 shares reserved for
issuance upon conversion of Class B Common Stock at December 31, 2004,
2003 and 2002.
(b) Pursuant to an agreement dated as of October 19, 2001 (the Stock Purchase
Agreement), the Company sold to Bedford Oak Partners, LP (the Bedford Oak)
in a private placement transaction, 300,000 shares of Class B Common Stock
(the Bedford Class B Shares) for $900,000. Upon the disposition of any of
the Bedford Class B Shares (other than to an affiliate of Bedford Oak who
agrees to be bound by the provisions of the Stock Purchase Agreement) or
at the request of the Board of Directors of the Company, Bedford Oak is
required to exercise the right to convert all of the Bedford Class B
Shares then owned by Bedford Oak into an equal number of shares of common
stock of the Company (the Bedford Underlying Shares). The Company was
required to file a registration statement to register
74
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2004 and 2003
the resale of the Bedford Underlying Shares by Bedford Oak, which
registration statement was declared effective as of August 13, 2002.
On any date prior to October 19, 2003 during which Bedford Oak was not
able to resell the Bedford Underlying Shares pursuant to the registration
statement, Bedford Oak had the right to require the Company to purchase
all, but not less than all, of the Bedford Class B Shares and the Bedford
Underlying Shares then held by Bedford Oak for a purchase price as
specified in the Stock Purchase Agreement. The put option obligation
expired upon the effectiveness of the registration statement on August 13,
2002 covering the Bedford Underlying Shares.
Pursuant to an agreement dated May 3, 2002, the Company agreed to sell to
Bedford Oak in a private placement transaction 1,200,000 shares of Common
Stock (the Bedford Common Shares) of the Company for an aggregate purchase
price of $4,200,000. Harvey Eisen, the managing member of Bedford Oak
Advisors, LLC, the investment manager of Bedford Oak, was elected a
director of the Company in July 2002.
Pursuant to an agreement dated May 3, 2002, the Company sold 100,000
shares of Common Stock for $350,000 to Marshall Geller (the Geller
Shares), a director of the Company, in a private placement transaction.
Pursuant to an agreement dated May 3, 2002 (the EGI Agreement), the
Company sold to Equity Group Investments, L.L.C. (EGI) in a private
placement transaction 1,000,000 shares of Common Stock (the EGI Common
Shares) for $3,500,000 and 300,000 shares of Class B Common Stock (the EGI
Class B Shares) for $1,260,000. Mark Radzik, a designee of EGI, was
elected a director of the Company in July 2002. Mark Radzik was replaced
by Matthew Zell as the designee for EGI in February 2005.
Upon the disposition of any of the EGI Class B Shares (other than to an
affiliate of EGI or to a transferee approved by the Board who in each case
agrees to be bound by the provisions of the EGI Agreement), EGI was
required to convert all of the EGI Class B Shares into an equal number of
shares of Common Stock (the EGI Underlying Shares).
On August 13, 2002, a registration statement covering the resale of the
Bedford Underlying Shares, the Bedford Common Shares, the EGI Common
Shares, the EGI Underlying Shares and the Geller Shares was declared
effective by the SEC.
(c) In June 2001, the Company entered into an agreement with a financial
consulting firm to provide certain services for which the Company, in
addition to cash payments, agreed to issue warrants to purchase 300,000
shares of the Company's common stock at an exercise price of $4.60 per
share. Pursuant to the spin-off of NPDC the exercise price of the warrants
was adjusted to $3.21 per share. These warrants expire in June 2011.
(d) On August 8, 2003, the Company issued and sold to four Gabelli funds
937,500 GP Warrants, each entitling the holder thereof to purchase
(subject to adjustment) one share of the Company's common stock (see note
10 (a)). The GP Warrants previously had an
75
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2004 and 2003
exercise price of $8.00 per share and are exercisable at any time until
August 2008. Pursuant to the spin-off of NPDC the exercise price of the
warrants was adjusted to $6.14 per share.
(e) GSE LONG-TERM INCENTIVE PLAN
During 1995, GSE established the 1995 Long-Term Incentive Stock Option
Plan (the GSE Plan), which includes all officers, key employees and
non-employee members of GSE's Board of Directors. All options to purchase
shares of GSE's common stock under the GSE Plan expire seven years from
the date of grant and generally become exercisable in three installments
with 40% vesting on the first anniversary of the grant date and 30%
vesting on each of the second and third anniversaries of the grant date,
subject to acceleration under certain circumstances. At December 31, 2004,
GSE had 686,844 shares of common stock reserved for future grants under
the GSE Plan.
Stock option and warrant activity for GSE is as follows:
NUMBER OF WEIGHTED
OPTIONS AND WARRANTS PRICE RANGE OPTIONS AND AVERAGE
OUTSTANDING PER SHARE WARRANTS EXERCISE PRICE
-------------------- --------------- ----------- --------------
October 23, 2003 $1.00 - $14.750 1,931,376 $ 3.93
Terminated $2.00 - $2.800 (27,400) 2.31
December 31, 2003 $1.00 - $14.750 1,903,976 3.95
Terminated $1.48 - $2.950 (37,200) 3.79
-----------
December 31, 2004 $1.00 - $14.750 1,866,776 3.96
===========
76
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2004 and 2003
The following table summarizes information relating to currently
outstanding and exercisable options and warrants at December 31, 2004:
WEIGHTED WEIGHTED
AVERAGE AVERAGE
RANGE OF NUMBER YEARS EXERCISE
EXERCISE PRICES OUTSTANDING REMAINING PRICE
----------------- ------------ --------- --------
$0.00 - $1.47 175,000 2.5 $ 1.19
$1.48 - $2.95 528,350 3.0 2.15
$2.96 - $4.43 789,485 1.6 3.67
$4.44 - $5.90 200,000 2.1 4.75
$5.91 - $7.38 10,000 2.3 6.38
$7.39 - $8.85 20,000 2.2 7.50
$8.86 - $11.80 17,700 1.6 11.25
$11.81 - $14.75 126,241 0.7 14.11
--------- --- -------
Total 1,866,776 2.1 $ 3.96
========= === =======
All options and warrants are currently exercisable.
