UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K [X] Annual Report Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934 For the fiscal year ended December 31, 2004 or [ ] Transition Report Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934 10-K/A

(Amendment No. 1)

x

Annual Report Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934

For the fiscal year ended December 31, 2006

o

Transition Report Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934

For the transition period from ________________ to ________________

Commission File Number 1-7234

GP STRATEGIES CORPORATION (Exact
(Exact name of Registrant as specified in its charter)

Delaware

13-1926739 (State

(State of Incorporation) (I.R.S.

(I.R.S. Employer Identification No.)

777 Westchester Avenue, White Plains, NY 10604 (Address

6095 Marshalee Drive, Suite 300, Elkridge, MD

21075

(Address of principal executive offices) (Zip

(Zip Code)

(914) 249-9700 Registrant's

(410) 379-3600

Registrant’s telephone number, including area code:

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class

Name of each exchange on which registered: ------------------- ------------------------------------------

Common Stock, $.01 par value

New York Stock Exchange, Inc.

Securities registered pursuant to Section 12(g) of the Act:       None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes   o No   x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes   o No   x

Indicate by check mark whether the Registrantregistrant (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   Xx No   ----- ----- o

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'sregistrant’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.o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.  See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer  o

Accelerated filer   x

Non-accelerated filer  o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12(b)-2 of the Exchange Act).Yes   Xo No   ----- ----- x

The aggregate market value of the outstanding shares of the Registrant'sRegistrant’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, 20042006 was approximately $83,228,000. $110,447,000.

The number of shares outstanding of each of the Registrant'sregistrant’s Common Stock and Class B Stock as of March 10, 2005: February 28, 2007:

Class

Outstanding ----- -----------

Common Stock, par value $.01 per share 16,736,262

16,423,493 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.

None.




TABLE OF CONTENTS

PAGE ---- PART I Item 1. Business 3 Item 2. Properties 17 Item 3. Legal Proceedings 18 Item 4. Submission of Matters to a Vote of Security Holders 19 PART II Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters 20 Item 6. Selected Financial Data 22 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 23 Item 7A. Quantitative and Qualitative Disclosures About Market Risk 37 Item 8. Financial Statements and Supplementary Data 38 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 91 Item 9A. Controls and Procedures Item 9B. Other Information 91

PART III

Item 10.

Directors, and Executive Officers of the Registrant * 92 and Corporate Governance

Item 11.

Executive Compensation * 92

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters* 92 Matters

Item 13.

Certain Relationships and Related Transactions* 92 Transactions, and Director Independence

Item 14.

Principal AccountantAccounting Fees and Services* 92 Services

PART IV

Item 15.

Exhibits and Financial Statement Schedules 92 SIGNATURES 94 REPORTS OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMS 95 EXHIBIT INDEX 96

Signatures

Exhibit Index

* To be incorporated

EXPLANATORY NOTE

The terms “we,” “our,” “us,” “GP Strategies” and “the Company” refer to GP Strategies Corporation and subsidiaries.

This Amendment No. 1 on Form 10-K/A (the “Amendment”) amends our annual report on Form 10-K for the year ended December 31, 2006, originally filed on March 14, 2007 (the “Original Filing”).  We are filing this Amendment to include the information required by reference fromPart III and not included in the Original Filing as we will not file our definitive proxy statement within 120 days of the end of our fiscal year ended December 31, 2006.  In addition, in connection with the filing of this Amendment and pursuant to the rules of the Securities and Exchange Commission (SEC), we are including with this Amendment certain currently dated certifications.  Accordingly, Item 15 of Part IV has also been amended to reflect the filing of these currently dated certifications.

Except as described above, no other changes have been made to the Original Filing.  This Amendment continues to speak as of the date of the Original Filing, and we have not updated the disclosures contained therein to reflect any events which occurred at a date subsequent to the filing of the Original Filing.




PART III

Item 10.Directors, Executive Officers and Corporate Governance

The following table sets forth certain information regarding our directors and executive officers as of April 13, 2007:

Name

Age

Position

Scott N. Greenberg (1)

50

Chief Executive Officer; Director

Harvey P. Eisen (1), (2), (3)

64

Chairman of the Board of Directors

Jerome I . Feldman (1)

78

Director

Marshall S. Geller (1), (2), (3), (4)

68

Director

Richard C. Pfenniger, Jr. (2), (3), (4)

51

Director

Ogden R. Reid (4)

81

Director

Douglas E. Sharp

48

President

Sharon Esposito-Mayer

40

Executive Vice President & Chief Financial Officer

Karl Baer

47

Executive Vice President

L. Thomas Davis

59

Executive Vice President

Kenneth L. Crawford

48

Senior Vice President, General Counsel & Secretary


(1)          Member of the Executive Committee.

(2)          Member of the Compensation Committee.

(3)          Member of the Nominating / Corporate Governance Committee.

(4)          Member of the Audit Committee.

Scott N. Greenberg has been a Director of the Company since 1987, President from 2001 until February 2006 and Chief Executive Officer since April 2005.  He was Chief Financial Officer from 1989 until December 2005, Executive Vice President from 1998 to 2001, Vice President from 1985 to 1998, and has held various other positions since joining the Company in 1981.  He has been a Director of GSE Systems, Inc. (“GSE”), a global provider of real-time simulation and training solutions, since 1999 and was a Director of Five Star Products, Inc. (“Five Star”), a paint and hardware distributor, from 1998 to 2003 and a Director of Valera Pharmaceuticals, Inc. (“Valera”), a specialty pharmaceutical company, until January 2005.  Mr. Greenberg has also been a Director and Chief Financial Officer of National Patent Development Corporation (“NPDC”), a holding company with interests in optical plastics, paint and hardware distribution services, since 2004.

Harvey P. Eisen has been a Director since 2002 and Chairman of the Board since April 2005.  He has been Chairman and Managing Member of Bedford Oak Advisors, LLC since 1998. Prior thereto, Mr. Eisen served as Senior Vice President of Travelers, Inc. and of Primerica prior to its merger with Travelers in 1993. Mr. Eisen has over thirty years of asset management experience. Mr. Eisen is a Trustee of the University of Missouri Business School where he established the first accredited course on the Warren Buffet Principles of Investing. Mr. Eisen has also been a Director of NPDC since August 2004.

Jerome I. Feldman founded the Company in 1959 and currently serves on our Board of Directors.  He was Chief Executive Officer from 1959 until April 2005, Chairman of the Board from 1999 until April 2005 and President from 1959 until 2001. He has been Chairman of the Board of Five Star since 1994, a Director of GSE since 1994, Chairman of the Board of GSE since 1997, and Chairman of the Board and Chief Executive Officer of NPDC since 2004. He was a Director of Valera from January 2005 until April 2007.  Mr. Feldman is also Chairman of the New England Colleges Fund and a Trustee of Northern Westchester


Hospital Foundation.

Marshall S. Geller has been a Director of the Company since 2002.  Mr. Geller is Co-Founder and Senior Managing Director of St. Cloud Capital, a Los Angeles based private investment fund formed in December 2001.  He is also Chairman, Chief Executive Officer and Founding Partner of Geller & Friend Capital Partners, Inc., a private merchant bank formed in 1995.  Mr. Geller has spent more than 40 years in corporate finance and investment banking, including 21 years as a Senior Managing Director of Bear, Stearns & Co. with oversight of all operations in Los Angeles, San Francisco, Chicago, Hong Kong and the Far East.  Mr. Geller is currently Non-Executive Chairman of the Board of ShopNBC-ValueVision Media, Inc. (Nasdaq:VVTV) and is a director on the boards of 1st Century Bank N.A. (Nasdaq:FCNA), National Holdings Corp. (NHLD.OB), SCPIE Holdings, Inc. (NYSE.SKP), and is on the Board of Governors of Cedars Sinai Medical Center, Los Angeles.  He was previously the Interim Co-Chairman of Hexcel Corporation (NYSE:HXL) and Interim President and COO of Players International, Inc.  Mr. Geller also serves on the Dean’s Advisory Council for the Registrant'sCollege of Business & Economics at California State University, Los Angeles.

Richard C. Pfenniger, Jr. has been a Director of the Company since January 2005.  Mr. Pfenniger is the Chairman of the Board, President, and Chief Executive Officer of Continucare Corporation, a provider of primary care physician services.  Mr. Pfenniger was appointed President and Chief Executive Officer in October 2003 after having served as a member of the board of Continucare since March 2002 and as Chairman since September 2002.   Mr. Pfenniger was the Chief Executive Officer and Vice Chairman of Whitman Education Group, Inc., a provider of career-oriented higher education, from 1997 until June 2003.  From 1994 to 1997, Mr. Pfenniger served as the Chief Operating Officer of IVAX Corporation, and from 1989 to 1994 he served as the Senior Vice President-Legal Affairs and General Counsel of IVAX Corporation, a multi-national pharmaceutical company. Mr. Pfenniger currently serves as a Director of Cellular Technical Services Company, Inc.

Ogden R. Reid has been a Director of the Company since 1979. During the last five years, Mr. Reid has served as Chairman of the Council of American Ambassadors and as a Director of Valera (which directorship ended in April 2007). Prior to that, Mr. Reid had been Editor and Publisher of the New York Herald Tribune and of its International Edition; United States Ambassador to Israel; a six-term member of the United States Congress and a New York State Environmental Commissioner.

Douglas E. Sharp has been President of the Company since February 2006 and President of the Company’s principal operating subsidiary, General Physics Corporation (“General Physics”), since 2002.  Mr. Sharp has had a broad range of experience with General Physics having worked in all of the market sectors served by General Physics during his twenty-six year tenure there. Mr. Sharp, who is a mechanical engineer, had served as Chief Operating Officer of General Physics prior to becoming President and has held various other positions since joining General Physics in 1981.  He is a member of the American Society of Training and Development, American Society of Mechanical Engineers and the American Institute of Chemical Engineers. He was a Director of GSE from 2003 to 2006.

Sharon Esposito-Mayer has been Executive Vice President and Chief Financial Officer of the Company and General Physics since December 2005.  She was Vice President of Finance of General Physics from 2001 to 2005 and Director of Finance of General Physics from 1997 to 2000, and joined General Physics in 1995. Prior to joining General Physics, Ms. Esposito-Mayer held various financial positions with increasing responsibilities with a Fortune 1000 and other companies.

Karl Baer has been Executive Vice President, Manufacturing and Strategic Planning, of the Company since March 2006.  He has been an Executive Vice President of General Physics since 2004 and was a Vice President of General Physics from 1998 until 2004.  Mr. Baer has held various other positions since joining General Physics in 1987.  Prior to joining General Physics, Mr. Baer served in the U.S. Navy’s nuclear submarine force for over nine years.


L. Thomas Davis has been Executive Vice President, Homeland Security, Energy & Government, of the Company since March 2006.  He has been an Executive Vice President of General Physics since 2000 and was a Vice President of General Physics from 1988 to 1999.  Mr. Davis has held various other positions since joining General Physics in 1984.  Mr. Davis is a graduate of the U.S. Naval Academy.

Kenneth L. Crawford was appointed Senior Vice President, General Counsel and Secretary of the Company on April 11, 2007.  He has been a Senior Vice President of General Physics since March 2006, was a Vice President from 1991 to March 2006, and has been General Counsel since 1991 and Secretary since 1990.  Mr. Crawford joined General Physics in 1987.  Prior to that he was engaged in the private practice of law.

Compliance with Section 16(a) of the Exchange Act

Section 16(a) of the Exchange Act requires our officers and directors, and persons who own more than 10% of a registered class of our securities, to file reports of ownership and changes in ownership with the SEC and the New York Stock Exchange, and to furnish us with such reports.

Based solely on a review of copies of such reports for 2006, we believe that during 2006 all reports applicable to our officers, directors and greater than 10% beneficial owners were filed on a timely basis, with the exception of one late filing by L. Thomas Davis reporting the exercise of stock options on May 16, 2006, which was filed on May 22, 2006; and four late filings each by Matthew Zell and Scott Peppet (former directors who resigned in January 2006) due to the inadvertent filing of the incorrect form reporting the quarterly receipt of shares constituting directors fees for 2005, Annual Meeting of Shareholders. CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS The forward-looking statements contained herein reflect GP Strategies' management's current viewswhich filings were corrected on January 31, 2006.

Audit Committee

Our Audit Committee assists our Board in fulfilling its oversight responsibility with respect to future eventsour auditing, accounting, financial reporting, and internal control functions as set forth in its charter. The Audit Committee also approves the services provided by our independent registered public accounting firm, and monitors and evaluates its performance, the fees paid, and the compatibility of the non-audit services provided by the firm with maintaining the firm’s independence.  Our Audit Committee currently consists of Ogden R. Reid, Chairman, Marshall S. Geller and Richard C. Pfenniger, Jr.  The Board of Directors has determined that Mr. Pfenniger qualifies as an “audit committee financial performance. expert” under applicable SEC regulations and that all three members of the Audit Committee are independent under the NYSE listing standards.

Code of Ethics

We use words such as "expects", "intends"have adopted a Code of Business Conduct and "anticipates" to indicate forward-looking statements. These forward-looking statements are subject to certain risksEthics for our directors, officers 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,employees, including, but not limited to, the Chief Executive Officer and the Chief Financial Officer and other senior managers in our inabilityaccounting and finance departments.  A copy of this Code of Business Conduct and Ethics can be found on our website at www.gpstrategies.com.  If we make any substantive amendments to generate fundsthe Code of Ethics for our executive officers or directors or grant any waiver from a provision of the Code of Ethics for our executive officers or directors, we will within four (4) business days disclose the nature of such amendment or waiver in a Report on Form 8-K or on our website at www.gpstrategies.com.

Stockholder Recommendations for Board Nominees

Our Nominating/Corporate Governance Committee identifies individuals qualified to be Board members, evaluates any stockholder recommendations for Board membership, and develops and recommends corporate governance policies and procedures. The charter for our Nominating/Corporate Governance Committee is


available on our website at www.gpstrategies.com. We did not implement any changes to our process for stockholder recommendations of director nominees during 2006.

Item 11.Executive Compensation

Compensation Committee

The Compensation Committee of the Board of Directors consists of three non-employee directors.  The charter of the Compensation Committee may be viewed by sellingaccessing the “Corporate Governance” page of our website and clicking on “Committee and Charter Info.”  The Compensation Committee is responsible for establishing and administering our policies governing the compensation for our executive officers and directors.  The responsibilities of the Compensation Committee include the following:

·                  Develop guidelines and review and approve corporate goals relevant to the compensation of the Chief Executive Officer, evaluate the Chief Executive Officer’s performance in light of these goals and objectives, and set the Chief Executive Officer’s compensation based on this evaluation;

·                  Produce an annual report on executive compensation for inclusion in our proxy statement, in accordance with applicable rules and regulations;

·                  Make recommendations to the Board with respect to the compensation of our executive officers and incentive-compensation plans and equity-based plans, and establish criteria for the granting of stock-based compensation to our officers and other employees, and review and approve the granting of stock-based compensation in accordance with such criteria;

·                  Review director compensation levels and practices, and recommend from time to time,  changes in such compensation levels and practices to the Board with equity ownership of the Company encouraged;

·                  Annually review and reassess the adequacy of the charter of the Compensation Committee and recommend any assetsproposed changes to the Board for approval; and

·                  Make recommendations to the Board with respect to (a) committee member qualifications, (b) committee member appointments and removals, (c) committee structure and operations, and (d) committee reporting to the Board.

The Compensation Committee is responsible for making compensation decisions regarding the Executive Management Team, which includes the Chief Executive Officer, the President, the Chief Financial Officer, and our other executive officers.  The Compensation Committee is also involved in making compensation decisions regarding non-executive officers of our principal operating entity, General Physics, with a rank of Vice President or above.

