UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549
FORM 10-Q
[x]x Quarterly Report Pursuant to Section 13 or 15(d) of
theThe Securities Exchange Act of 1934For the quarterly period ended September 30,
2005 OR [ ]2006or
o Transition Report Pursuant to Section 13 or 15(d) of
theThe Securities Exchange Act of 1934For the transition period from
________________to_____________________Commission File
Number:Number 1-7234GP
Strategies Corporation (ExactSTRATEGIES CORPORATION(Exact name of
registrantRegistrant as specified in its charter)
Delaware
13-1926739
(State or other jurisdiction(State of
(I.R.S.Incorporation)(I.R.S. Employer Identification No.)
incorporation or organization)
777 Westchester Avenue, White Plains, New York 10604 (Address6095 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)code:Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the
registrantRegistrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YesXx No----- -----oIndicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
(as definedor a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule12(b)-212b-2 of the ExchangeAct). Yes X No ----- -----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 oNo
X ----- -----xIndicate the number of shares outstanding of each of
issuer'sissuer’s classes of common stock as of October 31,2005:2006:
Class
Outstanding
Common Stock,
17,081,674par value $.01 per share15,818,449 shares
Class B Capital 1,200,000 sharesGP STRATEGIES CORPORATION AND SUBSIDIARIES
TABLE OF CONTENTS
GP STRATEGIES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS)
SEPTEMBER 30, 2005 DECEMBER 31, (UNAUDITED) 2004 ------------- ------------ASSETS Current assets: Cash and cash equivalents $ 10,507 $ 2,417 Cash held in escrow from arbitration settlement -- 13,798 Accounts and other receivables, less allowance for doubtful accounts of $883 in 2005 and $917 in 2004 24,264 31,114 Costs and estimated earnings in excess of billings on uncompleted contracts 12,143 16,834 Prepaid expenses and other current assets 7,363 5,828 -------- -------- Total current assets 54,277 69,991 -------- -------- Property, plant and equipment 6,020 13,078 Accumulated depreciation (4,007) (10,405) -------- -------- Property, plant and equipment, net 2,013 2,673 Intangible assets: Goodwill 57,507 63,867 Patents, licenses and contract rights 1,340 1,821 Accumulated amortization of patents, licenses and contract rights (653) (797) -------- -------- Intangible assets, net 58,194 64,891 Deferred tax assets 13,796 15,164 Other assets 1,245 3,316 -------- -------- Total assets $129,525 $156,035 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current maturities of long-term debt $ 87 $ 100 Short-term borrowings -- 6,068 Accounts payable and accrued expenses 19,947 33,219 Billings in excess of costs and estimated earnings on uncompleted contracts 7,168 10,003 -------- -------- Total current liabilities 27,202 49,390 Long-term debt less current maturities 11,207 10,951 Other non-current liabilities 1,138 1,739 -------- -------- Total liabilities 39,547 62,080 -------- -------- Minority interest -- 2,335 Stockholders' equity: Common stock, par value $0.01 per share 171 167 Class B capital stock, par value $0.01 per share 12 12 Additional paid-in capital 168,929 171,852 Accumulated deficit (76,193) (78,923) Unearned compensation (1,210) -- Accumulated other comprehensive loss (1,068) (761) Note receivable from stockholder (619) (619) Treasury stock, at cost (44) (108) -------- -------- Total stockholders' equity 89,978 91,620 -------- -------- Total liabilities and stockholders' equity $129,525 $156,035 ======== ========Condensed Consolidated Balance Sheets
(In thousands, except per share amounts)
September 30,
December 31,
2006
2005
(Unaudited)
Assets
Current assets:
Cash and cash equivalents
$
5,216
$
18,118
Accounts and other receivables, less allowance for doubtful accounts of $666 in 2006 and $1,166 in 2005
24,524
27,079
Costs and estimated earnings in excess of billings on uncompleted contracts
12,686
11,487
Prepaid expenses and other current assets
4,930
5,936
Total current assets
47,356
62,620
Property, plant and equipment
6,537
6,619
Accumulated depreciation
(4,867
)
(4,762
)
Property, plant and equipment, net
1,670
1,857
Goodwill
58,530
57,483
Other intangible assets, net
695
647
Deferred tax assets
7,498
10,391
Other assets
1,463
1,643
$
117,212
$
134,641
Liabilities and Stockholders’ Equity
Current liabilities:
Current maturities of long-term debt
$
35
$
71
Accounts payable and accrued expenses
19,698
20,315
Billings in excess of costs and estimated earnings on uncompleted contracts
5,473
7,430
Total current liabilities
25,206
27,816
Long-term debt less current maturities
11,260
11,309
Other noncurrent liabilities
1,219
1,174
Total liabilities
37,685
40,299
Stockholders’ equity:
Common stock, par value $0.01 per share
178
171
Class B capital stock, par value $0.01 per share
—
12
Additional paid-in capital
161,613
168,737
Accumulated deficit
(66,849
)
(71,710
)
Treasury stock at cost
(14,460
)
(29
)
Unearned compensation
—
(1,133
)
Accumulated other comprehensive loss
(831
)
(1,087
)
Note receivable from stockholder
(124
)
(619
)
Total stockholders’ equity
79,527
94,342
$
117,212
$
134,641
See accompanying notes to
thecondensed consolidated financial statements.1
GP STRATEGIES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------ ------------------- 2005 2004 2005 2004 ------- -------- -------- --------Revenue $44,059 $44,178 $131,278 $118,814 Cost of revenue 37,371 38,855 112,678 104,786 ------- ------- -------- -------- Gross profit 6,688 5,323 18,600 14,028 Selling, general and administrative expenses (4,060) (3,791) (10,996) (11,261) ------- ------- -------- -------- Operating income 2,628 1,532 7,604 2,767 Interest expense (387) (490) (1,129) (1,470) Other income 87 104 141 321 ------- ------- -------- -------- Income from continuing operations before income tax expense 2,328 1,146 6,616 1,618 Income tax expense (869) (546) (2,874) (1,002) ------- ------- -------- -------- Income from continuing operations 1,459 600 3,742 616 Income (loss) from discontinued operations, net of income taxes (417) (171) (1,012) 337 ------- ------- -------- -------- Net income $ 1,042 $ 429 $ 2,730 $ 953 ======= ======= ======== ======== Per common share data: Basic Income from continuing operations $ 0.08 $ 0.03 $ 0.21 $ 0.03 Income (loss) from discontinued operations (0.02) (0.01) (0.06) 0.02 ------- ------- -------- -------- Net income $ 0.06 $ 0.02 $ 0.15 $ 0.05 ======= ======= ======== ======== Diluted Income from continuing operations $ 0.07 $ 0.03 $ 0.20 $ 0.03 Income (loss) from discontinued operations (0.02) (0.01) (0.06) 0.02 ------- ------- -------- -------- Net income $ 0.05 $ 0.02 $ 0.14 $ 0.05 ======= ======= ======== ========Condensed Consolidated Statements of Operations
(Unaudited)
(In thousands, except per share amounts)
Three Months Ended
Nine Months Ended
September 30,
September 30,
2006
2005
2006
2005
Revenue
$
44,051
$
44,059
$
133,358
$
131,278
Cost of revenue
37,141
37,371
113,729
112,678
Gross profit
6,910
6,688
19,629
18,600
Selling, general and administrative expenses
3,827
4,060
10,831
10,996
Operating income
3,083
2,628
8,798
7,604
Interest expense
376
387
1,233
1,129
Other income
180
87
764
141
Income from continuing operations before income tax expense
2,887
2,328
8,329
6,616
Income tax expense
1,140
869
3,468
2,874
Income from continuing operations
1,747
1,459
4,861
3,742
Loss from discontinued operations, net of income taxes
—
(417
)
—
(1,012
)
Net income
$
1,747
$
1,042
$
4,861
$
2,730
Basic weighted average shares outstanding
15,657
18,260
16,535
18,105
Diluted weighted average shares outstanding
16,555
18,991
17,438
18,916
Per common share data:
Basic
Income from continuing operations
$
0.11
$
0.08
$
0.29
$
0.21
Loss from discontinued operations
—
(0.02
)
—
(0.06
)
Net income
$
0.11
$
0.06
$
0.29
$
0.15
Diluted
Income from continuing operations
$
0.11
$
0.07
$
0.28
$
0.20
Loss from discontinued operations
—
(0.02
)
—
(0.06
)
Net income
$
0.11
$
0.05
$
0.28
$
0.14
See accompanying notes to
thecondensed consolidated financial statements.2
GP STRATEGIES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS NINE MONTHS ENDED SEPTEMBERCondensed Consolidated Statement of Stockholders’ Equity
(Unaudited)
Nine months ended September 30,
2005 AND 2004 (UNAUDITED) (DOLLARS IN THOUSANDS)2006
2005 2004 ------- ------Cash flows from operating activities: Income from continuing operations $ 3,742 $ 616 Income (loss) from discontinued operations, net of income taxes (1,012) 337 ------- ------- Net income 2,730 953 Adjustments to reconcile net income to net cash provided (used) by operating activities: Depreciation and amortization 2,506 2,746 Collection of deposit in escrow 13,798 -- Issuance of stock for retirement savings plan and non-cash compensation expense 900 100 Gain on sales of marketable securities -- (381) Changes in other operating items (8,163) (4,211) ------- ------- Net cash provided (used) by operations 11,771 (793) ------- ------- Cash flows from investing activities: Additions to property, plant and equipment (818) (1,281) Proceeds from sales of marketable securities -- 1,012 Proceeds from sales of property, plant and equipment 21 -- ------- ------- Net cash used by investing activities (797) (269) ------- ------- Cash flows from financing activities: Proceeds from (repayment of) short-term borrowings, net (4,886) 1,056 Issuance of subordinated convertible note by GSE 2,000 -- Repayment of long-term debt -- (723) Proceeds from exercised stock options 1,238 404 Distribution of cash in the net assets of GSE in spin-off (804) -- Other financing activities (287) -- Payments of obligations under capital leases (70) (270) ------- ------- Net cash provided (used) by financing activities (2,809) 467 ------- ------- Effect of exchange rate changes on cash and cash equivalents (75) (3) ------- ------- Net increase (decrease) in cash and cash equivalents 8,090 (598) Cash and cash equivalents at the beginning of the period 2,417 4,416 ------- ------- Cash and cash equivalents at the end of the period $10,507 $ 3,818 ======= ======= Non-cash investing activity: Distribution of non-cash net assets of GSE in spin-off (see note 4) $ 5,978 $ --(In thousands, except for par value per share)
Class B
Accumulated
Note
Common
capital
other
receivable
Total
stock
stock
Additional
Accumulated
Treasury
Unearned
comprehensive
from
stockholders’
($0.01 par)
($0.01 par)
paid-in capital
deficit
stock at cost
compensation
loss
stockholder
equity
Balance at December 31, 2005
$
171
$
12
$
168,737
$
(71,710
)
$
(29
)
$
(1,133
)
$
(1,087
)
$
(619
)
$
94,342
Net income
—
—
—
4,861
—
—
—
—
4,861
Repurchase and exchange of common stock and Class B stock in capital stock restructuring
6
(12
)
(6,096
)
—
(14,758
)
—
—
—
(20,860
)
Repayment of note receivable from stockholder
—
—
—
—
—
—
—
495
495
Repurchases of common stock in the open market
—
—
—
—
(1,939
)
—
—
—
(1,939
)
Elimination of unearned compensation upon adoption of SFAS No. 123R
—
—
(1,133
)
—
—
1,133
—
—
—
Stock-based compensation expense
—
—
373
—
27
—
—
—
400
Other comprehensive income
—
—
—
—
—
—
256
—
256
Net issuances of stock for exercises of stock options and warrants and retirement savings plan
1
—
(268
)
—
2,239
—
—
—
1,972
Balance at September 30, 2006
$
178
$
—
$
161,613
$
(66,849
)
$
(14,460
)
$
—
$
(831
)
$
(124
)
$
79,527
See accompanying notes to
thecondensed consolidated financial statements.3
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
Nine months ended September 30, 2006 and 2005
(Unaudited)
(In thousands)
2006
2005
Cash flows from operating activities:
Net income
$
4,861
$
2,730
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization
1,961
2,506
Collection of deposit in escrow, including interest
—
13,798
Deferred income taxes
2,653
2,300
Issuance of stock for retirement savings plan and non-cash compensation expense
1,232
900
Minority interest
—
(953
)
Changes in other operating items, net of effect of acquisition:
Accounts and other receivables
3,317
4,362
Costs and estimated earnings in excess of billings on uncompleted contracts
(1,199
)
(737
)
Prepaid and other current assets
859
(2,729
)
Accounts payable and accrued expenses
(1,356
)
(7,998
)
Billings in excess of costs and estimated earnings on uncompleted contracts
(2,611
)
(1,988
)
Other
45
(420
)
Net cash provided by operating activities
9,762
11,771
Cash flows from investing activities:
Additions to property, plant and equipment
(509
)
(818
)
Acquisition, net of cash acquired
(619
)
—
Other investing activities
1
21
Net cash used in investing activities
(1,127
)
(797
)
Cash flows from financing activities:
Repurchase and exchange of common stock and Class B stock in capital stock restructuring
(20,860
)
—
Repayment of short-term borrowings
—
(4,886
)
Repurchases of common stock in the open market
(1,939
)
—
Repayment of note receivable from stockholder
495
—
Proceeds from stock option and warrant exercises
826
1,238
Proceeds from issuance of subordinated convertible note by GSE
—
2,000
Distribution of cash of GSE in spin-off
—
(804
)
Deferred financing costs
—
(287
)
Payments on obligations under capital leases
(76
)
(70
)
Net cash used in financing activities
(21,554
)
(2,809
)
Effect of exchange rate changes on cash and cash equivalents
17
(75
)
Net increase (decrease) in cash and cash equivalents
(12,902
)
8,090
Cash and cash equivalents at beginning of period
18,118
2,417
Cash and cash equivalents at end of period
$
5,216
$
10,507
Non-cash investing activities:
Reduction in carrying value of Gabelli Notes upon exercise of detachable stock purchase warrants
$
418
$
—
Distribution of non-cash net assets of GSE in spin-off
$
—
$
5,978
See accompanying notes to condensed consolidated financial statements.