(15) BUSINESS SEGMENTS
Prior to November 24, 2004 the Company had five operating business
segments: Manufacturing & Process, Information Technology, Simulation,
Optical Plastics and Home Improvement Distribution. On November 24, 2004,
the Company completed the spin-off of NPDC, which comprised the Optical
Plastics (MXL) and Home Improvement Distribution (Five Star) segments and
certain other non-core assets. The Company continues to own and operate
its wholly owned subsidiary, General Physics, comprised of its former
Manufacturing & Process and Information Technology segments and its
majority-owned subsidiary, GSE, formerly called the Simulation segment.
The Company reorganized its Manufacturing & Process and Information
Technology segments into the General Physics segment because it monitors
and operates the General Physics subsidiary as a single business.
General Physics, provides technology based training, engineering,
consulting and technical services to leading companies in the automotive,
steel, power, oil and gas, chemical, energy, pharmaceutical and food and
beverage industries and to the government sector, as well as IT training
programs and solutions, including Enterprise Solutions and comprehensive
career training and transition programs.
GSE provides real-time simulation, homeland security and engineering
services for the energy, process and military industries.
The management of the Company does not allocate the following items by
segment: investment and other income; interest expense; selling, general
and administrative expenses;
77
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2004 and 2003
depreciation and amortization expense; income tax expense; significant
non-cash items and long-lived assets. Inter-segment sales are eliminated
in consolidation and are not significant.
The following table sets forth the revenue and operating results
attributable to each line of business and includes a reconciliation of
segment revenue to consolidated revenue and operating results to
consolidated income (loss) before income taxes (in thousands):
YEARS ENDED DECEMBER 31,
---------------------------------
2004 2003 2002
--------- --------- ---------
Revenue:
General Physics $ 165,066 $ 133,975 $ 142,237
GSE 28,907 6,059 -
--------- --------- ---------
$ 193,973 $ 140,034 $ 142,237
========= ========= =========
Operating profit:
General Physics $ 8,881 $ 4,233 $ 1,599
GSE (174) 366 -
Corporate and other (6,479) (10,439) (5,462)
--------- --------- ---------
2,228 (5,840) (3,863)
Interest expense (2,113) (3,123) (2,467)
Other income (expense), gain on
arbitration award, net, gains
on sales of marketable securities,
net and valuation adjustment of
liability for warrants 14,309 1,777 1,531
--------- --------- ---------
Income (loss) from continuing
operations before income
taxes and minority
interests $ 14,424 $ (7,186) $ (4,799)
========= ========= =========
For the years ended December 31, 2004, 2003 and 2002, sales to the United
States government and its agencies represented approximately 37%, 32% and
32%, respectively, of the Company's revenue.
78
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2004 and 2003
Additional information relating to the Company's business segments is as
follows (in thousands):
DECEMBER 31,
----------------------------
2004 2003 2002
-------- -------- --------
Identifiable assets:
General Physics $130,529 $ 97,289 $102,171
GSE 17,208 19,817 -
MXL (1) - 10,462 9,818
Five Star (1) - 38,721 -
Corporate and other 8,298 22,034 32,916
-------- -------- --------
$156,035 $188,323 $144,905
======== ======== ========
YEARS ENDED DECEMBER 31,
--------------------------
2004 2003 2002
-------- ------- -------
Additions to property, plant and equipment:
General Physics $ 1,085 $ 707 $ 1,523
GSE 227 20 -
MXL (1) 238 1,135 368
Five Star (1) 226 159 -
Corporate and other 8 102 25
------- ------- -------
$ 1,784 $ 2,123 $ 1,916
======= ======= =======
Depreciation and amortization:
General Physics $ 1,645 $ 1,601 $ 1,854
GSE 853 192 -
MXL (1) 559 565 510
Five Star (1) 170 47 -
Corporate and other 857 523 940
------- ------- -------
$ 4,084 $ 2,928 $ 3,304
======= ======= =======
(1) On November 24, 2004, the Company completed the spin-off of MXL and Five
Star segments. The Company distributed $61,546,000 in total assets to NPDC
in the spin-off. The additions to property, plant and equipment and
depreciation and amortization shown in 2004 for MXL and Five Star segments
include the activity for the period from January 1, 2004 through November
24, 2004.
79
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2004 and 2003
Identifiable assets by industry segment are those assets that are used in
the Company's operations in each segment. Corporate and other assets are
principally cash and cash equivalents, marketable securities and
intangible assets, including goodwill.
Information about the Company's revenue in different geographic regions,
which are attributed to countries based on location of customers, is as
follows (in thousands):
YEARS ENDED DECEMBER 31,
----------------------------
2004 2003 2002
-------- -------- --------
United States $173,713 $129,433 $131,568
United Kingdom 11,010 7,131 7,258
Other 9,250 3,470 3,411
-------- -------- --------
$193,973 $140,034 $142,237
======== ======== ========
Information about the Company's total assets in different geographic
regions is as follows (in thousands):
DECEMBER 31,
----------------------------
2004 2003 2002
-------- -------- --------
United States $146,986 $180,026 $137,303
United Kingdom 4,230 3,820 3,301
Other 4,819 4,477 4,301
-------- -------- --------
$156,035 $188,323 $144,905
======== ======== ========
All corporate intangible assets of the Company, as well as other corporate
assets, are assumed to be in the United States.