Topics discussed by the Compensation Committee during 2006 meetings included, but were not limited to, the following:

·                       Competitive compensation and awards for the Executive Management Team and our non-employee directors;

·                       Review and approval of stock awards, bonus awards and salary changes for non-executive officers with a rank of Vice President or above;

·        Review of promotions of non-executive officers with a rank of Vice President or above; and

·                       Review of employment agreements for executive officers and non-executive officers with a rank of vice president or above.


None of the members of the Compensation Committee is a current or former officer or employee of the Company.

Compensation Discussion & Analysis

Overview

This Compensation Discussion and Analysis explains our compensation philosophy, policies and practices with respect to our Chief Executive Officer, Chief Financial Officer, and the other three most highly-compensated executive officers, which are collectively referred to as the named executive officers. This discussion focuses on the information contained in the following tables and related footnotes and narrative discussions for primarily the last completed fiscal year, but we also describe compensation actions taken before or after the last completed fiscal year to the extent it enhances the understanding of our executive compensation disclosure.

Compensation Philosophy and Objectives

The Compensation Committee’s overall goals with respect to executive officers are to provide compensation programs designed to achieve the following objectives:

·                  Attract and retain talented and dedicated executives;

·                  Motivate and reward executives whose knowledge, skills, potential and performance are critical to our success; and

·                  Align the interests of our executive officers and shareholders by motivating executive officers to increase shareholder value and rewarding executive officers when shareholder value increases.

The Compensation Committee believes that the most effective compensation program is one that provides competitive base pay, rewards the achievement of goals and objectives, and provides an incentive for retention. The principal elements of our executive compensation program are base salary, annual cash incentives, long-term equity incentives (the vesting of which may accelerate upon termination of employment and/or a change in control), other benefits and perquisites, and post-termination severance compensation.

Setting Executive Compensation

We subscribe annually to a number of compensation data resources to evaluate our salaries compared to those in the marketplace, including resources published by CompAnalyst, Western Management Group and the Institute of Management & Administration.  In addition, in 2006, to assist management and the Compensation Committee in assessing and determining competitive compensation packages, we engaged compensation consultants to evaluate our base compensation and bonus structure for our executive officers and other key employees.  The compensation consultant’s analysis (the “Compensation Benchmark Analysis”) compared the base level salary and bonus compensation structure of our executive officers and other key employees to those of executives in similar positions with similar responsibilities as described in executive compensation surveys obtained from WTPF, Mercer Human Resource Consulting, Culpepper and others.  The determination by the consultants of relevant similar positions was based on business focus, job descriptions, and revenue size.  The surveys provided base salary and bonus compensation data.  The Compensation Committee reviewed the Compensation Benchmark Analysis, which included the base salary and total compensation for each of our executive officers and similar data in the 25th percentile, 50th percentile, and 75th percentile for executives in similar positions covered by the survey. In general, our objective is to compensate our executive officers at levels between the 50th and 75th percentiles for executives in similar positions.  The Compensation Committee has sometimes deemed it


appropriate to compensate certain executives at levels exceeding the 50th — 75th percentile for executives in similar positions at other firms due to the executive’s experience, scope of responsibility, accountability and impact on our operations, and the impact their departure could potentially have on our performance.

Except as described below, our compensation committee has not adopted any formal or informal policies or guidelines for allocating compensation between long-term and currently paid out compensation, between cash and non-cash compensation, or among different forms of non-cash compensation.

Elements of Compensation

Base Salary

Salary levels are typically considered annually as part of our performance review process as well as upon promotion or other change in job responsibility. The Compensation Committee, with input from the Chief Executive Officer, reviews all competitive, individual and Company performance data in order to make compensation decisions that will incentivize, retain and maintain a competitive standing for each executive officer, but not place such officer outside the compensation parameters for peer group firms.  The Compensation Committee considers several factors when adjusting an executive’s salary, including the executive’s market value and prospective value to us, the knowledge, experience and accomplishments of the executive, the executive’s level of responsibility, and the compensation levels for individuals with similar credentials.  In 2006, the Compensation Committee utilized the Compensation Benchmark Analysis to assist in determining the adjustment to each executive’s annual base salary. The Compensation Benchmark Analysis compared our executive compensation with the executive compensation at a number of similarly sized companies, analyzing various factors including revenues, responsibilities, and markets served.  The Compensation Committee compared compensation of our executive officers to that of executives in comparable positions with comparable responsibilities to ensure the compensation of our executive officers was competitive with that of the marketplace.  Our Chief Executive Officer recommended salary adjustments for the executive officers to the Compensation Committee and provided the Compensation Committee with supporting documentation from the Compensation Benchmark Analysis.

Cash-Based Incentive Compensation (Bonus)

The annual incentive compensation award for 2006 was a discretionary cash bonus awarded to our executives based on performance against Company financial and operational performance objectives for the year and the achievement of individual annual performance objectives. The discretionary annual bonus is paid in cash in an amount reviewed and approved by the Compensation Committee in March or April following completion of each fiscal year, with advice from the Chief Executive Officer. The annual discretionary bonus is ordinarily paid in a single installment in March or April following the completion of the given fiscal year.  Information provided by the Compensation Benchmark Analysis is considered when determining bonus awards, along with performance of any Company business unit(s) for whom the executive is responsible (viewed on the basis of financial performance against budget and achievement of employee training, appraisal and retention goals), overall Company financial performance, and the executive’s individual performance.

The cash bonuses payable to our Chief Executive Officer and to our President may be based upon a formula contained in their employment agreements.  The formula ties the bonus payable to them to increases in General Physics’ earnings before income taxes, depreciation and amortization (“EBITDA”) compared to the prior year, with higher bonus amounts payable for increases in EBITDA of more than 10% compared to the prior year.  The maximum bonus for any calendar year is equal to 50% of such executive officer’s base salary for that year.  For 2006, the Compensation Committee determined that the bonuses that would have been received based upon applying the formula solely based upon General Physics’ financial performance (the “Employment Agreement Bonuses”) did not adequately compensate the Chief Executive Officer or the President for their respective performance and awarded discretionary cash bonuses (the “Discretionary Bonuses”) based upon the financial performance of the Company, on a consolidated basis. The Employment Agreement Bonuses and the Discretionary Bonuses are reflected in the columns of the Summary Compensation Table entitled “Non-Equity Incentive Plan Compensation” and “Bonus”, respectively.


Long-term Equity Incentive Compensation

Our Compensation Committee also grants to the named executive officers equity compensation under our 1973 Non-Qualified Stock Option Plan and our 2003 Incentive Stock Plan. Equity compensation for the named executive officers, which has historically taken the form of stock options and restricted stock or restricted stock units, is designed to align the interests of our executives with our investors as well as to retain the executives. Equity grants are also intended to drive long term performance, in that the value ultimately realized is linked to stock price appreciation. Option grants have no value without stock price appreciation, and restricted stock has value at grant that can increase with stock price appreciation. Thus, the Compensation Committee believes that equity grants should constructively influence management’s motivation to enhance the value of our common stock.

We do not have a formal policy for issuing equity compensation and do not always grant equity awards on an annual basis. Occasionally, the Compensation Committee awards equity compensation to supplement our executive officers’ compensation to ensure that total compensation is competitive in the marketplace and to align compensation with long term Company goals and objectives.

·Stock Options

We have not granted any stock options to our named executive officers in the last five years. Pursuant to our stock plans, our Compensation Committee may in the future elect to make grants of stock options to our executive officers pursuant to our stock plans.

·Restricted Stock and Restricted Stock Units

In March 2005, we granted Mr. Greenberg and Mr. Sharp 42,000 and 34,000 shares of restricted stock, respectively. These awards were fully vested at grant because they were attributable to their 2004 service, but the shares have a restriction on sale until December 31, 2007.

In April 2005, we also granted both Ms. Esposito-Mayer and Mr. Baer 23,000 restricted stock units each, which vest over five years from the date of grant. In addition, in April 2005 we granted Andrea Kantor, the Company’s then Executive Vice President and General Counsel, 20,000 restricted stock units which vested 50% on December 31, 2005 and 50% on December 31, 2006.

Other Benefits

We also provide our named executive officers with the following other benefits which are part of our overall compensation program and which we believe are consistent with the types of benefits offered by competitors:

·Retirement Saving Plan: We maintain a defined contribution 401(k) plan which permits all eligible employees to participate. The plan requires us to match at least 25% of the participants’ contributions, up to the first 7% of base compensation for employees who have completed one year of service.  We may make additional matching contributions at our discretion.  In 2006, we matched 50% of participants’ contributions in cash and/or shares of our common stock, up to the first 7% of participants’ base compensation.

·Health and Welfare Benefits:  All full-time employees, including our named executive officers, may participate in our health and welfare benefit programs, including medical, dental and vision care coverage, disability insurance and life insurance.

·Life Insurance Premiums: Life insurance policies, in excess of the standard life insurance plans


offered to full-time employees, are offered to the named executive officers.  The executive life insurance policies provide coverage up to three times the executive’s annual base salary.  The premiums are fully paid by the Company.  The policy can be transferred to the executive upon termination of employment at the executive’s election.

·Automobile Allowances: During 2006, Mr. Greenberg, Ms. Esposito-Mayer, Mr. Sharp and Ms. Kantor used vehicles leased or owned by the Company for both business and personal use; and we provided Mr. Baer with a monthly car allowance in lieu of a Company leased vehicle.

Employment Agreements, Severance Benefits and Change in Control Provisions

Mr. Greenberg, Ms. Esposito-Mayer and Mr. Sharp have written employment agreements which provide for separation payments and benefits upon certain types of termination of employment. Post-termination payments with respect to each of these executives are set forth in their respective employment agreements. The termination provisions for these executives are summarized starting on page 11 in the “Potential Payments upon Termination or Change in Control” section. Our Compensation Committee has recently approved amendments to Mr. Greenberg’s and Mr. Sharp’s employment agreements which would extend their terms, and the Committee is considering offering new employment agreements to certain of our executive officers.

Tax Deductibility of Executive Compensation

Limitations on deductibility of compensation may occur under Section 162(m) of the Internal Revenue Code which generally limits the tax deductibility of compensation paid by a public company to its chief executive officer and certain other highly compensated executive officers to $1 million in the year the compensation becomes taxable to the executive officer.  There is an exception to the limit on deductibility for performance-based compensation that meets certain requirements. Compensation paid under our incentive plans is generally fully deductible for federal income tax purposes. However, the Compensation Committee may approve compensation that exceeds the $1.0 million limitation in order to ensure competitive levels of total compensation for our executive officers.

Historically, the Company has not paid compensation that would cause Section 162(m) to affect deductibility.  In 2006, due to the vesting of restricted stock units and the exercise of stock options, two named executive officers received compensation in excess of $1 million. The compensation decisions made in 2006 were made without respect to Section 162(m) because the Compensation Committee did not expect it to have a significant impact on deductibility.  From time to time, the Compensation Committee may consider the potential impact of Section 162(m) and, if appropriate, will consider its impact in making compensation decisions.

8




Summary Compensation Table

The following table sets forth all compensation earned by each of the named executive officers for the 2006 fiscal year. The named executive officers are the Chief Executive Officer and the Chief Financial Officer, and the three other most highly compensated officers who were serving as executive officers at December 31, 2006.

Name and principal position

 

Year

 

Salary ($)

 

Bonus ($) (1)

 

Stock
Awards ($) (
2)

 

Option
Awards ($) (
2)

 

Non-Equity
Incentive Plan
Compensation
($) (
3)

 

All Other
Compensation
($) (
4)

 

Total ($)

 

Scott N. Greenberg Chief Executive Officer

 

2006

 

305,202

 

34,800

 

 

 

40,200

 

18,150

 

398,352

 

Sharon Esposito-Mayer Executive Vice President and Chief Financial Officer

 

2006

 

204,792

 

40,000

 

34,661

 

5,715

 

 

14,283

 

299,451

 

Douglas E. Sharp President

 

2006

 

336,016

 

31,000

 

 

25,148

 

39,000

 

15,033

 

446,197

 

Andrea D. Kantor (5) Executive Vice President & General Counsel

 

2006

 

239,596

 

 

87,449

 

 

 

14,375

 

341,420

 

Karl Baer
Executive Vice President

 

2006

 

230,625

 

40,000

 

34,661

 

10,059

 

 

16,762

 

332,107

 


Notes to 2006 Summary Compensation Table:

(1)               Discretionary bonus for 2006. For Mr. Greenberg and Mr. Sharp, the amounts indicated reflect the dollar amounts in excess of the bonus amounts payable under their respective employment agreements, which amounts are shown as Non-Equity Incentive Plan Compensation.

(2)               Reflects the dollar amount expensed for financial statement reporting for the year ended December 31, 2006 in accordance with SFAS No. 123R, with the exception that the amount shown in the table assumes no forfeitures. Stock-based compensation expense consists of stock options and restricted stock units granted prior to 2006. For other assumptions, see Note 13 of our Annual Report on Form 10-K filed with the SEC on March 14, 2007.

(3)               Bonus pursuant to employment agreement.

(4)               All other compensation includes GP Strategies’ matching contributions of cash and GP Strategies’ common stock under our Retirement Savings Plan, automobile lease payments and/or allowances, and life insurance premiums. A breakdown of these amounts is as follows:

Name

 

Company Matching
Contributions to
401(k) Plan ($)

 

Automobile
Payments or
Allowance ($)

 

Life Insurance
Premiums ($)

 

Total ($)

 

Scott N. Greenberg

 

7,500

 

7,569

 

3,081

 

18,150

 

Sharon Esposito-Mayer

 

6,603

 

6,702

 

978

 

14,283

 

Douglas E. Sharp

 

6,602

 

6,152

 

2,279

 

15,033

 

Andrea D. Kantor (5)

 

6,617

 

7,188

 

570

 

14,375

 

Karl Baer

 

7,372

 

8,400

 

990

 

16,762

 


(5)               Ms. Kantor resigned from the Company effective January 19, 2007.

9




Grants of Plan-Based Awards

The following table sets forth certain information with respect to non-equity incentive plan awards granted during the year ended December 31, 2006 to certain of our named executive officers:

 

 

 

 

Estimated Future Payouts Under Non-Equity Incentive Plan Awards

 

Name

 

Grant Date

 

Threshold ($)

 

Target ($)

 

Maximum ($)

 

Scott N. Greenberg(1)

 

N/A

 

 

40,200

 

152,601

 

Douglas E. Sharp(1)

 

N/A

 

 

39,000

 

168,008

 

Sharon Esposito-Mayer(2)

 

N/A

 

 

 

 

Karl Baer(2)

 

N/A

 

 

 

 


(1)             The amounts represent the target and maximum bonus payment levels payable pursuant to a formula in the executives’ employment agreements. The formula is based upon EBITDA of General Physics and is capped, for each executive, at 50% of his base salary. The actual total bonuses paid included a discretionary amount above target which is included in the spin-off,Bonus column of the Summary Compensation Table. See Compensation Discussion & Analysis.

(2)             The General Physics 2004 Bonus Plan provides that Business Unit and Group Leaders are eligible for bonuses based upon the achievement of certain Business Unit and individual targets, and that senior executives of General Physics and individuals not assigned to a Business Unit are eligible for discretionary bonuses awarded from a general bonus pool. Mr. Baer and Ms. Esposito-Mayer, as senior executives of General Physics, were eligible for discretionary bonuses from the general pool.

Outstanding Equity Awards at Fiscal Year-End

The following table sets forth certain information with respect to the value of all unexercised options and/or unvested restricted stock units previously awarded to our holding company structure,named executive officers as of December 31, 2006:

Option Awards

Stock Awards

Name

Number of
securities
underlying
unexercised
options (#)
exercisable

Number of
securities
underlying
unexercised
options (#)
unexercisable

Equity incentive
plan awards:
number of
securities
underlying
unexercised
unearned
options (#)

Option
exercise
price ($)

Option
expiration
date

Number of
shares or units
of stock that
have not vested
(#)

Market value of
shares or units
of stock that
have not vested
($) (
1)

Scott N. Greenberg

n/a

n/a

Sharon Esposito-Mayer

27,535

2,394

2,394

120

120

120

3.68

6.47

4.33

3.85

3.01

3.93

4/30/2007

7/1/2007

2/24/2010

2/1/2011

2/7/2012

12/10/2012

23,000 (2)

190,900

Douglas E. Sharp

47,887

5,000

5,986

120

120

6.47

8.70

4.33

3.85

3.01

7/1/2007

1/12/2008

2/24/2010

2/1/2011

2/7/2012

Andrea D. Kantor

n/a

n/a

Karl Baer

120

120

120

3.85

3.01

3.93

2/1/2011

2/7/2012

12/10/2012

23,000 (2)

190,900


(1)Market value is based on the closing market price of GP Strategies’ common stock on December 29, 2006 of $8.30 per share.

