June 20, 2005
Mr. Larry Spirgel
Assistant Director
United States Securities and Exchange Commission
Washington, D.C. 20549-0404
Re: GP Strategies Corporation
Forms 10-K and 10-K/A for the fiscal year ended
December 31, 2004 Filed March 17, 2005, April 5,
2005, April 29, 2005, and May 16, 2005, respectively
Form 10-Q for the quarter ended March 31, 2005 Filed
May 13, 2005
File No. 1-7234
Dear Mr. Spirgel:
As requested in the letter (the "Comment Letter") dated May 31, 2005, from you
to Scott N. Greenberg, Chief Executive Officer and Chief Financial Officer of
the Company, setting forth the comments of the Staff of the Securities and
Exchange Commission (the "Commission") on Forms 10-K and 10-K/A for the fiscal
year ended December 31, 2004 filed March 17, 2005, April 5, 2005, April 29,
2005, and May 16, 2005, respectively, and Form 10-Q for the quarter ended March
31, 2005, filed May 13, 2005, the numbers below correspond to the numbers set
forth in the Comment Letter.
1. In our disclosure we are referring to fixed-fee contracts that
typically involve development of training content and materials, design
of training processes, software implementation or engineering projects
for commercial customers. These contracts have all the elements
required to recognize revenue (i.e., evidence of an arrangement,
services that have been rendered, pricing that is fixed and
determinable that is reasonably assured of collection). These discrete
projects generally do not contain milestones or other reliable measures
of performance during performance of the contract services. However, we
believe that proportional performance method of revenue recognition is
appropriate for these contracts as they are covered, or are similar in
many respects to services covered, by Paragraph 13 of Statement of
Position No. 81-1, Accounting for Performance of Construction-Type and
Certain Production-Type Contracts. Value is provided to the customers
throughout the course of the projects by regular communications of
progress toward completion and other project findings. The customers
recognize this value in that the contracts typically contain contract
termination provisions that provide us with a portion of the fee based
on efforts expended, if the customer terminates the contract prior to
completion of the services.
Since reliable outputs are not measurable during the performance of the
contract, we use inputs to measure performance. The straight-line
method does not lend itself to recognition for these services, since
the projects either do not have defined periods of performance or the
projects involve a surge of performance in one period followed by
periods of limited activity. In SEC Staff Accounting Bulletin No. 104,
the staff indicated "...service revenue should be recognized on a
straight-line basis, unless evidence suggests that the revenue is
earned or obligations are fulfilled in a different pattern ..." Since
these projects are labor intensive, direct labor cost is generally the
input measure used.
2. Through March 31, 2005, our Chief Operating Decision Maker ("CODM") was
our Chief Executive Officer, Jerome Feldman. Prior to the spin-off of
National Patent Development Corporation ("NPDC"), the CODM and the
Board of Directors reviewed the consolidated financial statements of
the Company together with certain discrete financial information of our
wholly owned and majority owned subsidiaries. Following the spin-off,
the CODM and the Board of Directors review discrete financial
information for our two reportable segments, General Physics (GP) and
GSE Systems (GSE), in order to assess the performance of the Company
and make decisions regarding the allocation of resources.
The Company's corporate structure, for which separate discrete
financial information is available and reviewed by the CODM (for
purposes of deciding how to allocate resources), follows its legal
structure: GP and GSE, and is further segregated into US, UK and other
foreign entities. The US represents over 90% of GP's revenues,
operating profits and total assets. The UK operations represent
approximately 7% of GP's consolidated revenues, 4% of operating profits
and 4% of total assets; which are below the 10% quantitative threshold
noted in paragraph 18 of SFAS No. 131. GSE does not have any
significant foreign subsidiaries. GP and GSE also maintain business
units that are aligned with its services and customer base, each of
which has a designated business unit leader.
In addition, discrete financial information is prepared and analyzed by
legal entity and by markets served and used by additional management
personnel to evaluate performance. Such information is available to,
but historically has not been used by the CODM or Board of Directors to
assess the performance of the Company or to make decisions regarding
the allocation of resources. The CEO's of both GP and GSE, who report
directly to Jerome Feldman, use this information to assess the
performance of their direct reports.