(16) OTHER RELATED PARTY TRANSACTIONS
For a description of certain transactions pursuant to which the Company
received proceeds from the sale of Common Stock and Class B Common Stock
to certain related parties (see note 14).
As of December 31, 2004 and 2003, the Company had total loans receivable
from Mr. Feldman, the Company's Chief Executive Officer, of approximately
$619,000 and $2,323,000, respectively. Such loans bear interest at the
prime rate and are secured by the purchased Class B Common Stock and
certain other assets. All principal on the loans and accrued interest are
due on May 31, 2007.
On April 1, 2002, Jerome I. Feldman and the Company entered into an
incentive compensation agreement pursuant to which Mr. Feldman is eligible
to receive from the Company up to five payments in an amount of $1,000,000
each, based on the closing price of the Company's Common Stock sustaining
or averaging increasing specified levels over periods of at least 10
consecutive trading days. On June 11, 2003, July 23, 2003, December
80
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2004 and 2003
22, 2003, November 3, 2004 and December 10, 2004, Mr. Feldman earned an
incentive payment of $1,000,000 each, which amounts are payable in January
2006, unless further deferred. To the extent there are any outstanding
loans from the Company to Mr. Feldman at the time an incentive payment is
payable, the Company has the right to off-set the payment of such
incentive payment first against the outstanding accrued interest under
such loans and next against any outstanding principal.
The Company recorded compensation expense of $2,000,000 for the year ended
December 31, 2004 and $3,000,000 for the year ended December 31, 2003,
which is included in selling, general and administrative expense. Although
the off-set of the payments earned will take place in future periods, for
accounting purposes, the off-set will be deemed to have occurred on the
dates earned since the Company possesses the right of set-off under the
Incentive Agreement. As a result, in 2003 and 2004 the Company applied
incentive compensation earned against interest receivable as well as the
loan outstanding, which resulted in the outstanding balance of the note
receivable being reduced from $4,095,000 at December 31, 2002 to
$2,322,000 as of December 31, 2003 and to $619,000 as of December 31,
2004.
On July 1, 2002, the Company made a loan to Douglas Sharp, the President
of GP in the principal amount of $150,000 in connection with Mr. Sharp's
relocation. The loan bears interest at the prime rate of Wachovia Bank. As
of December 31, 2004, the aggregate amount of indebtedness outstanding
under the loan was approximately $65,000.
In December 2003, GSE's Board of Directors elected John Moran, an
executive of the Company with experience in the power industry and
simulation technology, as its Chief Executive Officer. In 2004, Mr. Moran
continued as an employee of the Company, however, Mr. Moran devoted 100%
of his time to the performance of his duties as CEO of GSE. For 2003, GSE
reimbursed the Company $35,000 for his compensation and benefits and in
2004 GSE reimbursed the Company $300,000 for Mr. Moran's compensation and
benefits. Effective January 1, 2005, Mr. Moran became an employee of GSE.
In 2004, Michael Feldman received a salary of $85,000 from GSE as
marketing manager and in 2003 received a salary of $16,000 from GSE.
Michael Feldman is the son of Jerome I. Feldman, the Company's Chairman
and Chief Executive Officer.
The Company has guaranteed the leases for Five Star's New Jersey and
Connecticut warehouses, totaling approximately $1,589,000 per year through
the first quarter of 2007. The Company's guarantee of such leases was in
effect when the Five Star business was conducted by a wholly-owned
subsidiary of the Company. In 1998, the Company sold substantially all of
the operating assets of the Five Star business to the predecessor
corporation of Five Star. As part of this transaction, the landlord of the
New Jersey and Connecticut facilities and the lessor of the equipment did
not consent to the release of the Company's guarantee. The Company has
also guaranteed the mortgages for MXL's Illinois and Pennsylvania
properties through June 2006 and March 2011, respectively, as well as
$700,000 in debt entered into by MXL on October 1, 2003 in connection with
the
81
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2004 and 2003
acquisition of certain assets from AOtec, LLC. The Company's guarantees
continued after the spin-off.
Prior to the spin-off, NPDC was a wholly-owned subsidiary of the Company.
The Company and NPDC have entered into contracts that will govern certain
relationships between them. The Company and NPDC believe that these
agreements are at fair market value and are on terms comparable to those
that would have been reached in arm's-length negotiations had the parties
been unaffiliated at the time of the negotiations.
Certain of NPDC's executive officers are also executive officers of the
Company and will remain on the Company's payroll. The executive officers
will not receive any salary from NPDC; however, they will provide NPDC
with management services under a management agreement between the Company
and NPDC. The Company charges NPDC a management fee to cover an allocable
portion of the compensation of these officers, based on the time they
spend providing services to NPDC, in addition to an allocable portion of
certain other corporate expenses.
In connection with the spin-off, NPDC entered into a separate management
agreement with the Company pursuant to which NPDC will provide certain
general corporate services to the Company. Under this management
agreement, NPDC will charge the Company a management fee to cover an
allocable portion of the compensation of its employees, based on the time
they spend providing services to the Company, in addition to an allocable
portion of corporate overhead related to services performed for the
Company and its subsidiaries.
Both management fees will be paid quarterly. Any disagreements over the
amount of such fees will be subject to arbitration. Each of the management
agreements will each have an initial term of three years, and after two
years, will be terminable by both the Company and NPDC, upon six months
prior written notice.
NPDC was included in the Company's consolidated income tax group and
NPDC's tax liability was included in the consolidated federal income tax
liability of the Company until the time of the spin-off. The Tax Sharing
Agreement provides for tax sharing payments between the Company and NPDC
for periods prior to the spin-off, so that NPDC will be generally
responsible for the taxes attributable to its lines of business and
entities comprising it and the Company will be generally responsible for
the taxes attributable to its lines of business and the entities
comprising it.
