UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[x] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended September 30, 2005
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ________________ to _____________________
Commission File Number: 1-7234
GP Strategies Corporation
(Exact name of registrant as specified in its charter)
Delaware 13-1926739
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
777 Westchester Avenue, White Plains, New York 10604
(Address of principal executive offices) (Zip Code)
(914)-249-9700
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
----- -----
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12(b)-2 of the Exchange Act). Yes X No
----- -----
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12(b)-2 of the Exchange Act). Yes No X
----- -----
Indicate the number of shares outstanding of each of issuer's classes of
common stock as of October 31, 2005:
Common Stock 17,081,674 shares
Class B Capital 1,200,000 shares
GP STRATEGIES CORPORATION AND SUBSIDIARIES
TABLE OF CONTENTS
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets -
September 30, 2005 and December 31, 2004 1
Condensed Consolidated Statements of Operations-
Three Months and Nine Months Ended September 30, 2005 and 2004 2
Condensed Consolidated Statements of Cash Flows -
Nine Months Ended September 30, 2005 and 2004 3
Notes to Condensed Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 18
Item 3. Quantitative and Qualitative Disclosure About Market Risk 26
Item 4. Controls and Procedures 26
PART II. OTHER INFORMATION
Item 6. Exhibits 28
Signatures 29
GP STRATEGIES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
SEPTEMBER 30,
2005 DECEMBER 31,
(UNAUDITED) 2004
------------- ------------
ASSETS
Current assets:
Cash and cash equivalents $ 10,507 $ 2,417
Cash held in escrow from arbitration settlement -- 13,798
Accounts and other receivables, less allowance
for doubtful accounts of $883 in 2005 and $917 in 2004 24,264 31,114
Costs and estimated earnings in excess of billings on
uncompleted contracts 12,143 16,834
Prepaid expenses and other current assets 7,363 5,828
-------- --------
Total current assets 54,277 69,991
-------- --------
Property, plant and equipment 6,020 13,078
Accumulated depreciation (4,007) (10,405)
-------- --------
Property, plant and equipment, net 2,013 2,673
Intangible assets:
Goodwill 57,507 63,867
Patents, licenses and contract rights 1,340 1,821
Accumulated amortization of patents,
licenses and contract rights (653) (797)
-------- --------
Intangible assets, net 58,194 64,891
Deferred tax assets 13,796 15,164
Other assets 1,245 3,316
-------- --------
Total assets $129,525 $156,035
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 87 $ 100
Short-term borrowings -- 6,068
Accounts payable and accrued expenses 19,947 33,219
Billings in excess of costs and estimated
earnings on uncompleted contracts 7,168 10,003
-------- --------
Total current liabilities 27,202 49,390
Long-term debt less current maturities 11,207 10,951
Other non-current liabilities 1,138 1,739
-------- --------
Total liabilities 39,547 62,080
-------- --------
Minority interest -- 2,335
Stockholders' equity:
Common stock, par value $0.01 per share 171 167
Class B capital stock, par value $0.01 per share 12 12
Additional paid-in capital 168,929 171,852
Accumulated deficit (76,193) (78,923)
Unearned compensation (1,210) --
Accumulated other comprehensive loss (1,068) (761)
Note receivable from stockholder (619) (619)
Treasury stock, at cost (44) (108)
-------- --------
Total stockholders' equity 89,978 91,620
-------- --------
Total liabilities and stockholders' equity $129,525 $156,035
======== ========
See accompanying notes to the condensed consolidated financial statements.
1
GP STRATEGIES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ -------------------
2005 2004 2005 2004
------- -------- -------- --------
Revenue $44,059 $44,178 $131,278 $118,814
Cost of revenue 37,371 38,855 112,678 104,786
------- ------- -------- --------
Gross profit 6,688 5,323 18,600 14,028
Selling, general and administrative expenses (4,060) (3,791) (10,996) (11,261)
------- ------- -------- --------
Operating income 2,628 1,532 7,604 2,767
Interest expense (387) (490) (1,129) (1,470)
Other income 87 104 141 321
------- ------- -------- --------
Income from continuing operations
before income tax expense 2,328 1,146 6,616 1,618
Income tax expense (869) (546) (2,874) (1,002)
------- ------- -------- --------
Income from continuing operations 1,459 600 3,742 616
Income (loss) from discontinued operations,
net of income taxes (417) (171) (1,012) 337
------- ------- -------- --------
Net income $ 1,042 $ 429 $ 2,730 $ 953
======= ======= ======== ========
Per common share data:
Basic
Income from continuing operations $ 0.08 $ 0.03 $ 0.21 $ 0.03
Income (loss) from discontinued operations (0.02) (0.01) (0.06) 0.02
------- ------- -------- --------
Net income $ 0.06 $ 0.02 $ 0.15 $ 0.05
======= ======= ======== ========
Diluted
Income from continuing operations $ 0.07 $ 0.03 $ 0.20 $ 0.03
Income (loss) from discontinued operations (0.02) (0.01) (0.06) 0.02
------- ------- -------- --------
Net income $ 0.05 $ 0.02 $ 0.14 $ 0.05
======= ======= ======== ========
See accompanying notes to the condensed consolidated financial statements.
2
GP STRATEGIES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004
(UNAUDITED)
(DOLLARS IN THOUSANDS)
2005 2004
------- ------
Cash flows from operating activities:
Income from continuing operations $ 3,742 $ 616
Income (loss) from discontinued operations, net of income taxes (1,012) 337
------- -------
Net income 2,730 953
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Depreciation and amortization 2,506 2,746
Collection of deposit in escrow 13,798 --
Issuance of stock for retirement savings plan
and non-cash compensation expense 900 100
Gain on sales of marketable securities -- (381)
Changes in other operating items (8,163) (4,211)
------- -------
Net cash provided (used) by operations 11,771 (793)
------- -------
Cash flows from investing activities:
Additions to property, plant and equipment (818) (1,281)
Proceeds from sales of marketable securities -- 1,012
Proceeds from sales of property, plant and equipment 21 --
------- -------
Net cash used by investing activities (797) (269)
------- -------
Cash flows from financing activities:
Proceeds from (repayment of) short-term borrowings, net (4,886) 1,056
Issuance of subordinated convertible note by GSE 2,000 --
Repayment of long-term debt -- (723)
Proceeds from exercised stock options 1,238 404
Distribution of cash in the net assets of GSE in spin-off (804) --
Other financing activities (287) --
Payments of obligations under capital leases (70) (270)
------- -------
Net cash provided (used) by financing activities (2,809) 467
------- -------
Effect of exchange rate changes on cash and cash equivalents (75) (3)
------- -------
Net increase (decrease) in cash and cash equivalents 8,090 (598)
Cash and cash equivalents at the beginning of the period 2,417 4,416
------- -------
Cash and cash equivalents at the end of the period $10,507 $ 3,818
======= =======
Non-cash investing activity:
Distribution of non-cash net assets of GSE in spin-off (see note 4) $ 5,978 $ --
See accompanying notes to the condensed consolidated financial statements.
3
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Three and nine months ended September 30, 2005 and 2004
(Unaudited)
(1) BASIS OF PRESENTATION
GP Strategies Corporation ("the Company") was incorporated in Delaware in
1959. As of September 30, 2005, the Company's business consists of its
training and workforce development business operated by General Physics
Corporation ("General Physics" or "GP"). General Physics is a workforce
development company that seeks to improve the effectiveness of
organizations by providing training, management consulting, e-Learning
solutions and engineering services that are customized to meet the specific
needs of clients.