(2)Unvested stock units granted on April 11, 2005 vest 40% on April 5, 2007 and 20% each year thereafter.

10




Option Exercises and Stock Vested

The table below sets forth the number of shares issued upon option exercises, the value realized on option exercises, the number of shares of restricted stock vested, and the realized value upon vesting of the restricted stock by our named executive officers during fiscal year 2006.

 

 

Option Awards

 

Stock Awards

 

Name

 

Number of shares acquired 
on exercise
(#)

 

Value realized on 
exercise ($) (1)

 

Number of shares 
acquired on vesting 
(#)

 

Value realized on 
vesting ($) (2)

 

Scott N. Greenberg

 

48,326

 

593,791

 

 

 

Sharon Esposito-Mayer

 

 

 

 

 

Douglas E. Sharp

 

32,785

 

414,816

 

 

 

Andrea D. Kantor

 

22,249

 

296,896

 

10,000

 

83,000

 

Karl Baer

 

18,493

 

184,940

 

 

 


(1)

Represents the difference between the market price of GP Strategies’ common stock on the date of exercise and the exercise price of the stock options exercised.

(2)

Represents stock units which vested on December 31, 2006. Value realized upon vesting is based on the closing market price of GP Strategies’ common stock on December 29, 2006 of $8.30 per share.

Potential Payments Upon Termination or Change in Control

Description of Termination Provisions in Employment Agreements

We have employment agreements with Mr. Greenberg, Ms. Esposito-Mayer, and Mr. Sharp. The discussion and tables below reflect the estimated termination benefits that would be paid or accrue to each of the named executive officers in the event of the following termination scenarios:

·Termination for Cause — If we terminate the employment of one of the named executives for “cause,” as defined below, such executive would be entitled to unpaid base salary and continuation of benefits through the date of termination only.

“Cause” is defined under the employment agreements of Messrs. Greenberg and Sharp as follows:

·Willful and continued failure to continue to attractsubstantially perform his/her duties or obligations under the employment agreement (after notice and retain personnel, loss of business from significant customers, failure to keep pace with technology, changing economic conditions, competition, our abilitycure); or

·Willful engaging in misconduct which is materially monetarily injurious to implement procedures that will reduce the likelihood thatCompany.

“Cause” as defined under the employment agreement of Ms. Esposito-Mayer exists if such executive shall :


·Be convicted, plead guilty, or enter a plea of nolo contendere to a felony or a crime involving moral turpitude; or

·Commit any act or omit to take any action in bad faith and to the detriment of the Company; or

·Willfully and continually fail to perform her duties or obligations under any provision of the employment agreement in any material weaknessesrespect, and shall not correct such failure within ten days after receipt of written notice thereof; or

·Fail to perform her duties or obligations pursuant to the non-compete and confidential information provisions of her employment agreement in internal control over financial reporting will not occurany material respect.

·Termination upon disability — We may terminate the employment of a named executive officer in the future,event of such executive’s incapacity due to extended physical or mental illness. In the case of disability, the affected executive would be entitled to such executive’s unpaid base salary and thosecontinuation of benefits through the date of termination only. In the event of disability for Messrs. Greenberg or Sharp, the date of termination would be determined after which time the executive has been absent from his/her duties on a full-time basis for the entire period of six consecutive months, and within 30 days after notice of termination is given and he has not returned to the performance of his duties on a full-time basis. In the event of disability for Ms. Esposito-Mayer, the date of termination would be determined after which time as a result of a serious health condition (as defined in the Family and Medical Leave Act of 1993), and after giving effect to any reasonable accommodation required by law, the executive is unable fully to discharge her duties for a period of 90 consecutive days.

·Termination upon death — In the event of death, each of the named executive officers would be entitled to such executive officer’s full salary through the date of death and the Company shall pay to such executive officer’s spouse or estate the following: for Messrs. Greenberg and Sharp — an amount equal to their full salary for one year after the date of death; and for Ms. Esposito-Mayer —  her full salary through the end of the calendar month within which termination occurred plus her full salary for the following two calendar months, and for purposes of the vesting of any stock units outstanding and unvested as of the date of termination of her employment, she shall be deemed to have been employed through the remaining period under the employment agreement.

·Termination without cause, or for “good reason” or “just cause” — If we terminate a named executive officer’s employment without cause or a named executive officer terminates his/her employment for “good reason” or “just cause” (as defined below), then the named executive officer would be entitled to certain compensation discussed in detail below.

“Good reason” is defined under the employment agreements of Messrs. Greenberg and Sharp as follows:

·A change in control as defined in the employment agreement; or

·A management change in control as defined in the employment agreement; or

·A failure by the Company to comply with any material provision of the employment agreement which has not been cured within ten days after notice of such noncompliance has been given by the executive to the Company; or


·Any purported termination of the executive’s employment by the Company which is not effected pursuant to a notice of termination satisfying the requirements of the employment agreement.

Ms. Esposito-Mayer shall be deemed to have resigned for “Just Cause,” under the terms of her employment agreement, in the event that she resigns within 30 days following either:

·The Company without express written consent of the executive imposes any significant change in her function, duties, or responsibilities that is not consistent with him/her being an executive of the Company and fails to rescind or modify such change within 10 business days after receipt of written notice from the executive; or fails to make any material payment, or provide any material benefit to the executive pursuant to the employment agreement, and fails to correct any such deficiency within ten business days after receipt of written notice from the executive; or

·The Company shall breach any other risksterm of the employment agreement and uncertainties detailedshall not correct such failure or breach within thirty days after written notice from the executive.

Termination Payments under Mr. Greenberg’s Employment Agreement

If we terminate Mr. Greenberg’s employment without cause, or if he terminates his employment for “good reason” (as defined above) other than as a result of a management change in GP Strategies' periodic reportscontrol, the Company shall pay him his full salary and registration statementsprovide his benefits through the date of termination, pay his full bonus for the calendar year in which the date of termination occurs, and pay as severance an amount equal to his average annual cash compensation received from the Company during the three full calendar years immediately preceding the termination date, multiplied by the greater of (i) the number of years that would have been remaining in the employment period if his employment had not been terminated and (ii) three. In addition, all options to purchase common stock granted to him shall become fully vested and the Company shall provide him with continued benefits under all employee benefit plans and programs in which he was entitled to participate prior to the termination for a number of years equal to the greater of (i) the number of years remaining in the employment period if his employment had not been terminated and (ii) three.

If Mr. Greenberg terminates his employment as a result of a management change in control (as defined in the agreement), the Company shall pay him his full salary and provide his benefits through the date of termination, pay his full bonus for the calendar year in which the date of termination occurs, and pay as severance an amount equal to his average annual cash compensation received from the Company during the three full calendar years immediately preceding the termination date, multiplied by the greater of (i) the number of years that would have been remaining in the employment period if his employment had not been terminated and (ii) two. In addition, all options to purchase common stock granted to him shall become fully vested and the Company shall provide him with continued benefits under all employee benefit plans and programs in which he was entitled to participate prior to the termination for a number of years equal to the greater of (i) the number of years remaining in the employment period if his employment had not been terminated and (ii) two.

Termination Payments under Mr. Sharp’s Employment Agreement

If we terminate Mr. Sharp’s employment without cause, or if he terminates his employment for “good reason” (as defined above) other than as a result of a management change in control, the Company


shall pay him his full salary and provide his benefits through the date of termination, pay his full bonus for the calendar year in which the date of termination occurs, and pay as severance an amount equal to his average annual cash compensation received from the Company during the three full calendar years immediately preceding the termination date, multiplied by the greater of (i) the number of years that would have been remaining in the employment period if his employment had not been terminated and (ii) three. In addition, all options to purchase common stock granted to him shall become fully vested and the Company shall provide him with continued benefits under all employee benefit plans and programs in which he was entitled to participate prior to the termination for a number of years equal to the greater of (i) the number of years remaining in the employment period if his employment had not been terminated and (ii) three.

If Mr. Sharp terminates his employment as a result of a management change in control (as defined in the agreement), the Company shall pay him his full salary and provide his benefits through the date of termination, pay his full bonus for the calendar year in which the date of termination occurs, and pay as severance an amount equal to his average annual cash compensation received from the Company during the three full calendar years immediately preceding the termination date. In addition, all options to purchase common stock granted to him shall become fully vested and the Company shall provide him with continued benefits under all employee benefit plans and programs in which he was entitled to participate prior to the termination for one year.

Termination Provisions of Employment Agreement with Ms. Esposito-Mayer

If during the term of Ms. Esposito-Mayer’s employment agreement we terminate her employment without “cause” or Ms. Esposito-Mayer terminates her employment for “Just Cause,” in each case as defined above, she is entitled to her full salary and benefits for the longer of: (i) six months and (ii) the remaining period under her employment agreement, and for purposes of outstanding and unvested stock units, she shall be deemed to have been employed by the Company through April 10, 2008. In addition, upon the occurrence of a “Change in Control” or “Sale of the Company” (as defined in the employment agreement with Ms. Esposito-Mayer), all stock options to purchase common stock granted to her shall immediately become fully vested and exercisable, and all stock units granted to her shall immediately be paid in unrestricted shares of common stock. If Ms. Esposito-Mayer’s employment agreement is not renewed and, during the period beginning August 1, 2007 and ending April 10, 2008, we terminate her employment without “cause” or she resigns for “Just Cause,” in each case as defined in her employment agreement, for purposes of any stock units outstanding and unvested as of the date of termination of her employment she shall be deemed to have been employed through April 10, 2008.

14




The amounts shown in the table below assume that the noted triggering events occurred on December 31, 2006 with respect to Mr. Greenberg, Ms. Esposito-Mayer and Mr. Sharp. Other relevant assumptions and explanations are provided in the footnotes following the table. The amounts shown reflect only the additional payments or benefits that a named executive officer would have received upon the occurrence of the respective triggering events listed below; they do not include the value of payments or benefits that would have been earned, or any amounts associated with equity awards that would have vested absent the triggering event. As discussed above, none of the named executive officers receive additional compensation in the event of voluntary or involuntary termination for “cause” or in the event of disability.

Potential Post-Employment Payments

Name / Element of Compensation

 

Termination
due to Death

 

Termination
Without
Cause or for
Good Reason,
Excluding
Change in
Control

 

Termination
due to Change
in Control

 

Termination due
to Management
Change in
Control

 

Scott N. Greenberg

 

 

 

 

 

 

 

 

 

Salary

 

$

335,000

(1)

 

 

 

Severance

 

 

$

1,410,148

(2)

$

1,410,148

(2)

$

940,099

(3)

Bonus (4)

 

 

75,000

 

75,000

 

 75,000

 

Benefits continuation

 

 

22,571

(5)

22,571

(5)

15,619

(6)

 

 

 

 

 

 

 

 

 

 

Sharon Esposito-Mayer

 

 

 

 

 

 

 

 

 

Salary

 

$

35,833

(7)

$

125,417

(8)

 

 

Stock Units (9)

 

76,360

 

114,540

 

$

190,900

 

$

190,900

 

Benefits continuation

 

 

4,920

(10)

 

 

 

 

 

 

 

 

 

 

 

 

Douglas E. Sharp

 

 

 

 

 

 

 

 

 

Salary

 

$

325,000

(1)

 

 

 

Severance

 

 

$

1,251,574

(2)

$

1,251,574

(2)

$

417,191

(11)

Bonus (4)

 

 

70,000

 

70,000

 

70,000

 

Stock options

 

 

 

112,566

(12)

112,566

(12)

Benefits continuation

 

 

22,571

(5)

22,571

(5)

8,110

(13)

 

 

 

 

 

 

 

 

 

 

Andrea D. Kantor (14)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Karl Baer (15)

 

 

 

 

 


(1)

Represents one year of current salary as of December 31, 2006.

(2)

Represents severance payment pursuant to employment agreement which equals the average of his cash compensation for the last three calendar years multiplied by three.

(3)

Represents severance payment pursuant to employment agreement which equals the average of his cash compensation for the last three calendar years multiplied by two.

(4)

Represents bonus earned during the year ended December 31, 2006 which would be due to the executive if any of the applicable triggering events occurred on December 31, 2006.

(5)

Represents an estimate of the incremental cost to the Company for benefits continuation for three years subsequent to termination date.


(6)

Represents an estimate of the incremental cost to the Company for benefits continuation for two years subsequent to termination date.

(7)

Represents two full calendar months of current salary as of December 31, 2006.

(8)

Represents the portion of current salary through the end of the employment agreement on July 31, 2007 that would have been paid or accrued if the triggering event occurred as of December 31, 2006.

(9)

Represents the value of the number of stock units deemed to have vested for each triggering event. Value is based on the closing price of our common stock on December 29, 2006 of $8.30.

(10)

Represents an estimate of the incremental cost to the Company for benefits continuation through the end of the employment agreement on July 31, 2007.

(11)

Represents severance payment pursuant to employment agreement which equals the average of his cash compensation for the last three calendar years.

(12)

Pursuant to Mr. Sharp’s employment agreement, in the event of a change in control of the Company, he can elect to surrender his outstanding stock options for a cash payment equal to the excess of the fair market value on the termination date of the common stock issuable upon exercise of the options over aggregate exercise price of the options surrendered. The amount included in the table represents the fair value of Mr. Sharp’s outstanding options as of December 31, 2006 based on the closing price of our common stock on December 29, 2006 of $8.30. All of Mr. Sharp’s outstanding options were fully vested as of December 31, 2006.

(13)

Represents an estimate of the incremental cost to the Company for benefits continuation for one year subsequent to termination date.

(14)

Ms. Kantor resigned from the Company effective January 19, 2007.

(15)

Mr. Baer’s employment agreement ended on April 11, 2007. The Compensation Committee is currently considering offering new employment agreements to Mr. Baer and other executive officers of the Company.

Director Compensation

Our Board of Directors has adopted guidelines for the compensation of our non-employee directors. Effective July 1, 2006, our non-employee directors are paid a retainer of $25,000 per year. In addition, the Chairman of the Board receives an additional $40,000 per year; the Chairman of the Audit Committee receives an additional $15,000 per year; members of the Audit Committee receive an additional $5,000 per year; the Chairman of the Compensation Committee receives an additional $5,000 per year; and members of the Compensation Committee receive an additional $2,500 per year. These annual fees are prorated and paid on a quarterly basis. At the option of the directors, up to one-half of the fees may be paid in shares of our common stock.

In addition to the annual retainers, each non-employee director receives $1,500 for each Board meeting attended and $750 for each committee meeting attended, but only if the committee meeting is held on a different date than the Board meeting.

On September 14, 2006, we granted 2,000 shares of restricted stock to each non-employee director, which stock vests quarterly over one year subsequent to the grant date.

The following table shows the compensation earned by each director for the year ended December 31, 2006 (excluding Mr. Greenberg, whose compensation as Chief Executive Officer is shown above in the Summary Compensation Table):


Directors Compensation Table

Name

 

Fees earned or paid
in cash ($)

 

Stock awards ($) (1)

 

All other
compensation ($)

 

Total ($)

 

Harvey P. Eisen

 

35,125

 

23,155

 

 

58,280

 

Jerome I. Feldman

 

 

 

136,344

(2)

136,344

 

Marshall S. Geller

 

36,500

 

6,901

 

 

43,401

 

Richard C. Pfenniger, Jr.