The Company and NPDC agreed that taxes related to intercompany
transactions that are triggered by the NPDC spin-off will be generally
allocated to the Company. The Company and NPDC agreed that joint
non-income tax liabilities will generally be allocated between the Company
and NPDC based on the amount of such taxes attributable to each group's
line of business. If the line of business with respect to which the
liability is appropriately associated cannot be readily determined, the
tax liability will be allocated to the Company.
82
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2004 and 2003
Under the distribution agreement that governed the spin-off of NPDC from
the Company, the Company and NPDC each agreed that neither would take any
action that might cause the spin-off of NPDC to not qualify as a tax-free
distribution under Section 355 of the Code. Should one party take an
action which causes the spin-off not to so qualify, then that party would
be liable to the other for any taxes incurred by the other from the
failure of the spin-off to qualify as a tax-free distribution.
On March 23, 2003, the Company extended its guarantee of up to $1,800,000
of GSE debt pursuant to GSE's previous credit facility through March 31,
2004 (see note 8). In consideration for the extension of the guarantee,
the Company received 150,000 shares of GSE common stock with a value of
$180,000. A deferred credit of $180,000 was recorded for the receipt of
these shares which is being amortized to income over the term of the
guarantee. During the year ended December 31, 2003, the Company recorded
$135,000 to other income in the consolidated statement of operation. The
guarantee was extended through May 31, 2004. On March 30, 2004, GSE was
added as a borrower under the General Physics Credit Agreement (see note
8). The Company agreed to guarantee GSE's allocated portion ($1,500,000)
of the Credit Agreement. General Physics received a waiver to loan GSE a
maximum of $1.0 million to satisfy any GSE short-term capital requirements
over the next 15 months.
(17) COMMITMENTS AND CONTINGENCIES
(a) The Company has various non-cancelable leases for real property and
machinery and equipment. Such leases expire at various dates with, in some
cases, options to extend their terms.
Minimum rentals under long-term operating leases are as follows (in
thousands):
MACHINERY
REAL AND
PROPERTY EQUIPMENT TOTAL
-------- --------- --------
2005 $ 3,920 $ 1,044 $ 4,964
2006 3,261 415 3,676
2007 2,755 190 2,945
2008 1,746 31 1,777
2009 890 2 892
Thereafter 5,313 - 5,313
-------- --------- --------
Total $ 17,885 $ 1,682 $ 19,567
======== ========= ========
Several of the leases contain provisions for rent escalation based
primarily on increases in real estate taxes and operating costs incurred
by the lessor. Rent expense was approximately $5,125,000, $4,200,000 and
$3,961,000 for 2004, 2003 and 2002, respectively.
(b) The Company has guaranteed the leases for Five Star's New Jersey and
Connecticut warehouses, totaling approximately $1,589,000 per year through
the first quarter of 2007. The Company's guarantee of such leases was in
effect when Five Star was originally a wholly owned subsidiary of the
Company prior to the sale by the Company in 1998 of
83
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2004 and 2003
substantially all of the operating assets of Five Star to the
predecessor company of Five Star. As part of this transaction, the
landlord of the New Jersey and Connecticut facilities did not consent to
the release of the Company's guarantee. The Company's guarantee of Five
Star's leases was not affected by the spin-off of NPDC.
(18) LITIGATION
On January 3, 2001, the Company commenced an action alleging that MCI
Communications Corporation, ("MCI") MCI's Systemhouse subsidiaries
("Systemhouse"), and Electronic Data Systems Corporation, as successor to
Systemhouse, ("EDS") committed fraud in connection with the Company's 1998
acquisition of Learning Technologies from the defendants for $24,300,000.
The Company seeks actual damages in the amount of $117,900,000 plus
interest, punitive damages in an amount to be determined at trial, and
costs. Such damages are subject to reduction by the amount recovered in
the arbitration.
The complaint, which is pending in the New York State Supreme Court,
alleges that the defendants fraudulently induced the Company to acquire
Learning Technologies by concealing the poor performance of Learning
Technologies' United Kingdom operation. The complaint also alleges that
the defendants represented that Learning Technologies would continue to
receive new business from Systemhouse even though the defendants knew that
the sale of Systemhouse to EDS was imminent and that such new business
would cease after such sale. In February 2001, the defendants filed
answers denying liability. No counterclaims against the plaintiffs have
been asserted. Although discovery had not yet been completed, defendants
made a motion for summary judgment, which was submitted in April 2002. The
motion was denied by the court due to the MCI bankruptcy, but with leave
to the other defendants to renew, as described below.
The defendants other than MCI then made an application to the court to
stay the fraud action until a later-commenced arbitration, alleging breach
of the acquisition agreement and of a separate agreement to refer business
to General Physics on a preferred provider basis and seeking actual
damages in the amount of $17,600,000 plus interest, is concluded. In a
decision dated May 9, 2003, the court granted the motion and stayed the
fraud action pending the outcome of the arbitration.
The arbitration hearings began on May 17, 2004 and concluded on May 24,
2004 before JAMS, a private dispute resolution firm. On September 10,
2004, the arbitrator issued an interim award in which she found that the
sellers of Learning Technologies breached certain representations and
warranties contained in the acquisition agreement. In a final award dated
November 29, 2004, the arbitrator awarded the Company $12,273,575 in
damages and $6,016,109 in interest. On December 30, 2004, EDS made a
payment of $18,427,684, which included $138,000 of accrued interest, to
the Company to satisfy its obligation under the arbitration award. The
Company recognized a gain on arbitration settlement, net of legal fees and
expenses of $13,660,000 in 2004, and the cash was held in escrow as of
December 31, 2004. EDS subsequently agreed that the arbitration award is
final and binding and that it will take no steps of any kind to vacate or
otherwise challenge the award.