On September 30, 2005, the Company completed a taxable spin-off of its 57%
interest in GSE Systems Inc. ("GSE") through a dividend to the Company's
stockholders. GSE is a stand alone public company which provides simulation
solutions and services to energy, process and manufacturing industries
worldwide. On September 30, 2005, stockholders received in the spin-off
0.283075 shares of GSE common stock for each share of the Company's common
stock or Class B stock held on the record date of September 19, 2005.
Following the spin-off, the Company ceased to have any ownership interest
in GSE and the operations of GSE have been reclassified as discontinued in
the Company's condensed consolidated statements of operations for all
periods presented (see note 4). The Company will continue to provide
corporate support services to GSE, including accounting, finance, human
resources, legal, network support and tax, pursuant to a management
services agreement, which has been extended through December 31, 2005 (see
notes 4 and 10).
On November 24, 2004, the Company completed the tax-free spin-off of
National Patent Development Corporation ("NPDC"). Subsequent to the
spin-off, the results of operations of NPDC are presented as discontinued
in the Company's condensed consolidated statements of operations for the
three and nine months ended September 30, 2004.
The condensed consolidated financial statements include the operations of
the Company and its majority-owned subsidiaries. All significant
intercompany balances and transactions have been eliminated.
The accompanying condensed consolidated balance sheet as of September 30,
2005, the condensed consolidated statements of operations for the three and
nine months ended September 30, 2005, and the condensed consolidated
statement of cash flows for the nine months ended September 30, 2005 have
not been audited, but have been prepared in conformity with U.S. generally
accepted accounting principles for interim financial information and with
the instructions to Form 10-Q and Article 10 of Regulation S-X. These
condensed consolidated financial statements should be read in conjunction
with the audited consolidated financial statements for the year ended
December 31, 2004 as presented in our Annual Report on Form 10-K/A dated
May 16, 2005. In the opinion of management, this interim information
includes all material adjustments, which are of a normal and recurring
nature, necessary for a fair presentation. The results for the 2005 interim
periods are not necessarily indicative of results to be expected for the
entire year. Certain amounts for 2004 have been reclassified to conform
with the presentation for 2005.
In September 2005 in conjunction with the spin-off of GSE, the Company
identified an amount in its deferred tax assets that related to the excess
tax basis over book basis of its investment in GSE. This deferred tax asset
should have been eliminated in purchase accounting when the Company
increased its ownership interest in GSE to 57% in October 2003. The Company
has reclassified $1.5 million from noncurrent deferred tax assets to
goodwill in its December 31, 2004 condensed consolidated balance sheet
herein. The Company determined the reclassification had a deminimus impact
on the results of the Company's operations for all periods subsequent to
October 2003 and was not material quantitatively or qualitatively to the
consolidated financial statements taken as a whole.
4
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Three and nine months ended September 30, 2005 and 2004
(Unaudited)
(2) INCOME PER SHARE
Basic income per share is based upon the weighted average number of common
shares outstanding, including Class B stock, during the periods. Class B
stockholders have the same rights to share in profits and losses and
liquidation values as common stockholders.
Diluted income per share is based upon the weighted average number of
common shares outstanding during the period assuming the issuance of common
stock for all potential dilutive common stock equivalents outstanding.
Income per share for the three and nine months ended September 30, 2005 and
2004 is as follows (in thousands, except per share data):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ -----------------
2005 2004 2005 2004
------- -------- ------- ------
INCOME (LOSS) USED IN COMPUTATION:
Income from continuing operations $ 1,459 $ 600 $ 3,742 $ 616
Income (loss) from discontinued operations (417) (171) (1,012) 337
------- ------- ------- -------
Net income $ 1,042 $ 429 $ 2,730 $ 953
======= ======= ======= =======
SHARES USED IN COMPUTATION:
Basic weighted average shares
outstanding 18,260 17,694 18,105 17,628
Dilutive impact of stock options, warrants
and non-vested restricted stock units 731 511 811 530
------- ------- ------- -------
Diluted weighted average shares
outstanding 18,991 18,205 18,916 18,158
======= ======= ======= =======
INCOME (LOSS) PER COMMON SHARE:
Basic
Income from continuing operations $ 0.08 $ 0.03 $ 0.21 $ 0.03
Income (loss) from discontinued operations (0.02) (0.01) (0.06) 0.02
------- ------- ------- -------
Net income $ 0.06 $ 0.02 $ 0.15 $ 0.05
======= ======= ======= =======
Diluted
Income from continuing operations $ 0.07 $ 0.03 $ 0.20 $ 0.03
Income (loss) from discontinued operations (0.02) (0.01) (0.06) 0.02
------- ------- ------- -------
Net income $ 0.05 $ 0.02 $ 0.14 $ 0.05
======= ======= ======= =======
5
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Three and nine months ended September 30, 2005 and 2004
(Unaudited)
For the three and nine months ended September 30, 2005, stock options,
warrants, and convertible notes totaling 574,000 shares for both periods
were not dilutive and were excluded from the computation of diluted income
per share. For the three and nine months ended September 30, 2004, stock
options, warrants, and convertible notes totaling 3,042,000 shares and
3,023,000 shares, respectively, were not dilutive and were excluded from
the computation of diluted income per share.
The difference between the basic and diluted number of weighted average
shares outstanding for the three and nine months ended September 30, 2005
and 2004 represents dilutive stock options and warrants, computed under the
treasury stock method using the average market price during the period. The
difference between the basic and diluted number of weighted average shares
outstanding for the three and nine months ended September 30, 2005 also
includes dilutive non-vested restricted stock awards granted during 2005,
computed under the treasury stock method using average market price.
(3) STOCK BASED COMPENSATION
The Company applies the intrinsic-value-based method of accounting
prescribed by Accounting Principles Board ("APB") Opinion No. 25,
Accounting for Stock Issued 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. Statement of Financial Accounting Standards
(SFAS) No. 123, Accounting for Stock-Based Compensation, as amended,
established accounting and disclosure requirements using a fair-value-based
method of accounting for stock-based employee compensation plans. As
allowed by SFAS No. 123, the Company has elected to continue to apply the
intrinsic-value-based method of accounting described above, and has adopted
only the disclosure requirements of SFAS No. 123.
The following table illustrates the effect on net income if the
fair-value-based method had been applied to all outstanding and unvested
awards for the three and nine months ended September 30, 2005 and 2004 (in
thousands, except per share data):
6
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Three and nine months ended September 30, 2005 and 2004
(Unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ -----------------
2005 2004 2005 2004
------ ----- ------ -----
Net income - as reported $1,042 $ 429 $2,730 $ 953
Add: stock-based compensation expense
determined under intrinsic value method and
included in reported net income, net of tax 90 6 125 18
Deduct: stock-based compensation expense
determined under the fair value based
method for all awards, net of tax (140) (37) (310) (212)
------ ----- ------ -----
Pro forma net income $ 992 $ 398 $2,545 $ 759
====== ===== ====== =====
Net income per share:
Basic - as reported $ 0.06 $0.02 $ 0.15 $0.05
Basic - pro forma $ 0.05 $0.02 $ 0.14 $0.04
Diluted - as reported $ 0.05 $0.02 $ 0.14 $0.05
Diluted - pro forma $ 0.05 $0.02 $ 0.13 $0.04
The Company granted 1,000 options during the first quarter of 2005 and no
options during the second and third quarters of 2005. The per share
weighted-average fair value of the Company's stock options granted during
the nine months ended September 30, 2005 and 2004 were $3.35 and $1.46,
respectively, on the date of grant using the modified Black-Scholes
option-pricing model with the following weighted-average assumptions:
NINE MONTHS
ENDED SEPTEMBER 30,
---------------------
2005 2004
--------- ---------
Expected dividend yield 0% 0%
Risk-free interest rate 3.56% 1.69%
Expected volatility 53.51% 34.08%
Expected life 4.0 years 2.0 years
In December 2004, the FASB issued SFAS No. 123 - Revised, Share-Based
Payment, which changed the accounting for stock-based compensation to
require companies to expense stock options and other equity awards based on
their grant-date fair values. SFAS No. 123R is discussed in more detail in
Note 12, Accounting Standard Issued.