 

32,750

 

9,402

 

 

42,152

 

Ogden R. Reid

 

39,000

 

6,901

 

 

45,901

 


(1)

Reflects the dollar amount expensed for financial statement reporting for the year ended December 31, 2006 in accordance with SFAS No. 123R for restricted stock awards granted on September 14, 2006 and annual director fees paid in shares of our common stock.

(2)

Compensation paid by GP Strategies pursuant to an employment agreement with Mr. Feldman, which expires on May 31, 2007. Pursuant to a management services agreement with NPDC, NPDC pays GP Strategies a management fee to cover a portion of the compensation of certain employees of GP Strategies who provide services to NPDC, which includes reimbursement of approximately 80% of Mr. Feldman’s compensation in 2006. The amount shown in the table is presented net of such reimbursed amounts. Mr. Feldman’s gross salary and other compensation for 2006 was $681,720 before reimbursement from NPDC (gross amount consists of salary of $538,542, life insurance premiums of $137,814, and Company matching contributions to the Retirement Savings Plan of $5,364). See Item 13, “Certain Relationships and Related Transactions, and Director Independence.”

Compensation Committee Interlocks and Insider Participation

Members of the Compensation Committee of the Board of Directors are Harvey P. Eisen, Marshall S. Geller, Chairman, and Richard C. Pfenniger, Jr. None of the members of the committee during 2006, (a) was an officer or employee of the Company, (b) was a former officer of the Company or (c) had any relationship requiring disclosure by the Company under any paragraph of Item 404 of Regulation S-K.

Compensation Committee Report

The Compensation Committee has reviewed and discussed with management the “Compensation Discussion and Analysis” included in this Form 10-K/A. Based upon this review and discussion, the Compensation Committee recommended to our Board of Directors that the “Compensation Discussion and Analysis” be included in this Form 10-K/A filed with the Securities and Exchange Commission. If any one or moreCommission for the fiscal year ended December 31, 2006.

COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS

Harvey P. Eisen

Marshall S. Geller

Richard C. Pfenniger, Jr.

17




Item 12.Security Ownership of these expectationsCertain Beneficial Owners and assumptions proves incorrect, actual results will likely differ materially from those contemplated byManagement and Related Stockholder Matters

Principal Stockholders

The following table sets forth 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 pricenumber of shares of our common stock beneficially owned as of April 13, 2007 by each person who is known by us to own beneficially more than 5% of our outstanding common stock.

Name and Address
Of Beneficial Owner

 

Amount and
Nature of
Beneficial Owner

 

Percent
of
_Class

 

 

 

 

 

 

 

Caxton Associates LLC
Princeton Plaza, Building 2
731 Alexander Road
Princeton, NJ 08540

 

1,388,034 shares

(1)

8.3%

 

 

 

 

 

 

 

Dimensional Fund Advisors LP
1299 Ocean Avenue
Santa Monica, CA 90401

 

1,311,383 shares

(2)

7.9%

 

 

 

 

 

 

 

Pequot Capital Management, Inc.
500 Nyala Farm Road
Westport, CT, 06880

 

1,215,000 shares

(3)

7.3%

 

 

 

 

 

 

 

Royce & Associates, LLC
1414 Avenue of the Americas
New York, NY 10019

 

857,100 shares

(4)

5.2%

 


(1)

Based on a Schedule 13G/A filed jointly by Caxton International Limited, GDK, Inc., A.R.T. Advisors LLC, Aaron Sosnick, Caxton Associates, LLC, Bruce S. Kovner, and Ross Taylor with the SEC on February 14, 2007.

(2)

Based on a Schedule 13G/A filed by Dimensional Fund Advisors LP (“Dimensional”) with the SEC on February 9, 2007. Dimensional has informed the Company that the shares are owned by advisory clients of Dimensional and that Dimensional disclaims beneficial ownership of such shares.

(3)

Based on a Schedule 13G filed by Pequot Capital Management, Inc. with the SEC on February 14, 2007.

(4)

Based on a Schedule 13G filed by Royce & Associates, LLC with the SEC on January 22, 2007.

Security Ownership of Directors and Named Executive Officers

The following table sets forth, as of April 13, 2007, the differences could be significant. We do not undertake to update any forward-looking statements madebeneficial ownership of common stock, by us. PART I ITEM 1: BUSINESS GENERAL DEVELOPMENT OF BUSINESS GP Strategies Corporation ("the Company" or "we") was incorporated in Delaware in 1959. The Company is a New York Stock Exchange listed company traded under the symbol GPX. 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,"each director, each of the named executive officers, and all directors and executive officers as a group.


Name of Beneficial Owner

 

Amount and
Nature of
Beneficial Owner

 

Percent of
Class(1)

 

Harvey P. Eisen

 

358,879

(2)

2.2%

 

 

 

 

 

 

 

Jerome I. Feldman

 

544,676

(3)

3.3%

 

 

 

 

 

 

 

Marshall S. Geller

 

215,145

 

1.3%

 

 

 

 

 

 

 

Scott N. Greenberg

 

120,037

(4)

*

 

 

 

 

 

 

 

Richard C. Pfenniger, Jr.

 

11,944

 

*

 

 

 

 

 

 

 

Ogden R. Reid

 

6,876

 

*

 

 

 

 

 

 

 

Douglas E. Sharp

 

117,292

(5)

*

 

 

 

 

 

 

 

Sharon Esposito-Mayer

 

34,972

(5)

*

 

 

 

 

 

 

 

Karl Baer

 

29,421

(5)

*

 

 

 

 

 

 

 

Directors and Executive Officers as a Group (11 persons)

 

1,487,988

(6)

8.9%

 


*Less than one percent.

(1)

Assumes for each beneficial owner and directors and executive officers as a group that all options are exercised in full only by the named beneficial owner or members of the group and no other options are exercised.

(2)

Includes 350,000 shares of common stock beneficially owned by Bedford Oak Partners, L.P. (“Bedford Oak”). Mr. Eisen is deemed to have beneficial ownership of such shares by virtue of his position as managing member of Bedford Oak Advisors, LLC, the investment manager of Bedford Oak.

(3)

Includes (i) 1,173 shares of common stock held by members of Mr. Feldman’s family, and (ii) 5,613 shares of common stock allocated to Mr. Feldman’s account pursuant to the provisions of our Retirement Savings Plan. Mr. Feldman disclaims beneficial ownership of the 1,173 shares of common stock held by members of his family.

(4)

Includes (i) 7,993 shares of common stock allocated to Mr. Greenberg’s account pursuant to the provisions of our Retirement Savings Plan and (ii) 4,000 shares of common stock held by members of his family. Mr. Greenberg disclaims beneficial ownership of the 4,000 shares held by members of his family.

(5)

Includes 59,113 shares for Mr. Sharp, 5,148 shares for Ms. Esposito-Mayer and 360 shares for Mr. Baer, issuable upon exercise of currently exercisable stock options; and 8,620 shares for Mr. Sharp, 6,799 for Ms. Esposito-Mayer, and 5,738 shares for Mr. Baer allocated pursuant to the provisions of our Retirement Savings Plan.

(6)

Includes 66,777 shares of common stock issuable upon exercise of currently exercisable stock

19




options and 46,499 shares of common stock of National Patent Development Corporation ("NPDC"), which comprised our Optical Plastics and Home Improvement Distribution segments and certain other non-core assets. In the spin-off, holders of record on November 18, 2004 of the Company's common stock and Class B capital stock received one share of NPDC common stock for each share of the Company's common stock or Class B capital stock owned. Shares of NPDC common stock are quoted on the OTC Bulletin Board under the symbol "NPDV.OB." Shares of the Company's common stock will continueallocated to be listed on The New York Stock Exchange under the symbol "GPX." The Company obtained a tax ruling from the Internal Revenue Service to the effect that the spin-off was tax-free for U.S. federal income tax purposes to the Company and its stockholders under Sections 355 and 368(a) of the Internal Revenue Code. We continue to own and operate our majority owned subsidiary, GSE Systems Inc. ("GSE"), formerly the Simulation segment; and our wholly owned subsidiary, General Physics Corporation ("General Physics"), comprised of our former Manufacturing & Process and Information Technology 3 segments. We reorganized our Manufacturing & Process and Information Technology segments into the new General Physics segment because we monitor and operate the General Physics subsidiary as a single business and reporting unit. Subsequent to the spin-off, we have reclassified the operations of NPDC as discontinued in our consolidated financial statements for all periods presented. The business description below of the Company is as it exists after the spin-off. General Physics is a workforce development company that improves the effectiveness of organizations by providing training, management consulting, e-Learning solutions and engineering services that are customized to meet the specific needs of clients. Additional information about General Physics may be found at www.gpworldwide.com. GSE develops and delivers business and technology solutions by applying simulation software, systems and services to the energy, process and manufacturing industries worldwide. Additional information about GSE may be found at www.gses.com Company Information Available on the Internet The Company's internet address is www.gpstrategies.com. The Company makes available free of charge through its internet site, its annual reports on Form 10-K; quarterly reports on Form 10-Q; current reports on Form 8-K; and any amendment to those reports filed or furnishedaccounts pursuant to the Securities Exchange Actprovisions of 1934, or the "Exchange Act," as soon as reasonably practicable after such material is electronically filed with, or furnished to, the U.S. Securities and Exchange Commission. GENERAL PHYSICS CORPORATION Organization and Operations 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. Since its incorporation in 1966, General Physics has provided clients with the products and services they need to successfully integrate their people, processes and technology. General Physics' instructional delivery capabilities include traditional classroom, structured on-the-job training (OJT), just-in-time methods, electronic performance support systems (EPSS) and the full spectrum of e-learning technologies. For businesses, government agencies and other organizations, General Physics offers services and products spanning the entire lifecycle of production facilities. General Physics' products and services include plant, equipment and process launch assistance; operations and maintenance practice training and consulting services; curriculum development and delivery; facility and enterprise change and configuration management; lean enterprise consulting; plant and process engineering review and re-design; business continuity planning and support services; alternative fuels engineering consulting, facility design and construction services; business process outsourcing; training outsourcing; e-learning hosting, consulting and systems implementation; and development and delivery of information technology (IT) training on an enterprise-wide scale. General Physics' personnel bring a wide variety of professional, technical and military backgrounds together to create cost-effective solutions for modern business and governmental challenges. 4 General Physics provides services and sells products within a structure that is integrated both vertically and horizontally. Vertically, General Physics is organized into Strategic Business Units (SBUs), Business Units (BUs) and Groups focused on providing a wide range of products and services to clients and prospective clients predominantly within targeted markets. Horizontally, General Physics is organized across SBUs, BUs and Groups to integrate similar service lines, technology, information, work products, client management and other resources. Communications and market research, accounting, finance, legal, human resources, information systems and other administrative services are organized at the corporate level. Business development and sales resources are aligned with operating units to support existing customer accounts and new customer development. General Physics provides technology-based training, engineering, consulting and technical services to leading companies in the automotive, steel, power, oil and gas, chemical, energy, electronics and semiconductor, pharmaceutical and food and beverage industries, as well as to the government sector, and focuses on developing long-term relationships with Fortune 500 companies, their suppliers and government agencies. Through this segment General Physics provides training, Business Process Outsource (BPO), training outsourcing, IT applications training and courseware development, engineering and technical support services to clients, whether involving workforce development, product/process/ plant launch, modification of existing facilities and systems or regulatory compliance. General Physics frequently supports the introduction of new work practices associated with lean manufacturing, self-directed work teams and engineering. Adult learning delivery capabilities include traditional classroom, structured on-the-job training (OJT), just in time methods, and the full spectrum of e-Learning technologies. General Physics e-Learning services, which enable it to function as a single-source e-learning solution provider through its integration services and hosting, the development and provisioning of proprietary content and the aggregation and distribution of third party content. General Physics Products and Services Training. General Physics' provides training services and products to support existing, as well as the launch of new, plants, products, equipment, technologies and processes. The range of services includes fundamental analysis of a client's training needs, curriculum design, instructional material development (in hard copy, electronic/software or other format), information technology service support and delivery of training using an instructor-led, on-the-job, computer-based, web-based, video-based or other technology-based method. General Physics has available an existing curriculum of business and technical courses and also is involved in the management of the training business operations for several of its customers. Training products include instructor and student training manuals, instructional materials on CD-ROM and PC-based simulators. Consulting. Consulting services include not only training-related consulting services, but also more traditional business management, engineering and other disciplines. General Physics is able to provide high-level lean enterprise consulting services, as well as training in the concept, methods and application of lean enterprise and other quality practices, organizational development and change management. General Physics also provides engineering consulting services to support regulatory and environmental compliance, modification of facilities and processes, plant performance improvement, reliability-centered maintenance practices and plant start-up activities. Consulting services also include operations continuity assessment, planning, training and procedure development. Consulting products include copyrighted training and reference materials. 5 Technical Support and Engineering. General Physics is staffed and equipped to provide engineering and technical support services and products to clients. General Physics has civil, mechanical and electrical engineers who provide consulting, design and evaluation services regarding facilities, process and systems. General Physics believes that it is a leader in the design and construction of alternative fuel stations, cryogenic systems and high pressure systems. Technical support services include procedure writing and configuration control for capital intensive facilities, plant start-up assistance, logistics support (e.g., inventory management and control), implementation and engineering assistance for facility or process modifications, facility management for high technology training environments, staff augmentation and help-desk support for standard and customized client desktop applications. Technical support products include General Physics' proprietary EtaPRO(TM) and Virtual Plant software applications. Contracts General Physics is currently performing under time-and-materials, fixed-price and cost-reimbursable contracts. General Physics' contracts with the United States Government have predominantly been cost-reimbursable contracts and fixed-price contracts. General Physics is required to comply with Federal Acquisition Regulations and Government Cost Accounting Standards with respect to services provided to the United States Government and agencies thereof. These Regulations and Standards govern the procurement of goods and services by the United States Government and the nature of costs that can be charged with respect to such goods and services. All such contracts are subject to audit by a designated government audit agency, which in most cases is the Defense Contract Audit Agency (the DCAA). The DCAA has audited General Physics' contracts through 2001 without any material disallowances. our Retirement Savings Plan.