84
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2004 and 2003
As a result of the conclusion of the arbitration, the state court has
lifted the stay of the fraud claim against EDS. The Company is now
proceeding with the fraud claim against EDS. On February 14, 2005, EDS
filed a new motion for summary judgment dismissing the Company's fraud
claim. The Company must respond to the motion by March 17, 2005. The
motion is currently scheduled for argument on April 4, 2005.
The fraud action against MCI had been stayed as a result of the bankruptcy
of MCI. In February 2004, the Bankruptcy Court lifted the stay so that the
state court could rule on the merits of MCI's summary judgment motion. MCI
has stated that it intends to ask the Bankruptcy Court to reinstate the
stay.
In connection with the spin-off of NPDC by the Company, the Company agreed
to make an additional capital contribution to NPDC in an amount equal to
the first $5,000,000 of any proceeds (net of litigation expenses and taxes
incurred, if any), and 50% of any proceeds (net of litigation expenses and
taxes incurred, if any) in excess of $15,000,000, received with respect to
the foregoing arbitration and litigation claims.
Pursuant to such agreement, in January 2005, the Company has made a
$5,000,000 distribution to NPDC out of the proceeds of the arbitration
award. The net cash proceeds to the Company was approximately $8,500,000
after legal fees and distribution to NPDC. A portion of such net proceeds
was used to reduce to zero the outstanding balance of General Physics'
revolving credit facility, which as of December 31, 2004 was $6.1 million.
The Company is not a party to any legal proceeding, the outcome of which
is believed by management to have a reasonable likelihood of having a
material adverse effect upon the financial condition and operating results
of the Company.
85
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2004 and 2003
(19) QUARTERLY INFORMATION (UNAUDITED)
The Company's quarterly financial information has not been audited but, in
management's opinion, includes all adjustments necessary for a fair
presentation.
THREE MONTHS ENDED YEAR ENDED
------------------------------------------------ ------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, DECEMBER 31,
2004 2004 2004 2004 2004
--------- -------- ------------- ------------ ------------
Revenue $ 42,720 $ 47,074 $ 51,518 $ 52,661 $ 193,973
Gross profit 5,702 6,300 6,989 6,972 25,963
Income from continuing operations 16 280 559 21,590 22,445
Income from discontinued operations,
net of income taxes 115 113 (130) (23) 75
Net income 131 393 429 21,567 22,520
Per common share data
Basic:
Income from continuing operations $ - $ 0.02 $ 0.03 $ 1.21 $ 1.27
Income (loss) from discontinued
operations, net of income taxes 0.01 - (0.01) - -
Net income 0.01 0.02 0.02 1.21 1.27
Diluted:
Income from continuing operations $ - $ 0.02 $ 0.03 $ 1.15 $ 1.23
Income (loss) from discontinued
operations, net of income taxes 0.01 - (0.01) - -
Net income 0.01 0.02 0.02 1.15 1.23
86
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2004 and 2003
THREE MONTHS ENDED YEAR ENDED
---------------------------------------------------- ------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, DECEMBER 31,
2003 2003 2003 2003 2003
--------- -------- ------------- ------------ ------------
Revenue $ 33,871 $ 33,986 $ 32,313 $ 39,864 $ 140,034
Gross profit 3,465 3,906 4,128 5,596 17,095
Loss from continuing operations (609) (3,025) (2,524) (1,953) (8,111)
Income (loss) from discontinued
operations, net of income taxes (94) 159 (323) 93 (165)
Net loss (703) (2,866) (2,847) (1,860) (8,276)
Per common share data
Basic:
Loss from continuing operations $ (0.04) $ (0.18) $ (0.14) $ (0.11) $ (0.47)
Income (loss) from discontinued
operations, net of income taxes (0.01) 0.01 (0.02) 0.01 (0.01)
Net loss (0.05) (0.17) (0.16) (0.10) (0.48)
Diluted:
Loss from continuing operations $ (0.04) $ (0.18) $ (0.14) $ (0.11) $ (0.47)
Income (loss) from discontinued
operations, net of income taxes (0.01) 0.01 (0.02) 0.01 (0.01)
Net loss (0.05) (0.17) (0.16) (0.10) (0.48)
87
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2004 and 2003
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
GP STRATEGIES CORPORATION
Dated: April 4, 2005 Jerome I. Feldman
Chief Executive Officer
88
Index No. Exhibit Number
3.1 Amended Restated Certificate of Incorporation of the Registrant filed
on October 5, 1995. Incorporated herein by reference to Exhibit 3 of
the Registrant's Form 10-Q for the third quarter ended September 30,
1995.
3.2 Amendment to the Registrant's Restated Certificate of Incorporation
filed on January 24, 1997. Incorporated herein by reference to Exhibit
3.1 of the Registrant's Form 10-K for the year ended December 31,
1996.
3.3 Certificate of Designations, Preferences and Rights of Series A Junior
Participating Preferred Stock of the Registrant dated June 23, 1997.**
3.4 Amendment to the Registrant's Restated Certificate of Incorporation
filed on March 5, 1998. Incorporated herein by reference to Exhibit
3.1 of the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1997.
3.5 Amended and Restated By-Laws of the Registrant. Incorporated herein by
reference to Exhibit 1 of the Registrant's Form 8-K filed on September
1, 1999.
10.1 1973 Non-Qualified Stock Option Plan of the Registrant, as amended on
June 26, 2000. Incorporated herein by reference to Exhibit 10.1 of the
Registrant's Annual Report on Form 10-K for the year ended December
31, 2000.