7
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Three and nine months ended September 30, 2005 and 2004
(Unaudited)
(4) DISCONTINUED OPERATIONS
In accordance with SFAS No. 144, Accounting for the Impairment or Disposal
of Long-Lived Assets (SFAS No. 144), discontinued businesses are removed
from the results of continuing operations and are classified as
discontinued operations in the consolidated statements of operations
through the effective date of disposal. The following table sets forth the
components of income (loss) from discontinued operations for the three and
nine months ended September 30, 2005 and 2004 (in thousands):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ ------------------
2005 2004 2005 2004
------- ------- ------- --------
Revenue $ 4,607 $36,079 $17,617 $109,962
Operating income (loss) (1,232) 3 (2,392) 1,881
Interest expense 180 308 251 1,080
Income tax benefit (expense) (30) 56 (63) (466)
Income (loss) from discontinued
operations, net of income taxes (417) (171) (1,012) 337
Discontinued operations for the three and nine months ended September 30,
2005 include the results of GSE, which was distributed to the Company's
shareholders in connection with the spin-off effective September 30, 2005.
Discontinued operations for the three and nine months ended September 30,
2004 include the results of GSE as well as the results of MXL Industries,
Inc., Five Star Products, Inc., and certain other non-core assets, which
were distributed to NPDC in connection with the spin-off effective November
24, 2004.
In accordance with SFAS No. 144, only those costs that are solely
attributable to the discontinued business segments have been allocated to
discontinued operations. Accordingly, the results for the three and nine
months ended September 30, 2005 and 2004 include overhead expenses that
were incurred for the benefit of the Company's continuing and discontinued
operations, which are included in continuing operations.
The Company will continue to provide corporate support services to GSE,
including accounting, finance, human resources, legal, network support and
tax, pursuant to a management services agreement which was extended through
December 31, 2005 (see note 10). For the three and nine months ended
September 30, 2005, the Company recorded revenues for these services of
$196,000 and $525,000, respectively. For the three and nine months ended
September 30, 2004, the Company recorded revenues for these services of
$144,000 and $450,000, respectively. The revenues and expenses related to
these services which were intercompany transactions prior to the spin-off
were eliminated in the Company's consolidated financial statements.
8
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Three and nine months ended September 30, 2005 and 2004
(Unaudited)
The following table summarizes the carrying amount of the assets and
liabilities of GSE as of September 30, 2005, which are no longer
consolidated with the Company effective with the spin-off (in thousands):
Assets:
Cash and cash equivalents $ 804
Accounts and other receivables 2,487
Costs and estimated earnings in excess of billings
on uncompleted contracts 5,428
Prepaid expenses and other current assets 983
Property, plant and equipment, net 314
Goodwill and other assets 7,487
-------
Total assets 17,503
-------
Liabilities:
Accounts payable and accrued expenses 5,224
Short-term borrowings 1,182
Billings in excess of costs and estimated
earnings on uncompleted contracts 848
Long-term debt 782
Minority interest and other liabilities 2,685
-------
Total liabilities 10,721
-------
Net assets of GSE distributed in spin-off $ 6,782
=======
As of September 30, 2005, GSE had borrowings of $1,182,000 and a letter of
credit for $10,000 under General Physics' Credit Agreement (see note 6),
under which $1,500,000 was allocated for use by GSE. The Company guarantees
GSE's borrowings under the Credit Agreement through August 13, 2006.
9
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Three and nine months ended September 30, 2005 and 2004
(Unaudited)
(5) LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
SEPTEMBER 30, DECEMBER 31,
2005 2004
------------- ------------
6% conditional subordinated notes due 2008 (a) $ 7,500 $ 7,500
ManTech Note (b) 5,251 5,251
Other 117 190
------- -------
12,868 12,941
Less warrant related discount, net of accretion (1,574) (1,890)
------- -------
11,294 11,051
Less current maturities (87) (100)
------- -------
$11,207 $10,951
======= =======
(a) Pursuant to a Note and Warrant Purchase Agreement dated August 8,
2003, the Company issued and sold to four Gabelli Funds $7,500,000
aggregate principal amount of 6% Conditional Subordinated Notes due
August 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
and 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 $5.85 per share, as amended
following the spin-offs of NPDC and GSE, and are exercisable at any
time until August 2008. The exercise price may be paid in cash, by
delivery of the Gabelli Notes, or a combination of the two. The GP
Warrants contain anti-dilution provisions for stock splits,
reorganizations, mergers and similar transactions. The fair value of
the GP Warrants at the date of issuance was $2,389,000, which reduced
long-term debt in the accompanying condensed consolidated balance
sheets. This amount is being accreted as additional interest expense
using the effective interest rate over the term of the Gabelli Notes.
The Gabelli Notes have a yield to maturity of 15.436% based on the
discounted value. Accretion charged as interest expense was
approximately $110,000 and $95,000 for the three months ended
September
10
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Three and nine months ended September 30, 2005 and 2004
(Unaudited)
30, 2005 and 2004, respectively, and approximately $316,000 and
$279,000 for the nine months ended September 30, 2005 and 2004,
respectively.
(b) The Company has a five-year 5% note due in full on October 21, 2008 in
the principal amount of $5,250,955 to ManTech International. Interest
is payable quarterly. Each year during the term of the note, the
holder of the note has the option to convert up to 20% of the original
principal amount of the note into common stock of the Company at the
then market price of the Company's common stock, but only in the event
that the Company's common stock is trading at $10 per share or more.
In the event that less than 20% of the principal amount of the note is
not converted in any year, such amount not converted will be eligible
for conversion in each subsequent year until converted or until the
note is repaid in cash.
(6) SHORT-TERM BORROWINGS
General Physics has a three-year $25 million Financing and Security
Agreement (the "Credit Agreement") for which $1,500,000 is allocated for
use by GSE, with a bank that expires on August 13, 2006 with annual renewal
options. The Credit Agreement is secured by certain assets of General
Physics and provides for an unsecured guaranty from the Company.
The interest rate on the Credit Agreement is at the daily LIBOR market
index rate plus 3%, which as of September 30, 2005 was approximately 6.84%.
Based upon the financial performance of General Physics, the interest rate
can be reduced. The Credit Agreement contains covenants with respect to
General Physics' minimum tangible net worth, leverage ratio, interest
coverage ratio and its ability to make capital expenditures. General
Physics was in compliance with all loan covenants under the Credit
Agreement as of September 30, 2005. The Credit Agreement also contains
certain restrictive covenants including a prohibition on future
acquisitions, incurrence of debt and the payment of dividends. General
Physics is currently restricted from paying dividends or management fees to
the Company in excess of $1,000,000 in any fiscal year.