Equity Compensation Plan Information

The following table illustrates the percentage of total revenue of General Physics attributable to each type of contract for the year ended December 31, 2004: Fixed-price 70% Time and materials, including fixed rate 18% Cost-reimbursable 12% --- Total revenue 100% ===
General Physics' fixed-price contracts provide for payment to General Physics of pre-determined amounts as compensation for the delivery of specific products or services, without regard to the actual cost incurred by General Physics. General Physics bears the risk that increased or unexpected costs required to perform the specified services may reduce General Physics' profit or cause General Physics to sustain a loss, but General Physics has the opportunity to derive increased profit if the costs required to perform the specified services are less than expected. Fixed-price contracts generally permit the client to terminate the contract on written notice; in the event of such termination, General Physics would typically, at a minimum, be paid a proportionate amount of the fixed price. 6 General Physics' time-and-materials contracts generally provide for billing of services based upon the hourly billing rates of the employees performing the services and the actual expenses incurred multiplied by a specified mark-up factor up to a certain aggregate dollar amount. General Physics' time-and-materials contracts include certain contracts under which General Physics has agreed to provide training, engineering and technical services at fixed hourly rates (subject to adjustment for labor costs). Time-and-materials contracts generally permit the client to control the amount, type and timing of the services to be performed by General Physics and to terminate the contract on written notice. If a contract is terminated, General Physics typically is paid for the services provided by it through the date of termination. General Physics' cost-reimbursable contracts provide for General Physics to be reimbursed for its actual direct and indirect costs plus a specified fee. These contracts also are generally subject to termination at the convenience of the client. If a contract is terminated, General Physics typically would be reimbursed for its costs to the date of termination, plus the cost of an orderly termination and paid a proportionate amount of the fee. No significant terminations of General Physics' contracts have occurred over the last five years. International General Physics conducts its business outside the United States and Canada primarily through its wholly-owned subsidiaries General Physics (UK) Ltd., General Physics Corporation Mexico, S.A. de C.V., General Physics Asia, Pte. Ltd. and General Physics (Malaysia) Sdn Bhd. Through these companies, General Physics is capable of providing substantially the same services and products as are available to clients in the United States, although modified as appropriate to address the language, business practices and cultural factors unique to each client and country. In combination with its subsidiaries, General Physics is able to coordinate the delivery to multi-national clients of services and products that achieve consistency on a global, enterprise-wide basis. GSE 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. Prior to September 25, 2003, GSE also had a process automation and control business. The automation products of this business unit optimized batch and hybrid plant control for the specialty chemical, food and beverage and pharmaceutical industries. On September 25, 2003, GSE completed the sale of substantially all of the assets of this business to Novatech, LLC. GSE is currently comprised of three divisions: Power Simulation, Process Simulation and Emergency Management Simulation. GSE is positioning itself to take advantage of emerging trends in the power industry. The operating licenses for numerous nuclear power plants will expire over the next several years. Fourteen plants have already received license extensions and sixteen more have applications pending. Many plants are also planning significant upgrades to the physical equipment and control room technology in conjunction with the license extensions. Both will result in the need to modify or replace the existing plant control 7 room simulators. GSE, having the largest installed base of existing simulators, is well positioned to capture the majority of this business. To address the varying levels of technology that exists across GSE's installed base, GSE has developed a Java-based graphical overlay technology called JADE (Java Application Development Environment). JADE provides a common look and feel to GSE's various simulation tools regardless of whether the underlying technology is UNIX, LINUX or Microsoft Windows XP. JADE also works with all of GSE's tools for building electrical, logic and control and flow system models for plants. GSE continues to focus on the fossil power segment of the power industry. Several fossil plant simulator projects were awarded in 2004, expanding GSE's presence in the market and establishing key strategic relationships with power industry DCS providers. GSE expects continued growth in this market segment and is focusing on second time simulation buyers that now demand the more sophisticated and realistic simulation models offered by GSE. Sales and marketing resources have been expanded for the fossil power industry. While GSE simulators are primarily utilized for power plant operator training, the uses are expanding to include engineering analysis, plant modification studies and operation efficiency improvements for both nuclear and fossil utilities. During plant construction, simulators are used to test control strategies and ensure on-time start-up. After commissioning, the same tools can be used to increase plant availability and optimize plant performance for the life of the facility. In 2004, GSE demonstrated its ability to link its simulation models to plant optimization tools of third parties to provide a unique and broad based optimization solution. GSE and its partners will be bringing these new products to market in 2005. GSE has targeted the Process simulation business as an area with a significant potential for growth. The process industries, particularly oil and gas and chemical, are expanding worldwide and are faced with the challenges of performance improvement at existing facilities and training of personnel to staff new and upgraded facilities. GSE's SimSuite Pro product and experience in the process industries provide GSE with excellent capabilities to service these needs. Dedicated sales and marketing resources have been assigned to Process simulation to facilitate this initiative. In 2004, GSE continued to expand the sale of its plant optimization tools based on advanced signal analysis technology. GSE's Pegasus Plant Surveillance and Diagnosis System helps improve plant availability, safety and economy. Pegasus is a software package for semi-automatic plant surveillance and diagnostics and enables site engineers to perform detailed analysis for specified component faults, allowing the identification of degraded performance and replacement of components before they fail. SensBase provides comprehensive sensor test services, thus ensuring that changes in transmitters and other instruments do not jeopardize the function of the nuclear plant protection systems. BRUS, a noise analysis program package, is a collection of signal analysis tools which allow users to detect developing abnormalities in the plant. GSE's worldwide reputation for boiling water reactor stability training lead to an increase in sales of both stability training courses and GSE's SIMON Stability Monitoring equipment. GSE has been very successful in selling this technology to European and Asian customers and is investigating its viability in the US market. The acquisition by the Company of controlling interest in GSE has led to further cooperation between General Physics and GSE. In addition to cooperating in the marketing of individual products, the companies have combined some of General Physics' extensive training materials and programs with 8 GSE's power plant simulation models to provide truly interactive and adaptive total training solutions. Cooperative marketing activities between General Physics and GSE are intended to enable GSE to extend simulation capabilities into industries beyond Power and Process and to expand the range of products and services offered to customers. In 2003, GSE began to aggressively market its access control and intrusion detection system to the nuclear and process industries, however, the market has been slow to develop. The nuclear industry security focus has been on investing in technology to detect the approach of intruders farther away from the plant perimeter. As a result, much of the anticipated sales of GSE's GAARDS system have failed to materialize. At the end of 2003, GSE made the decision to reduce its investment in this market segment until the market rebounds. In lieu of pursuing physical security system projects, GSE has turned its attention to opportunities for simulation in disaster recovery and terrorist threat response. In 2003, GSE modified its simulation technology to simulate the operation of Emergency Operations Centers (EOC) run by municipal and state governments. REMITS is a Real-time Emergency Management Interactive Training System designed to simulate emergency situations and enable EOC staffs to train without requiring human participation in the field. REMITS enables the EOC staff to stay current with the technology and enables instructors to introduce new problems and challenges during the exercise to test the EOC staff response to changing situations. As the Federal Government spends billions in first responder training, GSE believes its REMITS product will find a large market in the developing field of training for disaster recovery and terrorist threat response. CUSTOMERS General Physics currently provides services to approximately 500 customers. Significant customers include multinational automotive manufacturers, such as General Motors Corporation, Ford Motor Company, Mercedes-Benz and Daimler Chrysler Corporation; commercial electric power utilities, such as Bruce Power, L.P., First Energy, Consolidated Edison Company of New York, Public Service Electric & Gas Company and Entergy Operations, Inc.; governmental agencies, such as the U.S. Department of Defense, U.S. Department of Treasury, Office of Personnel Management, the U.S. Department of Homeland Security, and U.S. Social Security Administration; U.S. government prime contractors, such as Northrop-Grumman, Washington Group International, and Lockheed Martin; and other large multinational companies, such as Texas Instruments, Merck & Co., Eli Lilly & Co, IBM Corporation, United Technologies Corporation, Anheuser-Busch Company, Siemens Dematic Corporation, Agilent Technologies, Inc, and Gerdau Ameristeel Corporation. Revenue from the United States Government accounted for approximately 38% of General Physics' revenue for the year ended December 31, 2004. Revenue was derived from many separate contracts and subcontracts with a variety of Government agencies and contractors that are regarded by General Physics as separate customers. In 2004, revenue from the Department of the Army, which is included in United States Government revenue, accounted for approximately 19% of General Physics' revenue. No other customer accounted for more than 10% of General Physics' revenue in 2004. GSE has provided approximately 200 simulation systems to an installed base of over 75 customers worldwide. GSE's largest customer (Batelle's Pacific Northwest National Laboratory, a purchasing agent for the U.S. Department of Energy and the numerous projects GSE performs in Eastern and Central Europe) accounted for approximately 24% and 29%, respectively, of its revenue in 2004 and 9 2003. In 2004, approximately 65% of GSE revenue was generated from customers outside the United States. EMPLOYEES At December 31, 2004, the Company and its subsidiaries employed 1,449 persons, including 10 in the Company's headquarters, 1,295 at General Physics and 144 at GSE. General Physics' principal resource is its personnel. General Physics' future success depends to a significant degree upon its ability to continue to attract, retain and integrate into its operations instructors, engineers, technical personnel and consultants who possess the skills and experience required to meet the needs of its clients. As of December 31, 2004, General Physics employed 1,295 employees and over 100 adjunct instructors. General Physics utilizes a variety of methods to attract and retain personnel. General Physics believes that the compensation and benefits offered to its employees are competitive with the compensation and benefits available from other organizations with which it competes for personnel. In addition, General Physics maintains the professional development of its employees, both internally via General Physics University (its own internal training resource) and through third parties, and also offers tuition reimbursement for job-related educational costs. General Physics believes its relations with its employees are good. GSE employs a highly educated and experienced multinational workforce of 144 employees, including approximately 80 engineers and scientists. Approximately 60% of these engineers and scientists have advanced science and technical degrees in fields such as chemical, mechanical and electrical engineering, applied mathematics and computer sciences. GSE believes its employees offer a competitive advantage that enhances its position to compete in the Simulation markets. COMPETITION General Physics' services and products face a highly competitive environment. The principal competitive factors are the experience and capability of service personnel, performance, quality and functionality of products, reputation and price. Consulting services such as those provided by General Physics are performed by many of the customers themselves, large architectural and engineering firms that have expanded their range of services beyond design and construction activities, large consulting firms, information technology companies, major suppliers of equipment, degree-granting colleges and universities, vocational and technical training schools, continuing education programs, small privately held training providers and individuals and independent service companies similar to General Physics. The training industry is highly fragmented and competitive, with low barriers to entry and no single competitor accounting for a significant market share. Some of General Physics' competitors offer services and products that are similar to those of General Physics at lower prices, and some competitors have significantly greater financial, managerial, technical, marketing and other resources than does General Physics. There can be no assurance that General Physics will be successful against such competition. 10 The Power Simulation business encounters intense competition. In the nuclear simulation market, GSE competes directly with larger firms primarily from Canada and Germany, such as Canadian Aerospace & Electronics (CAE) and STN Atlas. The fossil simulation market is represented by smaller companies in the U.S. and overseas. Several of GSE's competitors have greater capital and other resources than it has, including, among other advantages, more personnel and greater marketing, financial, technical and research and development capabilities. Customer purchasing decisions are generally based upon price, the quality of the technology, experience in related projects and the financial stability of the supplier. GSE's competitors in Process Simulation include major corporations offering a wide range of products and services that include operator training simulators, companies focused on Process Technology and manufacturing enhancement, companies with specific industry niches that enables them to compete in operator training simulation and smaller training companies that compete at the lower cost levels of Computer Based Training (CBT) or simple simulations close to CBT. GSE's competition in Emergency Management Simulation is unclear at this time. MARKETING General Physics has approximately 40 employees dedicated primarily to marketing its services and products. General Physics uses attendance at trade shows, presentations of technical papers at industry and trade association conferences, press releases, public courses and workshops given by General Physics personnel to serve an important marketing function. General Physics also does selective advertising and sends a variety of sales literature to current and prospective clients. By staying in contact with clients and looking for opportunities to provide further services, General Physics sometimes obtains contract awards or extensions without having to undergo competitive bidding. In other cases, clients request General Physics to bid competitively. In both cases, General Physics submits proposals to the client for evaluation. The period between submission of a proposal to final award can range from 30 days or less (generally for non-competitive, short-term contracts), to a year or more (generally for large, competitive multi-year contracts with governmental clients). GSE markets its Power Simulation products and services through a network of direct sales staff, agents and representatives, systems integrators and strategic alliance partners. A direct sales force is employed in the continental United States. Market-oriented business and customer development teams define and implement specific campaigns to pursue opportunities in the power marketplace. GSE's ability to support its multi-facility, international and/or multinational Power Simulation clients is facilitated by its network of offices and strategic partners in the U.S. and overseas. Power Simulation offices are maintained in Maryland and Georgia, and outside the U.S. in Sweden, China and Japan. GSE markets its Process Simulation technologies through a combination of techniques including its existing direct sales channel, sales agents and strategic alliance partners. GSE markets its product in the U.S. Homeland Security industry through the existing sales channels of General Physics and foreign markets through existing power simulation partners and agents. BACKLOG General Physics' backlog for services under signed contracts and subcontracts as of December 31, 20042006 about shares of our common stock that may be issued upon the exercise of options, warrants and rights under our 1973 Non-Qualified Stock Option Plan, which was approximately $105.2 million compared to $74.9 million as of December 31, 2003. General Physics anticipates that most of its backlog as of December 31, 2004 will be recognized as revenue during fiscal year 2005, however, the rate atnot approved by security holders, and 2003 Incentive Stock Plan, which services are performed under certain contracts, and 11 thus the rate at which backlog will be recognized, is at the discretionwas approved by security holders.  For a description of the client and most contracts are, as mentioned above, subject to termination by the client upon written notice. Asmaterial terms of December 31, 2004, GSE's aggregate contract backlog totaled approximately $19.4 million, down from a backlog of $30.4 million as of December 31, 2003. Approximately $13.3 million or 69% of the backlog is expected to be converted to revenue by December 31, 2005. INSURANCE By providing servicesthese plans, see Note 13 to the commercial electric power industry,Consolidated Financial Statements included in the area of alternative fuel construction management and to the United States Armed Forces, the Company is engaged in industries in which there are substantial risks of potential liability. The Company maintains a consolidated insurance program (including general liability coverage) and claims made by any covered insured will reduce the amount of available insurance for the other insureds. In addition, certain liabilities associated with the Company's business are not covered by these insurance policies. In addition, such liabilities may not be covered by Federal legislation providing a liability protection system for licensees of the Nuclear Regulatory Commission (typically utilities) for certain damages caused by nuclear incidents, since the Company is not such a licensee. Finally, few of the Company's contracts with clients contain a waiver or limitation of liability. Thus, to the extent a risk is neither insured nor indemnified against nor limited by an enforceable waiver or limitation of liability, the Company could be materially adversely affected by a nuclear incident. Certain other environmental risks, such as liability under the Comprehensive Environmental Response, Compensation and Liability Act, as amended (Superfund), also may not be covered by the Company's insurance. ENVIRONMENTAL STATUTES AND REGULATIONS General Physics provides environmental engineering services to its clients, including the development and management of site environmental remediation plans. Due to the increasingly strict requirements imposed by Federal, state and local environmental laws and regulations (including, without limitation, the Clean Water Act, the Clean Air Act, Superfund, the Resource Conservation and Recovery Act and the Occupational Safety and Health Act), General Physics' opportunities to provide such services may increase. General Physics' activities in connection with providing environmental engineering services may also subject General Physics itself to such Federal, state and local environmental laws and regulations. Although General Physics subcontracts most remediation construction activities and all removal and offsite disposal and treatment of hazardous substances, General Physics could still be held liable for clean-up or violations of such laws as an "operator" or otherwise under such Federal, state and local environmental laws and regulations with respect to a site where it has provided environmental engineering and support services. General Physics believes, however, that it is in compliance in all material respects with such environmental laws and regulations. The nuclear power industry is associated with a number of hazards which could create significant liabilities for GSE. GSE's business could expose it to third party claims with respect to product, environmental and other similar liabilities. Although GSE has sought to protect itself from these potential liabilities through a variety of legal and contractual provisions as well as through liability insurance, the effectiveness of such protections has not been fully tested. The failure or malfunction of 12 one of GSE's systems or devices could create potential liability for substantial monetary damages and environmental cleanup costs. Such damages or claims could exceed the applicable coverage of their insurance. Although management has no knowledge of material liability claims against GSE to date, such potential future claims could have a material adverse effect on their business or financial condition. FACTORS AFFECTING OUR FUTURE PERFORMANCE Set forth below and elsewhere in this report and in other documents the Company files with the Securities and Exchange Commission are risks and uncertainties that could cause the Company's actual results to differ materially from the results contemplated by the forward-looking statements contained in this report and other public statements the Company makes. Our holding company structure could adversely affect our ability to pay our expenses. Our principal operations are conducted through our General Physics subsidiary. General Physics' credit agreement currently limits its ability to dividend or pay funds to us, which could adversely affect our ability to pay our expenses. We recently identified material weaknesses in our internal controls over financial reporting, and in our disclosure controls and procedures, and cannot assure you that we will not find further such weaknesses. Section 404 of the Sarbanes-Oxley Act of 2002 requires us to conduct an annual review and evaluation of our internal control of financial reporting and to include a report on, and an attestation by our independent registered public accountants, KPMG LLP, of, the effectiveness of these controls, beginning in this Annual Report on Form 10-K for the fiscal year ending December 31, 2004. On November 30, 2004, the Securities and Exchange Commission issued an exemptive order under which certain companies are permitted to delay, for up to 45 days after the due date of their Annual Report on Form 10-K, the filing of the internal control report and the related attestation of the independent registered public accountants. We qualify under the provisions of this exemptive order for such 45-day delay. In reliance on this exemptive order, this Annual Report on Form 10-K does not include the internal control report or related attestation, which we plan to file by amendment prior to the expiration of the 45-day extension. We are currently performing our assessment of the effectiveness of our internal control over financial reporting as of December 31, 2004, and have devoted considerable resources to this effort. In the course of this assessment, we have identified certain material weaknesses in our internal control over financial reporting. These material weaknesses arose from deficiencies with respect to our accounting for income taxes and with respect to the preparation and review of certain consolidated financial statement footnote disclosures. See Item 9A, Controls and Procedures. We are in the process of remediating these deficiencies. In addition, we have not yet completed this assessment, and cannot assure you that additional deficiencies or weaknesses in our controls and procedures will not be identified. The material weaknesses already identified, as well as any other weaknesses or deficiencies, could harm our business and operating results, result in adverse publicity and a loss in investor confidence in our financial reports, which in turn could have an adverse effect on our stock price, and, if they are not properly remediated, could adversely affect our ability to report our financial results on a timely and accurate basis. Failure to continue to attract and retain qualified personnel could harm our business. Our principal resource is our personnel. A significant portion of our revenue is derived from services and products that are delivered by instructors, engineers, technical personnel and consultants. Our success depends upon our ability to continue to attract and retain instructors, engineers, technical personnel and consultants who possess the skills and experience required to meet the needs of our clients. In order to initiate and develop client relationships and execute our growth strategy, we must maintain and continue to hire qualified salespeople. We must also continue to attract and develop capable management personnel to guide our business and supervise the use of our resources. Competition for qualified personnel can be intense. We cannot assure you that qualified personnel will continue to be available to us. Any failure to attract or retain qualified instructors, engineers, technical personnel, consultants, salespeople and managers in sufficient numbers could adversely affect our business and financial condition. The loss of our key personnel, including our executive management team, could harm our business. Our success is largely dependent upon the experience and continued services of our executive management team and our other key personnel. The loss of one or more of our key personnel and a failure to attract or promote suitable replacements for them may adversely affect our business. 13 Our revenue and financial condition could be adversely affected by the loss of business from significant customers. For the years ended December 31, 2002, 2003 and the 2004, revenue from the United States Government represented approximately 32%, 32% and 37% of our revenue, respectively. However, the revenue was derived from a number of separate contracts and subcontracts with a variety of government agencies and contractors we regard as separate customers. Most of our contracts and subcontracts are subject to termination on written notice, and therefore our operations are dependent on our clients' continued satisfaction with our services and their continued inability or unwillingness to perform those services themselves or to engage other third parties to deliver such services. Failure to keep pace with technology and changing market needs could harm our business. Traditionally, most of our training and performance improvement services and products have been delivered through instructors, written materials or video. Our future success will depend upon our ability to gain expertise in technological advances rapidly and respond quickly to evolving industry trends and client needs. We intend to deliver many of our training and development services and products, including some services and products previously delivered in "traditional" formats, via interactive multimedia software, such as CD-ROM, and distance-based media, such as video conferencing, intranets and the Internet. We cannot assure you that we will be successful in adapting to advances in technology, addressing client needs on a timely basis, or marketing our services and products in multimedia software and distance-based media formats. In addition, services and products delivered in the newer formats may not provide comparable training results. Furthermore, subsequent technological advances may render moot any successful expansion of the methods of delivering our services and products. If we are unable to develop new means of delivering our services and products due to capital, personnel, technological or other constraints, our business and financial condition could be adversely affected. Our business and financial condition could be adversely affected by government limitations on contractor profitability and the possibility of cost disallowance. A significant portion of our revenue and profit is derived from contracts and subcontracts with the United States Government. The United States Government places limitations on contractor profitability; therefore, government related contracts may have lower profit margins than the contracts we enter into with commercial customers. Furthermore, United States Government contracts and subcontracts are subject to audit by a designated government agency. Although we have not experienced any material cost disallowances as a result of these audits, we may be subject to material disallowances in the future. Changing economic conditions in the United States or the United Kingdom could harm our business and financial condition. Our revenues and profitability are related to general levels of economic activity and employment in the United States and the United Kingdom. As a result, any significant economic downturn or recession in one or both of those countries could harm our business and financial condition. A significant portion of our revenues is derived from Fortune 1000-level companies and their international equivalents, which historically have adjusted expenditures for external training during economic downturns. If the economies in which these companies operate weaken in any future period, these companies may not 14 increase or may reduce their expenditures on external training, which could adversely affect our business and financial condition. Our financial results are subject to quarterly fluctuations. We experience, and expect to continue to experience, fluctuations in quarterly operating results. Consequently, you should not deem our results for any particular quarter to be necessarily indicative of future results. These fluctuations in our quarterly operating results may vary because of, among other things, the overall level of performance improvement services and products sold, the gain or loss of material clients, the timing, structure and magnitude of acquisitions, the commencement or completion of client engagements or custom services and products in a particular quarter, and the general level of economic activity. To the extent they are unexpected, downward fluctuations may result in a decline in the trading price of our Common Stock. Competition could adversely affect our performance. The training industry is highly fragmented and competitive, with low barriers to entry and no single competitor accounting for a significant market share. Our competitors include several large publicly traded and privately held companies, vocational and technical training schools, degree-granting colleges and universities, continuing education programs and thousands of small privately held training providers and individuals. In addition, many of our clients maintain internal training departments. Some of our competitors offer similar services and products at lower prices, and some competitors have significantly greater financial, managerial, technical, marketing and other resources. Moreover, we expect to face additional competition from new entrants into the training and performance improvement market due, in part, to the evolving nature of the market and the relatively low barriers to entry. Our history of net losses could cause us to need additional capital. While we had income from continuing operations of $22.4 million for the year ended December 31, 2004, for the years ended December 31, 2001, 2002 and 2003, we experienced net looses of, $945,000, $5,228,000 and $8,276,000, respectively. If such net losses recur, we will need additional capital to fund our operations. If adequate funds are not available it may have a negative impact on our ability to conduct our operations at optimal levels. We are subject to potential environmental liabilities and liabilities associated with nuclear incidents. We provide services that could subject us to significant environmental, third party and professional liability. If we were found to have been negligent or to have breached our obligations to our clients, we could be exposed to significant fines and penalties and third-party liabilities and our reputation could be adversely affected. The Company maintains a consolidated insurance program (including general liability coverage) and claims made by any covered insured will reduce the amount of available insurance for the other insureds. Although we believe that we currently have appropriate insurance coverage, we may not be able to obtain appropriate coverage on a cost-effective basis in the future. In addition, we do not presently have coverage for all of the risks to which we are subject. For example, liabilities associated with nuclear incidents may not be covered by our insurance policies, or by indemnification provisions contained in agreements with clients. In addition, because we are not a licensee, these liabilities may not be covered by federal legislation providing liability protection for licensees of the Nuclear Regulatory Commission, typically utilities, for some damages caused by 15 nuclear incidents. Finally, few of our contracts with clients contain a waiver or limitation of liability. A nuclear incident could adversely affect our business and financial condition. We also provide environmental engineering services to our clients, including the development and management of site environmental remediation plans. Although we subcontract most remediation construction activities, and in all cases subcontract the removal and off-site disposal and treatment of hazardous substances, we could be subject to liability relating to the environmental services we perform directly or through subcontracts. Specifically, if we were deemed under federal and state legislation, including "Superfund" legislation, to be an "operator" of sites to which we provide environmental engineering and support services, we could be subject to liabilities. Our insurance policies may not provide coverage for these risks. Various mechanisms exist whereby the United States Government may limit liability for environmental claims and losses or indemnify us for such claims or losses under governmental contracts. Nonetheless, incurrence of any substantial "Superfund" or other environmental liability could adversely affect our business and financial condition. We do not anticipate paying cash dividends on our Common Stock. We do not, in the foreseeable future, anticipate paying any cash dividends on our Common Stock. Our Chief Executive Officer and directors can exercise significant influence over GP Strategies. The holder of a share of our Common Stock is entitled to one vote per share and the holder of a share of our Class B capital stock is entitled to ten votes per share. As of March 10, 2005, Jerome I. Feldman, our Chairman and Chief Executive Officer, beneficially owned shares of Common Stock and Class B capital stock constituting approximately 20% of our voting stock; Harvey Eisen, one of our directors, beneficially owned shares of Common Stock and Class B capital stock constituting approximately 18% of our voting stock; and EGI-Fund (02-04) Investors, L.L.C., which has designated Mathew Zell to be one of our directors, beneficially owns shares of Common Stock and Class B capital stock constituting 15% of our voting stock. Messrs. Feldman and Eisen and EGI will be able to influence our management and affairs and all matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions. This concentration of ownership may have the effect of delaying, discouraging or preventing a change in control and might affect the market price of our Common Stock. Our stockholder rights plan and authorized preferred stock could make a third-party acquisition of us difficult. We have a stockholder rights plan. Our stockholder rights plan would cause substantial dilution to any person or group that attempts to acquire us on terms not approved in advance by our Board of Directors. In addition, our certificate of incorporation allows us to issue up to 5,000,000 shares of preferred stock, the rights, preferences, qualifications, limitations and restrictions of which may be fixed by the Board of Directors without any further vote or action by the stockholders. The stockholder rights plan, the ability to issue preferred stock and certain provisions in our by-laws may have the effect of delaying, discouraging or preventing a change in control and might affect the market price of our Common Stock. Our certificate of incorporation may discourage foreign ownership of our Common Stock. 16 The United States Departments of Energy and Defense have policies regarding foreign ownership, control or influence over government contractors who have access to classified information, and inquire as to whether any foreign interest has beneficial ownership of 5% or more of a contractor's or subcontractor's voting securities. If either Department determines that an undue risk to the common defense and security of the United States exists, it may, among other things, terminate the contractor's or subcontractor's existing contracts. Our certificate of incorporation allows us to redeem or require the prompt disposition of all or any portion of the shares of our Common Stock owned by a foreign stockholder beneficially owning 5% or more of the outstanding shares of our Common Stock if either Department threatens termination of any of our contracts as a result of such an ownership interest. These provisions may have the additional effect of delaying, discouraging or preventing a change in control and might affect the market price of our Common Stock. FINANCIAL INFORMATION For financial information about segments and geographic operations and revenue, see note 15 to notes to Consolidated Financial Statements. Foreign operations and export sales represent less than 10% of the Company's revenue. ITEM 2: PROPERTIES The following information describes the material physical properties owned or leased by the Company and its subsidiaries. The Company leases approximately 10,000 square feet of space for its White Plains, New York principal executive offices. General Physics leases approximately 30,700 square feet in an office building in Elkridge, Maryland and approximately 172,000 square feet of office, classroom and warehouse space at various other locations throughout the United States, the United Kingdom, Canada, Mexico and Malaysia. GSE is headquartered in an approximately 53,000 square feet facility in Columbia, Maryland which also houses their support functions. In addition, GSE leases office space domestically in Georgia and internationally in China, Japan and Sweden. GSE leases these facilities for terms ending between 2005 and 2008. The facilities owned or leased by the Company are considered to be suitable and adequate for their intended uses and are considered to be well maintained and in good condition. ITEM 3: LEGAL PROCEEDINGS 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 connection2006, filed with the Company's 1998 acquisition of Learning Technologies from the defendants for $24.3 million. The Company seeks actual damages in the amount of $117.9 million 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 described below. 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 17 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 described below, 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 PhysicsSEC on a preferred provider basis and seeking actual damages in the amount of $17.6 million 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 General Physics $12.3 million in damages and $6.0 million in interest. EDS made a payment of $18.4 million, which includes an additional $0.1 million of accrued interest, to General Physics in December 2004 to satisfy its obligation under the arbitration award. The Company recognized a gain on arbitration settlement, net of legal fees and expenses, of $13.7 million in 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. 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 FebruaryMarch 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, which occurred on November 24, 2004, the Company agreed to make an additional capital contribution to NPDC in an amount equal to the first $5 million 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 million, received with respect to the foregoing arbitration and litigation claims. Pursuant to such agreement, in January 2005, the Company has made a $5 million additional capital contribution to NPDC from the proceeds of the arbitration award. After payment of such additional capital contribution and legal fees, the net proceeds retained by General Physics are $8.5 million. A portion of such net proceeds was used in January 2005 to reduce to zero the outstanding balance of General Physics' revolving credit facility. 18 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. ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year covered by this report. 19 PART II ITEM 5: MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's Common Stock, $.01 par value, is traded on the New York Stock Exchange. The following table presents its high and low market prices for the last two fiscal years. During the periods presented below, the Company has not paid any dividends.
2004 ------------- QUARTER HIGH LOW - ---------- ----- ----- First $7.93 $6.29 Second 7.60 6.27 Third 7.45 6.05 Fourth (1) 8.95 6.64
2003 ------------- QUARTER HIGH LOW - ---------- ----- ----- First $5.30 $4.72 Second 6.60 4.62 Third 7.44 5.90 Fourth 8.00 7.01
2007.