10.2 GP Strategies Corporation 2003 Incentive Stock Plan. Incorporated
herein by reference to Exhibit 4 of the Registrant's Form 10-Q for the
quarter ended September 30, 2004.
10.3 General Physics Corporation 2004 Bonus Plan.**
10.4 GP Strategies' Millennium Cell, LLC Option Plan. Incorporated herein
by reference to Exhibit 10.2 to the Registrant's Annual Report on Form
10-K for the year ended December 31, 2001.
10.5 Employment Agreement, dated as of June 1, 1999, between the Registrant
and Jerome I. Feldman. Incorporated herein by reference to Exhibit 10
of the Registrant's Form 10-Q for the second quarter ended June 30,
1999.
10.6 Amended and Restated Incentive Compensation Agreement dated as of June
11, 2003 between the Registrant and Jerome I. Feldman. Incorporated
here in by reference to Exhibit 10 to the Registrant's Form 10-Q for
the Quarter Ended September 30, 2003.
10.7 Amendment dated as of October 1, 2003 to the Amended and Restated
Incentive Compensation Agreement dated June 11, 2003 between GP
Strategies Corporation and Jerome I. Feldman. Incorporated herein by
reference to Exhibit 10.1 to the Registrants Form 10-Q for the Quarter
Ended September 30, 2003.
i
10.8 Amended and Restated Incentive Compensation Agreement dated November
17, 2003 between GP Strategies Corporation and Jerome I. Feldman.
Incorporated herein by reference to Exhibit 10.2 to the Registrant's
Form 10-Q for the Quarter Ended September 30, 2003.
10.9 Employment Agreement, dated as of July 1, 1999, between the Registrant
and Scott N. Greenberg. Incorporated herein by reference to Exhibit
10.1 of the Registrant's Form 10-Q for the third quarter ended
September 30, 1999.
10.10 Amendment, dated January 21, 2005, to Employment Agreement dated as of
July 1, 1999 between the Company and Scott N. Greenberg. Incorporated
herein by reference to Exhibit 10.1 of the Registrant's Form 8-K filed
on January 25, 005.
10.11 Separation Agreement, dated as of September 3, 2002, between the
General Physics Corporation and John C. McAuliffe. Incorporated herein
by reference to Exhibit 10 of the Registrant's Form 8-K filed on
September 4, 2002.
10.12 Employment Agreement dated as of May 1, 2001 between the Registrant
and Andrea D. Kantor. Incorporated herein by reference to Exhibit 10
of the Registrant's Form 10-Q for the second quarter ended June 30,
2001.
10.13 Amendment, dated January 21, 2005, to Employment Agreement dated as of
May 1, 2001 between the Company and Andrea D. Kantor. Incorporated
herein by reference to Exhibit 10.3 of the Registrant's Form 8-K filed
on January 25, 2005.
10.14 Employment Agreement, dated as of July 1, 1999, between the Registrant
and Douglas E. Sharp. Incorporated herein by reference to Exhibit
10.11 of the Registrant's Form 10-K for the year ended December 31,
2003.
10.15 Amendment, dated January 21, 2005, to Employment Agreement dated as of
July 1, 1999 between the Company and Douglas E. Sharp. Incorporated
herein by reference to Exhibit 10.2 of the Registrant's Form 8-K filed
on January 25, 005.
10.16 Asset Purchase Agreement, dated as of June 3, 1998, by and among SHL
Systemhouse Co., MCI Systemhouse Corp., SHL Computer Innovations Inc.,
SHL Technology Solutions Limited and General Physics Corporation.
Incorporated herein by reference to Exhibit 10.1 of the Registrant's
Form 8-K dated June 29, 1998.
10.17 Preferred Provider Agreement, dated as of June 3, 1998, by and among
SHL Systemhouse Co., MCI Systemhouse Corp., SHL Computer Innovations
Inc., SHL Technology Solutions Limited and General Physics
Corporation. Incorporated herein by reference to Exhibit 10.2 of the
Registrant's Form 8-K dated June 29, 1998.
10.18 Financial and Security Agreement dated August 13, 2003 by and between
General Physics Corporation, MXL Industries, Inc. and Wachovia Bank
National
ii
Association. Incorporated herein by reference to Exhibit 10.10 to the
Registrant's Form 10-Q for the quarter ended June 30, 2003.
10.19 Guaranty of Payment Agreement dated August 13, 2003 by GP Strategies
Corporation for the benefit of Wachovia Bank, National Association.
Incorporated herein by reference to Exhibit 10.11 to the Registrant's
Form 10-Q for the quarter ended June 30, 2003
10.20 Limited Guaranty of Payment Agreement dated August 13, 2003 by MXL
Industries, Inc. for the benefit of Wachovia Bank, National
Association. Incorporated herein by reference to Exhibit 10.12 to the
Registrant's Form 10-Q for the quarter ended June 30, 2003
10.21 Rights Agreement, dated as of June 23, 1997, between National Patent
Development Corporation and Computershare Investor Services LLC, as
Rights Agent, which includes, as Exhibit A thereto, the Resolution of
the Board of Directors with respect to Series A Junior Participating
Preferred Stock, as Exhibit B thereto, the form of Rights Certificate
and as Exhibit C thereto the form of Summary of Rights. Incorporated
herein by reference to Exhibit 4.1 of the Registrant's Form 8-K filed
on July 17, 1997.
10.22 Amendment, dated as of July 30, 1999, to the Rights Agreement dated as
of June 23, 1997, between the Computershare Investor Services LLC, as
Rights Agent. Incorporated herein by reference to Exhibit 4.2 of the
Registrant's report on Form 8-A12B/A filed on August 2, 1999.