The Company repaid in full the $6,068,000 outstanding under the Credit
Agreement as of December 31, 2004 in the first quarter of 2005, using the
proceeds received from the arbitration settlement as discussed in more
detail in Note 9, Litigation. As of September 30, 2005, the Company had no
borrowings outstanding under the Credit Agreement and there was
approximately $19,313,000 of available borrowings based upon 80% of
eligible accounts receivable and 80% of eligible unbilled receivables.
11
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Three and nine months ended September 30, 2005 and 2004
(Unaudited)
(7) COMPREHENSIVE INCOME
The following are the components of comprehensive income (loss) (in
thousands):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ -----------------
2005 2004 2005 2004
------ ----- ------ -------
Net income $1,042 $ 429 $2,730 $ 953
Other comprehensive income (loss)
before income tax expense:
Net unrealized gain (loss) on
available-for-sale securities 7 (877) 1 (1,703)
Net unrealized loss on interest
rate swap -- (165) -- (116)
Foreign currency translation
adjustment (309) 53 (400) (59)
------ ----- ------ -------
740 (560) 2,331 (925)
Income tax benefit (expense) relating
to items of other comprehensive
income (loss) (2) 406 -- 709
------ ----- ------ -------
Comprehensive income (loss),
net of tax $ 738 $(154) $2,331 $ (216)
====== ===== ====== =======
The components of accumulated other comprehensive loss are as follows (in
thousands):
SEPTEMBER 30, DECEMBER 31,
2005 2004
------------- ------------
Net unrealized gain on available-for-sale securities $ 21 20
Foreign currency translation adjustment (1,081) (773)
------- ----
Accumulated other comprehensive loss before tax (1,060) (753)
Accumulated income tax expense related to unrealized gain
on available-for-sale securities (8) (8)
------- ----
Accumulated other comprehensive loss, net of tax $(1,068) (761)
======= ====
12
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Three and nine months ended September 30, 2005 and 2004
(Unaudited)
(8) BUSINESS SEGMENTS
During the second quarter of 2005, the Company re-evaluated its reportable
business segments under SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information, due to the appointment of Scott N.
Greenberg as CEO of the Company on April 26, 2005. Based on the information
which Mr. Greenberg reviews in order to assess the performance of the
Company and make decisions regarding the allocation of resources, the
Company determined that General Physics consists of two reportable business
segments effective with Mr. Greenberg's appointment as CEO: 1) Process,
Energy & Government; and 2) Manufacturing & Business Process Outsourcing
(BPO). GSE ceases to be a reportable business segment effective with the
spin-off on September 30, 2005 and is reported in discontinued operations
in the accompanying condensed consolidated statements of operations. As a
result of the change in its reportable business segments, the Company has
restated the segment information below for all prior periods presented to
conform to the current period's presentation.
The Process, Energy & Government segment provides engineering consulting,
design and evaluation services regarding facilities, the environment,
processes and systems, staff augmentation, curriculum design and
development, and training and technical services primarily to federal and
state governmental agencies, large government contractors, petroleum and
chemical refining companies, and electric power utilities.
The Manufacturing & BPO segment provides training, curriculum design and
development, staff augmentation, system hosting, integration and help desk
support, business process outsourcing, and consulting and technical
services to large companies in the automotive, pharmaceutical, electronics,
and other industries as well as to governmental clients.
The Company does not allocate the following corporate items to the
segments: other income and interest expense; selling, general and
administrative expense; and income tax expense. Inter-segment revenue is
eliminated in consolidation and is not significant.
13
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Three and nine months ended September 30, 2005 and 2004
(Unaudited)
The following tables set forth the revenue and operating income of each of
the Company's operating segments and includes a reconciliation of segment
revenue to consolidated revenue and operating income to consolidated income
from continuing operations before income taxes (in thousands):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ -------------------
2005 2004 2005 2004
------- -------- -------- --------
REVENUE:
Process, Energy & Government $21,924 $21,086 $ 65,025 $ 59,329
Manufacturing & BPO 22,331 23,236 66,778 59,935
Elimination of intercompany revenue (196) (144) (525) (450)
------- ------- -------- --------
$44,059 $44,178 $131,278 $118,814
======= ======= ======== ========
OPERATING INCOME:
Process, Energy & Government $ 2,762 $ 2,756 $ 7,841 $ 6,832
Manufacturing & BPO 982 191 2,375 (192)
Elimination of intercompany revenue (196) (144) (525) (450)
Corporate and other general and
administrative expenses (920) (1,271) (2,087) (3,423)
------- ------- -------- --------
2,628 1,532 7,604 2,767
------- ------- -------- --------
Interest expense (387) (490) (1,129) (1,470)
Other income 87 104 141 321
------- ------- -------- --------
Income from continuing
operations before income
tax expense $ 2,328 $ 1,146 $ 6,616 $ 1,618
======= ======= ======== ========
(9) LITIGATION
On January 3, 2001, the Company commenced an action alleging that MCI
Communications Corporation ("MCI"), MCI's Systemhouse subsidiaries
("Systemhouse"), and Electronic Data Systems Corporation, as successor to
Systemhouse ("EDS"), committed fraud in connection with the Company's 1998
acquisition of Learning Technologies from the defendants for $24,300,000 in
cash. The Company seeks actual damages in the amount of $74,067,044 plus
interest, punitive damages in an amount to be determined at trial, and
costs, subject to reduction as set forth below.
The complaint, which was filed in the New York State Supreme Court, alleges
that the defendants fraudulently induced the Company to acquire Learning
Technologies by concealing the poor performance of Learning Technologies'
United Kingdom operation. The complaint also alleges that the defendants
represented that Learning Technologies would continue to receive new
business from Systemhouse even though the defendants knew that the sale of
Systemhouse to EDS was imminent and that such new business would cease
after such sale. In February 2001, the defendants filed answers denying
liability. No counterclaims against the plaintiffs have been asserted.
Although discovery had not yet been completed, defendants made a motion for
summary judgment, which was submitted in April 2002. The
14
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Three and nine months ended September 30, 2005 and 2004
(Unaudited)
motion was denied by the court due to the MCI bankruptcy, but with leave to
the other defendants to renew.
The defendants other than MCI then made an application to the court to stay
the fraud action until the Company and EDS completed a later-commenced
arbitration, in which the Company alleged breach of the acquisition
agreement and of a separate agreement to refer business to General Physics
on a preferred provider basis and seeking actual damages in the amount of
$17,600,000 plus interest. In a decision dated May 9, 2003, the court
granted the motion and stayed the fraud action pending the outcome of the
arbitration.
The arbitration hearings began on May 17, 2004 and concluded on May 24,
2004 before JAMS, a private dispute resolution firm. On September 10, 2004,
the arbitrator issued an interim award in which she found that the sellers
of Learning Technologies breached certain representations and warranties
contained in the acquisition agreement. In a final award dated November 29,
2004, the arbitrator awarded General Physics $12,273,575 in damages and
$6,016,109 in pre-award interest. (The damages sought in the litigation are
subject to reduction by the $12,273,575 in damages awarded in the
arbitration.) On December 30, 2004, EDS made a payment of $18,428,486,
which included $138,802 of post-award interest, to General Physics to
satisfy its obligation under the arbitration award, which cash was held in
escrow as of December 31, 2004. EDS subsequently agreed that the
arbitration award was final and binding and that it would take no steps of
any kind to vacate or otherwise challenge the award. As a result of the
foregoing, the Company recognized a gain on the arbitration award, net of
legal fees and expenses, of $13,660,000 in 2004.