 

 

Non-Qualified

 

 

 

 

 

Stock Option

 

Incentive

 

 

 

Plan

 

Stock Plan

 

Plan category:

 

 

 

 

 

 

 

 

 

 

 

Equity compensation plans not approved by security holders:

 

 

 

 

 

 

 

 

 

 

 

(a)         Number of securities to be issued upon exercise of outstanding options(1)

 

572,108

 

 

 

 

 

 

 

 

 

(b)        Weighted average exercise price of outstanding options (1)

 

$

5.48

 

 

 

 

 

 

 

 

 

(c)         Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in row (a))(2 )

 

1,361,180

 

 

 

 

 

 

 

 

 

Equity compensation plans approved by security holders:

 

 

 

 

 

 

 

 

 

 

 

(a)         Number of securities to be issued upon exercise of outstanding options, warrants and rights

 

 

 

 

 

 

 

 

 

 

(b)        Weighted average exercise price of outstanding options, warrants and rights

 

 

 

 

 

 

 

 

 

 

(c)         Number of securities remaining available for future issuance under equity compensation plans

 

 

 

1,721,000

 


(1) On November 24, 2004, the Company distributed 100% of the common stock of NPDC to the Company's shareholders on record date of November 18, 2004. Holders of recorded received one share of NPDC common stock for each share of GP Strategies common stock or Class B capital stock owned. The closing price of the NPDC stock was $1.00 per share on November 24, 2004. The number of shareholders of record of the Common Stock as of March 10, 2005 was 1,282 and the closing price of the Common Stock on the New York Stock Exchange on that date was $8.02. The Company has not declared or paid any cash dividends on its Common Stock during the two most recent fiscal years. The Company currently intends to retain future earnings to finance the growth and development of its business. In addition, the General Physics Credit Agreement (see Item 7 below) contains restrictive covenants, including a prohibition on the payment of dividends. General Physics is currently restricted from paying dividends or management fees to the Company in excess of $1.0 million in any fiscal year. 20 Equity Compensation Plan information as of December 31, 2004
GP STRATEGIES NON-QUALIFIED CORPORATION'S STOCK OPTION 2003 INCENTIVE PLAN STOCK PLAN ------------- -------------- Plan category: Equity compensation plans not approved by security holders: (A) Number of securities to be issued upon exercise of outstanding options (1) 1,821,829 (B) Weighted average exercise price of outstanding options (1) $ 4.73 (C) Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in row (a)) (2) 1,366,299 Equity compensation plans approved by security holders: (A) Number of securities to be issued upon exercise of outstanding options, warrants and rights -- (B) Weighted average exercise price of outstanding options, warrants and rights $ -- (C) Number of securities remaining available for future issuance under equity compensation plans 2,000,000
(1)
             Does not include warrants to purchase 300,000 shares of Common Stock issued to a financial consulting firm atcommon stock with an exercise price of $3.21$2.67 per share, as adjusted following the spin-offs of NPDC and GSE, and warrants to purchase 937,500786,293 shares issued and sold to four Gabelli funds in conjunction with the 6% Conditional Subordinated Notes due 2008 at an exercise price of $6.14$5.85 per share. share, as adjusted following the spin-offs of NPDC and GSE.