4
GP STRATEGIES CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Three and nine months endedSeptember 30,
2005 and 20042006
(Unaudited)(1)
BASIS OF PRESENTATIONBasis of PresentationGP Strategies Corporation
("the Company"(the “Company”) was incorporated in Delaware in 1959.As of September 30, 2005, the Company'sThe Company’s business consists of its training, engineering, andworkforce developmentconsulting business operated by General Physics Corporation("(“GeneralPhysics"Physics” or"GP"“GP”). General Physics is a workforce development company that seeks to improve the effectiveness of organizations by providing training and e-Learning solutions, management consulting,e-Learning solutionsand engineering services that are customized to meet the specific needs of clients.On September 30, 2005, the Company completed a taxable spin-off of its 57% interest in GSE Systems, Inc.
("GSE"(“GSE”) through a dividend to theCompany'sCompany’s stockholders. GSE is a stand alone public company which provides simulation solutions and services to energy, process and manufacturing industries worldwide. On September 30, 2005, stockholders received in the spin-off 0.283075 shares of GSE common stock for each share of theCompany's common stockCompany’s Common Stock or Class BstockCapital Stock (“Class B Stock”) held on the record date of September 19, 2005. Following the spin-off, the Company ceased to have any ownership interest in GSE and the operations of GSEhave been reclassifiedare presented as discontinued in theCompany'sCompany’s condensed consolidated statements of operations forallthe prior periodspresented (see note 4).presented. The Companywill continuecontinues to provide corporate support services to GSEincluding accounting, finance, human resources, legal, network support and tax,pursuant to a management services agreement whichhas been extendedextends through December 31,20052006 (seenotes 4 andNote 10).On November 24, 2004, the Company completed the tax-free spin-off of National Patent Development Corporation ("NPDC"). Subsequent to the spin-off, the results of operations of NPDC are presented as discontinued in the Company's condensed consolidated statements of operations for the three and nine months ended September 30, 2004. The condensed consolidated financial statements include the operations of the Company and its majority-owned subsidiaries. All significant intercompany balances and transactions have been eliminated.The accompanying condensed consolidated balance sheet as of September 30,
2005,2006, the condensed consolidated statements of operations for the three and nine months ended September 30, 2006 and 2005, and the condensed consolidatedstatementstatements of cash flows for the nine months ended September 30, 2006 and 2005 have not been audited, but have been prepared in conformity with U.S. generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements for the year ended December 31,20042005, as presented in our Annual Report on Form10-K/A10-K datedMayMarch 16,2005.2006. In the opinion of management, this interim information includes all material adjustments, which are of a normal and recurring nature, necessary for a fair presentation. The results for the20052006 interimperiodsperiod are not necessarily indicative of results to be expected for the entire year. During the nine months ended September 30, 2006, the Company reflected $0.4 million of equity in earnings of a joint venture within other income. In 2005, this amount was reflected in revenue. During the nine months ended September 30, 2005, $0.2 million was reflected in revenue related to this joint venture. Certain other amountsfor 2004in 2005 have been reclassified to conform with the presentation for2005. In September 2005 in conjunction with the spin-off of GSE, the Company identified an amount in its deferred tax assets that related to the excess tax basis over book basis of its investment in GSE. This deferred tax asset should have been eliminated in purchase accounting when the Company increased its ownership interest in GSE to 57% in October 2003.2006.The
Company has reclassified $1.5 million from noncurrent deferred tax assets to goodwill in its December 31, 2004condensedconsolidated balance sheet herein. The Company determined the reclassification had a deminimus impact on the results of the Company's operations for all periods subsequent to October 2003 and was not material quantitatively or qualitatively to theconsolidated financial statementstaken as a whole. 4GP STRATEGIES CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements Threeinclude the operations of the Company andnine months ended September 30, 2005its subsidiaries. All significant intercompany balances and2004 (Unaudited)transactions have been eliminated.(2)
INCOME PER SHAREEarnings Per ShareBasic
incomeearnings per common share (EPS) isbased upon the weighted average number of common shares outstanding, including Class B stock, during the periods. Class B stockholders have the same rights to share in profits and losses and liquidation values as common stockholders. Diluted income per share is based uponcomputed by dividing earnings by the weighted average number of common shares outstanding during theperiod assumingperiods. Diluted EPS reflects theissuancepotential dilution of common stockfor all potentialequivalent shares that could occur if securities or other contracts to issue common stock were exercised or converted into common stock.The Company’s dilutive common stock
equivalents outstanding. Income per share for the three and nine months ended September 30, 2005 and 2004 is as follows (in thousands, except per share data):
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------ ----------------- 2005 2004 2005 2004 ------- -------- ------- ------INCOME (LOSS) USED IN COMPUTATION: Income from continuing operations $ 1,459 $ 600 $ 3,742 $ 616 Income (loss) from discontinued operations (417) (171) (1,012) 337 ------- ------- ------- ------- Net income $ 1,042 $ 429 $ 2,730 $ 953 ======= ======= ======= ======= SHARES USED IN COMPUTATION: Basic weighted average shares outstanding 18,260 17,694 18,105 17,628 Dilutive impactequivalent shares consist ofstock options, warrants and non-vested restricted stock units 731 511 811 530 ------- ------- ------- ------- Diluted weighted average shares outstanding 18,991 18,205 18,916 18,158 ======= ======= ======= ======= INCOME (LOSS) PER COMMON SHARE: Basic Income from continuing operations $ 0.08 $ 0.03 $ 0.21 $ 0.03 Income (loss) from discontinued operations (0.02) (0.01) (0.06) 0.02 ------- ------- ------- ------- Net income $ 0.06 $ 0.02 $ 0.15 $ 0.05 ======= ======= ======= ======= Diluted Income from continuing operations $ 0.07 $ 0.03 $ 0.20 $ 0.03 Income (loss) from discontinued operations (0.02) (0.01) (0.06) 0.02 ------- ------- ------- ------- Net income $ 0.05 $ 0.02 $ 0.14 $ 0.05 ======= ======= ======= =======5GP STRATEGIES CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements Three and nine months ended September 30, 2005 and 2004 (Unaudited) For the three and nine months ended September 30, 2005,stock options,warrants, and convertible notes totaling 574,000 shares for both periods were not dilutive and were excluded from the computation of diluted income per share. For the three and nine months ended September 30, 2004,non-vested stockoptions, warrants, and convertible notes totaling 3,042,000 shares and 3,023,000 shares, respectively, were not dilutive and were excluded from the computation of diluted income per share. The difference between the basic and diluted number of weighted average shares outstanding for the three and nine months ended September 30, 2005 and 2004 represents dilutive stock optionsunits, and warrants to purchase shares of common stock computed under the treasury stock method, using the average market price during the period. Thedifference betweenfollowing table presents instruments which were not dilutive and were excluded from the computation of diluted EPS in each period, as well as the dilutive common stock equivalent shares which were included in the computation of diluted EPS:
Three Months Ended
Nine Months Ended
September 30,
September 30,
2006
2005
2006
2005
(In thousands)
Non-dilutive instruments
577
574
578
574
Dilutive common stock equivalents
898
731
903
811
(3)Stock-Based Compensation
Accounting Standard Adopted
In December 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard (SFAS) No. 123R, Share-Based Payment (SFAS No. 123R), which revises SFAS No. 123, Accounting for Stock-Based Compensation (SFAS No. 123), and supersedes Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB No. 25), and requires companies to recognize compensation expense for all equity-based compensation awards issued to employees that are expected to vest. The Company adopted SFAS No. 123R on January 1, 2006, using the Modified Prospective Application method without restatement of prior periods. Under this method, the Company began to amortize compensation cost for the remaining portion of its outstanding awards for which the requisite service was not yet rendered as of January 1, 2006. Compensation cost is based on the fair value of those awards as previously disclosed on a pro forma basis under SFAS No. 123. The Company determines the fair value of and accounts for awards that are granted, modified, or settled after January 1, 2006 in accordance with SFAS No. 123R.
The following table presents the impact of SFAS No. 123R on income from continuing operations before income tax expense, net income, cash flows from operating and financing activities, and basic and diluted earnings per share:
Three Months Ended
September 30, 2006
Nine Months Ended
September 30, 2006
As Reported
Including
SFAS No. 123R
Adoption
Pro-Forma
Excluding
SFAS No. 123R
Adoption
As Reported
Including
SFAS No. 123R
Adoption
Pro-Forma
Excluding
SFAS No. 123R
Adoption
(In thousands, except per share data)
Income from continuing operations before income tax expense
$
2,887
$
2,900
$
8,329
$
8,481
Net income
1,747
1,755
4,861
4,952
Net cash provided by operating activities
3,093
3,093
9,762
9,762
Net cash provided by (used in) financing activities
69
69
(21,554
)
(21,554
)
Earnings per share - basic
0.11
0.11
0.29
0.30
Earnings per share - diluted
0.11
0.11
0.28
0.28
Stock-Based Compensation Plans
Pursuant to the Company’s Non-Qualified Stock Option Plan, as amended (the “Non-Qualified Plan”), and 2003 Incentive Stock Plan (the “2003 Plan”), the Company may grant awards of non-qualified stock options, incentive stock options, restricted stock, stock units, performance shares, performance units and other incentives payable in cash or in shares of the Company’s Common Stock to officers, employees or members of the Board of Directors. The Company is authorized to grant an aggregate of
4,237,515 shares under the Non-Qualified Plan and an aggregate of 2,000,000 shares under the 2003 Plan. The Company may issue new shares or use shares held in treasury to deliver shares to employees for its equity grants or upon exercise of non-qualified stock options.
Under SFAS No. 123R, the Company recognizes compensation expense on a straight-line basis over the requisite service period for stock-based compensation awards with both graded and cliff vesting terms. The Company applies a forfeiture estimate to compensation expense recognized for awards that are expected to vest during the requisite service period, and revises that estimate if subsequent information indicates that the actual forfeitures will differ from the estimate. The Company recognizes the cumulative effect of a change in the number of
weighted average shares outstanding forawards expected to vest in compensation expense in the period of change. The Company does not capitalize any portion of its stock-based compensation.The following table summarizes the stock-based compensation expense included in reported net income under the fair value method in accordance with SFAS No. 123R (in thousands):
Three months ended
Nine months ended
September 30,
September 30,
2006
2006
Cost of revenue
$
50
$
260
Selling, general and administrative expenses
40
140
Total stock-based compensation expense (pre-tax)
$
90
$
400
Total compensation expense shown in the table above is comprised of the following (in thousands):
Three months ended
Nine months ended
September 30,
September 30,
2006
2006
Non-qualified stock options
$
13
$
152
Non-vested stock units
66
225
Board of Director stock grants
11
23
Total stock-based compensation expense (pre-tax)
$
90
$
400
During the three and nine months ended September 30,
2005 also includes dilutive non-vested restricted stock awards granted during 2005, computed under2006, thetreasury stock method using average market price. (3) STOCK BASED COMPENSATION TheCompanyappliesrecognized a deferred income tax benefit of $32,000 and $151,000, respectively, associated with theintrinsic-value-based method of accounting prescribed by Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations including Financial Accounting Standards Board ("FASB") Interpretation No. 44, Accounting for Certain Transactions Involving Stock Compensation, an interpretation of APB Opinion No. 25, to account for its fixed-plan stock options. Under this method,compensation expenseis recorded onrecognized for these awards. As of September 30, 2006, the Company had non-qualified stock options and non-vested stock units outstanding under these plans as discussed below.Non-Qualified Stock Options
Non-qualified stock options are granted with an exercise price not less than the fair market value of the Company’s Common Stock at the date of grant,
only ifvest over a period up to ten years, and expire at various terms up to ten years from thecurrent market pricedate of grant.Summarized information for the
underlyingCompany’s non-qualified stockexceedsoptions is as follows:
Weighted
average
Weighted
remaining
Aggregate
Number of
average
contractual
intrinsic
Stock Options
options
exercise price
term
value
Outstanding at December 31, 2005
1,411,345
$
4.83
Granted
—
Exercised
(139,569
)
4.96
Forfeited/expired
(26,729
)
4.89
Outstanding and expected to vest at September 30, 2006
1,245,047
$
4.81
1.23
$
3,380,000
Exercisable at September 30, 2006
1,235,406
$
4.79
1.23
$
3,365,000
The total intrinsic value realized by participants on stock options exercised was $106,000 and $253,000 during the three months ended September 30, 2006 and 2005, respectively, and $356,000 and $1,015,000 for the nine months ended September 30, 2006 and 2005, respectively. The Company did not realize a tax benefit related to these stock option exercises due to the existence of net operating loss carryforwards in these periods. In addition, the Company received cash for the exercise price associated with stock options exercised of $269,000 and $394,000 during the three months ended September 30, 2006 and 2005, respectively, and $686,000 and $1,238,000 during the nine months ended September 30, 2006 and 2005, respectively. As of September 30, 2006, the Company had $34,000 of unrecognized compensation related to the unvested portion of outstanding stock options expected to be recognized through July 2007.