As a result of the conclusion of the arbitration, the state court lifted
the stay of the fraud claim against the defendants other than MCI. On
February 14, 2005, such defendants filed a new motion for summary judgment
dismissing the Company's fraud claim against them. The Company opposed the
motion, which was argued on April 4, 2005. On June 6, 2005, the court
issued a decision on the motion for summary judgment refusing to dismiss
the Company's claims against EDS and Systemhouse relating to false
representations concerning the financial condition of Learning
Technologies' United Kingdom operation and held that the Company had
presented evidence sufficient to raise triable issues of fact as to whether
defendants provided the Company with financial projections which they knew
to be false or unreasonable, and made representations or omissions
indicating that Learning Technologies' United Kingdom operation was on
track to achieve revenue targets which they knew it would be unable to
achieve. However, the court dismissed the Company's claim that it had been
fraudulently induced to acquire Learning Technologies based on false
representations that Systemhouse was not for sale. The Company requested a
jury trial. Jury selection has commenced, and the trial is expected to
begin the week of November 14, 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 asked the Bankruptcy Court to reinstate the stay and to rule on its
summary judgment motion. The Company has argued that it would be more
efficient if the state court ruled on both summary judgment motions. The
Bankruptcy Court has not yet decided whether it or the state court should
determine MCI's summary judgment motion.
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
15
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Three and nine months ended September 30, 2005 and 2004
(Unaudited)
expenses and taxes incurred, if any), and 50% of any proceeds (net of
litigation expenses and taxes incurred, if any) in excess of $15,000,000,
received with respect to the foregoing arbitration and litigation claims.
Pursuant to such agreement, in January 2005, the Company made a $5,000,000
distribution to NPDC out of the proceeds of the arbitration award. The net
cash proceeds to the Company were approximately $8,500,000 after legal fees
and the distribution to NPDC. A portion of such net proceeds was used to
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.
(10) RELATED PARTY TRANSACTIONS
Management Services Agreements Between NPDC and the Company
Prior to the spin-off, NPDC was a wholly-owned subsidiary of the Company.
In connection with the spin-off, NPDC entered into a separate management
agreement with the Company pursuant to which the Company provides certain
general corporate services to NPDC.
Corporate Tax, Legal Support, and Executive Management Consulting Services
The Company has four associates, including the Chief Executive Officer and
Chief Legal Officer, who also provide services to NPDC under a management
services agreement, for which the Company is reimbursed for such services.
Services under the agreement relate to corporate federal and state income
taxes, corporate legal services, corporate secretarial administrative
support, and executive management consulting. The term of the agreement
extends for three years from the date of the spin-off, or through November
24, 2007, and may be terminated by either NPDC or the Company on or after
July 30, 2006 with 180 days prior written notice. Pursuant to an amendment
to the management services agreement effective July 1, 2005, NPDC will pay
the Company an annual fee of not less than $969,500 as compensation for
these services, payable in equal monthly installments. For the three and
nine months ended September 30, 2005, the Company charged NPDC $242,000 and
$899,000, respectively, which is included as a reduction of selling,
general and administrative expenses for services under this management
agreement.
In connection with the spin-off of NPDC, the Company also entered into a
separate management agreement with NPDC pursuant to which it was
anticipated that the Company would receive certain general corporate
services from NPDC. No such services have been required or provided, so the
Company and NPDC entered into a termination agreement effective as of July
1, 2005 terminating the management agreement.
Corporate Office Lease
NPDC continues to occupy a portion of corporate office space leased by the
Company. NPDC compensates the Company approximately $205,000 annually for
use of this space. The Company's lease extends through December 31, 2006.
16
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Three and nine months ended September 30, 2005 and 2004
(Unaudited)
Management Services Agreement Between GSE and the Company
Pursuant to a management services agreement, the Company provides corporate
support services to GSE, including accounting, finance, human resources,
legal, network support and tax. GSE pays the Company an annual fee of
$685,000 for these services. The management services agreement can be
renewed by GSE for successive one-year terms and was renewed through
December 31, 2005. Subsequent to the spin-off of GSE effective September
30, 2005, the Company will continue to provide GSE with these corporate
support services through the term of the agreement.
(11) COMMITMENTS
In April 2005, General Physics entered into employment agreements with
certain of its officers, resulting in committed compensation of
approximately $2.0 million annually. These agreements have employment terms
expiring in 2007, provide for grants of restricted stock units pursuant to
the Company's 2003 Incentive Stock Plan, and contain non-compete covenants
and change of control and termination provisions.
(12) ACCOUNTING STANDARD ISSUED
In December 2004, the FASB issued SFAS No. 123 - Revised, Share-Based
Payment (SFAS No. 123R), which revises SFAS No. 123, Accounting for
Stock-Based Compensation, and supersedes APB No. 25, Accounting for Stock
Issued to Employees. Currently, the Company does not record compensation
expense for certain stock-based compensation. Under SFAS No. 123R, the
Company will measure the cost of employee services received in exchange for
stock, based on the grant-date fair value (with limited exceptions) of the
stock award. Such cost will be recognized over the period during which the
employee is required to provide service in exchange for the stock award
(usually the vesting period). The fair value of the stock award will be
estimated using an option-pricing model, with excess tax benefits, as
defined in SFAS No. 123R, being recognized as an addition to paid in
capital. SFAS No. 123R was to be effective as of July 1, 2005. However,
based on Final Rule 74 issued by the Securities and Exchange Commission in
April 2005, which delayed the implementation of SFAS No. 123R, the Company
plans to adopt SFAS No. 123R effective January 1, 2006. The Company expects
to adopt SFAS No. 123R using the Modified Prospective Application method
without restatement of prior periods. Under this method, the Company will
begin to amortize compensation cost for the remaining portion of its
outstanding awards on the adoption date for which the requisite service has
not yet been rendered. Compensation cost for these awards will be based on
the fair value of the awards as disclosed on a pro forma basis under SFAS
123 in Note 3, Stock Based Compensation. The Company will account for
awards that are granted, modified, or settled after the adoption date in
accordance with SFAS No. 123R. The Company is currently in the process of
evaluating the impact of SFAS No. 123R on its consolidated financial
statements.
17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
General Overview
As of September 30, 2005, the Company's business consists of its training and
workforce development business operated by General Physics Corporation ("General
Physics" or "GP"). General Physics is a global workforce development company
that seeks to improve the effectiveness of organizations by providing training,
management consulting, e-Learning solutions and engineering services that are
customized to meet the specific needs of clients.
On September 30, 2005, the Company completed a taxable spin-off of its 57%
interest in GSE Systems Inc. ("GSE") through a dividend to the Company's
stockholders. GSE is a stand alone public company which provides simulation
solutions and services to energy, process and manufacturing industries
worldwide. On September 30, 2005, stockholders received in the spin-off 0.283075
shares of GSE common stock for each share of the Company's common stock or Class
B stock held on the record date of September 19, 2005. Following the spin-off,
the Company ceased to have any ownership interest in GSE and the operations of
GSE have been reclassified as discontinued in the Company's condensed
consolidated statements of operations for all periods presented. The Company
currently provides corporate support services to GSE, including accounting,
finance, human resources, legal, network support and tax, pursuant to a
management services agreement which has been extended through December 31, 2005.