(2)             Does not include shares of Common Stockcommon stock that may be issued for fees to directorsour directors.


Item 13.            Certain Relationships and Related Transactions, and Director Independence

Review & Approval Process for Related Person Transactions

Our Corporate Governance Guidelines, a copy of the Company as director's fees. For a description of the material terms of the Company's Non-Qualified Stock Option Plan and the Company's 2003 Incentive Stock Plan, see note 14which may be viewed on our website, require each director to the notes to the Consolidated Financial Statements. Directors of the Company who are not employeesavoid any action, position or interest that conflicts with an interest of the Company or gives the appearance of a conflict.  Although there is no formal written procedure in those Guidelines for handling such situations when they arise, in practice our Board of Directors, or a committee thereof, is responsible for reviewing and approving, all related person transactions. A related person transaction is a transaction, arrangement or relationship (or any series of similar transactions, arrangements or relationships) in which the Company and any “related person” are participants. A related person is an executive officer, director, or more than 5% stockholder of the Company, including any of their immediate family members, and any entity owned or controlled by such persons.

Our Conduct of Business Policy, a copy of which may be viewed on our website, governs related person transactions involving executive officers and the Company.  It prohibits activities or relationships which are incompatible with employment by the Company or which places the executive in a position where there is a conflict between the executive’s private interests and the interests of the Company, its subsidiaries receive an annual feeor affiliates.  Executives are required to immediately disclose such situations to their supervisor, the Company’s Ethics Program Compliance Officer, or the Company’s General Counsel for a determination of $10,000, payable quarterly. At the optionappropriate action.  The Company maintains a Hotline for employees to confidentially report questionable activities or seek advice in handling ethics-related issues.

Related Transactions

Share Repurchases and Exchanges

On January 19, 2006, we purchased from (i) EGI-Fund (02-04) Investors, L.L.C. (“EGI”) 1,090,000 shares of each director upour common stock for a price per share equal to one-half$6.80 and 300,000 shares of the annual fee could beour Class B stock for a price per share equal to $8.30 (the aggregate purchase price paid in Common Stock. In addition, the directors receive $1,500by us to EGI was $9,902,000) and (ii) Bedford Oak 1,031,500 shares of our common stock for each meetinga price per share equal to $6.80 and 300,000 shares of our Class B stock for a price per share equal to $8.30 (the aggregate purchase price paid by us to Bedford Oak was $9,504,200).  Simultaneously with such purchases, Jerome I. Feldman exchanged 568,750 shares of our Class B stock for common stock, at a rate of one share of Class B stock for one share of common stock, for a price of $1.50 per share exchanged (the aggregate price we paid to Mr. Feldman was $853,125, which Mr. Feldman applied toward repayment of his indebtedness to us; see further discussion below).

Harvey Eisen, Chairman of the Board of Directors attended, and generally do not receive any additional compensation for service on the committees of the Board of Directors other than the Audit Committee. Employees of the Company, or its subsidiaries do not receive additional compensation for serving as directors. 21 ITEM 6: SELECTED CONSOLIDATED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) The selected financial data presented below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our consolidated financial statements and the notes thereto included elsewhere in this report. Our consolidated statement of operations data for the years ended December 31, 2004, 2003, and 2002 and our consolidated balance sheet data as of December 31, 2004 and 2003 have been derived from our audited consolidated financial statements included elsewhere in this report which have been audited by KPMG LLP, whose report is included elsewhere in this report. Our statement of operations data for the years ended December 31, 2001 and 2000 and our balance sheet data as of December 31, 2002, 2001, and 2000 have been derived from unaudited consolidated financial statements, which are not presented in this report. On November 24, 2004, we completed the spin-off of NPDC. The results of operations of NPDC have been reclassified as discontinued operations in the consolidated statements of operations for all periods presented.
YEARS ENDED DECEMBER 31, ---------------------------------------------------- (in thousands, except per share amounts) 2004 2003 2002 2001 2000 -------- -------- -------- -------- -------- Revenue $193,973 $140,034 $142,237 $175,422 $186,452 Gross profit 25,963 17,095 15,366 20,332 17,633 Gain from arbitration settlement, net 13,660 -- -- -- -- Interest expense 2,113 3,123 2,467 4,418 5,559 Income (loss) from continuing operations before taxes and minority interests 14,424 (7,186) (4,799) 3,937 (33,611) Income (loss) from continuing operations 22,445 (8,111) (4,504) 428 (25,012) Income (loss) from discontinued operations, net of taxes 75 (165) (724) (1,373) (380) Net income (loss) 22,520 (8,276) (5,228) (945) (25,392) Diluted income (loss) per share: Income (loss) from continuing operations $ 1.23 $ (0.47) $ (0.29) $ 0.04 $ (2.01) Income (loss) from discontinued operations -- (0.01) (0.05) (0.13) (0.03) Net income (loss) 1.23 (0.48) (0.34) (0.09) (2.04)
DECEMBER 31, ---------------------------------------------------- BALANCE SHEET DATA (1) 2004 2003 2002 2001 2000 - ---------------------- -------- -------- -------- -------- -------- Cash and cash equivalents $ 2,417 $ 4,416 $ 1,516 $ 1,705 $ 11,317 Short-term borrowings 6,068 26,521 22,058 32,338 36,162 Working capital (deficit) 20,601 17,998 780 (2,750) 1,834 Total assets 156,035 188,323 144,905 160,824 212,578 Long-term debt 11,051 14,861 6,912 6,863 17,612 Stockholders' equity 91,620 92,812 92,982 95,943 112,518
(1) On November 24, 2004, the Company distributed net assets of $26.0 million to NPDC in connection with its spin-off. 22 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. 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 23 $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 it's 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 ceaseddeemed to have anybeneficial 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. 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 24 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. 25 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
YEARS ENDED DECEMBER 31, ------------------------ (Dollars in Thousands) 2004 2003 -------- -------- General Physics $165,066 $133,975 GSE 28,907 6,059 -------- -------- $193,973 $140,034 ======== ========
26 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, ----------------------------------------- (Dollars in thousands) 2004 2003 ------------------- ------------------- % 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 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 27 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 $19.3 million, which expire during 2022 and 2023. 28 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 Physics'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, ---------------------------------------- (Dollars in thousands) 2003 2002 ------------------- ------------------ % 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 Physcis 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. 29 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. 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. 30 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. 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 31 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 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): 32
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 33 the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Our estimates, judgments and assumptions are continually evaluated based on available information and experience. Because of the use of estimates inherent in the financial reporting process, actual results could differ from those estimates. Certain of our accounting policies require higher degrees of judgment than others in their application. These include 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 34 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. 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. 35 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 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 GOODWILL AT YEARS ENDED 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 ======= ====== ====== ======
36 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 $19.3 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. ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is exposed to the impact of interest rate, market risks and currency fluctuations. In the normal course of business, the Company employs internal processes to manage its exposure to interest rate, market risks and currency fluctuations. The Company's objective in managing its interest rate risk is to limit the impact of interest rate changes on earnings and cash flows and to lower its overall borrowing costs. The Company is exposed to the impact of currency fluctuations because of its international operations. As of December 31, 2004, the Company had approximately $6.1 million of variable rate borrowings. The Company estimates that for every 1% fluctuation in general interest rates, assuming debt levels at December 31, 2004, interest expense would vary by $60,000. As of December 31, 2004, GSE had contracts for the sale of 37 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. The Company's net investment in its foreign subsidiaries, including intercompany balances, at December 31, 2004 was immaterial, and accordingly, fluctuations in foreign currency do not have a material impact on the Company's financial position. The Company's revenues and profitability are related to general levels of economic activity and employment in the United States and the United Kingdom. As a result, any significant economic downturn or recession in one or both of those countries could harm our business and financial condition. A significant portion of the Company's revenues is derived from Fortune 500 level companies and their international equivalents, which historically have adjusted expenditures for external training during economic downturns. If the economies in which these companies operate weaken in any future period, these companies may not increase or may reduce their expenditures on external training, which could adversely affect the Company's business and financial condition. 38 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 40 Report of Independent Registered Public Accounting Firm - Eisner LLP 41 Consolidated Balance Sheets - December 31, 2004 and 2003 42 Consolidated Statements of Operations - Years ended December 31, 2004, 2003 and 2002 44 Consolidated Statements of Stockholders' Equity and Comprehensive Income (Loss) - Years ended December 31, 2004, 2003 and 2002 45 Consolidated Statements of Cash Flows - Years ended December 31, 2004, 2003 and 2002 46 Notes to Consolidated Financial Statements 48
39 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of Directors and Stockholders GP Strategies Corporation: We have audited the accompanying consolidated balance sheets of GP Strategies Corporation and subsidiaries as of December 31, 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 40 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM 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 statements of operations and comprehensive income, changes in stockholders' equity and cash flows for each of the years in the two-year period ended December 31, 2003 (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 audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated 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 each of the years in the two-year period ended December 31, 2003, 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 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 -------- -------- 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) 42 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. 43 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 interests 22,433 (8,171) (4,504) 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. 44 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 COMMON COMMON OTHER STOCK STOCK ADDITIONAL ACCUMULATED COMPREHENSIVE ($0.01 PAR) ($0.01 PAR) PAID-IN CAPITAL DEFICIT INCOME (LOSS) ----------- ----------- --------------- ----------- -------------- Balance at December 31, 2001 $128 $ 9 $180,078 $ (87,939) $ 8,364 ---- --- -------- --------- ------- 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 ---- --- -------- --------- ------- Net loss -- -- -- (8,276) -- Other comprehensive loss -- -- -- -- (436) Total comprehensive loss Repayment of notes receivable from stockholder -- -- -- -- -- Issuance and sale of common stock and warrants 9 -- 6,553 -- -- ---- --- -------- --------- ------- Balance at December 31, 2003 163 12 196,541 (101,443) 24 ---- --- -------- --------- ------- Net income -- -- -- 22,520 -- Other comprehensive loss -- -- -- -- (861) Total comprehensive income Repayment of notes receivable from stockholder -- -- -- -- -- 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) ==== === ======== ========= ======= NOTES RECEIVABLE TOTAL FROM TREASURY STOCKHOLDERS' COMPREHENSIVE STOCKHOLDER STOCK AT COST EQUITY INCOME (LOSS) ----------- ------------- ------------- -------------- Balance at December 31, 2001 $(4,095) $(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 (4,095) (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 -- 1,773 Issuance and sale of common stock and warrants -- 207 6,769 ------- ----- ------- Balance at December 31, 2003 (2,322) (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 -- 1,703 Distribution of net assets to NPDC -- -- (25,967) Proceeds from issuance of common stock -- 55 1,413 ------- ----- ------- Balance at December 31, 2004 $ (619) $(108) $91,620 ======= ===== =======
See accompanying notes to consolidated financial statements. 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 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) 46 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. 47 (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. 48 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. 49 GP STRATEGIES CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2004 and 2003 (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 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 50 GP STRATEGIES CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2004 and 2003 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 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 51 GP STRATEGIES CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2004 and 2003 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. 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 52 GP STRATEGIES CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2004 and 2003 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 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. 53 GP STRATEGIES CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2004 and 2003 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. (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. 54 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 55 GP STRATEGIES CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2004 and 2003 options. Under this method, compensation expense is recorded on the date of grant only if the current market price of the underlying stock exceeds the exercise price of the options. SFAS No. 123, Accounting for Stock-Based Compensation, as amended, established accounting and disclosure requirements using a fair-value-based method of accounting for stock-based employee compensation plans. As allowed by SFAS No. 123, the Company has elected to continue to apply the intrinsic-value-based method of accounting described above, and has adopted only the disclosure requirements of SFAS No. 123. The following table illustrates the effect on net income (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. 56 GP STRATEGIES CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2004 and 2003 (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. (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 57 GP STRATEGIES CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2004 and 2003 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. (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). 58 GP STRATEGIES CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2004 and 2003 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): 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 =======
59 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. 60 GP STRATEGIES CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2004 and 2003 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. 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. 61 GP STRATEGIES CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2004 and 2003 (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 nominatedowned 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 62 GP STRATEGIES CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2004 and 2003 estimated fair values of the net assets acquired was recorded as goodwill. Goodwill associated with the GSE acquisition will be deductible for tax purposes. 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. 63 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. 64 GP STRATEGIES CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2004 and 2003 (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 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 65 GP STRATEGIES CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2004 and 2003 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. (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). 66 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 67 GP STRATEGIES CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2004 and 2003 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. 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 68 GP STRATEGIES CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2004 and 2003 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. (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. 69 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. 70 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, pirmarily 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 $19,332,000 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. 71 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. 72 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 ===== =======
73 GP STRATEGIES CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2004 and 2003 (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 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. 74 GP STRATEGIES CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2004 and 2003 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 vesting provisions, option periods and other terms and conditions applicable prior to the spin-off. 75 GP STRATEGIES CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2004 and 2003 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 sharesby virtue 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 affiliatehis position as managing member of Bedford Oak who agrees to be bound by the provisionsAdvisors, LLC, investment manager of Bedford Oak.  EGI had designated Matthew
Zell
as a Director of the Stock Purchase Agreement) or at the request ofCompany. Mr. Zell resigned from the Board of Directors of the Company Bedford Oaksimultaneously with such repurchase.  Mr. Feldman is required to exercise the right to convert alla Director of the Bedford Class B Shares then ownedCompany. The repurchase and exchange transactions were negotiated and approved by Bedford Oak into an equal number of shares of common stocka Special Committee of the Company (the Bedford Underlying Shares). The Company was required to file a registration statement to register 76 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. 77 GP STRATEGIES CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2004 and 2003 (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 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 =========
78 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. 79 GP STRATEGIES CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2004 and 2003 The management of the Company does not allocate the following items by segment: investment and other income; interest expense; selling, general and administrative expenses; 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. 80 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. 81 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. 82 GP STRATEGIES CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2004 and 2003

Indebtedness

On April 1, 2002, Jerome I. Feldman and the Companywe entered into an incentive compensation agreement with Jerome I. Feldman (former Chief Executive Officer and a current Director of the Company) pursuant to which Mr. Feldman ishe was 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 Stockour common stock sustaining or averaging increasing specified levels over periods of at least 10 consecutive trading days. On June 11, 2003, July 23, 2003, December 22, 2003, November 3, 2004 and December 10, 2004, Mr. Feldmanhe earned an incentive paymentpayments of $1,000,000 each, which amounts are payable in January 2006, unless further deferred. each.


To the extent there arewere any outstanding loans from the Company to Mr. Feldman at the time an incentive payment iswas payable, the Company haswe had the right to off-set the payment of such incentive payment first against the outstanding accrued interest under such loans and next against any outstanding principal. The Company recorded compensation expenseWe previously made loans to Mr. Feldman (in year 2000 and prior), who primarily utilized the proceeds of $2,000,000 for the year ended December 31, 2004such loans to exercise stock options and $3,000,000 for the year ended December 31, 2003, which is included in selling, general and administrative expense. Although the off-setpurchase Class B stock. We have not paid Mr. Feldman any of the incentive payments earned will take place in future periods, for accounting purposes,and plan to apply 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 appliedentire incentive compensation earned by Mr. Feldman during 2004 and 2003 against the accrued interest receivable as well asand principal balances on his outstanding loans on May 31, 2007.