Non-vested Stock Units
In addition to stock options, the Company issues non-vested stock units to key employees and members of the
options. StatementBoard ofFinancial Accounting Standards (SFAS) No. 123, AccountingDirectors based on meeting certain service goals. The stock units vest to the recipients at various dates, up to five years, based on fulfilling service requirements. Upon vesting, the stock units are settled in shares of the Company’s Common Stock. Summarized share information forStock-Based Compensation,the Company’s non-vested stock units is asamended, established accounting and disclosure requirements using a fair-value-based methodfollows:
Weighted
Nine months ended
average
September 30,
grant date
2006
fair value
(In shares)
(In dollars)
Outstanding and unvested, beginning of period
182,000
$
7.54
Granted
14,000
7.42
Vested
—
—
Forfeited
(3,000
)
7.54
Outstanding and unvested, end of period
193,000
$
7.53
As of
accounting for stock-based employee compensation plans. As allowed by SFAS No. 123,September 30, 2006, the Companyhas electedhad unrecognized compensation cost of $923,000 related tocontinuethe unvested portion of its outstanding stock units expected toapply the intrinsic-value-based methodbe recognized over a weighted average remaining service period ofaccounting described above, and has adopted only the disclosure requirements of SFAS No. 123.3.2 years.Pro-Forma Information
The following table
illustratespresents the pro-forma effect on net incomeif the fair-value-based method had been applied toand earnings per share for all outstandingand unvestedstock-based compensation awards for the three and nine months ended September 30, 2005and 2004 (inin which the fair value provisions of SFAS No. 123R were not in effect (dollars in thousands, except per share data):6GP STRATEGIES CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements Three and nine months ended September 30, 2005 and 2004 (Unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------ ----------------- 2005 2004 2005 2004 ------ ----- ------ -----Net income - as reported $1,042 $ 429 $2,730 $ 953 Add: stock-based compensation expense determined under intrinsic value method and included in reported net income, net of tax 90 6 125 18 Deduct: stock-based compensation expense determined under the fair value based method for all awards, net of tax (140) (37) (310) (212) ------ ----- ------ ----- Pro forma net income $ 992 $ 398 $2,545 $ 759 ====== ===== ====== ===== Net income per share: Basic - as reported $ 0.06 $0.02 $ 0.15 $0.05 Basic - pro forma $ 0.05 $0.02 $ 0.14 $0.04 Diluted - as reported $ 0.05 $0.02 $ 0.14 $0.05 Diluted - pro forma $ 0.05 $0.02 $ 0.13 $0.04The Company granted 1,000 options during the first quarter of 2005 and no options during the second and third quarters of 2005.
Three months ended
Nine months ended
September 30,
September 30,
2005
2005
Net income – as reported
$
1,042
$
2,730
Add: stock-based compensation expense determined under intrinsic value method and included in reported net income, net of tax
90
125
Deduct: stock-based compensation expense determined under the fair-value-based method for all awards, net of tax
(140
)
(310
)
Pro forma net income
$
992
$
2,545
Net income per share:
Basic – as reported
$
0.06
$
0.15
Basic – pro forma
$
0.05
$
0.14
Diluted – as reported
$
0.05
$
0.14
Diluted – pro forma
$
0.05
$
0.13
The per share
weighted-averageweighted average fair value of theCompany'sCompany’s stock options granted during the nine months ended September 30, 2005and 2004 werewas $3.35and $1.46, respectively,on the date of grant using themodifiedBlack-Scholesoption-pricingoption pricing modelwith the following
weighted-averageweighted average assumptions:
NINE MONTHS ENDED SEPTEMBERThree and nine
months ended
September 30,
---------------------2005
2004 --------- ---------Expected dividend yield
0% 0%—
%
Risk-free interest rate
3.56% 1.69%3.56
%
Expected volatility
53.51% 34.08%53.51
%
Expected
lifeterm4.0 years
2.0 yearsIn December 2004,The Company estimates the
FASB issued SFAS No. 123 - Revised, Share-Based Payment, which changed the accounting for stock-based compensation to require companies to expensefair value of its stock optionsand other equity awardson the date of grant using the Black-Scholes option pricing model. The Company estimates the expected term of stock options granted taking into consideration historical data related to stock option exercises. The Company also uses historical data in order to estimate the volatility factor for a period equal to the duration of the expected life of stock options granted. The Company believes that the use of historical data to estimate these factors provides a reasonable basis for these assumptions. The risk-free interest rate for the periods within the expected life of the option is based ontheir grant-date fair values. SFAS No. 123R is discussedthe U.S. Treasury yield curve inmore detail in Note 12, Accounting Standard Issued. 7GP STRATEGIES CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements Three andeffect at the time of grant. No stock options were granted during the nine months ended September 30,20052006.(4) Short-Term Borrowings
General Physics has a $25 million Financing and
2004 (Unaudited) (4) DISCONTINUED OPERATIONS In accordanceSecurity Agreement (the ”Credit Agreement”), as amended, withSFAS No. 144, Accountinga bank that expires on August 12, 2007 with annual renewal options. The Credit Agreement is secured by certain assets of General Physics and provides forthe Impairment or Disposal of Long-Lived Assets (SFAS No. 144), discontinued businesses are removedan unsecured guaranty from theresults of continuing operations and are classified as discontinued operations inCompany. The Company continued to guarantee GSE’s borrowings under theconsolidated statements of operations through the effective date of disposal. The following table sets forth the components of income (loss) from discontinued operations for the three and nine months ended September 30, 2005 and 2004 (in thousands):
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------ ------------------ 2005 2004 2005 2004 ------- ------- ------- --------Revenue $ 4,607 $36,079 $17,617 $109,962 Operating income (loss) (1,232) 3 (2,392) 1,881 Interest expense 180 308 251 1,080 Income tax benefit (expense) (30) 56 (63) (466) Income (loss) from discontinued operations, net of income taxes (417) (171) (1,012) 337Discontinued operations for the three and nine months ended September 30, 2005 include the results of GSE, which was distributed to the Company's shareholders in connection with the spin-off effective September 30, 2005. Discontinued operations for the three and nine months ended September 30, 2004 include the results of GSE as well as the results of MXL Industries, Inc., Five Star Products, Inc., and certain other non-core assets, which were distributed to NPDC in connection with the spin-off effective November 24, 2004. In accordance with SFAS No. 144, only those costs that are solely attributable to the discontinued business segments have been allocated to discontinued operations. Accordingly, the results for the three and nine months ended September 30, 2005 and 2004 include overhead expenses that were incurred for the benefit of the Company's continuing and discontinued operations, which are included in continuing operations. The Company will continue to provide corporate support services to GSE, including accounting, finance, human resources, legal, network support and tax, pursuant to a management services agreement which was extended through December 31, 2005 (see note 10). For the three and nine months ended September 30, 2005, the Company recorded revenues for these services of $196,000 and $525,000, respectively. For the three and nine months ended September 30, 2004, the Company recorded revenues for these services of $144,000 and $450,000, respectively. The revenues and expenses related to these services which were intercompany transactions prior to the spin-off were eliminated in the Company's consolidated financial statements. 8GP STRATEGIES CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements Three and nine months ended September 30, 2005 and 2004 (Unaudited) The following table summarizes the carrying amount of the assets and liabilities of GSE as of September 30, 2005, which are no longer consolidated with the Company effective with the spin-off (in thousands):
Assets: Cash and cash equivalents $ 804 Accounts and other receivables 2,487 Costs and estimated earnings in excess of billings on uncompleted contracts 5,428 Prepaid expenses and other current assets 983 Property, plant and equipment, net 314 Goodwill and other assets 7,487 ------- Total assets 17,503 ------- Liabilities: Accounts payable and accrued expenses 5,224 Short-term borrowings 1,182 Billings in excess of costs and estimated earnings on uncompleted contracts 848 Long-term debt 782 Minority interest and other liabilities 2,685 ------- Total liabilities 10,721 ------- Net assets of GSE distributed in spin-off $ 6,782 =======As of September 30, 2005, GSE had borrowings of $1,182,000 and a letter of credit for $10,000 under General Physics'Credit Agreement(see note 6), under(for which $1,500,000 was allocated for use byGSE.GSE) subsequent to the spin-off on September 30, 2005. In March 2006, GSE repaid its borrowings in full and ceased to be a borrower under the Credit Agreement. As a result, the Company’s guarantee of GSE’s borrowings was terminated.The interest rate under the Credit Agreement is at the daily LIBOR market index rate plus 3.0%. Based upon the financial performance of General Physics, the interest rate can be reduced. As of September 30, 2006, the rate was LIBOR plus 2.5%, which resulted in a rate of approximately 7.8%. The Credit Agreement contains covenants with respect to General Physics’ minimum tangible net worth, leverage ratio, interest coverage ratio and its ability to make capital expenditures. General Physics was in compliance with all loan covenants under the Credit Agreement as of September 30, 2006. The Credit Agreement also contains certain restrictive covenants regarding future acquisitions, incurrence of debt and the payment of dividends. General Physics is currently restricted from paying dividends or management fees to the Company
guarantees GSE'sin excess of $1,000,000 in any year, with the exception of a waiver by the lender which permits General Physics to provide cash to the Company to repurchase up to $5 million of additional shares of its outstanding Common Stock (see Note 7).As of September 30, 2006, General Physics had no outstanding borrowings under the Credit Agreement
through August 13, 2006. 9GP STRATEGIES CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements Threeandnine months ended September 30, 2005there was approximately $20,527,000 of available borrowings based upon 80% of eligible accounts receivable and2004 (Unaudited)80% of eligible unbilled receivables.(5)
LONG-TERM DEBTLong-Term DebtLong-term debt consists of the following (in thousands):
SEPTEMBER 30, DECEMBER 31, 2005 2004 ------------- ------------6% conditional subordinated notes due 2008 (a) $ 7,500 $ 7,500 ManTech Note (b) 5,251 5,251 Other 117 190 ------- ------- 12,868 12,941 Less warrant related discount, net of accretion (1,574) (1,890) ------- ------- 11,294 11,051 Less current maturities (87) (100) ------- ------- $11,207 $10,951 ======= =======
September 30,
December 31,
2006
2005
6% conditional subordinated notes due 2008 (a)
$
7,000
$
7,500
ManTech Note (b)
5,251
5,251
Capital lease obligations
69
93
12,320
12,844
Less warrant related discount, net of accretion
(1,025
)
(1,464
)
11,295
11,380
Less current maturities
(35
)
(71
)
$
11,260
$
11,309
(a)
Pursuant to a Note and Warrant Purchase Agreement datedIn August8,2003, the Company issued and sold to four Gabelli Funds $7,500,000 aggregate principal amount of 6% Conditional Subordinated Notes dueAugust2008 (the"Gabelli Notes")Gabelli Notes) and 937,500 warrants("GP Warrants")(GP Warrants), each entitling the holder thereof to purchase (subject to adjustment) one share of theCompany's common stock.Company’s Common Stock at an exercise price of $8.00. The aggregate purchase price for the Gabelli Notes and GP Warrants was $7,500,000.The Gabelli Notes bear interest at 6% per annum payable semi-annually and mature in August 2008. The Gabelli Notes are secured by a mortgage on the
Company'sCompany’s former property located in Pawling, New York which was distributed toNPDC.National Patent Development Corporation (NPDC) in connection with its spin-off by the Company on November 24, 2004. In addition, at any time that less than $1,875,000 of the principal amount of the Gabelli Notesareis outstanding, the Company may defease the obligations secured by the mortgage and obtain a release of the mortgage by depositing with an agent for the Noteholders bonds or government securities with an investment grade rating by a nationally recognized rating agency which, without reinvestment, will provide cash on the maturity date of the Gabelli Notes in an amount not less than the outstanding principal amount of the Gabelli Notes.The GP Warrants have an exercise price of $5.85 per share, as amended followingSubsequent to the
spin-offsspin-off of NPDC and GSE and in accordance with the anti-dilution provisions of the warrant agreement for stock splits, reorganizations, mergers and similar transactions, the number of GP Warrants was adjusted to 984,116 and the exercise price was adjusted to $5.85 per share. The GP Warrants are exercisable at any time until August 2008. The exercise price may be paid in cash, by delivery of the Gabelli Notes, or a combination of the two.TheDuring the nine months ended September 30, 2006, Gabelli exercised 109,376 GP Warrantscontain anti-dilution provisionsforstock splits, reorganizations, mergersa total exercise price of $640,000 which was paid in the form of $140,000 cash andsimilar transactions.delivery of $500,000 of the Gabelli Notes. As of September 30, 2006, there were 874,740 GP Warrants with an exercise price of $5.85 outstanding and exercisable.The fair value of the GP Warrants at the date of issuance was $2,389,000, which reduced long-term debt in the accompanying
condensedconsolidated balancesheets. This amountsheets and is being accreted as additional interest expense using the effective interest rate over the term of the Gabelli Notes. The Gabelli Notes have a yield to maturity of 15.436% based on the discounted value. Accretion charged as interest expense was approximately$110,000$119,000 and$95,000$110,000 for the three months ended September10GP STRATEGIES CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements Three30, 2006 andnine months ended September 30,2005,and 2004 (Unaudited) 30, 2005 and 2004,respectively, and approximately$316,000$357,000 and$279,000$316,000 for the nine months ended September 30, 2006 and 2005,and 2004,respectively.(b)
TheIn October 2003, the Companyhasissued a five-year 5% note due in fullonin October21,2008 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 intocommon stockCommon Stock of the Company at the then market price of theCompany's common stock,Company’s Common Stock, but only in the event that theCompany's common stockCompany’s Common Stock is trading at $10 per share or more. In the event that less than 20% of the principal amount of the note is not converted in any year, such amount not converted will be eligible for conversion in each subsequent year until converted or until the note is repaid in cash.(6)
SHORT-TERM BORROWINGS General Physics has a three-year $25 million Financing and Security Agreement (the "Credit Agreement") for which $1,500,000 is allocated for use by GSE, with a bank that expires on August 13, 2006 with annual renewal options. The Credit Agreement is secured by certain assets of General Physics and provides for an unsecured guaranty from the Company. The interest rate on the Credit Agreement is at the daily LIBOR market index rate plus 3%, which as of September 30, 2005 was approximately 6.84%. Based upon the financial performance of General Physics, the interest rate can be reduced. The Credit Agreement contains covenants with respect to General Physics' minimum tangible net worth, leverage ratio, interest coverage ratio and its ability to make capital expenditures. General Physics was in compliance with all loan covenants under the Credit Agreement as of September 30, 2005. The Credit Agreement also contains certain restrictive covenants including a prohibition on future acquisitions, incurrence of debt and the payment of dividends. General Physics is currently restricted from paying dividends or management fees to the Company in excess of $1,000,000 in any fiscal year. The Company repaid in full the $6,068,000 outstanding under the Credit Agreement as of December 31, 2004 in the first quarter of 2005, using the proceeds received from the arbitration settlement as discussed in more detail in Note 9, Litigation. As of September 30, 2005, the Company had no borrowings outstanding under the Credit Agreement and there was approximately $19,313,000 of available borrowings based upon 80% of eligible accounts receivable and 80% of eligible unbilled receivables. 11Comprehensive Income GP STRATEGIES CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements Three and nine months ended September 30, 2005 and 2004 (Unaudited) (7) COMPREHENSIVE INCOMEThe following are the components of comprehensive income
(loss)(in thousands):
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------ -----------------
Three months ended
Nine months ended
September 30,
September 30,
2006
2005
2006
2005
Net income
$
1,747
$
1,042
$
4,861
$
2,730
Other comprehensive income (loss), net of income taxes
123
(304
)
256
(399
)
Comprehensive income, net of tax
$
1,870
$
738
$
5,117
$
2,331
As of September 30, 2006 and December 31, 2005,
2004 2005 2004 ------ ----- ------ -------Net income $1,042 $ 429 $2,730 $ 953 Other comprehensive income (loss) before income tax expense: Net unrealized gain (loss) on available-for-sale securities 7 (877) 1 (1,703) Net unrealized loss on interest rate swap -- (165) -- (116) Foreign currency translation adjustment (309) 53 (400) (59) ------ ----- ------ ------- 740 (560) 2,331 (925) Income tax benefit (expense) relating to items of other comprehensive income (loss) (2) 406 -- 709 ------ ----- ------ ------- Comprehensive income (loss), net of tax $ 738 $(154) $2,331 $ (216) ====== ===== ====== =======The components ofaccumulated other comprehensive loss,are as follows (in thousands):
SEPTEMBER 30, DECEMBER 31, 2005 2004 ------------- ------------Net unrealized gain on available-for-sale securities $ 21 20 Foreign currency translation adjustment (1,081) (773) ------- ---- Accumulated other comprehensive loss before tax (1,060) (753) Accumulated income tax expense related to unrealized gain on available-for-sale securities (8) (8) ------- ---- Accumulated other comprehensive loss, net of tax $(1,068) (761) ======= ====12GP STRATEGIES CORPORATION AND SUBSIDIARIES Notesnet of tax, was $831,000 and $1,087,000, respectively, and consisted primarily of foreign currency translation adjustments.(7) Capital Stock Restructuring
On January 19, 2006, the Company completed a restructuring of its capital stock, which included the repurchase of 2,121,500 shares of its Common Stock at a price of $6.80 per share, the repurchase of 600,000 shares of its Class B Stock at a price of $8.30 per share, and the exchange of 600,000 shares of its Class B Stock for 600,000 shares of Common Stock and payment of a cash premium of $1.50 per exchanged share. The repurchase prices and exchange premium were based on a fairness opinion rendered by an independent third party valuation firm. The repurchase and exchange transactions were negotiated and approved by a Special Committee of the Board of Directors and had the effect of eliminating all outstanding shares of the Company’s Class B Stock. The repurchase and exchange was financed with approximately $20.3 million of cash on hand.