10.23 Amendment, dated as of December 16, 1999, to the Rights Agreement
dated as of June 23, 1997, between the Registrant and Computershare
Investor Services LLC, as Rights Agent. Incorporated herein by
reference to Exhibit 4.2 of the Company's report on From 8-A12B/A
filed on December 17, 1999.
10.24 Agreement dated, December 29, 1998, among the Registrant, Jerome I.
Feldman and Martin M. Pollak. . Incorporated herein by reference to
Exhibit 10.11 of the Registrant's Form 10K for the year ended December
31, 1998.
10.25 Subscription Agreement dated as of October 19, 2001 between the
Registrant and Bedford Oak Partners, L.P. Incorporated herein by
reference to Exhibit 10.21 to the Registrant's Annual Report on Form
10-K for the year ended December 31, 2001.
10.26 Subscription Agreement dated as of May 3, 2002 by and between the
Registrant and Bedford Oak Partners, L.P. Incorporated herein by
reference to Exhibit 10.3 to the Registrant's Form 10-Q for the second
quarter ended March 31, 2002.
10.27 Investor Rights Agreement dated as of December 27, 2001 among the
Registrant, Hydro Med Sciences and certain Institutional Investors.
Incorporated herein by reference to Exhibit 10.23 to the Registrants
Annual Report on Form 10-K for the year ended December 31, 2001.
iii
10.28 Stock Purchase Agreement dated as of December 27, 2001 among the
Registrant, Hydro Med Sciences and certain Institutional Investors.
Incorporated herein by reference to Exhibit 10.24 to the Registrant's
Annual Report on Form 10-K for the year ended December 31, 2001.
10.29 Right of First Refusal Co-Sale Agreement dated as of December 27, 2001
among the Registrant, Hydro Med Sciences and certain Institutional
Investors. Incorporated herein by reference to Exhibit 10.25 to the
Registrant's Annual Report on Form 10-K for the year ended December
31, 2001.
10.30 Termination Agreement dated as of December 21, 2001 between Hydro Med
Sciences and Shire US Inc. Incorporated herein by reference to Exhibit
10.26 to the Registrant's Annual Report on Form 10-K for the year
ended December 31, 2002.
10.31 Stock Purchase Agreement dated as of May 30, 2003, by and among Hydro
Med Sciences, Inc. and Investors. Incorporated herein by reference to
Exhibit 10.32 of the Registrant's Annual Report on Form 10-K for the
year ended December 31, 2003.
10.32 Amendment No. 1 to Stock Purchase Agreement dated November 18, 2003 by
and among Valera Pharmaceutical, Inc. (f/k/a Hydro Med Sciences, Inc.)
and Investors. Incorporated herein by reference to Exhibit 10.33 of
the Registrant's Annual Report on Form 10-K for the year ended
December 31, 2003.
10.33 Amended and Restated Investor Rights Agreement dated May 30, 2003, by
and among Hydro Med Sciences, Inc. and Investors. Incorporated herein
by reference to Exhibit 10.34 of the Registrant's Annual Report on
Form 10-K for the year ended December 31, 2003.
10.34 Amended and Restated Investor Right of First Refusal and Co-Sale
Agreement dated as of May 30, 2003 by and among Hydro Med Sciences,
Inc. and Investors. Incorporated herein by reference to Exhibit 10.35
of the Registrant's Annual Report on Form 10-K for the year ended
December 31, 2003.
10.35 Amended Note dated December 19, 2003 in the amount of $2,800,000
payable by Five Star Products, Inc. to JL Distributors, a wholly owned
subsidiary of the Registrant. Incorporated herein by reference to
Exhibit 10.36 of the Registrant's Annual Report on Form 10-K for the
year ended December 31, 2003.
10.36 Amended Note dated March 31, 2003 in the amount of $2,800,000 payable
by Five Star Products, Inc. to JL Distributors, a wholly owned
subsidiary of the Registrant. Incorporated herein by reference to
Exhibit 10.37 of the Registrant's Annual Report on Form 10-K for the
year ended December 31, 2003.
10.37 Tax Sharing Agreement dated as of February 1, 2004 between Registrant
and Five Star Products. Incorporated herein by reference to Exhibit
10.38 of the Registrant's Annual Report on Form 10-K for the year
ended December 31, 2003.
iv
10.38 Conversion Letter dated January 22, 2004 between the Registrant and
Five Star Products. Incorporated herein by reference to Exhibit 10.39
of the Registrant's Annual Report on Form 10-K for the year ended
December 31, 2003.
10.39 Agreement of Subordination & Assignment dated as of June 30, 2003 by
JL Distributors in Favor of Fleet Capital Corporation. Incorporated
herein by reference to Exhibit 10.40 of the Registrant's Annual Report
on Form 10-K for the year ended December 31, 2003.
10.40 Stock Purchase Agreement dated as of May 3, 2002 by and between the
Registrant and EGI-Fund(02)04 Investors, L.L.L. Incorporated herein by
reference to Exhibit 10.1 to the Registrant's Form 10-Q for the second
quarter ended March 31, 2002.
10.41 Subscription Agreement dated as of May 3, 2002 by and between the
Registrant and Marshall Geller. Incorporated herein by reference to
Exhibit 10.4 to the Registrant's Form 10-Q for the second quarter
ended March 31, 2002.
10.42 Form of Officer's Pledge Agreement. Incorporated herein by reference
to Exhibit 10.33 to the Registrant's Form 10-K for the year ended
December 31, 2002.
10.43 Form of Officer's Promissory Note. Incorporated herein by reference to
Exhibit 10.34 to the Registrant's Form 10-K for the year ended
December 31, 2002.