On January 19, 2006 in connection with the loan outstanding, which resulted in the outstanding balanceshare repurchase and exchange transaction discussed above, Mr. Feldman repaid approximately $853,000 of the note receivable being reduced from $4,095,000 at December 31, 2002 to $2,322,000 asapproximately $972,000 of total indebtedness (including principal and interest) owed by him. As of December 31, 2006, we had a note receivable from Mr. Feldman, of approximately $124,000, after offsetting his incentive compensation earned in 2004 and 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.discussed above. The loannote bears interest at the prime rate and is secured by certain assets owned by him. All unpaid principal on the loans and accrued interest are due on May 31, 2007.  In addition, as of Wachovia Bank.December 31, 2006, we had other employee advances, unsecured loans and accrued interest receivable from him, totaling $58,000.  The largest aggregate amount of indebtedness (including principal and accrued interest) outstanding from January 1, 2006 through March 31, 2007, after giving effect to the application of the five $1 million incentive payments discussed above, was $972,000, which was the amount outstanding just prior to partial repayment by him discussed above.

Management Services Agreement with NPDC

Prior to the spin-off of NPDC in 2004, NPDC was a wholly-owned subsidiary of GP Strategies.  In connection with the spin-off, we entered into a separate management agreement with NPDC pursuant to which we would provide certain general corporate services to NPDC. As of December 31, 2004,2006, we had four employees, including the aggregate amount of indebtedness outstandingChief Executive Officer and Chief Legal Officer, who also provided services to NPDC under the loan was approximately $65,000. In December 2003, GSE's Board of Directors elected John Moran, anmanagement services agreement, for which we were reimbursed for such services.  Services under the agreement relate to executive financial services, corporate legal services, corporate secretarial administrative support and executive management consulting.  The term of the Companyagreement extends for three years from the date of the spin-off, or through November 24, 2007, and may be terminated by either NPDC or us on or after July 30, 2006 with experience in180 days prior written notice, with the power industry and simulation technology, as itsexception of fees relating to compensation for NPDC’s Chief Executive Officer. In 2004, Mr. MoranOfficer for which NPDC is liable through May 31, 2007 pursuant to his employment agreement.  For the years ended December 31, 2006 and 2005, NPDC paid us management fees of $925,000 and $1,141,000, respectively, as compensation for these services.

NPDC continued as an employeeto occupy a portion of corporate office space leased by us through December 31, 2006.Pursuant to the management services agreement, a portion of the Company, however, Mr. Moran devoted 100%management fee paid to us by NPDC represents compensation for use of his timethis space.

Management Services Agreement with GSE

Subsequent to the performancespin-off of his dutiesGSE effective September 30, 2005, we continued to provide GSE with corporate support services pursuant to a management services agreement through December 31, 2006.

Directorships

Certain of our Directors also serve as CEO ofDirectors for NPDC and 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'sis Chairman and Chief Executive Officer. The Company hasOfficer of NPDC, as well as Chairman of the Board of GSE. Scott N. Greenberg is a Director and the Chief Financial Officer of NPDC and a Director of GSE. Harvey P. Eisen is a Director of NPDC and Managing Member of Bedford Oak Partners LP, which owns approximately 13.6% of the issued and outstanding shares of NPDC.


Guarantees

Subsequent to the spin-off of NPDC, we guaranteed thecertain operating leases for Five Star'sStar’s New Jersey and Connecticut warehouses, totaling approximately $1,589,000 per yearannually through the first quarter ofMarch 31, 2007. The Company's guarantee of such leases was in effect when the Five Star business was in effect when the Five Star business was conducted by a wholly-owned subsidiary of the Company. 83 GP STRATEGIES CORPORATION AND SUBSIDIARIES Notes

Subsequent to Consolidated Financial Statements December 31, 2004 and 2003 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 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 84 GP STRATEGIES CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2004 and 2003 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. Under the distribution agreement that governed the spin-off of NPDC, fromwe continued to guarantee the Company,repayment of one debt obligation of MXL Industries, Inc. (“MXL”), which is secured by property and certain equipment of MXL.  The aggregate outstanding balance as of December 31, 2006 was $1,105,000.  Our guarantee expires upon the Company and NPDC each agreed that neither would take any action that might causematurity of the debt obligation in March 2011.

We continued to guarantee GSE’s borrowings under General Physics’ Credit Agreement (for which $1,500,000 was allocated for use by GSE) subsequent to the spin-off on September 30, 2005.  As 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, 2003,2005, GSE had borrowings of $1,182,000 under the Company recorded $135,000Credit Agreement.  In March 2006, GSE repaid its borrowings in full and ceased to other income in the consolidated statement of operation. The guarantee was extended through May 31, 2004. On March 30, 2004, GSE was added asbe a borrower under the General Physics Credit Agreement (see note 8).Agreement.

Director Independence

Our Board of Directors reviews the independence of its members on an annual basis. No Director will be deemed to be independent unless the Board affirmatively determines that the Director in question has no material relationship with GP Strategies, directly as an officer, stockholder, member or partner of an organization that has a material relationship with GP Strategies. The Company agreed to guarantee GSE's allocated portion ($1,500,000)Board has not adopted any categorical standards of Director independence, however, the Board of Directors employs the standards of independence 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. 85 GP STRATEGIES CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2004 and 2003 Minimum rentals under long-term operating leases are as follows (in thousands):
REAL MACHINERY 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 wasNYSE rules currently in effect when Five Star was originallyin making its determination that a wholly owned subsidiaryDirector qualifies as independent. In its annual review of Director independence, the Company prior to the sale by the Company in 1998 of substantiallyBoard considers 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 connectioncommercial, banking, consulting, legal, accounting, charitable or other business relationships any Director may have 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 86 GP STRATEGIES CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2004 and 2003 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.Strategies. As a result of its annual review, the conclusionBoard of the arbitration, the state courtDirectors 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 sodetermined 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)Harvey P. Eisen, Marshall S. Geller, Richard C. Pfenniger, Jr., 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 87 GP STRATEGIES CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2004 and 2003 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. 88 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
(Continued) 89 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)
90 ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. ITEM 9A: CONTROLS AND PROCEDURES Evaluation of Disclosure Controls and Procedures. The Company maintains disclosure controls and procedures thatOgden R. Reid are designed to ensure that information required to be disclosed by it in its reports filed or submitted pursuant to the Securities Exchange Act of 1934, as amended (Exchange Act), is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and formsindependent and that information required to be disclosed by the Company in its Exchange Act reports is accumulated and communicated to management, including the Company'sScott N. Greenberg, Chief Executive Officer, and Chief Financial Officer,Jerome I. Feldman, Director, are not independent. We have Nominating/Corporate Governance, Compensation and Audit Committees and based on these standards, all current members of such committees are independent.

ITEM 14.          Principal Accounting Fees and Services

Independent Registered Public Accountant Fees

The following table sets forth the fees billed to allow timely decisions regarding required disclosure. Underus for the supervision and with the participation of our management, including the Company's Chief Executive Officer and Chief Financial Officer, the Company carried out an evaluation of the effectiveness of the design and operation of the Company's disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(e) as ofyears ended December 31, 2004. Based upon that evaluation2006 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 such date. SECTION 404 ASSESSMENT Section 404 of the Sarbanes-Oxley Act of 2002 requires us to conduct an annual assessment of our internal control over financial reporting and to include a report on, and an attestation2005 for professional services rendered by our independent registered public accountants, KPMG LLP,LLP:

 

2006

 

2005

 

 

 

 

 

 

 

Audit Fees (1)

 

$

811,000

 

$

808,000

 

Audit-Related Fees (2)

 

80,000

 

50,000

 

Tax Fees (3)

 

59,000

 

66,000

 

All Other Fees (4)

 

0

 

40,000

 

Total

 

$

950,000

 

$

964,000

 


(1)          Audit-fees for 2006 and 2005 consisted of the effectiveness of these controls, beginning in this Annual Report on Form 10-Kfees for the fiscal year ended December 31, 2004. On November 30, 2004, the Securities and Exchange Commission issued an exemptive order under which certain companies are permitted to delay, for up to 45 days after the due dateaudit of their Annual Report on Form 10-K, the filing of the internal control report and the related attestation of the independent registered public accountants. The Company qualifies under the provisions of this exemptive order for such 45-day delay. In reliance on this exemptive order, this Annual Report on Form 10-K does not include the internal control report or related attestation, which the Company plans to file by amendment priorour consolidated financial statements, including quarterly review services, fees with respect to the expirationaudit of the 45-day extension. The Company is currently performing its assessment of the effectiveness of the Company's internal control over financial reporting, as of December 31, 2004, using the control criteria framework of the Committee of Sponsoring Organizations (COSO) of the Treadway Commission published in its report entitled Internal Control-Integrated Framework. As of the date of this filing, the Company and KPMG LLP have determined that certain material weaknesses exist in the Company's internal control over financial 91 reporting. These material weaknesses arose from deficiencies in two areas: (1) the accounting for income taxes and (2) the preparation and review of certain consolidatedSEC reporting matters.

(2)          Audit-related fees consisted of the audit of the financial statement footnote disclosures. In both cases, the Company did not have adequate technical resources or sufficient management review procedures. The deficiencies were promptly broughtstatements of employee benefit plans and statutory audit services and audit-related services for subsidiaries of General Physics in 2006 and 2005.


(3)   Includes fees for tax compliance services and research.

(4)          Other fees paid to KPMG for 2005 consisted of a SAS 70 Readiness Assessment on General Physics’ Business Process Outsourcing services.

Policy on Pre-Approval of Services Provided by Independent Auditor

Pursuant to the attentionrequirements of the Company'sSarbanes-Oxley Act of 2002, the terms of the engagement of KPMG are subject to specific pre-approval policies of the Audit Committee.  All audit and permitted non-audit services to be performed by KPMG require pre-approval by the Audit Committee andin accordance with pre-approval policies established by the Company has assigned a high priorityAudit Committee.  The procedures require all proposed engagements of KPMG for services of any kind be directed to the improvement of the internal control over financial reporting. The Company is developing a plan to remediate the material weaknesses that is expected to include: - Increasing the level of review in the preparation of the quarterlyCompany’s Chief Financial Officer and annual tax provision; - Formalizing the processes, procedures and documentation standards over the preparation of the quarterly and annual accountingthen submitted for income tax and the preparation of the consolidated financial statement footnote disclosures; and - Increasing resources for reportingapproval to the Securities and Exchange Commission pursuantAudit Committee prior to the Exchange Act. The Company expects to begin implementing such remediation plan as soon as possible. Changes in Internal Control over Financial Reporting No change in our internal control over financial reporting occurred during our fourth fiscal quarter of 2004 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. LIMITATIONS OF EFFECTIVENESS OF CONTROLS It should be noted that any system of controls, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the system will be met. The designbeginning of any control system is based, in part, upon the benefits of the control system relative to its costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issuesservice.


Part IV

Item 15:            Exhibits and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision making can be faulty, and that controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of control. In addition, over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Also, the design of any control system is based in part upon certain assumptions about the likelihood of future events. Because of inherent limitation in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. The Company's controls and procedures are designed to provide a reasonable level of assurance of achieving their objectives. 92 PART III The Company has adopted a Code of Business Conduct and Ethics for directors, officers and employees of the Company and its subsidiaries, which was approved by the Company's Audit Committee and Board of Directors. A copy of this Code of Business Conduct and Ethics is incorporated herein by reference into this report as Exhibit 14.1. If the Company makes any amendments to the Code of Business Conduct and Ethics or grants any waiver from a provision of the Code of Business Conduct and Ethics for its executive officers or directors, the Company will within five (5) days disclose the nature of such amendment or waiver on its website at www.gpstrategies.com or in a report on Form 8-K. All other information required by Items 10, 11, 12, 13 and 14 of Part III of this Annual Report on Form 10-K is incorporated herein by reference to the information under the captions "Directors and Executive Officers of the Registrant", "Executive Compensation", "Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters", "Certain Relationships and Related Transactions" and "Principal Accountant Fees and Services" in the Proxy Statement for the company's 2004 and 2005 Annual Meeting of Shareholders. PART IV ITEM 15: EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a)(1) The following financial statements are included in Part II, Item 8. Financial Statements and Supplementary Data: Financial Statements of GP Strategies Corporation and Subsidiaries:
PAGE ---- Report of Independent Registered Public Accounting Firm - KPMG LLP 40 Report of Independent Registered Public Accounting Firm - Eisner LLP 41 Consolidated Balance Sheets - December 31, 2004 and 2003 42 Consolidated Statements of Operations - Years ended December 31, 2004, 2003 and 2002 44 Consolidated Statements of Stockholders' Equity and Comprehensive Income (Loss)- Years ended December 31, 2004, 2003 and 2002 45 Consolidated Statements of Cash Flows - Years ended December 31, 2004, 2003 and 2002 46 Notes to Consolidated Financial Statements 48
(a)(2) Financial Statement Schedules

Schedule I - Schedule

(a)

1. and 2.

No financial statements or schedules are filed with this report on Form 10-K/A.

3.

Exhibits

A list of Valuation and Qualifying Accounts i

94 (a)(3) Exhibits Consentthe exhibits filed or furnished with this report on Form 10-K/A is provided in the Exhibit Index beginning on page 25 of Independent Registered Public Accounting Firm - KPMG LLP * Consent of Independent Registered Public Accounting Firm - Eisner LLP * this report.

* Filed herewith 95 SIGNATURES


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: March 16, 2005 /s/ Jerome I. Feldman

GP STRATEGIES CORPORATION

Dated: April 30, 2007

By:

/s/ SCOTT N. GREENBERG

Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
SIGNATURES TITLE ---------- ----- /s/ Jerome I. Feldman Principal Executive Officer /s/ Scott N. Greenberg

/s/ SHARON ESPOSITO-MAYER

Executive Vice President and Chief Financial Officer and Director /s/ Ogden R. Reid Director /s/ Harvey P. Eisen Director /s/ Marshall S. Geller Director

96 EXHIBIT INDEX


Exhibit Index

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.
97 EXHIBIT INDEX
EXHIBIT NUMBER - -------------- 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. 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, 2005. 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.
98 EXHIBIT INDEX
EXHIBIT NUMBER - -------------- 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, 2005. 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 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.
99 EXHIBIT INDEX
EXHIBIT NUMBER - -------------- 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. 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.
100 EXHIBIT INDEX
EXHIBIT NUMBER - -------------- 10.32 Amendment

Index 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. 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.

101 EXHIBIT INDEX
EXHIBIT NUMBER - -------------- 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. 10.48 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. 10.50 Mortgage Security Agreement and Assignment of Leases dated August 14, 2003 between GP Strategies Corporation and Gabelli Funds, LLC.
102 EXHIBIT INDEX
EXHIBIT NUMBER - -------------- 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 Corporation Form S-1, Registration No. 333-118568. 10.61 Form of Management Agreement
103 EXHIBIT INDEX
EXHIBIT NUMBER - -------------- between National Patent Development Corporation and the Registrant. Incorporated herein by reference to Exhibit 10.2. of National Patent Development Corporation Form S-1, Registration No. 333-118568. 10.60 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 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 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 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 Officer*

31.2

Certification of Chief Financial Officer Officer*

32.1

Certification Pursuant to Section 18 U.S.C. Section 1350 * 1350*


* Filed herewith. 104 GP STRATEGIES CORPORATION AND SUBSIDIARIES SCHEDULE I Schedule of Valuation and Qualifying Accounts
ADDITIONS BALANCE AT ADDITIONAL CHARGED TO BALANCE AT BEGINNING ALLOWANCE COSTS AND DEDUCTIONS END OF OF YEAR ACQUIRED (A) EXPENSES (B) YEAR ---------- ------------ ---------- ---------- ---------- Year ended December 31, 2004: Allowance for doubtful accounts (C) $1,739 -- 191 (1,013) $ 917 Year ended December 31, 2003: Allowance for doubtful accounts (C) $ 854 707 423 (245) $1,739 Year ended December 31, 2002: Allowance for doubtful accounts (C) $ 529 823 (498) $ 854
(A) Represents the allowance for doubtful accounts acquired as part of the Five Star and GSE Acquisitions of $700 and $7, respectively. (B) Write-off of uncollectible accounts, net of recoveries. For year ended December 31, 2004 also represents allowance of Five Star of $294 and MXL of $124 distributed in the spin-off of NPDC. (C) Deducted from related asset on Consolidated Balance Sheet. i herewith

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