Prior to
Condensed Consolidated Financial Statements Threethe restructuring, the 1,200,000 outstanding shares of Class B Stock collectively represented approximately 41% of the aggregate voting power of the Company since the Class B Stock had ten votes per share. The repurchase of a total of 2,721,500 shares represented approximately 15% of the total outstanding shares of capital stock of the Company. Of the 600,000 Class B shares exchanged for common shares, 568,750 shares were owned by the Chairman of the Executive Committee of the Company.In connection with the repurchase and exchange transactions, the Board of Directors of the Company authorized the repurchase of up to $5 million of additional common shares from time to time in the open market, subject to prevailing business and market conditions and other factors. General Physics’ lender has permitted General Physics to utilize funds borrowed under the Credit Agreement to provide cash to the Company to repurchase up to $5 million of additional shares of the Company’s outstanding Common Stock (see Note 4). During the three and nine months ended September 30,
2005 and 2004 (Unaudited) (8) BUSINESS SEGMENTS During the second quarter of 2005,2006, the Companyre-evaluatedrepurchased 38,000 and 276,000 shares, respectively, of itsreportable business segments under SFAS No. 131, Disclosures aboutCommon Stock in the open market for a total cost of approximately $277,000 and $1,939,000, respectively.(8) Business Segments
of an Enterprise and Related Information, due to the appointment of Scott N. Greenberg as CEO of theThe Company
on April 26, 2005. Based on the information which Mr. Greenberg reviews in order to assess the performance of the Company and make decisions regarding the allocation of resources, the Company determined that General Physics consists ofhas two reportable businesssegments effective with Mr. Greenberg's appointment as CEO:segments: 1) Process, Energy & Government; and 2) Manufacturing & Business Process Outsourcing (BPO).GSE ceases to be a reportable business segment effective withThe Company is organized by operating group primarily based upon thespin-off on September 30, 2005services performed andis reported in discontinued operations in the accompanying condensed consolidated statements of operations. As a result of the change in itsmarkets served by each group. The reportable business segments represent an aggregation of theCompany has restatedCompany’s operating segments in accordance with thesegment information below for all prior periods presented to conform to the current period's presentation.aggregation criteria in SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information.The Process, Energy & Government segment provides engineering consulting, design and evaluation services regarding facilities, the environment, processes and systems, and staff augmentation, curriculum design and development, and training and technical services primarily to federal and state governmental agencies, large government contractors, petroleum and chemical refining companies, and electric power utilities.
The Manufacturing & BPO segment provides training, curriculum design and development, staff augmentation, e-Learning services, system hosting, integration and help desk support, training and business process outsourcing, and consulting and technical services to large companies in the automotive, pharmaceutical, electronics, and other industries as well as to governmental clients.
GSE ceased to be a reportable business segment effective with the spin-off on September 30, 2005 and its results are reported in discontinued operations in the condensed consolidated statements of operations through the effective date of the spin-off. The Company recorded revenues for services provided to GSE primarily pursuant to the management services agreement (see Note 10) of $152,000 and $196,000 for the three months ended September 30, 2006 and 2005, respectively, and $453,000 and $525,000 for the nine months ended September 30, 2006 and 2005, respectively. The revenues and expenses related to these services, which were intercompany transactions prior to the spin-off of GSE have been eliminated in the condensed consolidated statements of operations for the three and nine months ended September 30, 2005.
For the nine months ended September 30, 2006 and 2005, sales to the United States government and its agencies represented approximately 30% and 40%, respectively, of the Company’s revenue. Revenue from the Department of the Army, which is included in the Process, Energy & Government segment, accounted for approximately 13% and 22% of the Company’s revenue for the nine months ended September 30, 2006 and 2005, respectively. No other customer accounted for greater than 10% of the Company’s revenue for the nine months ended September 30, 2006.
The Company does not allocate the following corporate items to the segments: other income and interest expense; selling, general and administrative expense; and income tax expense. Inter-segment revenue is eliminated in consolidation and is not significant.
13GP STRATEGIES CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements Three and nine months ended September 30, 2005 and 2004 (Unaudited)The following
tables settable sets forth the revenue and operating income of each of theCompany'sCompany’s operating segments and includes a reconciliation of segment revenue to consolidated revenue and operating income to consolidated income from continuing operations before incometaxestax expense (in thousands):
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------ ------------------- 2005 2004 2005 2004 ------- -------- -------- --------REVENUE: Process, Energy & Government $21,924 $21,086 $ 65,025 $ 59,329 Manufacturing & BPO 22,331 23,236 66,778 59,935 Elimination of intercompany revenue (196) (144) (525) (450) ------- ------- -------- -------- $44,059 $44,178 $131,278 $118,814 ======= ======= ======== ======== OPERATING INCOME: Process, Energy & Government $ 2,762 $ 2,756 $ 7,841 $ 6,832 Manufacturing & BPO 982 191 2,375 (192) Elimination of intercompany revenue (196) (144) (525) (450) Corporate and other general and administrative expenses (920) (1,271) (2,087) (3,423) ------- ------- -------- -------- 2,628 1,532 7,604 2,767 ------- ------- -------- -------- Interest expense (387) (490) (1,129) (1,470) Other income 87 104 141 321 ------- ------- -------- -------- Income from continuing operations before income tax expense $ 2,328 $ 1,146 $ 6,616 $ 1,618 ======= ======= ======== ========
Three months ended
Nine months ended
September 30,
September 30,
2006
2005
2006
2005
Revenue:
Process, Energy & Government
$
18,910
$
22,208
$
57,821
$
64,328
Manufacturing & BPO
25,141
21,851
75,537
66,950
$
44,051
$
44,059
$
133,358
$
131,278
Operating income:
Process, Energy & Government
$
2,055
$
2,829
$
5,450
$
7,810
Manufacturing & BPO
1,572
719
5,062
1,881
Corporate and other general and administrative expenses
(544
)
(920
)
(1,714
)
(2,087
)
3,083
2,628
8,798
7,604
Interest expense
(376
)
(387
)
(1,233
)
(1,129
)
Other income
180
87
764
141
Income from continuing operations before income tax expense
$
2,887
$
2,328
$
8,329
$
6,616
14
(9)
LITIGATIONAcquisitionOn
JanuaryFebruary 3,2001,2006, the Companycommenced an action alleging that MCI Communications Corporation ("MCI")completed the acquisition of Peters Management Consultancy Ltd. (PMC),MCI's Systemhouse subsidiaries ("Systemhouse"),a performance improvement andElectronic Data Systems Corporation, as successortraining company in the United Kingdom. The Company acquired 100% ownership of PMC for a purchase price of $1,331,000 in cash, subject toSystemhouse ("EDS"), committed fraud ina post-closing adjustment based on actual net equity, plus contingent payments of up to $923,000 based upon the achievement of certain performance targets during the first year following completion of the acquisition. In connection with theCompany's 1998acquisition and in accordance with SFAS No. 141, Business Combinations, the Company recorded $868,000 ofLearning Technologies fromgoodwill, representing thedefendants for $24,300,000 in cash. The Company seeks actual damagesexcess of the purchase price over the fair value of the net tangible assets acquired and $133,000 of third party acquisition costs, and $200,000 of customer-related intangible assets. PMC is included in theamount of $74,067,044 plus interest, punitive damages in an amount to be determined at trial,Company’s Manufacturing & BPO segment andcosts, subject to reduction as set forth below. The complaint, which was filedits results are included in theNew York State Supreme Court, alleges thatcondensed consolidated financial statements since thedefendants fraudulently induceddate of acquisition. The pro-forma impact of theCompanyPMC acquisition is not material toacquire Learning Technologies by concealingthepoor performanceCompany’s results ofLearning Technologies' United Kingdom operation. The complaint also alleges thatoperations for thedefendants 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 14GP STRATEGIES CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements Threethree and nine months ended September 30,20052006 and2004 (Unaudited) motion was denied by2005.The Company’s purchase price allocation for the
court due to the MCI bankruptcy, but with leave to the other defendants to renew. The defendants other than MCI then made an application to the court to stay the fraud action untilnet assets acquired is as follows:
Cash
$
845
Accounts receivable and other current assets
840
Property, plant and equipment, net
88
Goodwill
868
Intangible assets
200
Total assets
2,841
Accounts payable, accrued expenses and other liabilities
723
Billings in excess of costs and estimated earnings on uncompleted contracts
654
Total liabilities assumed
1,377
Net assets acquired
$
1,464
(10) Related Party Transactions
Loans
As of September 30, 2006 and December 31, 2005, the Company
and EDS completedhad alater-commenced arbitration, in whichnote receivable from theCompany alleged breachCompany’s Chairman of theacquisition agreementExecutive Committee and former Chief Executive Officer ofa separate agreement to refer business to General Physics on a preferred provider basisapproximately $124,000 andseeking actual damages in the amount of $17,600,000 plus interest. In a decision dated May 9, 2003, the court granted the motion and stayed the fraud action pending the outcome$619,000, respectively. The proceeds of thearbitration.original note were used primarily to exercise options to purchase Class B Stock. Thearbitration hearings begannote bears interest at the prime rate and is secured by certain assets owned by him. All unpaid principal and accrued interest on the note is due on May17, 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.31, 2007. Ina final award dated November 29, 2004, the arbitrator awarded General Physics $12,273,575 in damages and $6,016,109 in pre-award interest. (The damages sought in the litigation are subject to reduction by the $12,273,575 in damages awarded in the arbitration.) On December 30, 2004, EDS made a payment of $18,428,486, which included $138,802 of post-award interest, to General Physics to satisfy its obligation under the arbitration award, which cash was held in escrowaddition, as of December 31,2004. EDS subsequently agreed that the arbitration award was final and binding and that it would take no steps of any kind to vacate or otherwise challenge the award. As a result of the foregoing, the Company recognized a gain on the arbitration award, net of legal fees and expenses, of $13,660,000 in 2004. As a result of the conclusion of the arbitration, the state court lifted the stay of the fraud claim against the defendants other than MCI. On February 14,2005,such defendants filed a new motion for summary judgment dismissing the Company's fraud claim against them. The Company opposed the motion, which was argued on April 4, 2005. On June 6, 2005, the court issued a decision on the motion for summary judgment refusing to dismiss the Company's claims against EDS and Systemhouse relating to false representations concerning the financial condition of Learning Technologies' United Kingdom operation and held thatthe Company hadpresented evidence sufficient to raise triable issuesother employee advances, unsecured loans and accrued interest receivable from him, totaling $353,000. On January 19, 2006, he repaid approximately $853,000 offact as to whether defendants provided the Company with financial projections which they knew to be false or unreasonable,$972,000 of total indebtedness (including principal andmade representations or omissions indicating that Learning Technologies' United Kingdom operation was on track to achieve revenue targets which they knew it would be unable to achieve. However, the court dismissed the Company's claim that it had been fraudulently induced to acquire Learning Technologies based on false representations that Systemhouse was not for sale. The Company requested a jury trial. Jury selection has commenced, and the trial is expected to begin the week of November 14, 2005. The fraud action against MCI had been stayed as a result of the bankruptcy of MCI. In February 2004, the Bankruptcy Court lifted the stay so that the state court could rule on the merits of MCI's summary judgment motion. MCI has asked the Bankruptcy Court to reinstate the stay and to rule on its summary judgment motion. The Company has argued that it would be more efficient if the state court ruled on both summary judgment motions. The Bankruptcy Court has not yet decided whether it or the state court should determine MCI's summary judgment motion. In connection with the spin-off of NPDCinterest) owed bythe Company, the Company agreed to make an additional capital contribution to NPDC in an amount equalhim to thefirst $5,000,000Companyusing the proceeds he received from the Class B exchange transaction (see Note 7). As of
any proceeds (net of litigation 15GP STRATEGIES CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements Three and nine months endedSeptember 30,20052006, the aggregate amount of indebtedness (including principal and2004 (Unaudited) expenses and taxes incurred, if any), and 50% of any proceeds (net of litigation expenses and taxes incurred, if any) in excess of $15,000,000, received with respect toaccrued interest) outstanding under theforegoing arbitration and litigation claims. Pursuant to such agreement, in January 2005, the Company made a $5,000,000 distribution to NPDC out of the proceeds of the arbitration award. The net cash proceeds to the Company were approximately $8,500,000 after legal fees and the distribution to NPDC. A portion of such net proceedsnote wasused to reduce to zero the outstanding balance of General Physics' revolving credit facility, which as of December 31, 2004 was $6.1 million. The Company is not a party to any legal proceeding, the outcome of which is believed by management to have a reasonable likelihood of having a material adverse effect upon the financial condition and operating results of the Company. (10) RELATED PARTY TRANSACTIONS$166,000.Management Services
AgreementsAgreement Between NPDC and the CompanyPrior to the spin-off, NPDC was a wholly-owned subsidiary of the Company.In connection with the spin-off, NPDC entered into a separate management agreement with the Company pursuant to which the Company provides certain general corporate services to NPDC.