As of September 30, 2005, GSE had borrowings of $1,182,000 and a letter of
credit for $10,000 under General Physics' Credit Agreement, under which
$1,500,000 was allocated for use by GSE. The Company guarantees GSE's borrowings
under the Credit Agreement through August 13, 2006.
During the second quarter of 2005, the Company re-evaluated its reportable
business segments under SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information, as a result of Scott N. Greenberg's
appointment as CEO of the Company on April 26, 2005. Based on the information
which Mr. Greenberg reviews in order to assess the performance of the Company
and make decisions regarding the allocation of resources, the Company determined
that General Physics consists of two reportable business segments effective with
Mr. Greenberg's appointment as CEO: 1) Process, Energy & Government; and 2)
Manufacturing & Business Process Outsourcing (BPO). GSE ceases to be a
reportable business segment as a result of the spin-off effective September 30,
2005. As a result of the change in the Company's reportable business segments,
all prior period information presented herein has been restated to conform to
the current period's presentation.
The Process, Energy & Government segment provides engineering consulting, design
and evaluation services regarding facilities, the environment, processes and
systems, staff augmentation, curriculum design and development, and training and
technical services primarily to federal and state governmental agencies, large
government contractors, petroleum and chemical refining companies, and electric
power utilities.
The Manufacturing & BPO segment provides training, curriculum design and
development, staff augmentation, system hosting, integration and help desk
support, business process outsourcing, and consulting and technical services to
large companies in the automotive, pharmaceutical, electronics, and other
industries as well as to governmental clients.
On November 24, 2004, the Company completed the tax-free spin-off of National
Patent Development Corporation ("NPDC"). Subsequent to the spin-off, the results
of operations of NPDC are presented as discontinued operations for the three and
nine months ended September 30, 2004.
General Physics' backlog for services under signed contracts and subcontracts
was approximately $89.0 million as of September 30, 2005.
18
Operating Highlights
THREE MONTHS ENDED SEPTEMBER 30, 2005 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 2004
For the third quarter of 2005, the Company had income from continuing operations
before income tax expense of $2,328,000 compared to $1,146,000 for the third
quarter of 2004. The improved results were primarily due to increased operating
income of $797,000 for General Physics' two business segments, as well as
reduced general and administrative expenses at the corporate level. Government
revenue accounted for approximately 41% and 59% of General Physics' revenue for
the quarters ended September 30, 2005 and 2004, respectively.
Revenue
THREE MONTHS ENDED
SEPTEMBER 30,
------------------
2005 2004
------- -------
(Dollars in Thousands)
Process, Energy & Government $21,924 $21,086
Manufacturing & BPO 22,331 23,236
Elimination of intercompany revenue with GSE (196) (144)
------- -------
$44,059 $44,178
======= =======
Process, Energy & Government segment revenue increased $838,000 or 4.0% during
the third quarter of 2005 compared to the same period of 2004. The increase in
revenue is primarily due to increased contract scopes with our existing
government and energy customers to provide various training and domestic
preparedness services. The net increase in revenue was partially offset by a
decrease in revenue from certain contracts, primarily for hurricane recovery
services provided to the State of Florida totaling $2.2 million during the third
quarter of 2004 which did not recur in 2005.
Manufacturing & BPO segment revenue decreased $905,000 or 3.9% during the third
quarter of 2005 compared to the same period of 2004. The decrease in revenue is
primarily due to a change in contract scopes with a business process outsourcing
customer during the third quarter of 2005. This net decrease was partially
offset by increases in business process outsourcing services provided to several
existing customers, increased system implementation and hosting services
primarily to the federal government, and increases in other professional
development and training courses provided to customers in the manufacturing
industry. The Company continues to expand the scope of services provided to
business process and training outsource customers.
Gross Profit
THREE MONTHS ENDED SEPTEMBER 30,
---------------------------------------
2005 2004
------------------ ------------------
% Revenue % Revenue
--------- ---------
(Dollars in thousands)
Process, Energy & Government $4,245 19.4% $3,879 18.4%
Manufacturing & BPO 2,639 11.8% 1,588 6.8%
Elimination of intercompany revenue with GSE (196) -- (144) --
------ ---- ------ ----
$6,688 15.2% $5,323 12.0%
====== ==== ====== ====
19
Process, Energy & Government gross profit of $4.2 million or 19.4% of revenue
for the third quarter of 2005 increased by $366,000 or 9.4% when compared to
gross profit of approximately $3.9 million or 18.4% of revenue for the same
period of 2004. This increase in gross profit was primarily driven by an
increase in revenue for training services provided to our government and energy
customers. The increase in gross profit as a percentage of revenue is primarily
due to a decrease in overhead expenses as a percentage of revenue as our
infrastructure costs have not increased at the same rate as our contract revenue
growth, excluding the decrease in revenue from the non-recurring hurricane
recovery services in 2004 as discussed above.
Manufacturing & BPO gross profit of $2.6 million or 11.8% of revenue for the
third quarter of 2005 increased by $1.1 million or 66.2% when compared to gross
profit of approximately $1.6 million or 6.8% of revenue for the same period of
2004. The increase is primarily due to decreased overhead expenses as a
percentage of revenue as our infrastructure costs have not increased at the same
rate as our contract revenue growth for business process outsourcing and
training outsourcing services, excluding the decrease in revenue from the change
in contract scopes with a business process outsourcing customer in the third
quarter of 2005 as discussed above.
Selling, General and Administrative Expense
SG&A expenses increased $0.3 million from $3.8 million for the third quarter of
2004 to $4.1 million for the third quarter of 2005. This net increase is
primarily related to higher legal fees associated with the EDS litigation
incurred during the third quarter of 2005. These increases were partially offset
by a decrease in corporate SG&A expenses primarily due to the spin-off of NPDC
in November 2004, which were not allocable to discontinued operations.
Interest Expense
Interest expense decreased $0.1 million from $0.5 million for the third quarter
of 2004 to $0.4 million for the third quarter of 2005. The decrease was
primarily attributable to General Physics' payoff of its short term borrowings
in January 2005.
Other Income
Other income was $0.1 million for the three months ended September 30, 2005 and
2004, respectively.
Income Taxes
Income tax expense was $0.9 million for the third quarter of 2005 compared to
$0.5 million for the third quarter of 2004. The Company's effective tax rate was
37.3% and 47.6% for the third quarter of 2005 and 2004, respectively. The
increase is primarily due to increased income from continuing operations during
the third quarter of 2005.
20
NINE MONTHS ENDED SEPTEMBER 30, 2005 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER
30, 2004
For the nine months ended September 30, 2005, the Company had income from
continuing operations before income tax expense of $6,616,000 compared to
$1,618,000 for the same period in 2004. The improved results were primarily due
to increased operating income of $3,576,000 for General Physics' two business
segments, as well as reduced general and administrative expenses at the
corporate level. Government revenue accounted for approximately 40% and 38% of
General Physics' revenue for the nine months ended September 30, 2005 and 2004,
respectively.
Revenue
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------
2005 2004
-------- --------
(Dollars in Thousands)
Process, Energy & Government $ 65,025 $ 59,329
Manufacturing & BPO 66,778 59,935
Elimination of intercompany revenue with GSE (525) (450)
-------- --------
$131,278 $118,814
======== ========
Process, Energy & Government segment revenue increased $5.7 million or 9.6%
during the nine months ended September 30, 2005 compared to the same period of
2004. The increase in revenue is primarily due to increased contract scopes with
our existing government and energy customers to provide various training and
domestic preparedness services. The net increase in revenue was partially offset
by a decrease in revenue from certain contracts, primarily for hurricane
recovery services provided to the state of Florida totaling $2.2 million in
2004, which did not recur in 2005.