The business activities described in the 10-K and 10-Q, i.e. government
training, business process outsource, and e-Learning businesses, with
respect to GP, and power simulation, process simulation, and emergency
management simulation, with respect to GSE, represent services the
Company provides as part of its strategic initiatives. These services
are provided to governmental and commercial clients and are reported
within the legal structure discussed above. However, we have concluded
they do not represent separate reportable segments under the
requirements of paragraph 10 of SFAS No. 131, since the CODM has not
used this information to assess the performance of the Company and make
decisions regarding the allocation of resources.
3. Our operating segments are determined considering the guidance in
paragraph 10 of SFAS No. 131 and indicated in our response to comment
number 2 above. Our CODM reviews the discrete financial information of
GP and GSE on a monthly and quarterly basis. The financial measures
that are reviewed by the CODM are revenues, earnings before income
taxes (EBT), earnings before income taxes and interest (EBIT) and
earnings before income taxes, interest and depreciation (EBITD).
Since we have concluded that we have only two operating segments as
defined by SFAS No. 131, both of which we deemed reportable segments,
we have not completed a full analysis with respect to the aggregation
criteria in paragraph 17 of the standard. Upon a change in our
organizational structure, or in the discrete financial information used
by our CODM, we will reevaluate our reportable segments.
4. The Company will include additional disclosure related to its
management services agreement in its future filings with the SEC,
beginning with the Form 10-Q for the quarter ended June 30, 2005. The
disclosure will include a description of the personnel and the nature
of the services provided by such personnel to NPDC pursuant to such
agreement, for which the Company is reimbursed by NPDC. The Company
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will also disclose specifics relating to the office lease sharing
arrangement between the two companies.
5. In the fourth quarter ended December 31, 2004, the Company completed
the spin-off of certain of its non-core assets into a separate
corporation, NPDC. The separation of these businesses was accomplished
through a pro-rata distribution (the "Distribution") of 100% of the
outstanding common stock of NPDC to the Company's stockholders on the
record date of the Distribution.
Also in the fourth quarter ended December 31, 2004, the Company
received a final award judgment related to the arbitration between
General Physics Corporation (GP, a wholly owned subsidiary of GPS) and
Electronic Data Systems Corporation (EDS) of approximately $18.4
million, including interest. Such amount was irrevocably deposited into
escrow at year end and accordingly, we recognized a gain of $13.8
million, net of legal costs.
In accordance with a Contribution Agreement between the Company and
NPDC, upon a successful arbitration or any other legal settlement
associated with the claims relating to the Learning Technologies
acquisition, NPDC was entitled to receive the first $5 million of any
proceeds (net of litigation expenses and taxes incurred, if any), and
50% of any proceeds (net of litigation expenses and taxes incurred, if
any) in excess of $15 million received. The participation in the
settlement was deemed to be a part of the assets spun-off by the
Company. Accordingly, the Company accounted for the $5.0 million as a
distribution to NPDC in the quarter ended December 31, 2004, as the
liability met the definition of probable and estimable. The $5 million
is included in the $25 million distribution of net assets to NPDC
reported in the statement of stockholders' equity for the year ended
December 31, 2004, under guidance considered in Accounting Principles
Board No. 29, Accounting for Nonmonetary Transactions. The cash payment
from the Company to NPDC was made during the first quarter ended March
31, 2005.
In response to the Comment Letter dated May 31, 2005 and with respect to all
other SEC filings, the Company acknowledges that:
o the Company is responsible for the adequacy and accuracy of the disclosure
in the filings;
o staff comments or changes to disclosure in response to staff comments do
not foreclose the Commission from taking any action with respect to the
filings; and
o the Company may not assert staff comments as a defense in any proceeding
initiated by the Commission or any person under the federal securities laws
of the United States.
Very truly yours,
Scott N. Greenberg
Chief Executive Officer and
Chief Financial Officer
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