Corporate Tax, Legal Support, and Executive Management Consulting ServicesThe Company has fourassociates,employees, including the Chief Executive Officer and Chief Legal Officer, whoalsoprovide services to NPDC underathe management services agreement, for which the Company is reimbursed for such services. Services under the agreement relate tocorporate federal and state income taxes,executive financial services, corporate legal services, corporate secretarial administrative support, and executive management consulting. The term of the agreement extends for three years from the date of the spin-off, or through November 24, 2007, and may be terminated by either NPDC or the Company on or after July 30, 2006 with 180 days prior writtennotice. Pursuant to an amendment tonotice, with the exception of the portion of the managementservices agreement effective July 1, 2005,fee relating to compensation for NPDC’s Chief Executive Officer for which NPDCwill payis liable through May 31, 2007 pursuant to his employment agreement. NPDC pays the Company an annual fee ofnot less than $969,500$934,000 as compensation for these services, payable in equal monthly installments. For the three and nine months ended September 30,2005,2006, the Company charged NPDC$242,000approximately $234,000 and$899,000,$692,000, respectively, for services under the management agreement, which is included as a reduction of selling, general and administrative expensesfor services under this management agreement. In connection within thespin-offcondensed consolidated statements ofNPDC, the Company also entered into a separate management agreement with NPDC pursuant to which it was anticipated that the Company would receive certain general corporate services from NPDC. No such services have been required or provided, so the Company and NPDC entered into a termination agreement effective as of July 1, 2005 terminating the management agreement. Corporate Office Leaseoperations.NPDC continues to occupy a portion of corporate office space leased by the Company. Pursuant to the management services agreement, NPDC compensates the Company
approximately $205,000 annuallyfor use of this space. TheCompany'sCompany’s lease extends through December 31, 2006.16GP STRATEGIES CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements Three and nine months ended September 30, 2005 and 2004 (Unaudited)Management Services Agreement Between GSE and the Company
Pursuant to a management services agreement, the Company provides corporate support services to
GSE, including accounting, finance, human resources, legal, network support and tax.GSE. GSE pays the Company an annual fee of $685,000 for theseservices.services and can terminate the agreement by providing sixty days written notice. The management services agreement can be renewed by GSE upon mutual agreement for successive one-year terms and was renewed through December 31,2005.2006.(11) Guarantees
Subsequent to the spin-off of
GSE effectiveNPDC, the Company continues to guarantee certain obligations of NPDC’s subsidiaries, Five Star Products, Inc. (“Five Star”) and MXL Industries, Inc. (“MXL”). The Company guarantees certain operating 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 also guarantees the repayment of one debt obligation of MXL, which is secured by property and certain equipment of MXL. As of September 30, 2006, the aggregate outstanding balance of this obligation was $1,130,000. The Company’s guarantee expires upon the maturity of the debt obligation in March 2011.(12) Litigation
In November 2005, the Company
will continuesettled its remaining fraud claims against Electronic Data Systems Corporation (EDS) and Systemhouse in connection with the Company’s 1998 acquisition of Learning Technologies. Pursuant toprovide GSEthe settlement, EDS made a cash payment to the Company in the amount of $9,000,000 in December 2005. The Company recognized a gain on the litigation settlement, net of legal fees and expenses, of approximately $5,552,000 in the fourth quarter of 2005. In accordance withthese corporate support services througha spin-off agreement with NPDC, thetermCompany made an additional capital contribution to NPDC for approximately $1,201,000 of theagreement. (11) COMMITMENTS In Aprilsettlement proceeds, which was accounted for as a component of the net assets distributed to NPDC in connection with the spin-off, through a reduction of additional paid-in capital in 2005. The Company did not transfer cash to NPDC for this additional capital contribution, but instead is offsetting the management fee charges due from NPDC against the payable to NPDC (see Note 10). As of September 30, 2006, the Company has a remaining payable to NPDC of $476,000 for this additional capital contribution, which is included in accounts payable and accrued expenses on the condensed consolidated balance sheet.The Company’s original fraud action included MCI Communications Corporation (MCI) as a defendant. The fraud action against MCI had been stayed as a result of MCI’s bankruptcy filing, and the Company’s claims against MCI were not tried or settled with the claims against EDS and Systemhouse. On December 13, 2005,
General Physics entered into employment agreements with certain of its officers, resulting in committed compensation of approximately $2.0 million annually. These agreements have employment terms expiring in 2007, providethe Bankruptcy Court heard arguments on a summary judgment motion that MCI had made before filing forgrants of restricted stock units pursuantbankruptcy. On September 12, 2006, the Bankruptcy Court asked the parties to submit further briefs concerning whether the summary judgment motion should be decided based on the standard applicable to such motions under state or federal law. Pursuant to theCompany's 2003 Incentive Stock Plan,spin-off agreement with NPDC, the Company will contribute to NPDC 50% of any proceeds received, net of legal fees andcontain non-compete covenantstaxes, with respect to the litigation claims.The Company is not a party to any legal proceeding, the outcome of which is believed by management to have a reasonable likelihood of having a material adverse effect upon the financial condition and
changeoperating results ofcontrol and termination provisions. (12) ACCOUNTING STANDARD ISSUEDthe Company.(13) Accounting Standards Issued
In
December 2004,July 2006, the FASB issuedSFASFASB Interpretation No.123 - Revised, Share-Based Payment (SFAS No. 123R), which revises SFAS No. 123,48, Accounting forStock-Based Compensation,Uncertainty in Income Taxes — an Interpretation of FASB Statement No. 109 (FIN 48). FIN 48 prescribes a recognition threshold andsupersedes APB No. 25, Accountingmeasurement attribute forStock Issuedthe financial statement recognition of a tax position taken or expected toEmployees. Currently,be taken on a tax return. Under FIN 48, a tax benefit from an uncertain tax position may be recognized only if it is “more likely than not” that theCompany does not record compensation expense for certain stock-based compensation. Under SFAS No. 123R, the Company will measure the cost of employee services received in exchange for stock,position is sustainable upon examination, based on its technical merits. The tax benefit of a qualifying position under FIN 48 would equal thegrant-date fair value (with limited exceptions)largest amount ofthe stock award. Such costtax benefit that is greater than 50 percent likely of being realized upon ultimate settlement with a taxing authority having full knowledge of all relevant information. FIN 48 willbe recognized over the period during which the employee is required to provide service in exchange for the stock award (usually the vesting period). The fair value of the stock award will be estimated using an option-pricing model, with excess tax benefits, as defined in SFAS No. 123R, being recognized as an addition to paid in capital. SFAS No. 123R was tobe effective as ofJuly 1, 2005. However, based on Final Rule 74 issued by the Securities and Exchange Commission in April 2005, which delayed the implementation of SFAS No. 123R, the Company plans to adopt SFAS No. 123R effectiveJanuary 1,2006. The Company expects2007 for calendar-year companies. In applying the new accounting model prescribed by FIN 48, companies will need toadopt SFAS No. 123R using the Modified Prospective Application method without restatementdetermine and assess all material positions existing as ofprior periods. Under this method, the Company will begin to amortize compensation cost for the remaining portion of its outstanding awards onthe adoption date,for which the requisite service has not yet been rendered. Compensation cost for these awards will be based on the fair value of the awards as disclosed on a pro forma basis under SFAS 123including all significant uncertain positions, inNote 3, Stock Based Compensation. The Company will account for awardsall tax years, that aregranted, modified,still subject to assessment orsettled after the adoption date in accordance with SFAS No. 123R.challenge under relevant tax statutes. The Company is currently evaluating the impact of adopting this new accounting standard on its consolidated financial statements.In September 2006, the SEC issued Staff Accounting Bulletin No. 108, Considering the Effects
of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements (SAB No. 108). SAB No. 108 addresses how the
processeffects of prior year uncorrected misstatements should be considered when quantifying misstatements in current year financial statements. SAB No. 108 requires companies to quantify misstatements using a balance sheet and income statement approach and to evaluate whether either approach results in quantifying an error that is material in light of relevant quantitative and qualitative factors. The Company is required to adopt SAB No. 108 for its annual financial statements for the fiscal year ending December 31, 2006. The Company is currently evaluating the impact of SAB No. 108, but at this time does not expect its adoption to have a material impact on its consolidated financial statements for its fiscal year ending December 31, 2006.In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, Fair Value Measurements (SFAS No. 157), which defines fair value, establishes guidelines for measuring fair value and expands disclosures regarding fair value measurements. SFAS No. 157 does not require any new fair value measurements but rather eliminates inconsistencies in guidance found in various prior accounting pronouncements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007, with earlier adoption permitted. The Company is currently evaluating the impact of SFAS No.
123R157, but at this time does not expect its adoption to have a material impact on its consolidated financial statements.17ITEMItem 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONSManagement’s Discussion and Analysis of Financial Condition and Results of OperationsResults of Operations
General Overview
As of September 30, 2005, the Company'sThe Company’s business consists of its
training and workforce development business operated byoperating subsidiary, General Physics,Corporation ("General Physics" or "GP"). General Physics isa globalworkforce developmenttraining, engineering, and consulting company that seeks to improve the effectiveness of organizations by providing training and e-Learning solutions, management consulting,e-Learning solutionsand engineering services and products that are customized to meet the specific needs of clients.On September 30, 2005, the Company completed a taxable spin-off of its 57% interest in GSE Systems Inc. ("GSE") through a dividend to the Company's stockholders. GSEClients include Fortune 1000 companies and governmental customers. General Physics is astand alone public company which provides simulationglobal leader in performance improvement, with four decades of experience in providing solutionsand servicestoenergy, process and manufacturing industries worldwide. On September 30, 2005, stockholders received in the spin-off 0.283075 shares of GSE common stock for each share of the Company's common stock or Class B stock held on the record date of September 19, 2005. Following the spin-off, the Company ceased to have any ownership interest in GSE and the operations of GSE have been reclassified as discontinued in the Company's condensed consolidated statements of operations for all periods presented.optimize workforce performance.The Company
currently provides corporate support services to GSE, including accounting, finance, human resources, legal, network support and tax, pursuant to a management services agreement whichhasbeen extended through December 31, 2005. As of September 30, 2005, GSE had borrowings of $1,182,000 and a letter of credit for $10,000 under General Physics' Credit Agreement, under which $1,500,000 was allocated for use by GSE. The Company guarantees GSE's borrowings under the Credit Agreement through August 13, 2006. During the second quarter of 2005, the Company re-evaluated its reportable business segments under SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information, as a result of Scott N. Greenberg's appointment as CEO of the Company on April 26, 2005. Based on the information which Mr. Greenberg reviews in order to assess the performance of the Company and make decisions regarding the allocation of resources, the Company determined that General Physics consists oftwo reportable businesssegments effective with Mr. Greenberg's appointment as CEO:segments: 1) Process, Energy & Government; and 2) Manufacturing & Business Process Outsourcing (BPO). GSE ceases to be a reportable business segment as a result of the spin-off effective September 30, 2005. As a result of the change in the Company's reportable business segments, all prior period information presented herein has been restated to conform to the current period's presentation. The:· Process, Energy & Government – this segment provides engineering consulting, design and evaluation services regarding facilities, the environment, processes and systems, and staff augmentation, curriculum design and development, and training and technical services primarily to federal and state governmental agencies, large government contractors, petroleum and chemical refining companies, and electric power utilities.
The· Manufacturing & BPO - this segment provides training, curriculum design and development, staff augmentation, e-Learning services, system hosting, integration and help desk support, training and business process outsourcing, and consulting and technical services to large companies in the automotive, steel, pharmaceutical, electronics, and other industries as well as to governmental clients.
Significant Events of 2006
Capital Stock Restructuring
On
November 24, 2004,January 19, 2006, the Company completed a restructuring of its capital stock, which included the repurchase of 2,121,500 shares of its Common Stock at a price of $6.80 per share, the repurchase of 600,000 shares of its Class B Stock at a price of $8.30 per share, and the exchange of 600,000 shares of its Class B Stock for 600,000 shares of Common Stock and payment of a cash premium of $1.50 per exchanged share. The repurchase prices and exchange premium were based on a fairness opinion rendered by an independent third party valuation firm. The repurchase and exchange transactions were negotiated and approved by a Special Committee of the Board of Directors and had the effect of eliminating all outstanding shares of the Company’s Class B Stock.Prior to the restructuring, the 1,200,000 outstanding s hares of Class B Stock collectively represented approximately 41% of the aggregate voting power of the Company since the Class B Stock had ten votes per share. The repurchase of a total of 2,721,500 shares represented approximately 15% of the total outstanding shares of capital stock of the Company. Approximately $20.3 million was required for the repurchase and exchange and was financed with cash on hand. See Note 7 to the accompanying condensed consolidated financial statements for further details regarding the repurchase and exchange transaction.