10.44 Sublease Agreement dated as of December 13, 2002 between the
Registrant and Austin Nichols & Company, Inc. Incorporated herein by
reference to Exhibit 10.35 to the Registrant's Form 10-K for the year
ended December 31, 2002.
10.45 Lease Agreement dated as of July 5, 2002 between the Registrant's
wholly owned subsidiary, General Physics Corporation and Riggs
Company. Incorporated herein by reference to Exhibit 10.36 to the
Registrant's Form 10-K for the year ended December 31, 2002.
10.46 Note and Warrant Purchase Agreement dated August 8, 2003 among GP
Strategies Corporation, National Patent Development Corporation and
Gabelli Funds, LLC. Incorporated herein by reference to Exhibit 10.0
to the Registrant's Form 10-Q for the quarter ended June 30, 2003.
10.47 Form of GP Strategies Corporation 6% Conditional Subordinated Note due
2008 dated August 14, 2003. Incorporated herein by reference to
Exhibit 10.01 to the Registrant's Form 10-Q for the quarter ended June
30, 2003.
10.47 Form of GP Strategies Corporation Warrant Certificate dated August 14,
2003. Incorporated herein by reference to Exhibit 10.02 to the
Registrant's Form 10-Q for the quarter ended June 30, 2003.
10.49 Form of National Patent Development Corporation Warrant Certificate
dated August 14, 2003. Incorporated herein by reference to Exhibit
10.03 to the Registrant's Form 10-Q for the quarter ended June 30,
2003.
v
10.50 Mortgage Security Agreement and Assignment of Leases dated August 14,
2003 between GP Strategies Corporation and Gabelli Funds, LLC.
Incorporated herein by reference to Exhibit 10.04 to the Registrant's
Form 10-Q for the quarter ended June 30, 2003.
10.51 Registration Rights Agreement dated August 14, 2003 between GP
Strategies and Gabelli Funds, LLC. Incorporated herein by reference to
Exhibit 10.05 to the Registrant's Form 10-Q for the quarter ended June
30, 2003.
10.52 Registration Rights Agreement dated August 14, 2003 between National
Patent Development Corporation and Gabelli Funds, LLC. Incorporated
herein by reference to Exhibit 10.06 to the Registrant's Form 10-Q for
the quarter ended June 30, 2003.
10.53 Indemnity Agreement dated August 14, 2003 by GP Strategies Corporation
for the benefit of National Patent Development Corporation and MXL
Industries, Inc. Incorporated herein by reference to Exhibit 10.07 to
the Registrant's Form 10-Q for the quarter ended June 30, 2003.
10.54 Subordination Agreement dated August 14, 2003 among GP Strategies
Corporation, Gabelli Funds, LLC, as Agent on behalf of the holders of
the Company's 6% Conditional Subordinated Notes due 2008 and Wachovia
Bank, National Association. Incorporated herein by reference to
Exhibit 10.08 to the Registrant's Form 10-Q for the quarter ended June
30, 2003.
10.55 Purchase and Sale Agreement dated October 21, 2003 by and between GP
Strategies Corporation and ManTech International. Incorporated herein
by reference to Exhibit 10.1 to the Registrant's Form 8-K dated
October 23, 2003.
10.56 Teaming Agreement dated October 21, 2003 by and between GP Strategies
Corporation and ManTech International. Incorporated herein by
reference to Exhibit 10.2 to the Registrant's Form 8-K dated October
23, 2003.
10.57 $5,250,955 Promissory Note dated October 21, 2003 of GP Strategies
Corporation. Incorporated herein by reference to Exhibit 10.3 of the
Registrant's Form 8-K dated October 23, 2003.
10.58 Management Service Agreement dated January 1, 2004 between the
Registrant and GSE Systems, Inc. Incorporated herein by reference to
Exhibit 10.60 of the Registrant's Annual Report on Form 10-K for the
year ended December 31, 2003.
10.59 Form of Management Agreement between the Registrant and National
Patent Development Corporation. Incorporated herein by reference to
Exhibit 10.1 of National Patent Development's Corporation Form S-1,
Registration No. 333-118568.
vi
10.61 Form of Management Agreement between National Patent Development
Corporation and the Registrant. Incorporated herein by reference to
Exhibit 10.2. of National Patent Development Corporation's Form S-1,
Registration No. 333-118568.
10.60 Form of Management Agreement between National Patent Development
Corporation and the Registrant. Incorporated herein by references to
Exhibit 10.2 of National Patent Development Corporation's Form S-1,
Registration No. 333-118568.
10.61 Form of Tax Sharing Agreement between the Registrant and National
Patent Development Corporation. Incorporated herein by reference to
Exhibit 10.4 of National Patent Development Corporation's Form S-1,
Registration No. 333-118568.
10.62 Form of Distribution Agreement between the Registrant and National
Patent Development Corporation. Incorporated herein by reference to
Exhibit 2.1 of National Patent Development Corporation's Form S-1,
Registration No. 333-118568.
14.1 Code of Ethics Policy. Incorporated herein by reference to Exhibit
14.1 of the Registrant's Annual Report on Form 10-K for the year ended
December 31, 2003.
18 Not Applicable
19 Not Applicable
20 Not Applicable
21 Subsidiaries of the Registrant**
22 Not Applicable
23 Consent of KPMG LLP, Independent Registered Public Accounting Firm*
23.1 Consent of Eisner LLP, Independent Registered Public Accounting Firm*
28 Not Applicable
31.1 Certification of Chief Executive Officer**
31.2 Certification of Chief Financial Officer**
32.1 Certification Pursuant to Section 18 U.S.C. Section 1350 **
* Filed herewith.
**Previously Filed
vii