Manufacturing & BPO segment revenue increased $6.8 million or 11.4% during the
nine months ended September 30, 2005 compared to the same period of 2004. The
increase is due to an increase in business process outsourcing services provided
to customers primarily in the electronics industry, increased system
implementation and hosting services primarily to the federal government, and
increases in other professional development and training courses provided to
customers in the manufacturing industry. The Company continues to expand the
scope of services provided to business process and training outsource customers.
Gross Profit
NINE MONTHS ENDED SEPTEMBER 30,
------------------------------------------
2005 2004
-------------------- -------------------
% Revenue % Revenue
--------- ---------
(Dollars in thousands)
Process, Energy & Government $12,016 18.5% $10,466 17.6%
Manufacturing & BPO 7,109 10.6% 4,012 6.7%
Elimination of intercompany revenue with GSE (525) -- (450) --
------- ---- ------- ----
$18,600 14.2% $14,028 11.8%
======= ==== ======= ====
21
Process, Energy & Government gross profit of $12.0 million or 18.5% of revenue
for the nine months ended September 30, 2005 increased by $1.6 million or 14.8%
when compared to gross profit of approximately $10.5 million or 17.6% of revenue
for the same period of 2004. This increase in gross profit was primarily driven
by an increase in revenue for training services provided to our government and
energy customers. The increase in gross profit as a percentage of revenue is
primarily due to a decrease in overhead expenses as a percentage of revenue as
our infrastructure costs have not increased at the same rate as our contract
revenue growth.
Manufacturing & BPO gross profit of $7.1 million or 10.6% of revenue for the
nine months ended September 30, 2005 increased by $3.1 million or 77.2% when
compared to gross profit of approximately $4.0 million or 6.7% of revenue for
the same period of 2004. This increase in gross profit was primarily driven by
an increase in revenue from business process outsourcing and training
outsourcing services. The increase in gross profit as a percentage of revenue is
primarily due to a decrease in overhead expenses as a percentage of revenue as
our infrastructure costs have not increased at the same rate as our contract
revenue growth.
Selling, General and Administrative Expense
SG&A decreased $0.3 million or 2.4% from $11.3 million for the nine months ended
September 30, 2004 to $11.0 million for the same period of 2005. This decrease
is primarily related to a decrease in corporate SG&A expenses, primarily due to
the spin-off of NPDC in November 2004, which were not allocable to discontinued
operations.
Interest Expense
Interest expense decreased $0.4 million from $1.5 million for the nine months
ended September 30, 2004 to $1.1 million for the same period of 2005. The
decrease was primarily attributable to General Physics' payoff of its short term
borrowings in January 2005.
Other Income
Other income was $0.1 million for the nine months ended September 30, 2005
compared to $0.3 million for the same period of 2004.
Income Taxes
Income tax expense increased by approximately $1.9 million from $1.0 million for
the nine months ended September 30, 2004 to $2.9 million for the same period of
2005. This increase is primarily due to increased income from continuing
operations during the nine months ended September 30, 2005 compared to the same
period of 2004. The Company's effective tax rate was 43.4% and 61.9% for the
nine months ended September 30, 2005 and 2004, respectively.
LIQUIDITY AND CAPITAL RESOURCES
WORKING CAPITAL AND CASH FLOWS
As of September 30, 2005, the Company had cash and cash equivalents totaling
$10.5 million. The Company believes that cash generated from operations and
borrowing availability under its Credit Agreement (described below), will be
sufficient to fund the working capital and other requirements of the Company for
the foreseeable future.
22
During the nine months ended September 30, 2005, the Company's working capital
increased by $6.5 million from $20.6 million at December 31, 2004 to $27.1
million at September 30, 2005.
The Company's cash balance increased $8.1 million from $2.4 million at December
31, 2004 to $10.5 million at September 30, 2005. The increase in cash and cash
equivalents during the nine months ended September 30, 2005 resulted from cash
provided by operating activities of $11.8 million, offset by cash used by
investing activities of $0.8 million, cash used by financing activities of $2.8
million, and a negative effect of exchange rate changes on cash of approximately
$0.1 million.
Cash Flows from Operating Activities
Cash provided by operating activities was $11.8 million for the nine months
ended September 30, 2005 compared to cash used in operating activities of $0.8
million for the same period of 2004. The increase in cash compared to the prior
period is primarily due to $1.8 million higher net income in 2005 compared to
2004, proceeds from the EDS lawsuit arbitration of $13.8 million in 2005, and
increased non-cash compensation expense of $0.8 million in 2005 compared to
2004. These increases in cash flows from operating activities were offset by a
decrease in changes in other operating items by approximately $4.0 million,
primarily due to a decrease in accrued expenses related to the payout of $5
million of the EDS arbitration proceeds to NPDC in 2005 which were accrued for
in 2004. This decrease in changes in other operating items was partially offset
by favorable changes in working capital.
Cash Flows from Investing Activities
Cash used by investing activities was $0.8 million for the nine months ended
September 30, 2005 compared to cash used by investing activities of $0.3 million
for the same period of 2004. The increase in cash used by investing activities
is primarily due to proceeds from the sale of marketable securities of
approximately $1.0 million in 2004 that did not recur in 2005. This increase in
cash used by investing activities was offset by a decrease in capital
expenditures for property, plant and equipment of approximately $0.5 million
during the nine months ended September 30, 2005 compared to the same period of
2004.
Cash Flows from Financing Activities
Cash used by financing activities was $2.8 million for the nine months ended
September 30, 2005 compared to cash provided by financing activities of $0.5
million for the same period of 2004. The increase in cash used by financing
activities is primarily due to the repayment by General Physics of its
short-term borrowings of $6.1 million offset by short-term borrowings by GSE of
approximately $1.2 million during the nine months ended September 30, 2005. This
use of cash was offset by net cash proceeds of $2.0 million in 2005 in
connection with GSE's issuance of a subordinated convertible note prior to the
Company's spin-off of GSE, compared to repayments of long-term debt by the
Company of $0.7 million in 2004. Additionally, cash proceeds from the exercise
of employee stock options increased by $0.8 million during the nine months ended
September 30, 2005 compared to the same period of 2004. In connection with the
spin-off of GSE on September 30, 2005, the Company's cash balance decreased by
$804,000 as a result of GSE no longer being consolidated with the Company
effective with the spin-off.
LONG-TERM DEBT AND SHORT-TERM BORROWINGS
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
23
million. The Gabelli Notes are secured by a mortgage on the Company's former
property located in Pawling, New York which was distributed to NPDC in the
spin-off. In addition, at any time that less than $1.9 million principal amount
of the Gabelli Notes are outstanding, the Company may defease the obligations
secured by the mortgage and obtain a release of the mortgage.
The Company has a five-year 5% note due in full on October 21, 2008 in the
principal amount of $5,250,955 to ManTech International. Interest is payable
quarterly. Each year during the term of the note, the holder of the note has the
option to convert up to 20% of the original principal amount of the note into
common stock of the Company at the then market price of the Company's common
stock, but only in the event that the Company's common stock is trading at $10
per share or more. In the event that less than 20% of the principal amount of
the note is not converted in any year, such amount not converted will be
eligible for conversion in each subsequent year until converted or until the
note is repaid in cash.