On January 19, 2006, the Board of Directors also approved, subject to stockholder approval, a proposal to amend the Company’s Amended and Restated Certificate of Incorporation to eliminate the authorized shares of Class B Capital Stock (the “Amendment”). At its annual meeting on September 14, 2006, the stockholders voted to approve the Amendment (See Part II, Item 4, Submission of Matters to a Vote of Security Holders). The
Amendment was filed with the Delaware Secretary of State and was effective September 15, 2006.
Acquisition
On February 3, 2006, the Company completed the
tax-free spin-offacquisition ofNational Patent Development Corporation ("NPDC"). SubsequentPeters Management Consultancy Ltd. (PMC), a performance improvement and training company in the United Kingdom. The Company acquired 100% ownership of PMC for a purchase price of $1.3 million in cash, subject to a post-closing adjustment based on actual net equity, plus contingent payments of up to $0.9 million based upon thespin-off,achievement of certain performance targets during the first year following completion of the acquisition. PMC is included in the Company’s Manufacturing & BPO segment and its results are included in the accompanying condensed consolidated financial statements since the date ofoperations of NPDC are presented as discontinued operations for the three and nineacquisition.Operating Highlights
Three months ended September 30,
2004. General Physics' backlog2006 compared to the three months ended September 30, 2005For the quarter ended September 30, 2006, the Company had net income of $1.7 million, or $0.11 per diluted share, compared to $1.0 million, or $0.05 per diluted share, for
services under signed contracts and subcontracts was approximately $89.0 million as ofthe quarter ended September 30, 2005.18Operating Highlights THREE MONTHS ENDED SEPTEMBER 30,The improved results were primarily due to an increase in income from continuing operations, the components of which are discussed in detail below, offset by a loss from discontinued operations of $0.4 million in 2005COMPARED TO THE THREE MONTHS ENDED SEPTEMBER 30, 2004 Forwhich did not recur in 2006. In addition, the increase in diluted earnings per share is partially attributable to the decrease in common shares outstanding during the third quarter of 2006 compared to the third quarter of 2005 as a result of theCompany hadcapital stock restructuring discussed above.Revenue
(Dollars in thousands)
Three months ended
September 30,
2006
2005
Process, Energy & Government
$
18,910
$
22,208
Manufacturing & BPO
25,141
21,851
$
44,051
$
44,059
Process, Energy & Government revenue decreased $3.3 million or 14.9% during the third quarter of 2006 compared to the third quarter of 2005. The decrease in revenue is primarily due to a $10.0 million decline in government funding for the Domestic Preparedness Equipment Technical Assistance Program (DPETAP) which resulted in a decrease in revenue of $2.3 million during the third quarter of 2006 compared to the third quarter of 2005. In addition, there were decreases in revenue from various other governmental and energy customers of $3.5 million during the third quarter of 2006 compared to the third quarter of 2005 primarily due to the completion of several contracts in 2006. These decreases in revenue were offset by an increase in hurricane recovery services revenue of $1.0 million and a net increase in revenue of $1.5 million related to various new contracts during the third quarter of 2006 compared to the third quarter of 2005.
Manufacturing & BPO revenue increased $3.3 million or 15.1% during the third quarter of 2006 compared to the third quarter of 2005. The increase in revenue is due to the following: a $1.9 million increase due to the expansion of business process outsourcing services with new and existing customers, a $1.2 million increase
from our international operations in the United Kingdom primarily resulting from the PMC acquisition in February 2006, a $0.7 million increase in lean manufacturing services, a $0.4 million increase in other technical services provided primarily to a pharmaceutical customer, and net increases of $0.4 million on various other contracts. These increases were offset by a $1.3 million revenue decrease in government e-Learning implementation services due to fewer implementations taking place during the third quarter of 2006 compared to the third quarter of 2005.
Gross Profit
(Dollars in thousands)
Three months ended
September 30,
2006
2005
% Revenue
% Revenue
Process, Energy & Government
$
3,449
18.2
%
$
4,310
19.4
%
Manufacturing & BPO
3,461
13.8
%
2,378
10.9
%
$
6,910
15.7
%
$
6,688
15.2
%
Process, Energy & Government gross profit of $3.4 million or 18.2% of revenue for the third quarter of 2006 decreased by $0.9 million or 20.0% when compared to gross profit of $4.3 million or 19.4% of revenue for the third quarter of 2005. This decrease in gross profit is primarily attributable to a decline in government funding for the DPETAP contract and other decreases in revenue discussed above.
Manufacturing & BPO gross profit of $3.5 million or 13.8% of revenue for the third quarter of 2006 increased by $1.1 million or 45.5% when compared to gross profit of $2.4 million or 10.9% of revenue for the third quarter of 2005. This increase in gross profit is primarily attributable to an increase in revenue from business process outsourcing, lean manufacturing and other technical services, as well as international growth during the third quarter of 2006 compared to the third quarter of 2005. Additionally, infrastructure costs have not increased at the same rate as our revenue growth for this segment, resulting in increased profitability.
Selling, General and Administrative Expenses
SG&A decreased $0.2 million or 5.7% from $4.1 million for the third quarter of 2005 to $3.8 million for the third quarter of 2006. The decrease is primarily due to a decrease in legal expenses during the third quarter of 2006 compared to the third quarter of 2005.
Interest Expense
Interest expense was $0.4 million for both the third quarter of 2006 and 2005.
Other Income
Other income was $0.2 million for the third quarter of 2006 compared to $0.1 million for the third quarter of 2005. The increase was primarily due to an increase in income from a joint venture during the third quarter of 2006 compared to the third quarter of 2005. Other income for the third quarter of 2006 includes $0.1 million of equity in earnings of a joint venture, for which an immaterial amount was included in revenue during the third quarter of 2005.
Income Tax Expense
Income tax expense was $1.1 million for the third quarter of 2006 compared to $0.9 million for the third quarter of 2005. This increase is due to increased income from continuing operations before income tax expense
of $2,328,000 compared to $1,146,000for the third quarter of2004.2006 compared to the third quarter of 2005. Income tax expense for interim periods is based on an estimated annual effective tax rate which includes the federal and state statutory rates, permanent differences, and other items that may have an impact on income tax expense.Nine months ended September 30, 2006 compared to the nine months ended September 30, 2005
For the nine months ended September 30, 2006, the Company had net income of $4.9 million, or $0.28 per diluted share, compared to $2.7 million, or $0.14 per diluted share, for the same period in 2005. The improved results were primarily due to
increased operatingan increase in income from continuing operations, the components of$797,000 for General Physics' two business segments, as well as reduced general and administrative expenses atwhich are discussed in detail below, offset by a loss from discontinued operations of $1.0 million in 2005 which did not recur in 2006. In addition, thecorporate level. Government revenue accounted for approximately 41% and 59% of General Physics' revenue forincrease in diluted earnings per share is partially attributable to thequartersdecrease in common shares outstanding during the nine months ended September 30,2005 and 2004, respectively. Revenue
THREE MONTHS ENDED SEPTEMBER 30, ------------------ 2005 2004 ------- ------- (Dollars in Thousands)Process, Energy & Government $21,924 $21,086 Manufacturing & BPO 22,331 23,236 Elimination of intercompany revenue with GSE (196) (144) ------- ------- $44,059 $44,178 ======= =======Process, Energy & Government segment revenue increased $838,000 or 4.0% during the third quarter of 20052006 compared to the same period in 2005 as a result of2004.the capital stock restructuring discussed above, and repurchases of 276,000 common shares in the open market during the nine months ended September 30, 2006.Revenue
(Dollars in thousands)
Nine months ended
September 30,
2006
2005
Process, Energy & Government
$
57,821
$
64,328
Manufacturing & BPO
75,537
66,950
$
133,358
$
131,278
Process, Energy & Government revenue decreased $6.5 million or 10.1% during the nine months ended September 30, 2006 compared to the same period in 2005. The
increasedecrease in revenue is primarily due toincreaseda $10.0 million decline in government funding for the DPETAP contractscopes with our existing government and energy customers to provide various training and domestic preparedness services. The net increasewhich resulted inrevenue was partially offset bya decrease in revenuefrom certain contracts, primarily for hurricane recovery services provided to the StateofFlorida totaling $2.2$7.7 million during thethird quarter of 2004 which did not recur in 2005. Manufacturing & BPO segment revenue decreased $905,000 or 3.9% during the third quarter of 2005nine months ended September 30, 2006 compared to the same periodof 2004. Thein 2005. In addition, a scheduling delay on an environmental engineering contract resulted in a decrease in revenue of $3.5 million during the nine months ended September 30, 2006 compared to the same period in 2005. There were also net decreases in revenue of $0.6 million on various energy and other government contracts. These decreases were offset by an increase in hurricane recovery services revenue of $3.9 million, an increase in chemical demilitarization training support services of $0.6 million, and an increase in revenue of $0.8 million related to a liquefied natural gas (LNG) fueling station project during the nine months ended September 30, 2006 compared to the same period in 2005.Manufacturing & BPO revenue increased $8.6 million or 12.8% during the nine months ended September 30, 2006 compared to the same period in 2005. The increase in revenue is due to the following: a $4.6 million increase due to the expansion of business process outsourcing services with new and existing customers, a $3.1 million increase from our international operations in the United Kingdom primarily resulting from the PMC acquisition in February 2006 as well as growth on existing international contracts, a $2.3 million increase in lean manufacturing services, and a $1.3 million increase for other technical services provided primarily to a
pharmaceutical customer. These net increases in revenue were offset by other decreases in revenue, primarily due to a change in contract scopes with a business process outsourcing customer during 2005 which resulted in a decrease in revenue of $2.7 million during the
third quarter of 2005. This net decrease was partially offset by increases in business process outsourcing services provided to several existing customers, increased system implementation and hosting services primarilynine months ended September 30, 2006 compared to thefederal government, and increasessame period inother professional development and training courses provided to customers2005.Gross Profit
(Dollars in
the manufacturing industry. The Company continues to expand the scope of services provided to business process and training outsource customers. Gross Profit
THREE MONTHS ENDED SEPTEMBER 30, --------------------------------------- 2005 2004 ------------------ ------------------ % Revenue % Revenue --------- --------- (Dollars in thousands)Process, Energy & Government $4,245 19.4% $3,879 18.4% Manufacturing & BPO 2,639 11.8% 1,588 6.8% Elimination of intercompany revenue with GSE (196) -- (144) -- ------ ---- ------ ---- $6,688 15.2% $5,323 12.0% ====== ==== ====== ====19thousands)
Nine months ended
September 30,
2006
2005
% Revenue
% Revenue
Process, Energy & Government
$
9,419
16.3
%
$
11,978
18.6
%
Manufacturing & BPO
10,210
13.5
%
6,622
9.9
%
$
19,629
14.7
%
$
18,600
14.2
%
Process, Energy & Government gross profit of
$4.2$9.4 million or19.4%16.3% of revenue for thethird quarter of 2005 increasednine months ended September 30, 2006 decreased by$366,000$2.6 million or9.4%21.4% when compared to gross profit of approximately$3.9$12.0 million or18.4%18.6% of revenue for the nine months ended September 30, 2005. This decrease in gross profit is primarily attributable to a decline in government funding for the DPETAP contract and the environmental engineering project delay discussed above, offset by an increase in gross profit related to an increase in revenue from hurricane recovery services during the nine months ended September 30, 2006 compared to the same period in 2005.Manufacturing & BPO gross profit of $10.2 million or 13.5% of revenue for the nine months ended September 30, 2006 increased by $3.6 million or 54.2% when compared to gross profit of approximately $6.6 million or 9.9% of revenue for the same period of
2004.2005. This increase in gross profitwasis primarilydriven byattributable to an increase in revenuefor trainingfrom business process outsourcing, e-Learning, lean manufacturing and other technical services,providedas well as international growth during the nine months ended September 30, 2006 compared toour government and energy customers. The increase in gross profit as a percentagethe same period ofrevenue is primarily due to a decrease in overhead expenses as a percentage of revenue as our2005. Additionally, infrastructure costs have not increased at the same rate as ourcontract revenue growth, excluding the decrease in revenue from the non-recurring hurricane recovery services in 2004 as discussed above. Manufacturing & BPO gross profit of $2.6 million or 11.8% of revenue for the third quarter of 2005 increased by $1.1 million or 66.2% when compared to gross profit of approximately $1.6 million or 6.8% of revenue for the same period of 2004. The increase is primarily due to decreased overhead expenses as a percentage of revenue as our infrastructure costs have not increased at the same rate as our contractrevenue growth forbusiness process outsourcing and training outsourcing services, excluding the decreasethis segment, resulting inrevenue from the change in contract scopes with a business process outsourcing customer in the third quarter of 2005 as discussed above.increased profitability.Selling, General and Administrative
ExpenseExpensesSG&A
expenses increased $0.3 million from $3.8 million for the third quarter of 2004 to $4.1 million for the third quarter of 2005. This net increase is primarily related to higher legal fees associated with the EDS litigation incurred during the third quarter of 2005. These increases were partially offset by a decrease in corporate SG&A expenses primarily due to the spin-off of NPDC in November 2004, which were not allocable to discontinued operations. Interest Expense Interest expensedecreased$0.1 million from $0.5 million for the third quarter of 2004 to $0.4 million for the third quarter of 2005. The decrease was primarily attributable to General Physics' payoff of its short term borrowings in January 2005. Other Income Other income was $0.1 million for the three months ended September 30, 2005 and 2004, respectively. Income Taxes Income tax expense was $0.9 million for the third quarter of 2005 compared to $0.5 million for the third quarter of 2004. The Company's effective tax rate was 37.3% and 47.6% for the third quarter of 2005 and 2004, respectively. The increase is primarily due to increased income from continuing operations during the third quarter of 2005. 20NINE MONTHS ENDED SEPTEMBER 30, 2005 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER 30, 2004 For the nine months ended September 30, 2005, the Company had income from continuing operations before income tax expense of $6,616,000 compared to $1,618,000 for the same period in 2004. The improved results were primarily due to increased operating income of $3,576,000 for General Physics' two business segments, as well as reduced general and administrative expenses at the corporate level. Government revenue accounted for approximately 40% and 38% of General Physics' revenue for the nine months ended September 30, 2005 and 2004, respectively. Revenue
NINE MONTHS ENDED SEPTEMBER 30, ------------------- 2005 2004 -------- -------- (Dollars in Thousands)Process, Energy & Government $ 65,025 $ 59,329 Manufacturing & BPO 66,778 59,935 Elimination of intercompany revenue with GSE (525) (450) -------- -------- $131,278 $118,814 ======== ========Process, Energy & Government segment revenue increased $5.7$0.2 million or9.6% during the nine months ended September 30, 2005 compared to the same period of 2004. The increase in revenue is primarily due to increased contract scopes with our existing government and energy customers to provide various training and domestic preparedness services. The net increase in revenue was partially offset by a decrease in revenue1.5% fromcertain contracts, primarily for hurricane recovery services provided to the state of Florida totaling $2.2 million in 2004, which did not recur in 2005. Manufacturing & BPO segment revenue increased $6.8 million or 11.4% during the nine months ended September 30, 2005 compared to the same period of 2004. The increase is due to an increase in business process outsourcing services provided to customers primarily in the electronics industry, increased system implementation and hosting services primarily to the federal government, and increases in other professional development and training courses provided to customers in the manufacturing industry. The Company continues to expand the scope of services provided to business process and training outsource customers. Gross Profit
NINE MONTHS ENDED SEPTEMBER 30, ------------------------------------------ 2005 2004 -------------------- ------------------- % Revenue % Revenue --------- --------- (Dollars in thousands)Process, Energy & Government $12,016 18.5% $10,466 17.6% Manufacturing & BPO 7,109 10.6% 4,012 6.7% Elimination of intercompany revenue with GSE (525) -- (450) -- ------- ---- ------- ---- $18,600 14.2% $14,028 11.8% ======= ==== ======= ====21Process, Energy & Government gross profit of $12.0 million or 18.5% of revenue for the nine months ended September 30, 2005 increased by $1.6 million or 14.8% when compared to gross profit of approximately $10.5 million or 17.6% of revenue for the same period of 2004. This increase in gross profit was primarily driven by an increase in revenue for training services provided to our government and energy customers. The increase in gross profit as a percentage of revenue is primarily due to a decrease in overhead expenses as a percentage of revenue as our infrastructure costs have not increased at the same rate as our contract revenue growth. Manufacturing & BPO gross profit of $7.1 million or 10.6% of revenue for the nine months ended September 30, 2005 increased by $3.1 million or 77.2% when compared to gross profit of approximately $4.0 million or 6.7% of revenue for the same period of 2004. This increase in gross profit was primarily driven by an increase in revenue from business process outsourcing and training outsourcing services. The increase in gross profit as a percentage of revenue is primarily due to a decrease in overhead expenses as a percentage of revenue as our infrastructure costs have not increased at the same rate as our contract revenue growth. Selling, General and Administrative Expense SG&A decreased $0.3 million or 2.4% from $11.3 million for the nine months ended September 30, 2004 to$11.0million for the same period of 2005. This decrease is primarily related to a decrease in corporate SG&A expenses, primarily due to the spin-off of NPDC in November 2004, which were not allocable to discontinued operations. Interest Expense Interest expense decreased $0.4 million from $1.5 million for the nine months ended September 30, 2004 to $1.1 million for the same period of 2005. The decrease was primarily attributable to General Physics' payoff of its short term borrowings in January 2005. Other Income Other income was $0.1million for the nine months ended September 30, 2005comparedto$0.3$10.8 million for the same periodof 2004. Income Taxes Income taxin 2006. This net decrease is primarily due to a decrease in legal expenses during the nine months ended September 30, 2006 compared to the same period in 2005.Interest Expense
Interest expense
increased by approximately $1.9 million from $1.0was $1.2 million for the nine months ended September 30,20042006 compared to $1.1 million for the same period in 2005. The increase is primarily due to higher short-term borrowing levels during the nine months ended September 30, 2006 compared to the same period in 2005.Other Income
Other income was $0.8 million for the nine months ended September 30, 2006 compared to $0.1 million for the same period in 2005. The increase is primarily due to an increase in income from a joint venture, as well as an increase in investment income during the nine months ended September 30, 2006 compared to the same period
in 2005. Other income for the nine months ended September 30, 2006 includes $0.4 million of equity in earnings of a joint venture, for which an immaterial amount was included in revenue during the same period in 2005.
Income Tax Expense
Income tax expense was $3.5 million for the nine months ended September 30, 2006 compared to $2.9 million for the same period
ofin 2005. This increase isprimarilydue to increased income from continuing operations before income tax expense for the nine months ended September 30, 2006 compared to the same period in 2005. Income tax expense for interim periods is based on an estimated annual effective tax rate which includes the federal and state statutory rates, permanent differences, and other items that may have an impact on income tax expense.Liquidity and Capital Resources
Working Capital
For the nine months ended September 30, 2006, the Company’s working capital decreased $12.7 million from $34.8 million at December 31, 2005 to $22.2 million at September 30, 2006. The decrease is primarily due to the use of approximately $20.3 million of cash in January 2006 to complete the capital stock restructuring discussed below, offset by cash generated from operating activities during the nine months ended September 30,
2005 compared to the same period of 2004. The Company's effective tax rate was 43.4% and 61.9% for the nine months ended September 30, 2005 and 2004, respectively. LIQUIDITY AND CAPITAL RESOURCES WORKING CAPITAL AND CASH FLOWS As of September 30, 2005, the Company had cash and cash equivalents totaling $10.5 million.2006. The Company believes that cash generated from operations and borrowing availability underitsthe Credit Agreement (described below), will be sufficient to fund the working capital and other requirements of the Company for at least theforeseeable future. 22next twelve months. On January 19, 2006, the Company completed a restructuring of its capital stock in which it used approximately $20.3 million of cash on hand to repurchase 2,121,500 shares of its Common Stock and 600,000 shares of its Class B Stock, and to exchange 600,000 shares of its Class B Stock for 600,000 shares of Common Stock. In connection with the capital stock restructuring, the Company authorized the repurchase of up to $5 million of additional common shares from time to time in the open market, subject to prevailing business and market conditions and other factors. See Note 7 to the accompanying condensed consolidated financial statements for further details regarding the repurchase and exchange transaction. During the nine months ended September 30,
2005,2006, theCompany's working capital increased by $6.5Company repurchased 276,000 shares of its Common Stock in the open market for a total cost of approximately $1.9 million.On February 3, 2006, the Company completed the acquisition of PMC, a performance improvement and training company in the United Kingdom. The purchase price was $1.3 million in cash, subject to a post-closing adjustment based on actual net equity, plus contingent payments of up to $0.9 million based upon the achievement of certain performance targets during the first year following completion of the acquisition.
Cash Flows
Nine months ended September 30, 2006 compared to the nine months ended September 30, 2005
The Company’s cash balance decreased $12.9 million from
$20.6$18.1 millionatas of December 31,20042005 to$27.1$5.2 million at September 30,2005.2006. TheCompany's cash balance increased $8.1 million from $2.4 million at December 31, 2004 to $10.5 million at September 30, 2005. The increasedecrease in cash and cash equivalents during the nine months ended September 30,20052006 resulted from cash provided by operating activities of$11.8$9.8 million, offset by cash usedbyin investing activities of$0.8$1.1 million and cash usedbyin financing activities of$2.8 million, and a negative effect of exchange rate changes on cash of approximately $0.1$21.6 million. CashFlowsflows fromOperating Activitiesdiscontinued operations are combined with cash flows from continuing operations within the operating, investing, and financing activities categories in the accompanying consolidated statements of cash flows through the effective date of the spin-off of GSE.24
Cash provided by operating activities was
$11.8$9.8 million for the nine months ended September 30,20052006 compared tocash used in operating activities of $0.8$11.8 million for the same periodof 2004.in 2005. Theincreasedecrease in cash provided by operating activities compared to the prior year period is primarily due to$1.8 million higher net income in 2005 compared to 2004,the receipt of proceeds from the EDSlawsuitarbitration award of $13.8 million in January 2005, offset by an increase in net income of $2.4 million andincreased non-cash compensation expenseincreases in net working capital changes of$0.8$8.6 millionin 2005during the nine months ended September 30, 2006 compared to2004. These increasesthe same period incash flows from operating activities were offset by a2005. During the nine months ended September 30, 2005, working capital changes included an $8.0 million decrease inchanges in other operating items by approximately $4.0 million, primarily due to a decrease inaccounts payable and accrued expenses which was primarily related to the payout of$5$5.0 million of the EDS arbitration proceeds to NPDCin 2005 which were accrued for in 2004. This decrease in changes in other operating items was partially offset by favorablepursuant to the spin-off agreement (see Note 12 to the accompanying condensed consolidated financial statements). Excluding this item, net changes in workingcapital. Cash Flows from Investing Activitiescapital increased $3.6 million during the nine months ended September 30, 2006 compared to the same period in 2005.Cash used
byin investing activities was$0.8$1.1 million for the nine months ended September 30,20052006 compared tocash used by investing activities of $0.3$0.8 million for the same periodof 2004.in 2005. The increase in cash usedbyin investing activities is primarily due toproceeds from$0.6 million of net cash paid in connection with thesaleacquisition ofmarketable securitiesPMC (net ofapproximately $1.0$0.8 millionin 2004 that did not recur in 2005. This increasecash acquired), offset by a reduction in cash usedby investing activities was offset by a decrease in capital expendituresfor purchases of property, plant and equipment ofapproximately $0.5$0.3 million during the nine months ended September 30,20052006 compared to the same periodof 2004. Cash Flows from Financing Activitiesin 2005.Cash used
byin financing activities was$2.8$21.6 million for the nine months ended September 30,20052006 compared tocash provided by financing activities of $0.5$2.8 million for the same periodof 2004.in 2005. The increase in cash usedbyin financing activities is primarily due tothe repayment by General Physics of its short-term borrowings of $6.1$20.9 millionoffset by short-term borrowings by GSE of approximately $1.2 million during the nine months ended September 30, 2005. This useof cashwas offset by net cash proceeds of $2.0 million in 2005used in connection withGSE's issuancethe capital stock restructuring (including transaction costs) and $1.9 million ofa subordinated convertible note prior tocash used for repurchases of common stock in theCompany's spin-off of GSE, compared to repayments of long-term debt by the Company of $0.7 millionopen market. In addition, cash used in2004. Additionally, cash proceeds from the exercise of employee stock options increased by $0.8 millionfinancing activities during the nine months ended September 30, 2005comparedincluded the following items which did not recur in 2006: net repayments of short-term borrowings of $4.9 million; a distribution of $0.8 million of cash to GSE in connection with its spin-off, and proceeds from the issuance of a convertible note by GSE of $2.0 million.Short-term Borrowings and Long-term Debt
General Physics has a $25 million Credit Agreement with a bank that expires on August 12, 2007, as amended, with annual renewal options, and is secured by certain assets of General Physics. The interest rate on borrowings under the Credit Agreement is at the daily LIBOR Market Index Rate plus 3.0%. Based upon the financial performance of General Physics, the interest rate can be reduced. As of September 30, 2006, the rate was LIBOR plus 2.5%, which resulted in a rate of approximately 7.8%. The Credit Agreement also contains certain restrictive covenants. General Physics is currently restricted from paying dividends and management fees to the
same periodCompany in excess of2004. In connection$1.0 million in any fiscal year, with thespin-offexception ofGSE ona waiver by the lender which permits General Physics to provide cash to the Company to repurchase up to $5 million of additional shares of its outstanding Common Stock (see Note 7 to the accompanying condensed consolidated financial statements). As of September 30, 2006, the Company had no outstanding borrowings under the Credit Agreement and there was approximately $20,527,000 of available borrowings based upon 80% of eligible accounts receivable and 80% of eligible unbilled receivables. As of December 31, 2005, theCompany's cash balance decreased by $804,000 as a result of GSECompany had nolonger being consolidated withoutstanding borrowings under theCompany effective with the spin-off. LONG-TERM DEBT AND SHORT-TERM BORROWINGS Pursuant to a Note and Warrant Purchase Agreement datedCredit Agreement.In 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 (Gabelli Notes) and 937,500 warrants (GP Warrants), each entitling the holder thereof to purchase (subject to adjustment) one share of theCompany's common stock.Company’s Common Stock at an exercise price of $8.00. The aggregate purchase price for the Gabelli Notes and GP Warrants was $7.523million. The Gabelli Notes are secured by a mortgage on the Company'sCompany’s former property located in Pawling, New Yorkwhich was distributed to
NPDC in the spin-off.National Patent Development Corporation. In addition, at any time that less than$1.9$1,875,000 million principal amount of the Gabelli Notesareis outstanding, the Company may defease the obligations secured by the mortgage and obtain a release of the mortgage.TheSubsequent to the spin-offs of NPDC and GSE and in accordance with the anti-dilution provisions of the warrant agreement, the number of GP Warrants was adjusted to 984,116 and the exercise price was adjusted to $5.85 per share. During the nine months ended September 30, 2006, Gabelli exercised 109,376 GP Warrants for a total exercise price of $640,000 which was paid in the form of $140,000 cash and delivery of $500,000 of the Gabelli Notes. As of September 30, 2006, there were 874,740 GP Warrants with an exercise price of $5.85 outstanding and exercisable.In October 2003, the Company
hasissued a five-year 5% note due in fullonin October21,2008 in the principal amount of $5,250,955 to ManTechInternational.International (ManTech). Interest is payable quarterly. Each year during the term of the note,the holder of the noteManTech has the option to convert up to 20% of the original principal amount of the note intocommon stockCommon Stock of the Company at the then market price of theCompany's common stock,Company’s Common Stock, but only in the event that theCompany's common stockCompany’s Common Stock is trading at $10 per share or more. In the event that less than 20% of the principal amount of the note is not converted in any year, such amount not converted will be eligible for conversion in each subsequent year until converted or until the note is repaid in cash.General Physics hasAccounting Standards Issued
In July 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes — an Interpretation of FASB Statement No. 109 (FIN 48). FIN 48 prescribes a
three-year $25 million Credit Agreementrecognition threshold and measurement attribute for the financial statement recognition of a tax position taken or expected to be taken on a tax return. Under FIN 48, a tax benefit from an uncertain tax position may be recognized only if it is “more likely than not” that the position is sustainable upon examination, based on its technical merits. The tax benefit of a qualifying position under FIN 48 would equal the largest amount of tax benefit that is greater than 50 percent likely of being realized upon ultimate settlement with abanktaxing authority having full knowledge of all relevant information. FIN 48 will be effective as of January 1, 2007 for calendar-year companies. In applying the new accounting model prescribed by FIN 48, companies will need to determine and assess all material positions existing as of the adoption date, including all significant uncertain positions, in all tax years, thatexpiresare still subject to assessment or challenge under relevant tax statutes. The Company is currently evaluating the impact of adopting this new accounting standard onAugust 13,its consolidated financial statements.In September 2006,