General Physics has a three-year $25 million Credit Agreement with a bank that
expires on August 13, 2006 with annual renewal options and is secured by certain
assets of General Physics. The interest rate on borrowings under the Credit
Agreement is at the daily LIBOR Market Index Rate plus 3%, which was 6.84% as of
September 30, 2005. The Credit Agreement also contains certain restrictive
covenants. General Physics is currently restricted from paying dividends and
management fees to the Company in excess of $1.0 million in any fiscal year. The
Company repaid in full the $6.1 million outstanding under the Credit Agreement
as of December 31, 2004 in January of 2005, using the proceeds received from the
EDS arbitration award (see Note 9 to the condensed consolidated financial
statements). As of September 30, 2005, the Company had no borrowings outstanding
under the Credit Agreement and there was approximately $19,313,000 of available
borrowings based upon 80% of eligible accounts receivable and 80% of eligible
unbilled receivables. As of September 30, 2005, GSE had borrowings of $1,182,000
and a letter of credit for $10,000 under General Physics' Credit Agreement,
under which $1,500,000 was allocated for use by GSE. The Company guarantees
GSE's borrowings under the Credit Agreement through August 13, 2006.
CONTRACTUAL OBLIGATIONS
Effective April 11, 2005, General Physics entered into employment agreements
with certain of its officers, resulting in committed compensation of
approximately $2.0 million annually. These agreements have employment terms
expiring in 2007, provide for grants of restricted stock units pursuant to the
Company's 2003 Incentive Stock Plan, and contain non-compete covenants and
change of control and termination provisions.
NEW ACCOUNTING STANDARD
In December 2004, the FASB issued SFAS No. 123 - Revised (SFAS No. 123R),
Share-Based Payment, which revises SFAS No. 123, Accounting for Stock-Based
Compensation, and supersedes APB No. 25, Accounting for Stock Issued to
Employees. Currently, the Company does not record compensation expense for
certain stock-based compensation. Under SFAS No. 123R, the Company will measure
the cost of employee services received in exchange for stock, based on the
grant-date fair value (with limited exceptions) of the stock award. Such cost
will be recognized over the period during which the employee is required to
provide service in exchange for the stock award (usually the vesting period).
The fair value of the stock award will be estimated using an option-pricing
model, with excess tax benefits, as defined in SFAS No. 123R, being recognized
as an addition to paid in capital. SFAS No. 123R was to be effective as of July
1, 2005. However, based on Final Rule 74 issued by the Securities and Exchange
Commission in April 2005, which delayed the implementation of SFAS No. 123R, the
Company plans to adopt SFAS No. 123R effective January 1, 2006. The Company
expects to adopt SFAS No. 123R using the Modified Prospective Application method
without restatement of prior periods. Under this method, the Company will begin
to amortize compensation cost for the remaining portion of its outstanding
24
awards on the adoption date for which the requisite service has not yet been
rendered. Compensation cost for these awards will be based on the fair value of
those awards as disclosed on a pro-forma basis under SFAS 123 in Note 3, Stock
Based Compensation. The Company will account for awards that are granted,
modified, or settled after the adoption date in accordance with SFAS No. 123R.
The Company is currently in the process of evaluating the impact of SFAS No.
123R on its consolidated financial statements.
FORWARD-LOOKING STATEMENTS
The forward-looking statements contained herein reflect GP Strategies'
management's current views with respect to future events and financial
performance. We use words such as "expects", "intends" and "anticipates" to
indicate forward-looking statements. These forward-looking statements are
subject to certain risks and uncertainties that could cause actual results to
differ materially from those in the forward-looking statements, all of which are
difficult to predict and many of which are beyond the control of GP Strategies,
including, but not limited to, our 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.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company has no material changes to the disclosure on this matter made in its
report on Form 10-K/A for the fiscal year ended December 31, 2004.
ITEM 4. CONTROLS AND PROCEDURES
We carried out an evaluation, under the supervision and with the participation
of our management including our Chief Executive Officer and our Chief Financial
Officer, of the effectiveness of the design and operation of our disclosure
controls and procedures pursuant to Rule 13-15(b) of the Securities Exchange Act
of 1934, as amended. Based upon that evaluation and the material weaknesses
described below, the Chief Executive Officer and Chief Financial Officer
concluded that the Company's disclosure controls and procedures were not
effective as of the date covered by this report.
As discussed more fully in Item 9A of our Annual Report on Form 10-K/A-2 dated
April 29, 2005, for the year ended December 31, 2004, in connection with our
audit of our consolidated financial statements for the fiscal year ended
December 31, 2004, we determined that the Company's policies and procedures did
not provide for adequate management oversight and review of the Company's income
tax accounting. This lack of adequate management oversight and review of the
Company's income tax accounting resulted in material errors in the Company's
income tax provision, which were identified and corrected prior to the issuance
of the consolidated financial statements for the year ended December 31, 2004.
This deficiency represents more than a remote likelihood that a material
misstatement of the Company's annual or interim financial statements would not
have been prevented or detected.
The Company's policies and procedures did not provide for adequate management
oversight and review of the Company's consolidated financial statements and
footnote disclosures. In addition, the Company did not have adequate technical
resources to ensure the timely completion and review of its consolidated
financial statements and footnote disclosures. These deficiencies resulted in
material errors in the consolidated financial statements, primarily the number
of weighted average common shares outstanding used in the earnings per share
calculation, the presentation of cash flows from operating and financing
activities, and certain financial statement footnote disclosures related to
income taxes and stock-based compensation, which were identified and corrected
prior to the issuance of the 2004 consolidated financial statements. These
deficiencies represent more than a remote likelihood that a material
misstatement of the Company's annual or interim financial statements would not
have been prevented or detected.
Based on the material weaknesses described above, management concluded that the
Company's internal control over financial reporting was not effective as of
December 31, 2004. This assessment is based on management's conclusion that as
of December 31, 2004, there was more than a remote likelihood that a material
misstatement of the Company's annual or interim financial statements would not
be prevented or detected on a timely basis by Company employees in the normal
course of performing their assigned functions.
As a result, we implemented changes in certain of our internal controls over
financial reporting during the nine months ended September 30, 2005, as follows:
- The Company has, subsequent to December 31, 2004, revised its
processes and procedures to prepare the consolidated income tax
provision and the consolidated financial statements and footnote
disclosures, and implemented additional management review controls
over the related processes.
- The Company hired a Director of Financial Reporting who is dedicated
to the Company's financial reporting requirements.
26
We will continue to evaluate the effectiveness of our disclosure controls and
procedures and our internal controls over financial reporting on an ongoing
basis, and will take further action as appropriate. However, there can be no
assurance that our controls and procedures will prevent or detect material
misstatement of the Company's annual or interim financial statements.
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PART II. OTHER INFORMATION
ITEM 6. EXHIBITS
31.1 Certification of Chief Executive Officer and Chief Financial Officer of
the Company dated November 14, 2005 pursuant to Securities and Exchange
Act Rule 13d-14(a)/15(d-14(a), as adopted pursuant to Section 302 and 404
of the Sarbanes-Oxley Act of 2002.*
32.1 Certification of Chief Executive Officer and Chief Financial Officer of
the Company dated November 14, 2005 pursuant to 18 U.S.C. Section 1350 as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*
----------
* Filed herewith
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed in its behalf by the
undersigned thereunto duly authorized.
GP STRATEGIES CORPORATION
November 14, 2005 /s/ Scott N. Greenberg
----------------------------------------
Chief Executive Officer and
Chief Financial Officer
29