withthe SEC issued Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements (SAB No. 108). SAB No. 108 addresses how the effects of prior year uncorrected misstatements should be considered when quantifying misstatements in current year financial statements. SAB No. 108 requires companies to quantify misstatements using a balance sheet and income statement approach and to evaluate whether either approach results in quantifying an error that is material in light of relevant quantitative and qualitative factors. The Company is required to adopt SAB No. 108 for its annualrenewal options andfinancial statements for the fiscal year ending December 31, 2006. The Company issecured by certain assetscurrently evaluating the impact ofGeneral Physics. The interest rateSAB No. 108, but at this time does not expect its adoption to have a material impact onborrowings underits consolidated financial statements for theCredit Agreement is atfiscal year ending December 31, 2006.In September 2006, the
daily LIBOR Market Index Rate plus 3%FASB issued Statement of Financial Accounting Standards No. 157, Fair Value Measurements (SFAS No. 157), whichwas 6.84% as of September 30, 2005.defines fair value, establishes guidelines for measuring fair value and expands disclosures regarding fair value measurements. SFAS No. 157 does not require any new fair value measurements but rather eliminates inconsistencies in guidance found in various prior accounting pronouncements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007, with earlieradoption permitted. The
Credit Agreement also contains certain restrictive covenants. General PhysicsCompany is currentlyrestricted from paying dividends and management feesevaluating the impact of SFAS No. 157, but at this time does not expect its adoption tothe Company in excess of $1.0 million in any fiscal year. The Company repaid in full the $6.1 million outstanding under the Credit Agreement as of December 31, 2004 in January of 2005, using the proceeds received from the EDS arbitration award (see Note 9 to the condensedhave a material impact on its consolidated financialstatements). As of September 30, 2005, the Company had no borrowings outstanding under the Credit Agreement and there was approximately $19,313,000 of available borrowings based upon 80% of eligible accounts receivable and 80% of eligible unbilled receivables. As of September 30, 2005, GSE had borrowings of $1,182,000 and a letter of credit for $10,000 under General Physics' Credit Agreement, under which $1,500,000 was allocated for use by GSE. The Company guarantees GSE's borrowings under the Credit Agreement through August 13, 2006. CONTRACTUAL OBLIGATIONS Effective April 11, 2005, General Physics entered into employment agreements with certain of its officers, resulting in committed compensation of approximately $2.0 million annually. These agreements have employment terms expiring in 2007, provide for grants of restricted stock units pursuant to the Company's 2003 Incentive Stock Plan, and contain non-compete covenants and change of control and termination provisions. NEW ACCOUNTING STANDARDstatements.Accounting Standard Adopted
In December 2004, the
FASBFinancial Accounting Standards Board issuedSFASStatement of Financial Accounting Standards No.123 - Revised (SFAS No. 123R),123R, Share-Based Payment, which revises SFAS No. 123, Accounting for Stock-Based Compensation, and supersedesAPBAccounting Principles Board Opinion No. 25, Accounting for Stock Issued toEmployees. Currently, the Company does not recordEmployees, and requires companies to recognize compensation expense forcertain stock-based compensation. Underall equity-based compensation awards issued to employees that are expected to vest. The Company adopted SFAS No. 123Rthe Company will measure the cost of employee services received in exchange for stock, basedonthe grant-date fair value (with limited exceptions) of the stock award. Such cost will be recognized over the period during which the employee is required to provide service in exchange for the stock award (usually the vesting period). The fair value of the stock award will be estimated using an option-pricing model, with excess tax benefits, as defined in SFAS No. 123R, being recognized as an addition to paid in capital. SFAS No. 123R was to be effective as of July 1, 2005. However, based on Final Rule 74 issued by the Securities and Exchange Commission in April 2005, which delayed the implementation of SFAS No. 123R, the Company plans to adopt SFAS No. 123R effectiveJanuary 1,2006. The Company expects to adopt SFAS No. 123R2006, using the Modified Prospective Application method without restatement of prior periods. Under this method, the Companywill beginbegan to amortize compensation cost for the remaining portion of its outstanding24awards on the adoption datefor which the requisite servicehaswas not yetbeen rendered.rendered as of January 1, 2006. Compensation cost for these awardswill beis based on the fair value of those awards as previously disclosed on apro-formapro forma basis under SFAS123 in Note 3, Stock Based Compensation.No. 123. The Company will determine the fair value of and account for awards that are granted, modified, or settled afterthe adoption dateJanuary 1, 2006 in accordance with SFAS No. 123R.TheDuring the three and nine months ended September 30, 2006, the Company
is currentlyrecognized $90,000 and $400,000, respectively, of pre-tax stock-based compensation expense under the fair value method inthe process of evaluating the impact ofaccordance with SFAS No.123R on123R. During the three and nine months ended September 30, 2006, the Company recognized a deferred income tax benefit of $32,000 and $151,000, respectively, associated with the compensation expense recognized for these awards. As of September 30, 2006, the Company had $34,000 of unrecognized compensation related to the unvested portion of outstanding stock options awards expected to be recognized through July 2007. As of September 30, 2006, the Company had unrecognized compensation cost of $923,000 related to the unvested portion of itsconsolidated financial statements. FORWARD-LOOKING STATEMENTS Theoutstanding stock units expected to be recognized over a weighted average remaining service period of 3.2 years.Forward-Looking Statements
This report contains forward-looking statements
contained hereinwithin the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for forward looking statements. Forward-looking statements are not statements of historical facts, but rather reflectGP Strategies' management'sour currentviews with respect toexpectations concerning future events andfinancial performance.results. We use words such as"expects"“expects”,"intends"“intends”, “believes”, “may”, “will” and"anticipates"“anticipates” to indicate forward-looking statements.TheseBecause these forward-looking statementsare subject to certaininvolve risks and uncertainties, there are important factors that could cause actual results to differ materially from thosein theexpressed or implied by these forward-looking statements,all of which are difficult to predict and many of which are beyond the control of GP Strategies,including, but not limited to,our holding company structure, failure to continue to attract and retain personnel, lossthose factors set forth under Item 1A - Risk Factors ofbusiness from significant customers, failure to keep pace with technology, changing economic conditions, competition, our ability to implement procedures that will reducethelikelihood that material weaknesses in internal control over financial reporting will not occur in the future,Company’s 2005 Annual Report on Form 10-K and those other risks and uncertainties detailed inGP Strategies'the Company’s periodic reports and registration statements filed with the Securities and Exchange Commission. We caution that these risk factors may not be exhaustive. We operate in a continually changing business environment, and new risk factors emerge from time to time. We cannot predict these new risk factors, nor can we assess the effect, if any, of the new risk factors on our business or the extent to which any factor or combination of factors may cause actual results to differ from those expressed or implied by these forward-looking statements.If any one or more of these expectations and assumptions proves incorrect, actual results will likely differ materially from those contemplated by the forward-looking statements. Even if all of the foregoing assumptions and expectations prove correct, actual results may still differ materially from those expressed in the forward-looking statements as a result of factors we may not anticipate or that may be beyond our control. While
we cannot assess the future impact that any of these differences could have on our business, financial condition, results of operations and cash flows or the market price of shares of our common stock, the differences could be significant. We do not undertake to update any forward-looking statements made by
us. 25ITEMus, whether as a result of new information, future events or otherwise. You are cautioned not to unduly rely on such forward-looking statements when evaluating the information presented in this report.Item 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKQuantitative and Qualitative Disclosure About Market RiskThe Company has no material changes to the disclosure on this matter made in its
reportAnnual Report on Form10-K/A10-K for the fiscal year ended December 31,2004. ITEM2005.Item 4.
CONTROLS AND PROCEDURESControls and ProceduresWe carried out an evaluation, under the supervision and with the participation of our management including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13-15(b) of the Securities Exchange Act of 1934, as amended. Based upon that evaluation and the material
weaknessesweakness described below, the Chief Executive Officer and Chief Financial Officer concluded that theCompany'sCompany’s disclosure controls and procedures were not effective as of the date covered by this report.As discussed more fully in Item 9A of our Annual Report on Form
10-K/A-210-K datedApril 29, 2005,March 16, 2006, for the year ended December 31,2004,2005, in connection with our audit of our consolidated financial statements for the fiscal year ended December 31,2004,2005, we determined that theCompany's policiesCompany’s account reconciliation andprocedures didmanagement review controls over the accounting for income taxes were notprovide for adequate management oversight and reviewoperating effectively because of theCompany's income tax accounting. Thislack of adequatemanagement oversight and review of the Company's incometax accountingresulted inexpertise as of December 31, 2005. As a result, there was a materialerrorsmisstatement in theCompany'sCompany’s income tax provisionwhich were identified andthat was corrected prior to the issuance of the consolidated financial statements for the year ended December 31,2004. This deficiency represents more than a remote likelihood that a material misstatement of the Company's annual or interim financial statements would not have been prevented or detected. The Company's policies and procedures did not provide for adequate management oversight and review of the Company's consolidated financial statements and footnote disclosures. In addition, the Company did not have adequate technical resources to ensure the timely completion and review of its consolidated financial statements and footnote disclosures. These deficiencies resulted in material errors in the consolidated financial statements, primarily the number of weighted average common shares outstanding used in the earnings per share calculation, the presentation of cash flows from operating and financing activities, and certain financial statement footnote disclosures related to income taxes and stock-based compensation, which were identified and corrected prior to the issuance of the 2004 consolidated financial statements. These deficiencies represent more than a remote likelihood that a material misstatement of the Company's annual or interim financial statements would not have been prevented or detected.2005.Based on the material
weaknessesweakness described above, management concluded that theCompany'sCompany’s internal control over financial reporting was not effective as of December 31,2004.2005. This assessment is based onmanagement'smanagement’s conclusion that as of December 31,2004,2005, there was more than a remote likelihood that a material misstatement of theCompany'sCompany’s annual or interim financial statements would not be prevented or detected on a timely basis by Company employees in the normal course of performing their assigned functions.As a result, we implemented changes in certain of our internal controls over financial reporting during the nine months ended September 30,
2005,2006, as follows:-· The Company has, subsequent to December 31,
2004, revised2005, continued to revise its processes and proceduresto prepare the consolidated income tax provision and the consolidated financial statements and footnote disclosures, and implemented additional management review controlsover therelated processes. -accounting for income taxes.· The Company hired a new Director of
Financial ReportingTax on December 31, 2005 whois dedicatedwe believe will provide the Company with the necessary technical skills to perform, review and analyze complex tax accounting activities.We believe these improvements in our internal controls will enable us to remediate the
Company's financial reporting requirements. 26material weakness; however, such determination will not occur until these additional controls have been in place for a period of time sufficient to demonstrate that the controls are operating effectively. We will continue to evaluate the effectiveness of our disclosure controls and procedures and our internal controls over financial reporting on an ongoing basis, and will take further action as appropriate. However, there can be no assurance that our controls and procedures will prevent or detect material misstatement of the Company'sCompany’s annual or interim financial statements.27PART II. OTHER INFORMATION
ITEMNone.
The Company has no material changes to the disclosure on this matter made in its Annual Report on Form 10-K for the fiscal year ended December 31, 2005.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The following table provides information about the Company’s share repurchase activity for the three months ended September 30, 2006:
Issuer Purchases of Equity Securities
Total number
Approximate
of shares
dollar value of
Total number
Average
purchased as
shares that may yet
of shares
price paid
part of publicly
be purchased under
Month
purchased
per share
announced program
the program
July 1-31, 2006
—
—
—
—
August 1-31, 2006
37,700
(1)
$
7.31
37,700
$
3,075,000
September 1-30, 2006
—
—
—
—
(1) Represents shares repurchased in the open market in connection with the Company’s share repurchase program under which the Company may repurchase up to $5 million of its common stock from time to time in the open market subject to prevailing business and market conditions and other factors. This program was authorized by the Company’s Board of Directors and was publicly announced on January 19, 2006. There is no expiration date for the repurchase program.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
On September 14, 2006, the Company held its annual meeting of shareholders. At that meeting, the following matters were voted upon:
1. All of the Directors nominated by the Company were elected as follows:
Common Shares Cast:
For
Withheld
Harvey P. Eisen
13,799,916
140,201
Jerome I. Feldman
9,453,863
4,486,254
Marshall S. Geller
13,247,710
692,407
Scott N. Greenberg
13,789,864
150,253
Richard C. Pfenniger, Jr.
13,483,732
456,385
Ogden R. Reid
11,536,762
2,403,355
2. The elimination of the authorized shares of Class B Capital Stock by amendment to the Amended and Restated Certificate of Incorporation was approved. With respect to holders of common stock, the number of affirmative votes cast was 13,835,524, the number of votes cast against was 43,536, and the number of abstentions was 61,057.
3. The ratification of KPMG LLP as independent auditors was approved. With respect to holders of common stock, the number of affirmative votes cast was 13,841,232, the number of votes cast against was 47,494, and the number of abstentions was 51,391.
None.
Item 6.
EXHIBITS- ---------- *Filed herewith28SIGNATURE31
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed
inon its behalf by the undersigned thereunto duly authorized.GP STRATEGIES CORPORATION November 14, 2005 /s/ Scott N. Greenberg ---------------------------------------- Chief Executive Officer and Chief Financial Officer 29
GP STRATEGIES CORPORATION
November 9, 2006
/s/ Scott N. Greenberg
Chief Executive Officer
/s/ Sharon Esposito-Mayer
Executive Vice President and Chief Financial Officer
32